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The Analytics of Growth Dynamics An Empirical Approach December, 2011.
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Transcript of The Analytics of Growth Dynamics An Empirical Approach December, 2011.
The Analytics of Growth Dynamics
An Empirical Approach
December, 2011
Outline• A Forecasting Scenario for 2012-14
• Growth Facts
• Policy Questions
• The Centrality of economic growth
• The relationship between globalization and economic growth
• The Paradoxes of globalization
• From Correlates to Fundamental Causes
The Analytics of Growth Dynamics: GDP Forecast 2011
A Forecasting Scenario for 2012-14Real GDP Growth (PPPexchange rate)
Real GDP Growth (Market exchange rates)
A Forecasting Scenario for 2012-14Consumer price inflation(% av)
Main Policy Interest Rates(%; end-period)
Tremendous divergence in per-capita incomes since 1750
Small number of countries, mainly in East and Southeast Asia, have consistently caught up with growth leaders
Many countries have experienced growth spurts for a decade or two; but these have often fizzled out
Low growth over long term for a large number of countries
During the last two decades, China and (to a lesser extent) India have grown rapidly, while most other countries have experienced a growth slowdown.
Growth facts
The Policy Questions
• What determines the global growth rate of the leading countries in the last two centuries?
• To what extent is this growth rate sustainable? Can it be increased?
• What is the cause of the great differences between countries?
• Why are so many countries lagging behind? • How can we support their development?
Assume you care only about your own consumption Define rich and poor (within a country) as follows:
rich : having the same income level as people in the top decile (10%) of a country’s income distribution
poor: having the same income level as people in the bottom decile of a country’s income distribution
Define rich and poor country as follows rich country: a country that is in the top decile of all
countries ranked by per-capita GDP poor country: a country that is in the bottom decile of all
countries ranked by per-capita GDP
yj per-capita income (GDP) in country j;
dj income share of decile d in country j;
ydj average income level in decile d (=1,2,..,10) in country j.
ydj = 10 x dj x yj
Inequities in income: within and across countries
yj djRepresentative income of …
Poor country $868 Income share of top decile in poor countries = 0.35
Rich individual in poor country = $3,039
Rich country $34,767 Income share of bottom decile in rich countries
= 0.027
Poor individual in rich country = $9,387
(all figures in 2004 PPP-adjusted $)
Under-5 mortality rate (per 1000)
country average
bottom income quantile
top income quantile
ratio
representative poor country: Madagascar
123 142 49 2.9
representative rich country:
Denmark*6 7 2
ratio21
Source: WHO, World Bank.
* To be conservative, the distribution in Denmark is assumed to be same as in Madagascar.
Figure 1: World inequality has gone from almost exclusively a "within" country to mostly
an "across" country phenomena
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
1800 1820 1840 1860 1880 1900 1920 1940 1960 1980 2000
Years
Fra
cti
on
of
To
tal
Ine
qu
alit
y D
ue
to
A
cro
ss
Co
un
trie
s
Theil coefficient
Mean ln deviation
Source: Bourguignon and Morrison (2002), via Pritchett (2003)
Source: Maddison (2001), in 1990 international $
The Great DivergenceLong-term economic growth: the Great Divergence
100
1000
10000
100000
1500 1600 1700 1820 1870 1913 1950 1973 1998
19
90
PP
P $
Western Europe
Eastern Europe
Former USSR
United States
Other Western Offshoots
Latin America
Japan
China
India
Other Asia
Africa
Long-term economic growth: the Great Divergence
100
1000
10000
100000
1500 1600 1700 1820 1870 1913 1950 1973 1998
1990
PP
P $
Western Europe
Eastern Europe
Former USSR
United States
Other Western Offshoots
Latin America
Japan
China
India
Other Asia
Africa
Source: Maddison (2001)
Major landmarks in economic growth
Industrial revolution in Europe and the onset of “modern economic growth” (c.1750-1820)
Source: Maddison (2001). In 1990 PPP $.
