Transcript lect5

Lecture 5. STE’s economic
performance: growth,
technological progress, inequality
Lecture outline
• An initial look at growth rates
• Total factor productivity (TFP)
• Types of economic growth (extensive vs.
intensive growth)
• Another look at growth rates
• Reasons for low TFP growth
• Inequality
Annual per capita GNP growth
Countries
1950-60
1970-75
1975-80
1980-85
Socialist
countries
4.7
4.0
2.0
2.0
USSR
3.9
2.7
1.8
1.1
China
5.6
4.5
4.6
8.0
Market
economies
3.7
2.95
2.6
1.3
USA
1.5
1.6
2.6
1.4
Total fctor productivity
Let L’=(Lt+1-Lt)/Lt = growth rate of labor
K’= (Kt+1-Kt)/Kt = growth rate of capital
and Y’= (Yt+1-Yt)/Yt = growth rate of GDP
And let a=wL/Y and b=rK/Y be shares of
labor and capital in the economy (w and r
are prices of capital and labor, respectively)
(a+b=1)
Total factor productivity (cont.)
Under certain assumptions, if only the
quantities of inputs change, then
Y’ = aL’ + bK’
(GDP growth = growth of combined inputs)
If quality of inputs improves, Y’ > aL’ + bK’
TFP growth = Y’ – (aL’ + bK’)
Types of growth
• Low TFP growth  extensive growth
• High TFP growth  intensive growth
• Limits of extensive growth:
– Labor and land cannot grow fast
– Diminishing marginal returns
– Large amount of capital  high depreciation
Factor productivity (1950-60)
Countries
L’
K’
Socialist
countries
0.8
USSR
TFP
growth
4.2
Combined
inputs
growth
1.7
1.2
9.4
3.4
2.4 (1.7)
Market
economies
0.9
4.7
1.8
3.0
USA
1.4
3.6
1.8
1.3
3.5
Factor productivity (1960-85)
Countries
L’
K’
Socialist
countries
0.8
USSR
TFP
growth
5.1
Combined
inputs
growth
2.1
1.3
7.3
2.8
0.8
Market
economies
0.9
4.7
1.9
1.8
USA
2.0
3.3
2.4
0.7
0.9
More on GDP and TFP growth
• USSR (growth per year):
Per Capita GDP 1980-85:
TFP
1980-85:
Household
consumption
1970-80:
1.1
-0.5
2.3
China’s growth
• PC GDP growth per year:
1960-65 - 2.5%
1965-70 - 4.0%
1975-80 - 4.6%
1980-85 - 8.0%
TFP growth:
1953-78: -0.7
1979-94: 3.8
Reasons for slowdown in the USSR
and other E. European economies
•
•
•
•
•
Increasing complexity of economy
Lower oil revenues of USSR
Increasing burden of military expenditures
Second economy growth
Calcified bureaucracy (rent-seeking )
• How was China different?
Income distribution
• Measures of income inequality
Lorenz curve
Gini coefficient
Decile ratio
Lorenz curve & Gini
Decile ratio
Income inequality in selected
countries (late 1980’s, exp. USA)
Country
Gini Coefficient
Decile Ratio
Czechoslovakia
20.1
2.44
Poland
USSR
26.8
28.9
3.31
3.53
UK
29.7
3.79
USA (1997)
37.5
5.64
Income distribution in STE’s vs.
market economies (theory)
• Capital ownership
- allocation of capital income in STE’s
- capital ownership in ME’s
• Progressive income taxation
• An alternative measure of welfare:
(PC GDP)*(1-Gini coefficient)
Hard to measure factors
•
•
•
•
Informal economy
Access to goods in short supply
Subsidies (housing, etc.)
Unrepresentative nature of surveys in
STE’s
Other problems with centrally
planned economies
• Structural distortions:
- overdeveloped heavy industry and construction
(relative to GDP); small service sector;
- prevalence of large firms and relatively few
medium and small firms;
- little competition among enterprises
• Distorted investment decision
• No enterprise closures
• Excessive vertical integration of enterprises
• Soft budget constraint
• Large and growing foreign debt
Did the STE’s have to reform?
• Reliability of growth rates ad other numbers
(Law of equal cheating?)
• Look back at the reasons for the slowdown in
growth; they were going to slow down the
economy further
• The system’s legitimacy was based on high
growth
• Lots of other problems
• Improvement in communications that facilitated
comparison with other countries