Transcript Long-Run Growth - University of Wisconsin–La Crosse

Long-Run Growth
Robert Lucas
• "Is there some action a government of India could take that
would lead the Indian Economy to grow like Indonesia’s or
Egypt’s? If so, what exactly? If not, what is it about the
“nature of India” that makes it so? The consequences for
human welfare involved in questions like these are simply
staggering: Once one starts to think about them it is
hard to think of anything else.
Why is Growth important?
• Measures of Welfare
• http://www.gapminder.org/index.html
Economic Growth from 1,000,000 B.C. to the Present
World economic growth was
essentially zero in the years
before 1300, and it was
very slow—an average of
only 0.2 percent per year—
before 1800.
The Industrial Revolution
made possible the sustained
increases in real GDP per
capita that have allowed
some countries to attain
high standards of living.
Long-Run Growth
• Economic growth refers to an increase in the
total output of an economy. Defined by some
economists as an increase of real GDP per
capita.
Long-Run Growth
• Modern economic growth is the period of
rapid and sustained increase in real output per
capita that began in the Western World with
the Industrial Revolution.
The Growth Process:
From Agriculture to Industry
• The production possibility
frontier (ppf) shows all the
combinations of output that can
be produced if all society’s scarce
resources are fully and efficiently
employed.
• Economic growth expands
society’s production
possibilities, shifting the
ppf up and to the right.
The Growth Process:
From Agriculture to Industry
• Before the Industrial Revolution in Great Britain, every
society in the world was agrarian.
• Beginning in England around 1750, technical change and
capital accumulation increased productivity in two
important industries: agriculture and textiles.
• More could be produced with fewer resources, leading to
new products, more output, and wider choice.
The Sources of Economic Growth
• An aggregate production function is the
mathematical representation of the
relationship between inputs and national
output, or gross domestic product.
The Sources of Economic Growth
• If you think of GDP as a function of both
labor and capital, you can see that an increase
in GDP can come about through:
1. An increase in the labor supply
2. An increase in physical or human capital
3. An increase in productivity (the amount of
product produced by each unit of capital or
labor)
An Increase in Labor Supply
• An increasing labor supply can generate more
output, but if the capital stock remains fixed,
the new labor will be less productive
(diminishing returns).
An Increase in Labor Supply
• Malthus and Ricardo predicted a gloomy
future as population outstripped the land’s
capacity to produce. However, they forgot the
impact of technological change and capital
accumulation.
An Increase in Labor Supply
• Growth in the labor force, without a
corresponding increase in the capital stock or
technological change, might lead to growth of
output but declining productivity and a lower
standard of living.
An Increase in Labor Supply
Economic Growth from an Increase in Labor – More Output but
Diminishing Returns and Lower Labor Productivity
PERIOD
QUANTITY
OF LABOR
L
(HOURS)
QUANTITY
OF CAPITAL
K
(UNITS)
TOTAL
OUTPUT
Y
(UNITS)
MEASURED
LABOR
PRODUCTIVITY
Y/L
1
100
100
300
3.0
2
110
100
320
2.9
3
120
100
339
2.8
4
130
100
357
2.7
An Increase in Labor Supply
• Labor productivity is the output per worker
hour; the amount of output produced by an
average worker in 1 hour.
An Increase in Labor Supply
Employment, Labor Force, and Population Growth, 1947 – 2002
CIVILIAN
NONINSTITUTIONAL
POPULATION
OVER 16 YEARS OLD
(MILLIONS)
CIVILIAN
LABOR
FORCE
Number
(Millions)
Percentage
of Population
EMPLOYMENT
(MILLIONS)
1947
101.8
59.4
58.3
57.0
1960
117.3
69.6
59.3
65.8
1970
137.1
82.8
60.4
78.7
1980
167.7
106.9
63.7
99.3
1990
189.2
125.8
66.5
118.8
2002
214.0
142.5
66.6
134.3
+ 110.2
+ 139.9
Percentage change, 1947 – 2002
Annual rate
Source: Economic Report of the President, 2003, Table B-35.
+ 1.4%
+1.6%
+ 135.6
+ 1.6%
An Increase in Labor Supply
• As long as the economy and the
capital stock are expanding rapidly
enough, new entrants into the labor
force do not displace other workers.
Increases in Physical Capital
• An increase in the stock of capital can
increase output, even if it is not
accompanied by an increase in the labor
force.
