Macroeconomic Themes:221 Why Growth Rates Differs Across Countries?

Macroeconomic Themes:22 1

Why Growth Rates Differs Across Countries?

Human Capital and Labour Market Reasons

Physical Capital and Financial Sector Factors

Fiscal and Monetary Policy Arrangements

Technology and Innovations and Adoptions

Trade and Exchange Rate Policies


Growth Rates in the UK Economy

-6

-4

-2

0

2

4

6

8

10

12


Growth Rates of Per Capita GDP (WDI 2000)

-4.000

-2.000

0.000

2.000

4.000

6.000

8.000

10.000

12.000

14.000

Years

Gro

wth

Ra

tes in

Pe

rce

nt

UK

USA

France

Germany

Italy

Japan


Annual Growth Rates of GDP (WDI 2000)

-4.000

-2.000

0.000

2.000

4.000

6.000

8.000

10.000

12.000

14.000 UK

USA

France

Germany

Italy

Japan


Growth Rates of GDP

-4.000

-2.000

0.000

2.000

4.000

6.000

8.000

UK

USA

France


HLAKY and assume that 1 . Like before take log of this

production function and differentiate both sides w ith respect to time to get.

hg

ng

kg

ag

yg

y

y

Recall the fact that in steady state output and capital grow at the rate ofpopulation growth rate. A constant output per capita and capital per capita

in the steady state implies that L

Yy , or 0

L

dL

Y

dY

y

dy

Human Capital Augmented Solow Growth Model


Role of Saving, Investment and Productivity Shock in Economic Growth (Ramsey (1928))

Preference of a representative consumer:

0ttCUt

tC

Max

Budget constraint

tAtLtKFtztMtXtGtItC ,,1

Evolution of the capital stock: tItKtK

11

Boundary conditions: 00 K and 0TK


I n f a c t G D P f r o m t h e s u p p l y s i d e c a n b e d e c o m p o s e d i n t o t h ew o r k i n g a g e p o p u l a t i o n ( P ) l a b o u r f o r c e a n d p a r t i c i p a t i o n r a t e( L / P ) , e m p l o y m e n t r a t e ( E / L ) , t h e p r o d u c t i v i t y o f p e r w o r k e r

a n d t h e c a p i t a l o u t p u t r a t i o a s f o l l o w i n g : QK

EQ

LE

PLPY .

W o r k i n g a g e p o p u l a t i o n ( P ) : a l l i n d i v i d u a l s o f 1 6 y e a r s o l d o ra b o v e .

L a b o u r f o r c e ( L ) : a l l i n d i v i d u a l s a t w o r k ( e m p l o y e d ) o r w h oa r e w i l l i n g t o w o r k a n d a c t i v e l y l o o k i n g f o r a j o b( u n e m p l o y e d ) .

P a r t i c i p a t i o n r a t e ( L / P ) : R a t i o o f l a b o u r f o r c e o f w o r k i n g a g ep o p u l a t i o n .

E m p l o y m e n t r a t e ( E / L ) : P r o p o r t i o n o f l a b o u r f o r c e t h a t i se m p l o y e d .

U n e m p l o y m e n t r a t e ( U / L ) : p r o p o r t i o n o f l a b o u r f o r c e t h a t i sa c t i v e l y l o o k i n g f o r w o r k b u t i s o u t o f w o r k .

P r o d u c t i v i t y r a t e ( Q / E ) : o u t p u t p e r w o r k e r ( w e e k l y , m o n t h l yo r y e a r l y ) . C a p i t a l - o u t p u t r a t i o ( K / Y ) : u n i t s o f c a p i t a l p e r u n i to f o u t p u t .

GDP and Productivity: Manpower or Labour Market Approach


QKg

EQgLEgPLgPgYg

C a p i t a l i n c r e a s e s b y s a v i n g b u t t h e p a r t i c i p a t i o n r a t e ,e m p l o y a b i l i t y a n d p r o d u c t i v i t y o f w o r k e r m a i n l y d e p e n do n t h e i r l e v e l o f e d u c a t i o n a n d t r a i n i n g .

