Download Security Scenarios And The Global Economy

NS4053
Winter Term 2015
Growth Accounting
Growth Accounting: Introduction
• IMF, Anchoring Growth: Importance of ProductivityEnhancing Reforms in Emerging and Developing
Economies (EMDEs), December 2013
• Understanding Past Growth Drivers: A Supply Side
Perspective
• IMF uses a neoclassical growth model to estimate past
sources of growth in the EMDEs
• Despite broad based growth in the EMDEs during past
decade:
• Underlying drivers of catch-up convergence at aggregate and
sectoral levels have varied
• Suggests different challenges for sustaining growth momentum
• Convergence gaps with advanced economies remain
wide point to significant catch-up potential
2
National Growth Accounting I
Convergence
• Rapid growth of EMDEs since mid 1990s reflects
resumption of catch up convergence
• Economic theory predicts economies further from the
global technological frontier will experience stronger
economic growth:
• Given high return investment opportunities and
• Benefits of absorbing imported technologies
• In fact growth did pick up in second half of the 1990s and
by mid 2000s EMDS as a whole grew faster than
advanced economies
• Occurred despite
• The Tequila, Asian and Russian financial crisis
• Sharp transition related collapses in Eastern Europe
3
National Growth Accounting II
4
National Growth Accounting III
Favorable External Environment
• Range of external factors supported growth
• The expansion of global and regional value changes led
to trade investment nexus for many countries
• Asia and Central, Eastern and South Eastern Europe (CESEE)
• Stimulated technology and knowledge transfer
• Technology led declines in transportation and
communication costs
• Facelifted fragmentation of production, buoyed trade and
• Propelled growth of information and communication technology
(ICT) services
• Historically high commodity prices, easy financing
conditions led to higher rates of investment
5
National Growth Accounting IV
• Domestic Drivers
• Wide ranging structural forms
• Better policy making and
• Greater trade and financial openness
• Allowed countries to take advantage of favorable external
conditions
• Macroeconomic stability improved across broad
spectrum of countries and
• Economic institutions were strengthened
• Reform efforts in product markets, trade and financial
liberalization picked up markedly in 1980s and 1990s
• In some cases crisis catalyzed reforms
• Demographic tailwinds also played a role in some
countries – demographic dividend
6
National Growth Accounting V
7
National Growth Accounting VI
Heterogeneity
• Growth accounting suggests that catch-up has been driven
by different factors
• In particular, differences in real GDP per capita growth rates
across regions driven mainly by labor productivity
• Reflects the contribution of technology and efficiency gains
(total factor productivity, TFP), greater capital intensity or
both
• In Europe and Central Asia productivity gains have
accounted for larger share of real GDP per capita than other
regions
• Labor utilization lagged
• Sizeable increases in TFP reflected dramatic changes in
economic structures in transition
• Rebound in capacity utilization in the CIS
• Tighter integration with euro area in CESEE
8
National Growth Accounting VII
• In developing Asia rapid growth in 19990s
• Capital deepening played a more important role in catch up
process compared to other regions
• Facilitated by high domestic savings rates in East Asia
• Region experienced solid TFP as well
• Labor utilization rather than capital depending or TFP
growth main driver in Latin America and Caribbean
• Reflects increasing labor force participation and lower
unemployment
• The contribution of TFP to growth picked up in 2000s but was
more modest than other regions
• In sub-Saharan Africa end of armed conflicts and
improved macroeconomic conditions in many countries
• Led to a turnaround in TFP performance and
• Greater capital deepening in the 2000 relative to the 1990a
9
National Growth Accounting VIII
10
National Growth Accounting IX
• Economic structure affects growth
• Higher skills and the technology component of manufacturing
production and
• Positive forward and backward linkages with rest of economy
• Typically lead to high productivity spillovers and
• Greater incentives for capital improvement
• Similarly greater diversification leads to
• Exports concentrated in sectors characterized by technology
spillovers and product upgrading
• Growth rates in economies with a high manufacturing share
• A more diversified export base experienced not only
• significantly higher average contribution from capital deepening
• but also larger TFP
11
National Growth Accounting X
Closing Convergence Gaps
• Rapid growth during past few decades has translated
into lower convergence gaps for many EMDEs relative to
the US
• However income differentials relative to the US remain large and
have even widened in some or stagnated in others
• Reflects shortfalls in factor inputs and especially TFP
• Main implications
• As of 2010 the capital to output ratios in some EMDE regions
(LAC, SSA) are still lower than in the US
• Suggests for some countries investment in physical and ICT
(information, communications technology) will be important
factors in catch-up
12
National Growth Accounting XI
13
National Growth Accounting XII
• Main implications (contd.)
