Global Markets and Institutions

Professor John Coleman

Duke UniversityFuqua School of Business

Rethinking the Boundaries of Business SchoolJune 2010FUQINTR 389W

Course OutlineGrowth and Institutions

Labor and Trade

International Capital Flows; Supply-Side Economics

Financial Crisis

Growth and InstitutionsCountryIntl.$CountryIntl.$2009 per-capita real (PPP) GDP for select countries

Labor and Trade

International Capital FlowsSupply-Side Economics

Financial Crisis

Production and Long-Term Growth

Sustained Growth and Country-Level Income Inequality are Modern PhenomenaWorld-Wide Per-Capita GDP

Most of the World is Poor

The 21st Century may be the Century of Convergence2007 population 6.7 billion - World 1.3 billion - China 1.1 billion - India

China and India represent 36 percent of the worlds population

Many Poor Countries are Still Being Left Behind

How does output increase?Key to our analysis of growth will be the production functionCan boost output by increasing factor inputs or using inputs more efficiently

Aggregate Production FunctionAggregate production function for the US:

y = A k.3n.7

y = real output (income) k = physical stock of capitaln = labor input per unit of timeA = level of efficiency or total factor productivity (TFP)

Calibrating the Aggregate Production FunctionThe production function is motivated by this fact:

Labor income share is consistently 70% of national incomeCapital income share is 30% of national income

Labor Income Share of GDPDistribution of National Income, 1994Employee Compensation as Percentage of GNP 1959-1999 (very stable over time at 70%)

