Determinants of Growth
description
Transcript of Determinants of Growth
![Page 1: Determinants of Growth](https://reader035.fdocuments.in/reader035/viewer/2022062315/5681649b550346895dd67b17/html5/thumbnails/1.jpg)
Determinants of Growth
Danyang XieFall 2013
![Page 2: Determinants of Growth](https://reader035.fdocuments.in/reader035/viewer/2022062315/5681649b550346895dd67b17/html5/thumbnails/2.jpg)
Outline• A Tale of Two Nations: Philippines and South Korea• Growth Makes a Difference• How can a country grow faster• A Daring Plan: Charter Cities• Convergence
– OECD Convergence– Convergence among US States– Evidence from China Provincial Data
• Sources of Economic Growth– Why China Grow so Fast?– HK versus Singapore
![Page 3: Determinants of Growth](https://reader035.fdocuments.in/reader035/viewer/2022062315/5681649b550346895dd67b17/html5/thumbnails/3.jpg)
Philippines and South Korea
• Per Capita GDP $ 640• Population 28 million• 27 % of people lives in
Manila
• Per Capita GDP $ 640• Population 25 million• 28% of people lives in
Seoul
1960
![Page 4: Determinants of Growth](https://reader035.fdocuments.in/reader035/viewer/2022062315/5681649b550346895dd67b17/html5/thumbnails/4.jpg)
By 2003, per capita income in South Korea is about 12 times as large as that in Philippines
Is there some action a government of Philippinescould take that would lead the Philippines’ economy to grow like South Korean? If so,what exactly? If not, why not?
“Once one starts to think about these questions,it is hard to think about anything else”
Lucas, 1988
![Page 5: Determinants of Growth](https://reader035.fdocuments.in/reader035/viewer/2022062315/5681649b550346895dd67b17/html5/thumbnails/5.jpg)
Growth Makes a Difference
![Page 6: Determinants of Growth](https://reader035.fdocuments.in/reader035/viewer/2022062315/5681649b550346895dd67b17/html5/thumbnails/6.jpg)
Calculating Growth Rate• The growth rate of x from time t to t+1 is given by
• Rule of 70– If the growth rate of x is 2%, then it takes 70/2=35 periods to double
x
x t x tx t
( ) ( )( ) % 1 100
![Page 7: Determinants of Growth](https://reader035.fdocuments.in/reader035/viewer/2022062315/5681649b550346895dd67b17/html5/thumbnails/7.jpg)
Growth Makes the Difference• Between 1960 and 1980
– India’s growth rate of income was 1.4% per year– South Korea’s growth rate was 7% per year
• As a result– Indian income will double every __ years– Korean income will double every __ years
![Page 8: Determinants of Growth](https://reader035.fdocuments.in/reader035/viewer/2022062315/5681649b550346895dd67b17/html5/thumbnails/8.jpg)
Growth Makes the Difference• Between 1960 and 1980
– India’s growth rate of income was 1.4% per year– South Korea’s growth rate was 7% per year
• As a result– Indian income will double every 50 years– Korean income will double every 10 years
![Page 9: Determinants of Growth](https://reader035.fdocuments.in/reader035/viewer/2022062315/5681649b550346895dd67b17/html5/thumbnails/9.jpg)
What a Difference!
• An Indian will, on average, be twice as well off as his grandfather
• A Korean will be __ times as well off as his grandfather
![Page 10: Determinants of Growth](https://reader035.fdocuments.in/reader035/viewer/2022062315/5681649b550346895dd67b17/html5/thumbnails/10.jpg)
What a Difference!
• An Indian will, on average, be twice as well off as his grandfather
• A Korean will be 32 times as well off as his grandfather
![Page 11: Determinants of Growth](https://reader035.fdocuments.in/reader035/viewer/2022062315/5681649b550346895dd67b17/html5/thumbnails/11.jpg)
How can a country grow faster?
• “Simply advising a society to follow the Korean model is like advising an aspiring basketball player to follow the Michael Jordan model.”
