Transcript Lecture2 - Stanford University

Economics 216:
The Macroeconomics of Development
Lawrence J. Lau, Ph. D., D. Soc. Sc. (hon.)
Kwoh-Ting Li Professor of Economic Development
Department of Economics
Stanford University
Stanford, CA 94305-6072, U.S.A.
Spring 2000-2001
Email: [email protected]; WebPages: http://www.stanford.edu/~ljlau
Lecture 2
The Historical Experience of
Economic Development
Lawrence J. Lau, Ph. D., D. Soc. Sc. (hon.)
Kwoh-Ting Li Professor of Economic Development
Department of Economics
Stanford University
Stanford, CA 94305-6072, U.S.A.
Spring 2000-2001
Email: [email protected]; WebPages: http://www.stanford.edu/~ljlau
The Definition of Economic Take-Off
 Take-off
into "Self-Sustained Economic Growth"
 Working definition: A continuous growth of output of more
than 4 percent per annum on a per capita basis over a
decade
 East Asia has done exceptionally well in the post-war
period, despite relatively unfavorable natural resource
endowment and population density. How has it been able
to achieve this economic growth?
 Philippines is the only economy in East Asia that has not
achieved an economic take-off into self-sustained growth
Lawrence J. Lau, Stanford University
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The Record of Postwar Economic Growth
 Asia
was the poorest region in the World in 1950
 Between 1960 and 1996, according to World Bank data,
China, Hong Kong, Indonesia, Japan, South Korea,
Malaysia, Singapore, Taiwan, Thailand, Botswana and
Swaziland were the only countries that achieved an
average annual rate of growth of real GDP per capita
greater than 4%
 Botswana and Swaziland (both in Africa) are the only nonAsian countries that achieved an average annual rate of
growth of real GDP per capita greater than 4% between
1960 and 1997
 Philippines is the only economy in East Asia that was not
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able to achieve a 4% rate of growth over the same period
Is an Eventual Slowdown Inevitable?
 Paul
Krugman’s hypothesis
 Miracle or bubble?
 How soon will the slowdown come?
 What happens if (voluntary) leisure is included in the
measurement of GNP?
 Rising
real wage rates
 Declining hours per worker—rising leisure hours per worker
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Rates of Growth of Inputs & Outputs of the
East Asian Developing & the G-7 Countries
Table 3.1: Average Annual Rates of Growth of Real GDP, Capital, Labor and Human Capital (percent)
(Extended sample period)
Average
Capital
Utilized
Labor
Human
Human
Country
Period
GDP
Stock
Capital Employment Hours
Capital
Capital
Hong Kong
66-95
7.4
8.8
8.6
2.6
2.4
4.8
2.1
S. Korea
60-95
8.5
12.3
12.3
3.1
3.3
6.2
4.0
Singapore
64-95
8.8
10.3
10.3
4.3
4.7
5.9
3.5
Taiwan
53-95
8.4
11.8
11.8
2.7
2.3
5.3
2.8
Indonesia
70-94
6.7
8.9
9.8
3.1
3.1
9.6
7.7
Malaysia
70-95
7.3
11.8
11.8
3.7
3.7
7.7
4.9
Philippines
66-95
4.0
5.8
5.9
3.2
3.2
10.8
8.5
Thailand
66-94
7.6
9.1
9.4
2.8
2.8
8.5
5.8
China
65-95
8.4
10.3
10.3
3.0
3.0
5.9
3.3
Japan
57-94
5.9
8.1
8.0
1.1
0.6
2.1
0.9
Canada
57-94
3.8
4.8
4.7
2.3
1.9
3.0
1.1
France
57-94
