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What Makes Nations Grow?
MSc EPS
Hilary term 2013 (S3)
Professor Dermot McAleese
OUTLINE
1) Trends in economic growth
2) Growth theories
3) Human welfare and
sustainable growth
4) Economic convergence
5) Policies for growth
2
WHAT IS ECONOMIC GROWTH?
 Gross Domestic Product (GDP) - measure of economic
growth
 GDP per capita - level of output per person
Production frontier
Manufactures
T
R2
R3
T1
R
M
O
F
Food
R1
T1
T
3
WHAT IS ECONOMIC GROWTH?
Manufactures
T
R2
R3
T1
R
M
O
F
Food
R1
T1
T
4
Trends in Economic Growth
5
SIX STYLISED FACTS ON ECONOMIC
GROWTH
 Growth - the norm
 Rich stayed rich
 Poor better off since 1950s
 Diversity in performance
 Acute poverty persists
 Natural resources  economic success
6
1.
Growth is the Norm
Growth Rates 1965-2005
Real GDP
Real GDP
per head
(% p.a.)
Population
2000
(millions)
3.7
3722
1.9
1433
2.3
903
Low income ($760 or less) countries(63) 5.9
Middle income countries
3.7
High income ($9,361 or more) countries (35)
3
Source: World Bank World Development Indicators 2001.
Note difference in pop figures since 2000. Low income now 2495m and middle income 2738m.
In 2002 China graduated from low income to the lower middle income bracket.
7
SourcIMF WEO Apr09
8
2. The
Rich
stayed
rich
Table
6. Real
GNP
per person
1900
1950
2000
Table 2.1 GNP per person for selected
industrial countries
at constant 2002
US $
Belgium
Denmark
Finland
Belgium
France
Germany
Denmark
Italy
Finland
Japan
France
Netherlands
Germany
Sw eden
Italy
UK
Japan
US
Netherlands
Sweden
China
United Kingdom
India
South
Korea
United States
Argentina
1900
5236
5104
2882
2794
3941
3062
2071
5013
3941
5386
5544
5039
4912
2774
2689
3718
2947
1993
4825
3793
5184
5336
1950
11064
7382
2002
25391
7070
7670 4942
11495 5986
7346 5097
5135 3287
6219 7991
9977
5296
7729
3415
12274
22305
26019
24205
22391
34281
21650
26660
23640
25888
23401
26493
21084
21622
21883
36492
31942
540
659
904
2865
5162
10199
8303
10366 444
8030 626
12753 928
25216
26596
28993
3484
26460
1951
13500
36680
Source: Computed from Angus Maddison, The World Economy: A Millenial
Source: Computed from Angus Maddison, The World Economy: A Millenium
Perspective (Paris: OECD, 2001) and the International Monetary Fund, World
Perspective (Paris: OECD, 2001) and IMF, World Economic Outlook, May
Economic Outlook , April 2002.
1999. Purchasing power parities have been used for the developing
countries.
9
Rich stayed rich: Real GNP per person (1900, 1950, 2002) $
Finland
France
Germany
Italy
Japan
Netherlands
Sweden
UK
US
Morocco
China
India
South Korea
Argentina
Mexico
2774
2689
3718
2947
1993
4825
3793
5184
5336
807
540
659
904
2865
1116
7070
4942
5986
5097
3287
7991
9977
7729
12274
1455
444
626
928
5162
2011
22305
24205
22391
21650
23640
23401
21084
21883
31942
2693
3484
1951
13500
10199
9021
10
Source: Computed from Angus Maddison, The World Economy: A Millenium Perspective (Paris: OECD, 2001)
Rich families also stay rich – rich parents have
rich children
If you are twice as rich as the average of your generation in…
The US and the UK : your children can expect to be 40%
higher income than the average for their generation and your
grandchildren 16% richer than average for their generation.