B y r a i s i n g s k i l l s f o r m a l a n d i n f o r m a l e d u c a t i o n n o t o n l yp r o d u c t i v i t y o f w o r k i n g i n d i v i d u a l s b u t a l s oe m p l o y a b i l i t y o f t h o s e i n t h e l a b o u r f o r c e a n dp a r t i c i p a t i o n r a t e a m o n g t h e w o r k i n g a g e p o p u l a t i o n .

G D P i n c r e a s e s e i t h e r b y a n i n c r e a s e i n p o p u l a t i o n o r t h e i rp a r t i c i p a t i o n r a t e , o r b y t h e i r e m p l o y m e n t r a t e o r b yi n c r e a s e i n t h e i r p r o d u c t i v i t y o r b y i n c r e a s e i n c a p i t a l s t o c ko r a n y c o m b i n a t i o n o f t h e s e f a c t o r s o r b y a l l o f t h e m .

GDP Growth, Utilisation of Labour Force and Productivity


Contribution of the Financial Sector in Economic Growth

Financial sector diversifies risks and guarantees efficient allocation ofthe portfolio by households and corporate sector

Investments are based on market evaluation (Tobin’s q). Free and liberal financial market: convertibility and controls of

capital account. Direct foreign in/outward investments to complement national saving Reduce effects of credit rationing, market segmentation and

asymmetric information Avoid economic crises and contagion effects Reduce speculative bubbles and attacks on financial and exchange

rate markets Monitoring, supervision and deposit insurance. Build confidence by assuring inter generational equity, Viability of

pension funds and pay as you go social security system


Ratio of the Gross Domestic Investment to GDP

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

UK

USA

Germany

Japan


Real Exchange Rate Across Countries

0.000

20.000

40.000

60.000

80.000

100.000

120.000

140.000

160.000

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

19

95

=1

00

UK

US

Japan

Italy

France

Germany


Ratio of Saving to GDP

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

45.00

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

UK

USA

Germany

Japan


Real Interest Rates Across Countries

-4.000

-2.000

0.000

2.000

4.000

6.000

8.000

10.000

12.000

An

nu

al P

erc

en

t

UK

USA

Japan

Italy

France

Germany


Wrong economics policies generated disturbing fluctuations in1970s and 1980s.

Economic growth is promoted by macroeconomic prudence,outward orientation and domestic liberalisation.

New macroeconomic policy framework includesthe central bank independencecredibility and transparency in economic policyadoption of the golden rule of public finance– borrow only to invest– sustainable long-term public finances

monetary and fiscal co-ordinationforward looking framework of the monetary policy

Emphasis in more investment in education and health.

The tightening of the fiscal policy in last 1990s

These policy steered back to the stability and steady growthcompared that in 1980s.

Fiscal and Monetary Policies for Stability and Growth: Policy in the UK


Cross Industry Productivity MeasureG e r o s k i ( 1 9 9 1 ) u s e s c r o s s s e c t i o n a n d t i m e s e r i e s p o o l i n gr e g r e s s i o n t e c h n i q u e t o m e a s u r e t h e c o n t r i b u t i o n o fi n n o v a t i o n s i n p r o d u c t i o n a m o n g 7 9 t h r e e d i g i t i n d u s t r i e sb e t w e e n 1 9 7 6 - 1 9 7 9 .

it

itI

itftiti

itq

w h e r e itq i s o u t p u t p e r w o r k e r i n i n d u s t r y i , i

tf i n p u t

p e r w o r k e r i n i n d u s t r y i a t t i m e t , i a n d i g i v e s a s e t o f

i n d u s t r y d u m m i e s t a n d t r e f e r s t o t i m e d u m m i e s , a n d

i s t h e itI i s t h e n u m b e r o f i n n o v a t i o n s ( c o u n t m e a s u r e )

b e t w e e n t a n d p e r i o d s w h e r e ....0 .


