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Why Growth Rates Differs Across Countries? Human Capital and Labour Market Reasons Physical Capital and Financial Sector Factors Fiscal and Monetary Policy Arrangements Technology and Innovations and Adoptions Trade and Exchange Rate Policies Macroeconomic Themes:22 1 19 70 19 Q2 71 19 Q2 72 19 Q2 73 19 Q2 74 19 Q2 75 19 Q2 76 19 Q2 77 19 Q2 78 19 Q2 79 19 Q2 80 19 Q2 81 19 Q2 82 19 Q2 83 19 Q2 84 19 Q2 85 19 Q2 86 19 Q2 87 19 Q2 88 19 Q2 89 19 Q2 90 19 Q2 91 19 Q2 92 19 Q2 93 19 Q2 94 19 Q2 95 19 Q2 96 19 Q2 97 19 Q2 98 19 Q2 99 Q 2 Growth Rates in the UK Economy 12 10 8 6 4 2 0 -2 -4 -6 Macroeconomic Themes:22 2 Growth Rates of Per Capita GDP (WDI 2000) 14.000 UK USA France Germany Italy Japan 10.000 8.000 6.000 4.000 2.000 -4.000 Years Macroeconomic Themes:22 3 20 00 19 97 19 94 19 91 19 88 19 85 19 82 19 79 19 76 19 73 19 70 19 67 -2.000 19 64 0.000 19 61 Growth Rates in Percent 12.000 Annual Growth Rates of GDP (WDI 2000) 14.000 12.000 10.000 8.000 UK USA France Germany Italy Japan 6.000 4.000 2.000 19 61 19 64 19 67 19 70 19 73 19 76 19 79 19 82 19 85 19 88 19 91 19 94 19 97 20 00 0.000 -2.000 -4.000 Macroeconomic Themes:22 4 Growth Rates of GDP 8.000 UK 6.000 USA France 4.000 2.000 -2.000 -4.000 Macroeconomic Themes:22 5 97 19 95 19 93 19 91 19 89 19 87 19 85 19 83 19 81 19 79 19 77 19 75 19 73 19 71 19 69 19 67 19 65 19 63 19 19 61 0.000 Human Capital Augmented Solow Growth Model Y AK L H and assume that 1 . Like before take log of this production function and differentiate both sides with respect to time to ge y g g g g g y a k n h y Recall the fact that in steady state output and capital grow at the rate of population growth rate. A constant output per capita and capital per capit dy dY dL Y in the steady state implies that y , or y Y L 0 L Macroeconomic Themes:22 6 Role of Saving, Investment and Productivity Shock in Economic Growth (Ramsey (1928)) Preference of a representative consumer: Max tU Ct Ct t 0 Budget constraint Ct It Gt X t M t zt F K , Lt , At t 1 Evolution of the capital stock: Boundary conditions: Kt 1 K t 1 It K 0 and K 0 T 0 Macroeconomic Themes:22 7 GDP and Productivity: Manpower or Labour Market Approach In fact GDP from the supply side can be decomposed into the working age population (P) labour force and participation rate (L/P), employment rate (E/L), the productivity of per worker QK . PLEQ LE and the capital output ratio as following: Y P Working age population (P): all individuals of 16 years old or above. Labour force (L): all individuals at work (employed) or who are willing to work and actively looking for a job (unemployed). Participation rate (L/P): Ratio of labour force of working age population. Employment rate (E/L): Proportion of labour force that is employed. Unemployment rate (U/L): proportion of labour force that is actively looking for work but is out of work. Productivity rate (Q/E): output per worker (weekly, monthly or yearly). Capital-output ratio (K/Y): units of capital per unit Macroeconomic Themes:22 of output. 8 GDP Growth, Utilisation of Labour Force and Productivity g Y g g g g g P LP EL QE KQ Capital increases by saving but the participation rate, employability and productivity of worker mainly depend on their level of education and training. By raising skills formal and informal education not only productivity of working individuals but also employability of those in the labour force and participation rate among the working age population. GDP increases either by an increase in population or their participation rate, or by their employment rate or by increase in their productivity or by increase in capital stock or any combination of these factors or by all of them. Macroeconomic Themes:22 9 Contribution of the Financial Sector in Economic Growth Financial sector diversifies risks and guarantees efficient allocation of the portfolio by households and corporate sector Investments are based on market evaluation (Tobin’s q). Free and liberal financial market: convertibility and controls of capital account. Direct foreign in/outward investments to complement national saving Reduce effects of credit rationing, market segmentation and asymmetric information Avoid economic crises and contagion effects Reduce speculative bubbles and attacks on financial and exchange rate markets Monitoring, supervision and deposit insurance. Build confidence by assuring inter generational equity, Viability of pension