Download Economic Governance and Sustained Growth

Thorvaldur Gylfason
 Overview
of general theme of conference:
economic governance and sustained growth
 Picture to be presented will be painted with
a broad brush, covering


Main determinants of efficiency and growth
Empirical cross-country growth patterns observed
 Main
task: Set stage, without explicit Balkan
content, for local as well as regional analyses
to follow
 Like politics, all growth economics focusing
on economic policy and institutions is local
 Our
standard of living today depends on one
thing only, by definition: 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)
 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 1960-2003
(US$ at 2000 prices)
2400
THAILAND
2000
ZAMBIA
1600
1200
800
400
0
60
65
70
75
80
85
90
95
00
 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
GDP per capita 1900-2003
(US$ at 1990 prices)
24000
20000
ARGENTINA
SWEDEN
16000
12000
8000
4000
0
1900
1925
1950
1975
2000
 What
makes countries grow
 Economic efficiency and growth
 Economic policies and institutions




Education and health care
Business governance
Monetary and financial policies and institutions
External governance
 Empirical
evidence of cross-country linkages
between governance and growth as we go
along
 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
 Output per capita, however, cannot grow
through population growth, on the contrary
 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
 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
 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
lifts labor
productivity,
thereby increasing
overall economic
efficiency and
growth of output
 From unskilled to
skilled labor
 Data for 131
countries,
1960-2000
Per capita growth adjusted for initial income (%)
 Education
r = rank correlation
r = 0.50
6
4
2
0
-2
-4
-6
0
20
40
60
80
100
Secondary school-enrolment rate (%)
is another
way to provide more
and better
education to
children
 Produce fewer
children to increase
their average
“quality”
 163 countries,
1960-2000
Pefr capita growth adjusted for initial income (%)
 There
r = -0.54
6
4
2
0
-2
-4
-6
-8
1
2
3
4
5
6
7
Fertility (number of children)
8
public health,
reflected in
longevity, is also
conducive to
increased labor
productivity and
economic growth
 156 countries,
1960-2000
Per capita growth adjusted for initial income (%)
 Good
r = 0.54
6
4
2
0
-2
-4
-6
-8
30
40
50
60
70
Life expectancy 1960 (years)
80
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
Per capita growth adjusted for initial income (%)
 Increased
r = 0.40
6
4
2
0
-2
-4
-6
-8
0
2
4
6
8
10
12
Health expenditure (% of GDP)
14
of
prices increases
efficiency in
resource allocation
 Liberalization of
trade increases
efficiency in division
of labor
 163 countries,
1960-2000
Per capita growth adjusted for initial income (%)
 Liberalization
r = 0.26
6
4
2
0
-2
-4
-6
-8
0
40
80
120
160
Exports (% of GDP)
200
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
Per capita growth adjusted for initial income (%)
 Exports
r r== -0.23
0.20
6
4
2
0
-2
-4
-6
-8
0
10
20
30
40
50
60
70
Share of import duties in tax revenues (%)
 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
increases efficiency
by reducing
production
distortions,
uncertainty,
inflation tax, and
overvaluation
 164 countries,
1960-2000
Per capita growth adjusted for initial income (%)
 Stabilization
r = -0.46
r = -0.46
6
4
2
0
-2
-4
-6
-8
0.0
0.2
0.4
0.6
Inflation distortion
0.8
1.0
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
Per capita growth adjusted for initial income (%)
 High
r = -0.46
r = -0.46
6
4
2
0
-2
-4
-6
-8
0.0
0.2
0.4
0.6
Inflation distortion
0.8
1.0
 Privatization
r = -0.35
8
Per capita growth (% per year)
replaces political
motives by profit
motive in business
 Private enterprise is
usually more
efficient than stateowned enterprises
 38 countries,
1978-92
6
4
2
0
-2
-4
-6
.0
.1
.2
.3
.4
Share of SOEs in employment (%)

Growth differentials across countries can be
traced to several different interconnected
factors

Private initiatives



Investment
Fertility
Public policies





Education
Health care
Liberalization
Stabilization
Privatization


This is not all, however
Institutions and geography

Institutions (Aspects of social capital)




Geography



Corruption
Inequality
Liberal democracy
Primary production (Agriculture, mining, etc.)
Natural resource dependence
Institutions or geography?


False contrast
There is room for both, side by side
views
 Corruption greases
wheels of
production and
exchange and thus
helps growth
 Corruption breeds
inefficiency and
hurts growth
 88 countries,
1960-2000
Per capita growth adjusted for initial income (%)
 Two
r = 0.69
6
4
2
0
-2
-4
-6
0
2
4
6
8
10
12
Corruption perceptions index
More corruption
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
Per capita growth adjusted for initial income (%)
 So,
r = 0.69
6
4
2
0
-2
-4
-6
0
2
4
6
8
10
12
Corruption perceptions index
More corruption
views
 Inequality sharpens
incentives and thus
helps growth
 Inequality
endangers social
cohesion and hurts
growth
 117 countries,
1960-2000
Per capita growth adjusted for intial income (%)
 Two
r = -0.27
6
4
2
0
-2
-4
-6
-8
10
20
30
40
50
60
Gini index of inequality
70
views
 Political oppression
restrains special
interest groups and
thus helps growth
 Political oppression
breeds inefficiency
and hurts growth
 117 countries,
1960-2000
Per capita growth adjusted for initial income (%)
 Two
r = -0.64
6
4
2
0
-2
-4
-6
0
1
2
3
4
5
6
Political oppression
7
8
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
Per capita growth adjusted for initial income (%)
 Again,
rr =
= 0.50
0.48
6
4
2
0
-2
-4
-6
-8
-12
-8
-4
0
4
Democracy
8
12
is an
important source of
technological
innovation and
progress and
thereby also of
economic growth
 156 countries,
1960-2000
Per capita growth adjusted for initial income (%)
 Manufacturing
r = 0.48
8
6
4
2
0
-2
-4
-6
0
20
40
60
80
100
Share of manufactures in exports (%)
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
Per capita growth adjusted for initial income (%)
 Agriculture
rr == -0.59
0.48
6
4
2
0
-2
-4
-6
-8
0
10
20
30
40
50
60
Primary production (% of GDP)
70
 Economic
growth is available to all who make
the effort to achieve it (Lewis)
 High-quality growth requires accumulation of
capital as well as economic efficiency
through good governance: judicious policy
undertakings and sound institutions




Education, family planning, health care
Free trade, stable prices, private enterprise
Honesty, equality, liberty, democracy
Not too much dependence on agriculture and
natural resources