Robert E. Lucas, Jr., 1993
![Page 12: Determinants of Growth](https://reader035.fdocuments.in/reader035/viewer/2022062315/5681649b550346895dd67b17/html5/thumbnails/12.jpg)
How can a country grow faster?
• Some suggestions– Encourage human capital accumulation– Subsidize basic scientific research– Open up the economy– Import Ideas– Promote on the job training– Develop financial sector?– Build a Democratic Society?
![Page 13: Determinants of Growth](https://reader035.fdocuments.in/reader035/viewer/2022062315/5681649b550346895dd67b17/html5/thumbnails/13.jpg)
Empirical Results from 4 million regressions (Xavier Sala-i-Martin, 1997)
• Sala-i-Martin ran regressions that include 1960 per capita GDP, 1960 Primary School Enrollment, and 1960 Life Expectancy and tested the significance of other 59 variables
• He found that 21 out of the 59 variables are significant for economic growth at 95 percent level
![Page 14: Determinants of Growth](https://reader035.fdocuments.in/reader035/viewer/2022062315/5681649b550346895dd67b17/html5/thumbnails/14.jpg)
The significant 21 variablesEquipment Investment +Number of Years Open Economy +Fraction of Confucius +Rule of Law +Fraction of Muslim +Less Political Rights -Latin American Dummy -Sub-Sahara African Dummy -Less Civil Liberty -Revolution and Coups -Fraction of GDP in Mining +S.D. Black Market Premium -Primary Exports in 1970 -Degree of Capitalism +War Dummy -Non-Equipment Investment +Absolute Latitude +Exchange Rate Distortions -Fraction of Protestant -Fraction of Buddhist +Fraction of Catholic -
![Page 15: Determinants of Growth](https://reader035.fdocuments.in/reader035/viewer/2022062315/5681649b550346895dd67b17/html5/thumbnails/15.jpg)
Regional VariablesEquipment Investment +Number of Years Open Economy +Fraction of Confucius +Rule of Law +Fraction of Muslim +Less Political Rights -Latin American Dummy -Sub-Sahara African Dummy -Less Civil Liberty -Revolution and Coups -Fraction of GDP in Mining +S.D. Black Market Premium -Primary Exports in 1970 -Degree of Capitalism +War Dummy -Non-Equipment Investment +Absolute Latitude +Exchange Rate Distortions -Fraction of Protestant -Fraction of Buddhist +Fraction of Catholic -
![Page 16: Determinants of Growth](https://reader035.fdocuments.in/reader035/viewer/2022062315/5681649b550346895dd67b17/html5/thumbnails/16.jpg)
Political variablesEquipment Investment +Number of Years Open Economy +Fraction of Confucius +Rule of Law +Fraction of Muslim +Less Political Rights -Latin American Dummy -Sub-Sahara African Dummy -Less Civil Liberty -Revolution and Coups -Fraction of GDP in Mining +S.D. Black Market Premium -Primary Exports in 1970 -Degree of Capitalism +War Dummy -Non-Equipment Investment +Absolute Latitude +Exchange Rate Distortions -Fraction of Protestant -Fraction of Buddhist +Fraction of Catholic -
![Page 17: Determinants of Growth](https://reader035.fdocuments.in/reader035/viewer/2022062315/5681649b550346895dd67b17/html5/thumbnails/17.jpg)
Market Distortions and Market PerformanceEquipment Investment +Number of Years Open Economy +Fraction of Confucius +Rule of Law +Fraction of Muslim +Less Political Rights -Latin American Dummy -Sub-Sahara African Dummy -Less Civil Liberty -Revolution and Coups -Fraction of GDP in Mining +S.D. Black Market Premium -Primary Exports in 1970 -Degree of Capitalism +War Dummy -Non-Equipment Investment +Absolute Latitude +Exchange Rate Distortions -Fraction of Protestant -Fraction of Buddhist +Fraction of Catholic -
![Page 18: Determinants of Growth](https://reader035.fdocuments.in/reader035/viewer/2022062315/5681649b550346895dd67b17/html5/thumbnails/18.jpg)
