Transcript The presentation of Prof. Edward Prescott

Economic Integration:
Poland’s Path to Riches
Edward C. Prescott
19 November 2010
20th Anniversary of Poland Chamber of Insurance
Central Europe Catching Up
• 8 European EU that joined in 2004
Percent of U.S.
(EU-15 is 70%)
Poland Doing Well
Poland’s Growth in GDP per Person
2008 Q1
6.6%
2008 Q2
6.5%
2008 Q3
5.5%
2008 Q4
3.3%
2009 Q1
1.1%
2009 Q2
1.3%
Key Development Facts
• Prior to 1800, constant living standard that varied little
across countries and over time.
• After 1800, living standards began to increase in some
countries.
• There was a transition from stagnant income to modern
economic growth, which is called the Industrial
Revolution.
• With modern economic growth, living standards double
every 35-40 years, probably faster.
Explosive Growth Post-1800
Leader's Per Capita GDP Relative to the Pre-1800 level
40
30
20
10
1
0
2000 bc
1000 bc
0
1000
2000
U.S. Per Capita GDP
32,000
1990 U.S. $
16,000
Trend Growth
about 2% per year
8,000
4,000
2,000
1880
1900
Source: Maddison
1920
1940
1960
1980
2000
Fact: U.S. Overtakes U.K.
GDP per Capita: US relative to UK
1868
79
1888
85
1908
103
1928
123
Source: Maddison
Why Did This Happen?
Answer:
– U.S. became economically integrated because of the
dramatic fall in transportation costs – factor of 10
– And because member states had a high degree of
economic sovereignty
Poland should preserve its economic sovereignty!
Fact : Original E.U. countries
• Productivity half of U.S. level for the 40 years prior to
World War II
• Went from 50% to 100% of U.S. productivity in the 35
years following the signing of the Treaty of Rome in 1957
• Will discuss why the E.U. arrangement fostered this
spectacular catch-up
EU-6 Caught Up
Late E.U. Joiners Lost Ground
Prior to Joining
1995 Joiners (Austria, Finland &
Sweden) and Switzerland Lose Ground
Year
Others Relative
to Original EU
1900
103
1913
99
1938
103
1957
106
1973
96
1983
85
1993
81
Why Is EU-15 GDP per Capita Only 70%
of U.S. Level?
Answer: The Europeans have a bad tax system
• The marginal effective tax rate is 60% in Western Europe
versus 40% in the U.S.
• If Western Europe reformed its tax systems, it would
quickly catch up to U.S.
– Don’t need high tax rates for a welfare state
• Mandatory savings and insurance suffice
Predicted vs. Actual Weekly Hours
predicted hours
30.0
Japan
Australia
28.0
New Zeland
26.0
Ireland
Portugal
Spain
24.0
U.S.
U.K.
Poland
Canada
22.0
20.0
Iceland
Italy
France Germany Denmark
18.0
16.0
16.0
18.0
20.0
22.0
24.0
actual hours
26.0
28.0
30.0
Poland Workers Work Long Hours
Full-Time Workers’ Hours per Year
OECD Average
Germany
Netherlands
United States
1766
1432
1389
1792
Poland
1969
Source: OECD
Poles Retire Early
• This is the reason that hours per person aged 15-64 is
not high
• When politically feasible Poland should do more to
increase retirement average age
Why Did the Original E.U.
Countries Catch Up?
• Answer:
Original E.U. countries became economically integrated
in 1957 with the signing of the Treaty of Rome.
Fact : Latin America Is Not Catching Up
Percent of Leader
Why the Failure to Catch-Up?
• Answer: Latin America is not economically integrated.
There Is Hope for Latin America
• Maybe things are changing. Brazil, Mexico, Colombia,
and Peru are becoming more integrated with the
advanced industrial countries and recently have been
experiencing reasonably rapid growth.
• Chile did so early and soon will be one of the rich
industrial states.
The Asian Facts
•
Some have caught up – Japan, S. Korea, Taiwan,
Hong Kong, and Singapore
•
Others have narrowed the gap – Malaysia, Thailand,
China, and recently India and others
•
These countries trade in industrial products
The Asian Facts
•
Some have caught up – Japan, S. Korea, Taiwan,
Hong Kong, and Singapore
•
Others have narrowed the gap – Malaysia, Thailand,
China, and recently India and others
•
These countries trade in industrial products
•
Other still poor Asian countries growing rapidly
– They have 40% of the world’s population
Japan, S. Korea, Taiwan, Hong Kong, and
Singapore Caught Up
GDP per Capita Percent of U.S. Level
1961
31
1981
58
2001
67
Source: Maddison
Population: 200 million
• Empirically – catch-up occurs when an economy
becomes economically integrated with the industrial
leaders
• By integrated I mean
– Produce and trade industrial goods and services
– Protect property rights of foreign multinationals
– Have multinational corporations
The Degree of Integration Matters
• More integrated, higher relative income
• Less integrated, lower relative income
• An example
Spain
GDP Per Capita Relative to U.S.
