Download Diapozitiv 1 - World Bank Group

The World Bank ABCDE Confernce in Stocholm, My 31, 2010
Plenary Session 2:
Franjo Štiblar
DISCUSSION OF PAPER:
Zhi Wang, Shang-Jin Wei, Anna Wong:
DOES LEAPFROGGING GROWTH STRATEGY RAISE GROWTH RATE ?
Some International Evidence
INTRODUCTION
Two determinants of economic growth related to global markets are:
- openness to trade – trade liberalization
- leapfrogging: use of policies to guide the industrial structural transformation to
promote high-tech and high domestic VA ahead of a country’s endowments
Problem: how to measure first and second ?
Theory: if production of sophisticated goods generates positive externalities via
learning-by- doing, then there would be an underinvestment among private economic
agents relative to socially optimal level. Leapfrogging = a government led industrial
policy that tilts resource allocation to technologically sophisticated industries – could
correct the market failure. Country may benefit more from exporting sophisticated
products with high domestic VA, even if comparative advantage in current time is to
produce less sophisticated goods. This is comparative advantage defying
development strategy. For proponents of fast follower strategy it is technology
leverage competitive strategy.
- Hausman, Hvang and Rodrik (HHR 2007): suggest that some export goods have
higher spillover effects than others. They develop measure of export sophistication and
find its positive relation to economic growth rate.
- Autors: express skepticism: size of market failure and creation of government failure
- Justin Lin: advocates for development strategies that follows a country’s comparative
advantage, and against “comparative advantage defying strategies”, which include a
leapfrogging industrial policy. But the role of Government is to help private firms to find
“latent comparative advantage”.
Paper tests the validity of the leapfrogging hypothesis with fresh evidence from a
cross-country data set and concludes that there is no strong and robust evidence
that a leapfrogging strategy contributes to higher growth rate.
2. Measuring leapfrogging:
Ideal: compare country’s actual production structure with what have been predicted
based on its factor endowments.
Data are not available or relatively coarse so that differences in economic structure do
not reveal themselves as such on aggregate level.
To control normal amount of sophistication based on factor endowments, country’s
income and education level are included as controls.
Export structure is used as approximation of industrial structure.
2.1. Measures:
1/ EXPY based on PRODY (by HHR): level of income implied in the export bundle
2/ export dissimilarity index (Schot; Wang, Wei) EDI: measure distance of country’s
export structure and that of high-income G3: Japan, the U.S. and the EU15.
Alternative is similarity index ESI.
3/ modified EXPY: discount the PRODY of each good by the ratio of the unit value of
the exporter to the mean unit value of the same goods in G3 to measure quality
4/ ATP share (advanced technology products) in exports, narrow and broad.
Assumptions: - for 1-3: higher income countries export more sophisticated products
- for 4: based on degree of sophistication of the product itself.
2.2 Data and basic facts
Export structure is assumed as crucial explanatory variable for economic growth.
-EXPY requires data on trade flow and GDP per capita.
-Modified EXPY in addition requires data on unit value
-EDI and ATP share use harmonized system classification Ch 1-27.
Other explanatory variables:
-human capital: average school year
-GDP pc: Penn World Tables
-institutional quality: government effectiveness index WB: rule of law index (HHR);
corruption, regulation quality, CPI score
3. EMPIRICAL RESULTS: EXAMINATION OF EVIDENCE
Estimation process:
1.step: HHR specification repeated: initial EXPY statistically significant, positive, but
different value (due to updated sample ?): Conclusion: can be replicated
2. step: Other 3 export sophistication variables included: right direction, insignificant.
3.step: Does growth in stead of level in sophistication leads to growth in income ?
Reject hypothesis.
4. step: Panel regressions with IV
Panel analysis: preparedness of the political leader was used as as IV for export
sophistication.
Result: neither is significant (EXPY or EDI). They reject leapfrogging hypothesis.
CONCLUSION
- It is desired to transform the country’s economic structure ahead of its income level
towards higher domestic VA and more sophisticated sectors.
- But, any such policy promotion takes away resources from other industries, especially
those consistent with the country’s factor endowment and level of development. On
balance, effect is conceptually less clear.
Problem is to quantify the degree of leapfrogging an economy can exhibit:
-data on production structure are not refined enough,
-most relevant policies are not easily quantifiable or comparable across countries.
One way to measure leapfrogging is the use of export data.
Conclusion of study: lack of strong and robust support for leapfrogging hypothesis.
Follow-up research proposed:
-work on import side (import substitution of high-tech, VA products ?Could backfire.
-moderate, subtle version of leapfrogging strategy could work that aims not to defy
comparative advantages, but to explore “latent comparative advantage”.
