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Economic Governance and Sustained Growth

Economic Governance and Sustained Growth. Thorvaldur Gylfason. introduction. Overview of general theme of conference: economic governance and sustained growth Picture to be presented will be painted with a broad brush, covering Main determinants of efficiency and growth

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Economic Governance and Sustained Growth

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  1. Economic Governance and Sustained Growth Thorvaldur Gylfason

  2. introduction • Overview of general theme of conference: economic governance and sustained growth • Picture to be presented will be painted with a broad brush, covering • Main determinants of efficiency and growth • Empirical cross-country growth patterns observed • 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 is local

  3. Importance of growth • Our standard of living today depends on one thing only, by definition: economic 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)

  4. Growing apart • Thailand and Zambia started out in a similar position and grew apart • Thailand pursued growth-friendly policies, stressing liberal trade, stability, private enterprise, and education GDP per capita 1960-2003 (US$ at 2000 prices)

  5. Growing apart • Argentina and Sweden went hand in hand 1900-1930 and then grew apart • Sweden pursued free trade, liberal democracy, and income equality, and avoided high inflation • Argentina did not GDP per capita 1900-2003 (US$ at 1990 prices)

  6. Outline of presentation • What makes countries grow • Economic efficiency and growth • Economic policies and institutions • Education and health care • Business governance • Monetary and financial policies and institutions • External governance • