Economic Growth and poverty reduction
description
Transcript of Economic Growth and poverty reduction
ECONOMIC GROWTH AND
POVERTY REDUCTION
Thorvaldur GylfasonJoint Vienna Institute/
Institute for Capacity DevelopmentDistance Learning Course on
Financial Programming and PoliciesVienna, Austria
NOVEMBER 26–DECEMBER 7, 2012
I. Determinants of growth1) Saving and investment2) Efficiency
a) Liberalizationb) Stabilizationc) Privatizationd) Educatione) Financef) Diversificationg) Institutions
II. Pictures of growthIII. Empirical evidence
OUTLINE
Time
Natio
nal e
cono
mic
outp
ut
Actual outputPotential output
Business cyclesin the short run
Economic growthin the long run
Downswing
Upswing
ECONOMIC GROWTH:SHORT RUN VS. LONG RUN
To analyze changes in actual output from year to year – in the short runNeed short-run macroeconomic theory
Keynesian or neoclassical
To analyze the path of potential output over long periodsNeed modern theory of economic
growthNeoclassical or endogenous
ECONOMIC GROWTH:SHORT RUN VS. LONG RUN
Time
Natio
nal e
cono
mic
outp
ut
Rapid growth
Slow growth
West-Germany : East-GermanyAustria : Czech RepublicFinland : EstoniaTaiwan : ChinaSouth Korea : North Korea
Botswana : NigeriaKenya : TanzaniaThailand : BurmaTunisia : MoroccoSpain : ArgentinaMauritius : Madagascar
Economic system
Economic policy?
GROWING TOGETHER,GROWING APART
Years
Outp
ut p
er c
apita
Case B: 2% a year
Case A: 0.4% a year
Aspects of efficiency Economic system Economic policy
Threefold difference after 60 years
0 60
China – Europe:1:1 in 1400
1:20 in 1989GROWING APART
SOURCES OF GROWTH:INVESTMENT AND EDUCATION
Growth
Investment Education
+ +
+ denotes a positive effect in the direction shown
SOURCES OF GROWTH:INVESTMENT AND EDUCATION
Growth
Investment Education
+ +
Adam Smith knew all this, and more, as did Arthur Lewis
SOURCES OF GROWTH:INVESTMENT AND EDUCATION
Growth
Investment Education
+ +
Robert Solow raised doubts about long-run linkages
MORE SOURCES OF GROWTH:TRADE, STABILITY, NATURE
Growth
Investment
X
Education
+ +
Arthur Lewis: X can be trade, stable politics, good weather
MORE SOURCES OF GROWTH:TRADE, STABILITY, NATURE
Growth
Investment
X
Education
+ +
But Solow carried the day: long-run growth is exogenous!
MORE SOURCES OF GROWTH:TRADE, STABILITY, NATURE
Growth
Investment
Trade
Education
+ +
Suppose X is openness to trade; then …
+
Traces the rate of growth of output per capita to a single source:• Technological progress
Hence, long-run growth 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 NEOCLASSICAL THEORY OF EXOGENOUS GROWTH
Traces the rate of growth of output per capita to three main sources:
• Saving• Efficiency• Depreciation
“The proximate causes of economic growth are the effort to economize, the accumulation of knowledge, and the
accumulation of capital.”W. ARTHUR LEWIS
THE NEW THEORY OF ENDOGENOUS GROWTH
You may recognize the endogenous growth model as a reinterpretation of the Harrod-Domar model
where growth depends on• The saving rate• The capital/output ratio• The depreciation rate
ENDOGENOUS GROWTH IN THE HARROD-DOMAR MODEL
Four building blocks S = I
Saving equals investment in equilibrium S = sY
Saving is proportional to income I = K + K
Investment involves addition to capital stock
Y = EK Output depends on quality and quantity of
capital
A SIMPLE MODEL OF ENDOGENOUS GROWTH
Let’s do the arithmetic: S = sY = I = K + K = Y/E + Y/E Rearranging terms we find Y/E = sY - Y/E
Multiplying by E and dividing by Y gives
Y/Y = sE -
A SIMPLE MODEL OF ENDOGENOUS GROWTH
Bottom line g = sE - Rate of economic growth equals Saving rate
times Efficiency (i.e., the output/capital ratio)
minus Depreciation
A SIMPLE MODEL OF ENDOGENOUS GROWTH
Three implications for growth
0dsdg
0dEdg
0d
dg
Saving is good for growth
Efficiency helps growth
Depreciation hurts growth
WHAT THIS MEANSg = sE -
IMPORTANCE OF GROWTH Our standard of living today depends
