Session 4. Growth Stylized Facts on Standards of Living across Countries Characterizing Growth over 100 Years: The US Economy Growth Dynamics of the G7 Countries and the OECD Economies Characterizing Growth for the World Economy The Determinants of Economic Growth. The 4 I s of Economic Growth
Indonesia 2.5% Mexico 2.0% Saudi Arabia 1.5% Turkey 1.4% Iran 1.2% Other Emerging, 27.2% Measuring GDP Across Countries Production (GDP, 2016). Measured in USD (PPP) EU, 16.8% Germany 3.3% UK 2.3% France 2.3% Italy 1.9% Spain 1.4% US, 15.6% India 7.3% Russia 3.1% Brazil 2.6% BRI, 13.1% China, 17.9% Other Advanced, 9.5% Japan 4.1% Korea 1.6% Canada 1.4% Australia 1.0%
Population as a Resource Population (2015). World 7.3 Billion Indonesia 3.5% Pakistan 2.6% Nigeria 2.5% Bangladesh 2.2% EU, 7.0% US, 4.4% Other Advanced, 3.1% Other Emerging, 43.8% China, 18.9% India 18.0% Brazil 2.8% Russia 2.0% BRI, 22.7%
Total GDP = Population x GDP per capita GDP Per Capita (USD, PPP). 2016. World Sub-Saharan Africa Emerging Asia Latin America India China Russia Japan EU USA 0 10,000 20,000 30,000 40,000 50,000
GDP Per Capita = Technology + Effort 2016 Levels. US = 100 GDP Per Capita GDP per Hour France 71 99 Germany 86 97 Japan 68 64 Korea 69 50 United Kingdom 75 77 Australia 90 83 Singapore 146 87 Indonesia 21 18 United States 100 100
12.0 World Population Billions 10.0 8.0 8.7 6.0 5.7 4.0 3.4 1.7 2.0 0.8 1.1 1.3 1.4 0.0 1930 1950 1970 1990 2010 2030 2050-2.0 Advanced Emerging
Demographics 2,500 2,000 1,500 2015 2050 Population 2015 versus 2050 1,000 500 0 European Union North America Sub-Saharan Africa East Asia & Pacific South Asia Japan
Demographics Age Dependency 2015 versus 2050 Younger than 16 and older than 65 as a ratio to working age population. 100 90 2015 80 70 2050 60 50 40 30 20 10 0 European Union North America Sub-Saharan Africa East Asia & Pacific South Asia Japan
Demographics Working-Age Population Growth 3.5 3 2.5 2 1.5 1 0.5 0-0.5 1960-70 1970-80 1980-90 1990-00 2000-10 2010-20 2020-30 2030-40 2040-50 World Advanced Sub-Saharan Africa Asia
Forecasting 80 Years Ahead US Real GDP per Capita 65000 11 1. Put yourself in 1928. have been asked to forecast income per capita in the year 2016. 22000 10 8100 9 3000 8 1870 1878 1886 1894 1902 1910 1918 1926 1934 1942 1950 1958 1966 1974 1982 1990 1998 2006 2014
Forecasting 80 Years Ahead US Real GDP per Capita 65000 11 2. You collect data for GDP per capita from 1870 to 1928. 22000 10 8100 9 3000 8 1870 1878 1886 1894 1902 1910 1918 1926 1934 1942 1950 1958 1966 1974 1982 1990 1998 2006 2014
Forecasting 80 Years Ahead US Real GDP per Capita 65000 11 22000 10 8100 9 3. Fit a trend that assumes a constant growth rate 3000 8 1870 1878 1886 1894 1902 1910 1918 1926 1934 1942 1950 1958 1966 1974 1982 1990 1998 2006 2014
Forecasting 80 Years Ahead US Real GDP per Capita 65000 11 22000 10 8100 9 4. Use the fitted trend to forecast US income per capita. You find that it grows by a factor of 5 and will reach $63,096 in 2016 3000 8 1870 1878 1886 1894 1902 1910 1918 1926 1934 1942 1950 1958 1966 1974 1982 1990 1998 2006 2014
Forecasting 80 Years Ahead US Real GDP per Capita 65000 11 22000 10 8100 9 5. You predicted $63,096 in 2016 and the actual number is $57,293, an error of 5%. Not bad. You deserve a promotion. 3000 8 1870 1878 1886 1894 1902 1910 1918 1926 1934 1942 1950 1958 1966 1974 1982 1990 1998 2006 2014
Technological Revolutions Take Place World GDP Per Capita 9.2 6,000 8.7 8.2 GDP Per Capita (2007 USD) 3,000 7.7 7.2 6.7 500 6.2 5.7 0 200 400 600 800 1000 1200 1400 1600 1800 2000 Year
but not as often as we think. The New Economy. It seems almost too good to be true With the information technology sector leading the way, the U.S. has enjoyed almost 4% growth since 1994. This spectacular boom was not built on smoke and mirrors. The result is the so-called New Economy: faster growth and lower inflation. We are in a period of the most wonderful progress in science and invention, especially as applied to communication and transportation, this or any other country has ever known. It is obviously our present great fortune to live in what, in the light of history, will be recognized as a golden age of American industry. "My great economists don't want me to say this, but I think we can do better than 4%"
