Sources of Growth Thorvaldur Gylfason Washington, DC 14-25 August 2006.
Openness and Thorvaldur Gylfason Or why international trade is good for economic growth Growth.
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Transcript of Openness and Thorvaldur Gylfason Or why international trade is good for economic growth Growth.
OpenneOpenness andss and
Thorvaldur Gylfason
Or why international trade is good for economic growth
GrowthGrowth
Growing ApartGrowing Apart
Different national economies have Different national economies have grown at grown at different ratesdifferent rates in the in the pastpast
Nations that started out in similar Nations that started out in similar circumstances a few decades circumstances a few decades ago can have vastly ago can have vastly different different standardsstandards of living today of living today
Reasons for differencesReasons for differencesDifferent economic Different economic systemssystemsDifferent economic Different economic policiespolicies
TimeTimeNati
on
al eco
nom
ic o
utp
ut
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 Growing ApartApart
Botswana and Nigeria: GNP per capita 1964-2000
Case 1
Current US$,Atlas method
0
500
1000
1500
2000
2500
3000
3500
4000
1960
1964
1968
1972
1976
1980
1984
1988
1992
1996
2000
Botswana
Nigeria
Spain and Argentina: GNP per capita 1964-2000 Current US$,
Atlas method
Case 2
0
2000
4000
6000
8000
10000
12000
14000
16000
18000
1960
1964
1968
1972
1976
1980
1984
1988
1992
1996
2000
Argentina
Spain
Mauritius and Madagascar: GNP per capita 1964-2000
Current US$,Atlas method
Case 3
0
500
1000
1500
2000
2500
3000
3500
4000
4500
1960
1964
1968
1972
1976
1980
1984
1988
1992
1996
2000
Mauritius
Madagascar
Economic Systems and Policies
Economic systems and growthAs a rule, mixed market economy
grows more rapidly than centrally planned economy
Economic policies and growthPolicies that promote economic
efficiency are also good for growthLiberalization, stabilization,
privatizationEducation, diversification
Extensive and Intensive GrowthMain determinants of economic
growthSaving and high-quality investmentEconomic efficiency, including
technology
Extensive growth through accumulationSaving and investment
Intensive growth through better use of existing resourcesMore efficiency, better technologyEducation
Sources Sources of of growth: 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 Sources of growth: growth: Investment and Investment and educationeducation
Robert Solow Robert Solow raised doubts raised doubts on long-run on long-run linkageslinkages
Growth is Growth is
exogenousexogenous
More More sources sources of of growthgrowth
In ves tm en t x E d u ca tion
G row th+ +
+denotes a positive effect in the direction shown
+
Arthur Lewis: Arthur Lewis: xx is mainly trade, is mainly trade, stable politics, good weatherstable politics, good weather
Growth is Growth is
endogenouendogenou
ss
Sources of Endogenous Growth
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, 1965-98109
countrie
s
-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)
10%
1½%
BotswanaEach ten percentage point increase in the investment ratio is associated with an increase in per capita growth by 1½% per year.
Let’s Let’s be be more more specifispecificc
Growth and Investment, 1965-9885
countrie
s
-8
-6
-4
-2
0
2
4
6
0 5 10 15 20 25 30 35
Gross domestic investment 1965-1998 (% of GDP)
An
nu
al g
row
th o
f G
NP
pe
r ca
pit
a 19
65-9
8, a
dju
ste
d f
or
init
ial i
nco
me
(%
)
Nicaragua
Chad
Thailand
Jordan
Ireland
An increase in investment by 4% of GDP is associated with an increase in per capita growth by 1% per year.
r = 0.65
How How about about initial initial incomeincome??
Growth and Education, 1965-9886
countrie
s
-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 40% of each cohort goes along with an increase in per capita growth by 1% per year.
Growth and Education, 1965-9887
countrie
s
-8
-6
-4
-2
0
2
4
6
0 20 40 60 80 100 120
Gross secondary-school enrolment 1980-97 (%)
An
nu
al g
row
th o
f G
NP
pe
r ca
pit
a 19
65-9
8, a
dju
ste
d
for
init
ial i
nco
me
(%
) Thailand Japan
Finland
JamaicaGhana
How How about about initial initial incomeincome??
Positive but diminishing returns to education
Efficiency is Key
Need economic policies that increase efficiencyProduce more output from given
inputs Takes fewer inputs to produce given
outputMore efficiency, better technology are
two ways of increasing output per unit of input
So is more and better education
Trade increases efficiency and thereby also economic growth
A Simple Model of Endogenous Growth
Four building blocks:Four building blocks:
S = IS = ISaving equals investment in equilibrium Saving equals investment in equilibrium
S = sYS = sYSaving is proportional to incomeSaving is proportional to income
I = I = K + K + KKInvestment means addition to capital stockInvestment means addition to capital stock
Y = EKY = EKOutput depends on Output depends on qualityquality and and quantityquantity of of
capital capital
A Simple Model of Endogenous Growth
Let´s do the arithmetic:Let´s do the arithmetic:
S = sY = I = S = sY = I = K + K + K K
= = Y/E + Y/E + Y/E Y/E
Rearranging terms we find Rearranging terms we find
Y/E = sY - Y/E = sY - Y/E Y/E
Multiplying by Multiplying by EE and dividing by and dividing by YY gives gives Y/Y = sE - Y/Y = sE -
A Simple Model of Endogenous Growth
Growth equation:Growth equation:
g = sE - g = sE -
Rate of economic growth equalsRate of economic growth equals Saving rateSaving rate
timestimes
EfficiencyEfficiencyminusminus
DepreciationDepreciation
Sources of Endogenous Growth
This is This is good newsgood newsIf 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
supporting supporting 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 we there 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 growthfoster rapid economic growth
Because Because 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
Sources of Endogenous Growth
Five mainFive main sources of increased efficiencysources of increased efficiency1.1. LiberalizationLiberalization of prices and trade increases of prices and trade increases
efficiency, and thus is efficiency, and thus is good for growthgood for growth
2.2. StabilizationStabilization reduces the inefficiency associated with reduces the inefficiency associated with inflation, and thus is inflation, and thus is good for growthgood for growth
3.3. PrivatizationPrivatization reduces the inefficiency associated with reduces the inefficiency associated with state-owned enterprises, and thus …state-owned enterprises, and thus …
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!
