Download Long Term Growth Potential

Development
Strategy
Link
• Major project to compare prices internationally
implemented by the World Bank with the help of
UN and national statistical agencies.
• ICP has been implemented by UN Statistical
Office since 1968.
PPP’s
1. Divide expenditures into k = 1,..,K
categories of goods.
2. All j = 1,..J countries (in 2005, J = 146)
report total expenditure in domestic
k
currency of all categories
v
j
.
3. Sample prices of representative goods
from each category in each country.
4. Construct average of those prices
(relative to “anchor” economy) for each
country j basic heading type of good k .
p
k
j
p
k
ANC
WDI provides PPP data for many countries
using US$ as anchor currency
Hong Kong PPP per Category
PPP
Xrate
Classification Name
2005
1101 Food and non-alcoholic beverages
8.81547906
1102 Alcoholic beverages and tobacco
10.1680743
1103 Clothing and footwear
6.11435997
1104 Housing, water, electricity, gas and other fuels
9.09847987
1105 Furnishings, household equipment and household maintenance 7.61334163
1106 Health
2.9312812
1107 Transport
9.40016616
1108 Communication
6.83789147
1109 Recreation and culture
5.24897067
1110 Education
3.25951882
1111 Restaurants and hotels
8.98215569
1112 Miscellaneous goods and services
5.61784877
1501 Machinery and equipment
7.5934365
1502 Construction
4.15019416
7.78
7.78
7.78
7.78
7.78
7.78
7.78
7.78
7.78
7.78
7.78
7.78
7.78
7.78
PPP Conversion Factor
• PPP is a value weighted average of relative
prices of all K goods.
PPPjAC $  w1j
p1j
p1ANC
 w2j
p 2j
2
p ANC
 ...  wKj
p Kj
K
p ANC
,......, w 
n
j
v nj
Vj
PPP 2010
China
Hong Kong
Korea
Japan
Singapore
PPP
3.94638098
5.34545752
827.345987
111.389068
1.04012836
PPP/XR
0.582922
0.688032
0.71566
1.268959
0.762831
XR
6.770269
7.769167
1156.061
87.77988
1.363508
One benchmark for thinking about whether a currency is undervalued or overvalued. If
PPP < XR, then domestic goods are relatively cheap, currency is undervalued.
GDP in Intl$
• PPP’s are used to construct comparable
measures of GDP for multiple countries by
converting them into international dollars.
GDPj [ Intl $] 
Per capita GDP in
international dollars is
headline way of
comparing living
standards.
GDPj
PPPjINTL $
GDP per capita, PPP (current international $)
2005
Hong Kong SAR, China
$35,677.92
China
$4,114.57
India
$2,299.76
Indonesia
$3,216.81
Malaysia
$11,754.53
Korea, Rep.
$22,783.27
Thailand
$6,750.94
Singapore
$45,374.24
Atlas Conversion Method
GDP pe Capita, US$
60000
50000
Axis Method
40000
30000
20000
10000
0
2000
2001
2002
2003
2004
2005
Hong Kong SAR, China
2006
2007
Singapore
2008
2009
2010
2011
2012
• Use real GDP growth rates to construct path of
constant price International $GDP for comparisons
of production levels across time and space.
GDP per Capita, PPP
Constant 2005 International $
60,000.00
50,000.00
40,000.00
30,000.00
20,000.00
10,000.00
0.00
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Singapore
Hong Kong
• Developing countries tend to be relatively cheap with
PPP’s being lower than exchange rates.
• OECD countries tend to have more similar price
structures, though they tend to be relatively more
expensive.
• High income, non-OECD countries tend to be
relatively cheap.
• Compare values measured in different currencies
using the PPP and exchange rate method.