450 400
774 8941024
1232
1974
34734594
11534
17921
400 400 400 400473
1201
2431
5257
9288
16172
26146
450 450572 575 571 575 543
640 635
1231
2936
425 416 400 400 400 418 444585
852
1365 1368
100
1000
10000
100000
0 1000 1500 1600 1700 1820 1870 1913 1950 1973 1998
year
Western Europe
Eastern Europe
Western off shoots
Latin America
J apan
Other Asia
Af rica
Per-capita GDP across various regions over the millennium
Long-term economic growth: the Great Divergence
100
1000
10000
100000
1500 1600 1700 1820 1870 1913 1950 1973 1998
1990
PP
P $
Western Europe
Eastern Europe
Former USSR
United States
Other Western Offshoots
Latin America
Japan
China
India
Other Asia
Africa
Source: Maddison (2001)
Major landmarks in economic growth
Absence of economic growth in Asia (except Japan) and Africa before 1950)
Long-term economic growth: the Great Divergence
100
1000
10000
100000
1500 1600 1700 1820 1870 1913 1950 1973 1998
1990
PP
P $
Western Europe
Eastern Europe
Former USSR
United States
Other Western Offshoots
Latin America
Japan
China
India
Other Asia
Africa
Source: Maddison (2001)
Major landmarks in economic growth
Japanese catchup post-1950
Long-term economic growth: the Great Divergence
100
1000
10000
100000
1500 1600 1700 1820 1870 1913 1950 1973 1998
1990
PP
P $
Western Europe
Eastern Europe
Former USSR
United States
Other Western Offshoots
Latin America
Japan
China
India
Other Asia
Africa
Source: Maddison (2001)
Major landmarks in economic growth
A world divided between rich and poor countries
(percent below $1.25 per day poverty line, in 2005 PPP $)(percent below $1.25 per day poverty line, in 2005 PPP $)
Source: Thomas (2007)
Source: Thomas (2007)
Trade opportunities, capital flows, access to technology increase potential for catch-up
On the other hand, policies of free trade and free capital mobility do not necessarily provide the most conducive environment for domestic entrepreneurship, investment, and structural change. Cf. relationships between tariffs and growth in late 19th
century; downside of recent experience with financial globalization
What does the overall empirical record show?
Historical experience with growth
0
1
2
3
4
5
6
7
8
9
1000-1500 1500-1820 1820-1870 1870-1913 1913-1950 1950-73 1973-90 1990-2005
Western Europe United States Other Westernoffshoots
Mexico Norway Japan South Korea China
GDP per capita growth rate of fastest growingcountry/region (annual average, %)World GDP per capita growth rate (annual
average, %)
Foreign economic policies in the World Bank’s star “globalizers” of the 1990s growth rate average
tariffs (early to mid-
‘90s)
NTBs? WTO member? (early to mid-
‘90s)
Open capital
account?
China 7.1 31.2 yes no no Vietnam 5.6 30-50 yes no no India 3.3 50.5 yes yes no Uganda 3.0 14.4 yes yes no Note: List of star globalizers taken from World Bank, Globalization, Growth, and Poverty: Building an Inclusive World Economy, 2001.
Economic growth
3.3%
5.6%
6.4%
1.2%
3.3% 3.3%
2.8%
-0.8%
1.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
1960-1980 1980-90 1990-2003
East Asia & Pacif ic
South Asia
Latin America & Caribbean
Heritage Foundation Index of "Economic Freedom"*
5
5.5
6
6.5
7
7.5
8
China India Vietnam Argentina Bolivia Brazil Chile El Salvador Mexico Uruguay
World Bank's star economic globalizers
*The index is a composite quantitative measure of “the 10 key ingredients of economic freedom such as low tax rates, tariffs, regulation, and government intervention, as well as strong property rights, open capital markets, and monetary stability.”
Source: Jeanne and Ranciere (2005)
Foreign reserves (excluding gold) in months of importsindustrial and non-oil developing countries
0
1
2
3
4
5
6
7
8
9
1950
1952
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
Industrial Countries
Developing Countries (excl. oil-exportingcountries)
Source: Prasad, Rajan and Subramanian (2006)
A parable of two countriesCountry A
… has preferential, free access to the US market for its exports… can send several millions of its citizens to the US as workers… receives huge volumes of direct investment… is totally plugged in to US production chains… for which the US Treasury stands ready to as lender of last resort… has effective security guarantee from the US military
Does globalization get better than this? Whereas B is a country for which
… the US maintains a trade embargo, and does not have diplomatic relations
… which receives neither aid nor any other kind of assistance… and which is kept outside international organizations like the WTO… which is prevented from borrowing from the IMF and WB.
Which country did better?