solely, by definition, on economic growth Rich countries are rich because they grew
rapidly over long periods Poor countries are poor because they did
not grow rapidly enough So why do some countries grow more
rapidly than others? Why, e.g., did Thailand leave Zambia so far
behind in one generation? Hard to think of anything else (Lucas)
GROWING APART:THAILAND AND ZAMBIA Thailand and
Zambia started out in a similar position and grew apart
Thailand pursued growth-friendly policies, stressing liberal trade, stability, private enterprise, and education
GDP per capita 1965-2004 (US$ at 2000 prices)
0
400
800
1,200
1,600
2,000
2,400
65 70 75 80 85 90 95 00
THAILANDZAMBIA
Thailand 4.7% per yearZambia -1.5% per year
1.06239 = 10.4
GDP per capita 1900-2003 (US$ at 1990 prices)
GROWING APART:SWEDEN AND ARGENTINA Argentina and
Sweden went hand in hand 1900-1930, and then grew apart
Sweden pursued free trade, liberal democracy, and income equality, and avoided high inflation
Argentina did not
0
4,000
8,000
12,000
16,000
20,000
24,000
1900 1925 1950 1975 2000
ARGENTINASWEDEN
Sweden 2.1% per yearArgentina 1.0% per year
1.011103 = 3.1
GDP per capita 1965-2004 (US$ at 2000 prices)
Argentina and Spain went hand in hand 1965-1970, and then grew apart
Spain pursued free trade and price stability through EU membership and adopted democracy
Argentina lacked stability
GROWING APART:SPAIN AND ARGENTINA
4,000
6,000
8,000
10,000
12,000
14,000
16,000
65 70 75 80 85 90 95 00
SPAINARGENTINA
Spain 2.7% per yearArgentina 0.6% per year
1.02139 = 2.2
GDP per capita 1965-2004 (US$ at 2000 prices)
Botswana and Nigeria went hand in hand 1965-1970, and then grew apart
Botswana stressed education and resisted corruption
Nenadi Usman, Nigeria’s finance minister: “Oil has made us lazy”
GROWING APART:BOTSWANA AND NIGERIA
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
65 70 75 80 85 90 95 00
BOTSWANANIGERIA
Botswana 7.1% per yearNigeria 0.6% per year
1.06539 = 11.7
GDP per capita 1965-2004 (US$ at 1990 prices)
Mauritius did many things right and reaped rapid growth
Madagascar’s economy has remained at a standstill all this time for many reasons, as we will see shortly
GROWING APART:MAURITIUS AND MADAGASCAR
0
1,000
2,000
3,000
4,000
5,000
65 70 75 80 85 90 95 00
MAURITIUSMADAGASCAR
Mauritius 4.3% per yearMadagascar -1.2% per year
1.05539 = 8.1
A TALE OF TWO COUNTRIES
Country A Country B
A TALE OF TWO COUNTRIES
In % Country A Country B
Girls at primary school
100 72
A TALE OF TWO COUNTRIES
In % Country A Country B
Girls at primary school
100 72Investment ratio
25 11
A TALE OF TWO COUNTRIES
In % Country A Country B
Girls at primary school
100 72Investment ratio
25 11Export ratio 58 23
A TALE OF TWO COUNTRIES
In % Country A Country B
Girls at primary school
100 72Investment ratio
25 11Export ratio 58 23Primary export ratio
33 80
A TALE OF TWO COUNTRIES
In % Country A Country B
Girls at primary school
100 72Investment ratio
25 11Export ratio 58 23Primary export ratio
33 80Inflation 10 18
A TALE OF TWO COUNTRIES
In % Country A Country B
Girls at primary school
100 72Investment ratio
25 11Export ratio 58 23Primary export ratio
33 80Inflation 10 18Growth per capita 1960-2002
4.3 -1.2
A TALE OF TWO COUNTRIES
And the countries are: Country A Country B
Girls at primary school
100 72Investment ratio
25 11Export ratio 58 23Primary export ratio
33 80Inflation 10 18Growth per capita 1960-2002
4.3 -1.2
A TALE OF TWO COUNTRIES
And the countries are: Mauritius Madagasc
arGirls at primary school
100 72Investment ratio 25 11Export ratio 58 23Primary export ratio
33 80Inflation 10 18Growth per capita 1960-2002
4.3 -1.2
GDP per capita 1965-2004 (US$ at 1990 prices)
Mauritius did many things right and reaped rapid growth
Madagascar has been at a standstill all this time for many reasons, including too little investment, trade, and education, as we will see shortly
GROWING APART:MAURITIUS AND MADAGASCAR
0
1,000
2,000
3,000
4,000
5,000
65 70 75 80 85 90 95 00
