Download The Crisis and the Impact on China

Determinants of Growth
Danyang Xie
Fall 2013
Outline
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A Tale of Two Nations: Philippines and South Korea
Growth Makes a Difference
How can a country grow faster
A Daring Plan: Charter Cities
Convergence
– OECD Convergence
– Convergence among US States
– Evidence from China Provincial Data
• Sources of Economic Growth
– Why China Grow so Fast?
– HK versus Singapore
Philippines and South Korea
1960
• Per Capita GDP $ 640
• Population 28 million
• 27 % of people lives in
Manila
• Per Capita GDP $ 640
• Population 25 million
• 28% of people lives in
Seoul
By 2003, per capita income in South Korea
is about 12 times as large as that in Philippines
Is there some action a government of Philippines
could take that would lead the Philippines’
economy to grow like South Korean? If so,
what exactly? If not, why not?
“Once one starts to think about these questions,
it is hard to think about anything else”
Lucas, 1988
Growth Makes a Difference
Calculating Growth Rate
• The growth rate of x from time t to t+1 is given by
x ( t  1)  x ( t )
x( t )
 100 %
• Rule of 70
– If the growth rate of x is 2%, then it takes 70/2=35 periods to double
x
Growth Makes the Difference
• Between 1960 and 1980
– India’s growth rate of income was 1.4% per year
– South Korea’s growth rate was 7% per year
• As a result
– Indian income will double every __ years
– Korean income will double every __ years
Growth Makes the Difference
• Between 1960 and 1980
– India’s growth rate of income was 1.4% per year
– South Korea’s growth rate was 7% per year
• As a result
– Indian income will double every 50 years
– Korean income will double every 10 years
What a Difference!
• An Indian will, on average, be twice as well off
as his grandfather
• A Korean will be __ times as well off as his
grandfather
What a Difference!
• An Indian will, on average, be twice as well off
as his grandfather
• A Korean will be 32 times as well off as his
grandfather
How can a country grow faster?
• “Simply advising a society
to follow the Korean
model is like advising an
aspiring basketball player
to follow the Michael
Jordan model.”
Robert E. Lucas, Jr., 1993
How can a country grow faster?
• Some suggestions
– Encourage human capital accumulation
– Subsidize basic scientific research
– Open up the economy
– Import Ideas
– Promote on the job training
– Develop financial sector?
– Build a Democratic Society?
Empirical Results from 4 million regressions
(Xavier Sala-i-Martin, 1997)
• Sala-i-Martin ran regressions that include
1960 per capita GDP, 1960 Primary School
Enrollment, and 1960 Life Expectancy and
tested the significance of other 59 variables
• He found that 21 out of the 59 variables are
significant for economic growth at 95 percent
level
The significant 21 variables
Equipment Investment
Number of Years Open Economy
Fraction of Confucius
Rule of Law
Fraction of Muslim
Less Political Rights
Latin American Dummy
Sub-Sahara African Dummy
Less Civil Liberty
Revolution and Coups
Fraction of GDP in Mining
S.D. Black Market Premium
Primary Exports in 1970
Degree of Capitalism
War Dummy
Non-Equipment Investment
Absolute Latitude
Exchange Rate Distortions
Fraction of Protestant
Fraction of Buddhist
Fraction of Catholic
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Regional Variables
Equipment Investment
Number of Years Open Economy
Fraction of Confucius
Rule of Law
Fraction of Muslim
Less Political Rights
Latin American Dummy
Sub-Sahara African Dummy
Less Civil Liberty
Revolution and Coups
Fraction of GDP in Mining
S.D. Black Market Premium
Primary Exports in 1970
Degree of Capitalism
War Dummy
Non-Equipment Investment
Absolute Latitude
Exchange Rate Distortions
Fraction of Protestant
Fraction of Buddhist
Fraction of Catholic
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Political variables
Equipment Investment
Number of Years Open Economy
Fraction of Confucius
Rule of Law
Fraction of Muslim
Less Political Rights
Latin American Dummy
Sub-Sahara African Dummy
Less Civil Liberty
Revolution and Coups
Fraction of GDP in Mining
S.D. Black Market Premium
Primary Exports in 1970
Degree of Capitalism
War Dummy
Non-Equipment Investment
Absolute Latitude
Exchange Rate Distortions
Fraction of Protestant
Fraction of Buddhist
Fraction of Catholic
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Market Distortions and Market Performance
Equipment Investment
Number of Years Open Economy
Fraction of Confucius
Rule of Law
Fraction of Muslim
Less Political Rights
Latin American Dummy
Sub-Sahara African Dummy
Less Civil Liberty
Revolution and Coups
Fraction of GDP in Mining
S.D. Black Market Premium
Primary Exports in 1970
Degree of Capitalism
War Dummy
Non-Equipment Investment
Absolute Latitude
Exchange Rate Distortions
Fraction of Protestant
Fraction of Buddhist
Fraction of Catholic
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+
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+
+
+
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+
-
Variables not strongly related to growth
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Government spending
Inflation rate
Inflation variance
Tariff restrictions
Index of Democracy 1965
Urbanization Rate
…
A Daring Plan: Charter Cities
• Paul Romer: TED Lecture
• Rules are important
– North Korea vs South Korea
– Haiti vs Dominican Republic
– Hong Kong
– Honduras
Convergence Hypothesis
• Poor countries should grow faster than rich
countries because:
– Capital stock is low relative to labor, the return to
capital should be high in poor countries
– Poor countries can free ride on the technologies
developed in the rich countries
– Migration is a third source of convergence
Empirical findings
• There is no unconditional convergence
No unconditional convergence
Empirical findings
• There is no unconditional convergence
• Convergence does occur among countries
with similar characteristics (conditional
convergence)
Conditional Convergence (OECD)
China: Provincial Convergence
• Convergence is significant for the period 197889
• Convergence is insignificant for the period
1989-97
Source: Table 3.3. China: Competing in the Global Economy. IMF 2003.
Conditional Convergence (US States)
Openness Helps Convergence
Openness Helps Convergence
Lucas: Trade and Diffusion of the Industrial Revolution, NBER August 2007
Sources of economic growth
• Technological progress (TFP growth)
• Increases in capital inputs
• Increases in labor inputs
Growth Accounting
Production function: Y = A F(K, N)
In terms of growth:
Y
A
K
N