Cross Country Productivity Measures

P r o d u c t i v i t y i n d e x i n c o u n t r y u : i isu

iL

uiYuA

P r o d u c t i v i t y d i f f e r e n c e b e t w e e n c o u n t r y u a n d k i n s e c t o r

i iskiL

kiY

isuiL

uiY

iC

O v e r a l P r o d u c t i v i t y d i f f e r e n c e b e t w e e n c o u n t r y u a n d k :

uis

kisk

iL

kiY

isi kiL

kiY

uiL

uiYkAuA


Total

non-market Total Market

Services Economy Sectors

1996

US 91.0 127.4 128.5

UK 100.0 100.0 100.0

France 111.8 128.5 120.2

Germany 92.2 114.1 114.3

Japan 90.0 81.0

1999

US 84.3 130.3 139.0

UK 100.0 100.0 100.0

France 107.4 129.4 122.0

Germany 87.3 117.4 119.2

Japan* 88.7 80.7

Productivity Differences Between UK and Her Trading Partners (Source: O'Mahony and De Boer (2002) NIESR report.

www.niesr.ac.uk/research for detailed data set)

http://www.niesr.ac.uk/research






Cross Industry Productivity MeasureG e r o s k i ( 1 9 9 1 ) u s e s c r o s s s e c t i o n a n d t i m e s e r i e s p o o l i n gr e g r e s s i o n t e c h n i q u e t o m e a s u r e t h e c o n t r i b u t i o n o fi n n o v a t i o n s i n p r o d u c t i o n a m o n g 7 9 t h r e e d i g i t i n d u s t r i e sb e t w e e n 1 9 7 6 - 1 9 7 9 .

it

itI

itftiti

itq

w h e r e itq i s o u t p u t p e r w o r k e r i n i n d u s t r y i , i

tf i n p u t

p e r w o r k e r i n i n d u s t r y i a t t i m e t , i a n d i g i v e s a s e t o f

i n d u s t r y d u m m i e s t a n d t r e f e r s t o t i m e d u m m i e s , a n d

i s t h e itI i s t h e n u m b e r o f i n n o v a t i o n s ( c o u n t m e a s u r e )

b e t w e e n t a n d p e r i o d s w h e r e ....0 .


Real Cost Reduction Approach: Harberger (1998)

TFP growthover period1=100

AbsoluteAmount ofreal costreduction

Cumulativesum of RCRof (2)

Cumulativeshare ofRCR (3)

Value addedby sector

Cumulativesum ofvalueaddedof (5)

Cumulativeshare ofvalueadded of(6)

Industry (1) (2) (3) (4) (5) (6) (7)1 0.8 80 80 0.16 100 100 0.092 0.6 120 200 0.4 200 300 0.273 0.5 150 350 0.7 300 600 0.55

All therest

0.107 150 500 1 500 1100 1.00


Key Points to Growth Study

(a) always study the components of growth separately(b) the accumulation of human capital by the labour force should

be represented in the labour contribution of the growth equation(c) study externalities of education and technology at the firm level

and spatial dimensions(d) check both firm and industry level reasons for declining

multifactor productivitycross country growth regressions do not reveal much pay attentionto episodes within individual countries.


Policy Implications of Real Cost Reduction

(a) people must perceive real costs in order to reduce them(b) avoid prices that lie(c) excess costs are imposed by ill-conceived regulations and

bureaucratic hurdles(d) international trade distortions are harmful for growth(e) privatisation, sound legal and institutional frameworks are good

for growth(f) political consensus concerning the broad outlines of economic

policy.


agri Min Man Egw constr Trade trnsp Fin pub edu other

1993 6.31% 0.80% 4.40% 9.00% -2.84% 5.60% 2.88% 8.30% 1.98% 6.69% 6.70%

1994 0.69% 9.33% 8.08% -0.69% 7.03% 5.15% 6.82% 7.64% -0.98% 5.44% 8.92%

1995 10.82% 10.69% 6.90% -3.54% 5.73% 5.06% 3.57% 4.11% 0.40% 5.53% 6.29%

1996 -0.26% 20.76% 4.50% 4.45% 4.79% 7.47% 4.15% 6.63% -0.12% 6.36% 9.98%

1997 -13.55% -8.36% 4.26% -0.85% 6.63% 9.34% 7.37% 8.36% -0.13% 5.66% 12.60%

1998 -5.10% -13.46% 0.73% -1.12% 6.01% 7.98% 8.39% 13.44% 0.23% 6.10% 10.43%

1999 -1.56% 11.00% -0.66% 0.05% 6.19% 6.29% 4.61% 6.19% -0.95% 8.00% 7.91%

2000 -7.14% 45.43% 0.83% -1.48% 6.10% 4.30% 5.75% 8.23% 3.75% 7.59% 6.27%

Source: ONS input output table

Import Penetration and Growing and Shrinking Sectors


Why Slow Growth Rates in the Last Two Decades?

