to grow or not to grow: that is the question
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To Grow or Not to Grow: That is the Question. Thorvaldur Gylfason. Outline. Pictures of growth Determinants of growth Saving and investment Efficiency Liberalization Stabilization Privatization Diversification Empirical evidence of growth. Economic growth: - PowerPoint PPT PresentationTRANSCRIPT
To Grow or To Grow or Not to Not to Grow:Grow:That is the That is the QuestionQuestion
Thorvaldur GylfasonThorvaldur Gylfason
Outline
I.I. Pictures of growthPictures of growth
II.II. Determinants of growthDeterminants of growth1.1. Saving and investmentSaving and investment
2.2. EfficiencyEfficiencya)a) LiberalizationLiberalizationb)b) StabilizationStabilizationc)c) PrivatizationPrivatizationd)d) DiversificationDiversification
III.III. Empirical evidence Empirical evidence ofof growth growth
Economic growth: The short run vs. the long run
Time
Nati
on
al eco
nom
ic o
utp
ut
Actual output
Potential output
Business cyclesin the short run
Economic growthin the long run
Downswing
Upswing
The crisis of 1997-98 is irrelevant to Asia’s long-term growth potential.
Economic growth: The short run vs. the long run
To analyze the movements ofTo analyze the movements of actualactual output from year to year, viz., in theoutput from year to year, viz., in the shortshort runrunNeed short-run macroeconomic theoryNeed short-run macroeconomic theory
Keynesian or neoclassicalKeynesian or neoclassical
To analyze the path ofTo analyze the path of potentialpotential output output overover longlong periodsperiodsNeed modernNeed modern theory of economic growththeory of economic growth
Neoclassical or endogenousNeoclassical or endogenous
Growing together, growing apart
Time
Nati
on
al eco
nom
ic o
utp
ut
Rapid growth
Slow growth
West-Germany : East-GermanyWest-Germany : East-GermanyAustria : Czech RepublicAustria : Czech RepublicFinland : EstoniaFinland : EstoniaTaiwan : ChinaTaiwan : ChinaSouth Korea : North KoreaSouth Korea : North Korea
Botswana : NigeriaBotswana : NigeriaKenya : TanzaniaKenya : TanzaniaThailand : BurmaThailand : BurmaTunisia : MoroccoTunisia : MoroccoSpain : ArgentinaSpain : ArgentinaMauritius : MadagascarMauritius : Madagascar
Economic system
Economic policy?
Growing apart
YearsYears
Outp
ut
per
cap
ita
Outp
ut
per
cap
ita
Country B: 2% a yearCountry B: 2% a year
Country A: 0.4% a yearCountry A: 0.4% a year
EfficiencyEfficiency
Economic systemEconomic system
Economic policyEconomic policy Threefold Threefold difference after difference after 60 years60 years
00 6060
Divide into 72 by the Divide into 72 by the growth rate to find the growth rate to find the number of years it takes number of years it takes of income per head to of income per head to double double
Sources Sources of growth: of growth: Investment and Investment and educationeducation
In ves tm en t E d u ca tion
G row th
+ +
+denotes a positive effect in the direction shown
In ves tm en t E d u ca tion
G row th
+ +
+denotes a positive effect in the direction shown
Adam Smith knew this, and more, as did Arthur Lewis
Sources of growth: Sources of growth: Investment and Investment and educationeducation
Solow raised Solow raised
doubts on doubts on
long-run long-run
linkageslinkages
More More sources of growthsources of growth
In ves tm en t x E d u ca tion
G row th+ +
+denotes a positive effect in the direction shown
+
Arthur Lewis: x is trade, stable politics, good weather
But Solow carried the day: long-run growth is exogenous
0
500
1000
1500
2000
2500
3000
3500
Botswana
Nigeria
Botswana and Nigeria: GNP per capita 1964-99Case 1
Current US$,Atlas method
0
50
100
150
200
250
300
350
400
450
500
Kenya
Tanzania
Uganda
Kenya, Tanzania, and Uganda: GNP per capita 1964-99Case 2
Current US$,Atlas method
0
100
200
300
400
500
600
700
Burma
Thailand
Burma and Thailand: GNP per capita 1960-97Case 3
Local currency, 1988 prices, 1960 = 100
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
10000
Barbados
Haiti
Dominican Republic
Barbados, Dominican Republic, and Haiti: GNP per capita 1964-99
Case 4
Current US$,Atlas method
0
500
1000
1500
2000
2500
Egypt
Morocco
Tunisia
Egypt, Morocco, and Tunisia:GNP per capita 1964-99Case 5
Current US$,Atlas method
0
2000
4000
6000
8000
10000
12000
14000
16000
Argentina
Spain
Uruguay
Argentina, Uruguay, and Spain:GNP per capita 1964-99Case 6
Current US$,Atlas method
0
500
1000
1500
2000
2500
3000
3500
4000
4500
Madagascar
Mauritius
Madagascar and Mauritius:GNP per capita 1964-99Case 7
Current US$,Atlas method
Chile and Zambia:GNP per capita 1964-99Case 8
0
1000
2000
3000
4000
5000
6000
Chile
Zambia
Current US$,Atlas method
Ireland and Greece:Ireland and Greece: GNP per capita 1964-99Case 9
0
5000
10000
15000
20000
25000
Greece
Ireland
Why?Why?
