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Determinants of Growth. Danyang Xie Fall 2013. Outline. 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 - PowerPoint PPT Presentation

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The Crisis and the Impact on China

Determinants of GrowthDanyang XieFall 20131OutlineA Tale of Two Nations: Philippines and South KoreaGrowth Makes a DifferenceHow can a country grow fasterA Daring Plan: Charter CitiesConvergenceOECD ConvergenceConvergence among US StatesEvidence from China Provincial DataSources of Economic GrowthWhy China Grow so Fast?HK versus Singapore

2Philippines and South Korea

Per Capita GDP $ 640Population 28 million27 % of people lives in ManilaPer Capita GDP $ 640Population 25 million28% of people lives in Seoul19603By 2003, per capita income in South Korea is about 12 times as large as that in PhilippinesIs there some action a government of Philippinescould 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 elseLucas, 19884Growth Makes a Difference5Calculating Growth RateThe growth rate of x from time t to t+1 is given by

Rule of 70If the growth rate of x is 2%, then it takes 70/2=35 periods to double x

6Growth Makes the DifferenceBetween 1960 and 1980Indias growth rate of income was 1.4% per yearSouth Koreas growth rate was 7% per yearAs a resultIndian income will double every __ yearsKorean income will double every __ years7Growth Makes the DifferenceBetween 1960 and 1980Indias growth rate of income was 1.4% per yearSouth Koreas growth rate was 7% per yearAs a resultIndian income will double every 50 yearsKorean income will double every 10 years8What a Difference!An Indian will, on average, be twice as well off as his grandfatherA Korean will be __ times as well off as his grandfather9What a Difference!An Indian will, on average, be twice as well off as his grandfatherA Korean will be 32 times as well off as his grandfather10How 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., 199311How can a country grow faster?Some suggestionsEncourage human capital accumulationSubsidize basic scientific researchOpen up the economyImport IdeasPromote on the job trainingDevelop financial sector?Build a Democratic Society?12Empirical 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 variablesHe found that 21 out of the 59 variables are significant for economic growth at 95 percent level13The significant 21 variablesEquipment 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-14Regional VariablesEquipment 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-15Political variablesEquipment 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-16Market Distortions and Market PerformanceEquipment 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-17Variables not strongly related to growthGovernment spendingInflation rateInflation varianceTariff restrictionsIndex of Democracy 1965Urbanization Rate18A Daring Plan: Charter CitiesPaul Romer: TED LectureRules are importantNorth Korea vs South KoreaHaiti vs Dominican RepublicHong KongHondurasConvergence HypothesisPoor countries should grow faster than rich countries because:Capital stock is low relative to labor, the return to capital should be high in poor countriesPoor countries can free ride on the technologies developed in the rich countriesMigration is a third source of convergence20Empirical findingsThere is no unconditional convergence21

No unconditional convergence22Empirical findingsThere is no unconditional convergenceConvergence does occur among countries with similar characteristics (conditional convergence)23Conditional Convergence (OECD)

24China: Provincial ConvergenceConvergence is significant for the period 1978-89Convergence is insignificant for the period 1989-97Source: Table 3.3. China: Competing in the Global Economy. IMF 2003. 25Conditional Convergence (US States)

26Openness Helps Convergence

Openness Helps Convergence

Lucas: Trade and Diffusion of the Industrial Revolution, NBER August 2007Sources of economic growthTechnological progress (TFP growth)Increases in capital inputsIncreases in labor inputs29Growth AccountingProduction function: Y = A F(K, N)In terms of growth:

Total factor productivity growthelasticity of Y w.r.t Kelasticity of Y w.r.t. N30In the US economya = 0.36 and b = 0.64

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%31How to estimate the elasticities?The elasticities a and b are often estimated by capital income share and labor income share, respectively.b = labor income / GDPa = 1 bThis approach works well in economies with competitive markets and constant returns to scale.Growth accounting exercise I

Why China Grows So Fast? 33China: Sources of Growth, 1952-94

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?34China: Percentage Contribution to Output Growth

Source: Hu and Khan (1996)Percentage contribution from capital to output growth after reform:a*(growth rate of capital)/(output growth)35Will China continue to grow?120 million of rural labor is yet to be fully employedPlenty of room for improvement on rule of lawIncentive mechanism in the financial system remains to be put in placeHuman capital accumulationMuch catching up to do: per capita income in China is estimated to be about $6,200 in 2012, ranked 87th, still far behindThe precondition for growth is social stability36Growth accounting exercise II

A tale of two cities37A tale of two cities

Source: Alwyn Young (1995)Percentage Contribution to Output Growth38Non-parametric estimation

Source: Iwata, Khan, and Murao (IMF Staff Papers 2003)39SummaryGrowth makes a differenceBesides 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.

PeriodOutputTFPCapitalLabor

1952-785.81.16.22.5

1979-949.33.97.72.7

PeriodTFPCapitalLabor

1952-781865.216.8

1979-9441.645.612.8

TFPCapitalLabor

Hong Kong304228

Singapore-57332

CountryTFP growth estimate (%)CapitalLabor

ConventionalNonparametric

ElasticityIncome shareElasticityIncome share

YoungCollins

Hong Kong SAR4.14.13.40.410.370.710.63

Korea2.82.33.70.180.290.810.71

Singapore0.51.83.70.170.490.630.51

Taiwan Province of

China3.82.13.80.190.260.760.74

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