Market distortions: higher rates of taxes

Slower Growth Rate of Productivity of Labour

Appreciating exchange rate and destabilising monetary policies

controlled interest rate?

Import penetration and export ratios

Slow growth rate of technology

Imperfect competitions

Lack of modernisation


Barro R. J.(1998) Economic Growth in Cross Sections of Countries, Quarterly Journal ofEconomics May 1991, pp. 407-443.

Bhattarai K. (2002) Welfare Impacts of Equal-yield Tax Reforms in the UK Economy,mimio, University of Hull.

Costello Donna M. (1993) A Cross-Country, Cross-Industry Comparison of ProductivityGrowth The Journal of Political Economy, Vol. 101, No. 2. (Apr., 1993), pp. 207-222.

Thomas F. Cooley, Lee E. Ohanian (1997) Postwar British Economic Growth and theLegacy of Keynes The Journal of Political Economy, Vol. 105, No. 3. (Jun., 1997), pp.439-472.

Jan Fagerberg (1994) Technology and International Differences in Growth RatesJournal of Economic Literature, Vol. 32, No. 3. pp. 1147-1175.

P. A. Geroski (1991)Innovation and the Sectoral Sources of UK Productivity Growth The Economic Journal, Vol. 101, No. 409. (Nov., 1991), pp. 1438-1451.

Arnold C. Harberger (1998) A Vision of the Growth Process The American Economic Review, Vol. 88, No. 1.March, pp. 1-32.

Grossman and Helpman (1991) Innovation and Growth in the Global Economy,Cambridge Mass. MIT Press.

D. Greasley (1992) The Stationarity of British Economic and Productivity Growth 1856-1913 Journal of Applied Econometrics, Vol. 7, No. 2. (Apr. - Jun., 1992), pp. 203-209.

Jones, Charles (CJ) Introduction to economic growth, 2002, 2nd Edition, Norton.

References-1


Catherine Lynde, J. Richmond (1993) Public Capital and Long-run Costs in U.K.ManufacturingThe Economic Journal, Vol. 103, No. 419.July, pp. 880-893.

Michael Kitson, Jonathan Michie (1996) Controversy: Deindustrialisation and Britain'sIndustrial Performance since 1960 Britain's Industrial Performance since 1960:Underinvestment and Relative Decline The Economic Journal, Vol. 106, No. 434., pp.196-212.

Lindbeck a (1983) The Recent Slowdown of Productivity Growth, Economic Journal, 93,13-34.O’Mahony M and W. de Boer (2002) Britain’s relative productivity performance:Updatesto 1999, Final report to DTI/Treasury/ONS, NIESR. London.

Romer, Paul (1989) Endogenous Technological Change, Journal of Political Economy,vol. 98, no. 5. Pt. 2, pp. S71-S102.

Mankiw N.G. D., Romer and D.N. Weil (1992) A Contribution to the Empirics ofEconomic Growth, , Quarterly Journal of Economics, pp. 407-437.

R. C. O. Matthews (1969) Why Growth Rates Differ The Economic Journal, Vol. 79,No. 314. (Jun., 1969), pp. 261-268.

Torsten Persson, Guido Tabellini (1994) Is Inequality Harmful for Growth? The American Economic Review, Vol. 84, No. 3. pp. 600-621.

Romer, Paul (1989) Endogenous Technological Change, Journal of Political Economy,vol. 98, no. 5. Pt. 2, pp. S71-S102.

Solow, Robert M., 1956: A Contribution to the Theory of Economic Growth, QJE, pp.65-95.

References-2

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Macroeconomic Themes:221 Why Growth Rates Differs Across Countries?