Current US$,Atlas method
More More sources of growthsources of growth
In ves tm en t x E d u ca tion
G row th+ +
+denotes a positive effect in the direction shown
+
Arthur Lewis: x is trade, stable politics, good weather
But Solow carried the day: long-run growth is exogenous
0
5
10
15
20
25
30
35
40
45
Greece
Ireland InvestmeInvestment is good nt is good for for growth, growth, but hardly but hardly explains explains the the growth growth differentiadifferential between l between Ireland Ireland and and GreeceGreece
Ireland and Greece:Ireland and Greece: Investment 1960-99 (% of GDP)
0
1
2
3
4
5
6
7
8
Greece
Ireland
EducatioEducation is good n is good for for growthgrowth
Ireland and Greece:Ireland and Greece: Expenditure on education 1960-96 (% of GNP)
0
10
20
30
40
50
60
70
80
90
100
Ireland
Greece
Foreign Foreign trade is trade is good for good for growthgrowth
Ireland and Greece:Ireland and Greece: Exports 1960-99 (% of GNP)
The Neoclassical Theory of Exogenous Economic Growth
Traces the rate of growth of output per capita to a single source:
Technological progressTechnological progress
Hence, economic growth in the long run is immune to economic policy, good or bad.
“To change the rate of growth of real output per head you have to change the rate of technical progress.”
ROBERT M. SOLOW
The New Theory of Endogenous Economic Growth
Traces the rate of growth of output Traces the rate of growth of output per capita to three main sources:per capita to three main sources:
SavingSaving
EfficiencyEfficiency
DepreciationDepreciation
“The proximate causes of economic growth are the effort to economize, the accumulation of knowledge, and the accumulation of capital.”
W. ARTHUR LEWIS
Exogenous vs. endogenous growth
The neoclassical viewThe neoclassical viewthat economic growth in the long run is that economic growth in the long run is
merely a matter ofmerely a matter of technologytechnology does not does not throw much light on the spectacular growth throw much light on the spectacular growth performance of Asia since the 1960s. performance of Asia since the 1960s.
The new viewThe new viewthat long-run growth depends onthat long-run growth depends on savingsaving, ,
efficiencyefficiency, and, and depreciationdepreciation is more is more illuminating.illuminating.
Besides, it’s not really new, because Adam Besides, it’s not really new, because Adam Smith knew this (1776). Smith knew this (1776).
One crucial implication of exogenous growth
The neoclassical viewThe neoclassical viewIf two countries are identical (same If two countries are identical (same
saving rate, same population growth, saving rate, same population growth, same technology), then their income same technology), then their income per head will per head will ultimatelyultimately be the same. be the same.
This means that poor countries must This means that poor countries must grow faster than – grow faster than – catch upcatch up with! – with! – rich countries: “conditional rich countries: “conditional convergence”convergence”
Endogenous growth theory does not Endogenous growth theory does not have this implication. have this implication.
Enter initial incomeEnter initial income
In ves tm en t
In it ia l In com e N atu ra l C ap ita l
x E d u ca tion
G row th+
+
+–
+denotes a positive effect in the direction shown
– denotes a negative effect in the direction shown
?
Conditional Conditional convergencconvergencee
Absolute convergence?
Do poor
countrie
s catch
up?
-4
-2
0
2
4
6
8
10
0 2 4 6 8 10 12
Log of initial GDP per capita (1965)
Gro
wth
of
GN
P p
er
ca
pit
a 1
96
5-1
99
8 (
%)
r = -0.09Botswana
China Korea
Nicaragua
ThailandIndonesia
No sign that poor countries grow faster than rich
8855 countries countries
r = rank correlation
Conditional Conditional convergconvergence ence does not does not entail entail absolute absolute convergenceconvergence
EnterEnter natural resourcesnatural resources
In ves tm en t
In it ia l In com e N atu ra l C ap ita l
x E d u ca tion
G row th+
+
+––
+denotes a positive effect in the direction shown
– denotes a negative effect in the direction shown
?
Endogenous growth: x can be almost anything!Dutch disease and rent seeking
A simple model of endogenous growth
Four building blocks:Four building blocks: S = IS = I
Saving equals investment in equilibrium.Saving equals investment in equilibrium.
S = sYS = sY Saving is proportional to income.Saving is proportional to income.
I = I = K + K + KK Investment involves addition to capital stock.Investment involves addition to capital stock.
Y = EKY = EK Output depends on quality and quantity of Output depends on quality and quantity of
capital.capital.
A simple model of endogenous growth
Implication:Implication: g = sE - g = sE -
Rate of economic growth equalsRate of economic growth equals Saving rateSaving rate
timestimes
Efficiency Efficiency (i.e., the output/capital ratio)(i.e., the output/capital ratio)minusminus
DepreciationDepreciation
Endogenous growth in the Endogenous growth in the Harrod-Domar modelHarrod-Domar model
You may recognize the You may recognize the endogenous growth model endogenous growth model as a reinterpretation of theas a reinterpretation of the Harrod-Domar modelHarrod-Domar modelwhere growth depends onwhere growth depends on
A.A. the saving ratethe saving rate
B.B. the capital/output ratiothe capital/output ratio
C.C. the depreciation ratethe depreciation rate
You may recognize the You may recognize the endogenous growth model endogenous growth model as a reinterpretation of theas a reinterpretation of the Harrod-Domar modelHarrod-Domar modelwhere growth depends onwhere growth depends on
A.A. the saving ratethe saving rate
B.B. the capital/output ratiothe capital/output ratio
C.C. the depreciation ratethe depreciation rate
Sources of endogenous growth I
Saving Saving Fits real worldFits real world experienceexperience quite wellquite well
No coincidence that, in East Asia, saving rates ofNo coincidence that, in East Asia, saving rates of 30-30-40%40% of GDP went along with rapid economic growthof GDP went along with rapid economic growth
No coincidence either that many African economies with No coincidence either that many African economies with saving rates aroundsaving rates around 10%10% of GDP have been stagnantof GDP have been stagnant
OECD countries: saving rates of aboutOECD countries: saving rates of about 20%20% of GDPof GDP
Important implication forImportant implication for economic policyeconomic policy::Economic stability withEconomic stability with low inflationlow inflation and positive real and positive real
interest rates spurs saving, which isinterest rates spurs saving, which is good for growth.good for growth.
