to grow or not to grow: that is the question

To Grow or To Grow or Not to Not to Grow:Grow:That is the That is the QuestionQuestion

Thorvaldur GylfasonThorvaldur Gylfason

Outline

I.I. Pictures of growthPictures of growth

II.II. Determinants of growthDeterminants of growth1.1. Saving and investmentSaving and investment

2.2. EfficiencyEfficiencya)a) LiberalizationLiberalizationb)b) StabilizationStabilizationc)c) PrivatizationPrivatizationd)d) DiversificationDiversification

III.III. Empirical evidence Empirical evidence ofof growth growth

Economic growth: The short run vs. the long run

Time

Nati

on

al eco

nom

ic o

utp

ut

Actual output

Potential output

Business cyclesin the short run

Economic growthin the long run

Downswing

Upswing

The crisis of 1997-98 is irrelevant to Asia’s long-term growth potential.

Economic growth: The short run vs. the long run

To analyze the movements ofTo analyze the movements of actualactual output from year to year, viz., in theoutput from year to year, viz., in the shortshort runrunNeed short-run macroeconomic theoryNeed short-run macroeconomic theory

Keynesian or neoclassicalKeynesian or neoclassical

To analyze the path ofTo analyze the path of potentialpotential output output overover longlong periodsperiodsNeed modernNeed modern theory of economic growththeory of economic growth

Neoclassical or endogenousNeoclassical or endogenous

Growing together, growing apart

Time

Nati

on

al eco

nom

ic o

utp

ut

Rapid growth

Slow growth

West-Germany : East-GermanyWest-Germany : East-GermanyAustria : Czech RepublicAustria : Czech RepublicFinland : EstoniaFinland : EstoniaTaiwan : ChinaTaiwan : ChinaSouth Korea : North KoreaSouth Korea : North Korea

Botswana : NigeriaBotswana : NigeriaKenya : TanzaniaKenya : TanzaniaThailand : BurmaThailand : BurmaTunisia : MoroccoTunisia : MoroccoSpain : ArgentinaSpain : ArgentinaMauritius : MadagascarMauritius : Madagascar

Economic system

Economic policy?

Growing apart

YearsYears

Outp

ut

per

cap

ita

Outp

ut

per

cap

ita

Country B: 2% a yearCountry B: 2% a year

Country A: 0.4% a yearCountry A: 0.4% a year

EfficiencyEfficiency

Economic systemEconomic system

Economic policyEconomic policy Threefold Threefold difference after difference after 60 years60 years

00 6060

Divide into 72 by the Divide into 72 by the growth rate to find the growth rate to find the number of years it takes number of years it takes of income per head to of income per head to double double

Sources Sources of growth: of growth: Investment and Investment and educationeducation

In ves tm en t E d u ca tion

G row th

+ +

+denotes a positive effect in the direction shown

In ves tm en t E d u ca tion

G row th

+ +


Adam Smith knew this, and more, as did Arthur Lewis

Sources of growth: Sources of growth: Investment and Investment and educationeducation

Solow raised Solow raised

doubts on doubts on

long-run long-run

linkageslinkages

More More sources of growthsources of growth

In ves tm en t x E d u ca tion

G row th+ +


+

Arthur Lewis: x is trade, stable politics, good weather

But Solow carried the day: long-run growth is exogenous

0

500

1000

1500

2000

2500

3000

3500

Botswana

Nigeria

Botswana and Nigeria: GNP per capita 1964-99Case 1

Current US$,Atlas method

0

50

100

150

200

250

300

350

400

450

500

Kenya

Tanzania

Uganda

Kenya, Tanzania, and Uganda: GNP per capita 1964-99Case 2


0

100

200

300

400

500

600

700

Burma

Thailand

Burma and Thailand: GNP per capita 1960-97Case 3

Local currency, 1988 prices, 1960 = 100

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000

Barbados

Haiti

Dominican Republic

Barbados, Dominican Republic, and Haiti: GNP per capita 1964-99

Case 4


0

500

1000

1500

2000

2500

Egypt

Morocco

Tunisia

Egypt, Morocco, and Tunisia:GNP per capita 1964-99Case 5


0

2000

4000

6000

8000

10000

12000

14000

16000

Argentina

Spain

Uruguay

Argentina, Uruguay, and Spain:GNP per capita 1964-99Case 6


0

500

1000

1500

2000

2500

3000

3500

4000

4500

Madagascar

Mauritius

Madagascar and Mauritius:GNP per capita 1964-99Case 7


Chile and Zambia:GNP per capita 1964-99Case 8

0

1000

2000

3000

4000

5000

6000

Chile

Zambia


Ireland and Greece:Ireland and Greece: GNP per capita 1964-99Case 9

0

5000

10000

15000

20000

25000

Greece

Ireland

Why?Why?


