Download Trade and Growth: then and now

Globalization and Growth:
then (1972) and now
Growth benchmarks
Annual growth rates, 1972-2006
Real output
Total
Per capita
The world
3.7%
2.1%
The US
3.0%
2.0%
Theory: why globalization helps
1.
2.
3.
Countries produce their low-opportunity cost items and trade
them for their high-opportunity items (this generates income)
LDCs spread their scarce capital widely across labor-intensive
industries instead of concentrating it in capital-intensive
industries (this raises LDC wages)
Countries sell to a huge global market (this exploits economies of
large-scale production)
4.
5.
Countries gain access to better technology (this raises growth rates)
Industries face more competition (this reduces monopoly
exploitation)
6.
Foreign investment adds to scarce savings in LDCs (this further
adds to demand for labor and raises wages)
7. Labor migration allows LDC workers to gain higher incomes
abroad and send remittances home to their families
8. Countries can use the incomes they gain to make investments
in physical and human capital that helps them grow (this can
change their comparative advantage over time)
Growth takes more than globalization,
including…
•
•
•
•
Good governance to use income wisely
Stability
High rates of saving
Investments in infrastructure and education
The evidence: lesser known facts
about 1972
• “Globalization” did not appear in
economics textbooks
• A natural experiment was in progress:
--Import Substitution Industrialization (ISI)
versus
--Export Led Industrialization (ELI)
• The "Asian Miracle" was already underway,
but not yet in the news
• Dr. J was a sophomore in college, not
paying much attention to the news anyway
Jeopardy 311
These four countries collectively
comprise the “Asian Tigers.”
The Asian Tigers pursued ELI:
•
•
•
•
South Korea
Taiwan
Singapore
Hong Kong
Tiger 1: South Korea up to 1972
• 1953: The Korean War ended, with 2/3 of South Korea’s
industrial capacity destroyed.
• 1960: South Korea was poorer than Bangladesh, Haiti,
and the Ivory Coast. It exported only 3% of its output
and imposed average import tariffs above 50%.
• Mid 1960s:
--South Korea began outward-oriented reforms
--British economist Joan Robinson "referred to the
economic miracle of North Korea and declared that it
would economically overwhelm the poverty-stricken
South.”
• 1972: South Korea’s exports had risen to 20% of its
output, with textiles accounting for 25% of exports. Per
capita income had doubled in the 12 years since 1960.
South Korea today
• South Korea exports over 40% of its output.
• Computer and transportation goods have
replaced textiles as its leading exports.
• It has been the fastest growing country in
the world since 1960.
• It is now more than 10 times richer than
Bangladesh, Haiti and Ivory Coast, its peers
in 1960.
Tiger 2: Taiwan
• In 1949, Chiang Kai-Shek’s Nationalists
arrived.
• Sociologist Max Weber asserted that
Confucianism is incompatible with capitalism.
• Taiwan stopped receiving US aid in 1965
• It has been the world’s third-fastest growing
country since 1960.
Tigers 3 & 4: Singapore and Hong Kong
• In 1965, Singapore seceded from 8-year old
Malaysia to become its own country, not quite as
rich as Brazil.
• Both Singapore and Hong Kong have small
populations, no tariffs and exports that exceed
total output.
• Singapore explicitly courts Multinational
Corporations (MNCs).
• Both are well off today: Singapore’s income in
2006 was 3.5 times as high as Brazil, and Hong
Kong is even richer.
The Asian Tigers have shown significant
convergence toward US income levels
Per capita income, % of US
90
80
70
60
50
1960
1972
2006
40
30
20
10
0
South Korea
Taiwan
Singapore
Hong Kong
The “miracle” is no longer just
“Asian”….
Jeopardy 1972
This country, known at the time as
“the poor man of Europe,” becomes a
member of the European Community
(now called the European Union).
Ire
Sp
Ita
Ice
Aus
Nor
Fin
Bel
UK
Nth
Fra
Ger
Den
Lux
Swe
100
90
80
70
60
50
40
30
20
10
0
Swz
Per capita income as % of US
In Europe,…Ireland
In 1972, Ireland was poorer than Spain
and 14 other European countries
Per capita income as % of
US
100
90
80
70
60
50
40
30
20
10
0
Ire 0
Sp 0
Ita 0
Aus -1
Bel -3
Nth -4
UK -2
Fin +1
Fra -2
Ger -2
Den -2
Ice +8
Swe -2
Lux 0
Nor +9
Swz 0
In 1987, Ireland was still poorer than Spain
and 14 other European countries.
Ireland since 1987
• 1987: Ireland was still the Poor Man of Europe
Foreign Direct Investment was less than 1% of GDP
Ireland began macroeconomic reforms.
It began promoting FDI (as Singapore did).
• Today: Ireland is known as the “Celtic Tiger.”
FDI now exceeds 20% of its GDP.
It earned the #1 Globalization Index ranking from
2001-2004.
It has been the fastest growing EU economy since
1987.
Per capita income as %
of US
160
140
120
100
80
60
40
20
0
France
Italy
Spain
Germany
UK
Belgium
Netherlands
Sweden
Austria
Switzerland
Finland
Iceland
Denmark
Luxembourg
Norway
Ireland
Ireland moved up from #16 in 1987 to #3 in
2006, passing the UK in 1997
Jeopardy 311
This Latin American country
depended on copper for 80% of its
export earnings in 1972.