GDP per Capita vs. Productivity
• Per Capita GDP can be broken down into two
parts:
GDP
per
Capita
=
Productivity
GDP
per
Engaged Person
X
Employment Rate
Engaged Person
per
Capita
Bosnia and Herzegovina
Iraq
Yemen
Mali
Maldives
Croatia
Bangladesh
Belize
Lebanon
Georgia
South Africa
Argentina
Peru
Sierra Leone
Ireland
Gabon
Senegal
Uganda
Guinea
Lesotho
Malta
Cameroon
Malaysia
Gambia
Bhutan
Portugal
Mauritius
United Kingdom
Ukraine
Bahamas
Azerbaijan
Madagascar
Tanzania
Trinidad and Tobago
Germany
Mozambique
New Zealand
Equatorial Guinea
Norway
Macao
Bahrain
Fraction of Population
Employment per Capita, 2011
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
Congo - Kinshasa
Madagascar
Malawi
Sierra Leone
Comoros
Benin
Senegal
Bangladesh
Kyrgyzstan
Congo - Brazzaville
Yemen
Pakistan
India
Paraguay
Moldova
Jamaica
Sri Lanka
Egypt
St. Vincent & the Grenadines
Tunisia
Jordan
Botswana
Peru
Bulgaria
Serbia
Belarus
Kazakhstan
Iran
Russia
Barbados
Hungary
Slovenia
South Korea
Iceland
Bermuda
Denmark
Spain
Oman
Hong Kong
Ireland
Kuwait
2005 Intl $
Most differences due to Worker Productivity
GDP per Worker, 2011
180000
160000
140000
120000
100000
80000
60000
40000
20000
0
. Productivity
• Productivity can be broken down into two
parts:
Productivity
GDP
per
Engaged Person
=
Productivity
GDP
per
Hour
X
Hour
per
Engaged Person
Hours Worked per Worker, 2011
2500
2000
Hours
1500
1000
500
0
Productivity per Hour
80
70
60
2005 Intl $
50
40
30
20
10
0
Labor Productivity Data
• Key source for international comparisons in
productivity is the Total Economy Database
Total Economy Database Link
• Originally developed at University of
Groningen Growth and Development Centre.
Link
Patterns of Economic Growth
• Developed Economies experienced a golden
age of per capita GDP growth during post-war
period but have experienced slower growth
since 1973
• Many developing economies also experienced
fast growth during 1950-1973 but slowed
markedly during 1973-1998. Some developing
economies (India, Africa) have experienced a
growth resurgence since then.
Productivity Catch Up: Europe
Source: Groningen Growth & Development Center
USA
France
Germany
Italy
UK
1950
18.89
7.95
6.45
6.57
11.49
% of US
100.0%
42.1%
34.1%
34.8%
60.8%
2009 Intl$, GDP per Hour Worked (Y/L)
2009
58.98
54.65
53.46
41.01
50.76
% of US
100.0%
92.7%
90.6%
69.5%
86.1%
Productivity Catch Up: East Asia
Source: Groningen Growth & Development Center
USA
Hong Kong
Japan
Singapore
South Korea
Taiwan
1963
18.89
10.28
7.39
7.94
2.86
2.95
% of US
100.0%
54.4%
39.1%
42.0%
15.1%
15.6%
2009 Intl$, GDP per Hour Worked (Y/L)
2009
58.98
39.98
39.91
38.22
27.03
36.65
% of US
100.0%
67.8%
67.7%
64.8%
45.8%
62.1%
Productivity Catch Up?:
Latin America
Source: Groningen Growth & Development Center
USA
Argentina
Brazil
Chile
Mexico
1950
18.89
8.05
3.33
5.72
7.01
% of US
100.0%
42.6%
17.6%
30.3%
37.1%
2009 Intl$, GDP per Hour Worked (Y/L)
2009
58.98
21.35
11.48
15.48
17.26
% of US
100.0%
36.2%
19.5%
26.2%
29.3%
Capital Accumulation
• Capital Formation – Stock of equipment,
machines, structures.
• Incremental increase in capital is investment
less some measure of depreciation
∆𝐾 = 𝐺𝐹𝐶𝐹 − 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛
Capital Productivity
• Capital Productivity: Capital investment is a
central part of advancing productivity in
developing economy but displays diminishing
returns.
350000
Capital stock at current PPPs (in mil. 2005US$) per persons engaged
300000
200000
Brazil
France
South Korea
150000
United States
100000
50000
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
1960
1958
1956
1954
1952
0
1950
2005 Intl. $
250000
Capital Productivity
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
Brazil
France
South Korea
United States
Measuring Capital Returns
ICOR
Incremental Capital –Output Ratio: Ratio of
constant dollar investment
to increase in output
Const.$
GFCFt 1
ICORt 
GDPt Const.$  GDPt Const.$
1
• Measures number of dollar of investment
needed to produce an extra dollar of output.