More More sources of growthsources of growth

In ves tm en t x E d u ca tion

G row th+ +


+

Arthur Lewis: x is trade, stable politics, good weather

But Solow carried the day: long-run growth is exogenous

0

5

10

15

20

25

30

35

40

45

Greece

Ireland InvestmeInvestment is good nt is good for for growth, growth, but hardly but hardly explains explains the the growth growth differentiadifferential between l between Ireland Ireland and and GreeceGreece

Ireland and Greece:Ireland and Greece: Investment 1960-99 (% of GDP)

0

1

2

3

4

5

6

7

8

Greece

Ireland

EducatioEducation is good n is good for for growthgrowth

Ireland and Greece:Ireland and Greece: Expenditure on education 1960-96 (% of GNP)

0

10

20

30

40

50

60

70

80

90

100

Ireland

Greece

Foreign Foreign trade is trade is good for good for growthgrowth

Ireland and Greece:Ireland and Greece: Exports 1960-99 (% of GNP)

The Neoclassical Theory of Exogenous Economic Growth

Traces the rate of growth of output per capita to a single source:

Technological progressTechnological progress

Hence, economic growth in the long run is immune to economic policy, good or bad.

“To change the rate of growth of real output per head you have to change the rate of technical progress.”

ROBERT M. SOLOW

The New Theory of Endogenous Economic Growth

Traces the rate of growth of output Traces the rate of growth of output per capita to three main sources:per capita to three main sources:

SavingSaving

EfficiencyEfficiency

DepreciationDepreciation

“The proximate causes of economic growth are the effort to economize, the accumulation of knowledge, and the accumulation of capital.”

W. ARTHUR LEWIS

Exogenous vs. endogenous growth

The neoclassical viewThe neoclassical viewthat economic growth in the long run is that economic growth in the long run is

merely a matter ofmerely a matter of technologytechnology does not does not throw much light on the spectacular growth throw much light on the spectacular growth performance of Asia since the 1960s. performance of Asia since the 1960s.

The new viewThe new viewthat long-run growth depends onthat long-run growth depends on savingsaving, ,

efficiencyefficiency, and, and depreciationdepreciation is more is more illuminating.illuminating.

Besides, it’s not really new, because Adam Besides, it’s not really new, because Adam Smith knew this (1776). Smith knew this (1776).

One crucial implication of exogenous growth

The neoclassical viewThe neoclassical viewIf two countries are identical (same If two countries are identical (same

saving rate, same population growth, saving rate, same population growth, same technology), then their income same technology), then their income per head will per head will ultimatelyultimately be the same. be the same.

This means that poor countries must This means that poor countries must grow faster than – grow faster than – catch upcatch up with! – with! – rich countries: “conditional rich countries: “conditional convergence”convergence”

Endogenous growth theory does not Endogenous growth theory does not have this implication. have this implication.

Enter initial incomeEnter initial income

In ves tm en t

In it ia l In com e N atu ra l C ap ita l

x E d u ca tion

G row th+

+

+–


– denotes a negative effect in the direction shown

?

Conditional Conditional convergencconvergencee

Absolute convergence?

Do poor

countrie

s catch

up?

-4

-2

0

2

4

6

8

10

0 2 4 6 8 10 12

Log of initial GDP per capita (1965)

Gro

wth

of

GN

P p

er

ca

pit

a 1

96

5-1

99

8 (

%)

r = -0.09Botswana

China Korea

Nicaragua

ThailandIndonesia

No sign that poor countries grow faster than rich

8855 countries countries

r = rank correlation

Conditional Conditional convergconvergence ence does not does not entail entail absolute absolute convergenceconvergence

EnterEnter natural resourcesnatural resources

In ves tm en t


x E d u ca tion

G row th+

+

+––


– denotes a negative effect in the direction shown

?

Endogenous growth: x can be almost anything!Dutch disease and rent seeking

A simple model of endogenous growth

Four building blocks:Four building blocks: S = IS = I

Saving equals investment in equilibrium.Saving equals investment in equilibrium.

S = sYS = sY Saving is proportional to income.Saving is proportional to income.

I = I = K + K + KK Investment involves addition to capital stock.Investment involves addition to capital stock.

Y = EKY = EK Output depends on quality and quantity of Output depends on quality and quantity of

capital.capital.

A simple model of endogenous growth

Implication:Implication: g = sE - g = sE -

Rate of economic growth equalsRate of economic growth equals Saving rateSaving rate

timestimes

Efficiency Efficiency (i.e., the output/capital ratio)(i.e., the output/capital ratio)minusminus

DepreciationDepreciation

Endogenous growth in the Endogenous growth in the Harrod-Domar modelHarrod-Domar model

You may recognize the You may recognize the endogenous growth model endogenous growth model as a reinterpretation of theas a reinterpretation of the Harrod-Domar modelHarrod-Domar modelwhere growth depends onwhere growth depends on

A.A. the saving ratethe saving rate

B.B. the capital/output ratiothe capital/output ratio

C.C. the depreciation ratethe depreciation rate

You may recognize the You may recognize the endogenous growth model endogenous growth model as a reinterpretation of theas a reinterpretation of the Harrod-Domar modelHarrod-Domar modelwhere growth depends onwhere growth depends on

A.A. the saving ratethe saving rate

B.B. the capital/output ratiothe capital/output ratio

C.C. the depreciation ratethe depreciation rate

Sources of endogenous growth I

Saving Saving Fits real worldFits real world experienceexperience quite wellquite well

No coincidence that, in East Asia, saving rates ofNo coincidence that, in East Asia, saving rates of 30-30-40%40% of GDP went along with rapid economic growthof GDP went along with rapid economic growth

No coincidence either that many African economies with No coincidence either that many African economies with saving rates aroundsaving rates around 10%10% of GDP have been stagnantof GDP have been stagnant

OECD countries: saving rates of aboutOECD countries: saving rates of about 20%20% of GDPof GDP

Important implication forImportant implication for economic policyeconomic policy::Economic stability withEconomic stability with low inflationlow inflation and positive real and positive real

interest rates spurs saving, which isinterest rates spurs saving, which is good for growth.good for growth.