Variables not strongly related to growth
• Government spending• Inflation rate• Inflation variance• Tariff restrictions• Index of Democracy 1965• Urbanization Rate• …
![Page 19: Determinants of Growth](https://reader035.fdocuments.in/reader035/viewer/2022062315/5681649b550346895dd67b17/html5/thumbnails/19.jpg)
A Daring Plan: Charter Cities
• Paul Romer: TED Lecture• Rules are important– North Korea vs South Korea– Haiti vs Dominican Republic– Hong Kong– Honduras
![Page 20: Determinants of Growth](https://reader035.fdocuments.in/reader035/viewer/2022062315/5681649b550346895dd67b17/html5/thumbnails/20.jpg)
Convergence Hypothesis
• Poor countries should grow faster than rich countries because:– Capital stock is low relative to labor, the return to
capital should be high in poor countries– Poor countries can free ride on the technologies
developed in the rich countries– Migration is a third source of convergence
![Page 21: Determinants of Growth](https://reader035.fdocuments.in/reader035/viewer/2022062315/5681649b550346895dd67b17/html5/thumbnails/21.jpg)
Empirical findings
• There is no unconditional convergence
![Page 22: Determinants of Growth](https://reader035.fdocuments.in/reader035/viewer/2022062315/5681649b550346895dd67b17/html5/thumbnails/22.jpg)
No unconditional convergence
![Page 23: Determinants of Growth](https://reader035.fdocuments.in/reader035/viewer/2022062315/5681649b550346895dd67b17/html5/thumbnails/23.jpg)
Empirical findings
• There is no unconditional convergence• Convergence does occur among countries
with similar characteristics (conditional convergence)
![Page 24: Determinants of Growth](https://reader035.fdocuments.in/reader035/viewer/2022062315/5681649b550346895dd67b17/html5/thumbnails/24.jpg)
Conditional Convergence (OECD)
![Page 25: Determinants of Growth](https://reader035.fdocuments.in/reader035/viewer/2022062315/5681649b550346895dd67b17/html5/thumbnails/25.jpg)
China: Provincial Convergence
• Convergence is significant for the period 1978-89
• Convergence is insignificant for the period 1989-97
Source: Table 3.3. China: Competing in the Global Economy. IMF 2003.
![Page 26: Determinants of Growth](https://reader035.fdocuments.in/reader035/viewer/2022062315/5681649b550346895dd67b17/html5/thumbnails/26.jpg)
Conditional Convergence (US States)
![Page 27: Determinants of Growth](https://reader035.fdocuments.in/reader035/viewer/2022062315/5681649b550346895dd67b17/html5/thumbnails/27.jpg)
Openness Helps Convergence
![Page 28: Determinants of Growth](https://reader035.fdocuments.in/reader035/viewer/2022062315/5681649b550346895dd67b17/html5/thumbnails/28.jpg)
Openness Helps Convergence
Lucas: Trade and Diffusion of the Industrial Revolution, NBER August 2007
![Page 29: Determinants of Growth](https://reader035.fdocuments.in/reader035/viewer/2022062315/5681649b550346895dd67b17/html5/thumbnails/29.jpg)
Sources of economic growth
• Technological progress (TFP growth)• Increases in capital inputs• Increases in labor inputs
![Page 30: Determinants of Growth](https://reader035.fdocuments.in/reader035/viewer/2022062315/5681649b550346895dd67b17/html5/thumbnails/30.jpg)
Growth Accounting
Production function: Y = A F(K, N)
In terms of growth:
NNb
KKa
AA
YY
Total factor productivity growth
elasticity of Y w.r.t K
elasticity of Y w.r.t. N
![Page 31: Determinants of Growth](https://reader035.fdocuments.in/reader035/viewer/2022062315/5681649b550346895dd67b17/html5/thumbnails/31.jpg)
In the US economy
a = 0.36 and b = 0.64
YY
AA
KK
NN
0 36 0 64. .