Is its pattern identifiable and explorable ?
COMMENT
SOME OBSERVATIONS – RESERVATIONS
- The question: is there one to one correspondence between structure of exports and
structure of production (especially in larger relatively less open economies, in which
most of production goes to domestic market and exports are not priority)
-problems with cross country estimation of growth models,
- missing factors and binding constrains
- how are the variables of technological content of export constructed; measures of
technical sophistication of export products: direct and indirect
- economic gowth and welfare (income distribution, social, ecological externalities)
- what happened with growth equations in present financial crisis: downturn in trade
is stronger than in economic growth; which approach explains it better ?
- Rodrik: openness (export/GDP) and growth versus trade policy(barriers) and growth
FACTOR ENDOWMENTS → INDUSTRIAL STRUCTURE
║
INFRASTRUCTURE (hard, soft)
\ (ffs)
GOVERNMENT
/ (nse)
IDEA
Authors try to reject “old “(Keynesian, fast follower) theory that government
intervention into structure of exports in direction of its higher technological substance
than what would be defined by factor endowments and comparative advantage theory
will improve not only export but also structure of production towards higher
technological substance and this, in turn, will lead to faster GDP growth, compared
with its dynamics without government intervention.
In the eyes of authors this intervention defies comparative advantage theory and
distorts prices and markets; it is not efficient and leads to x-inefficiency.
To prove, they use HHR variable PRODY and EXPY and construct four other variables
EDI, ATP, modified EXPY to measure the technological content of exports.
In their regressions (cross products, cross country, cross time) they obtain the result
that the incremental explanatory power of such technological content of export variable
is weak, statistically insignificant. Its contribution to faster GDP growth is not robust.
EMPIRICAL EVIDENCE: authors rejected leapfrogging hypothesis, but:
- they replicated HHR estimation results (significant, but weaker positive impact),
- in promoting fast follower strategy description of East Asian development model
several authors obtained significant positive impact for active policy factors like
advance technology products, big business presence, upgrading industries Keun
Lee,John Mathews and others, parallel session 4).
This way they rejected the HHR hypothesis and thus indirectly confirmed the assertion
by Justin Lin of new structural economics, given in three points in WP (February 2010):
1/ economy’s structure of factor endowments evolves during stages of development.
Different industrial structures are defined by the first and require corresponding
infrastructure (hard and soft).
2/continuum exist in development instead of rich-poor division.
3/ market is effective mechanism for effective resource allocation, but government:
industrial upgrading and improvements of hard and soft infrastructure. Government
needs intervene to facilitate both, as it has externalities to firms’ transaction costs.
According to Lin factor endowment defines industrial structure, which needs to be
supported by adequate infrastructure (hard and soft).
But, there is no one-to-one correspondence among elements in causal chain:
EXPORT STRUCTURE → INDUSTRIAL STRUCTURE → GROWTH → WELFARE
(size, openness)
(other growth factors)
(Y distribution)
BACKGROUND – WIDER FRAMEWORK
The presented paper can be seen as an attempt to reject the old structural economics
theory of development and thus affirm the new structural economics.
In fact, discussion deals with the role of government in development.
Both structural theories, old and new, recognize this role, but differ significantly in
methods and goals of government intervention.
History:
- First, A. Smith explicitly took into account the role f government (in forming
adequate infrastructure for successful market development; but this was neglected by
neoclassic, because it did not fit well with their liberal doctrine – “L’etat gendarme”
only; similarly the moral sentiments were part of A,. Smith doctrine,but were neglected
by liberals pertaining to “homo oeconomicus” as representative agent ).
- Second, “old structural economics”, as named by Justin Lin, took into account the
role of state in active industrial policy as a way to accelerate growth (i.e. relaxing
binding constraint and fast follower strategy, as experienced by East Asian model)
- Third: neoclassicists deny any active role to state intervention in development.
- Fourth: new structural economics recognizes the role of state, but in different form
than old structural economics. State should help providing appropriate infrastructure
(hard and soft) to the level of development in industrial structure, which, in turn,
depends on the level of development of factor endowments (changing, improving over
time).
JUSTIN LIN’S NEW STRUCTURAL ECONOMICS - THEORY
New structural economics, as presented by Justin Lin in Policy research Working
Paper 5197, February 2010 - Few comments:
-explicit assertion that new structural economics is based on neoclassical theory is
specifically repeatedly rejected by description of 7 insights where differences between
the two are stated (in fields like fiscal, monetary, trade, financial sector, FDI,….
And, in general: Justin Lin is for the role of government, not neoclassicists. He is for
gradual approach in transition (for instance, Slovenia practiced it), Washington
consensus neoliberals (neoclassicists) were for the shock therapy, et cetera….