Sources of endogenous growth I

100100

400400

300300

200200

19651965 19901990

East AsiaEast Asia

OECDOECD

AfricaAfrica

High saving rates

High saving rates

Medium saving rates

Low saving rates

IncomeIncomeper capitaper capita

Growth and investment, 1965-98

109 countries

-6

-4

-2

0

2

4

6

8

10

0 10 20 30 40 50

Investment (% of GDP)

Gro

wth

pe

r c

ap

ita (%

pe

r y

ear)

10%

1½%

BotswanaEach ten percentage point increase in the investment ratio is associated with an increase in per capita growth by 1½% per year.

South Africa


33 sub-33 sub-SaharanSaharan African African countriecountriess

-6

-4

-2

0

2

4

6

8

10

0 10 20 30 40 50

Investment (% of GDP)

Gro

wth

pe

r c

ap

ita

(%

pe

r y

ea

r)Each ten percentage point increase in the investment ratio is associated with an increase in per capita growth by 1½% per year.


Botswana

Uganda

Swaziland

Lesotho

ZambiaTanzania

Angola

ZimbabweNamibia

Malawi

-4

-2

0

2

4

6

8

10

12

0 10 20 30 40 50

Investment (Per Cent of GDP)

Gro

wth

Per

Cap

ita (P

er C

ent P

er Y

ear)

Each ten percentage point increase in the investment ratio is associated with an increase in per capita growth by 1½% per year.

11 11 MEFMIMEFMI countriecountriess

Investment and economic growth

-8

-6

-4

-2

0

2

4

6

0 5 10 15 20 25 30 35

Gross domestic investment 1965-1998 (% of GDP)

Gro

wth

of

GN

P p

er c

apit

a 19

65-1

998,

ad

just

ed f

or

init

ial

inco

me

(% p

er y

ear)

r = 0.65

Jordan

Botswana

Nicaragua

85 countries85 countries

An increase in investment by 4% of GDP is associated with an increase in per capita growth by 1% per year.

4%

1%

Thailand

Sources of endogenous growth II

Depreciation Depreciation The effect of depreciation on growth is related The effect of depreciation on growth is related

to that of saving and investment on growth.to that of saving and investment on growth.Unprofitable investment in the past reduces Unprofitable investment in the past reduces

thethe quality of capitalquality of capital and makes it depreciate and makes it depreciate more rapidly, necessitating more replacement more rapidly, necessitating more replacement investment to make up for economic and investment to make up for economic and physical wear and tear.physical wear and tear.

The more national saving has to be set aside The more national saving has to be set aside for replacement investment, the less will be for replacement investment, the less will be available for theavailable for the buildup of new capitalbuildup of new capital. .

Investment: Quantity and quality

Compare Botswana and Tanzania:Compare Botswana and Tanzania:InIn BotswanaBotswana, , the share of State-Owned the share of State-Owned

Enterprises in total investment fell Enterprises in total investment fell from 16% in 1985-90 to 12% in 1990-from 16% in 1985-90 to 12% in 1990-97. 97.

InIn TanzaniaTanzania, , the SOE share of the SOE share of investment fell from 46% in 1985-90 investment fell from 46% in 1985-90 to 23% in 1990-97. to 23% in 1990-97.

This is probably a good sign.This is probably a good sign.Privatization helpsPrivatization helps improve investment.improve investment.

Investment: Quantity and quality

Investment quality, however, is Investment quality, however, is not only a question of public vs. not only a question of public vs. private enterprise.private enterprise.

Sound bankingSound banking is also important.is also important.It takes sound commercial banks, It takes sound commercial banks,

usuallyusually privately ownedprivately owned banks banks motivated by profit rather than by motivated by profit rather than by political concerns, to channel political concerns, to channel household savings intohousehold savings into high-high-quality investmentquality investment. .


EfficiencyEfficiencyAlso fits real world experience quite wellAlso fits real world experience quite well

Technical progress is good for growth because it allows Technical progress is good for growth because it allows us tous to squeeze more output out of given inputssqueeze more output out of given inputs..

And that is exactly what increasedAnd that is exactly what increased efficiencyefficiency is all is all about! about!

Thus, technology is best viewed as an aspect of general Thus, technology is best viewed as an aspect of general economic efficiency. economic efficiency.

Important implication forImportant implication for economic policyeconomic policy::Everything that increases economic efficiency, no matter Everything that increases economic efficiency, no matter

what, is alsowhat, is also good for growthgood for growth..


Five sources of increased efficiencyFive sources of increased efficiency1.1. LiberalizationLiberalization of prices and trade increases of prices and trade increases

efficiency, which isefficiency, which is good for growthgood for growth..