Denmark, your children can expect to be 15% better off than
average for their generation. Similar results for Sweden and
Canada
Miles Corak, University of Ottawa; Gary Solon University of Michigan
11
12
13
Know-how keeps rich countries rich …
Owning capital also important …
Source: World Bank Global Economic Prospects 2008
14
3. Poor Countries are better off
since the 1950s
• Life expectancy has roughly doubled
(Gap between developed and developing countries’
life expectancy was 30 yrs in 1950, 10 years in 2000)
• Proportion of children attending school has risen from
less than 50% to more than 75%
• Average GDP per person has doubled
• China and India two most populous countries in the
world have been driving forces in this improvement
DMcA p. 15
15
Growth Rates 1965-2008
Real GDP
Real GDP
per head
(% p.a.)
Population
2000
(millions)
3.7
3722
1.9
1433
Low income ($755 or less) countries(60) 5.9
Middle income countries
3.7
Source: World Bank World Development Indicators 2001.
16
Source: UN MDG Report 2007
17
4. DIVERSITY IN PERFORMANCE
China, India, South East Asia
Latin America
North Africa/ Middle East
Sub-Saharan Africa
18
GDP per capita growth 1971-2010
1971-80
1981-90
1991-2003
2001-10
Asia
3.2
4.9
5.3
6.9
Latin America
3.3
-0.9
1.6
2.0
Middle
East/N. Africa
4.0
-0.6
1.2
2.8
Sub-Saharan
Africa
0.7
-1.1
-0.2
3.5
High Income
Countries
2.6
2.5
1.8
1.7
World Bank Washington DC
19
Europe’s Growth , World Bank Washington DC 2012
20
South
Asia
Middle
East & N.
Europe &
Central
10
8
6
4
2
0
Highincome
%
REAL GROWTH IN GDP PER PERSON
2001-2012
Source: World Bank Global Economic Prospects 2012
21
5. Acute Poverty Persists
% living below $1 (PPP) a day
Sub-Saharan Africa
South Asia
Latin America and the Caribbean
East Asia and Pacific
Eastern Europe and Central Asia
Middle East and North Africa
0
20
2005
40
60
1987
S Chen and M Ravallion “The Developing World is Poorer than we Thought ..”
Policy Research Paper 4703 World Bank August 2008
22
Decline in income poverty 1981-2005
Share of people living on less than $1 (PPP US$) a day (%)
Region
1981
1990
2005
East Asia
68.7
40.6
9.5
Europe & Central Asia
0.7
0.8
3.4
Latin America
7.4
7.1
5.0
MENA
3.6
2.3
2
South Asia
41.9
33.6
24.3
Subsaharan Africa
39.2
45.9
39.2
World
41.7
29.8
16.1
Source Chen and Ravallion World Bank August 2008 Table 7
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The Bottom Billion
The Third World has shrunk. For forty years the
development challenge has been a rich world of one
billion people facing a poor world of five billion people. …
By 2015 however it will be apparent that this way of
conceptualising development has become outdated.
Most of the five billion are developing often at an
amazing speed. The real challenge of development is
there is a group of countries at the bottom that are
falling behind and often falling apart.
Paul Collier The Bottom Billion: Why the Poorest Countries are failing and what can be done
about it?
Oxford University Press 2008
24
6. Natural resources  economic success
Major oil producers and economic growth
GDP per capita
GDP per capita
Oil reserves (end- Years of remaining
grow th 1975-2005
$2005(PPP)
03, barrels bn)
reserves
Saudi Arabia
263
73
-2.0
15,711
Iran, Islamic Rep.
127
93
-0.2
7,968
Iraq
118
100+
na
na
United Arab Emirates
100
100+
-2.6
25,514
Kuwait
96
100+
-0.5
26,321
Venezuela
77
72
-1.0
6,632
Russian Federation
73
22
-0.7
10,845
Libya
32
66
2.5
6,621
Nigeria
30
43
-0.1
1,128
Source: World Bank, Economist July 17th 2004, UNDP Human Dev Report 2007/8
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The Natural Resources (NR) trap
• Voracity effect: Revenues from natural resources leads
to big govt, insufficient total investment and bad
(‘corrupt’) investment decisions
• Oil and other surplus from NR are unsuited to the
pressures generated by electoral competition (Nigeria)
• NR attract FDI, but often in bad circumstances (China’s
investment in Angola, Chad)
A probabilistic tendency, not a law … exceptions Norway,
Botswana
See Collier ch 3
27
Growth Theories
28
WHERE ECONOMICS BEGAN
Adam Smith, Wealth of Nations, 1776
 Productivity the key to wealth of nations (not gold, not balance of




trade surplus)
Productivity enhanced by specialisation
 Dexterity
 Saving of time
 Machinery invented by workmen
Specialisation increased by enlarging the extent of the market
Extent of market limited by
 Trade barriers
 Monopoly
‘Invisible hand’ will even look after the poor!