Increases in Physical Capital
Economic Growth from an Increase in Capital – More Output, Diminishing
Returns to Added Capital, Higher Measured Labor Productivity
PERIOD
QUANTITY
OF LABOR
L
(HOURS)
QUANTITY
OF CAPITAL
K
(UNITS)
TOTAL
OUTPUT
Y
(UNITS)
MEASURED
LABOR
PRODUCTIVITY
Y/L
1
100
100
300
3.0
2
100
110
310
3.1
3
100
120
319
3.2
4
100
130
327
3.3
Increases in Physical Capital
• The increase in capital stock is the difference
between gross investment and depreciation.
• Capital has been increasing faster than the
labor force since 1960. When capital expands
more rapidly than labor, the ratio of capital to
labor (K/L) increases, and this too is a source
of increasing productivity.
Increases in Physical Capital
Fixed Private Nonresidential Net Capital Stock, 1960 – 2001
(Billions of 1996 Dollars)
EQUIPMENT
STRUCTURES
1960
672.7
2,015.7
1970
1,154.8
2,744.2
1980
1,989.8
3,589.1
1990
2,722.5
4,703.5
2001
4,480.0
5,682.5
Percentage change, 1960 – 2001
+ 566.0
+ 181.9
Annual rate
Source: Survey of Current Business, September 2002, Table 15, p. 37.
+ 4.7%
+ 2.6%
Increases in Human Capital
Years of School Completed by People Over 25 Years Old, 1940 – 2000
1940
1950
1960
1970
1980
1990
2000
PERCENTAGE
WITH LESS
THAN 5
YEARS OF
SCHOOL
13.7
11.1
PERCENTAGE
WITH 4 YEARS
OF HIGH SCHOOL
OR MORE
24.5
34.3
8.3
5.5
3.6
NA
NA
NA = not available.
Source: Statistical Abstract of the United States, 1990, Table 215; and 2002, Table 208.
41.1
52.3
66.5
77.6
84.1
PERCENTAGE
WITH 4 YEARS
OF COLLEGE
OR MORE
4.6
6.2
7.7
10.7
16.2
21.3
25.6
Increases in Productivity
• Growth that cannot be explained by increases
in the quantity of inputs can be explained only
by an increase in the productivity of those
inputs.
Increases in Productivity
• The productivity of an input is the amount
produced per unit of an input.
• Factors that affect the productivity of an input
include technological change, other advances
in knowledge, and economies of scale.
Increases in Productivity
• Technological change affects productivity in
two stages:
– First there is an advance in knowledge, or an
invention.
– Then there is innovation, or the use of new
knowledge to produce a new product or to
produce an existing product more efficiently.
• There are capital-saving innovations, and laborsaving innovations.
Increases in Productivity
• External economies of scale are cost savings
that result from increases in the size of
industries.
• Production abatement requirements divert
capital and labor from the production of
measured output, therefore reducing
measured productivity.
Growth and Productivity
in the United States
Growth of Real GDP in the United States, 1871 – 2000
PERIOD
AVERAGE
GROWTH
RATE
PER YEAR
PERIOD
AVERAGE
GROWTH
RATE
PER YEAR
1871-1889
5.5
1950-1960
3.5
1889-1909
4.0
1960-1970
4.2
1909-1929
2.8
1970-1980
3.2
1929-1940
1.6
1980-1990
3.2
1940-1950
5.6
1990-2000
3.2
Sources: Historical Statistics of the United States: Colonial Times to 1970, Tables F47-70, F98-124; U.S. Department of Commerce, Bureau of Economic Analysis.
Growth and Productivity
in the United States
Growth of Real GDP in the United States and
Other Countries, 1981 – 1998
COUNTRY
AVERAGE
GROWTH RATE
PER YEAR
United States
Japan
3.2
2.3
Germany
2.2
France
2.1
Italy
2.0
United Kingdom
2.6
Canada
3.1
Africa
Asia (excluding Japan)
2.7
7.2
Source: Economic Report of the President, 2002, computed from Table B-112.
Sources of Growth in the
U.S. Economy, 1929 – 1982
Sources of Growth in the United States, 1929 – 1982
PERCENT OF GROWTH ATTRIBUTABLE TO EACH SOURCE
1929 – 1982
1929 – 1948
1948 – 1973
1973 – 1979
53
49
45
94
Labor
20
26
14
47
Capital
14
3
16
29
Education (human capital)
19
20
15
18
Increases in productivity
47
51
55
6
Advances in knowledge
31
30
39
8
Other factorsa
16
21
16
-2
Increases in inputs
Annual growth rate
in real national
income
aEconomies
2.8
2.4
of scale, weather, pollution abatement, worker safety and health, crime, labor disputes, and so forth.
Source: Edward Denison, Trends in American Economic Growth, 1929 – 1982 (Washington: Brookings Institution, 1985).
