Growth, Trade, and Development

1. Growth, Trade, and Development CHAPTER 20

2. Introduction • In 2000, per capita GNP in Ghana was only US$350 • Malaysia and Thailand were $3,400 and $2,000, respectively • Ghana has slipped behind • Ghana’s 1998 human development index was 0.548, ranking 129th in the world • Reflects a relatively low life expectancy and unsatisfactory educational attainment • How can Ghana “get somewhere” rather than “go nowhere?” • What roles might trade, education, and health play in this process?

3. Old Growth Theory • Why was Ghana’s 2000 per capita income $350 rather than $1,350 or $10,350? • A first attempt to answer such questions was provided by Nobel Laureate Robert Solow (1956) • Now known as the “old” growth theory • Begins with an intensive production function which relates two economic variables • Per capita income or per capita output (y) • Capital-labor ratio (k) • Positive relationship between capital-labor ratio and per capita income • For example, as capital-labor ratio increases and each worker has more physical capital to work with, per capita income increases • Known as capital deepening • Relationship is decreasingly positive • Result of diminishing returns to labor and capital • Thus, increases in k at lower levels add more to per capita income than increases in k at higher levels

4. Figure 20.1. The Intensive Production Function and Capital Deepening

5. Sources of Per Capita Income Increases • Capital deepening • Technological change • Improvements in technology shift graph upward • How fast can increases in capital-labor rations or improvements in technology make economies grow? • Most economies grow only a few percentage points each year

6. Figure 20.2. Technological Change in the Intensive Production Function

7. Table 20.1. How Fast Do Economies Grow?

8. Old Growth Theory • Increases in k require increases in the capital stock that more than offset any increases in population • Increases in capital stock require investment • Investment requires saving • Domestic Investment = Domestic Savings + Foreign Savings • Increases in per capita incomes through capital deepening require investment • Investment has two sources • Domestic savings (household and government) • Foreign savings • In the absence of technological improvements these are the only sources of growth in per capita incomes • Increases must be large enough to increase capital stock sufficiently so it more than offsets any increase in population • If they are not k and y will fall even though capital stock increases through investment

9. Figure 20.3. An Open Economy with Government, Savings, and Investment

10. Old Growth Theory • Increasing domestic savings is often a matter of making institutions available to households of economy • Institutions should be as broad-based as possible • Accessible to rich and poor, rural and urban • Increasing government savings is a matter of decreasing government expenditures and increasing government tax revenues • Caveat—some types of government expenditures (e.g. education) can positively affect level of technology • Some government investments are complementary to private investments • Increasing foreign savings is a matter of increasing capital account surplus on balance of payments • Pay attention to form and magnitude of capital account surplus • Large capital account surpluses based on short-term investments are risky and could be damaging in long run

11. Old Growth Theory • Leaves a lot to be explained • Solow residual • Amount of unexplained growth in per capita incomes • In practice residuals can be quite large • How can we begin to account for this unexplained growth? • Question that “new” growth theory attempts to answer

12. New Growth Theory and Human Development • A number of new growth theory models emphasize role of human capital in addition to labor and physical capital • Acknowledges that labor is more than just hours worked • Reflects skills, abilities, and education • Appears to be a direct link between human capital and technological efficiency • Greater levels of education and training allow an economy to operate in a state of greater technical efficiency • Technology is now an endogenous variable that can be influenced by education and training policies

13. Figure 20.4. Unexplained Growth in Per Capita Incomes

14. Figure 20.5. Human Capital and Unexplained Growth in Per Capita Incomes

15. New Growth Theory and Human Development • Inclusion of human capital in a growth model suggests there might be some important relationships among components of human development index (HDI) • Education has a direct impact on HDI through its one-third weight • Can also have an indirect impact via its impact on human capital • And on per capita income through intensive production function • Health also has a direct impact on HDI through its one-third weight • Might also contribute to human capital and therefore have an indirect impact on HDI via per capita income • Educated persons (particularly women) contribute to healthy children who are more likely to become educated

