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Development Strategy

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Major project to compare prices internationally implemented by the World Bank with the help of UN and national statistical agencies. ICP has been implemented by UN Statistical Office since 1968. Link

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PPPs 1.Divide expenditures into k = 1,..,K categories of goods. 2.All j = 1,..J countries (in 2005, J = 146) report total expenditure in domestic currency of all categories. 3.Sample prices of representative goods from each category in each country. 4.Construct average of those prices (relative to anchor economy) for each country j basic heading type of good k.

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Hong Kong PPP per Category WDI provides PPP data for many countries using US$ as anchor currency

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PPP Conversion Factor PPP is a value weighted average of relative prices of all K goods.

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PPP 2010 One benchmark for thinking about whether a currency is undervalued or overvalued. If PPP < XR, then domestic goods are relatively cheap, currency is undervalued.

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GDP in Intl$ PPPs are used to construct comparable measures of GDP for multiple countries by converting them into international dollars. Per capita GDP in international dollars is headline way of comparing living standards.

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Atlas Conversion Method

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Use real GDP growth rates to construct path of constant price International $GDP for comparisons of production levels across time and space.

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Developing countries tend to be relatively cheap with PPPs being lower than exchange rates. OECD countries tend to have more similar price structures, though they tend to be relatively more expensive. High income, non-OECD countries tend to be relatively cheap. Compare values measured in different currencies using the PPP and exchange rate method.

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GDP per Capita vs. Productivity Per Capita GDP can be broken down into two parts: GDP per Capita = Productivity GDP per Engaged Person Employment Rate Engaged Person per Capita X

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Most differences due to Worker Productivity

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. Productivity Productivity can be broken down into two parts: Productivity GDP per Hour = Productivity GDP per Engaged Person Hour per Engaged Person X

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Labor Productivity Data Key source for international comparisons in productivity is the Total Economy Database Originally developed at University of Groningen Growth and Development Centre. Link Link Total Economy Database LinkLink

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Patterns of Economic Growth Developed Economies experienced a golden age of per capita GDP growth during post-war period but have experienced slower growth since 1973 Many developing economies also experienced fast growth during 1950-1973 but slowed markedly during 1973-1998. Some developing economies (India, Africa) have experienced a growth resurgence since then.

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Productivity Catch Up: Europe Source: Groningen Growth & Development Center 2009 Intl$, GDP per Hour Worked (Y/L)

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Productivity Catch Up: East Asia Source: Groningen Growth & Development Center 2009 Intl$, GDP per Hour Worked (Y/L)

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Productivity Catch Up?: Latin America Source: Groningen Growth & Development Center 2009 Intl$, GDP per Hour Worked (Y/L)

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Capital Accumulation

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Capital Productivity Capital Productivity: Capital investment is a central part of advancing productivity in developing economy but displays diminishing returns.

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Measuring Capital Returns ICOR Incremental Capital Output Ratio: Ratio of constant dollar investment to increase in output Measures number of dollar of investment needed to produce an extra dollar of output. LINK LINK ICOR is volatile, must take long run averages.

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DEVELOPMENT POLICY Tne Role of Government

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Structuralist Theory Two kinds of economies Developed Underdeveloped Key difference: Rich, developed economies dominated by industry; poor, underdeveloped dominant in agriculture and resources. Development policy: shift countries from underdeveloped to developed.

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Government Intervention Capital is in short supply in developing economies so must be directed toward building of heavy industry. Coordination failures Set of infrastructure necessary to build the industrial economy has multiple inputs that must come on line at the same time. No need for a dam if there is no power network, no need for a power network if there are no factories, no need for factories if there is no power network. Government can coordinate big push toward industrial development: Rosenstein-Rodan. Example: India LinkLink Example: Brazil LinkLink

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Industrialization Structuralist Theory Rosenstein-Rodan: Growth potential, combination of degree of investment and capacity to organize investment Predictions

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Structuralist Theory and Trade UNCTAD Economist Raul Prebisch developed the idea that prices of primary products would fall in value relative to manufactured goods. LinkLink International trade would always leave underdeveloped economies impoverished. Use of tariffs and trade restrictions to develop domestic manufacturing sector. Dependency Theory: International trade enforces a system of power that relegates developing countries to producing raw material and cheap labor. Lesson: self-reliance.

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Criticisms 1. High cost of imports and import substitutes reduces economic efficiency making people poorer. 2.Developing economies operate on too small of a scale to be efficient in capital heavy goods. 3.Created monopolies protected from competition 4.Source of corruption Link - Krueger.Link - Krueger

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Link

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Washington Consensus 1.Fiscal Discipline.- Balanced Budget. 2.Reordering Public Expenditure Priorities. Eliminate biased subsidies, increase health, education and infrastructure. 3.Tax Reform. Broad tax base with moderate marginal tax rates. 4.Liberalizing Interest Rates 5.Competitive Exchange Rate http://www.iie.com/publications/papers/williamson0904-2.pdf

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6.Trade Liberalization 7.Liberalization of Inward Foreign Direct Investment. 8.Privatization. 9.Deregulation. specifically on easing barriers to entry and exit. 10. Property Rights Identified as a consensus for development by policymakers in Washington (World Bank, IMF) and particularly Latin America.