MAURITIUSMADAGASCAR
Mauritius 4.3% per yearMadagascar -1.2% per year
1.05539 = 8.1
ENDOGENOUS VS. EXOGENOUS GROWTH The neoclassical view
that economic growth in the long run is merely a matter of technology does not throw much light on the impressive growth performance of Asia since the 1960s, or on growth differentials
The new view that long-run growth depends on saving
and efficiency is more illuminating Besides, it’s not really new, because
Adam Smith knew this (1776)
ONE CRUCIAL IMPLICATION OF ENDOGENOUS GROWTH The neoclassical view
If two countries are identical (same saving rate, same population growth, same technology), then their income per head will ultimately be the same
This means that poor countries must grow faster than – catch up with! – rich countries: “conditional convergence”
Endogenous growth theory does not have this implication
+denotes a positive effect in the direction shown
– denotes a negative effect in the direction shown
ENTER INITIAL INCOME
Growth
Investment
Trade
Initial income
Natural capital
Education
+
+ +
–
–
Conditional convergence
Once the main determinants of growth have been taken into account, initial income will have a negative effect on growth
Conditional convergence does not entail absolute convergence
164 countries from 1960 to 2000
CONDITIONAL CONVERGENCE
-8
-6
-4
-2
0
2
4
6
8
5 6 7 8 9 10 11 12
GNP per capita 1965 (log)
Gro
wth
of G
NP
per
cap
ita 1
960-
2000
(%)
Poor countries grow faster than rich ones if
Growth is inversely related to initial income, or if
Regression of current income on initial income produces a slope coefficient that is smaller than one
ABSOLUTE CONVERGENCE?
45o5
6
7
8
9
10
11
12
5 6 7 8 9 10 11 12
GNP per capita 1965 (log)
GN
P p
er c
apita
200
0 (lo
g)45o
SOURCES OF GROWTH I: SAVING AND INVESTMENT Fits real world experience quite well
In East Asia, saving rates of 30-40% of GDP went along with rapid economic growth
In several African economies, saving rates of around 10% of GDP went for a long time hand in hand with economic stagnation
In OECD countries, saving rates of about 20% of GDP went along with respectable growth
Important implication for policy Economic stability with low inflation and
positive real interest rates spurs saving, which is good for growth
An increase in investment by 8% of GDP is associated with an increase in per capita growth by one percentage point per year
Quantity and quality Cause and effect World Bank data for
164 countries and 40 years, 1960-2000
INVESTMENT AND GROWTH r = rank correlation
-8
-6
-4
-2
0
2
4
6
5 10 15 20 25 30 35 40 45
Investment (% of GDP)Per
cap
ita g
row
th a
djus
ted
for i
nitia
l inc
ome
(%) r =
0.42
Also fits experience quite well Technical progress is good for growth
because it allows us to squeeze more output out of given inputs
And that is exactly what increased efficiency is all about!
Thus, technology is best viewed as an aspect of general economic efficiency
Important implication for policy Everything that increases efficiency, no
matter what, is also good for growth
SOURCES OF GROWTH II: EFFICIENCY
AGAIN: WHAT MAKES COUNTRIES GROW? First things first: Output is produced by
labor, capital, and other inputs Output per capita can grow through
accumulation of capital through saving and investment, as we have seen
Output per capita, however, cannot grow through population growth, as we will see
But, output per capita can grow through improvements in labor, via investments in human capital: Education and health care Investment and education: Key drivers of
growth
Education and health care make labor force more efficient
Technological progress enhances efficiency
Liberalization of prices and trade increases efficiency: good for growth
Stabilization reduces the inefficiency associated with inflation: good for growth
Privatization reduces the inefficiency of state-owned enterprises: good for growth
The possibilities are virtually endless!