2.2. Stabilization reduces the inefficiency associated with Stabilization reduces the inefficiency associated with inflation, which isinflation, which is good for growthgood for growth..

3.3. PrivatizationPrivatization reduces the inefficiency associated with reduces the inefficiency associated with state-owned enterprises, which …state-owned enterprises, which …

4.4. EducationEducation makes the labor force more efficient.makes the labor force more efficient.

5.5. Technological progressTechnological progress also enhances efficiency.also enhances efficiency.

The possibilities are virtually endless!The possibilities are virtually endless!


This isThis is good newsgood news..If growth were merely a matter of technology, we If growth were merely a matter of technology, we

would not be able to do much about it …would not be able to do much about it …… … except to follow technology-friendly policies by except to follow technology-friendly policies by

supportingsupporting R&DR&D and such.and such.

But if growth depends on saving and efficiency, But if growth depends on saving and efficiency, there are things that wethere are things that we can docan do, in the private , in the private sector as well as through the public sector, to sector as well as through the public sector, to foster rapid economic growth.foster rapid economic growth.

BecauseBecause everything that is good for saving and everything that is good for saving and efficiency is also efficiency is also good for growthgood for growth..

What to do to encourage economic growth

Recap

Maintain strong incentives toMaintain strong incentives to savesaveKeep Keep inflationinflation low andlow and real interest ratesreal interest rates positive positive

MaintainMaintain financial systemfinancial system in good healthin good healthso as to channel saving into high-quality investmentso as to channel saving into high-quality investment

Foster Foster efficiencyefficiency1.1. Liberal price and trade regimesLiberal price and trade regimes

2.2. Low inflationLow inflation

3.3. Strong private sectorStrong private sector

4.4. More and better educationMore and better education

5.5. Limited, or well managed, natural resourcesLimited, or well managed, natural resources

6.6. Reasonable equalityReasonable equality

Liberalization and economic growth

Liberalization of pricesLiberalization of prices means that markets, means that markets, not bureaucrats, are allowed to set prices. not bureaucrats, are allowed to set prices. Mixed market economy isMixed market economy is more efficientmore efficient than than

central planning.central planning. Compare former Soviet Union with the US and Compare former Soviet Union with the US and

EuropeEurope

Liberalization of tradeLiberalization of trade allows specialization allows specialization according to comparative advantage.according to comparative advantage.Free trade isFree trade is more efficientmore efficient than self-sufficiency.than self-sufficiency.

North Korea and Cuba vs. Hong Kong and SingaporeNorth Korea and Cuba vs. Hong Kong and Singapore

Applies to trade in goods, services, capital.Applies to trade in goods, services, capital.

1

Growth and trade, 1965-98

105 105 countriecountriess

-6

-4

-2

0

2

4

6

8

10

0 50 100 150 200 250 300 350

Trade (% of ppp-adjusted GDP)

Gro

wth

pe

r ca

pita

(% p

er y

ear)

NB: UAE, Hong Kong, and Singapore.

Singapore

Hong Kong

United Arab Emirates

China

Korea

Botswana

Each 50 percentage point increase in the trade ratio is associated with an increase in per capita growth by almost 1% per year.


32 sub-32 sub-Saharan Saharan African African countriecountriess

-6

-4

-2

0

2

4

6

8

10

0 20 40 60 80 100

Trade (% of ppp-adjusted GDP)

Gro

wth

per

cap

ita (%

per

yea

r)Each 20 percentage point increase in the trade ratio is associated with an increase in per capita growth by 1% per year.


Botswana

Swaziland

Lesotho

Zambia

Angola

Tanzania

Uganda

Zimbabwe

Malawi

Namibia

-4

-2

0

2

4

6

8

10

12

0 10 20 30 40 50 60

Trade (Per Cent of GDP)

Gro

wth

Per

Cap

ita (P

er C

ent P

er Y

ear)

Each ten percentage point increase in the trade ratio is associated with an increase in per capita growth by almost 1% per year.


Openness and growth 1965-98

-8

-6

-4

-2

0

2

4

6

-40 -30 -20 -10 0 10 20 30 40

Actual less predicted exports 1965-98 (% of GDP)

An

nu

al g

row

th o

f G

NP

per

cap

ita

1965

-98,

ad

just

ed f

or

init

ial

inco

me

(%)

Malaysia

Belgium

Korea

Guinea Bissau

87

countrie

s

An increase in openness by 14% of GDP is associated with an increase in per capita growth by 1% per year.

r = 0.40

Growth and foreign direct investment, 1965-98

100 100 countriecountriess

-4

-2

0

2

4

6

8

10

0 2 4 6 8 10 12 14

Foreign direct investment (% of ppp-adjusted GDP)

Gro

wth

per

cap

ita (%

per

yea

r)

Qualification: Relationship rests on Botswana and Singapore.

BotswanaSingapore

Each three percentage point increase in the FDI ratio is associated with an increase in per capita growth by almost 1% per year.

Growth and foreign direct investment, 1965-98

-4

-2

0

2

4

6

8

10

0 2 4 6 8

Foreign direct investment (% of ppp-adjusted GDP)

Gro

wth

per

cap

ita (%

per

yea

r)Each one percentage point increase in the FDI ratio is associated with an increase in per capita growth by almost 1% per year.