‘in a well-governed society, opulence extends itself to the lowest
ranks of the people’
29
30
The Model
α
1-α
Y=AK L
log Y = log A + a log K + (1-a) log L
• L = Labour
• K = Capital Stock minus 4% depreciation plus investment rate
(% of GDP)
• A = Total factor productivity (TFP)
31
GROWTH THEORIES
 Quantity of inputs
Labour --- population growth,
participation rates, hours worked
per worker, unemployment rate
Capital --- physical (I/GDP ratio)
--- human (education)
 Total factor productivity
Y = A.f(L, K). dA/A = dY/Y – a.dL/L – b. dK/K where a = wL/y and b = rK/y. This is the growth
accounting approach. Y = g + h.L +j. K + f. A etc prod function approach. Total factor productivity (A)
32 is
unobservable. Also called multi-factor productivity
SOURCES OF REAL GDP GROWTH (1999-2005)
Capital
Labor
TFP
China
3.3
0.7
5.1
9.1
East Asia
1.7
1.5
2.0
5.2
South East Europe
1.1
0.2
2.0
3.3
Latin America
0.9
1.7
--
2.6
Source World Bank Unleashing Prosperity 2008 (forthcoming)
33
OECD Economic Surveys: China, Feb 2010
34
Total Factor Productivity (TFP)
A growing body of evidence suggests that, even
after physical and human capital accumulation are
accounted for, something else accounts for the
bulk of cross country differences in the level and
growth rate of GDP per head. Economists typically
refer to the something else as total factor
productivity
Easterly and Levine What have we learned from a decade of
empirical research on growth? The World Bank Economic Review No
2 2001
Baking a cake with exactly same set of ingredients. Some do it very well and produce splendid and varied cakes.
Others make a mess of it. How to explain. TFP differs across industries and across firms within industries.
35
TOTAL FACTOR PRODUCTIVITY
(TFP/MFP)
advances in technology
redistribution of resources from low- to
high-productivity sectors
terms of trade
institutional and political stability
quality of the labour force
(human skills and motivation)
economic policy
36
Implications of TFP findings
•
Raise investment and saving :
Govt and private domestic saving
Private and public capital inflow
Foreign aid/Debt forgiveness
•
Reduce capital output ratio :
Use capital productively (competition, education)
Choose right industries (market/planning?)
Implement good policy (new consensus?)
•
New approaches focus on knowledge
economy, governance, political stability
37
Population and economic growth
• High population growth adversely linked with
standard of living
• Stabilisation of population growth leads to
transitional gain as dependency rate falls
• Zero or negative population growth also has
adverse implications for living standards. High
elderly dependency becomes the next “problem”
38
China’s population
TOTAL (thousands)
1,550,000
1,500,000
1,450,000
1,400,000
1,350,000
1,300,000
1,250,000
1,200,000
1,150,000
1,100,000
2000
2010
2020
2030
2040
2050
39
Age dependency rates for selected countries 1960-1999
1.2
1.1
1
0.9
China
0.8
India
0.7
Japan
0.6
Morocco
0.5
0.4
0.3
1960
1970
1980
1990
1999
Note: age dependency = (pop 0-14 + pop 65+)/pop 15-64
Source: World Bank WDI
40
China’s age dependency ratio
2000-2045
65.0
60.0
55.0
50.0
45.0
40.0
35.0
30.0
2000
2005
2010
2015
2020
2025
2030
2035
2040
2045
41
ELDERLY (age 65+) DEPENDENCY RATIOS 2000
China
Elderly pop (m) Active Pop (m) Elderly dependency
ratio (%)
88
853
12
Japan
22
87
25
United States
36
186
20
China’s elderly ratios: 2010 – 16 elderly per 100 workers
2025 - 32 elderly per 100 workers
2050 - 61 elderly per 100 workers
Increase from 88m in 2000 to 438m in 2050
Source: World Bank, Center for Strategic and International Studies Wash DC. Updated data in Table L, HDR 2009.
