Transcript Growth in Mature Economies

Growth in Mature
Economies
Chap.
France: High but falling capital
productivity
Capital Productivity
0.7
0.6
0.5
0.4
0.3
0.2
0.1
19
60
19
62
19
64
19
66
19
68
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70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
0
France
Canada
UK
USA
High but falling labor productivity
growth rates
Labor Productivity Growth Rates
6.00%
5.00%
4.00%
France
3.00%
USA
2.00%
1.00%
0.00%
1950s
1960s
1970s
1980s
1990s
High Labor Productivity
Labor Productivity per Hour
60.00
50.00
40.00
30.00
20.00
10.00
19
59
19
62
19
65
19
68
19
71
19
74
19
77
19
80
19
83
19
86
19
89
19
92
19
95
19
98
20
01
20
04
0.00
France
USA
Low Capital Productivity
Capital Productivity
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
France
USA
World Technology Frontier?
There are problems with modeling Q as some
common level of technology available in the world
which drives the long-run growth path.
As a matter of theory, we haven’t really explained
long-term growth. Long-term growth occurs
through the costless (and exogenous magic of)
technology. This might be important since:

1.
•
•
Some countries on the balanced growth path seem to
have grown at different rates (for example, US labor
productivity growth has been faster over the 20th
century than British.
There have been long periods of relatively slow
technology growth in developed countries, such as the
productivity slowdown of 1975-1995.
Source: Dale Jorgenson, Harvard
Economic Growth in the Information Age
Sources of U.S. Labor Productivity Growth
3.0
2.5
Annual Contribution (%)
2.0
1.5
1.0
0.5
0.0
1977-1989
1989-1995
1995-2000
-0.5
Labor Quality
Non-IT Capital Deepening
IT Capital Deepening
TFP
Endogenous Growth



Capital based growth cannot explain long-term
growth because capital has diminishing returns.
When capital grows too large relative to labor,
the returns to extra capital do not create enough
extra investment capacity to support the
replacement investment costs?
What if capital does not have diminishing
returns? Yt = AKt → yt = Akt → MPK = A
AK Model


Investment is a constant share of output.
Yt
I t  sYt  sAK t  s
 sA
Kt
Growth in the capital labor ratio is constant
kt 1  kt
Yt
k
 gt  s   (d  n)  sA  (d  n)
kt
Kt

Growth in productivity is equal to growth in
capital-labor ratio: gy = gk
Endogenous Growth
The growth rate of output is always
positive even with constant technology.
 Long-term growth is explained by
investment rate.
 Problem: Model exaggerates role of
capital in production. No role for labor.

Learning by doing.


Productivity is a function of the capital labor ratio
a
1 a
y

k
Q
and technology. t
t
t
Technological knowledge is generated by the
use of capital which spills over to the economy.
1
1 a
Qt  A

kt
Taking these spillovers into consideration, there
is no diminishing return to capital labor ratio.
1
1 a
yt  kta [ A
kt ]1a  Akt
Technology Accumulation Models
Assume that the economy has an R& D
sector, u is the fraction of workers in that
sector.
 Output is a function of workers not
devoted in R&D

Yt  K ta (Qt (1  u ) Lt )1 a  yt  kta (Qt (1  u ))1 a
 gtY  agtk  (1  a) gtQ
Technology growth

The increase in technology is a function of:
1.
2.
3.
Share of time in R & D sector, u.
Current state of knowledge, Q.
Efficiency of R& D industry, A
Qt 1  Qt
Qt 1  Qt  A  u  Qt  g 
 Au
Qt
Knowledge accumulation does not have
diminishing returns because it is possible to build
on new ideas.
Q
t

Differences in Q and the growth
rate of Q
Growth rate of technology is constant and
determined by economic decision (i.e. how
much time is spent on R & D.) as well as
how productive the R & D sector is.
 Trade-off: More effort spent in R & D
sector reduces income levels today but
produces more growth in the future.

R& D Shares World wide
R&D % of GDP
US
A
U
EM
ng
ap
or
e
Si
Ko
re
a
Ko
ng
Ho
ng
La
tin
Am
er
ica
3
2.5
2
1.5
1
0.5
0
Rich and Large Countries More
Likely to Spend on R&D
R&D per Capita, 1997 (US$, PPP)
900
800
700
600
500
400
300
200
100
0
EU
North
Total
US
UK
Turkey
Sweden
Spain
Portugal
Poland
Norway
New
Netherlands
Mexico
Korea
Japan
Italy
Ireland
Iceland
Hungary
Greece
Germany
France
Finland
Denmark
Czech Rep.
Canada
Belgium
Austria
Technology Differences


Do technology differences make it more
difficult for poor countries to catch up with rich
countries.
Maybe, maybe not. Poor countries can can
adopt rich country technologies
1.
2.
Foreign Direct Investment
Copy rich country technology directly. Can avoid the
trial and error process of rich countries.
FDI to Emerging Markets
200
$bn
150
100
50
0
1
0
9
9
1
1
9
9
1
2
9
9
1
3
9
9
1
4
9
9
1
5
9
9
1
6
9
9
1
7
9
9
1
8
9
9
1
9
9
9
World Technology Frontier? Pt. 2
2.
Differences in the level of productivity at
the country level cannot be explained
unless Q varies across countries.
Education Quality
B. Technology Adoption
C. Resource Allocation
A.
Distribution of GDP per Worker
GGDC
70000
60000
50000
40000
30000
20000
10000
0
1
6
11 16 21 26 31 36 41 46 51 56 61 66 71 76 81 86 91 96 101
Differences in Worker Quality