31 sub-31 sub-Saharan Saharan AfricanAfrican countriecountriess

Relationship depends on the inclusion of Botswana.

Botswana

Growth and FDI, 1975-1998

Botswana

Swaziland

LesothoUganda

Namibia

ZambiaTanzania

Zimbabwe

Malawi

Angola

-4

-2

0

2

4

6

8

10

12

0 1 2 3 4 5 6 7 8

Foreign Direct Investment (Per Cent of GDP)

Gro

wth

Per

Cap

ita

(Per

Cen

t P

er Y

ear)

Each ten percentage point increase in the FDI ratio is associated with an increase in per capita growth by 1% per year.


Openness toOpenness to FDIFDI and and growth 1965-98growth 1965-98

-8

-6

-4

-2

0

2

4

6

-4 -2 0 2 4 6 8

Actual less predicted FDI 1975-1998 (% of GDP, ppp)

An

nu

al g

row

th o

f G

NP

per

cap

ita

1965

-98,

ad

just

ed f

or

init

ial i

nco

me

(%)

Botswana

An increase in openness to FDI by 2% of GDP is associated with an increase in per capita growth by more than 1% per year.

r = 0.62

85

countrie

s

Stabilization and economic growth

Stabilization of pricesStabilization of prices means that distortions means that distortions associated with inflation are reduced.associated with inflation are reduced. InflationInflation distorts the choice between real and financial distorts the choice between real and financial

capital by punishing money holdings, and thuscapital by punishing money holdings, and thus creates creates inefficiency inefficiency in production.in production.

Inflation thus involves a tax, theInflation thus involves a tax, the inflation taxinflation tax.. AnAn inefficient taxinefficient tax compared with most other taxes.compared with most other taxes.

Inflation also createsInflation also creates uncertainlyuncertainly which tends to which tends to discourage trade and investment. discourage trade and investment.

Inflation also tends to result inInflation also tends to result in overvaluationovervaluation of of currency, thus hurting exports and growth.currency, thus hurting exports and growth.

2

Money and inflation, 1990-1998

Namibia

Lesotho

Swaziland

BotswanaZimbabwe

Tanzania

UgandaMalawi

Zambia

0

5

10

15

20

25

30

35

40

45

0 10 20 30 40 50 60 70

Inflation 1990-98 (Per Cent Per Year)

Mo

ney

an

d Q

uas

i-M

on

ey 1

998

(Per

Cen

t o

f G

DP

)

A 10 percentage point increase in annual inflation is associated with a decrease in money and quasi-money by 3% of GDP.

Privatization and economic growth

PrivatizationPrivatization means that profit-oriented means that profit-oriented owners and able managers are allowed to owners and able managers are allowed to direct enterprises.direct enterprises.Profit motiveProfit motive replaces political considerations as replaces political considerations as

the guiding principle of business operations.the guiding principle of business operations.Profit-maximizing owners generally want to appoint Profit-maximizing owners generally want to appoint

managers and staff on merit rather than on the managers and staff on merit rather than on the basis of political connections, for example.basis of political connections, for example.

Private enterprise is generallyPrivate enterprise is generally more efficientmore efficient than state-owned enterprises.than state-owned enterprises.

3

Same story time and again

Free trade Free trade is good for growth is good for growth Reduces the inefficiency that results from Reduces the inefficiency that results from

restrictions on trade restrictions on trade

Price stabilityPrice stability is good for growth is good for growth Reduces inefficiency resulting from inflationReduces inefficiency resulting from inflation

PrivatizationPrivatization is good for growth is good for growth Reduces inefficiency resulting from SOEsReduces inefficiency resulting from SOEs

EducationEducation is good for growth is good for growth Reduces the inefficiency that results from Reduces the inefficiency that results from

inadequate educationinadequate education

Same story time and again

Can describe this by simple arithmeticCan describe this by simple arithmetic

The efficiency gain fromThe efficiency gain from eliminating an eliminating an economic distortioneconomic distortion (trade restrictions, (trade restrictions, inflation, unnecessary state intervention, inflation, unnecessary state intervention, insufficient education) is directly insufficient education) is directly proportional to the square of the distortion:proportional to the square of the distortion:

E = mcE = mc22

EE stands for efficiency gain,stands for efficiency gain, mm is a multiplicative is a multiplicative constant, andconstant, and cc is the distortionis the distortion

E = mcE = mc22

If the distortion is substantial (severe trade If the distortion is substantial (severe trade restrictions, high inflation, big SOE sector, restrictions, high inflation, big SOE sector, poor education), then reducing or poor education), then reducing or eliminating the distortion can increase eliminating the distortion can increase efficiency andefficiency and growthgrowth a great deal.a great deal.

We can see this by plugging appropriate We can see this by plugging appropriate numbers into the formula and also bynumbers into the formula and also by econometriceconometric research, where the theory is research, where the theory is compared with experience (i.e., economic compared with experience (i.e., economic statistics).statistics).