42
World’s largest countries by population
(million)
2007
2050
China
1329
India
1658
India
1169
China
1409
Unites States
306
United States
402
Indonesia
232
Indonesia
297
Brazil
192
Pakistan
292
Pakistan
164
Nigeria
289
Bangladesh
159
Brazil
254
Nigeria
148
Bangladesh
254
Russian Federation
142
Congo
187
Japan
128
Ethiopia
183
43
Population growth: Uganda case study
Despite HIV rate that peaked at 30% in the 1990s Uganda now has one
of the world’s fastest growing populations.
30m 2007, 60m 2030, 103m 2050. President Museveni thought this
was desirable, and that higher population should be a target for
Uganda’s policy!
56% of population is under the age of 18
Fertility rate remains 7 children per woman
Uganda’s pop growth 3.6% in 2008 and in recent yrs Kenya and
Yemen > 4%
SSA growth in labor force 1993-2003 was 2.8%
This increase in numbers wiped out the benefits of growth.
Economists have attributed 40% of east Asia’s per capita growth
between 1965-1990 to its “beneficial” population structure – and to
the decline in its dependency ratio.
44
CLASS EXERCISE: RECENT GROWTH EXPERIENCE
1. How many countries have experienced annual average
growth in real GDP per head <1% during the period
1970-2008?
Do these countries have any special
economic or geographic characteristics that separate
them from positive growing countries?
2. What countries experienced rapid GDP per head growth
(>3% p.a.)?
Do they have any common
characteristics? What lessons do they have to offer to
the negative growth countries?
3. From a general view of the statistics and reading of
chapter 2 and HDR 2010 tables, is the global trend one
of convergence of living standards between poor and
rich countries, or is the process one of “the rich getting
richer and the poor getting poorer”?
45
Class Exercise
Explain how an increase in these variables would
affect growth of GDP per capita :
•
•
•
•
•
•
•
•
Initial income level
Initial level of schooling
Population growth
Investment/GDP ratio
Terms of trade
Degree of openness/globalisation
Government consumption/GDP
Democracy
46
Class exercises (2)
• Q for D 4, p. 39
• Q for D 5, p. 39
(Asia vs Africa)
(growth of firm vs growth of economy)
• E4, p. 39
• E 6, p. 40
(India and China case)
47
Exercise 6 p.40
a) India's per capita GDP was $2675 in 2002 (PPP basis).
Assuming a growth rate of 3 per cent per person was sustained,
how many years will it take India to reach the average per capita
GDP level in developed countries of about $28,744? b) Suppose
developed countries continue to grow at 2 per cent per year, how
long before India catches up with the developed countries?
Comment on the plausibility of these projections?
c) Do the
same exercise for China. Assume China’s GDP per capita is
$5003 (PPP) in 2003, take $30,300 as figure for developed
countries and assume China’s per capita GDP grows at 7% p.a.
48
Question for Discussion
“With appropriate economic policies and
institutions, rapid economic growth is
achievable almost anywhere.”
Thorvaldur Gylfason Principles of
Economic Growth 1999
Do you agree?
49
Human Welfare and Economic
Growth
50
Source: Deutsche Bank Research “Measures of Well being” Sept 2006
51
TOGDP
IMPROVE
GDP AS MEASURE
WELFARE ….
AS MEASURE
OF OF
WELFARE
ADD:
Add:
Household economy
Leisure
Voluntary
activities
Household contribution
Shadow economy (positive aspects)
Voluntary activities
Leisureeconomy (positive aspects)
Shadow
SUBTRACT:
Subtract:
Environmental damage
Inputs classified as output (police, defence
Depletion of natural resources
spending)
Inputs classified as output (defence, cost of pollution
control)
Environmental
degradation
Take accountExhaustion
of:
of natural resources
Income distribution
52
GDP and Human Development Index

HDI is a weighted average of data on:
 GDP per head
 Life expectancy at birth
 Years of schooling and adult literacy
 HDI and GDP per head ranking is very similar (see
next table)
 High income, better health and more education
tend to improve at the same time
 Research continues on direction of causality.
