Transcript Vicious and Virtuous Circles

Vicious and Virtuous Circles
•Vicious circle of debt
Debt  Child Labor  Low Education  Poverty
Note Bernanke’s warning …
Budget deficit  Debt  Interest rates
•Virtuous circle of development
Per capita real GDP  Health  Productivity
W.W. Rostow: Best & the Brightest?
Stages of Economic Growth
• Traditional Society
• Transition: Preconditions to Take Off
–Emergence of Capitalist/Commercial Sector
–Finance/Transport Infrastructure
•Take Off
–Political change  Protection of private property
–Accumulation  Compound Growth
•Maturity
–Diversification / Import Substitution
•Mass Consumption Society / Welfare State
Penn World Table:
Heston, Summers, Aten
Want Real GDP in comparable units ($2000)
• Define global output basket
• Price the basket in each country
– Basket costs …………….. ZL 220 in Poland
– Basket costs ………………$ 100 in U.S.
PPP Exchange Rate …….. ZL 2.2/$1
(as opposed to market exchange rate of ~ ZL 4/ $1
Penn World Table:
Heston, Summers, Aten
• Polish 2004 gdp per capita ………. ZL 22,560
• Translated to $s @ ZL 2.19/$ ………$ 10,484
– This was Polish PPP per capita gdp in 2004 $s
• It was 26.5% as great as US gdp per capita in 2004
– If Polish gdp had been translated into dollars at
the 2004 market exchange rate of ZL 3.66/$,
Polish gdp would have measured only $6,273
per capita
• only 15.9% of US per capita gdp of $39,535
• 2004 dollars don’t go as far as 2000 dollars
– Adjusting for dollar inflation, 2004 Polish Real GDP Per
Capita in 2000 dollars is $9,705 in PPP dollars
• This compares with 2003 real gdp per capita of $9,216
• Poles enjoyed a 5.3% growth in real per capita gdp
Growth and Development in Pictures
y = f(Factors & Productivity)
Productivity  Technology & Efficiency
Estimated Country Effects, (Ai Relative to Lowest)
Yit = Kitα (Ai Lit )(1-α)
Source: Nazrui Islam, Growth Empirics, QJE 11/95
Latin American Countries
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Argentina
Brazil
Chile
Mexico
Venezuela
Colombia
Peru
Ecuador
Costa Rica
El Salvador
Honduras
Nicaragua
7.1
11.6
6.2
13.4
16.2
6.5
10.5
9.1
10.5
6.8
3.5
8.3
Other Countries
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USA
Hong Kong
South Korea
Japan
India
Germany
United Kingdom
Italy
Israel
Ivory Coast
Kenya
Somalia
27.5
38.5
10.0
21.6
2.0
18.3
23.8
16.2
17.0
4.7
2.0
1.0
Adam Smith’s Glorious Vision
Accumulation
+
Division of Labor
=
Cumulative Progress
Adam Smith
• Accumulation:
– “capitals are increased by parsimony
and diminished by prodigality and
misconduct.”
• Division of labor:
– “… natural propensity among men to
truck, barter, and exchange one thing for
another.”
Adam Smith:
• The division of labor is limited by the
extent of the market.
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Free Trade  Extended Market
Adam Smith:
Virtuous Circle of Growth
• Accumulation
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• Division of Labor
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• Productivity
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• Reduced Cost
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• Extended Market
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• Profit
Adam Smith:
Limit to Growth
• Accumulation
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• Competition Up
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• Profit Down
• Steady State: “that full complement of
riches which the nature of [a nation’s] soil
and climate, and its situation with respect
to other countries, allow it to acquire.”
Getting to Take-Off: Foreign Aid?
Harrod – Domar Model  Financing Gap
Y=kK
– Labor doesn’t matter  there’s surplus labor
Sir W. Arthur Lewis
– Constant marginal productivity of capital
ΔY = k Δ K = k I
g = ΔY/Y = k (I/Y)
– Investment share of gdp limited to national saving … unless
you get injections from abroad
– With k = output:capital ratio ≈.25, need saving rate of 20% to
achieve growth of 5%
 Poor country needs grants and loans … foreign aid
Rostow: Once growth takes off, national saving up
Easterly: But it doesn’t – incentive is to consume