• Employment to population rations are also lower in some
regions (CESSE, CSIS, MENA)
• Partly reflecting higher unemployment rates
• Also labor force participation rates among certain groups (e.g.
women)
• Suggests that measures to boost labor force participation in
these countries could be a priority
• Stock of human capital (average years of schooling) is
considerably lower in EMDEs
• Reflects differences in age education structure of the population
– expected to close provided educational attainment is sustained
at current rates
• But gaps in education quality remain equally pressing
• Could be a significant payoff from investments in high quality
education
14
National Growth Accounting XIII
• Main Implications (contd).
• TFP levels are well below those in advanced countries
• Ranging from 12% in SSA to 55% MENA oil
• Suggests a significant source of catch-up potential
• Consistent with the findings in literature that TFP gaps account
for the bulk of income and labor productivity across countries
• Thus technological diffusion and efficiency gains are
potentially a key source of future productivity growth in
EMDEs.
15
National Growth Accounting XIV
16
Sectoral Sources of Growth I
• To summarize
• Labor productivity gains at the aggregate level, stemming
from capital deepening and improvements in TFP
• have been a major force behind growth in many EMDEs in
recent years
• Gains can be indicative over broad segments of the
economy of
• Better utilization of resources and
• Technology catch-up
17
Sectoral Sources of Growth II
• In addition, productivity gains can also accrue from
structural transformation
• Reallocation of resources from low – to high productivity sectors
and activities
• Spurts of accelerated growth (take-off) are often
associated with a
• Strong pickup in productivity growth across sectors and
• An increasing pace of labor shifting out of agriculture
Structural Change
• The relative weight of different sectors in the economy is
determined by
• Technological progress within industries and firms
• Market and non market forces
18
Sectoral Sources of Growth III
19
Sectoral Sources of Growth IV
Structural Change (contd.)
• With an expansion of the most productive sectors,
aggregate productivity increases
• Usually, reallocation of labor is from low-productivity
agriculture to high productivity sectors (initially
manufacturing and subsequently services
• Primary channel though which advanced economies have
increased their national incomes
Sectoral Shares and Shifts
• Some generalizations from studies from the period 1990
and 2008
• First, most regions have experienced a reallocation of
resources away from agriculture, but magnitudes of such
shifts have varied by region.
20
Sectoral Sources of Growth V
Sectoral Shares and Shifts (contd.)
• Second, in marked contrast to the past experience of
advanced economies,
• services account for a growing share of employment and value
added, even at low levels of development
• Services tend to have lower average productivity than
manufacturing
• Important regional differences have also shaped
economic structures and caused differences in aggregate
productivity and growth performance
• Structural changes in CESEE and CIS have reflected their
transition from central planning
• Significant labor shedding in agriculture and
• A shift of resources toward the previously underdeveloped
21
Sectoral Sources of Growth VI
• Sectoral Shares and Shifts (contd.)
