Determinants of long-term

economic growth

Determinants of long-term

economic growth

Economic systemsEconomic policiesEconomic institutions

Economic systemsEconomic policiesEconomic institutions

Explaining why Explaining why growth rates differgrowth rates differ

QuestionsQuestions

If the economic systems adopted by two countries are not completely different, is it nonetheless possible to trace the differences in their economic performance to their different economic policies?

Or does technology dictate growth differentials in such cases?

Or perhaps geography?

Or history?

Or all of the above?

If the economic systems adopted by two countries are not completely different, is it nonetheless possible to trace the differences in their economic performance to their different economic policies?

Or does technology dictate growth differentials in such cases?

Or perhaps geography?

Or history?

Or all of the above?

Examination of economic growth in theory and practice

Examination of economic growth in theory and practice

Growth performance of four pairs or clusters of countries since 1970

Low- and middle-income countriesBut most of the points to emerge apply to high-income countries as well

Those economies have developed quite differently over the past 30-40 years despite roughly comparable initial conditions

The four clustersThe four clusters

Thailand and Burma

Botswana, Nigeria, and Ghana

Uruguay, Argentina, and Spain

Madagascar and Mauritius

Thailand and Burma

Botswana, Nigeria, and Ghana

Uruguay, Argentina, and Spain

Madagascar and Mauritius

Burma and Thailand

Burma and Thailand

Burma1962: General Ne Win came to

power‘victorious march towards

socialism’self-reliance

but active client of IMF 1970s: respectable growthrising investment

centrally planned poor qualitystagnant export1980s: something had gone

seriously wrong

Burma1962: General Ne Win came to

power‘victorious march towards

socialism’self-reliance

but active client of IMF 1970s: respectable growthrising investment

centrally planned poor qualitystagnant export1980s: something had gone

seriously wrong

Thailandrising export ratiostrong saving and investment

performancebanking system strongly

influenced by politicians quality of investment

questionablestrong education record1960-1994: GNP per capita

increased by more than 5% per year on average compared with 1% in Burma

Thailandrising export ratiostrong saving and investment

performancebanking system strongly

influenced by politicians quality of investment

questionablestrong education record1960-1994: GNP per capita

increased by more than 5% per year on average compared with 1% in Burma

0

100

200

300

400

500

600

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

Burma

Thailand

Burma and Thailand: GNP per capita, 1960-1994 (constant 1987 US$, 1960=100)

Burma and ThailandBurma and Thailand

Burma spurts of rapid growth depressed investments of low quality plummeting exports deteriorating education evaporation of expertise political control of economic affairs

Burma spurts of rapid growth depressed investments of low quality plummeting exports deteriorating education evaporation of expertise political control of economic affairs

Thailand The stock-market crash in 1997-8 not likely to dim long-run prospects Thailand’s growth prospects continue to look

bright Thailand’s economy seems basically sound

In 1990, Burma’s military junta refused to abide by the general election victory of the opposition, led by Aung San Suu KyiIn 1996, the universities were shut down

Rapid growth over the long haul does not always have to be smooth

Annualaveragegrowth ofGNP percapita1970-1995 (in%)

GNP percapita1995(USD,adjustedforpurchasingpower)

Investmentaspercentageof GNP1995

Exports ofgoods andservices aspercentageof GNP1995

Enrollmentinsecondaryeducationaspercentageof relevantage group1993

Annualaverageinflation1970-1995(in %)

BBuurrmmaa 11..22 …… 1122 22 …… 1133

TThhaaiillaanndd 55..22 77,,554400 4433 4422 3377 66

BBoottsswwaannaa 77..33 55,,558800 2255 4499 5522 1111

NNiiggeerriiaa --00..99 11,,222200 99 2244 2299 1199

GGhhaannaa --11..22 11,,999900 1199 2255 3366 3366

UUrruugguuaayy 00..22 66,,663300 1144 1199 8811 6611

AArrggeennttiinnaa --00..44 88,,331100 1188 99 7722 118800

SSppaaiinn 22..00 1144,,552200 2211 2244 8877 1111

MMaaddaaggaassccaarr --22..44 664400 1111 2233 1144 1166

MMaauurriittiiuuss 33..11 1133,,221100 2255 5588 5599 1100

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Botswana, Nigeria, and Ghana

Botswana, Nigeria, and Ghana

Botswanaworld record in growthGDP per capita has grown by 7.5% per year since 1966dependent on natural resources - diamonds

80% of exports40% of GDP

democraticwell-managed resourcesstrong educationstable economic development11% average inflation rate

Botswanaworld record in growthGDP per capita has grown by 7.5% per year since 1966dependent on natural resources - diamonds

80% of exports40% of GDP

democraticwell-managed resourcesstrong educationstable economic development11% average inflation rate

Nigeriaoil price increase in world markets income per capita rose fourfold poor investment unproductive capital collapse of outputlow investment since 1980soil exports crowded out non-oil exports (90% of total)natural resources: a mixed blessing?