Sources of endogenous growth I
100100
400400
300300
200200
19651965 19901990
East AsiaEast Asia
OECDOECD
AfricaAfrica
High saving rates
High saving rates
Medium saving rates
Low saving rates
IncomeIncomeper capitaper capita
Growth and investment, 1965-98
109 countries
-6
-4
-2
0
2
4
6
8
10
0 10 20 30 40 50
Investment (% of GDP)
Gro
wth
pe
r c
ap
ita (%
pe
r y
ear)
10%
1½%
BotswanaEach ten percentage point increase in the investment ratio is associated with an increase in per capita growth by 1½% per year.
South Africa
Growth and investment, 1965-98
33 sub-33 sub-SaharanSaharan African African countriecountriess
-6
-4
-2
0
2
4
6
8
10
0 10 20 30 40 50
Investment (% of GDP)
Gro
wth
pe
r c
ap
ita
(%
pe
r y
ea
r)Each ten percentage point increase in the investment ratio is associated with an increase in per capita growth by 1½% per year.
Growth and investment, 1975-1998
Botswana
Uganda
Swaziland
Lesotho
ZambiaTanzania
Angola
ZimbabweNamibia
Malawi
-4
-2
0
2
4
6
8
10
12
0 10 20 30 40 50
Investment (Per Cent of GDP)
Gro
wth
Per
Cap
ita (P
er C
ent P
er Y
ear)
Each ten percentage point increase in the investment ratio is associated with an increase in per capita growth by 1½% per year.
11 11 MEFMIMEFMI countriecountriess
Investment and economic growth
-8
-6
-4
-2
0
2
4
6
0 5 10 15 20 25 30 35
Gross domestic investment 1965-1998 (% of GDP)
Gro
wth
of
GN
P p
er c
apit
a 19
65-1
998,
ad
just
ed f
or
init
ial
inco
me
(% p
er y
ear)
r = 0.65
Jordan
Botswana
Nicaragua
85 countries85 countries
An increase in investment by 4% of GDP is associated with an increase in per capita growth by 1% per year.
4%
1%
Thailand
Sources of endogenous growth II
Depreciation Depreciation The effect of depreciation on growth is related The effect of depreciation on growth is related
to that of saving and investment on growth.to that of saving and investment on growth.Unprofitable investment in the past reduces Unprofitable investment in the past reduces
thethe quality of capitalquality of capital and makes it depreciate and makes it depreciate more rapidly, necessitating more replacement more rapidly, necessitating more replacement investment to make up for economic and investment to make up for economic and physical wear and tear.physical wear and tear.
The more national saving has to be set aside The more national saving has to be set aside for replacement investment, the less will be for replacement investment, the less will be available for theavailable for the buildup of new capitalbuildup of new capital. .
Investment: Quantity and quality
Compare Botswana and Tanzania:Compare Botswana and Tanzania:InIn BotswanaBotswana, , the share of State-Owned the share of State-Owned
Enterprises in total investment fell Enterprises in total investment fell from 16% in 1985-90 to 12% in 1990-from 16% in 1985-90 to 12% in 1990-97. 97.
InIn TanzaniaTanzania, , the SOE share of the SOE share of investment fell from 46% in 1985-90 investment fell from 46% in 1985-90 to 23% in 1990-97. to 23% in 1990-97.
This is probably a good sign.This is probably a good sign.Privatization helpsPrivatization helps improve investment.improve investment.
Investment: Quantity and quality
Investment quality, however, is Investment quality, however, is not only a question of public vs. not only a question of public vs. private enterprise.private enterprise.
Sound bankingSound banking is also important.is also important.It takes sound commercial banks, It takes sound commercial banks,
usuallyusually privately ownedprivately owned banks banks motivated by profit rather than by motivated by profit rather than by political concerns, to channel political concerns, to channel household savings intohousehold savings into high-high-quality investmentquality investment. .
Sources of endogenous growth II
EfficiencyEfficiencyAlso fits real world experience quite wellAlso fits real world experience quite well
Technical progress is good for growth because it allows Technical progress is good for growth because it allows us tous to squeeze more output out of given inputssqueeze more output out of given inputs..
And that is exactly what increasedAnd that is exactly what increased efficiencyefficiency is all is all about! about!
Thus, technology is best viewed as an aspect of general Thus, technology is best viewed as an aspect of general economic efficiency. economic efficiency.
Important implication forImportant implication for economic policyeconomic policy::Everything that increases economic efficiency, no matter Everything that increases economic efficiency, no matter
what, is alsowhat, is also good for growthgood for growth..
Sources of endogenous growth II
Five sources of increased efficiencyFive sources of increased efficiency1.1. LiberalizationLiberalization of prices and trade increases of prices and trade increases
efficiency, which isefficiency, which is good for growthgood for growth..
2.2. Stabilization reduces the inefficiency associated with Stabilization reduces the inefficiency associated with inflation, which isinflation, which is good for growthgood for growth..
3.3. PrivatizationPrivatization reduces the inefficiency associated with reduces the inefficiency associated with state-owned enterprises, which …state-owned enterprises, which …
4.4. EducationEducation makes the labor force more efficient.makes the labor force more efficient.
5.5. Technological progressTechnological progress also enhances efficiency.also enhances efficiency.
The possibilities are virtually endless!The possibilities are virtually endless!