WHAT MAKES COUNTRIES GROW? A LONGER LIST
WHAT MAKES COUNTRIES GROW Why do education and health care matter? Because they increase labor productivity This is also why technological progress is
good for growth Technological progress enables firms to
squeeze more output from given inputs But so does increased efficiency!
Latin American story about air fares Increased efficiency is tantamount to
technological progress, which helps growth
THIS IS GOOD NEWS If growth were merely a matter of
technology, we could not do much about it Except follow technology-friendly policies
by supporting R&D and such But if growth depends on saving and
efficiency, there are things that we can do, in the private sector as well as through the public sector, to foster rapid growth
Because everything that is good for saving and efficiency is also good for growth
EFFICIENCY AND GROWTH In sum, output per capita depends on the
quantity and quality of inputs Quantity of inputs can be increased
through accumulation, esp. capital accumulation
Quality of inputs – their productivity! – can be increased through increased efficiency Education and health Liberalization Stabilization Privatization Aspects of institutions
Check them out one by one
Policies
EDUCATION, HEALTH CARE, AND GROWTH Education and health care make the
work force more efficiento Need to provide primary and secondary
education to all, especially femaleso Need to provide tertiary education to a
greatly increased number of peopleo Need increased public commitment to
education as well as health careo Need both increased public expenditure
on education and probably also increased scope for private sector involvement in education and health care
EDUCATION AND GROWTH Education lifts
labor productivity, thereby increasing overall economic efficiency and growth of output
From unskilled to skilled labor
Data for 131 countries, 1960-2000
-6
-4
-2
0
2
4
6
0 20 40 60 80 100
Secondary school-enrolment rate (%)Per
cap
ita g
row
th a
djus
ted
for i
nitia
l inc
ome
(%)
r = 0.50
POLICIES
EDUCATION AND GROWTH Interpretation of
regression line: An increase in
secondary-school enrolment by 25% of each cohort goes along with an increase in per capita growth by one percentage point per year
-6
-4
-2
0
2
4
6
0 20 40 60 80 100
Secondary school-enrolment rate (%)Per
cap
ita g
row
th a
djus
ted
for i
nitia
l inc
ome
(%)
r = 0.50
POLICIES
FERTILITY AND GROWTH There is another
way to provide more and better education to children
Produce fewer children to increase their average “quality”
163 countries, 1960-2000
-8
-6
-4
-2
0
2
4
6
1 2 3 4 5 6 7 8
Fertility (number of children)Pef
r cap
ita g
row
th a
djus
ted
for i
nitia
l inc
ome
(%)
POLICIES
r = -0.54
PUBLIC HEALTH AND GROWTH Good public
health, reflected in longevity, is also conducive to increased labor productivity and economic growth
156 countries,1960-2000
-8
-6
-4
-2
0
2
4
6
30 40 50 60 70 80
Life expectancy 1960 (years)Per
cap
ita g
row
th a
djus
ted
for i
nitia
l inc
ome
(%)
POLICIES
r = 0.54
PUBLIC HEALTH AND GROWTH Increased
spending on health care also spurs economic growth
Close connection between public health and health care, i.e., between output and input
162 countries,1960-2000
-8
-6
-4
-2
0
2
4
6
0 2 4 6 8 10 12 14
Health expenditure (% of GDP)Per
cap
ita g
row
th a
djus
ted
for i
nitia
l inc
ome
(%)
POLICIES
r = 0.40
Liberalization of prices o Markets, not bureaucrats, set prices
o Mixed market economy is more efficient than central planning
o Former Soviet Union vs. the US and Europe
Liberalization of trade o Specialization according to
comparative advantageo Free trade is more efficient than self-
sufficiencyoNorth Korea vs. South Korea and
Singapore
LIBERALIZATION AND GROWTH
POLICIES
LIBERALIZATION AND GROWTH Liberalization of
prices increases efficiency in resource allocation
Liberalization of trade increases efficiency in division of labor
163 countries,1960-2000
-8
-6
-4
-2
0
