Transcript Introduction -- Growth, Convergence and Income Distribution

NS4053
Winter Term 2014
Growth, Convergence
and Income Distribution
Introduction I
• Kemal Dervis and Homi Kharas, Growth, Convergence
and Income Distribution: An Introduction (Brookings,
November 2014
• Introduces several of the main themes in the course –
growth, convergence and income distribution
• I. With differential recoveries from the 2008-09 global
economic crisis a number of new debates on growth
• Some economies argue an era of secular stagnation lies ahead
unless vigorous policy actions are taken
• Other economists argue that ongoing and pending technological
change is likely to lead to an acceleration in growth
• Stagnation thesis usually applied to the advanced countries, but
sometimes to the global economy as a whole – can emerging
economies decouple and sustain growth on their own?
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Introduction II
• II. Second debate is on the convergence between average
incomes in the lower- and middle-income emerging
economies and that in the advanced economies
• Until post-WWII period no doubt considerable divergence
• In 1776 per capita income in Netherlands about four times that in
poorer countries
• Two centuries later the Netherlands was 40 times richer than
China, 24 times richer than India and 10 times richer than
Thailand
• In the aggregate, this divergence slowed markedly in the 1950s
with average incomes in all EMDEVs (emerging and developing
economies) picked up pace
• Then starting in the late 1980s a processes of convergence
seems to have taken hold – average income in EMDEVs
growing much faster over 1989-2014.
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Introduction III
• Today, the Netherlands is only five times richer than
China and Thailand and 11 times richer than India
• Major question –
• Is this convergence going to last? or
• Was rapid convergence a temporary phenomenon?
• III. The third debate centers on income distribution –
intense, contemporary debate over capitalism
• Is growth relevant if increases in income largely accrue to the top
10 or even 1% of the population?
• Seems to be happening in the U.S. and the U.K
• Is there an inherent long-run tendency towards greater inequality
in a market economy?
• Is there a possible link between possible secular stagnation and
income distribution?
• How does inequality in the world relate to inequality in particular 4
countries?
Overview: Three Interlinked Debates I
•
Secular stagnation debate confusing:
• Does it refer to slower potential output growth? or
•
• Slower growth of actual output?
Potential growth may be slowing because of trends in:
• technological change,
• educational advancement, aging, and
•
•
• debt-induced underinvestment in public goods and infrastructure
Slowdown in observed output growth can also be due to gaps
between actual and potential output.
Hansen/Summers view that this form of stagnation may threaten
the U.S. economy or advanced economies as a whole. Reason:
• Desired aggregate savings has increased compared to desired
aggregate investment
• Real interest rate needed to restore macroeconomic equilibrium
may be negative
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Overview: Three Interlinked Debates II
• Less clear is whether this form of secular stagnation
applies to the global economy
• Has global investment demand and the global supply of saving
shifted so that there is a global savings glut?
• Requiring a global real interest rate that is negative?
• Is it desirable therefore to link the secular stagnation
debate to the convergence debate?
• If secular stagnation affects all countries, then convergence may
disappear.
• If it is more of a phenomenon affecting rich countries, then
convergence could continue.
• In this case, it may be that growth in the emerging world might
actually provide the demand impulse needed for the advanced
economies
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Overview: Three Interlinked Debates III
• The income distribution debate is itself linked to both the
growth and convergence debate.
• If take population of the world as a whole and focus on an
inequality indicator for that population, increasing inequality
within countries will lead to increases in the global inequality
index.
• But convergence – catch up by the developing countries – will
lead to a decrease in world inequality index.
• Has an important bearing on global demand
• While we see stress on the struggling middle class in advanced
countries resulting from wage stagnation and growing withincountries inequalities –
• Also see emergence of a global middle class in the rest of the
world – especially Asia
• Clearly one has to clearly define what one means by
inequality.
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Overview: Three Interlinked Debates IV
• Whether inequality is good or bad for growth has been
debated over the years
• Classical economists felt savings were needed to finance
investment and therefore inequality good because higher
income groups do most of the savings
• These theories focus on changes in potential output as the real
determinant on growth.
• Recent research suggests the opposite view
• IMF research suggests there have been more episodes of
sustained rapid growth in societies that are relatively more equal
• More stable socially, politically and financially – factors that
seem to outweigh the classical link to savings.
• Keynesian link diametrically opposed to classical link – problem
of excess savings and increased income inequality makes the
problem worse – here focus is on actual rather than potential
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output
The Tree Debates
• The rest of the paper contains some technical terms that
we will have to discuss before delving into the arguments
– we should return to these debates after developing the
neoclassical model with its emphasis on the sources of
growth.
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