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What Makes Nations Grow?
Session 3
MSc EPS
Hilary term 2011
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 output of
goods and services
 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 1965-2008
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. Low income
had changed by 2010 to $995 or less, high income $12,196 or more
7
SourcIMF WEO Apr09
8
9
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.
10
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
11
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
12
Know-how keeps rich countries rich …
Source: World Bank Global Economic Prospects 2008
13
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
14
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.
15
4. DIVERSITY IN PERFORMANCE
China, India, South East Asia
Latin America
North Africa/ Middle East
Sub-Saharan Africa
16
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
17
South
Asia
Middle
East & N.
Europe &
Central
10
8
6
4
2
0
Highincome
%
REAL GROWTH IN GDP PER PERSON
2001-2010
Source: World Bank Global Economic Prospects 2009
18
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
19
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
20
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
21
“Seeing the world differently”
The Economist June 12th 2010.
 Since 2008 developing countries have contributed almost all global
economic growth.
 Their share of world GDP at PPP has risen from 34% in the 1980s to 43%
in 2010.
 Trade between developing countries is growing twice as fast as world trade.
 Emerging markets are donors of capital. China recently agreed to finance
oil refineries in Nigeria worth over $23 billion – nearly twice the overall aid
to Africa over 5 years in one deal.
 Yield on 10-year govt bonds is the same in Thailand as in America.
 The largest single foreign investment in Afghanistan is a Chinese-owned
copper mine in Aynak, 20 miles east of Kabul. Over next 25 yrs it plans to
produce 11m tons copper, build a power station and construct a road to
Kabul. (The International Independent 15 June 2010).
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
23
The Natural Resources (NR) trap
• Voracity effect: NR revenues leads to big government
and often bad investment decisions
• Pressures generated by electoral competition reinforce
the above effect (Nigeria)
• NR attracts FDI (good!) but often this bolsters
unsavoury regimes (China’s investment in Angola, Chad
has been criticised on these grounds)
• NR trap is a probabilistic tendency, not a immutable
rule ...... Some countries use NR effectively (Norway,
Botswana)
See Collier ch 3
24
Growth Theories
25
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’
26
The Model
α
1-α
Y=AK L
• L = Labour
• K = Capital Stock minus 4% depreciation plus investment rate
(% of GDP)
• A = Total factor productivity (TFP)
27
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) is
unobservable. Also called multi-factor productivity
28
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
29
OECD Economic Surveys: China, Feb 2010
30
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.
31
Easterly and Levine’s Stylised Facts
(World Bank Economic Review Summer 2001)
• TFP a more crucial factor than factor
accumulation (human and capital)
• TFP growth accounts for more than half of
total growth in output per worker
• But we don’t know enough about which
specific components of TFP matter most.
32
TOTAL FACTOR PRODUCTIVITY
(TFP/MFP)
advances in technology
redistribution of resources to higher
productivity sectors
terms of trade
institutional and political stability
quality of the labour force
(human skills and motivation）
economic policy
33
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”
34
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
35
Age dependency rates for selected countries 1960-1999
Note: age dependency = (pop 0-14 + pop 65+)/pop 15-64
Source: World Bank WDI
36
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
37
AGE DEPENDENCY RATE
2000
Japan
46.6
France
53.6
Germany 46.0
China
48.0
Source: World Bank 2005
2010
55.3
52.8
49.4
40.3
2030
71.7
67.9
69.9
50.5
2045
91.0
73.7
83.6
62.5
ADR = Pop (0-14 + 65+) % pop (15-64)
38
ELDERLY 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:
2000 - 12 elderly per 100 workers
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
39
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
40
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 (3.3% pa 2005-2010).
17m 1990, 31m 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: 6.4 children per woman
Total GDP growth 1990-2007 7%, GDP per head 3.5%.
Increase in population means that growth has to be spread over larger
numbers of people.
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.
Source: HDR Report 2009 Tables L and M
41
CLASS EXERCISE: RECENT GROWTH EXPERIENCE
1. How many countries have experienced annual average
growth in real GDP per head <1% during the period
1990-2008? How do you explain their poor
performance? Do these countries have any special
economic or geographic characteristics that separate
them from other countries?
2. What countries experienced rapid GDP per head growth
(>3% p.a.)? How do you explain their strong
performance?
Do
they
have
any
common
characteristics? What lessons do they have to offer to
the slow-growth countries?
3. Taking a general view, 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”?
42
Class Exercise
Explain how an increase in each of these variables
would be expected to 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
43
Class exercises (2)
• Q for D 4, p. 39 (Asia vs Africa)
• Q for D 5, p. 39 (growth of firm vs growth of economy)
• E4, p. 39
• E 6, p. 40 (India and China case)
44
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
industrial countries continue to grow at 2 per cent per year, how
long before India catches up with the industrial countries?
Comment on the plausibility of these projections? c) Do 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.
45
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?
46
Human Welfare and Economic
Growth
47
AS MEASURE
OF OF
WELFARE
TOGDP
IMPROVE
GDP AS MEASURE
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
48
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.
49
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
50
Environmental damage
Depletion of natural resources
Inputs classified as output (defence, cost of pollution control)
World Bank estimates that the total annual cost of air and water pollution
In China amounts to 5% of China’s GDP.
This measure is contested. It relies on estimates of the effect of
pollution on health.
Report finds that China’s poor are disproportionately affected by pollution.
Source: World Bank web page.
This World Bank study was referred to in James Fallows Postcards from Tomorrow Square: Reports
From China Vintage 2009
51
CHINA (OECD 2010)
Source: www.oecd.org
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 proceed in tandem
 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
55
Developing countries:
HDI GDP per cap
South Korea
26
35
Chile
44
59
Mexico
53
58
Saudi Arabia
59
40
Brazil
75
79
Philippines
105
124
Turkey
79
63
China
92
86
Algeria
104
88
South Africa
129
78
Indonesia
111
121
Egypt
123
103
Morocco
130
118
India
134
114
Botswana
125
60
Zambia
164
176
Source: HDR 2009 table H
S Leone
180
175
Note: Blue denotes a better HDI ranking, Red denotes a better GDP per capita ranking.56
1) Does GDP per capita growth = Happiness?
2) Does high level of GDP per capita = 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.
3) Beyond that threshold, income
distribution matters more.
More unequal societies have
more unhappiness
Sources: Andrew Oswald, University of Warwick
Robert Frankel, Yale University
57
Happiness and income:
the weakest link
58
59
Peter Sanfey “Does Transition make you happy?” EBRD working paper no 91, April 2005
60
Layard (continued)
61
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
62
Policy Implications
63
POLICY PRESCRIPTION FOR GROWTH
 Give priority to economic efficiency
 Government to complement rather than replace market forces
Stable, transparent institutional framework
Competition policy
Labour market policy
Infrastructure
Education system for new tech activities
Poor macro management significantly impairs growth
Outward orientated policies help growth
Economic environment should encourage and
mobilise individual effort in a socially productive way
64
Conclusions
• Growth a complex process, no easy blueprint
• New economic consensus helps 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
65
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
66