2
4
6
0 40 80 120 160 200
Exports (% of GDP)Per
cap
ita g
row
th a
djus
ted
for i
nitia
l inc
ome
(%)
POLICIES
r = 0.26
LIBERALIZATION AND GROWTH Exports are not a
good indicator of openness because size matters
So look at import duties as well
Higher duties hurt growth, but connection is weak
147 countries,1960-2000
r = 0.20
-8
-6
-4
-2
0
2
4
6
0 10 20 30 40 50 60 70
Share of import duties in tax revenues (%)Per
cap
ita g
row
th a
djus
ted
for i
nitia
l inc
ome
(%)
POLICIES
r = -0.23
LIBERALIZATION AND GROWTH Economic theory is
clear, from Adam Smith (1776) on: external as well as internal trade is good for growth
Good external governance is good for growth
Autarky spells disaster, always and everywhere
Darkness in North-Korea
POLICIES
Stabilization of prices Reduces distortions due to
inflationo Inflation distorts the choice between real
and financial capital by punishing money holdings, and thus creates inefficiency in production
o Implicit inflation tax is an inefficient taxo Inflation creates uncertainly that tends to
discourage trade and investment o Inflation tends to result in currency
overvaluation, hurting exports and growth
STABILIZATION AND GROWTH
Finance matters for growth
POLICIES
STABILIZATION AND GROWTH Stabilization
increases efficiency by reducing production distortions, uncertainty, inflation tax, andovervaluation
164 countries,1960-2000
r = -0.46
-8
-6
-4
-2
0
2
4
6
0.0 0.2 0.4 0.6 0.8 1.0
Inflation distortionPer
cap
ita g
row
th a
djus
ted
for i
nitia
l inc
ome
(%)
POLICIES
r = -0.46
STABILIZATION AND GROWTH High inflation is a
sure sign of lax fiscal and monetary policies, so sound policies support rapid growth
Sound financial institutions, incl. independent central banks, also support rapid growth
r = -0.46
-8
-6
-4
-2
0
2
4
6
0.0 0.2 0.4 0.6 0.8 1.0
Inflation distortionPer
cap
ita g
row
th a
djus
ted
for i
nitia
l inc
ome
(%)
POLICIES
r = -0.46
Model 1
Inflation distortion
-2.51(2.07)
Natural resourcesInitial incomeInvestment
Secondary educationPopulation growthAdj. R2 0.04
STABILIZATION AND GROWTH
Inflation distortion = /(1+ ) Inflation impedes
growth
Note: t-values are shown within parentheses.
Model 1
Model 2
Inflation distortion
-2.51(2.07)
-2.46(2.37)
Natural resources
-0.09(5.75)
Initial incomeInvestment
Secondary educationPopulation growthAdj. R2 0.04 0.30
STABILIZATION AND GROWTH
Natural resource curse
Model 1
Model 2
Model 3
Inflation distortion
-2.51(2.07)
-2.46(2.37)
-2.26(2.25)
Natural resources
-0.09(5.75)
-0.10(6.52)
Initial income
-0.45(2.67)
Investment
Secondary educationPopulation growthAdj. R2 0.04 0.30
STABILIZATION AND GROWTH
Convergence
Model 1
Model 2
Model 3
Model 4
Inflation distortion
-2.51(2.07)
-2.46(2.37)
-2.26(2.25)
-1.95(2.25)
Natural resources
-0.09(5.75)
-0.10(6.52)
-0.07(5.01)
Initial income
-0.45(2.67)
-0.45(3.05)
Investment
0.15(5.41)
Secondary educationPopulation growthAdj. R2 0.04 0.30 0.35 0.51
STABILIZATION AND GROWTH
Investment is good for growth
Model 1
Model 2
Model 3
Model 4
Model 5
Inflation distortion
-2.51(2.07)
-2.46(2.37)
-2.26(2.25)
-1.95(2.25)
-1.97(2.49)
Natural resources
-0.09(5.75)
-0.10(6.52)
-0.07(5.01)
-0.04(2.93)
Initial income
-0.45(2.67)
-0.45(3.05)
-1.10(5.39)
Investment
0.15(5.41)
0.09(3.36)
Secondary education
1.24(4.24)
Population growthAdj. R2 0.04 0.30 0.35 0.51 0.60
STABILIZATION AND GROWTH
Education also boosts growth
Model 1
Model 2
Model 3
Model 4
Model 5
Model 6
Inflation distortion
-2.51(2.07)
-2.46(2.37)
-2.26(2.25)
-1.95(2.25)
-1.97(2.49)
-1.61(2.14)
Natural resources
-0.09(5.75)
-0.10(6.52)
-0.07(5.01)
-0.04(2.93)
-0.04(2.49)
Initial income
-0.45(2.67)
-0.45(3.05)
-1.10(5.39)
-1.27(6.42)
Investment
0.15(5.41)
0.09(3.36)
0.10(3.74)
Secondary education*
1.24(4.24)
1.07(3.82)
Population growth
-0.56(3.42)
Adj. R2 0.04 0.30 0.35 0.51 0.60 0.64
STABILIZATION AND GROWTH
Population drag
Note: An increase in secondary-school enrolment by a third increases growth by 1%.