Grafikon1

0.6820780512

0.6771634615

0.6862697448

0.6867788462

0.6871495327

0.6941781623

0.6953982714

0.6969270467

0.6964243982

0.6912168344

0.6887892377

0.6841761116

0.6850545221

0.6880269815

0.6862622472

0.6838643371

0.6868131868

0.6845261895

0.6840551181

0.6831530139

0.6805293006

0.6839166046

0.6842585829

0.6868121956

0.6785213735

0.6773195876

0.6778433024

0.6773507768

0.6754788666

0.6837419959

0.6891311022

0.6896499698

0.6939784302

0.6971904266

0.697915148

0.6996284653

0.7030379041

0.7029743311

0.70608557

0.7088492115

0.7108156482

0.7160090475

0.7221127801

0.729957291

0.7390089871

0.7367410607

0.7350821222

0.738317757

0.7305021063

0.7294642857

0.7294001318

0.7275954814

0.7293725939

0.7314530963

0.7231912785

0.7171390527

0.7187126437

0.7216615606

0.721464402

0.7173265219

0.726957844

0.7347228012

0.7375857563

0.7395833333

0.73932277

0.7334487916

0.7220295537

0.7223522528

0.7222182974

0.7274307971

0.7290305011

0.7314327583

0.7268154263

0.7223325062

0.7178241574

0.7205701934

0.7255529519

0.7160393243

0.7162783325

0.7160973614

0.7199581507

0.7227059284

0.7251420116

0.7249721397

0.7266832918

0.7440369913

0.7424988804

0.7336942621

0.7306615042

0.7374648117

0.7244409572

0.733346372

0.7421435272

0.7359048167

0.7400473753

0.742765763

0.7385638

0.7321590703

0.7280760666

0.7248545019

0.7160433071

0.71217818

0.7119109254

0.7145053661

0.7139969224

0.7169670566

0.7176653834

0.7219032707

0.7235049477

0.7268937555

0.7304168316

0.7364827046

0.7319123386

0.7259967507

0.720834741

0.7208098645

0.7180609074

0.7188641566

0.717105106

0.7127485762

0.7123142739

0.7149292296

0.719817975

0.7235004386

0.7214313958

0.7199552101

0.7239099739

0.7229146692

0.7237947387

0.725518348

0.7272765369

0.7293853541

0.7245530828

0.7259802155

0.7408753964

0.7281271461

0.7283425575

0.7254534681

0.7293005743

0.7225836518

0.7340704752

0.7231504444

0.7190899041

0.7157018725

0.717425187

0.7163943701

0.7136124062

0.7133226271

0.7083120436

0.7070154424

0.7079722427

0.7079285985

0.7053416955

0.7036418056

0.7028036266

0.7070598459

0.7099256592

0.7118493465

0.7130702262

0.7137674108

0.7113913696

0.7122495992

0.7143749751

Wn/Y

gnp

yearqtr1959gnpcompens

195911959.25402.3274.40.6820780512

195921959.5416281.70.6771634615

195931959.75411.5282.40.6862697448

195941960416285.70.6867788462

196011960.25428294.10.6871495327

196021960.5427.7296.90.6941781623

196031960.75428.1297.70.6953982714

196041961426.3297.10.6969270467

196111961.25427.92980.6964243982

196121961.5437.2302.20.6912168344

196131961.75446307.20.6887892377

196141962458.8313.90.6841761116

196211962.25467.7320.40.6850545221

196221962.5474.4326.40.6880269815

196231962.75479.7329.20.6862622472

196241963486.5332.70.6838643371

196311963.25491.4337.50.6868131868

196321963.5500.2342.40.6845261895

196331963.75508347.50.6840551181

196341964517.6353.60.6831530139

196411964.255293600.6805293006

196421964.5537.2367.40.6839166046

196431964.75547.6374.70.6842585829

196441965554.3380.70.6868121956

196511965.25570.8387.30.6785213735

196521965.5582394.20.6773195876

196531965.75593.5402.30.6778433024

196541966611.5414.20.6773507768

196611966.25631.7426.70.6754788666

196621966.5640.3437.80.6837419959

196631966.75651.4448.90.6891311022

196641967662.8457.10.6896499698

196711967.25667.6463.30.6939784302

196721967.5672.74690.6971904266

196731967.75685.9478.70.697915148

196741968699.8489.60.6996284653

196811968.25717.6504.50.7030379041

196821968.5736.3517.60.7029743311

196831968.75752.6531.40.70608557

196841969767.3543.90.7088492115

196911969.25782.25560.7108156482

196921969.5795.8569.80.7160090475

196931969.75812.2586.50.7221127801

196941970819.5598.20.729957291

197011970.25823.4608.50.7390089871

197021970.5833.46140.7367410607

197031970.75846.3622.10.7350821222

197041971845.3624.10.738317757

197111971.25878.3641.60.7305021063

197121971.5896653.60.7294642857

197131971.75910.2663.90.7294001318

197141972929.5676.30.7275954814

197211972.25961.17010.7293725939

197221972.5978.6715.80.7314530963

197231972.751009729.70.7231912785

1972419731051.47540.7171390527

197311973.251087.5781.60.7187126437

197321973.51109.8800.90.7216615606

197331973.751136.3819.80.721464402

1973419741174.5842.50.7173265219

197411974.251183.7860.50.726957844

197421974.51199.5881.30.7347228012

197431974.751224.4903.10.7375857563

1974419751238.4915.90.7395833333

197511975.251243.3919.20.73932277

197521975.51270.3931.70.7334487916

197531975.751326.4957.70.7220295537

1975419761367.2987.60.7223522528

197611976.251415.51022.30.7222182974