Sources of endogenous growth II
This isThis is good newsgood news..If growth were merely a matter of technology, we If growth were merely a matter of technology, we
would not be able to do much about it …would not be able to do much about it …… … except to follow technology-friendly policies by except to follow technology-friendly policies by
supportingsupporting R&DR&D and such.and such.
But if growth depends on saving and efficiency, But if growth depends on saving and efficiency, there are things that wethere are things that we can docan do, in the private , in the private sector as well as through the public sector, to sector as well as through the public sector, to foster rapid economic growth.foster rapid economic growth.
BecauseBecause everything that is good for saving and everything that is good for saving and efficiency is also efficiency is also good for growthgood for growth..
What to do to encourage economic growth
Recap
Maintain strong incentives toMaintain strong incentives to savesaveKeep Keep inflationinflation low andlow and real interest ratesreal interest rates positive positive
MaintainMaintain financial systemfinancial system in good healthin good healthso as to channel saving into high-quality investmentso as to channel saving into high-quality investment
Foster Foster efficiencyefficiency1.1. Liberal price and trade regimesLiberal price and trade regimes
2.2. Low inflationLow inflation
3.3. Strong private sectorStrong private sector
4.4. More and better educationMore and better education
5.5. Limited, or well managed, natural resourcesLimited, or well managed, natural resources
6.6. Reasonable equalityReasonable equality
Liberalization and economic growth
Liberalization of pricesLiberalization of prices means that markets, means that markets, not bureaucrats, are allowed to set prices. not bureaucrats, are allowed to set prices. Mixed market economy isMixed market economy is more efficientmore efficient than than
central planning.central planning. Compare former Soviet Union with the US and Compare former Soviet Union with the US and
EuropeEurope
Liberalization of tradeLiberalization of trade allows specialization allows specialization according to comparative advantage.according to comparative advantage.Free trade isFree trade is more efficientmore efficient than self-sufficiency.than self-sufficiency.
North Korea and Cuba vs. Hong Kong and SingaporeNorth Korea and Cuba vs. Hong Kong and Singapore
Applies to trade in goods, services, capital.Applies to trade in goods, services, capital.
1
Growth and trade, 1965-98
105 105 countriecountriess
-6
-4
-2
0
2
4
6
8
10
0 50 100 150 200 250 300 350
Trade (% of ppp-adjusted GDP)
Gro
wth
pe
r ca
pita
(% p
er y
ear)
NB: UAE, Hong Kong, and Singapore.
Singapore
Hong Kong
United Arab Emirates
China
Korea
Botswana
Each 50 percentage point increase in the trade ratio is associated with an increase in per capita growth by almost 1% per year.
Growth and trade, 1965-98
32 sub-32 sub-Saharan Saharan African African countriecountriess
-6
-4
-2
0
2
4
6
8
10
0 20 40 60 80 100
Trade (% of ppp-adjusted GDP)
Gro
wth
per
cap
ita (%
per
yea
r)Each 20 percentage point increase in the trade ratio is associated with an increase in per capita growth by 1% per year.
Growth and trade, 1975-1998
Botswana
Swaziland
Lesotho
Zambia
Angola
Tanzania
Uganda
Zimbabwe
Malawi
Namibia
-4
-2
0
2
4
6
8
10
12
0 10 20 30 40 50 60
Trade (Per Cent of GDP)
Gro
wth
Per
Cap
ita (P
er C
ent P
er Y
ear)
Each ten percentage point increase in the trade ratio is associated with an increase in per capita growth by almost 1% per year.
11 11 MEFMIMEFMI countriecountriess
Openness and growth 1965-98
-8
-6
-4
-2
0
2
4
6
-40 -30 -20 -10 0 10 20 30 40
Actual less predicted exports 1965-98 (% of GDP)
An
nu
al g
row
th o
f G
NP
per
cap
ita
1965
-98,
ad
just
ed f
or
init
ial
inco
me
(%)
Malaysia
Belgium
Korea
Guinea Bissau
87
countrie
s
An increase in openness by 14% of GDP is associated with an increase in per capita growth by 1% per year.
r = 0.40
Growth and foreign direct investment, 1965-98
100 100 countriecountriess
-4
-2
0
2
4
6
8
10
0 2 4 6 8 10 12 14
Foreign direct investment (% of ppp-adjusted GDP)
Gro
wth
per
cap
ita (%
per
yea
r)
Qualification: Relationship rests on Botswana and Singapore.
BotswanaSingapore
Each three percentage point increase in the FDI ratio is associated with an increase in per capita growth by almost 1% per year.
Growth and foreign direct investment, 1965-98
-4
-2
0
2
4
6
8
10
0 2 4 6 8
Foreign direct investment (% of ppp-adjusted GDP)
Gro
wth
per
cap
ita (%
per
yea
r)Each one percentage point increase in the FDI ratio is associated with an increase in per capita growth by almost 1% per year.
31 sub-31 sub-Saharan Saharan AfricanAfrican countriecountriess
Relationship depends on the inclusion of Botswana.
Botswana
Growth and FDI, 1975-1998
Botswana
Swaziland
LesothoUganda
Namibia
ZambiaTanzania
Zimbabwe
Malawi
Angola
-4
-2
0
2
4
6
8
10
12
0 1 2 3 4 5 6 7 8
Foreign Direct Investment (Per Cent of GDP)
Gro
wth
Per
Cap
ita
(Per
Cen
t P
er Y
ear)
Each ten percentage point increase in the FDI ratio is associated with an increase in per capita growth by 1% per year.
