Transcript Principles of Economic Growth

Determinants of long-term
economic growth
Economic systems
Economic policies
Economic institutions
Explaining why
growth rates differ
Questions
 If
the economic systems adopted by two countries are not
completely different, is it nonetheless possible to trace the
differences in their economic performance to their different
economic policies?
 Or
does technology dictate growth differentials in such cases?
 Or
perhaps geography?
 Or
history?
 Or
all of the above?
Examination of economic growth in theory
and practice
performance of four pairs or clusters of
countries since 1970
 Growth
Low-
and middle-income countries
But
most of the points to emerge apply to
high-income countries as well
 Those economies have developed quite
differently over the past 30-40 years despite
roughly comparable initial conditions
The four clusters
Thailand and
Burma
Botswana, Nigeria,
and Ghana
Uruguay, Argentina, and
Madagascar and
Spain
Mauritius
Burma and Thailand
 Burma
 1962: General Ne Win came to
power
 ‘victorious march towards
socialism’
 self-reliance

but active client of IMF
 1970s:
respectable growth
 rising investment

centrally planned  poor quality
 stagnant
export
 1980s: something had gone
seriously wrong
 Thailand
 rising export ratio
 strong saving and investment
performance
 banking system strongly
influenced by politicians

 quality of investment
questionable
 strong
education record
 1960-1994: GNP per capita
increased by more than 5% per
year on average compared with
1% in Burma
Burma and Thailand:
GNP per capita, 1960-1994
(constant 1987 US$, 1960=100)
600
500
Burma
400
Thailand
300
200
100
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
1960
0
Burma and Thailand







Burma
spurts of rapid growth
depressed investments of low quality
plummeting exports
deteriorating education
evaporation of expertise
political control of economic affairs
In 1990, Burma’s military junta
refused to abide by the general
election victory of the opposition,
led by Aung San Suu Kyi
In 1996, the universities
were shut down




Thailand
The stock-market crash in 1997-8
not likely to dim long-run prospects
Thailand’s growth prospects continue to look
bright
Thailand’s economy seems basically sound
Rapid growth over the long haul
does not always have to be smooth
Annual
average
growth of
GNP per
capita
19701995 (in
%)
GNP per
capita
1995
(USD,
adjusted
for
purchasing
power)
Investment
as
percentage
of GNP
1995
Exports of
goods and
services as
percentage
of GNP
1995
Enrollment
in
secondary
education
as
percentage
of relevant
age group
1993
Annual
average
inflation
19701995
(in %)
Burma
1.2
…
12
2
…
13
Thailand
5.2
7,540
43
42
37
6
Botswana
7.3
5,580
25
49
52
11
Nige ria
-0.9
1,220
9
24
29
19
Ghana
-1.2
1,990
19
25
36
36
Uruguay
0.2
6,630
14
19
81
61
Argentina
-0.4
8,310
18
9
72
180
Spa in
2.0
14, 520
21
24
87
11
Mada gascar
-2.4
640
11
23
14
16
Mauritius
3.1
13, 210
25
58
59
10
Botswana, Nigeria,
and Ghana

Botswana
world
record in growth
GDP per capita has grown by
7.5% per year since 1966
dependent on natural
resources - diamonds
 80% of exports
 40% of GDP
democratic
well-managed resources
strong education
stable economic development
11% average inflation rate
Nigeria

oil
price increase in world
markets  income per capita
rose fourfold  poor
investment  unproductive
capital  collapse of output
low investment since 1980s
oil exports crowded out nonoil exports (90% of total)
natural resources: a mixed
blessing?
Botswana, Nigeria,
and Ghana
 Ghana
 Nigeria
 model client of IMF and World
oil
Bank since 1980s

80% of government revenue
 increasing foreign trade

20% of GDP
 increasing investment
ruled by military on and off
 1982 - a turning point
19% inflation on average
 exports of goods and services
rising
 net foreign direct investment
Abundant natural resource
flowing into Ghana 3.6% of GDP
in 1995 compared with 2.4% in
wealth can turn out to be, at
Nigeria
best, a mixed blessing
 36% inflation on average
Botswana, Ghana, and Nigeria: GNP
per capita, 1970-1995 (current US$,
Atlas method)
Botswana
Ghana
Nigeria
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
3500
3000
2500
2000
1500
1000
500
0
Uruguay, Argentina, and
Spain
 Uruguay
 abundant resources
 dedication to social security and
social services

South American welfare state
 active
role of government
 protectionism
 declining GNP per capita
 today: quite closed economy
 rampant inflation
 Argentina
 gradual relative decline

political development lagged
behind economic progress
 landowners

blocking decentralization,
democratization, and
diversification away from
agriculture
 hardening

conflict
between landowners and
emerging urban classes
 gradual
Economic growth
is relative
ruled the country
deterioration of living
standards
Uruguay, Argentina, and
Spain

Argentina
 Perón


high inflation
rapid escalation of debt
 flawed




president in 1946
economic policies
import substitution
overvaluation of the currency
insufficient competition
reduced foreign trade and dragged down
living standards
 civil
disorder, inflation, corruption, and
brain-drain  slow and uneven growth


strikingly closed economy
history of high inflation

Spain
 joined
the European Union in
1986
 opened up its economy
 expanded exports
History matters for
economic growth, as
does politics ...
... and so does inflation
Argentina, Uruguay, and Spain:
GNP per capita, 1970-1995
(current US$, Atlas method)
Argentina
Uruguay
Spain
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
16,000
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
Madagascar and Mauritius

Mauritius
 mixed
market economy
 since 1980: income per head
has increased fast
 diversified economy
 more open to foreign trade
and investment
 invests more
 farther along on its way from
agriculture to industry, trade,
and services
 sends more girls go to school

Madagascar
 centrally
planned economy
 since 1980: income per head
has fallen
 growth differential between the
two countries has been even
larger since mid-1980s
 more inflation
 more dependent on exports of
raw materials
 more indebted abroad
Madagascar and Mauritius: GNP per
capita, 1970-1995
(current US$, Atlas method)
Madagascar
Mauritius
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
4000
3500
3000
2500
2000
1500
1000
500
0
Conclusion

Country comparisons are not to be taken literally

Intended to highlight some aspects of economic growth

What do the examples have in common?

All point to economic factors rather than exogenous technology
 economic system
 institutions
 orientation of economic policy
Key distinction:
Endogenous growth
vs. exogenous growth
This is the fundamental message of
the theory of endogenous growth