Nigeriaoil price increase in world markets income per capita rose fourfold poor investment unproductive capital collapse of outputlow investment since 1980soil exports crowded out non-oil exports (90% of total)natural resources: a mixed blessing?

Botswana, Nigeria, and Ghana

Botswana, Nigeria, and Ghana

Nigeriaoil

80% of government revenue 20% of GDP

ruled by military on and off19% inflation on average

Nigeriaoil

80% of government revenue 20% of GDP

ruled by military on and off19% inflation on average

Ghanamodel client of IMF and World

Bank since 1980sincreasing foreign tradeincreasing investment1982 - a turning pointexports of goods and services

risingnet foreign direct investment

flowing into Ghana 3.6% of GDP in 1995 compared with 2.4% in Nigeria

36% inflation on average

Ghanamodel client of IMF and World

Bank since 1980sincreasing foreign tradeincreasing investment1982 - a turning pointexports of goods and services

risingnet foreign direct investment

flowing into Ghana 3.6% of GDP in 1995 compared with 2.4% in Nigeria

36% inflation on average

Abundant natural resource wealth can turn out to be, at best, a mixed blessing

0500100015002000250030003500

BotswanaGhanaNigeria

Botswana, Ghana, and Nigeria: GNP per capita, 1970-1995 (current US$, Atlas method)

Uruguay, Argentina, and

Spain

Uruguay, Argentina, and

SpainUruguay

abundant resourcesdedication to social security and

social services South American welfare state

active role of governmentprotectionismdeclining GNP per capitatoday: quite closed economyrampant inflation

Uruguayabundant resourcesdedication to social security and

social services South American welfare state

active role of governmentprotectionismdeclining GNP per capitatoday: quite closed economyrampant inflation

Argentinagradual relative decline

political development lagged behind economic progress

landowners ruled the countryblocking decentralization,

democratization, and diversification away from agriculture

hardening conflict between landowners and

emerging urban classesgradual deterioration of living

standards

Argentinagradual relative decline

political development lagged behind economic progress

landowners ruled the countryblocking decentralization,

democratization, and diversification away from agriculture

hardening conflict between landowners and

emerging urban classesgradual deterioration of living

standardsEconomic growth Economic growth is relativeis relative

Uruguay, Argentina, and

Spain

Uruguay, Argentina, and

Spain Argentina

Perón president in 1946 high inflation rapid escalation of debt

flawed economic policies import substitutionovervaluation of the currency insufficient competition reduced foreign trade and dragged down

living standardscivil disorder, inflation, corruption, and

brain-drain slow and uneven growthstrikingly closed economyhistory of high inflation

ArgentinaPerón president in 1946

high inflation rapid escalation of debt

flawed economic policies import substitutionovervaluation of the currency insufficient competition reduced foreign trade and dragged down

living standardscivil disorder, inflation, corruption, and

brain-drain slow and uneven growthstrikingly closed economyhistory of high inflation

Spainjoined the European Union in

1986opened up its economyexpanded exports

Spainjoined the European Union in

1986opened up its economyexpanded exports

History matters for History matters for economic growth, as economic growth, as does politics ...does politics ...

... and so does ... and so does inflationinflation

Argentina, Uruguay, and Spain: GNP per capita, 1970-1995 (current US$, Atlas method)

02,0004,0006,0008,00010,00012,00014,00016,000

Argentina

Uruguay

Spain

Madagascar and Mauritius

Madagascar and Mauritius

Mauritiusmixed market economysince 1980: income per head

has increased fastdiversified economymore open to foreign trade

and investmentinvests morefarther along on its way from

agriculture to industry, trade, and services

sends more girls go to school

Mauritiusmixed market economysince 1980: income per head

has increased fastdiversified economymore open to foreign trade

and investmentinvests morefarther along on its way from

agriculture to industry, trade, and services

sends more girls go to school

Madagascarcentrally planned economysince 1980: income per head

has fallengrowth differential between the

two countries has been even larger since mid-1980s

more inflationmore dependent on exports of

raw materialsmore indebted abroad

Madagascarcentrally planned economysince 1980: income per head

has fallengrowth differential between the

two countries has been even larger since mid-1980s

more inflationmore dependent on exports of

raw materialsmore indebted abroad

05001000150020002500300035004000

Madagascar

Mauritius

Madagascar and Mauritius: GNP per capita, 1970-1995(current US$, Atlas method)

ConclusionConclusion

Country comparisons are not to be taken literally Intended to highlight some aspects of economic growth

What do the examples have in common? All point to economic factors rather than exogenous technology

economic systeminstitutionsorientation of economic policy

Key distinction: Key distinction: Endogenous growth Endogenous growth vs. exogenous vs. exogenous growthgrowth

This is the fundamental This is the fundamental message of the theory of message of the theory of endogenous growth endogenous growth