11 11 MEFMIMEFMI countriecountriess
Openness toOpenness to FDIFDI and and growth 1965-98growth 1965-98
-8
-6
-4
-2
0
2
4
6
-4 -2 0 2 4 6 8
Actual less predicted FDI 1975-1998 (% of GDP, ppp)
An
nu
al g
row
th o
f G
NP
per
cap
ita
1965
-98,
ad
just
ed f
or
init
ial i
nco
me
(%)
Botswana
An increase in openness to FDI by 2% of GDP is associated with an increase in per capita growth by more than 1% per year.
r = 0.62
85
countrie
s
Stabilization and economic growth
Stabilization of pricesStabilization of prices means that distortions means that distortions associated with inflation are reduced.associated with inflation are reduced. InflationInflation distorts the choice between real and financial distorts the choice between real and financial
capital by punishing money holdings, and thuscapital by punishing money holdings, and thus creates creates inefficiency inefficiency in production.in production.
Inflation thus involves a tax, theInflation thus involves a tax, the inflation taxinflation tax.. AnAn inefficient taxinefficient tax compared with most other taxes.compared with most other taxes.
Inflation also createsInflation also creates uncertainlyuncertainly which tends to which tends to discourage trade and investment. discourage trade and investment.
Inflation also tends to result inInflation also tends to result in overvaluationovervaluation of of currency, thus hurting exports and growth.currency, thus hurting exports and growth.
2
Money and inflation, 1990-1998
Namibia
Lesotho
Swaziland
BotswanaZimbabwe
Tanzania
UgandaMalawi
Zambia
0
5
10
15
20
25
30
35
40
45
0 10 20 30 40 50 60 70
Inflation 1990-98 (Per Cent Per Year)
Mo
ney
an
d Q
uas
i-M
on
ey 1
998
(Per
Cen
t o
f G
DP
)
A 10 percentage point increase in annual inflation is associated with a decrease in money and quasi-money by 3% of GDP.
Privatization and economic growth
PrivatizationPrivatization means that profit-oriented means that profit-oriented owners and able managers are allowed to owners and able managers are allowed to direct enterprises.direct enterprises.Profit motiveProfit motive replaces political considerations as replaces political considerations as
the guiding principle of business operations.the guiding principle of business operations.Profit-maximizing owners generally want to appoint Profit-maximizing owners generally want to appoint
managers and staff on merit rather than on the managers and staff on merit rather than on the basis of political connections, for example.basis of political connections, for example.
Private enterprise is generallyPrivate enterprise is generally more efficientmore efficient than state-owned enterprises.than state-owned enterprises.
3
Same story time and again
Free trade Free trade is good for growth is good for growth Reduces the inefficiency that results from Reduces the inefficiency that results from
restrictions on trade restrictions on trade
Price stabilityPrice stability is good for growth is good for growth Reduces inefficiency resulting from inflationReduces inefficiency resulting from inflation
PrivatizationPrivatization is good for growth is good for growth Reduces inefficiency resulting from SOEsReduces inefficiency resulting from SOEs
EducationEducation is good for growth is good for growth Reduces the inefficiency that results from Reduces the inefficiency that results from
inadequate educationinadequate education
Same story time and again
Can describe this by simple arithmeticCan describe this by simple arithmetic
The efficiency gain fromThe efficiency gain from eliminating an eliminating an economic distortioneconomic distortion (trade restrictions, (trade restrictions, inflation, unnecessary state intervention, inflation, unnecessary state intervention, insufficient education) is directly insufficient education) is directly proportional to the square of the distortion:proportional to the square of the distortion:
E = mcE = mc22
EE stands for efficiency gain,stands for efficiency gain, mm is a multiplicative is a multiplicative constant, andconstant, and cc is the distortionis the distortion
E = mcE = mc22
If the distortion is substantial (severe trade If the distortion is substantial (severe trade restrictions, high inflation, big SOE sector, restrictions, high inflation, big SOE sector, poor education), then reducing or poor education), then reducing or eliminating the distortion can increase eliminating the distortion can increase efficiency andefficiency and growthgrowth a great deal.a great deal.
We can see this by plugging appropriate We can see this by plugging appropriate numbers into the formula and also bynumbers into the formula and also by econometriceconometric research, where the theory is research, where the theory is compared with experience (i.e., economic compared with experience (i.e., economic statistics).statistics).
Education and economic growth
EducationEducation means a better trained and hencemeans a better trained and hence more efficientmore efficient work force.work force. Need to provide primary and secondary education Need to provide primary and secondary education
to all, especially femalesto all, especially females Need to provide tertiary education to a greatly Need to provide tertiary education to a greatly
increased number of peopleincreased number of people Need increased public commitment to educationNeed increased public commitment to education This requires both increasedThis requires both increased public expenditurepublic expenditure on on
education and probably also increased scope foreducation and probably also increased scope for private sector involvementprivate sector involvement in education.in education.
4
Growth and education, 1965-98
86 countries
-4
-2
0
2
4
6
8
10
0 20 40 60 80 100 120 140
Secondary-school enrolment 1980-97 (%)
Gro
wth
pe
r c
ap
ita
(%
pe
r y
ea
r)
An increase in secondary-school enrolment by 4% of each cohort goes along with an increase in per capita growth by 1% per year.
Growth and education, 1965-98
-6
-4
-2
0
2
4
6
8
10
0 1 2 3 4 5 6 7 8
Public expenditure on education (% of GNP)
Gro
wth
per
cap
ita (%
per
yea
r)Each two percentage point increase in the education expenditure ratio is associated with an increase in per capita growth by about 1% per year.