US Economy: Summary Very stable growth rates over the period 1870-2014 Do not take this growth rate for granted. It is based on a continuous effort to innovate, to improve production processes. A succession of small revolutions (like the new economy ) The US economy seems to be at a steady-state where economic conditions are such that investment and research efforts undertook by companies over this period have produced a fairly even pattern of growth in economic activity This pattern is surprising giving the amount of changes we have seen over this century. For example R&D to sales ratio are today much higher than 100 years ago. Why doesn t it lead to higher productivity growth?
Advanced Economies Real GDP Per Capita (PPP) USA UK Germany France Italy Japan Korea 1870 1882 1894 1906 1918 1930 1942 1954 1966 1978 1990 2002 2014
Remember Effort Matters Real GDP Per Hour (PPP) USA France 1950 1954 1958 1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010
Characterizing Long-Term Growth for OECD Economies OECD economies have been converging to similar levels of GDP per capita. Some countries are further along the process while others still have room to converge As countries converge to US levels of GDP per capita, their growth rates decline. Countries are approaching their steady state. The steady state might not be the same for all countries. For example, a very patient society (one that values the future more relative to the present) will be willing to invest more than a less patient society. As a result, its steady state will be higher. These dynamics are well described by The Solow Model (as proposed by Robert E. Solow in 1956).
Emerging Markets: Real GDP Per Capita (PPP) USA Argentina Chile Brazil Korea India China 1900 1906 1912 1918 1924 1930 1936 1942 1948 1954 1960 1966 1972 1978 1984 1990 1996 2002 2008 2014
Emerging Markets 10 Annual Growth GDP Per Capita 8 6 4 2 0-2 -4 1980 Korea 1990 2000 2015 USA 0 0.2 0.4 0.6 0.8 1 1.2 1.4 1.6 Initial GDP Per Capita Relative to US level
Emerging Markets Annual Growth GDP Per Capita China 10 1990 2000 8 1980 Korea 1980 6 1990 2015-2025? 4 2 0-2 2000 2015 USA 0 0.2 0.4 0.6 0.8 1 1.2 1.4 1.6-4 Initial GDP Per Capita Relative to US level
Emerging Markets: Catching up as well? 10 Annual Growth GDP Per Capita 8 6 4 2 0-2 -4 0 0.2 0.4 0.6 0.8 1 1.2 1.4 1.6 Initial GDP Per Capita Relative to US level 1980-89
Emerging Markets: Catching up as well? 10 Annual Growth GDP Per Capita 8 6 4 2 0-2 -4 0 0.2 0.4 0.6 0.8 1 1.2 1.4 Initial GDP Per Capita Relative to US level 1990-99
Emerging Markets: Catching up as well? 10 Annual Growth GDP Per Capita 8 6 4 2 0-2 -4 0 0.2 0.4 0.6 0.8 1 1.2 1.4 Initial GDP Per Capita Relative to US level 2000-14
Emerging Markets: Catching up as well? Annual Growth GDP Per Capita 10 8 6 4 2 0-2 China Korea Ireland Hong Kong Singapore Norway 0 0.2 0.4 0.6 0.8 1 1.2 1.4 1.6-4 India Brazil Initial GDP Per Capita Relative to US level 1980-89 1990-99 2000-14
Shifting Economic Power World Economic Center of Gravity 1980 Today 2050? More than 50% of the World Population Source: Danny Quah (LSE)
Shifting Powers
What drives Growth differences? Production is the result of two factors: 1. Inputs in the production process: hours, capital (a result of investment in physical and human capital, knowledge) 2. Their productivity, which is also driven by investment in capital, knowledge, technology Hypothesis: Countries that invest more grow faster. Investment rates (as % of GDP) over the last 3 decades Singapore 35% Venezuela 20% Investment rate in China today: almost 50%!!!