3.6
2.6
Labor Productivity: 1952 – 2003
Labor Productivity: 1952 – 2003
• Some of the explanations for the
slowdown in productivity growth in
the 1970s include:
– A low rate of saving
– Increased environmental and
government regulations
– Lack of spending in R&D
– High energy costs
Labor Productivity: 1952 – 2003
• Many of these factors turned around in the
1980s and 1990s, yet productivity growth
remained low.
Economic Growth and Public Policy
• Policy provisions to improve the quality of
education include the new Education
Individual Retirement Account that allows
savings to earn tax free returns as long as the
balance is used to pay for educational
expenses.
Economic Growth and Public Policy
• Policies to increase the saving rate include
individual retirement accounts that accumulate
earnings without paying income tax.
Economic Growth and Public Policy
• The amount of capital accumulation is
ultimately constrained by its rate of saving.
• The tax system and the social security system
in the United States are biased against saving.
Economic Growth and Public Policy
• Some public finance economists favor shifting
to a system of consumption taxation rather
than income taxation to reduce the tax
burden on saving.
Economic Growth and Public Policy
• Other public policies to stimulate economic
growth include:
– Policies to stimulate investment
– Policies to increase research and development
– Reduced regulations
– Industrial policy, or government involvement in
the allocation of capital across manufacturing
sectors.
The Pro-growth Argument
• Advocates of growth believe growth is
progress.
• New technologies and production methods
lead to new and better products. Capital
accumulation and new technology improve the
quality of life.
The Progrowth Argument
• Growth saves the most valuable
commodity—time.
• Growth also improves the quality
of things that yield satisfaction
directly.
The Progrowth Argument
• Growth produces jobs and higher
incomes. With higher incomes we
can better afford the sacrifices
needed to help the poor.
• When population growth is not
accompanied by growth in output,
unemployment and poverty
increase.
The Antigrowth Argument
• Growth has negative effects on the quality of
life.
• Growth encourages the creation of artificial
needs.
– Consumer sovereignty is the notion that people
are free to choose, and that things that people do
not want will not sell. “The consumer rules.”
The Anti-growth Argument
• Growth means the rapid depletion of a finite
quantity of resources.
• Growth requires an unfair income distribution
and propagates it.
Economic Growth
in Developing and
Transitional Economies
• Nature’s Inequalities
– Geography
– Institutions matter(Daron Acemoglu)
• Solow’s Surprise
– Capital matters, but only to a point.
– Growth comes from Technology (productivity)
Economic Growth in Developing
and Transitional Economies
• The universality of scarcity makes
economic analysis relevant to all nations.
• Economic problems and policy
instruments are different, but economic
thinking about these problems can be
transferred easily from country to
country.
Life in the Developing Nations:
Population and Poverty
• The United States and other industrialized
economies rarely face the difficulties faced by
developing nations:
–
–
–
–
–
–
–
chronic food shortages
explosive population growth
hyperinflations
low productivity and low GDP per capita
primitive shelter
illiteracy
infant mortality
Life in the Developing Nations:
Population and Poverty
Indicators of Economic Development
COUNTRY GROUP
POPULATION
(MILLIONS)
2002
GROSS
NATIONAL
INCOME
PER
CAPITA,
2002
(DOLLARS)
ANNUAL
HEALTH
EXPENDITURES
PER CAPITA
2001
(DOLLARS)
INFANT
MORTALITY,
2001
(DEATHS
BEFORE
AGE FIVE PER
1,000 BIRTHS)
PERCENTAGE OF
POPULATION IN
URBAN AREAS,
2001
Low-income
(e.g., China, Ethiopia,
Haiti, India)
2,495
430
21.5
121.7
32
Lower middle-income
(e.g., Guatemala, Poland,
Philippines, Thailand)
2,411
1,390
72.3
42.2
42
Upper middle-income
(e.g., Brazil, Malaysia,
Mexico)
331
5,040
308.9
28.6
76
Industrial market economies
(e.g., Japan, Germany,
New Zealand, United States)
965
26,310
2,736
7.1
79
Source: World Bank, WWW.WORLDBANK.ORG
Life in the Developing Nations:
Population and Poverty
• In the year 2002, the world population reached over
6.2 billion people. Most of the world’s more than
200 nations belong to the developing world.
• While the developed nations account for only about
one-quarter of the world’s population, they
consume about three-quarters of the world’s
output.
• Developing countries have three-fourths of the
world’s population, but only one-fourth of the
world’s income.
Economic Development:
Sources and Strategies
• Almost all developing nations have a scarcity of
physical capital relative to other resources,
especially labor.