LINK
• ICOR is volatile, must take long run averages.
GFCFtConst.$
1
ICOR 
GDPtConst.$
1
GFCFtConst.$
1
GDPtConst.$ GDPtConst.$
1
GDPtConst.$
1

GDPtConst.$
1
gtQ
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
1979
1978
1977
1976
1975
ICOR, Korea, 5 year Rolling Averages
10
9
8
7
6
5
4
3
2
1
0
Tne Role of Government
DEVELOPMENT POLICY
Structuralist Theory
• Two kinds of economies
• Developed
• Underdeveloped
• Key difference: Rich, developed economies
dominated by industry; poor, underdeveloped
dominant in agriculture and resources.
• Development policy: shift countries from
underdeveloped to developed.
Government Intervention
• Capital is in short supply in developing economies so
must be directed toward building of heavy industry.
• Coordination failures – Set of infrastructure necessary to
build the industrial economy has multiple inputs that
must come on line at the same time. No need for a dam
if there is no power network, no need for a power
network if there are no factories, no need for factories if
there is no power network.
• Government can coordinate big push toward industrial
development: Rosenstein-Rodan.
• Example: India Link
• Example: Brazil Link
Industrialization
Predictions
Structuralist Theory
• Rosenstein-Rodan: Growth
potential, combination of
degree of investment and
capacity to organize
investment
Structuralist Theory and Trade
• UNCTAD Economist Raul Prebisch developed the
idea that prices of primary products would fall in
value relative to manufactured goods. Link
• International trade would always leave
underdeveloped economies impoverished.
• Use of tariffs and trade restrictions to develop
domestic manufacturing sector.
• Dependency Theory: International trade enforces
a system of power that relegates developing
countries to producing raw material and cheap
labor. Lesson: self-reliance.
Criticisms
1. High cost of imports and import substitutes
reduces economic efficiency making people
poorer.
2. Developing economies operate on too small of a
scale to be efficient in capital heavy goods.
3. Created monopolies protected from competition
4. Source of corruption
Link - Krueger.
Per Capita GDP
10
8
6
4
%Growth Rate
2
0
-2
-4
-6
-8
-10
196 196 196 196 196 197 197 197 197 197 197 197 197 197 197 198 198 198 198 198 198 198 198 198 198 199 199 199
5
6
7
8
9
0
1
2
3
4
5
6
7
8
9
0
1
2
3
4
5
6
7
8
9
0
1
2
Brazil
1.53 0.39 0.41 2.55 3.85 5.04 6.5 7.95 8.49 8.39 7.72 7.44 5.99 3.89 3.45 4.22 1.45 0.68 -0.6 -0.9 -1 1.43 2.1 2.82 2.51 0.19 -1 -1.7
India
1.4 0.63 1.56 1.03 0.82 2.32 2.63 0.97 0.93 -0.1 0.62 0.61 2.12 2.58 1.32 0.85 1.71 0.99 1.32 3.11 2.84 2.62 2.74 3.22 3.67 3.75 3.06 3.4
Myanmar 2.23 1.15 -0.9 -1.2 0.58 -0.6 1.18 2.82 0.29 0.71 0.57 0.96 1.66 3.13 3.11 3.86 3.92 3.87 3.47 3.45 2.51 1.14 -0.7 -3.6 -3.8 -3.7 -3.5 -0.8
Algeria
Kenya
0
-7.4 -0.5 2.25 3.04 3.6 2.33 5.85 4.52 4.37 3.63 7.45 3.11 4.12 4.07 3.18 2.05 2.19 1.37 0.96 1.52 1.06 -0.2 -1.4 -1.5 -2 -2.2 -1.6
0.24 4.56 3.35 3.16 3.69 2.36 3.75 6.34 5.88 5.08 6.11 2.21 0.71 0.88 1.54 2.43 2.72 1.17 0.08 -1 -1.3 -0.6 0.31 1.31 1.94 1.98 0.94 -0.3
Link
12 W. Europe
W. Offshoots
F. USSR
8 L. America
Asia
Total Africa
World Total
Average Growth Rate, GDP per Capita
1950-1973 1973-1998
1998-2008
3.8%
1.8%
1.7%
2.4%
1.9%
1.6%
3.3%
-1.8%
7.0%
2.6%
1.1%
1.8%
3.8%
2.9%
4.6%
1.9%
0.1%
2.3%
2.9%
1.3%
2.9%
Washington Consensus
1. Fiscal Discipline.- Balanced Budget.
2. Reordering Public Expenditure Priorities.
Eliminate biased subsidies, increase health,
education and infrastructure.
