Transcript Growth Policy in the UK

Why Growth Rates Differs Across Countries?
Human Capital and Labour Market Reasons
Physical Capital and Financial Sector Factors
Fiscal and Monetary Policy Arrangements
Technology and Innovations and Adoptions
Trade and Exchange Rate Policies
Macroeconomic Themes:22
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19 Q2
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19 Q2
99
Q
2
Growth Rates in the UK Economy
12
10
8
6
4
2
0
-2
-4
-6
Macroeconomic Themes:22
2
Growth Rates of Per Capita GDP (WDI 2000)
14.000
UK
USA
France
Germany
Italy
Japan
10.000
8.000
6.000
4.000
2.000
-4.000
Years
Macroeconomic Themes:22
3
20
00
19
97
19
94
19
91
19
88
19
85
19
82
19
79
19
76
19
73
19
70
19
67
-2.000
19
64
0.000
19
61
Growth Rates in Percent
12.000
Annual Growth Rates of GDP (WDI 2000)
14.000
12.000
10.000
8.000
UK
USA
France
Germany
Italy
Japan
6.000
4.000
2.000
19
61
19
64
19
67
19
70
19
73
19
76
19
79
19
82
19
85
19
88
19
91
19
94
19
97
20
00
0.000
-2.000
-4.000
Macroeconomic Themes:22
4
Growth Rates of GDP
8.000
UK
6.000
USA
France
4.000
2.000
-2.000
-4.000
Macroeconomic Themes:22
5
97
19
95
19
93
19
91
19
89
19
87
19
85
19
83
19
81
19
79
19
77
19
75
19
73
19
71
19
69
19
67
19
65
19
63
19
19
61
0.000
Human Capital Augmented Solow Growth Model

Y  AK  L H

and assume that       1 . Like before take log of this
production function and differentiate both sides with respect to time to ge
y
 g  g  g  g  g
y
a
k
n
h
y
Recall the fact that in steady state output and capital grow at the rate of
population growth rate. A constant output per capita and capital per capit
in the steady state implies that y 
Y
dy dY dL


0
, or
L
y
Y
L
Macroeconomic Themes:22
6
Role of Saving, Investment and Productivity Shock
in Economic Growth (Ramsey (1928))
Preference of a representative consumer:
Max 
  tU Ct 
Ct t 0
Budget constraint
Ct  It  Gt  X t  M t  zt F  K , Lt , At 
 t 1

Evolution of the capital stock:
Boundary conditions:
Kt  1  K
t 1
 It
K  0 and K  0
T
0
Macroeconomic Themes:22
7
GDP and Productivity: Manpower or Labour Market
Approach
 In fact GDP from the supply side can be decomposed into the
working age population (P) labour force and participation rate
(L/P), employment rate (E/L), the productivity of per worker
LEQK
Y

P
and the capital output ratio as following:
PLEQ.
 Working age population (P): all individuals of 16 years old or
above.
 Labour force (L): all individuals at work (employed) or who
are willing to work and actively looking for a job
(unemployed).
 Participation rate (L/P): Ratio of labour force of working age
population.
 Employment rate (E/L): Proportion of labour force that is
employed.
 Unemployment rate (U/L): proportion of labour force that is
actively looking for work but is out of work.
 Productivity rate (Q/E): output per worker (weekly, monthly
or yearly). Capital-output ratio (K/Y): units of capital per unit
Macroeconomic Themes:22
of output.
8
GDP Growth, Utilisation of Labour Force and
Productivity
 g
Y
g g
g
g
g
P
LP
EL
QE
KQ
 Capital increases by saving but the participation rate,
employability and productivity of worker mainly depend
on their level of education and training.
 By raising skills formal and informal education not only
productivity of working individuals but also
employability of those in the labour force and
participation rate among the working age population.
GDP increases either by an increase in population or their
participation rate, or by their employment rate or by
increase in their productivity or by increase in capital stock
or any combination of these factors or by all of them.
Macroeconomic Themes:22
9
Contribution of the Financial Sector in
Economic Growth
 Financial sector diversifies risks and guarantees efficient allocation of
the portfolio by households and corporate sector
 Investments are based on market evaluation (Tobin’s q).
 Free and liberal financial market: convertibility and controls of
capital account.
 Direct foreign in/outward investments to complement national saving
 Reduce effects of credit rationing, market segmentation and
asymmetric information
 Avoid economic crises and contagion effects
 Reduce speculative bubbles and attacks on financial and exchange
rate markets
 Monitoring, supervision and deposit insurance.
 Build confidence by assuring inter generational equity, Viability of
pension funds and pay as you go social security system
Macroeconomic Themes:22
10
Ratio of the Gross Domestic Investment to GDP
40.00
35.00
30.00
25.00
20.00
15.00
UK
USA
Germany
Japan
10.00
5.00
Macroeconomic Themes:22
19
98
19
96
19
94
19
92
19
90
19
88
19
86
19
84
19
82
19
80
19
78
19
76
19
74
19
72
0.00
11
Real Exchange Rate Across Countries
160.000
140.000
100.000
80.000
UK
US
Japan
Italy
France
Germany
60.000
40.000
20.000
Macroeconomic Themes:22
12
19
99
19
97
19
95
19
93
19
91
19
89
19
87
19
85
19
83
19
81
19
79
19
77
0.000
19
75
1995=100
120.000
Ratio of Saving to GDP
45.00
40.00
35.00
30.00
25.00
20.00
15.00
UK
USA
Germany
Japan
10.00
5.00
Macroeconomic Themes:22
19
98
19
96
19
94
19
92
19
90
19
88
19
86
19
84
19
82
19
80
19
78
19
76
19
74
19
72
0.00
13
Real Interest Rates Across Countries
12.000
10.000
6.000
-4.000
Macroeconomic Themes:22
14
20
00
19
98
19
96
19
94
19
92
19
90
19
84
19
82
-2.000
19
80
0.000
19
88
2.000
19
86
UK
USA
Japan
Italy
France
Germany
4.000
19
78
Annual Percent
8.000
Fiscal and Monetary Policies for Stability
and Growth: Policy in the UK
Wrong economics policies generated disturbing fluctuations in
1970s and 1980s.
Economic growth is promoted by macroeconomic prudence,
outward orientation and domestic liberalisation.
New macroeconomic policy framework includes
the central bank independence
credibility and transparency in economic policy
adoption of the golden rule of public finance
– borrow only to invest
– sustainable long-term public finances
monetary and fiscal co-ordination
forward looking framework of the monetary policy
Emphasis in more investment in education and health.
The tightening of the fiscal policy in last 1990s
These policy steered back to the stability and steady growth
compared that in 1980s.
Macroeconomic Themes:22
15
Cross Industry Productivity Measure
Geroski (1991) uses cross section and time series pooling
regression technique to measure the contribution of
innovations in production among 79 three digit industries
between 1976-1979.
qti   i   t   i   t  f ti    I ti  ti