a
b
Y
A
K
N
elasticity of Y w.r.t. N
elasticity of Y w.r.t K
Total factor productivity growth
In the US economy
a = 0.36 and b = 0.64
Y
A
K
N

 0.36
 0.64
Y
A
K
N
• 10% increase in A raises Y by 10%
• 10% increase in K raises Y by 3.6%
• 10% increase in N raises Y by 6.4%
How to estimate the elasticities?
• The elasticities a and b are often estimated by
capital income share and labor income share,
respectively.
• b = labor income / GDP
• a=1–b
• This approach works well in economies with
competitive markets and constant returns to
scale.
Growth accounting exercise I
Why China Grows So Fast?
China: Sources of Growth, 1952-94
Period
Output
TFP
Capital
Labor
1952-78
5.8
1.1
6.2
2.5
1979-94
9.3
3.9
7.7
2.7
Source: Hu and Khan (1996)
In-Class Number Crunching III:
If we use labor income share as an approximation for the labor elasticity,
what is the average labor income share since economic reform in 1979?
China: Percentage Contribution to Output Growth
Period
TFP
Capital
Labor
1952-78
18
65.2
16.8
1979-94
41.6
45.6
12.8
Source: Hu and Khan (1996)
Percentage contribution from capital to output growth after reform:
a*(growth rate of capital)/(output growth)
Will China continue to grow?
• 120 million of rural labor is yet to be fully employed
• Plenty of room for improvement on rule of law
• Incentive mechanism in the financial system remains to be
put in place
• Human capital accumulation
• Much catching up to do: per capita income in China is
estimated to be about $6,200 in 2012, ranked 87th, still far
behind
The precondition for growth is social stability
Growth accounting exercise II
A tale of two cities
A tale of two cities
Percentage Contribution to Output Growth
TFP
Capital Labor
Hong Kong
30
42
28
Singapore
-5
73
32
Source: Alwyn Young (1995)
Non-parametric estimation
TFP growth estimate (%)
Conventional
Country
Capital
Labor
Nonparametric
Elasticity
Income share
Elasticity
Income share
4.1
3.4
0.41
0.37
0.71
0.63
2.8
2.3
3.7
0.18
0.29
0.81
0.71
Singapore
0.5
1.8
3.7
0.17
0.49
0.63
0.51
Taiwan Province of
China
3.8
2.1
3.8
0.19
0.26
0.76
0.74
Young
Collins
Hong Kong SAR
4.1
Korea
Source: Iwata, Khan, and Murao (IMF Staff Papers 2003)
Summary
• Growth makes a difference
• Besides the three variables that are commonly believed to
influence growth (initial GDP, initial school enrollment, initial
life expectancy), there are 21 variables that strongly related to
growth. Rules that provide the right incentives are extremely
important.
• No unconditional convergence; but conditional convergence
exists and is strong among the economies that are open.
• Pay attention to TFP growth. Its estimation is sensitive to the
estimates of the elasticities.