33 sub-33 sub-SaharanSaharan AfricanAfrican countriecountriess
Growth and education, 1975-1998
Botswana
Swaziland
NamibiaZimbabwe
Angola
ZambiaTanzania
MalawiUganda
Lesotho
-4
-2
0
2
4
6
8
10
12
0 1 2 3 4 5 6 7 8
Public Expenditure on Education (Per Cent of GNP)
Gro
wth
Per
Cap
ita
(Per
Cen
t P
er Y
ear)
Each two percentage point increase in the education expenditure ratio is associated with an increase in per capita growth by almost 1% per year.
11 11 MEFMIMEFMI countriecountriess
Growth and education, 1965-98
-8
-6
-4
-2
0
2
4
6
0 20 40 60 80 100 120
Secondary-school enrolment 1980-97 (% of cohort)
Per
cap
ita g
row
th 1
965-9
8,
ad
juste
d f
or
init
ial
inco
me (
% p
er
year) Thailand Japan
Finland
JamaicaGhana
Positive but decreasing returns to education
An increase in secondary-school enrolment by 25% of each cohort goes along with an increase in per capita growth by 1% per year
r = 0.72
87
countries
Natural resourcesNatural resources and and economic growtheconomic growth
Natural resources, if not well Natural resources, if not well managed, may turn out to be, managed, may turn out to be, at best, aat best, a mixed blessingmixed blessing..
Three possible channelsThree possible channels Dutch diseaseDutch disease Rent seekingRent seeking Education Education
What is the evidence?What is the evidence?
5
Natural resource abundance and economic structure
Resource poor,resource dependent
(Chad, Mali)
Resource rich,resource dependent
(OPEC)
Resource rich,resource free(Canada, USA)
Resource poor,resource free
(Jordan, Panama)
Reso
urc
e d
ep
en
den
ceR
eso
urc
e d
ep
end
ence
Resource abundanceResource abundance
Natural resources and economic growth 1965-98
Abundant natural resources, if not well Abundant natural resources, if not well managed, appearmanaged, appear harmful to growthharmful to growth..
-4
-2
0
2
4
6
8
10
0 10 20 30 40 50 60
Share of natural capital in national wealth (%)
Gro
wth
per
cap
ita
(% p
er y
ear)
86 countries
A ten percentage point increase in the natural capital share goes along with a decrease in per capita growth by nearly 1% per year.
Natural capital and economic growth
85 countries85 countries
What is the empirical evidence?
r = rank correlation
-8
-6
-4
-2
0
2
4
6
0 10 20 30 40 50 60
Share of natural capital in national wealth 1994 (%)
Gro
wth
of
GN
P p
er
ca
pit
a 1
96
5-1
99
8, a
dju
ste
d f
or
init
ial
inc
om
e (
%)
An increase in the natural capital share by 8% goes along with a decrease in per capita growth by 1% per year.
r = -0.64
8 African countriesI/Y = 0.05
8 Asian countriesI/Y = 0.32
Notice Notice
two two
clustercluster
ss
AA newnew measure of measure of natural natural resource resource abundanceabundanceConfirms Confirms results based results based on other on other measures measures
Venezuela
Australia
Recent literatureRecent literature
Four main linkages: 1. Dutch disease
Hurts level or composition of exports
2. Rent seeking Protectionism, corruption
3. Education4. False sense of security
Poor quality of policies and institutions
5. Investment
But Norway is,
so far at least,
an exception
ForeigForeig
n n capitalcapital
Social Social
capitacapita
llHumaHuma
n n capitacapita
llReal Real
capitalcapital
Natural capital tends to crowd Natural capital tends to crowd outout
In ves tm en t
In it ia l In com e N atu ra l C ap ita l
x E d u ca tion
G row th+
+
+––
––
Enter natural Enter natural resourcesresources
?
Natural resource abundance hurtsNatural resource abundance hurts investment investment and and education, and hence also growtheducation, and hence also growth
Natural resources and education
90 countries
0
1
2
3
4
5
6
7
8
9
0 10 20 30 40 50 60
Share of natural capital in national wealth (%)
Pu
blic
exp
end
itu
re o
n e
du
cati
on
(%
of
GN
P)
An 18 percentage point increase in the natural capital share is associated with a decrease in public expenditure on education by 1% of GNP.
Abundant Abundant natural natural resources resources appear to appear to crowd outcrowd out human human resourcesresources..
Secondary-school enrolment and natural capital
-40
-20
0
20
40
60
80
100
120
0 10 20 30 40 50 60
Share of natural capital in national wealth 1994 (%)
Se
co
nd
ary
-sc
ho
ol e
nro
lme
nt
19
80
-97
(%
of
co
ho
rt)
r = -0.66
Finnland
Niger
Vietnam
Uruguay
An increase in natural capital by 5% of national wealth goes along with a reduction in secondary-school enrolment by almost 10% of each cohort
91 91
countriescountries
Congo
Increased Increased natural natural resource resource abundancabundance hurts e hurts education education and and growthgrowth
Natural capital and investment
0
5
10
15
20
25
30
35
0 10 20 30 40 50 60
Share of natural capital in national wealth 1994 (%)
Gro
ss
do
me
sti
c in
ve
stm
en
t 1
96
5-1
99
8 (
% o
f G
DP
) An increase in the natural capital share by 10% is associated with a decrease in investment by 2% of GDP.
r = -0.38
Congo
Sierra Leone
Mali
85 countries85 countries
Natural capital and financial depth
85 countries85 countries
0
20
40
60
80
100
120
0 10 20 30 40 50 60
Share of natural capital in national wealth 1994 (%)
Mo
ne
y a
nd
qu
as
i-m
on
ey
19
65
-19
98
(%
of
GD
P) r = -0.68
Italy
Portugal
New Zealand
Financial depth and economic growth
85 countries85 countries-8
-6
-4
-2
0
2
4
6
0 20 40 60 80 100 120
Money and quasi-money 1965-1998 (% of GDP)
Gro
wth
of
GN
P p
er
ca
pit
a 1
96
5-1
99
8, a
dju
ste
d f
or
init
ial
inc
om
e (
% p
er
ye
ar)
r = 0.66
Jordan
Switzerland
JapanIndonesia
Natural resources and corruption
Abundant Abundant natural natural resources resources appear to appear to go along go along withwith corruptiocorruptionn..