Privatization o Profit-oriented owners and able
managers are allowed to direct enterpriseso Profit motive replaces political
considerations as the guiding principle of business operations
oProfit-maximizing owners generally appoint managers and staff on merit rather than on the basis of political connections
o Private enterprise is generally more efficient than state-owned enterprises
PRIVATIZATION AND GROWTH
POLICIES
PRIVATIZATION AND GROWTH Privatization
replaces political motives by profit motive in business
Private enterprise is usually more efficient than state-owned enterprises
38 countries, 1978-92
-6
-4
-2
0
2
4
6
8
.0 .1 .2 .3 .4
Share of SOEs in employment (%)
Per
cap
ita g
row
th (%
per
yea
r)
POLICIES
r = -0.35
SAME STORY TIME AND AGAINFree trade is good for growth
o Reduces the inefficiency that results from restrictions on trade
Price stability is good for growth o Reduces inefficiency resulting from
inflationPrivatization is good for growth
o Reduces inefficiency resulting from SOEs
Education is good for growth o Reduces the inefficiency that results
from inadequate education, and health care
POLICIES
Natural resources, if not well managed, may turn out to be, at best, a mixed blessing
Four possible channelso Dutch disease (foreign capital)o Rent seeking (social capital)o Education (human capital) o Investment (real capital)
NATURAL RESOURCES AND GROWTH
NATURAL RESOURCES AND GROWTH Dutch disease through overvaluation
Hurts level or composition of exports and FDI Rent seeking takes many forms
Protectionism, corruption, oppression Education falters
False sense of security Poor quality of policies and institutions
Investment: Same story One more thing: Resource drag
Nonrenewable natural resources are a fixed factor of production
Decreasing returns to scale
+denotes a positive effect in the direction shown
– denotes a negative effect in the direction shown
ENTER NATURAL RESOURCE DEPENDENCE
Growth
Investment
Trade
Initial income
Natural capital
Education
+
+ +
–
–
Resource curse
+ ––
MANUFACTURING AND GROWTH Manufacturing is
an important source of technological innovation and progress and thereby also of economic growth
156 countries,1960-2000
-6
-4
-2
0
2
4
6
8
0 20 40 60 80 100
Share of manufactures in exports (%)Per
cap
ita g
row
th a
djus
ted
for i
nitia
l inc
ome
(%)
INSTITUTIONS
r = 0.48
AGRICULTURE AND GROWTH Agriculture and
mining are low-skill labor intensive and offer few spillover benefits to other industries
Natural resources: Mixed blessing if not well managed
156 countries,1960-2000
r = 0.48
-8
-6
-4
-2
0
2
4
6
0 10 20 30 40 50 60 70
Primary production (% of GDP)Per
cap
ita g
row
th a
djus
ted
for i
nitia
l inc
ome
(%)
INSTITUTIONS
r = -0.59
AGRICULTURE AND GROWTH An increase in
primary production by 11% of GDP goes along with a decrease in per capita growth by one percentage point per year
r = 0.48
-8
-6
-4
-2
0
2
4
6
0 10 20 30 40 50 60 70
Primary production (% of GDP)Per
cap
ita g
row
th a
djus
ted
for i
nitia
l inc
ome
(%)
INSTITUTIONS
r = -0.59
AID AND GROWTH Foreign aid has
sometimes been compared to natural resource discoveries
Aid and growth are inversely related across countries
Cause and effect 156 countries,
1960-2000
INSTITUTIONS
-8
-6
-4
-2
0
2
4
6
-20 0 20 40 60 80
Foreign aid (% of GDP)Per
cap
ita g
row
th a
djus
ted
for i
nitia
l inc
ome
(%) r = -
0.36
SOCIAL CAPITAL AND GROWTH Three aspects of social
capital Equality Honesty Democracy
What do the data tell us?