funds and pay as you go social security system Macroeconomic Themes:22 10 Ratio of the Gross Domestic Investment to GDP 40.00 35.00 30.00 25.00 20.00 15.00 UK USA Germany Japan 10.00 5.00 Macroeconomic Themes:22 19 98 19 96 19 94 19 92 19 90 19 88 19 86 19 84 19 82 19 80 19 78 19 76 19 74 19 72 0.00 11 Real Exchange Rate Across Countries 160.000 140.000 100.000 80.000 UK US Japan Italy France Germany 60.000 40.000 20.000 Macroeconomic Themes:22 12 19 99 19 97 19 95 19 93 19 91 19 89 19 87 19 85 19 83 19 81 19 79 19 77 0.000 19 75 1995=100 120.000 Ratio of Saving to GDP 45.00 40.00 35.00 30.00 25.00 20.00 15.00 UK USA Germany Japan 10.00 5.00 Macroeconomic Themes:22 19 98 19 96 19 94 19 92 19 90 19 88 19 86 19 84 19 82 19 80 19 78 19 76 19 74 19 72 0.00 13 Real Interest Rates Across Countries 12.000 10.000 6.000 -4.000 Macroeconomic Themes:22 14 20 00 19 98 19 96 19 94 19 92 19 90 19 84 19 82 -2.000 19 80 0.000 19 88 2.000 19 86 UK USA Japan Italy France Germany 4.000 19 78 Annual Percent 8.000 Fiscal and Monetary Policies for Stability and Growth: Policy in the UK Wrong economics policies generated disturbing fluctuations in 1970s and 1980s. Economic growth is promoted by macroeconomic prudence, outward orientation and domestic liberalisation. New macroeconomic policy framework includes the central bank independence credibility and transparency in economic policy adoption of the golden rule of public finance – borrow only to invest – sustainable long-term public finances monetary and fiscal co-ordination forward looking framework of the monetary policy Emphasis in more investment in education and health. The tightening of the fiscal policy in last 1990s These policy steered back to the stability and steady growth compared that in 1980s. Macroeconomic Themes:22 15 Cross Industry Productivity Measure Geroski (1991) uses cross section and time series pooling regression technique to measure the contribution of innovations in production among 79 three digit industries between 1976-1979. qti i t i t f ti Iti ti where qti is output per worker in industry i,f ti input per worker in industry i at time t,i and i gives a set of industry dummiest and t refers to time dummies, and i I is the t is the number of innovations (count measure) 0.... between t and periods where . Macroeconomic Themes:22 16 Cross Country Productivity Measures u Y Productivity index in country u: Au iu s i Li i Productivity difference between country u and k in sector Yiu Yik iC u s i L i Lk si i i Overal Productivity difference between country u and k: Au Ak u Yi u i Li Yik Yik k u s si si i Lik Lik Macroeconomic Themes:22 17 Productivity Differences Between UK and Her Trading Partners (Source: O'Mahony and De Boer (2002) NIESR report. www.niesr.ac.uk/research for detailed data set) Total non-market Total Market Services Sectors Economy 1996 US 91.0 127.4 128.5 UK 100.0 100.0 100.0 France 111.8 128.5 120.2 92.2 114.1 114.3 90.0 81.0 Germany Japan 1999 US 84.3 130.3 139.0 UK 100.0 100.0 100.0 France 107.4 129.4 122.0 87.3 117.4 119.2 88.7 80.7 Germany Japan* Macroeconomic Themes:22 18 Cross Industry Productivity Measure Geroski (1991) uses cross section and time series pooling regression technique to measure the contribution of innovations in production among 79 three digit industries between 1976-1979. qti i t i t f ti Iti ti where qti is output per worker in industry i,f ti input per worker in industry i at time t,i and i gives a set of industry dummiest and t refers to time dummies, and i I is the t is the number of innovations (count measure) 0.... between t and periods where . Macroeconomic Themes:22 19 Real Cost Reduction Approach: Harberger (1998) TFP growth Absolute over period Amount of 1=100 real cost reduction Industry 1 2 3 All the rest (1) 0.8 0.6 0.5 0.107 (2) 80 120 150 150 Cumulative sum of RCR of (2) (3) 80 200 350 500 Cumulative Value added Cumula Cumulative share of by sector tive share of RCR (3) sum of value value added of added (6) of (5) (4) (5) (6) (7) 0.16 100 100 0.09 0.4 200 300 0.27 0.7 300 600 0.55 1 500 1100 1.00 Macroeconomic Themes:22 20 Key Points to Growth Study (a)always study the components of growth separately (b) the accumulation of human capital by the labour force should be represented in the labour contribution of the growth equation (c)study externalities of education and technology at the firm level and spatial dimensions (d) check both firm and industry level reasons for declining multifactor