16. Figure 20.6. Education, Health, Growth, and Human Development

17. Trade, Education, and Growth • Many economists suggest that countries’ openness to international trade has a positive impact on growth in per capita incomes and human development • Might be a way forward for countries such as Ghana • Idea is technological efficiency responds to two impulses • Domestic innovation and accumulation of human capital through education positively affects domestic innovation • Absorption of new technology from the rest of the world • Thought that openness to trade, particularly exports, facilitate this absorption of technology • Exports generate additional technology gains on supply side of the economy • Has caused a number of international economic institutions (especially World Bank) to call for export promotion as an important development strategy • Contrasts with import substitution in which domestic industrialization occurs in response to tariff and quota protection

18. Trade, Education, and Growth • Edwards (1998) used statistical techniques to show that the more open countries are to international trade, the faster their growth in per capita incomes • All exports do not necessarily generate positive technological externalities • Levin and Raut (1997) showed these externalities are notably absent in primary product exports • Characterize many developing countries, including Ghana • Some agreement that accumulation of human capital is an important prerequisite to absorption of technology from abroad

19. Trade, Education, and Growth • Some empirical evidence to support conclusion that human capital and manufactured exports interact positively in supporting growth of per capita incomes • Levin and Raut’s (1997) evidence shows contribution of human capital depends on level of manufactured exports • Contribution of manufactured exports depends on level of human capital • Trade and education can contribute to increases in per capita incomes and, thereby, to HDI both directly and indirectly • Interaction is restricted to manufactured exports

20. Figure 20.7. Export Externalities for Ghana

21. Education • Given the obviously limited nature of educational resources, it is often important to distinguish among primary, secondary, and tertiary (higher) education • Evidence suggests primary education plays a particularly important role in development process • Psacharopoulos (1985) and (1994) has shown that the social returns on investments in primary education exceed social returns on investments in secondary or tertiary education • Suggests that primary education should be a first priority in development strategies • Significant gender aspect to educational levels • Often educational levels (and therefore literacy rates) are lower for girls and women than for boys and men • Increased educational levels for women have important implications in health and population • Psacharopoulos (1994) and Schultz (2002) have shown social returns to education for women are higher than those for men

22. Table 20.2. Education Indicators

23. Health and Development • Contributes to effectiveness of labor in both its hours-worked and human capital dimensions • Per capita income perspective views health as well as education as a means to economic development • In contrast, human development perspective views health as an end • Improved health contributes directly to human development via life expectancy component of HDI

24. Health and Development • Quantitative indicators of the health of a country’s population include • Demographic indicators such as life expectancy and infant and child mortality • May not fully reflect health of surviving population • Morbidity indicators • Difficult to collect • Health service indicators • Ignore quality measures

25. Health and Development • Interdisciplinary field involving economists, sociologists, anthropologists, health professionals, and public policy professionals • Agreement that child morbidity and mortality are important indicators of general state of health in a country • Leading contributors to child morbidity and mortality • Diarrhea • Respiratory infections (e.g. pneumonia) • Undernourishment • Vaccination-preventable diseases (e.g. measles) • Violence in certain countries

26. Health and Development • Educational levels of women contributes positively and significantly to child health • Mediating factors • Hygiene • Nutrition • Child-care factors

27. Table 20.3. Health Indicators

28. Population Issues • Interdisciplinary field in which economists, sociologists, anthropologists, health professional, and public policy professionals are all involved • Important variables in study of population and development are • Crude birth rate (rb) • Number of live births per 1,000 population • Crude death rate (rd) • Number of deaths per 1,000 population • These rates together determine natural rate of population growth (a percentage measure) • Important because, along with rate of growth of physical capital, it determines level of capital-labor ratio, k • In turn, determines level of per capita income, y • The higher is the natural rate of population growth, the less likely will increases in investment translate into increases in per capita income

29. Population Issues • Causal chain determining natural rate of population growth • Primary factors • Socio-cultural factors such as availability of birth control and role of women • More favorable is a society to full participation of women, the lower the total fertility rate • Level of per capita income is also important • Higher the level, the lower the total fertility rate • Higher the level of women’s education, the lower the total fertility rate • Total fertility rate contributes positively and directly to crude birth rate and, in turn, positively to natural rate of population growth • Health policies can contribute to level of child mortality • Higher the level of women’s education, the lower will be child mortality • Child mortality contributes positively and directly to the crude death rate and, in turn, negatively to the natural rate of population growth

30. Figure 20.8. Explaining the Natural Rate of Population Growth