The main determinant of growth is accumulation of capital. Countries with higher investment rates have outperformed countries with low investment rates. Growth GDP per capita (%) 9 8 7 6 5 4 3 2 1 0 Period: 1980-2014 Bolivia Brazil Guatemala Investment and Growth S Africa Investment and Growth USA Chile India Botswana France Korea Singapore 15 20 25 30 35 40 Investment in physical capital (% of GDP) China
Investment in Human capital and Growth
Determinants of Economic Growth Productivity (technological progress) if you are close to the frontier. Investment (in physical capital, in education, ) if you are far from the frontier. But what drives Investment? Institutions: property rights, absence of corruption, good governments Stability (macroeconomic and political)
Political stability
Political stability
Transparency
Accountability
Institutions Drive Investment and Growth Singapore Brazil Procedures to start a business 3 11 Days to open a business 2.5 102 Taxes as % of profits 18% 69% Source: Doing Business 2015, World Bank
Oil Producing Countries 2.50 Institutions Matter Institutional Quality 2.00 NZLFIN DNK SWE NOR NLDCHE CAN AUS AUT SGP DEU GBR IRLHKG 1.50 BEL JPN CHL FRA USA EST PRT CYP 1.00 MUS POL LTUSVN CZE URY ESP BWA LVASVK KOR QAT CRI HUN ISR PRI ITA HRV NAM MYS 0.50 GRC GEO ZAF GHA BGR JAM PAN TTO OMN LSO MKD BRA RWA ARM SLVMNG JOR SRB TUR BHR 0.00 SEN MEX ZMB ALB MDA BIH BEN TUN PER MAR DOM MWI LKA COLTHA 6.00 7.00 8.00 IND PHL 9.00IDN 10.00 SAU 11.00 12.00 MOZ BFA TZA NICVNM SWZ KSV UGA BOL CHN GAB GMB PNG GTM ECU -0.50 SLE HND PRY NER KEN LBN LBR KHM UKR AZE KAZ RUS MDGMLI NPL KGZ LAO MRT CIV DZA BLR TGO ETH CMR BGD EGY BDI HTI GIN PAK COG AGO IRN -1.00 TJK NGA UZB GNB ZWE TCD YEM TKM IRQ VEN ERI SSD LBY CAF COD AFG SDN -1.50-2.00 Source: Fatás and Mihov (HBR 2009), updated. GDP Per Capita (2013)
Institutions Matter 2 Institutional quality 1 0-1 -2 Developing Country China 1980 Emerging Market China 2016 Poland 1990 Advanced Economy Poland 2016 800 1600 3200 6400 12800 25600 51200 Income per capita
Summary on Economic Growth: The Four I s Innovation Initial conditions Investment Institutions The incentives to innovate (e.g. respect of intellectual property rights) will shift the technology frontier. This is the main force behind growth in the developed countries. Provides the potential for catching up. Poor countries can grow faster when they set on a convergence path to the rich economies A key ingredient in the process of convergence is the building up of the capital stock. This requires high investment rates. Miracles are countries with investment of over 25% of GDP. In addition to physical investment, it is important to invest in human capital, efficiency, technology What drives investment: stability, institutions. The best way to ensure sound macroeconomic policies (i.e. stability) and political stability is to build institutions that create incentives for stability: Independent central bank, checks and balances, rule of law, transparency. US, Japan, France, Germany Europe after WWII, China today High growth (Korea) 35%; Steady state (US, Germany) ~ 18% There is not a single country that has become rich with poor-quality institutions
Session 4. Summary The 4 I s framework summarizes how economic success has been a result of providing the appropriate conditions (macroeconomic and institutional) for investment and, more generally, for business creation to take place. Growth in income per capita is the outcome of accumulation of capital and productivity growth. Investment (understood broadly) drives capital accumulation and productivity growth. High investment rates are needed to grow fast. The growth dynamics of the world economy can be characterized by The US and other OECD countries (the technology frontier ) are growing now at a steady rate Some countries approach fast the technology frontier Other countries have not been able to follow this convergence process