productivity cross country growth regressions do not reveal much pay attention to episodes within individual countries. Macroeconomic Themes:22 21 Policy Implications of Real Cost Reduction (a)people must perceive real costs in order to reduce them (b) avoid prices that lie (c)excess costs are imposed by ill-conceived regulations and bureaucratic hurdles (d) international trade distortions are harmful for growth (e)privatisation, sound legal and institutional frameworks are good for growth (f) political consensus concerning the broad outlines of economic policy. Macroeconomic Themes:22 22 Import Penetration and Growing and Shrinking Sectors agri Min Man Egw constr 1993 6.31% 0.80% 4.40% 1994 0.69% 9.33% 8.08% -0.69% 1995 10.82% 10.69% 1996 -0.26% 1997 -13.55% Trade trnsp 9.00% -2.84% 5.60% 2.88% Fin 8.30% pub edu other 1.98% 6.69% 6.70% 7.03% 5.15% 6.82% 7.64% -0.98% 5.44% 8.92% 6.90% -3.54% 5.73% 5.06% 3.57% 4.11% 0.40% 5.53% 6.29% 20.76% 4.50% 4.45% 4.79% 7.47% 4.15% 6.63% -0.12% 6.36% 9.98% -8.36% 4.26% -0.85% 6.63% 9.34% 7.37% 8.36% -0.13% 5.66% 12.60% 1998 -5.10% -13.46% 0.73% -1.12% 6.01% 7.98% 8.39% 13.44% 1999 -1.56% 11.00% -0.66% 2000 -7.14% 45.43% 0.23% 6.10% 10.43% 0.05% 6.19% 6.29% 4.61% 6.19% -0.95% 8.00% 7.91% 0.83% -1.48% 6.10% 4.30% 5.75% 8.23% 6.27% 3.75% 7.59% Source: ONS input output table Macroeconomic Themes:22 23 Why Slow Growth Rates in the Last Two Decades? Market distortions: higher rates of taxes Slower Growth Rate of Productivity of Labour Appreciating exchange rate and destabilising monetary policies controlled interest rate? Import penetration and export ratios Slow growth rate of technology Imperfect competitions Lack of modernisation Macroeconomic Themes:22 24 References-1 Barro R. J.(1998) Economic Growth in Cross Sections of Countries, Quarterly Journal of Economics May 1991, pp. 407-443. Bhattarai K. (2002) Welfare Impacts of Equal-yield Tax Reforms in the UK Economy, mimio, University of Hull. Costello Donna M. (1993) A Cross-Country, Cross-Industry Comparison of Productivity Growth The Journal of Political Economy, Vol. 101, No. 2. (Apr., 1993), pp. 207-222. Thomas F. Cooley, Lee E. Ohanian (1997) Postwar British Economic Growth and the Legacy of Keynes The Journal of Political Economy, Vol. 105, No. 3. (Jun., 1997), pp. 439-472. Jan Fagerberg (1994) Technology and International Differences in Growth Rates Journal of Economic Literature, Vol. 32, No. 3. pp. 1147-1175. P. A. Geroski (1991)Innovation and the Sectoral Sources of UK Productivity Growth The Economic Journal, Vol. 101, No. 409. (Nov., 1991), pp. 1438-1451. Arnold C. Harberger (1998) A Vision of the Growth Process The American Economic Review, Vol. 88, No. 1.March, pp. 1-32. Grossman and Helpman (1991) Innovation and Growth in the Global Economy, Cambridge Mass. MIT Press. D. Greasley (1992) The Stationarity of British Economic and Productivity Growth 18561913 Journal of Applied Econometrics, Vol. 7, No. 2. (Apr. - Jun., 1992), pp. 203-209. Jones, Charles (CJ) Introduction to economic growth, 2002, 2nd Edition, Norton. Macroeconomic Themes:22 25 References-2 Catherine Lynde, J. Richmond (1993) Public Capital and Long-run Costs in U.K. ManufacturingThe Economic Journal, Vol. 103, No. 419.July, pp. 880-893. Michael Kitson, Jonathan Michie (1996) Controversy: Deindustrialisation and Britain's Industrial Performance since 1960 Britain's Industrial Performance since 1960: Underinvestment and Relative Decline The Economic Journal, Vol. 106, No. 434., pp. 196-212. Lindbeck a (1983) The Recent Slowdown of Productivity Growth, Economic Journal, 93, 13-34. O’Mahony M and W. de Boer (2002) Britain’s relative productivity performance:Updates to 1999, Final report to DTI/Treasury/ONS, NIESR. London. Romer, Paul (1989) Endogenous Technological Change, Journal of Political Economy, vol. 98, no. 5. Pt. 2, pp. S71-S102. Mankiw N.G. D., Romer and D.N. Weil (1992) A Contribution to the Empirics of Economic Growth, , Quarterly Journal of Economics, pp. 407-437. R. C. O. Matthews (1969) Why Growth Rates Differ The Economic Journal, Vol. 79, No. 314. (Jun., 1969), pp. 261-268. Torsten Persson, Guido Tabellini (1994) Is Inequality Harmful for Growth? The American Economic Review, Vol. 84, No. 3. pp. 600-621. Romer, Paul (1989) Endogenous Technological Change, Journal of Political Economy, vol. 98, no. 5. Pt. 2, pp. S71-S102. Solow, Robert M., 1956: A Contribution to the Theory of Economic Growth, QJE, pp.65-95. Macroeconomic Themes:22 26