3. Tax Reform. Broad tax base with moderate
marginal tax rates.
4. Liberalizing Interest Rates
5. Competitive Exchange Rate
http://www.iie.com/publications/papers/williamson0904-2.pdf
Identified as a consensus for development by
policymakers in Washington (World Bank, IMF) and
particularly Latin America.
6. Trade Liberalization
7. Liberalization of Inward Foreign Direct
Investment.
8. Privatization.
9. Deregulation. specifically on easing barriers
to entry and exit.
10. Property Rights
EAST ASIAN MIRACLE
GDP per capita growth (annual %) , 5 year averages
12
10
8
6
4
2
0
-2
-4
Hong Kong SAR, China
Indonesia
Korea, Rep.
Malaysia
Singapore
Thailand
Latin America & Caribbean (all income levels)
Middle East & North Africa (developing only)
South Asia
Sub-Saharan Africa (developing only)
Neo-classical View
Physical & Human Capital Deepening
• High investment rates beginning in 1970’s
• Rapid growth in education rates.
• Macroeconomic Stability: Low inflation, small
budget deficits
• Market Orientation: South Korea vs. North
Korea
Gross capital formation (% of GDP)
50
45
40
35
30
25
20
15
10
5
0
1960
1965
1970
1975
1980
1985
1990
1995
Hong Kong SAR, China
Indonesia
Korea, Rep.
Malaysia
Singapore
Thailand
Latin America & Caribbean (all income levels)
Middle East & North Africa (developing only)
South Asia
Sub-Saharan Africa (developing only)
2000
2005
2010
Revisionist View
• East Asia not exemplar of Washington Consensus
• Government heavily involved in the economy
• Developmental State – Chalmers Johnson
– Ideological devotion to development
– Independent bureaucracy embedded within the
economy playing a leading role.
• Developing industries protected from
international competition
• Friedrich List’s American system
Can Japan Compete?
Link
• Japanese companies dominated a number of
advanced industries from the 1980’s and
experienced high growth up to that period with
slower subsequent growth.
• Japan: Known for industrial policy activism
through Ministry for Industry, Trade and
Investment. MITI approach was to
– encourage cooperation by companies in key
industries.
– allow cartels and even encourage formation.
– Limit foreign trade & investment
Competitive Outcomes
• Low returns on capital
• Firms emphasize market share, maintenance
of employment
• Intense domestic competition in some sectors
especially those internationally successful
ones.
• Sectors with government sponsored cartels or
planning, low competition, low success
World Bank View
• High levels of investment supported by high
level of savings
– Government institutions: Savings banks and
mandatory provident funds developed to
overcome market failures
• Expansion in Education Broad based rather
than concentrated in elite
Gross domestic savings (% of GDP)
60
50
40
30
20
10
0
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
Hong Kong SAR, China
Singapore
Korea, Rep.
Thailand
Malaysia
Indonesia
World
Latin America & Caribbean (all income levels)
Middle East & North Africa (developing only)
South Asia
Sub-Saharan Africa (developing only)
School enrollment, tertiary (% gross)
25
20
15
10
5
0
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
Indonesia
Malaysia
Thailand
Latin America & Caribbean (developing only)
Middle East & North Africa (developing only)
South Asia
Sub-Saharan Africa (developing only)
1983
1984
1985
Literacy rate, adult total (% of people ages 15 and above)
Thailand
Malaysia
Indonesia
Latin America & Caribbean (developing only)
Middle East & North Africa (developing only)
Sub-Saharan Africa (developing only)
South Asia
0
10
20
2000
30
1990
40
1980
50
60
70
80
90
100
Government Intervention
• “Market friendly” – Macroeconomic stability
and strong property rights encourage private
investment but,…
• Strong Bureaucratic State to Promote Growth
Key Interventions
• Financial repression to promote corporate
investment
• Allocation of Resources (Credit & Foreign
Exchange) to Export Industries
Market Failure: Externalities
• Some economic activities creates negative
spillovers: Pollution, Crime
– Private benefits but public costs.