Moderately Integrated
Before 1930
42%
1940-54
22%
Moderately Integrated
1965
36%
Becomes EU Member
1981
49.4%
Highly Integrated
2007
61.4%
Not Integrated
Set of Industrial Leaders
• Number increased from 14 in 1950 to 32 in 2009
• Early members, Western Europe and its off-shoots
• A number of countries are near joining in Central and
Eastern Europe and also Chile
• A set of 5 in Eastern Asia with 200 million people have
joined
Will China Join?
• If its per capita income grows at 7% annually for 16
years, it will join the set in 2025
• Over the last decade this growth rate has been nearer to
9%
• China will join if it becomes more economically
integrated with the other advanced industrial countries
• And there is some degree of economic autonomy of its
provinces
Why Economic Integration leads to
Catch-Up
Three reasons
1. Have access to foreign know-how – technology capital
2. Barriers to adopting better technologies are lower
3. More rapid diffusion of knowledge useful in production
Technology Capital Reason
• Multinationals use their technological know-how in their
foreign subsidiaries
• This increases productivity and output in these countries
– Wal-Mart has a large stock of knowledge that it uses
in all its operations, domestic and foreign
Multinationals Key
• Threat of entry by foreign multinational is often sufficient
for increased efficiency
• U.S. Bureau of Economic Analysis (BEA) reports 9.5%
return on U.S. foreign direct investment (FDI)
• And only 3.2% on FDI in the U.S.
• Reason is that U.S. has a lot of technology capital, and
the implicit rents on this capital are included in the
accounting returns
Technology Capital Stock Big
• Technology capital investments
– R&D
– Developing brand names – advertising and marketing
• U.S. multinationals’ wholly owned foreign subsidiaries
have big accounting profits
– over 35% of their total accounting profits
– but only 10% of their reported investment
• Why? Accounting profits include technology capital rents
The Lower Barriers Reason
• Absent barriers to efficient production, a country will be
more productive and richer
• Technological know-how is the Lever to Riches but this
lever does not make a country rich unless it is used
• Often better work practices are not used because of
barriers to their use
• Groups with a vested interest in maintaining current
practices will use the political process to block change
• With economic integration, not a problem
• If productivity-enhancing change is instituted, with
foreign markets, output increases by more than
productivity and employment increases
• Further, if foreign competition is blocked, foreign
countries will retaliate and domestic exporters will be
hurt
– These exporters have a vested interest in their
country remaining open
Flow of Knowledge Reason
• Samsung Electronics has operations in Helsinki and in
Austin, Texas -- why?
• In order to get knowledge from Nokia and Dell.
• There is a flow of knowledge between people in
proximity. It is an important positive externality.
Integration Lowers Barriers to Efficient
Production
• Some rent-seeking activity is productive – e.g.,
becoming more productive by acquiring an MBA
• But some is unproductive – e.g., lobbying and paying
bribes for regulations that result in monopoly rents
• Some getting the rents are the politicians
Competition Reason
• Competition leads to greater productivity
• An example is what happened in Northern Minnesota on
the Iron Range
Minnesota Iron Ore Example
•
In 1982 Reagan permitted competition from new
Brazilian mines
•
Minnesota productivity doubled with no new investment
•
–
Reason: Work rules changed
–
Cut employment of skilled machinists in half
These skilled machinists went to the Twin Cities and
quickly found higher-paying jobs
• Example: Power Shifts Away from Unions in Europe
(N.E. Boudette, WSJ)
• Concessions by automobile worker unions in Western
Europe in response to Greater Openness with Eastern
Europe
• Daimler – new engine plant in Kolleda, Germany
•
Would have built plant in Eastern Europe if unions had
not agreed on flexible work rules that increased
productivity
Direct Foreign Investment Overcomes
Barriers to Adopting Better Technologies
• States without groups that will be adversely affected by
the introduction of some technology and with groups that
will benefit want the better technology adopted there.
• Example: Toyota in 1985 located an automobile plant in
Kentucky introducing just-in-time production in the U.S.
– Kentucky’s people want high-paying jobs
– Kentucky’s people want building project
•
The same thing happened in Wales in 1990
Technology Capital
• Must be an exporter to be an importer
• U.S. and E.U. and other advanced industrial economies
hold foreign technology capital hostage
– This protects technology capital abroad from being
expropriated
Conclusion
• Central and Eastern European countries either are or
soon will be among the rich industrial countries
• Everyone benefits from the use of technology capital
– These countries will benefit from use of foreign
technology capital
– Other advanced industrial countries will benefit from
the use of the technology capital of these countries
Effective Measures to Improve Economic
Performance
• Cut marginal tax rates
• Become more open
• Follow pro-productivity growth policies
• Reform labor market policies so workers move quickly to
where they are more productive
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