Education and economic growth

EducationEducation means a better trained and hencemeans a better trained and hence more efficientmore efficient work force.work force. Need to provide primary and secondary education Need to provide primary and secondary education

to all, especially femalesto all, especially females Need to provide tertiary education to a greatly Need to provide tertiary education to a greatly

increased number of peopleincreased number of people Need increased public commitment to educationNeed increased public commitment to education This requires both increasedThis requires both increased public expenditurepublic expenditure on on

education and probably also increased scope foreducation and probably also increased scope for private sector involvementprivate sector involvement in education.in education.

4

Growth and education, 1965-98

86 countries

-4

-2

0

2

4

6

8

10

0 20 40 60 80 100 120 140

Secondary-school enrolment 1980-97 (%)

Gro

wth

pe

r c

ap

ita

(%

pe

r y

ea

r)

An increase in secondary-school enrolment by 4% of each cohort goes along with an increase in per capita growth by 1% per year.


-6

-4

-2

0

2

4

6

8

10

0 1 2 3 4 5 6 7 8

Public expenditure on education (% of GNP)

Gro

wth

per

cap

ita (%

per

yea

r)Each two percentage point increase in the education expenditure ratio is associated with an increase in per capita growth by about 1% per year.

33 sub-33 sub-SaharanSaharan AfricanAfrican countriecountriess


Botswana

Swaziland

NamibiaZimbabwe

Angola

ZambiaTanzania

MalawiUganda

Lesotho

-4

-2

0

2

4

6

8

10

12

0 1 2 3 4 5 6 7 8

Public Expenditure on Education (Per Cent of GNP)

Gro

wth

Per

Cap

ita

(Per

Cen

t P

er Y

ear)

Each two percentage point increase in the education expenditure ratio is associated with an increase in per capita growth by almost 1% per year.



-8

-6

-4

-2

0

2

4

6

0 20 40 60 80 100 120

Secondary-school enrolment 1980-97 (% of cohort)

Per

cap

ita g

row

th 1

965-9

8,

ad

juste

d f

or

init

ial

inco

me (

% p

er

year) Thailand Japan

Finland

JamaicaGhana

Positive but decreasing returns to education

An increase in secondary-school enrolment by 25% of each cohort goes along with an increase in per capita growth by 1% per year

r = 0.72

87

countries

Natural resourcesNatural resources and and economic growtheconomic growth

Natural resources, if not well Natural resources, if not well managed, may turn out to be, managed, may turn out to be, at best, aat best, a mixed blessingmixed blessing..

Three possible channelsThree possible channels Dutch diseaseDutch disease Rent seekingRent seeking Education Education

What is the evidence?What is the evidence?

5

Natural resource abundance and economic structure

Resource poor,resource dependent

(Chad, Mali)

Resource rich,resource dependent

(OPEC)

Resource rich,resource free(Canada, USA)

Resource poor,resource free

(Jordan, Panama)

Reso

urc

e d

ep

en

den

ceR

eso

urc

e d

ep

end

ence

Resource abundanceResource abundance

Natural resources and economic growth 1965-98

Abundant natural resources, if not well Abundant natural resources, if not well managed, appearmanaged, appear harmful to growthharmful to growth..

-4

-2

0

2

4

6

8

10

0 10 20 30 40 50 60

Share of natural capital in national wealth (%)

Gro

wth

per

cap

ita

(% p

er y

ear)

86 countries

A ten percentage point increase in the natural capital share goes along with a decrease in per capita growth by nearly 1% per year.

Natural capital and economic growth


What is the empirical evidence?

r = rank correlation

-8

-6

-4

-2

0

2

4

6

0 10 20 30 40 50 60

Share of natural capital in national wealth 1994 (%)

Gro

wth

of

GN

P p

er

ca

pit

a 1

96

5-1

99

8, a

dju

ste

d f

or

init

ial

inc

om

e (

%)

An increase in the natural capital share by 8% goes along with a decrease in per capita growth by 1% per year.

r = -0.64

8 African countriesI/Y = 0.05

8 Asian countriesI/Y = 0.32

Notice Notice

two two

clustercluster

ss

AA newnew measure of measure of natural natural resource resource abundanceabundanceConfirms Confirms results based results based on other on other measures measures

Venezuela

Australia

Recent literatureRecent literature

Four main linkages: 1. Dutch disease

Hurts level or composition of exports

2. Rent seeking Protectionism, corruption

3. Education4. False sense of security

Poor quality of policies and institutions

5. Investment

But Norway is,

so far at least,

an exception

ForeigForeig

n n capitalcapital

Social Social

capitacapita

llHumaHuma

n n capitacapita

llReal Real

capitalcapital

Natural capital tends to crowd Natural capital tends to crowd outout

In ves tm en t


x E d u ca tion

G row th+

+

+––

––

Enter natural Enter natural resourcesresources

?

Natural resource abundance hurtsNatural resource abundance hurts investment investment and and education, and hence also growtheducation, and hence also growth

Natural resources and education

90 countries

0

1

2

3

4

5

6

7

8

9

0 10 20 30 40 50 60


Pu

blic

exp

end

itu

re o

n e

du

cati

on

(%

of

GN

P)

An 18 percentage point increase in the natural capital share is associated with a decrease in public expenditure on education by 1% of GNP.

Abundant Abundant natural natural resources resources appear to appear to crowd outcrowd out human human resourcesresources..