What is lacking in this approach (and in paper presented) is taking into account the
changing conditions and power relations caused by the global financial crisis, as
observed by stronger drop of trade than economic growth and decline of imbalances.
The crisis is result of improper dominance of neoclassical approach of liberal
economics in creating of economic (especially financial) system and application of
economic policies. The reality of crisis made some economic laws of liberal
economics invalid (“homo oeconomicus”, perfect competition, representative agent
and in this ultra-rationality hypothesis). Thus, also in development theory one should
take into account that failure and not base it explicitly on neoclassical foundations, as
if nothing happened in reality.
The fact is that active industrial policy is practiced around the world (including
China, the USA) as state of mind, using carrots and sticks, transparent, accountable.
III. Ricardo Hausman, Jason Hwang, Dani Rodrik:
WHAT YOU EXPORT MATTERS
Journal of Economic Growth, 2007, 12:1, 1-25
When cost discovery generates knowledge spillovers, specialization patters become
partly indeterminate and the mix of goods that a country produces may have
important implications for economic growth.
They prove empirically this proposition by constructing index of income level of
country’s exports (EXPY.
INTRODUCTION
“Fundamentals” view of the world: endowments of production factors (HK, PK, L, N)
along with overall quality of institutions determine relative costs and the patterns of
specialization
/ = comparative advantages; Ricardo = that neoclassic?/
Attempts to reshape the production structure beyond the boundaries based on
fundamentals will fail and hamper economic performance.
HHR: idiosyncratic elements in specialization patterns are analyzed. Specializing in
some products will bring higher growth than in others.
Therefore, Government policy has a potentially important positive role to play in
reshaping the production structure, if it is appropriately targeted on the market failure
in question.
Specialization patterns are not entirely predictable.
Countries that specialize in the types of goods that rich countries export are likely to
grow faster.
HHR model of “cost discovery” – cost uncertainty:
The returns of pioneer investor’s costs discovery become socialized, losses remain
private. This knowledge externality implies that investment levels in cost discovery
are sub-optimal unless industry or government find some way in which the
externality can be internalized /financial support/. Larger the number of
entrepreneurs that can be stimulated to engage in cost discovery in the modern
sectors the closer economy can get to its productivity frontier.
They focus on the spillover in cost information and are interested in the economic
growth implications of different specialization patterns.
HHR framework suggest different binding constraint (sophistication of production
industrial structure) on entrepreneurship than is considered in the literature of
economic development: credit constrains, institutional weaknesses, barriers to
competition and entry.
HHR: cost-discovery externalities play a role in restricting entrepreneurship in new
activities – where it matters the most.
Countries that export goods associated with higher productivity level /sophisticated/
grow more rapidly, even after control for initial Ypc, HK level and time-invariant
country statistics /pop, area,/.
Growth is the result of transferring resources from lower productivity activities to
higher identified by the entrepreneurial cost-discovery process. Exist elastic
demand for these goods in world markets.
Fostering an environment that promotes entrepreneurship and investment in new
activities is critical to economic convergence. Such activities generate information
spillovers for emulators. The requisite: subsidize initial entrants in new activities
HHR More broadly:
type of goods in which country specializes has important implications for subsequent
economic performance. Economy is better off producing goods that richer countries
export. (problem in world with homogeneous goods; growth of output, not income).
Standard model: pushing specialization up in the production scale would be bad for
economy’s health: distort production and create efficiency losses.
HHR alternative interpretation: country fundamentals generally allow it to produce
more sophisticated goods than it currently produces. Countries can get stuck with
lower-income goods because entrepreneurship in cost discovery entail important
externalities
If countries are able to overcome these externalities through policies that entice
entrepreneurs into new activities , can reap benefits in higher growth.
IV. Francisco Rodrigues, Dani Rodrik: (RR)
TRADE POLICY AND ECONOMIC GROWTH
A skeptic’ guide to the cross national evidence,
NBER macroeconomics Annual 2000, January 2001 (261-338)
They reject the assertion that lower trade barriers lead to faster growth.
Problems are in empirical testing of this hypothesis:
a) Standard robustness criticism often leveled at cross-country growth empirics.
b) Strong results that lower trade barriers lead to higher growth suffer from:
-mis-specification,
-use of measures of openness that are proxies for other policy or institutional
variables that have independent effect on growth.
- problem of reverse causality: adequate IV ?
? = Do countries with lower policy induced barriers to international trade grow faster,
once other relevant country statistics are controlled for ?
Not ?: does international trade raise growth rates of income ?
Research focused on export and growth, not trade policies and growth.
Conceptual issues-cross-country analysis