3.3
3.9
3.9
0.4
-0.2
2.0
1.1
W. Germany
57-94
3.2
3.3
3.1
0.1
-0.3
1.5
1.0
Italy
59-94
3.5
5.2
5.3
0.0
-0.3
1.8
1.3
UK
57-94
2.4
3.9
3.8
0.2
-0.1
1.2
0.8
US
49-94
3.1
3.0
3.3
1.7
1.3
2.1
0.8
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Real Output per Labor Hour
R eal O utp ut p er Lab o r Ho ur (1980 US $)
15
C hina
Hong Kong
Indone s ia
S . Kor e a
Malays ia
P hilippine s
S ing apor e
Taiwan
Thailand
J apan
N on-A s ian G5
10
5
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95
19
93
19
91
19
89
19
87
19
85
19
83
19
81
19
79
19
77
19
75
19
73
19
71
19
69
19
67
19
65
19
63
19
61
19
59
19
57
19
55
19
53
0
19
1980 US $ p er Lab o r Ho ur
20
7
Rates of Growth of Real GNP per Capita:
Selected East Asian Economies
Rates of Growth of Real GNP per Capita, Selected East Asian Economies
20
16
12
8
Percent per annum
4
0
1961
1963
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
-4
-8
-12
-16
-20
-24
Hong Kong, China
Korea, Rep.
Singapore
Indonesia
Malaysia
Philippines
Thailand
China
Japan
Taiwan
-28
Year
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University
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Rates of Growth of Real GNP per Capita:
East Asian Newly Industrialized Economies
Rates of Growth of Real GNP per Capita, East Asian Newly Industrialized Economies
16
12
Percent per annum
8
4
0
1961
1964
1967
1970
1973
1976
1979
1982
1985
1988
1991
1994
1997
-4
Hong Kong, China
Korea, Rep.
Singapore
Taiwan
-8
Year
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Rates of Growth of Real GNP per Capita:
Selected East Asian Economies
Rates of Growth of Real GNP per Capita, Selected East Asian Economies
16
12
Percent per annum
8
4
0
1961
1964
1967
1970
1973
1976
1979
1982
1985
1988
1991
1994
1997
-4
-8
Indonesia
Malaysia
Thailand
China
Philippines
-12
-16
Year
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University
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Rates of Growth of Real GNP per Capita:
Selected Non-Asian Economies
Rate of Growth of Real GNP per Capita, Selected Non-Asian Economies
22
16
Brazil
Mexico
Russian Federation
Slovenia
Nigeria
South Africa
Percent per annum
10
4
-2 1961
1965
1969
1973
1977
1981
1985
1989
1993
1997
-8
-14
-20
Year
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University
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Rates of Growth of Real GNP per Capita:
The Group-of-Seven (G-7) Countries
Rate of Growth of Real GNP per Capita, Group of Seven Countries
16
12
United Kingdom
France
Germany
Italy
Japan
Canada
8
Percent per annum
United States
4
0
1960
1964
1968
1972
1976
1980
1984
1988
1992
1996
-4
-8
Year
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University
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Rates of Growth of Real GNP per Capita:
Other Developed Economies
Rate of Growth of Real GNP per Capita, Other Developed Economies
16
Percent per annum
10
4
1960
1964
1968
1972
1976
1980
1984
1988
1992
1996
-2
Greece
Portugal
-8
Spain
New Zealand
-14
Year
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University
13
Internal and External Factors