Secondary-school enrolment and natural capital

-40

-20

0

20

40

60

80

100

120

0 10 20 30 40 50 60


Se

co

nd

ary

-sc

ho

ol e

nro

lme

nt

19

80

-97

(%

of

co

ho

rt)

r = -0.66

Finnland

Niger

Vietnam

Uruguay

An increase in natural capital by 5% of national wealth goes along with a reduction in secondary-school enrolment by almost 10% of each cohort

91 91

countriescountries

Congo

Increased Increased natural natural resource resource abundancabundance hurts e hurts education education and and growthgrowth

Natural capital and investment

0

5

10

15

20

25

30

35

0 10 20 30 40 50 60


Gro

ss

do

me

sti

c in

ve

stm

en

t 1

96

5-1

99

8 (

% o

f G

DP

) An increase in the natural capital share by 10% is associated with a decrease in investment by 2% of GDP.

r = -0.38

Congo

Sierra Leone

Mali


Natural capital and financial depth


0

20

40

60

80

100

120

0 10 20 30 40 50 60


Mo

ne

y a

nd

qu

as

i-m

on

ey

19

65

-19

98

(%

of

GD

P) r = -0.68

Italy

Portugal

New Zealand

Financial depth and economic growth

85 countries85 countries-8

-6

-4

-2

0

2

4

6

0 20 40 60 80 100 120

Money and quasi-money 1965-1998 (% of GDP)

Gro

wth

of

GN

P p

er

ca

pit

a 1

96

5-1

99

8, a

dju

ste

d f

or

init

ial

inc

om

e (

% p

er

ye

ar)

r = 0.66

Jordan

Switzerland

JapanIndonesia

Natural resources and corruption

Abundant Abundant natural natural resources resources appear to appear to go along go along withwith corruptiocorruptionn..

0

1

2

3

4

5

6

7

8

9

10

0 5 10 15 20 25


Co

rru

pti

on

in

dex

New Zealand

45 countries

6 Inequality and economic growth

Two views:Two views:1.1. Inequality isInequality is goodgood for growthfor growth

Too much equality weakens Too much equality weakens incentives to work, save, and incentives to work, save, and acquire an educationacquire an education

2.2. Inequality isInequality is badbad for growthfor growth Too much inequality reduces social Too much inequality reduces social

cohesion and creates conflictcohesion and creates conflict

What is the empirical evidence?What is the empirical evidence?

Gini = 25 Gini = 25 20/20 ratio = 3 20/20 ratio = 3 (Scandinavia)(Scandinavia)

Gini = 30 Gini = 30 20/20 ratio = 4 20/20 ratio = 4 (Germany)(Germany)

Gini = 35 Gini = 35 20/20 ratio = 6 (UK) 20/20 ratio = 6 (UK)

Gini = 40 Gini = 40 20/20 ratio = 8 (USA) 20/20 ratio = 8 (USA)

Gini = 50 Gini = 50 20/20 ratio = 15 (Nigeria) 20/20 ratio = 15 (Nigeria)

Gini = 60 Gini = 60 20/20 ratio = 26 (Brazil) 20/20 ratio = 26 (Brazil)

Gini coefficient: An index of inequality

Gini = 25 Gini = 25 20/20 ratio = 3 20/20 ratio = 3 (Scandinavia)(Scandinavia)

Gini = 30 Gini = 30 20/20 ratio = 4 (Germany) 20/20 ratio = 4 (Germany)

Gini = 35 Gini = 35 20/20 ratio = 6 (UK) 20/20 ratio = 6 (UK)

Gini = 40 Gini = 40 20/20 ratio = 8 (USA) 20/20 ratio = 8 (USA)

Gini = 50 Gini = 50 20/20 ratio = 15 (Nigeria) 20/20 ratio = 15 (Nigeria)

Gini = 60 Gini = 60 20/20 ratio = 26 (Brazil) 20/20 ratio = 26 (Brazil)

Gini coefficient and the 20/20 ratio

Increase in Gini coefficient by 10 Increase in Gini coefficient by 10 points roughlypoints roughly doubles doubles the 20/20 ratiothe 20/20 ratio

Gini = 25Gini = 25 20/2020/20 ratio = 3ratio = 3 (Scandinavia)(Scandinavia)

Gini = 30 Gini = 30 20/20 20/20 ratio = 4 (Germany)ratio = 4 (Germany)

Gini = 35 Gini = 35 20/20 20/20 ratio = 6 (UK)ratio = 6 (UK)

Gini = 40 Gini = 40 20/20 20/20 ratio = 8 (USA)ratio = 8 (USA)

Gini = 50 Gini = 50 20/20 20/20 ratio = 15 (Nigeria)ratio = 15 (Nigeria)

Gini = 60 Gini = 60 20/20 20/20 ratio = 26 (Brazil)ratio = 26 (Brazil)



Gini = 25Gini = 25 20/2020/20 ratio = 3ratio = 3 (Scandinavia)(Scandinavia)

Gini = 30 Gini = 30 20/20 20/20 ratio = 4 (Germany)ratio = 4 (Germany)

Gini = 35Gini = 35 20/2020/20 ratio = 6ratio = 6 (UK)(UK)






Gini = 25 Gini = 25 20/20 20/20 ratio = 3 ratio = 3 (Scandinavia)(Scandinavia)