Four models of growth:
1. Foreign borrowing-led growth• countries in the periphery of EU in 1990s, LA in 1970s, …
2. Commodity booms• 19th century, many African countries in the last decade
3. Growth based on deep integration• Goods and factor market integration + institutions +
transfers (convergence within EU)4. Structural transformation-led growth
• From low-productivity traditional products to modern, mostly manufacturing activities (and lately increasingly into tradable services)
• Based not on (static) comparative advantage, but on producing what richer countries produce
• Japan, S. Korea, ChinaOnly the last is a realistic possibility for most countries
EU versus NAFTA models One is hard because it entails legal, institutional,
political integration Labor mobility, in addition to capital and product-market
integration Embedded within EU-wide institutions
Acquis communautaire (>100,000 pages) European Court of Justice European Central Bank and a common currency (for most) Significant inter-regional transfers
Growing pains of a quasi-federal political system The other is comparatively easy But only the first has the potential to foster economic
convergence The EU model not in the cards for most developing
countries
High-growth countries are those that are able to undertake rapid structural transformation from low-productivity (“traditional”) to high-productivity
(“modern”) activities to tradables in particular and to industrial activities within tradables and also in more recent times, tradable services
Economic rationale: modern tradables are under-produced in laissez-faire because they suffer disproportionately from the market and institutional failures that are rampant in poor nations (Rodrik 2009)
Sound “fundamentals” Market-friendly policies Macro stability
But also: Industrial policies in support of new economic
activities Undervalued currencies to promote tradables A certain degree of repression of finance, to
enable: Development banking Subsidized credit Undervaluation
Permissive of industrial policies At least under GATT and Until recently
No pressure to liberalize finance and capital accounts Until recently
Willing to absorb excess supply of tradables U.S. attitude of benign neglect towards current account
deficits BW I and II
Unconcerned with undervaluation in developing countries
Again, until recently
Trade regime Agreements on subsidies, TRIMs, TRIPs, and other
negotiations on services narrowing room for “industrial policies”
International capital markets Financial codes and standards no roles for
development banking and credit market interventions Monetary rules
CB independence and “free floating” no role for exchange rate as developmental policy instrument
income
institutionstrade
geographyexogenous
partlyendogenous
endogenous
Growth Economics: Rethinking The Links
endowments productivity
income
institutionstrade
geography(Jared Diamond, Jeffrey Sachs)
endowments productivity
1, 2
4
3
Growth Economics: Rethinking The Links
The Analytics Of Growth Dynamics: From Correlates to Fundamental Causes • The Correlates of economic growth are physical capital, human capital and technology. •But these are only proximate causes of economic growth and economic success: why do certain societies fail to improve their technologies, invest more in physical capital, and accumulate more human capital? • To illustrate this point further: how did South Korea and Singapore manage to grow, while Nigeria failed to take advantage of the growth opportunities? If physical capital accumulation is so important, why did Nigeria not invest more in physical capital? If education is so important, why our education levels in Nigeria still so low and why is existing human capital not being used more effectively? •The answer to these questions is related to the fundamental causes of economic growth. •We can think of the following list of potential fundamental causes: luck (or multiple equilibria) ;geographic differences; institutional differences ; cultural differences •An important caveat should be noted: discussions of geography, institutions and culture can sometimes be carried out without explicit reference to growth models or even to growth empirics. But it is only by formulating parsimonious models of economic growth and confronting them with data that we can gain a better understanding of both the proximate and the fundamental causes of economic•growth.
The Analytics Of Growth Dynamics: From Correlates to Fundamental Causes
The Analytics of Growth Dynamics: The Role of FinanceElements of Rapid Growth:• What are the reasonably robust empirical correlates of economic growth: Macroeconomic stability Stable, predictable “property rights” (institutional quality) Financial sector Something about external policies
Government’s role in finance:• Governments need to do More and better in some areas Less in others• And to recognize how finance without frontiers is changing what they can
do, and can achieve• Because finance matters for growth and poverty reduction, and we have
the evidenceidence
What has been empirically prooved:
• Strength of relationship between finance and growth Importance of legal and information base
• Importance of private sector monitoring for development and stability Cautions on deposit insurance
• The cost of state ownership• The benefits of foreign banking • How technology is leading to finance without frontiersWhat should not be done:
• To ‘leave finance to the market.’ • To privatize banks all at once• Open up to entry to foreign financial firms and leave it to them.• Open to capital flows without robust regulatory system.
“Augmented” Washington Consensus the previous 10 items, plus:
1. Fiscal discipline2. Reorientation of public expenditures3. Tax reform4. Financial liberalization5. Unified and competitive exchange rates6. Trade liberalization7. Openness to DFI8. Privatization9. Deregulation10.Secure Property Rights
11. Corporate governance 12. Anti-corruption13. Flexible labor markets14. WTO agreements15. Financial codes and standards16. “Prudent” capital-account opening 17. Non-intermediate exchange rate regimes18. Independent central banks/inflation targeting19. Social safety nets20. Targeted poverty reduction
Original Washington Consensus
Growth Economics: The Washington Consensus
Latin America: Only 3 countries have grown faster during the 1990s than in the 1950-80 period (and one of those 3 is [was] Argentina!)
Countries in transition from socialism: Real output below 1990 levels in all but four former socialist economies; poverty rates remain higher 1990 even in the most successful countries (e.g., Poland)
Sub-Saharan Africa: Results remain very disappointing, and far worse than those obtained prior to the late 1970s
Widening income gaps: Income inequalities have worsened in most of the countries that have adopted the WC agenda
Frequent and painful financial crises: East Asia, Brazil, Russia, Argentina, Turkey.
Questions about the augmented WCFeasibility
Can all of it be done together?Priorites
Which reforms first?Relevance
Does the recipe correspond to actual experience of successful cases?
UniformityIs there really one way?
Economic principles do not map into
a unique set of institutional arrangements
is not that they present inadequate levels of market access for developing nations
Doha round and agriculture a sideshow No developing country’s growth potential is significantly constrained at
present due to inadequate market access but that they are premised on the notion that removing
remaining impediments to trade in goods, services and capital are the primary lever with which to achieve convergence
thus forcing developing nations to trade valuable “policy space” in exchange for ephemeral gains in market access