• 10% increase in A raises Y by 10%• 10% increase in K raises Y by 3.6%• 10% increase in N raises Y by 6.4%
![Page 32: Determinants of Growth](https://reader035.fdocuments.in/reader035/viewer/2022062315/5681649b550346895dd67b17/html5/thumbnails/32.jpg)
How to estimate the elasticities?
• The elasticities a and b are often estimated by capital income share and labor income share, respectively.
• b = labor income / GDP• a = 1 – b• This approach works well in economies with
competitive markets and constant returns to scale.
![Page 33: Determinants of Growth](https://reader035.fdocuments.in/reader035/viewer/2022062315/5681649b550346895dd67b17/html5/thumbnails/33.jpg)
Growth accounting exercise I
Why China Grows So Fast?
![Page 34: Determinants of Growth](https://reader035.fdocuments.in/reader035/viewer/2022062315/5681649b550346895dd67b17/html5/thumbnails/34.jpg)
China: Sources of Growth, 1952-94
Period Output TFP Capital Labor
1952-78 5.8 1.1 6.2 2.5
1979-94 9.3 3.9 7.7 2.7
Source: Hu and Khan (1996)
In-Class Number Crunching III: If we use labor income share as an approximation for the labor elasticity,what is the average labor income share since economic reform in 1979?
![Page 35: Determinants of Growth](https://reader035.fdocuments.in/reader035/viewer/2022062315/5681649b550346895dd67b17/html5/thumbnails/35.jpg)
China: Percentage Contribution to Output Growth
Period TFP Capital Labor
1952-78 18 65.2 16.8
1979-94 41.6 45.6 12.8
Source: Hu and Khan (1996)
Percentage contribution from capital to output growth after reform:a*(growth rate of capital)/(output growth)
![Page 36: Determinants of Growth](https://reader035.fdocuments.in/reader035/viewer/2022062315/5681649b550346895dd67b17/html5/thumbnails/36.jpg)
Will China continue to grow?• 120 million of rural labor is yet to be fully employed• Plenty of room for improvement on rule of law• Incentive mechanism in the financial system remains to be
put in place• Human capital accumulation• Much catching up to do: per capita income in China is
estimated to be about $6,200 in 2012, ranked 87th, still far behind
The precondition for growth is social stability
![Page 37: Determinants of Growth](https://reader035.fdocuments.in/reader035/viewer/2022062315/5681649b550346895dd67b17/html5/thumbnails/37.jpg)
Growth accounting exercise II
A tale of two cities
![Page 38: Determinants of Growth](https://reader035.fdocuments.in/reader035/viewer/2022062315/5681649b550346895dd67b17/html5/thumbnails/38.jpg)
A tale of two cities
TFP Capital Labor
Hong Kong 30 42 28
Singapore -5 73 32
Source: Alwyn Young (1995)
Percentage Contribution to Output Growth
![Page 39: Determinants of Growth](https://reader035.fdocuments.in/reader035/viewer/2022062315/5681649b550346895dd67b17/html5/thumbnails/39.jpg)
Non-parametric estimation
TFP growth estimate (%) Capital Labor
Conventional Country
Young Collins
Nonparametric
Elasticity Income share Elasticity Income share
Hong Kong SAR 4.1 4.1 3.4 0.41 0.37 0.71 0.63
Korea 2.8 2.3 3.7 0.18 0.29 0.81 0.71
Singapore 0.5 1.8 3.7 0.17 0.49 0.63 0.51
Taiwan Province of China
3.8 2.1 3.8 0.19 0.26 0.76 0.74
Source: Iwata, Khan, and Murao (IMF Staff Papers 2003)
![Page 40: Determinants of Growth](https://reader035.fdocuments.in/reader035/viewer/2022062315/5681649b550346895dd67b17/html5/thumbnails/40.jpg)
Summary• Growth makes a difference• Besides the three variables that are commonly believed to
influence growth (initial GDP, initial school enrollment, initial life expectancy), there are 21 variables that strongly related to growth. Rules that provide the right incentives are extremely important.
• No unconditional convergence; but conditional convergence exists and is strong among the economies that are open.
• Pay attention to TFP growth. Its estimation is sensitive to the estimates of the elasticities.