Gini = 30 Gini = 30 20/20 20/20 ratio = 4ratio = 4 (Germany)(Germany)







Gini = 25 Gini = 25 20/20 20/20 ratio = 3 ratio = 3 (Scandinavia)(Scandinavia)

Gini = 30 Gini = 30 20/20 20/20 ratio = 4ratio = 4 (Germany)(Germany)


Gini = 40 Gini = 40 20/20 20/20 ratio = 8ratio = 8 (USA)(USA)





y = -0.0799x + 2.1297

R2 = 0.1968

-6

-4

-2

0

2

4

6

0 20 40 60 80

Gini index

Per

cap

ita

gro

wth

196

5-98

, ad

just

ed f

or

init

ial

inco

me

(% p

er y

ear)

An increase in Gini index by 12 points goes along with a decrease in per capita growth by almost 1% per year

r = rank

correlation

r = -0.50

Growth and inequality, 1965-98

What

do the

data

say?

Sweden

Thailand

Central African Republic

South Africa

France

Brazil

No No discernibldiscernible sign e sign that that equality equality stands in stands in the way the way of of economic economic growthgrowth

Korea

75 countries

75 countries

Lesotho

Inequality and natural resource abundance

y = 0.3569x + 37.522

R2 = 0.13730

10

20

30

40

50

60

70

0 10 20 30 40 50 60


Gin

i in

de

x

An increase in natural capital by 3% of national wealth goes along with an increase in Gini index by 1 point

7 African countries where investment is 5% of GDP and per capita growth

is -1% per year

Notice a Notice a

clustercluster

Increased Increased natural natural resource resource abundancabundance e increases increases inequality inequality and and reduces reduces growthgrowth

Rwanda

Mauritania

Norway

Bangladesh

r = 0.41

75 countries

75 countries

What is the upshot?What is the upshot?

Economic growth responds toEconomic growth responds to public public policypolicy..

In particular, by encouragingIn particular, by encouragingsaving andsaving and investmentinvestment of high qualityof high quality foreignforeign tradetrade and investmentand investmenteducationeducationeconomic diversificationeconomic diversification

... the government can help foster ... the government can help foster rapidrapid economic growtheconomic growth..

Sir Arthur Lewis got it Sir Arthur Lewis got it rightright

Since the second Since the second world war it has world war it has become quite clear become quite clear that rapid economic that rapid economic growth is available growth is available to those countries to those countries with adequate with adequate natural resources natural resources whichwhich make the make the effort to achieve iteffort to achieve it..

W. ARTHUR LEWISW. ARTHUR LEWIS(1968)(1968)

What else?What else?These lessons are borne out by These lessons are borne out by

experience from around the world.experience from around the world.Additional lessons:Additional lessons:

Too muchToo much inflationinflation hurts saving, investment, hurts saving, investment, and trade and trade — and thereby also growth. and thereby also growth.

Too muchToo much SOESOE activity hurts the quality of activity hurts the quality of investment and education investment and education — and growth. and growth.

Too muchToo much agricultureagriculture and, more generally,and, more generally, natural resource dependencenatural resource dependence, if not well , if not well managed, hurts education and trade managed, hurts education and trade — and and thereby also growth. thereby also growth.

Too rapidToo rapid population growthpopulation growth also tends to also tends to impede economic growth.impede economic growth.

And too muchtoo much inequalityinequality also tends also tends to impede economic to impede economic growth.growth.

ReservationsReservationsEven so, the question of rapid growth is, Even so, the question of rapid growth is,

of course, a bit more complicated.of course, a bit more complicated.We also need to address a host ofWe also need to address a host of

politicalpolitical, , socialsocial, and, and culturalcultural questions questions as well as questions ofas well as questions of naturalnatural conditions, climate, and public health — conditions, climate, and public health — which would take us too far afield.which would take us too far afield.

But the main point remains:But the main point remains:To grow or not to growTo grow or not to grow is in large measure ais in large measure a

matter of choicematter of choice..Many of the constraints on growth areMany of the constraints on growth are man-man-

mademade, and can be removed., and can be removed.

Conclusion: ItConclusion: It can can be donebe done

Economic growth makes a difference, Economic growth makes a difference, especially in poor countries.especially in poor countries.A question literally of life and deathA question literally of life and death

And not only in poor countries,And not only in poor countries,for there is poverty amid plenty in rich for there is poverty amid plenty in rich

countries countries

Recall the main point of Gunnar Myrdal’sRecall the main point of Gunnar Myrdal’s Asian DramaAsian Drama (1968): (1968): It was that the Asian economies were It was that the Asian economies were

incapable of rapid economic growth!incapable of rapid economic growth!

New growth theory suggests that similar New growth theory suggests that similar claims about Africa will also be proven claims about Africa will also be proven wrong.wrong.

To grow or not to grow is in large measure a matter of choice.

To grow or not to grow is in large measure a matter of choice.

These slides can be viewed on my website: www.hi.is/~gylfason/lesotho.htm

Conclusion:Conclusion: It can It can be donebe done

The EndThe End

to grow or not to grow: that is the question

Documents

growth rate

short runneed short

double sources of growth

linkagesmore sources

long runto

short runeconomic

positive effect

atlas method current