197621976.51437.81045.90.7274307971

197631976.751468.81070.80.7290305011

1976419771501.31098.10.7314327583

197711977.251550.611270.7268154263

197721977.516121164.40.7223325062

197731977.751667.41196.90.7178241574

1977419781711.71233.40.7205701934

197811978.251749.71269.50.7255529519

197821978.51841.11318.30.7160393243

197831978.751892.71355.70.7162783325

1978419791955.61400.40.7160973614

197911979.252007.21445.10.7199581507

197921979.52044.41477.50.7227059284

197931979.752094.91519.10.7251420116

1979419802153.61561.30.7249721397

198011980.252205.51602.70.7266832918

198021980.52184.31625.20.7440369913

198031980.75223316580.7424988804

1980419812345.81721.10.7336942621

198111981.252427.81773.90.7306615042

198121981.52451.11807.60.7374648117

198131981.7525491846.60.7244409572

1981419822556.51874.80.733346372

198211982.252558.41898.70.7421435272

198221982.52605.51917.40.7359048167

198231982.752617.419370.7400473753

1982419832626.41950.80.742765763

198311983.252677.91977.80.7385638

198321983.52753.520160.7321590703

198331983.752829.12059.80.7280760666

19834198429212117.30.7248545019

198411984.2530482182.50.7160433071

198421984.53138.42235.10.71217818

198431984.753206.32282.60.7119109254

1984419853251.92323.50.7145053661

198511985.253314.32366.40.7139969224

198521985.53351.22402.70.7169670566

198531985.753402.724420.7176653834

1985419863448.82489.70.7219032707

198611986.253486.52522.50.7235049477

198621986.53502.32545.80.7268937555

198631986.753536.22582.90.7304168316

1986419873573.22631.60.7364827046

198711987.253664.12681.80.7319123386

198721987.53754.72725.90.7259967507

198731987.753847.92773.70.720834741

1987419883941.428410.7208098645

198811988.254022.52888.40.7180609074

198821988.54106.22951.80.7188641566

198831988.754185.33001.30.717105106

1988419894284.43053.70.7127485762

198911989.254347.830970.7123142739

198921989.54373.33126.60.7149292296

198931989.7543953163.60.719817975

1989419904446.33216.90.7235004386

199011990.254552.23284.10.7214313958

199021990.54643.93343.40.7199552101

199031990.754674.23383.70.7239099739

1990419914693.533930.7229146692

199111991.254702.33403.50.7237947387

199121991.54736.23436.20.725518348

199131991.754772.634710.7272765369

1991419924810.935090.7293853541

199211992.254933.83574.80.7245530828

199221992.54993.83625.40.7259802155

199231992.754950.936680.7408753964

1992419935096.53710.90.7281271461

199311993.255149.53750.60.7283425575

199321993.55231.93795.50.7254534681

199331993.755258.63835.10.7293005743

1993419945364.53876.30.7225836518

199411994.255372.13943.50.7340704752

199421994.55524.33994.90.7231504444

199431994.755608.24032.80.7190899041

1994419955719.74093.60.7157018725

199511995.255774.44142.70.717425187

199521995.55833.14178.80.7163943701

199531995.755919.64224.30.7136124062

1995419965977.84264.10.7133226271

199611996.256067.14297.40.7083120436

199621996.56177.84367.80.7070154424

199631996.756254.24427.80.7079722427

1996419976341.64489.40.7079285985

199711997.256473.64566.10.7053416955

199721997.56581.94631.30.7036418056

199731997.756694.94705.20.7028036266

1997419986789.14800.30.7070598459

199811998.256887.24889.40.7099256592

199821998.56977.649670.7118493465

199831998.757087.15053.60.7130702262

1998419997193.85134.70.7137674108

199911999.257334.55217.70.7113913696

199921999.57423.15287.10.7122495992

199937522.15373.60.7143749751

5449.7

gnp

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

US Production Function: Measurementy, k, measured in billions of 1992 dollars.n measured in millions of workers.A is computed by using the production function

y

k

n

A

% A

1980

4612

4491

99.3

14.80

1981

4725

4655

100.4

14.89

0.6

1982

4624

4765

99.5

14.56

-2.2

1983

4810

4849

100.8

14.93

2.5

1984

5138

5004

105.0

15.35

2.8

1985

5330

5189

107.2

15.53

1.1

1986

5490

5328

109.6

15.62

0.6

1987

5648

5445

112.4

15.69

0.4

1988

5863

5572

115.0

15.92

1.5

1989

6060

5708

117.3

16.11

1.2

1990

6139

5830

117.3

16.11

1.2

1991

6079

5892

116.9

16.04

-0.7

1992

6244

5979

117.6

16.34

1.8

1993

6384

6094

119.3

16.44

0.6

1994

6609

6258

123.1

16.52

0.5

1995

6743

6473

124.9

16.52

0.0

1996

6995

6566

126.7

16.80

1.7

1997

7270

6716

129.6

17.16

2.1

1998

7560

6815

131.5

17.59

2.5

1999

7862

6917

133.5

18.01

2.4

Output per workerLabor productivity is output per worker

Living standard is determined byA: efficiency (or TFP)k/n: capital per worker

International Differences in Output per Worker Source: Hall and Jones, QJE(1999)Output per Worker = (Capital per Worker contribution) X (TFP)contribution from