In Latin America,…Chile – 1970s
• Latin America was the laboratory for ISI
• 1970: Salvador Allende, a Socialist, was elected
president of Chile.
• 1973: Allende died in a military coup, and Augusto
Pinochet assumed power.
• Late 1970s:
--The Chicago Boys of Santiago’s Catholic University began
administering reform.
--105 percent average tariff rates were sharply reduced.
• 1983: Following 2 global and domestic recessions,
Chile's standard of living was still only 2% higher than
a generation before.
Chile today
• Chile applies a uniform tariff on imports, at a rate
of 6% since 2003.
• Chile exports more than twice as much copper
now as in 1972, but copper accounts for less than
40% of export earnings compared to 80% in 1972
• Since 1983, Chile has been Latin America's
fastest-growing economy with per capita output
growth of 5.1% per year, 2.5 times as fast as the
US
--Its standard of living has more than doubled.
--It has moved from the 8th to the 2nd richest
country in Latin America.
Jeopardy 311
This country is the world’s number
one diamond exporter.
In Africa,…Botswana
Background: 1972
• Many African countries were newly
independent.
• Several started off well.
• In 1972, Nigeria was among the top 25% of
the world's countries in its rate of growth
• The curse of natural wealth: oil-rich Nigeria
was poorer in 2001 than in 1972.
Botswana
• Transparency International has ranked Botswana
as Africa's least corrupt country since the ratings
began in 1998.
• Moody's Investors Service and Standard & Poor's
have assigned Botswana “A” grade credit rating.
• Since independence in 1966, it has had the world's
6th-fastest growth rate of per capita income
• It moved from one of the poorest countries in the
world to a middle-income country with a per
capita income of $11,000 in 2006.
• The bad news: It has the world's highest incidence
of HIV/AIDS
Late boomers….
Jeopardy 311
A policymaker from this country
defended his pragmatic economic
reform proposals by remarking that
“It doesn't matter whether a cat is
black or white so long as it catches
mice.”
China
• 1972: Mao Zedong was still in power.
--The Cultural Revolution was recent history.
--Nixon visited China.
• 1973: Pragmatic reformer Deng Xiaoping was
“rehabilitated.”
• 1978: Deng’s lasting reforms kicked in.
China favored self-sufficiency
before the reforms of Deng Xiaoping in 1978
1600
Real GDP per capita
Exports as % of GDP
1400
Index: 1952 = 100
1200
1000
800
600
400
200
1978:
GDP per capita, % of US: 4.4%
Exports as % of GDP: 4.6%
1952:
GDP per capita, % of US: 5.2%
Exports as % of GDP: 2.8%
0
1952
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
Since 1978, China has been much more outward looking, and its
real GDP per capita has grown at an average annual rate of 8.3%.
1600
2005:
GDP per capita, % of US: 17.8%
Exports as % of GDP: 33.4%
Real GDP per capita
Exports as % of GDP
1400
1200
Index: 1952 = 100
1000
800
1978:
GDP per capita, % of US: 4.4%
Exports as % of GDP: 4.6%
600
400
1952:
GDP per capita, % of US: 5.2%
Exports as % of GDP: 2.8%
200
0
1952
1956
1960
1964
1968
1972
1976
1980
1984
1988
1992
1996
2000
2004
Jeopardy 311
Economist Jagdish Bhagwati wrote in
one of your online course readings
that he was in charge of the
preparation of this country’s first
Five-Year Plan.
India
• According to one of its own economists: "India's
misfortune was to have brilliant economists, an
affliction that the Far Eastern super-performers
were spared."
• Historically, India has been democracy with
Soviet-style economic planning and South
American-style ISI strategy
• 1972: India exported 4% of its output, and
operated under a bureaucratic system known as
the “Permit Raj.”
• 1991: India adopted reforms sparked by a
financial crisis.
Until 1991, India pursued ISI and
its Permit Raj system of regulation
450
Real GDP per capita
Exports as % of GDP
400
350
Index: 1950 = 100
300
1991:
GDP per capita, % of US: 6.0%
Exports as % of GDP: 8.6%%
250
200
150
1950:
GDP per capita, % of US: 6.7%
Exports as % of GDP: 7.8%
100
50
0
1950
1953
1956
1959
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
India switched to ELI only recently, but its real GDP per capita
has grown at an average annual rate of 4.2% since 1991
450
2005:
GDP per capita, % of US: 8.8%
Exports as % of GDP: 20.3%
Real GDP per capita
Exports as % of GDP
400
1991:
GDP per capita, % of US: 6.0%
Exports as % of GDP: 8.6%
350
Index: 1950 = 100
300
250
200
150
1950:
GDP per capita, % of US: 6.7%
Exports as % of GDP: 7.8%
100
50
0
1950
1954
1958
1962
1966
1970
1974
1978
1982
1986
1990
1994
1998
2002
Recap
• The “Asian Tigers”: South Korea, Taiwan,
Singapore, Hong Kong
• ELI leaders elsewhere: Ireland, Chile, Botswana
• Late boomers: China and India
• Some other countries on the move:
Africa: Mauritius
Asia: Vietnam
Latin America: Mexico
What lies ahead?
In the opinion of Rana Foroohar, in “The Poor Speak Up”:
“The game is on. It pits the emerging front of poor
nations against rich governments, who once made the
rules, but also against Western activists, who once
claimed to speak for them. The victors will shape the
changing global order.” (Newsweek, 2002)