– The vicious-circle-of-poverty hypothesis suggests
that poverty is self-perpetuating because poor nations
are unable to save and invest enough to accumulate
the capital stock that would help them grow.
• Poverty alone cannot explain capital shortages, and
poverty is not necessarily self-perpetuating.
The Sources of
Economic Development
• Capital flight is the tendency for
both human capital and financial
capital to leave developing countries
in search of higher rates of return
elsewhere.
– Price ceilings, import controls, and
expropriation are some of the policies
that discourage investment.
– The absence of productive capital
prevents income from rising.
The Sources of
Economic Development
• Just as financial capital seeks the
highest return, so does human
capital:
– Brain drain is the tendency for
talented people from developing
countries to become educated in a
developed country and remain there
after graduation.
• Development cannot proceed without
human resources capable of initiating and
managing economic activity.
The Sources
of Economic Development
• Social overhead capital is the basic
infrastructure projects such as roads, power
generation, and irrigation systems that add
to a nation’s productive capacity.
– In developing economies, government provision
of public goods is highly deficient, and many
socially useful projects cannot be successfully
undertaken by the private sector.
Strategies for Economic Development
• A developing economy with insufficient human
and physical capital faces some very basic
trade-offs. Three of these trade-offs are:
– Agriculture versus industry.
– Exports versus import substitution.
– Central planning versus the market.
Agriculture or Industry?
• Industry has some apparent attractions over agriculture:
– The building of factories is an important step toward increasing the
stock of capital.
– Developed economies have experienced a structural transition
from agriculture to industrialization and greater provision of
services.
• However, industrialization in many developed countries has
not brought the benefits that were expected.
Agriculture or Industry?
The Structure of Production in Selected Developed and Developing Economies, 2001
COUNTRY
Tanzania
PER CAPITA
GROSS
NATIONAL
INCOME (GNI)
$
PERCENTAGE OF GROSS DOMESTIC PRODUCT
AGRICULTURE
INDUSTRY
SERVICES
270
45
16
39
Bangladesh
360
23
25
52
China
840
15
57
34
Thailand
1,440
10
41
49
Colombia
1,890
13
30
57
Brazil
3,070
9
34
57
Korea
9,460
4
42
54
United States
34,280
2
25
73
Japan
35,610
1
32
67
Source: World Bank, WWW.WORLDBANK.ORG, 2003.
Exports or Import Substitution?
• Import substitution is an industrial
trade strategy that favors developing
local industries that can manufacture
goods to replace imports.
Exports or Import Substitution?
• The import-substitution strategy has failed almost
everywhere for the following reasons:
– Domestic industries, sheltered from international
competition, develop major economic inefficiencies.
– Import substitution encouraged the production of capitalintensive production methods, which limited the creation
of jobs.
– The cost of the resulting output was far greater than the
price of that output in world markets.
Exports or Import Substitution?
• Export promotion is a trade policy
designed to encourage exports.
– Several countries including Japan, the “four little
dragons,” Brazil, Colombia, and Turkey, have had
some success with outward-looking trade
policy.
– Government policies to promote exports
include subsidies to export industries and the
maintenance of a favorable exchange rate
environment.
Central Planning or the Market?
• Today, planning takes many forms in developing
nations.
• The economic appeal of planning lies in its
ability to channel savings into productive
investment and to coordinate economic
activities that otherwise might not exist.
• The reality of central planning is that it is
technically difficult, highly politicized, and
difficult to administer.
Central Planning or the Market?
• Market-oriented reforms
recommended by international
agencies include:
– the elimination of price controls,
– privatization of state-run enterprises,
and
– reductions in import restraints.
Central Planning or the Market?
• The International Monetary Fund is
an international agency whose primary
goals are to stabilize international
exchange rates and to lend money to
countries that have problems financing
their international transactions.
Central Planning or the Market?
• The World Bank is an
international agency that lends
money to individual countries for
projects that promote economic
development.
Growth Versus Development:
The Policy Cycle
• Structural adjustment is a series of
programs in developing nations designed to:
1. reduce the size of their public sectors through
privatization and/or expenditure reductions,
2. decrease their budget deficits,
3. control inflation, and
4. encourage private saving and investment through
tax reform.
Issues in Economic Development
• The growth of the population in developing nations is about
1.7 percent per year, compared to only 0.5 percent per
year in industrial market economies.
• Thomas Malthus, England’s first professor of political
economy, believed populations grow geometrically. He
believed that due to the diminished marginal productivity of
land, food supplies grow much more slowly.
The Growth of World Population,
Projected to 2020 A.D.