Growth Accountingand Efficiency of the EconomyGrowth-accounting equation:

The labor contribution to growth:0.7 * % growth of labor

Capital contribution to growth:0.3 * % growth in capital

Growth Accountingfor the United States, 1948-2000

Recent Productivity in the US

Does TFP growth explain convergence?

TFP relative to the US

Sheet1

YearsCanadaFranceGermanyItalyJapanKoreaUnited Kingdom

19470.812

19480.793

19490.800

19500.8200.5310.462

19510.8040.5210.493

19520.8400.5260.5220.5900.434

19530.8410.5520.5310.6150.443

19540.8170.5700.5710.6210.463

19550.8320.5670.6090.6410.4820.668

19560.8760.5860.6310.6700.4940.673

19570.8590.6010.6520.6740.5070.687

19580.8600.6000.6600.6980.4960.686

19590.8410.6060.6810.7050.5050.678

19600.8430.6430.7370.7160.5510.2400.700

19610.8380.6540.7480.7400.6010.2390.701

19620.8360.6580.7420.7400.5640.2350.677

19630.8460.6670.7400.7300.5880.2460.677

19640.8510.6790.7680.7310.6210.2520.689

19650.8590.6850.7850.7620.6130.2450.677

19660.8640.6920.7700.7700.6310.2650.678

19670.8590.7130.7520.8010.6580.2710.699

19680.8730.7190.8100.8080.7080.2750.706

19690.8680.7570.8690.8510.7400.3030.704

19700.9140.7880.9090.8760.7790.3160.742

19710.9160.7890.9000.8300.7680.3130.769

19720.9090.7910.8920.8270.7730.3100.770

19730.9070.8060.9060.8490.7720.3480.775

Source: Productivity, Vol. 2, by Dale W. Jorgenson, MIT Press, 1995.

Sheet1

0000000

0000000

0000000

0000000

0000000

0000000

0000000

0000000

0000000

0000000

0000000

0000000

0000000

0000000

0000000

0000000

0000000

0000000

0000000

0000000

0000000

0000000

0000000

0000000

0000000

0000000

0000000

Canada

France

Germany

Italy

Japan

Korea

United Kingdom

Year

Total Factor Productivity Relative to US

Sheet2

Sheet3

Growth Accounting is Everywhere

TFP Convergence AssumptionU.S TFP growth at constant 1.3%Level of TFPIncome per capita relative to the US (time)Developing country TFP

Why Care About TFP?Sustained Growth not possible without TFP growth

Incentive to invest related to return to capital---this falls rapidly to zero without TFP growth

Without TFP growth income will stop growing

Soviet Union had no TFP growthreturn to capital fell to zero

Growth from 1,000,000 BC to now Pre-Industrial Revolution stagnation in per-capita income Industrial Revolution and TFP Growing Income Inequality 21st Century may be the Century of Convergence

Lucas: The Industrial Revolution Malthusian trap Fixed vs. reproducible inputs Demographic transition

Understanding efficiency Higher A implies that the economy is more efficient More output can be produced with the same inputs (labor and capital) What drives A?

Innovation and TFP Growth

Technology Adoption Rates Differ Dramatically Across Countries

Learning by doing and TFP growthIn New Economy same effect is achieved by using computers and other IT --- this also raises y/n.

What determines TFP?

Relationship between Income and Growth

Open Countries Tend to ConvergeOpen: (1) effective protection rates < 40%, (2) quotas on < 40% of imports, (3) no currency controls or currency black markets, (4) no export marketing board, and (5) not socialist.