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EAST ASIAN MIRACLE

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Neo-classical View Physical & Human Capital Deepening High investment rates beginning in 1970s Rapid growth in education rates. Macroeconomic Stability: Low inflation, small budget deficits Market Orientation: South Korea vs. North Korea

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Revisionist View East Asia not exemplar of Washington Consensus Government heavily involved in the economy Developmental State Chalmers Johnson Ideological devotion to development Independent bureaucracy embedded within the economy playing a leading role. Developing industries protected from international competition Friedrich Lists American system

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Can Japan Compete? Japanese companies dominated a number of advanced industries from the 1980s and experienced high growth up to that period with slower subsequent growth. Japan: Known for industrial policy activism through Ministry for Industry, Trade and Investment. MITI approach was to encourage cooperation by companies in key industries. allow cartels and even encourage formation. Limit foreign trade & investment Link

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Competitive Outcomes Low returns on capital Firms emphasize market share, maintenance of employment Intense domestic competition in some sectors especially those internationally successful ones. Sectors with government sponsored cartels or planning, low competition, low success

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World Bank View High levels of investment supported by high level of savings Government institutions: Savings banks and mandatory provident funds developed to overcome market failures Expansion in Education Broad based rather than concentrated in elite

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Government Intervention Market friendly Macroeconomic stability and strong property rights encourage private investment but, Strong Bureaucratic State to Promote Growth Key Interventions Financial repression to promote corporate investment Allocation of Resources (Credit & Foreign Exchange) to Export Industries

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Market Failure: Externalities Some economic activities creates negative spillovers: Pollution, Crime Private benefits but public costs. Some economic activities create positive spillovers: knowledge. Developing new knowledge may create public benefits that will accrue to people who do not pay for the costs

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Pillars of East Asian Growth Miracle World Bank Chief Economist View World Bank Chief Economist View Govt intervention in East Asia overcomes market failures Underdeveloped financial markets govt intervention fills Govt intervention supports knowledge producing activities. Technical education and research Deliberative councils, research consortia FDI Export industries

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Foreign Direct Investment Two key elements need to be emphasized in the definition of FDI: 1.long-term nature or of lasting interest. 2.the investor has a significant degree of influence on the management of the enterprise. For operational purposes, 10 per cent of the voting shares or voting power is the level of ownership necessary for a direct investment interest to exist (IMF, 1993, paragraph 362; OECD, 2008, paragraph 117) UNCTAD Training Manual on Statistics for FDI and the Operations of TNCs Volume I FDI Flows and Stocks LINK

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Pros and Cons of FDI Pro: i.Increased domestic capital formation. ii.FDI brings superior technology iii.Increases domestic competition iv.Gives access to export markets. v.FDI more stable than loans or capital flows. Con: i.Multinationals may interfere with local political economy. ii.Foreign nationals fill top jobs. LinkLink #1LinkLink #2

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Export Industries and Knowledge Export industries must use advanced technology Export firms compete in foreign countries and learn international best practices. Successful export firms demonstrate comparative advantage benefit imitators Success in export markets is an objective standard of performance that cant be gamed by corrumption.

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New Structuralist Development Strategy New Structural Economics by Justin Lin New Structural Economics by Justin Lin Countries have grown more developed by Investing in physical and human capital but Comparative advantage depends on level of capital. Focusing on areas of comparative advantage requires structural change as country develops.

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Industrial Policy for 21 st Century Dani Rodrik Link Link Development is the process of creating new industries, not only upgrading but diversifying. Two roles for government Pioneer firms take risks entering into new industries, generate information about which sorts of products an economy is good at, but this can be copied by competitors. Industries rely on a network of suppliers and supporting industries. Building a new industry might require co-ordination. Korean microwaves vs. Taiwan bicycles: Not necessarily comparative advantage

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Peruvian Asparagus Peruvian farmers growing asparagus since 1950s with minimal economic impact. In 1980s, US govt sent experts for knowledge transfer. Govt started cooperative associations for technology sharing and marketing coordination. Govt invested in freezing & packing plants. Peru now the #1 asparagus exporter.

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Principles Upgrading not radical change New activities only Clear benchmarks of success Built-in sunset clause Subsidize activities that create information or knowledge spillovers

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Industrial Policy Govt institutions need close connections with business to discover what might work/is working. Close connections with bureaucracy may lead to corruption. Elements of Successful Architecture Political support from top leaders. Deliberative coordination councils. Mechanisms of transparency and accountability.