• Developing Asia stands out with rapid decline in
employment share of agriculture and labor sifts into
manufacturing and services
• Still share of employment in agriculture remains high
• On average, manufacturing continues to account for a higher
share in value added compared to other regions
• In LAC where structural changes took place earlier than
other regions
• There is a high and growing share of service sector in
employment and value added
• In many SSA countries especially in the low income
countries:
• agriculture remains the largest employer, poorer countries, and
• Industry’s share of value added has remained stagnant
22
Sectoral Sources of Growth VII
• In countries in which growth driven by non-renewable
natural resources, mining sector accounts for
• A relatively high share of industry value added
• The economic structure remains undiversified
• Capital intensive nature of sector offers limited employment
• Many workers have to drift into other sectors with much lower
average productivity
23
Sectoral Sources of Growth VIII
24
Sectoral Sources of Growth IX
Productivity Growth by Sector
• In general productivity in tradable sectors (industry and
agriculture) in EMs has exceeded that in services
• However many low income countries experienced more
significant productivity increases in the agriculture and service
sectors
• Fast growing regions that were integrated into global supply
chains (developing Asia, CESEE)
• exhibited higher productivity growth in industry,
• particularly manufacturing compared with other regions that saw
limited integration
• In regions with relatively slower growth (MENA and LAC),
productivity growth was highest in agriculture
• But sector’s contribution to aggregate productivity growth was
limited given its low share in value added
• Productivity growth in LAC’s large mainly non tradable
services sector notably lagged that in other regions
25
Sectoral Sources of Growth X
26
Sectoral Sources of Growth XI
• Within sector or structural change effects
• Analysis suggests that a within-sector component and a
structural change component (the inter-sectoral shift
effect) have occurred
• The bulk of the surge in labor productivity growth in
EMDEs between 1990 and 2008 driven by within-sector
productivity growth
• Reallocation of labor across sectors has been an
important driver of economy wide productivity gains in
• fast growing regions (Asia, CESEE, CIS), and
• countries (China, Turkey, Poland, Bangladesh) that experienced
employment shifts out of agriculture and has accounted for a
large share of variation in regional growth rate
27
Sectoral Sources of Growth XIII
• In contrast structural change on average has been
• productivity reducing in LAC, MENA and SSA
• Suggests that labor in these regions was absorbed by lower
productivity activates
• Finally, productivity growth in the mining sector in the
CIS and MENA has been low as compared with other
regions weighing down aggregate productivity growth
28
Sectoral Sources of Growth XIV
29
Sectoral Sources of Growth XV
• Scope for further structural change
• The contribution of structural change to aggregate
productivity growth depends on
• Differences in inter-sectoral productivity levels
• These differentials remain high in many EMDEs and are
much larger than in advanced economies
• Implies potential for growth benefits from further structural
transformation
• Strategies include
• Reducing agricultural productivity gaps
• Moving to higher value added activities
• Boosting services productivity
30
Sectoral Sources of Growth XVI
• Big potential for increased services productivity
• As countries develop manufacturing becomes more capital
intensive and economies more serviced based
• Services generally tending to be less productive than
manufacturing the growing importance of the service sector in
EMDEs in the absence of productivity enhancing measures
could be a drag on potential growth
• Still great differences across countries
• Median country in the CESSE and SSA exhibiting higher
productivity in services than manufacturing
• Productivity gps between services and manufacturing very large
in many EMDEs (China, Saudi Arabia Namibia) suggesting that
tackling barriers to productivity growth within service sectors
would be especially important for future growth prospects
31
Sectoral Sources of Growth XVII
32
Sectoral Sources of Growth XVIII
Closing within sector productivity gaps
• Productivity gaps with respect to advanced countries
remain large within sectors
• Implies considerable catch up potential through capital
deepening, improvements in human capital and
• TFP at the sector level
• In many cases these gaps are indicative of a significant
misallocation of productive inputs within sectors
• Policy efforts to improve allocative efficiency within sectors could
have a significant positive consequence for closing aggregate
productivity gaps and facilitating income convergence
33
Sectoral Sources of Growth XIX
34