53
The basic purpose of development is to enlarge people’s
choices. ..
People often value achievements that do not show up at all, or
not immediately, in income or growth figures: greater
assess to knowledge, better nutrition and health services,
more secure livelihoods, security against crime and physical
violence, satisfying leisure hours, political and cultural freedoms
and sense of participation in community activities.
The objective of development is to create an enabling
environment for people to enjoy long, healthy and creative lives.
Mahbub ul Haq
Founder the the Human Development Report
54
When there are large changes in inequality (more generally a
change in income distribution) gross domestic product (GDP) or any
other aggregate computed per capita may not provide an accurate
assessment of the situation in which most people find themselves.
If inequality increases enough relative to the increase in average per
capita GDP, most people can be worse off even though average
income is increasing
Report by the Commission on the Measurement of Economic Performance and
Social Progress, J Stiglitz, A Sen and J Fitoussi Paris 2009 . Report presented to
the President of France.
55
The commonly used statistics may not be capturing some
phenomena, which have an increasing impact on the well-being
of citizens.
For example, traffic jams may increase GDP as a result of the
increased use of gasoline, but obviously not the quality of life.
Moreover, if citizens are concerned about the quality of air, and
air pollution is increasing, then statistical measures which
ignore air pollution will provide an inaccurate estimate of what is
happening to citizens’ well-being.
Or a tendency to measure gradual change may be inadequate
to capture risks of abrupt alterations in the environment such as
climate change.
Report by the Commission on the Measurement of Economic Performance and Social
Progress, J Stiglitz, A Sen and J Fitoussi Paris 2009
56
HDR 2011
57
Developing countries:
HDI GDP per cap
South Korea
12
35
Chile
45
59
Mexico
53
58
Saudi Arabia
59
40
Brazil
73
79
China 101
Philippines
97
124
HDR2011
Turkey
83
63
China
89
85
Algeria
104
88
South Africa
129
78
Indonesia
111
121
Egypt
123
103
Morocco
114
104
India
119
114
Botswana
125
60
Zambia
164
176
Source: HDR 2010
S Leone
158
175
Note: Blue denotes a better HDI ranking, Red denotes a better GDP per capita ranking.58
1) Does GDP growth = Happiness?
2) Does GDP level = Happiness?
1) Weak correlation between
economic growth and
happiness index (‘Are you
feeling satisfied with your life’)
2) Weak correlation between
income level and happiness
up to a certain threshold.
Beyond that threshold, income
distribution matters more.
More unequal societies have
more unhappiness
Sources: Andrew Oswald, University of Warwick
Robert Frankel, Yale University
59
Happiness and income:
the weakest link
60
Source: Deutsche Bank Research “Measures of Well Being: there is more to it than GDP”, 8 September 2006
61
62
Peter Sanfey “Does Transition make you happy?” EBRD working paper no 91, April 2005
63
Layard (continued)
64
Why do GDP and Happiness differ?
• Many goods are ‘Positional goods’ –
status symbols
• Externalities – e.g. if everyone has a
car, congestion costs increase
• Relative poverty creates major feelings
of unhappiness
• Longevity is good, but leads to high
medical bills and rise in dependency
ratio
65
Policy Implications
66
Supply-side policies are crucial
Nomura “Europe will work” March 2011
67
68
POLICY PRESCRIPTION FOR GROWTH
 Give priority to economic efficiency
 Government should complement rather than replace
market forces
Poor macro management significantly impairs growth
Outward orientated policies help growth
Economic environment should encourage and
mobilise individual effort in a socially productive way
69
Conclusions
• Growth a complex process, no easy blueprint
• Economic consensus policies help most
countries and some more than others, but it is
not sufficient
• Economic growth will not occur when there is
political instability and absence of property
rights. Hence emphasis on TFP, institutions,
governance and stability
• We still have big gaps in knowledge about key
binding constraints on growth. They differ
from country to country
• Climate change and sustainable growth are
pushing up the agenda
70
Question for Discussion
The growth of global trade has been wonderful for Asia.
But don’t count on trade to help the bottom billion.
Based on present trends, it seems more likely to lock yet
more of the bottom-billion countries into the natural
resource trap than to save them through export
diversification
Paul Collier The Bottom Billion p. 87
71