So What to Do to Encourage Economic GrowthMaintain strong incentives to Maintain strong incentives to savesave
Keep Keep inflationinflation low and low and real interest ratesreal interest rates positive positive
Maintain Maintain financial systemfinancial system in good health in good healthso as to channel saving into high-quality investmentso as to channel saving into high-quality investment
Place strong emphasis on Place strong emphasis on efficiencyefficiency1.1. Liberal price and trade regimes Liberal price and trade regimes
2.2. Low inflation Low inflation
3.3. Strong private sector Strong private sector
4.4. More and better education More and better education
5.5. Limited natural resources Limited natural resources
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 is Mixed market economy is more efficientmore efficient than than
central planning.central planning. Compare former Soviet Union with the US and EuropeCompare former Soviet Union with the US and Europe
Liberalization of tradeLiberalization of trade allows specialization allows specialization according to comparative advantage.according to comparative advantage.Free trade is Free trade is more efficientmore efficient than self-sufficiency. than self-sufficiency.
Compare North Korea with Hong Kong and SingaporeCompare North Korea with Hong Kong and Singapore
More efficiency is More efficiency is good for growthgood for growth..
Market Equilibrium and Economic Welfare
SupplySupply
DemandDemand
EE
ProducerProducersurplussurplus
ConsumeConsumerrsurplussurplus
Quantity
Price
AA
BB
CC
Total Total welfare gainwelfare gain associated associatedwith market equilibrium equalswith market equilibrium equalsproducer surplus (= ABE) plusproducer surplus (= ABE) plusconsumer surplus (= BCE)consumer surplus (= BCE)
SupplySupply
DemandDemand
Price ceilingPrice ceiling
EE
FF
GG
Quantity
PriceWelfareWelfarelossloss
Price ceiling imposes aPrice ceiling imposes awelfare losswelfare loss equivalent to equivalent tothe triangle the triangle EFGEFG
AA
BB
CC
Consumer surplus = AFGHConsumer surplus = AFGH
HH
JJ
Market Intervention and Economic Welfare
Producer surplus = CGHProducer surplus = CGH
Total surplus = AFGC
Liberalization Increases Economic Efficiency
Modern outputModern output
Traditionaloutput
Traditionaloutput
DD
G
Domestic, distorted price ratio
Domestic, distorted price ratioE
C
HH
O
Liberalization Increases Economic Efficiency
Modern outputModern output
Traditionaloutput
Traditionaloutput
World price ratioWorld price ratio
DD
G
Domestic, distorted price ratio
Domestic, distorted price ratio
F
E
A B
C
Price distortionPrice distortion
HH
O
If output gain = If output gain = EE and and price distortion = price distortion = cc, , then then E = mcE = mc22 Output
gain
OC = modern outputCA = traditional outputOA = total output
Liberalization Increases Economic Efficiency
Modern outputModern output
Traditionaloutput
Traditionaloutput
World price ratioWorld price ratio
DD
G
Domestic, distorted price ratio
Domestic, distorted price ratio
F
E
A B
C
Price distortionPrice distortion
HHJJ
ImportsImports
ExportsExports
O
KK
Welfaregain
Welfaregain
Output gain
Liberalization Increases Economic Efficiency
Modern outputModern output
Traditionaloutput
Traditionaloutput
DD
G
F
E
A B
C
Price distortionPrice distortion
HHJJ
O
MN
Q
WelfaregainWelfaregain
Transition takes time: From E to F via M, N, and Q
How Trade Increases Efficiency
Autarky breeds inefficiencyTrade with other nations increases
efficiency by allowing1. Specialization through comparative
advantage2. Exploitation of economies of scale3. Promotion of free competition
Not only trade in goods and services, but also in capital and labor“Four freedoms”
How Trade Increases Efficiency
Trade also encourages international exchange of IdeasInformationKnow-howTechnology
Trade is educationWhich is also good for growth
Large and Small Countries
Small countries need trade to extend their markets beyond their national borders
Large countries need trade less than smallDomestic trade replaces foreign trade
Evidence from around the worldSmall countries have higher ratios of
exports to GDP than large countries
Selected Countries: Exports 1999-2000 (% of GDP)
0
10
20
30
40
50
60
70
80
90
UnitedStates
Japan Germany Belgium Ireland Estonia
Empirical EvidenceOpenness can be defined as export
ratio adjusted for country size (e.g., population)
Evidence shows that open economies tend to grow more rapidly than closed economiesTrade encourages growthGrowth encourages trade
Other measures of openness yield a similar conclusion
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
gro
wth
of
GN
P p
er
cap
ita
196
5-98
, a
dju
ste
d 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.
Bottom LineBottom Line
Increased openness stimulates Increased openness stimulates economic efficiency and growth economic efficiency and growth ......... as long as the gains from trade ... as long as the gains from trade
are well distributedare well distributed
Continued globalization is thus by Continued globalization is thus by no means sure to succeedno means sure to succeed
Need to pay attention to Need to pay attention to distributiondistribution as well as growth as well as growth The EndThe End