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Thorvaldur Gylfason
Overview of general theme of conference: economic governance and sustained growth economic governance and sustained growth
Picture to be presented will be painted with a broad brush, covering Main determinants of efficiency and growth Main determinants of efficiency and growth Empirical cross-country growth patterns Empirical cross-country growth patterns
observedobserved Main task: Set stage, without explicit Balkan
content, for local as well as regional analyses to follow
Like politics, all growth economics focusing on economic policy and institutions economic policy and institutions is local
Our standard of living today depends on one thing only, by definition: economic economic growth growth
Rich countries are rich because they grew rapidly over long periods
Poor countries are poor because they did not grow rapidly enough
So why do some countries grow more rapidly than others?
Why, e.g., did Thailand leave Zambia so far behind in one generation?
Hard to think of anything else (Lucas)
Thailand and Zambia started out in a similar position and grew apart
Thailand pursued growth-friendly growth-friendly policiespolicies, stressing liberal trade, stability, private enterprise, and education
0
400
800
1200
1600
2000
2400
60 65 70 75 80 85 90 95 00
THAILAND ZAMBIA
GDP per capita 1960-2003 GDP per capita 1960-2003 (US$ at 2000 prices)
Argentina and Sweden went hand in hand 1900-1930 and then grew apart
Sweden pursued free tradefree trade, liberal liberal democracydemocracy, and income equalityincome equality, and avoided high inflation
Argentina did not
GDP per capita 1900-2003 GDP per capita 1900-2003 (US$ at 1990 prices)
0
4000
8000
12000
16000
20000
24000
1900 1925 1950 1975 2000
ARGENTINA SWEDEN
What makes countries grow Economic efficiencyefficiency and growth Economic policiespolicies and institutionsinstitutions
Education and health careBusiness governanceMonetary and financial policies and
institutionsExternal governance
Empirical evidence Empirical evidence of cross-country linkages between governance and growth as we go along
First things first: Output is produced by labor, capital, and other inputs
Output per capita can grow through accumulation of capital through savingsaving and investmentinvestment
Output per capita, however, cannot grow through population growth, on the contrary
But, output per capita can grow through improvementsimprovements in labor, via investments in human capital: Education Education and health carehealth care Investment and education: Key drivers of
growth
Why do education and health care matter? Because they increase labor productivitylabor productivity This is also why technological progress technological progress is
good for growth Technological progress enables firms to
squeeze more output from given inputssqueeze more output from given inputs But so does increased efficiency!
Latin American story about air fares Increased efficiency Increased efficiency is tantamount to
technological progress, which helps growthhelps growth
In sum, output per capita depends on the quantityquantity and qualityquality of inputs
Quantity of inputs can be increased through accumulationaccumulation, esp. capital accumulation
QualityQuality of inputs – their productivity! – can be increased through increased efficiencyincreased efficiency Education and healthEducation and health LiberalizationLiberalization StabilizationStabilization PrivatizationPrivatization Aspects of institutionsAspects of institutions
Check them
out one by one
Policies
Education lifts Education lifts labor productivitylabor productivity, thereby increasing overall economic efficiency and growth of output
From unskilled to skilled labor
Data for 131 countries, 1960-2000
-6
-4
-2
0
2
4
6
0 20 40 60 80 100
Secondary school-enrolment rate (%)
Pe
r ca
pita
gro
wth
ad
just
ed
for
initi
al i
nco
me
(%
)
r = 0.50
POLICIES
r = rank correlation
There is another way to provide more and better education to children
Produce fewer fewer children children to increase their average “quality”
163 countries, 1960-2000
-8
-6
-4
-2
0
2
4
6
1 2 3 4 5 6 7 8
Fertility (number of children)Pe
fr c
ap
ita g
row
th a
dju
ste
d fo
r in
itia
l in
com
e (
%)
POLICIES
r = -0.54
Good public health, reflected in longevitylongevity, is also conducive to increased labor productivity and economic growth
156 countries,1960-2000
-8
-6
-4
-2
0
2
4
6
30 40 50 60 70 80
Life expectancy 1960 (years)
Pe
r ca
pita
gro
wth
ad
just
ed
for
initi
al i
nco
me
(%
)
POLICIES
r = 0.54
Increased spending on health health care care also spurs economic growth
Close connection between public health and health care, i.e., between output and input
162 countries,1960-2000
-8
-6
-4
-2
0
2
4
6
0 2 4 6 8 10 12 14
Health expenditure (% of GDP)
Pe
r ca
pita
gro
wth
ad
just
ed
for
initi
al i
nco
me
(%
)
POLICIES
r = 0.40
Liberalization of pricesprices increases efficiency in resource resource allocationallocation
Liberalization of tradetrade increases efficiency in division of labordivision of labor
163 countries,1960-2000
-8
-6
-4
-2
0
2
4
6
0 40 80 120 160 200
Exports (% of GDP)
Pe
r ca
pita
gro
wth
ad
just
ed
for
initi
al i
nco
me
(%
)
POLICIES
r = 0.26
Exports are not a good indicator of openness because size matterssize matters
So look at import import duties duties as well