Demographic transition--a pronounced decline in the fertility rate,
the rate of growth of population, and the dependency ratio
A rise in the productivity of labor in the agricultural sector enabling a
release of surplus output and labor to the industrial sector (land
reform, etc.)
Foreign assistance may be needed at the beginning--e.g. U.S. aid to
South Korea (in the 50s and 60s) and Taiwan (up until 1965); Soviet
aid to China (in the 1950s), etc.
A Two-Gap Model (savings gap and foreign exchange gap--both can
be bridged with foreign aid or investment)
The positive effects of adversity on the four “Newly Industrialized
Economies” (Hong Kong, South Korea, Singapore and Taiwan)
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High Domestic Savings and Investment Rates
 Reasons
for high domestic savings rate
 (inadequacy
of) social safety net
 (unavailability) of consumer credit
 (high) price of housing
 positive real rates of return (achieved through low inflation)
 stable financial system
 bonus system of compensation
 social norms of (low and inconspicuous) consumption
 A high
domestic savings rate enables a high domestic
investment rate
 A high domestic investment rate is the key to sustained
economic growth
 If technical progress were “embodied”, a high investment
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rate is required in order to benefit from technical progress
Savings Rates as a Percent of GDP
of Selected East Asian Countries
T h e S a v in g s R a te a s a P er c e n t o f G D P
50
40
P e rc e n t
30
20
10
C h in a
Ho ng K on g
In do n e si a
Ko re a , R e p u b lic o f
M a lay si a
P h i lip p in e s
S in g a p o r e
T a iw a n
T h a ila n d
M e x ic o
In d i a
0
196 5
196 7
196 9
197 1
197 3
197 5
197 7
197 9
198 1
198 3
198 5
198 7
198 9
199 1
199 3
199 5
199 7
199 9
-1 0
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The Savings-Investment Gap as a Percent of
GDP--Selected East Asian Countries
T h e S a v in g s -In v e s tm e n t G a p a s a P e rc e n t o f G D P
25
20
15
Ch ina
H on g K o ng
Ind o ne s ia
K o re a , R ep u blic of
M ala y s ia
P hilip pin es
S in ga po re
T aiw an
T h aila nd
M e x ico
In d ia
P e rc e n t
10
5
0
19 65
19 70
19 75
19 80
19 85
19 90
19 95
20 00
-5
- 10
- 15
- 20
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The Savings Rate and Real GNP per Capita
 The
savings rate was typically very low initially
 It rose rapidly with the growth of real GNP per capita
 It reached a plateau and stabilized at a level between 30
and 40% of GDP and stayed there
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The Savings Rate and Real Output per Capita:
East Asian Economies
N a tio na l S a v ing s R a te a nd R e a l G N P pe r C a pita
55
Ch in a
In d o n e s ia
K o re a , Re p u b lic o f
Ph ilip p in e s
T h a ila n d
50
45
Ho n g Ko n g
Ja p a n
M a la y s ia
Sin g a p o re
Pe rce n t
40
35
30
25
20
15
10
100
1000
10000
100000
R e a l GD P pe r C a pita , 1 9 9 5 US $
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The Savings Rate and Real Output per Capita:
Taiwan
Sa v in g s R ate v e rsu s R e a l G N P pe r C a p ita
45
S a v in g s R a te ( P e r c e n t )
40
35
30
25
20
15
10
5
0
0
2 0 00
4 0 00
6 0 00
8 0 00
1 0 0 00
1 2 0 00
1 4 0 00
G N P p e r c a p it a in 19 9 9 U S $
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Relative Inflation in East Asian Economies
 Inflation
in the East Asian economies has remained low
relative to the United States
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Rates of Inflation Relative to the United States-Selected East Asian Countries
Rates of Inflation Relative to the United States (percent p.a.)
90
80
70
60
China
Hong Kong
Indonesia
Korea
Malaysia
Philippines
Singapore
Taiwan
Thailand
Percent p.a.
50
40
30
20
10
0
1979
1982
1985
1988
1991
1994
1997
2000
-10
-20
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A High Rate of Investment in Human Capital
(Education)
 High
rates of investment in human capital
 High
value for education because of the traditional “examination
system”
 An effective and trainable labor force
 Implies that the actual savings rate has been even higher
 Was
“brain drain” a problem?
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Human Capital
A verage H um an C ap ital (Y ears o f S c ho o ling p er W o rking-A ge P ers o n)
14
Ho n g Ko n g
In d o n e s ia
M a la y s ia
S. K o re a
Ph ilip p in e s
Sin g a p o re
T a iw a n
T h a ila n d
N o n -A s ia n G5
Ja p a n
10
8
6
4
2
Lawrence J. Lau, Stanford University
95
19
93
19
91
19
89
19
87
19
85
19
83
19
81
19
79
19
77
19
75
19
73
19
71
19
69
19
67
19
65
19
63
19
61
19
59
19
57
19
55
19
53
0
19
Years p er W o rking-Age P ers o n
12
Ch in a
24
Export Orientation
 Export
orientation implies a low (under-valued) exchange
rate, low tariffs (after rebates) on imported inputs including
capital, raw materials and intermediate inputs, trade credits
for exporters, development of ports and harbors and other
infrastructure
 Export orientation also implies that investment must be
market-directed as opposed to government-directed (a
country cannot afford to subsidize losses indefinitely in the
face of competition in the open world market)
 Export orientation facilitates foreign direct investment and
foreign loans (because of the ease of repayment and
repatriation)
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Export Orientation
 Export
orientation encourages the adoption/importation of
new technology and know-how
 International competition requires efficient operations for
survival
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The Concept of Comparative Advantage:
A Simple Two-Country, Two-Good Model
Country A Country B
 Natural Endowments of Labor
10
10
 Labor Required per Unit of Good I 1
2
 Labor Required per Unit of Good II 2
5
 Country A is therefore more efficient then Country B in the
production of every good
 Question: Is there any gain for Country A to trade with
Country B?