where qti is output per worker in industry i,f ti input
i gives a set of
per worker in industry i at time t,  i and
industry dummies  t andt refers to time dummies, and
i
I
is the t  is the number of innovations (count measure)
  0....
between t and periods where
.
Macroeconomic Themes:22
16
Cross Country Productivity
Measures
u
Y
Productivity index in country u: Au   iu s
i Li i
Productivity difference between country u and k in sector
Yiu
Yik
si
i Ci  u si 
Li
Lik
Overal Productivity difference between country u and k:
Au  Ak
 u
Yi
  u
i  Li

Yik 
Yik  k u 
 si  
 si  si 

Lik 
Lik 

Macroeconomic Themes:22
17
Productivity Differences Between UK and Her Trading Partners
(Source: O'Mahony and De Boer (2002) NIESR report.
www.niesr.ac.uk/research for detailed data set)
Total
non-market Total
Market
Services
Sectors
Economy
1996
US
91.0
127.4
128.5
UK
100.0
100.0
100.0
France
111.8
128.5
120.2
92.2
114.1
114.3
90.0
81.0
Germany
Japan
1999
US
84.3
130.3
139.0
UK
100.0
100.0
100.0
France
107.4
129.4
122.0
87.3
117.4
119.2
88.7
80.7
Germany
Japan*
Macroeconomic Themes:22
18
Cross Industry Productivity Measure
Geroski (1991) uses cross section and time series pooling
regression technique to measure the contribution of
innovations in production among 79 three digit industries
between 1976-1979.
qti   i   t   i   t  f ti    I ti  ti