INEQUALITY AND GROWTH Two views Inequality
sharpens incentives and thus helps growth
Inequality endangers social cohesion and hurts growth
117 countries,1960-2000
-8
-6
-4
-2
0
2
4
6
10 20 30 40 50 60 70
Gini index of inequality
Per
cap
ita g
row
th a
djus
ted
for i
ntia
l inc
ome
(%)
INSTITUTIONS
r = -0.27
INEQUALITY AND GROWTH Equality is good for
growth No visible sign here
that equality stands in the way of economic growth
An increase in Gini index by 16 points goes along with a decrease in per capita growth by one percentage point per year
-8
-6
-4
-2
0
2
4
6
10 20 30 40 50 60 70
Gini index of inequality
Per
cap
ita g
row
th a
djus
ted
for i
ntia
l inc
ome
(%)
INSTITUTIONS
r = -0.27
Democracy
OligocracyAutocracy
FROM AUTOCRACY TO DEMOCRACY
INSTITUTIONS
LIBERTY AND GROWTH Two views Political oppression
restrains special interest groups and thus helps growth
Political oppression breeds inefficiency and hurts growth
117 countries,1960-2000
-6
-4
-2
0
2
4
6
0 1 2 3 4 5 6 7 8
Political oppressionPer
cap
ita g
row
th a
djus
ted
for i
nitia
l inc
ome
(%)
INSTITUTIONS
r = -0.64
DEMOCRACY AND GROWTH Again, two views Democracy plays
into hands of special interest groups that hurt growth
Democracy facilitates change of government and helps growth
143 countries, 1960-2000
r = 0.48
-8
-6
-4
-2
0
2
4
6
-12 -8 -4 0 4 8 12
DemocracyPer
cap
ita g
row
th a
djus
ted
for i
nitia
l inc
ome
(%)
INSTITUTIONS
r = 0.50
DEMOCRACY AND GROWTH Democracy is
good for growth No visible sign
here that democracy stands in the way of economic growth
A rise in democracy index by 7 points goes along with an increase in per capita growth by one percentage point per year
r = 0.48
-8
-6
-4
-2
0
2
4
6
-12 -8 -4 0 4 8 12
DemocracyPer
cap
ita g
row
th a
djus
ted
for i
nitia
l inc
ome
(%)
INSTITUTIONS
r = 0.50
CORRUPTION AND GROWTH Once more, two
views Corruption greases
wheels of production and exchange and thus helps growth
Corruption breeds inefficiency and hurts growth
88 countries,1960-2000
-6
-4
-2
0
2
4
6
0 2 4 6 8 10 12
Corruption perceptions indexPer
cap
ita g
row
th a
djus
ted
for i
nitia
l inc
ome
(%)
More corruption
INSTITUTIONS
r = 0.69
CORRUPTION AND GROWTH So, good business
governance is good for growth
Argument can be extended to other aspects, such as secure property rights and effective bankruptcy laws
Same story
-6
-4
-2
0
2
4
6
0 2 4 6 8 10 12
Corruption perceptions indexPer
cap
ita g
row
th a
djus
ted
for i
nitia
l inc
ome
(%)
More corruption
INSTITUTIONS
r = 0.69
Economic growth responds to public policy
In particular, by encouragingosaving and investment of high
qualityoforeign trade and investmentoeducation and health careoeconomic diversificationosound institutions
... the government can help foster rapid economic growth
WHAT IS THE UPSHOT?
Since the second world war it has become quite clear that rapid economic growth is available to those countries with adequate natural resources which make the effort to achieve it.
W. ARTHUR LEWIS(Accra, 1968)
SIR ARTHUR LEWIS GOT IT RIGHT
These lessons are borne out by experience from around the world
Additional lessons:Too much SOE activity hurts the quality of
investment and education — and growthToo much agriculture and, more
generally, natural resource dependence, if not well managed, hurts education, investment, and trade — and thereby also growth
Too rapid population growth also tends to impede economic growth
WHAT ELSE?
Even so, the question of rapid growth is, of course, a bit more complicated
We also need to address a host of political, social, and cultural questions as well as questions of natural conditions, climate, and public health
RESERVATIONS
But the main point remains:To grow or not to grow is in large measure a matter of choice
Many of the constraints on growth are man-made, and can be removed
CONCLUSION: IT CAN BE DONE
These slides – and more! – can be viewed on my website:
www.hi.is/~gylfason
The End