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Growth, Trade, and Development. CHAPTER 20. 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 129 th in the world

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  • 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?
old growth theory
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
sources of per capita income increases
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
old growth theory1
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
old growth theory2
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
old growth theory3
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
new growth theory and human development
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
new growth theory and human development1
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
trade education and growth
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
trade education and growth1
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
trade education and growth2
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
  • 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
health and development
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
health and development1
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
health and development2
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
health and development3
Health and Development
  • Educational levels of women contributes positively and significantly to child health
    • Mediating factors
      • Hygiene
      • Nutrition
      • Child-care factors
population issues
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
population issues1
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