Rodrik: Institutions for High-Quality Growth Which Institutions Matter? property rights regulatory institutions macroeconomic stabilization social insurance conflict management How Are Good Institutions Acquired? accepting institutional diversity two modes of acquiring institutions participatory politics as a metainstitution

The Colonial Origins of Institutions and Development Source: Acemoglu, Johnson, and Robinson, AER(2001) Life expectancy for European colonists differed greatly by region of colonization Low mortality regions encouraged the development of governance that replicated home institutions (e.g., United States, Australia, and New Zealand) High mortality regions encouraged the development of extractive states which set up repressive institutions to maximize the extraction of resources (e.g., Congo and Gold Coast) Early development of institutions have persistent effects on todays institutions But institutions can still change today

Growth and Radical Institutional Change: The French Revolution Source: Acemoglu, Contoni, Johnson, and Robinson, The Consequences of Radical Reform: The French Revolution, 2009Ancien Rgime in France/Europe Landed nobility imposed feudalism/serfdom, which tied peasants to land and restricted a free labor market (recall that the vast majority of labor was in agriculture) Urban oligarchy controlled major occupations by guilds, significantly limiting competition and restricting adoption of new technology Nobility and clergy were exempted from many taxes, and indeed imposed taxes of their own, and were subject to different laws and courts

French Revolution of 1789 Abolished feudalism Abolished guilds and internal tariffs Significant reduction of power of nobility and clergy Declaration of equality before the law for all citizens

French Revolution Expanded into parts of Europe Toppled established regime in Belgium, the Netherlands, Italy, Switzerland, and parts of Germany New regimes persisted even after the French leftGrowth under new regimeGrowth under old regime

The World Bank Source: Easterly, The Elusive Quest for Growth, 2002.Created out of Bretton Woods in 1944 Prior to 1980 focus on loans tied to specific projects in developing countries Later focused on adjustment lending that were meant to encourage policies to promote overall growth and lower inflation Some successes: Ghana, Mauritius

What went wrong? Debt relief created poor incentives Poor performing countries received as much or more follow-on loans as other countries WB/IMF gave 18 adjustment loans to Cte d'Ivoire, despite persistent budget deficits of 14 percent of GDP WB/IMF gave 22 adjustment loans to Pakistan, despite persistent budget deficits of 7 percent of GDP Adjustment lending to many corrupt governments: 46 adjustment loans to Congo, Bangladesh, Liberia, Haiti, Paraguay, Guyana, and Indonesia

Botswana: A Diamond in the RoughCase Discussion This case concerns, in large part, the diamond industry in Botswana, including the institutional mechanisms for exploiting this natural resource. Before the development of the diamond industry, the chief forms of wealth were land and cattle. What were the institutional arrangements for ownership and management of these two forms of wealth? Were these arrangements formal or informal? Why were the formal and informal arrangements that were in place before the discovery of diamonds of such importance to decisions about how to manage the diamonds?The wealth associated with diamonds brings its own benefits and problems. Identify the key problems posed by this source of wealth, and explain which of Botswanas formal and informal institutions addressed those problems. Is Botswana truly anomalous in Africa (as suggested by some observers; see page 2 of the case)? What would determine if Botswanas model is replicable in other countries with similar mineral wealth?

Charter Cities?Optional Topic from www.chartercities.orgCharter cities offer a truly global win-win solution. These cities address global poverty by giving people the chance to escape from precarious and harmful subsistence agriculture or dangerous urban slums. Charter cities let people move to a place with rules that provide security, economic opportunity, and improved quality of life. Charter cities also give leaders more options for improving governance and investors more opportunities to finance socially beneficial infrastructure projects.All it takes to grow a charter city is an unoccupied piece of land and a charter. The human, material, and financial resources needed to build a new city will follow, attracted by the chance to work together under the good rules that the charter specifies. 20 min video at www.chartercities.org/resourcesPaul Romer