0
1
2
3
4
5
6
7
8
9
10
0 5 10 15 20 25
Share of natural capital in national wealth (%)
Co
rru
pti
on
in
dex
New Zealand
45 countries
6 Inequality and economic growth
Two views:Two views:1.1. Inequality isInequality is goodgood for growthfor growth
Too much equality weakens Too much equality weakens incentives to work, save, and incentives to work, save, and acquire an educationacquire an education
2.2. Inequality isInequality is badbad for growthfor growth Too much inequality reduces social Too much inequality reduces social
cohesion and creates conflictcohesion and creates conflict
What is the empirical evidence?What is the empirical evidence?
Gini = 25 Gini = 25 20/20 ratio = 3 20/20 ratio = 3 (Scandinavia)(Scandinavia)
Gini = 30 Gini = 30 20/20 ratio = 4 20/20 ratio = 4 (Germany)(Germany)
Gini = 35 Gini = 35 20/20 ratio = 6 (UK) 20/20 ratio = 6 (UK)
Gini = 40 Gini = 40 20/20 ratio = 8 (USA) 20/20 ratio = 8 (USA)
Gini = 50 Gini = 50 20/20 ratio = 15 (Nigeria) 20/20 ratio = 15 (Nigeria)
Gini = 60 Gini = 60 20/20 ratio = 26 (Brazil) 20/20 ratio = 26 (Brazil)
Gini coefficient: An index of inequality
Gini = 25 Gini = 25 20/20 ratio = 3 20/20 ratio = 3 (Scandinavia)(Scandinavia)
Gini = 30 Gini = 30 20/20 ratio = 4 (Germany) 20/20 ratio = 4 (Germany)
Gini = 35 Gini = 35 20/20 ratio = 6 (UK) 20/20 ratio = 6 (UK)
Gini = 40 Gini = 40 20/20 ratio = 8 (USA) 20/20 ratio = 8 (USA)
Gini = 50 Gini = 50 20/20 ratio = 15 (Nigeria) 20/20 ratio = 15 (Nigeria)
Gini = 60 Gini = 60 20/20 ratio = 26 (Brazil) 20/20 ratio = 26 (Brazil)
Gini coefficient and the 20/20 ratio
Increase in Gini coefficient by 10 Increase in Gini coefficient by 10 points roughlypoints roughly doubles doubles the 20/20 ratiothe 20/20 ratio
Gini = 25Gini = 25 20/2020/20 ratio = 3ratio = 3 (Scandinavia)(Scandinavia)
Gini = 30 Gini = 30 20/20 20/20 ratio = 4 (Germany)ratio = 4 (Germany)
Gini = 35 Gini = 35 20/20 20/20 ratio = 6 (UK)ratio = 6 (UK)
Gini = 40 Gini = 40 20/20 20/20 ratio = 8 (USA)ratio = 8 (USA)
Gini = 50 Gini = 50 20/20 20/20 ratio = 15 (Nigeria)ratio = 15 (Nigeria)
Gini = 60 Gini = 60 20/20 20/20 ratio = 26 (Brazil)ratio = 26 (Brazil)
Increase in Gini coefficient by 10 Increase in Gini coefficient by 10 points roughlypoints roughly doubles doubles the 20/20 ratiothe 20/20 ratio
Gini coefficient and the 20/20 ratio
Gini = 25Gini = 25 20/2020/20 ratio = 3ratio = 3 (Scandinavia)(Scandinavia)
Gini = 30 Gini = 30 20/20 20/20 ratio = 4 (Germany)ratio = 4 (Germany)
Gini = 35Gini = 35 20/2020/20 ratio = 6ratio = 6 (UK)(UK)
Gini = 40 Gini = 40 20/20 20/20 ratio = 8 (USA)ratio = 8 (USA)
Gini = 50 Gini = 50 20/20 20/20 ratio = 15 (Nigeria)ratio = 15 (Nigeria)
Gini = 60 Gini = 60 20/20 20/20 ratio = 26 (Brazil)ratio = 26 (Brazil)
Increase in Gini coefficient by 10 Increase in Gini coefficient by 10 points roughlypoints roughly doubles doubles the 20/20 ratiothe 20/20 ratio
Gini coefficient and the 20/20 ratio
Gini = 25 Gini = 25 20/20 20/20 ratio = 3 ratio = 3 (Scandinavia)(Scandinavia)
Gini = 30 Gini = 30 20/20 20/20 ratio = 4ratio = 4 (Germany)(Germany)
Gini = 35 Gini = 35 20/20 20/20 ratio = 6 (UK)ratio = 6 (UK)
Gini = 40 Gini = 40 20/20 20/20 ratio = 8 (USA)ratio = 8 (USA)
Gini = 50 Gini = 50 20/20 20/20 ratio = 15 (Nigeria)ratio = 15 (Nigeria)
Gini = 60 Gini = 60 20/20 20/20 ratio = 26 (Brazil)ratio = 26 (Brazil)
Increase in Gini coefficient by 10 Increase in Gini coefficient by 10 points roughlypoints roughly doubles doubles the 20/20 ratiothe 20/20 ratio
Gini coefficient and the 20/20 ratio
Gini = 25 Gini = 25 20/20 20/20 ratio = 3 ratio = 3 (Scandinavia)(Scandinavia)
Gini = 30 Gini = 30 20/20 20/20 ratio = 4ratio = 4 (Germany)(Germany)
Gini = 35 Gini = 35 20/20 20/20 ratio = 6 (UK)ratio = 6 (UK)
Gini = 40 Gini = 40 20/20 20/20 ratio = 8ratio = 8 (USA)(USA)
Gini = 50 Gini = 50 20/20 20/20 ratio = 15 (Nigeria)ratio = 15 (Nigeria)
Gini = 60 Gini = 60 20/20 20/20 ratio = 26 (Brazil)ratio = 26 (Brazil)
Increase in Gini coefficient by 10 Increase in Gini coefficient by 10 points roughlypoints roughly doubles doubles the 20/20 ratiothe 20/20 ratio
Gini coefficient and the 20/20 ratio
y = -0.0799x + 2.1297
R2 = 0.1968
-6
-4
-2
0
2
4
6
0 20 40 60 80
Gini index
Per
cap
ita
gro
wth
196
5-98
, ad
just
ed f
or
init
ial
inco
me
(% p
er y
ear)
An increase in Gini index by 12 points goes along with a decrease in per capita growth by almost 1% per year
r = rank
correlation
r = -0.50
Growth and inequality, 1965-98
What
do the
data
say?