• Some economic activities create positive
spillovers: knowledge. Developing new
knowledge may create public benefits that will
accrue to people who do not pay for the costs
Pillars of East Asian Growth Miracle
World Bank Chief Economist View
• Gov’t intervention in East Asia overcomes market
failures
• Underdeveloped financial markets – gov’t
intervention fills
• Gov’t intervention supports knowledge producing
activities.
–
–
–
–
Technical education and research
Deliberative councils, research consortia
FDI
Export industries
Foreign Direct Investment
Two key elements need to be emphasized in the
definition of FDI:
1. long-term nature or of “lasting interest.”
2. the investor has a “significant degree of
influence” on the management of the enterprise.
For operational purposes, 10 per cent of the voting
shares or voting power is the level of ownership
necessary for a direct investment interest to
exist (IMF, 1993, paragraph 362; OECD, 2008,
paragraph 117)
UNCTAD Training Manual on Statistics for FDI and the Operations of TNCs
Volume I FDI Flows and Stocks
LINK
Pro’s and Cons of FDI
Pro:
i.
ii.
iii.
iv.
v.
Increased domestic capital formation.
FDI brings superior technology
Increases domestic competition
Gives access to export markets.
FDI more stable than loans or capital flows.
• Con:
i.
Multinationals may interfere with local political
economy.
ii. Foreign nationals fill top jobs.
Link #1
Link #2
Foreign direct investment, net inflows (% of GDP)
10
9
8
7
6
%
5
4
3
2
1
0
-1
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
Indonesia
Malaysia
Thailand
Arab World
Latin America & Caribbean (developing only)
Middle East & North Africa (all income levels)
South Asia
Sub-Saharan Africa (developing only)
1995
1996
1997
Export Industries and Knowledge
• Export industries must use advanced
technology
• Export firms compete in foreign countries and
learn international best practices.
• Successful export firms demonstrate
comparative advantage benefit imitators
Success in export markets is an objective
standard of performance that can’t be gamed by
corrumption.
New Structuralist Development
Strategy
New Structural Economics by Justin Lin
• Countries have grown more developed by
Investing in physical and human capital but…
• Comparative advantage depends on level of
capital.
• Focusing on areas of comparative advantage
requires structural change as country
develops.
Korea: Average Years of Schooling, 25+
12.00
10.00
8.00
6.00
4.00
2.00
0.00
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
Korea, Industry Share of Exports
40.00%
35.00%
30.00%
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
Auto
Textiles and Clothing
Office & Telecom
Equipment
1980
1990
Iron and Steel
2000
2010
Chemicals
Other Machinery
Industrial Policy for 21st Century
Dani Rodrik Link
• Development is the process of creating new
industries, not only upgrading but diversifying.
Two roles for government
• Pioneer firms take risks entering into new
industries, generate information about which sorts
of products an economy is good at, but this can be
copied by competitors.
• Industries rely on a network of suppliers and
supporting industries. Building a new industry
might require co-ordination.
Korean microwaves vs. Taiwan bicycles: Not necessarily comparative advantage
Peruvian Asparagus
• Peruvian farmers growing asparagus since
1950’s with minimal economic impact.
• In 1980’s, US gov’t sent experts for knowledge
transfer.
• Gov’t started cooperative associations for
technology sharing and marketing
coordination.
• Gov’t invested in freezing & packing plants.
• Peru now the #1 asparagus exporter.
Principles
•
•
•
•
•
Upgrading not radical change
New activities only
Clear benchmarks of success
Built-in sunset clause
Subsidize activities that create information or
knowledge spillovers
Industrial Policy
• Gov’t institutions need close connections with
business to discover what might work/is
working.
• Close connections with bureaucracy may lead
to corruption.
Elements of Successful Architecture
• Political support from top leaders.
• Deliberative coordination councils.
• Mechanisms of transparency and
accountability.