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Production and Consumption Patterns in the
Absence of International Trade
 Let
us suppose that in the absence of international trade,
the pattern of production (and consumption) is given by:

Country A Country B
World
 Units of Good I
6
2.5
8.5
 Units of Good II
2
1
3
 It may be verified that labor is fully employed in both
countries
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A Possible Production Pattern with
International Trade
 With
international trade, a possible pattern of production is
given by:

Country A Country B
World
 Units of Good I
4
5
9
 Units of Good II
3
0
3
 It may be verified that labor is fully employed in both
countries
 Thus, the World can be better off with international trade in
the sense that the total availability of goods is enhanced
 International trade expands the production/consumption
possibilities of the world--when international trade is first
introduced, total world
GNP
is increased
(one-time)
Lawrence
J. Lau, Stanford
University
29
A Possible Consumption Pattern with
International Trade
 With
international trade and the above pattern of
production, a possible pattern of consumption is given by:

Country A Country B
World
 Units of Good I
6.25
2.75
9
 Units of Good II
2
1
3
 It may be verified that total world consumption is equal to
total world production of each good
 In this case, country A trades 1 unit of good II with country
B for 2.25 units of good I. Both countries are better off
with trade than without trade
Lawrence J. Lau, Stanford University
30
Another Possible Consumption Pattern with
International Trade






With international trade and the above pattern of production, a
possible pattern of consumption is given by:
Country A
Country B
World
Units of Good I
6.01
2.99
9
Units of Good II
2
1
3
It may be verified that total world consumption is again equal to total
world production of each good
In this case, country A trades 1 unit of good II with country B for
2.01 units of good I. Both countries are still better off with trade
than without trade. But note that the distribution of the gains from
trade is changed. Country A does not gain as much under this
alternative scenario as under the previous scenario.
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31
A Third Possible Consumption Pattern with
International Trade
 It
is also possible to have most of the gains appropriated by
Country A--such a possible pattern of consumption is
given by:

Country A Country B
World
 Units of Good I
6.49
2.51
9
 Units of Good II
2
1
3
 In this case, country A trades 1 unit of good II with country
B for 2.49 units of good I. Both countries are still better
off with trade than without trade.
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32
The Distribution of Gains from Voluntary
International Trade is Indeterminate
 What
these examples illustrate is that while voluntary
international trade brings gains to everyone, the
distribution of gains from trade, or the terms of trade, is not
uniquely determined by the principles of comparative
advantage alone but depends on the relative bargaining
power of the trading partners
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Is Free Trade Always Good?
 Voluntary
international trade is always beneficial to both
trading partner countries
 However, transitional assistance may be required (retraining, unemployment insurance)
 Protection can be justified under the “infant industry
argument”
 Economies
of scale
 Learning by doing
 Predatory competition
 Sunset provision
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Empirical Regularities
 Large
economies have low trade/GDP ratios
 e.g.,
United States, Japan, China
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The Effect of Size:
Trade/GDP Ratio versus GDP
Trade as a Percent of GDP versus GDP, 1995
Trade as a Percent of GDP
versus GDP, 1995
350
300
Trade (% of GDP) 1995
250
200
150
100
50
0
100
1,000
10,000
100,000
1,000,000
10,000,000
GDP, millions
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The Export/GDP Ratio and GNP per Capita
Exports/GDP and GNP per capita, 1995
160
Exports/GDP Non-Oil Producers 1995
Exports/GDP Oil Producers 1995
Exports/GDP, Percent
140
120
100
80
60
40
20
0
10
100
1,000
10,000
100,000
GNP per capita
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The Effect of Size:
Export/GDP Ratio versus Population
E xpo rt-G D P R a tio a nd P o pula tio n
160
Export-G D P R atio (pe rce nt)
140
120
100
80
60
40
20
0
1
10
100
1 ,0 0 0
1 0 ,0 0 0
Population (millions )
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38
Exports as a Percent of GDP:
Selected East Asian Economies
Exports as a Percentage of GDP
%
HONG KONG
INDIA
INDONESIA
KOREA
MALAYSIA
SINGAPORE
THAILAND
CHINA
Japan
Taiwan
PHILIPPINES
180
160
140
120
100
80
60
40
20
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
0
Year
Lawrence J. Lau, Stanford University
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Exports to U.S. as a Percent of Total Exports
Exports to U.S. as a Percent of Total Exports
%
60
China
Hong Kong
India
Indonesia
Philippines
Singapore
Taiwan
Thailand
Korea
Maylaysia
50
40
30
20
10
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
0
Year
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40
The Importance of Exports in the East Asian
Economies
 While
exports is a very high percentage of GDP in Hong
Kong, Malaysia, Singapore and Taiwan, it is a relatively
low percentage of the Chinese economy, amounting to
approximately 20 percent
 The proportion of total exports destined for the U.S. has
generally declined in the East Asian economies over the
years, to less than 30 percent
 The one exception is the Chinese economy, where the
proportion of Chinese exports destined for the U.S. has
been rising to its current level of approximately 20 percent
 Overall, the East Asian economies export approximately
50% of their total exports to other East Asian economies
Lawrence J. Lau, Stanford University
41
Reliance on the Private Sector
 Reliance
on the private sector means mistakes are
corrected immediately--the public sector takes a long time
to correct mistakes because it has deep pockets and
operates with “other people’s money”
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42