Transcript Slide 1

Trade, Markets and Economic
Growth
Harry Flam
Institute for International Economic
Studies, Stockholm University
Growth arithmetic
X % doubles GDP per capita in Y years:
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•
•
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1 % - 70 years
3 % - 23 years
7 % - 10 years
10 % - 7 years
Standard growth theory
• Per capita GDP is determined by per
capita stocks of physical and human
capital, and productivity of capital stocks
• Investment in capital has diminishing
returns
• Growth stops when investment yields just
enough to cover depreciation of capital
• ... unless total factor productivity grows
Growth accounting
• Construct stocks of physical and human
capital by adding yearly investment and
subtracting yearly depreciation
• Calculate weighted average of capital
growth, using incomes shares as weights
• Subtract weighted average capital growth
from output growth per capita
• Residual = total factor productivity growth
Total factor productivity, TFP
• Great variation in TFP across countries,
both in terms of levels and in terms of
growth rates
• Example: TFP growth explains 2 % of
Singapore’s growth, 31 % of Hong Kong’s
in 1966-1990.
• Example: TFP grew at 0,5 % in U.S.,
Canada and Switzerland, and at 2 % in
Finland and Norway 1971-1995.
Trade: static effects
• Gains from specialization according to
comparative advantage
• Economies of scale by producing for a
larger market
• Less slack and less monopoly power from
increased competition
• Greater choice for consumers and
producers
Trade: dynamic effects
• Spillovers from domestic and foreign R&D
• Greater incentives to innovate when
market is larger (?)
• Less redundancy in R&D
Trade and growth: evidence
• Need to find variable that is exogenous to
GDP and correlated with trade (an
instrument)
• Frankel and Romer: 1 per cent higher
trade leads to 2 per cent higher GDP per
capita
• More studies needed
Trade policy and growth: evidence
• Trade policy is usually part of set of
policies. How isolate effects of trade
policy?
• Trade policy hard to represent in single,
quantitative measure
• Hard to interpret regressions of growth on
trade policy
• All studies show that restrictive policy has
negative effects on growth
Spillovers from foreign R&D
• Foreign R&D stock = trade weighted
average of R&D stocks of trading partners
• Coe and Helpman: 60 % of variation in
level of TFP explained by foreign R&D
stock
• Keller: 70 % of R&D spillovers due to
trade, 15 % due to FDI and 15 % to
language skills
Markets and institutions
• Institutions: laws and judiciary, regulations
and regulatory bodies, public policy,
organizations, beliefs, culture
• Markets depend on the institutional
environment
• Property rights protection is fundamental
• No single optimal set of institutions for all
time and all countries exists
• Form is not always sufficient
Summary
• What explains growth and what explains
great variation in growth?
• Standard theory: capital accumulation and
total factor productivity
• Newer theory stresses dynamic effects
through R&D and innovation
• Trade and FDI important channels of
spillovers from foreign R&D
• Markets need good institutions