where qti is output per worker in industry i,f ti input
i gives a set of
per worker in industry i at time t,  i and
industry dummies  t andt refers to time dummies, and
i
I
is the t  is the number of innovations (count measure)
  0....
between t and periods where
.
Macroeconomic Themes:22
19
Real Cost Reduction Approach: Harberger (1998)
TFP growth Absolute
over period Amount of
1=100
real cost
reduction
Industry
1
2
3
All the
rest
(1)
0.8
0.6
0.5
0.107
(2)
80
120
150
150
Cumulative
sum of RCR
of (2)
(3)
80
200
350
500
Cumulative Value added Cumula Cumulative
share of
by sector
tive
share of
RCR (3)
sum of value
value added of
added (6)
of (5)
(4)
(5)
(6)
(7)
0.16
100
100
0.09
0.4
200
300
0.27
0.7
300
600
0.55
1
500
1100
1.00
Macroeconomic Themes:22
20
Key Points to Growth Study
(a)always study the components of growth separately
(b) the accumulation of human capital by the labour force should
be represented in the labour contribution of the growth equation
(c)study externalities of education and technology at the firm level
and spatial dimensions
(d) check both firm and industry level reasons for declining
multifactor productivity
cross country growth regressions do not reveal much pay attention
to episodes within individual countries.
Macroeconomic Themes:22
21
Policy Implications of Real Cost Reduction
(a)people must perceive real costs in order to reduce them
(b) avoid prices that lie
(c)excess costs are imposed by ill-conceived regulations and
bureaucratic hurdles
(d) international trade distortions are harmful for growth
(e)privatisation, sound legal and institutional frameworks are good
for growth
(f) political consensus concerning the broad outlines of economic
policy.
Macroeconomic Themes:22
22
Import Penetration and Growing
and Shrinking Sectors
agri
Min
Man
Egw
constr
1993
6.31%
0.80%
4.40%
1994
0.69%
9.33%
8.08% -0.69%
1995
10.82%
10.69%
1996
-0.26%
1997 -13.55%
Trade
trnsp
9.00% -2.84% 5.60% 2.88%
Fin
8.30%
pub
edu
other
1.98% 6.69%
6.70%
7.03% 5.15% 6.82%
7.64% -0.98% 5.44%
8.92%
6.90% -3.54%
5.73% 5.06% 3.57%
4.11%
0.40% 5.53%
6.29%
20.76%
4.50%
4.45%
4.79% 7.47% 4.15%
6.63% -0.12% 6.36%
9.98%
-8.36%
4.26% -0.85%
6.63% 9.34% 7.37%
8.36% -0.13% 5.66% 12.60%
1998
-5.10% -13.46%
0.73% -1.12%
6.01% 7.98% 8.39% 13.44%
1999
-1.56%
11.00% -0.66%
2000
-7.14%
45.43%
0.23% 6.10% 10.43%
0.05%
6.19% 6.29% 4.61%
6.19% -0.95% 8.00%
7.91%
0.83% -1.48%
6.10% 4.30% 5.75%
8.23%
6.27%
3.75% 7.59%
Source: ONS input output table
Macroeconomic Themes:22
23
Why Slow Growth Rates in the Last Two Decades?
Market distortions: higher rates of taxes
Slower Growth Rate of Productivity of Labour
Appreciating exchange rate and destabilising monetary policies
controlled interest rate?
Import penetration and export ratios
Slow growth rate of technology
Imperfect competitions
Lack of modernisation
Macroeconomic Themes:22
24
References-1
Barro R. J.(1998) Economic Growth in Cross Sections of Countries, Quarterly Journal of
Economics May 1991, pp. 407-443.
Bhattarai K. (2002) Welfare Impacts of Equal-yield Tax Reforms in the UK Economy,
mimio, University of Hull.
Costello Donna M. (1993) A Cross-Country, Cross-Industry Comparison of Productivity
Growth The Journal of Political Economy, Vol. 101, No. 2. (Apr., 1993), pp. 207-222.
Thomas F. Cooley, Lee E. Ohanian (1997) Postwar British Economic Growth and the
Legacy of Keynes The Journal of Political Economy, Vol. 105, No. 3. (Jun., 1997), pp.
439-472.
Jan Fagerberg (1994) Technology and International Differences in Growth Rates
Journal of Economic Literature, Vol. 32, No. 3. pp. 1147-1175.
P. A. Geroski (1991)Innovation and the Sectoral Sources of UK Productivity Growth
The Economic Journal, Vol. 101, No. 409. (Nov., 1991), pp. 1438-1451.
Arnold C. Harberger (1998) A Vision of the Growth Process
The American Economic Review, Vol. 88, No. 1.March, pp. 1-32.
Grossman and Helpman (1991) Innovation and Growth in the Global Economy,
Cambridge Mass. MIT Press.
D. Greasley (1992) The Stationarity of British Economic and Productivity Growth 18561913 Journal of Applied Econometrics, Vol. 7, No. 2. (Apr. - Jun., 1992), pp. 203-209.
Jones, Charles (CJ) Introduction to economic growth, 2002, 2nd Edition, Norton.
Macroeconomic Themes:22
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References-2
Catherine Lynde, J. Richmond (1993) Public Capital and Long-run Costs in U.K.
ManufacturingThe Economic Journal, Vol. 103, No. 419.July, pp. 880-893.
Michael Kitson, Jonathan Michie (1996) Controversy: Deindustrialisation and Britain's
Industrial Performance since 1960 Britain's Industrial Performance since 1960:
Underinvestment and Relative Decline The Economic Journal, Vol. 106, No. 434., pp.
196-212.
Lindbeck a (1983) The Recent Slowdown of Productivity Growth, Economic Journal, 93,
13-34.
O’Mahony M and W. de Boer (2002) Britain’s relative productivity performance:Updates
to 1999, Final report to DTI/Treasury/ONS, NIESR. London.
Romer, Paul (1989) Endogenous Technological Change, Journal of Political Economy,
vol. 98, no. 5. Pt. 2, pp. S71-S102.
Mankiw N.G. D., Romer and D.N. Weil (1992) A Contribution to the Empirics of
Economic Growth, , Quarterly Journal of Economics, pp. 407-437.
R. C. O. Matthews (1969) Why Growth Rates Differ The Economic Journal, Vol. 79,
No. 314. (Jun., 1969), pp. 261-268.
Torsten Persson, Guido Tabellini (1994) Is Inequality Harmful for Growth?
The American Economic Review, Vol. 84, No. 3. pp. 600-621.
Romer, Paul (1989) Endogenous Technological Change, Journal of Political Economy,
vol. 98, no. 5. Pt. 2, pp. S71-S102.
Solow, Robert M., 1956: A Contribution to the Theory of Economic Growth, QJE,
pp.65-95.
Macroeconomic Themes:22
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