Sweden
Thailand
Central African Republic
South Africa
France
Brazil
No No discernibldiscernible sign e sign that that equality equality stands in stands in the way the way of of economic economic growthgrowth
Korea
75 countries
75 countries
Lesotho
Inequality and natural resource abundance
y = 0.3569x + 37.522
R2 = 0.13730
10
20
30
40
50
60
70
0 10 20 30 40 50 60
Share of natural capital in national wealth 1994 (%)
Gin
i in
de
x
An increase in natural capital by 3% of national wealth goes along with an increase in Gini index by 1 point
7 African countries where investment is 5% of GDP and per capita growth
is -1% per year
Notice a Notice a
clustercluster
Increased Increased natural natural resource resource abundancabundance e increases increases inequality inequality and and reduces reduces growthgrowth
Rwanda
Mauritania
Norway
Bangladesh
r = 0.41
75 countries
75 countries
What is the upshot?What is the upshot?
Economic growth responds toEconomic growth responds to public public policypolicy..
In particular, by encouragingIn particular, by encouragingsaving andsaving and investmentinvestment of high qualityof high quality foreignforeign tradetrade and investmentand investmenteducationeducationeconomic diversificationeconomic diversification
... the government can help foster ... the government can help foster rapidrapid economic growtheconomic growth..
Sir Arthur Lewis got it Sir Arthur Lewis got it rightright
Since the second Since the second world war it has world war it has become quite clear become quite clear that rapid economic that rapid economic growth is available growth is available to those countries to those countries with adequate with adequate natural resources natural resources whichwhich make the make the effort to achieve iteffort to achieve it..
W. ARTHUR LEWISW. ARTHUR LEWIS(1968)(1968)
What else?What else?These lessons are borne out by These lessons are borne out by
experience from around the world.experience from around the world.Additional lessons:Additional lessons:
Too muchToo much inflationinflation hurts saving, investment, hurts saving, investment, and trade and trade — and thereby also growth. and thereby also growth.
Too muchToo much SOESOE activity hurts the quality of activity hurts the quality of investment and education investment and education — and growth. and growth.
Too muchToo much agricultureagriculture and, more generally,and, more generally, natural resource dependencenatural resource dependence, if not well , if not well managed, hurts education and trade managed, hurts education and trade — and and thereby also growth. thereby also growth.
Too rapidToo rapid population growthpopulation growth also tends to also tends to impede economic growth.impede economic growth.
And too muchtoo much inequalityinequality also tends also tends to impede economic to impede economic growth.growth.
ReservationsReservationsEven so, the question of rapid growth is, Even so, the question of rapid growth is,
of course, a bit more complicated.of course, a bit more complicated.We also need to address a host ofWe also need to address a host of
politicalpolitical, , socialsocial, and, and culturalcultural questions questions as well as questions ofas well as questions of naturalnatural conditions, climate, and public health — conditions, climate, and public health — which would take us too far afield.which would take us too far afield.
But the main point remains:But the main point remains:To grow or not to growTo grow or not to grow is in large measure ais in large measure a
matter of choicematter of choice..Many of the constraints on growth areMany of the constraints on growth are man-man-
mademade, and can be removed., and can be removed.
Conclusion: ItConclusion: It can can be donebe done
Economic growth makes a difference, Economic growth makes a difference, especially in poor countries.especially in poor countries.A question literally of life and deathA question literally of life and death
And not only in poor countries,And not only in poor countries,for there is poverty amid plenty in rich for there is poverty amid plenty in rich
countries countries
Recall the main point of Gunnar Myrdal’sRecall the main point of Gunnar Myrdal’s Asian DramaAsian Drama (1968): (1968): It was that the Asian economies were It was that the Asian economies were
incapable of rapid economic growth!incapable of rapid economic growth!
New growth theory suggests that similar New growth theory suggests that similar claims about Africa will also be proven claims about Africa will also be proven wrong.wrong.
To grow or not to grow is in large measure a matter of choice.
To grow or not to grow is in large measure a matter of choice.
These slides can be viewed on my website: www.hi.is/~gylfason/lesotho.htm
Conclusion:Conclusion: It can It can be donebe done
The EndThe End