Higher duties hurt hurt growthgrowth, but connection is weak
147 countries,1960-2000
r = 0.20
-8
-6
-4
-2
0
2
4
6
0 10 20 30 40 50 60 70
Share of import duties in tax revenues (%)
Pe
r ca
pita
gro
wth
ad
just
ed
for
initi
al i
nco
me
(%
)
POLICIES
r = -0.23
Economic theory is clear, from Adam Smith (1776) on: external as well as internal trade is trade is good for growthgood for growth
Good external Good external governance governance is good for growth
Autarky spells Autarky spells disasterdisaster, always and everywhere
Darkness in North-Korea
POLICIES
Stabilization Stabilization increases increases efficiency efficiency by reducing production distortions, uncertainty, inflation tax, andovervaluation
164 countries,1960-2000
r = -0.46
-8
-6
-4
-2
0
2
4
6
0.0 0.2 0.4 0.6 0.8 1.0
Inflation distortion
Pe
r ca
pita
gro
wth
ad
just
ed
for
initi
al i
nco
me
(%
)
POLICIES
r = -0.46
High inflation is a sure sign of lax fiscal and monetary policies, so sound sound policies support policies support rapid growthrapid growth
Sound financial institutions, incl. independent independent central bankscentral banks, also support rapid growth
r = -0.46
-8
-6
-4
-2
0
2
4
6
0.0 0.2 0.4 0.6 0.8 1.0
Inflation distortion
Pe
r ca
pita
gro
wth
ad
just
ed
for
initi
al i
nco
me
(%
)
POLICIES
r = -0.46
Privatization replaces political motives by profit profit motivemotive in business
Private enterprise Private enterprise is usually more efficient than state-owned enterprises
38 countries, 1978-92
-6
-4
-2
0
2
4
6
8
.0 .1 .2 .3 .4
Share of SOEs in employment (%)
Pe
r ca
pita
gro
wth
(%
pe
r ye
ar)
POLICIES
r = -0.35
Growth differentials across countries can be traced to several different interconnected factors Private initiativesPrivate initiatives
Investment Fertility
Public policiesPublic policies Education Health care Liberalization Stabilization Privatization
Overlaps between
private and public
spheres
This is not all, however Institutions and geography
Institutions (Institutions (Aspects of social capitalAspects of social capital)) Corruption Inequality Liberal democracy
GeographyGeography Primary production (Agriculture, mining, etc.) Natural resource dependence
Institutions or geography? False contrast There is room for both, side by side
Two views Corruption Corruption
greases wheels greases wheels of production and exchange and thus helps growth
Corruption breeds Corruption breeds inefficiency inefficiency and hurts growth
88 countries,1960-2000
-6
-4
-2
0
2
4
6
0 2 4 6 8 10 12
Corruption perceptions index
Pe
r ca
pita
gro
wth
ad
just
ed
for
initi
al i
nco
me
(%
)
More corruption
INSTITUTION
S
r = 0.69
So, good business good business governance is governance is good for growthgood for growth
Argument can be extended to other aspects, such as secure property secure property rights rights and effective effective bankruptcy lawsbankruptcy laws
Same story
-6
-4
-2
0
2
4
6
0 2 4 6 8 10 12
Corruption perceptions index
Pe
r ca
pita
gro
wth
ad
just
ed
for
initi
al i
nco
me
(%
)
More corruption
INSTITUTION
S
r = 0.69
Two views Inequality Inequality
sharpens sharpens incentives incentives and thus helps growth
Inequality Inequality endangers social endangers social cohesion cohesion and hurts growth
117 countries,1960-2000
-8
-6
-4
-2
0
2
4
6
10 20 30 40 50 60 70
Gini index of inequality
Pe
r ca
pita
gro
wth
ad
just
ed
for
intia
l in
com
e (
%)
INSTITUTION
S
r = -0.27
Two views Political oppression Political oppression
restrains special restrains special interest groups interest groups and thus helps growth
Political oppression Political oppression breeds inefficiency breeds inefficiency and hurts growth
117 countries,1960-2000
-6
-4
-2
0
2
4
6
0 1 2 3 4 5 6 7 8
Political oppression
Pe
r ca
pita
gro
wth
ad
just
ed
for
initi
al i
nco
me
(%
)
INSTITUTION
S
r = -0.64
Again, two views Democracy plays Democracy plays
into hands of into hands of special interest special interest groups groups that hurt growth
Democracy Democracy facilitates change of facilitates change of government government and helps growth
143 countries, 1960-2000
r = 0.48
-8
-6
-4
-2
0
2
4
6
-12 -8 -4 0 4 8 12
Democracy
Pe
r ca
pita
gro
wth
ad
just
ed
for
initi
al i
nco
me
(%
)
INSTITUTION
S
r = 0.50
Manufacturing is an important source of technological technological innovation and innovation and progress progress and thereby also of economic growth
156 countries,1960-2000
-6
-4
-2
0
2
4
6
8
0 20 40 60 80 100
Share of manufactures in exports (%)
Pe
r ca
pita
gro
wth
ad
just
ed
for
initi
al i
nco
me
(%
)
INSTITUTION
S
r = 0.48
Agriculture and mining are low-skill labor intensive and offer few spillover few spillover benefits benefits to other industries
Natural resources: Mixed blessing Mixed blessing if not well managed
156 countries,1960-2000
r = 0.48
-8
-6
-4
-2
0
2
4
6
0 10 20 30 40 50 60 70
Primary production (% of GDP)
Pe
r ca
pita
gro
wth
ad
just
ed
for
initi
al i
nco
me
(%
)
INSTITUTION
S
r = -0.59
Economic growth is available to all who make the effort to achieve it (Lewis)
High-quality growth requires accumulation of capital as well as economic efficiency economic efficiency through good good governancegovernance: judicious policypolicy undertakings and sound institutionsinstitutions Education, family planning, health careFree trade, stable prices, private enterpriseHonesty, equality, liberty, democracyNot too much dependence on agriculture
and natural resources THE END