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There are variations in the quality of the
workforce across countries both in terms of
experience and education.
Strong correlation between education and
income at national level. Causality has been
caused into question.
Microeconomic evidence suggests that each
additional level of schooling (at all levels)
increases productivity levels by 8-10%.
Richer Countries tend to be more
Barro & Lee Dataset, Harvard & Korea
educated. Source:
University
Average Education of Workforce vs. GDP per Capita
120000
100000
80000
60000
40000
20000
0
0
2
4
6
8
10
12
14
Distribution of Education Levels,
1999
Years of Education
14
12
10
8
6
4
2
0
Africa
United States
Latin America
East Asia
Emerging East
Asia
Europe
M
na
a)
al
ay
sia
Ph
ilip
pi
ne
s
Si
ng
ap
or
e
Sr
iL
an
ka
Ta
iw
an
Th
ai
la
nd
M
Ko
re
a
Ja
pa
n
In
do
ne
sia
In
di
a
Ko
ng
Ch
i
ar
(B
ur
m
Ho
ng
ya
nm
Years of Education
Years of Education: Pop 25+
12
10
8
6
4
2
0
Comparison of Japan and USA
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US has TFP level 50% higher than Japanese
level.
Japan has an educated workforce, at most two
years less per person than the USA.
Japan has amongst the highest R & D budgets
in the world.
Japan has many creative, cutting edge high-tech
firms.
Why such a big gap in
productivity?
Allocative Efficiency



A society has a certain amount of resources
(factors of production). Technology is the skill
with which society combines these resources to
produce goods.
Scientific technology is one way to increase this
skill.
An another important source of productivity is
the skill with which society allocates resources to
the most productive producers.
Differences in TFP: USA & Japan
Captial Productivity
Labor Productivity
0.7
40.00
0.6
35.00
0.5
30.00
2002 US$
0.4
0.3
25.00
20.00
15.00
0.2
10.00
0.1
5.00
0.00
0
Japan
Japan
USA
USA
TFP
USA
Japan
0
1
2
3
4
5
6
7
8
9
10
Dual Economy
(W.Lewis, McKinsey Global Institute, “Power of Productivity”)


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
Japan has followed a particular industrial
strategy during its growth process.
Financial system directs capital toward banks.
Banks direct capital toward manufacturing
industries.
Manufacturing firms compete fiercely in export
markets with each other and foreign firms.
Domestic service, retail and construction firms
were protected from competition by a variety of
legal restrictions.
Dual Economy cont.
In Japan, durable goods manufacturing
(cars, electical equipment) have higher
TFP than USA.
 Many other sectors have much lower
productivity.
 Restrictions on land use, competition, and
obtaining financing for domestic-oriented
sector of the population.

Policies for Capital Accumulation
Capital accumulation is through
investment.
 Investment can be financed through
savings and borrowing on international
financial markets.
 Discuss these issues more thoroughly
later.

In 1960 no obvious signs that this region would perform so well
East Asian economies tended to have extremely high
investment rates
Understanding the Wealth of Nations by Miles and Scott
Singapore financed huge capital accumulation
by compulsory pension scheme
50
40
30
Employee
20
Employers
1990
1988
1986
1984
0
1982
10
Central Provident Fund Contributions
% of Wages
Saving and Productivity
Saving to finance investment may be a
double edged sword.
 Saving will increase capital per worker and
increase productivity

Policies for Innovation and Growth

Firms make choices to invest for the future
either in physical capital or in research and
development.
 Perhaps
the things that generate high
investment in capital also determine R & D.

Investment in R & D may have unique
properties.
 High
fixed costs.
 Large spillovers
High Fixed Costs

It is in the nature of many technology advances
that the costs that go into producing blueprint
are much larger than cost of producing actual
goods.
 Each
copy of software is virtually costless to produce
once the sunk cost has been put in.
 Drugs are cheap to produce once they have been
tested.

Such goods could not be developed in a
competitive market where price equals marginal
cost.
Patents and Monopolies
Government typically offer developers of
new inventions some period of time when
they are legal monopolists.
 Trade-off: Monopoly power generates
economic inefficiencies. Patent protection
should not be infinite.

Externalities

Not all of the benefits of research and
development go to innovators.
 Example: Apple
developed Graphical User Interface
for the MAC. Microsoft does not pay for adopting GUI
for Windows.

Government may want to subsidize basic
research that generates research.
 Science
Parks
 University Research.
Policies for education
Each year of education has some what
equivalent marginal effects on productivity.
 Education at higher levels is more
expensive in terms of direct and
opportunity costs.
 More cost effective to spread education
levels out.

Ratio of Girl Students to Boy
Students, World Bank World Development Indicators
120
100
80
60
40
20
1995
0
1975
East Asia
Latin America
Middle East
% of Adults whose highest level of
education is: Barro & Lee Data
50.0
45.0
40.0
35.0
30.0
% 25.0
20.0
15.0
10.0
5.0
Secondary
0.0
Tertiary
Emerging Asia
Europe
Latin America
1995
Policies for Allocative Efficiency
(per McKinsey)
Eliminate restrictions on entry into
markets.
 Free trade allows foreign competition.
 “Smart” rules for standardizing product
types to promote information and
competition.

 Free
competition may increase efficiency but
is there a cost in equity?
Summary
Analysis suggests that most economies
have reached their mature levels given
their capital fundamentals and their level
of Q.
 Increasing growth key to increasing future
living standards, but all policies to increase
growth face trade-offs.

Growth trade-offs
More investment, less consumption
 More R & D, less production of other
goods.
 More patents, more market power.
 More education of mature adults is more
expensive.
 More allocative efficiency, more inequality.