Population Growth
• Population growth is determined by the relationship
between births and deaths.
• The fertility rate, or birth rate, equals:
number of births per year
 100
population
• The mortality rate, or death rate, equals:
number of deaths per year
 100
population
Population Growth
• The natural rate of population increase is the difference
between the birth rate and the death rate. It does not take
migration into account.
• Any nation that wants to slow its rate of population growth
will probably find it necessary to have in place economic
incentives for fewer children as well as family planning
programs.
Developing-Country Debt Burdens
• Debt rescheduling is an agreement between banks and borrowers
through which a new schedule of repayments of the debt is negotiated;
often some of the debt is written off and the repayment period is
extended.
• A stabilization program is an agreement between a borrower
country and the International Monetary Fund in which the country
agrees to revamp its economic policies to provide incentives for higher
export earnings and lower imports.
Political Systems and Economic Systems:
Socialism, Capitalism, and Communism
• Democracy and dictatorship refer to political
systems.
– A democracy is a system of government in which
ultimate power rests with the people, who make
governmental decisions either directly through
voting or indirectly through representatives.
– A dictatorship is a political system in which
ultimate power is concentrated in either a small
elite group or a single person.
Political Systems and Economic Systems:
Socialism, Capitalism, and Communism
• Two major economic systems have existed:
socialism and capitalism.
• A socialist economy is one in which most capital—
factories, equipment, buildings, railroads, and so
forth—is owned by the government rather than by
private citizens. Social ownership is another term that
is used to describe a socialist economy.
Political Systems and Economic Systems:
Socialism, Capitalism, and Communism
• Two major economic systems have
existed: socialism and capitalism.
• A capitalist economy is one in which
most capital is privately owned.
Political Systems and Economic Systems:
Socialism, Capitalism, and Communism
• Communism is an economic system in
which the people control the means of
production (capital and land) directly,
without the intervention of a
government or state.
Political Systems and Economic Systems:
Socialism, Capitalism, and Communism
• Comparing economies today, the real distinction is between
centrally planned socialism and capitalism, not between
capitalism and communism.
• No pure socialist economies and no pure capitalist
economies exist.
• The United States supports many government enterprises,
including the postal system, although public ownership is
the exception.
Political Systems and Economic Systems:
Socialism, Capitalism, and Communism
• Whether particular kinds of political systems tend to
be associated with particular kinds of economic
systems is debatable.
• There are capitalist economies with democratic
political institutions; socialist economies that maintain
strong democratic traditions; and democratic countries
with strong socialist institutions.
• At the heart of both the market system and democracy
is individual freedom.
Central Planning Versus the Market
• Just as there are no pure capitalist and no pure
socialist economies, there are no pure market
economies and no pure planned economies.
• A market-socialist economy is an economy
that combines government ownership with
market allocation.
• Easterly
• Policy doesn’t matter for growth, except don’t
have bad policies.
– Stay away from extreme inflation
– etc
Review Terms and Concepts
aggregate production function
consumer sovereignty
economic growth
industrial policy
innovation
invention
labor productivity
modern economic growth
productivity of an input
Review Terms and Concepts
brain drain
capital flight
capitalist economy
communism
debt rescheduling
export promotion
fertility rate
import substitution
International Monetary Fund, IMF
market-socialist economy
mortality rate
natural rate of population increase
shock therapy
social overhead capital
socialist economy
stabilization program
structural adjustment
tragedy of commons
vicious-circle-of-poverty hypothesis
World Bank
The Transition to a Market Economy
•
Economists generally agree on six basic requirements for
a successful transition from socialism to a market-based
system:
1. macroeconomic stabilization;
2. deregulation of prices and liberalization
of trade;
3. privatization of state-owned
enterprises and development of new
private industry;
The Transition to a Market Economy
•
Economists generally agree on six basic
requirements for a successful transition from
socialism to a market-based system:
4. the establishment of market-supporting
institutions, such as property and
contract laws, accounting systems,
and so forth;
5. a social safety net to deal with
unemployment and poverty; and
6. external assistance.
The Transition to a Market Economy
• The tragedy of commons is the idea
that collective ownership may not
provide the proper private incentives
for efficiency because individuals do not
bear the full costs of their own
decisions but do enjoy the full benefits.
The Transition to a Market Economy
•
•
Shock therapy is the approach to transition from
socialism to market capitalism that advocates rapid
deregulation of prices, liberalization of trade, and
privatization.
Advocates of a gradualist approach believe that the best
course of action is to build up market institutions first,
gradually decontrol prices, and privatize only the most
efficient government enterprises.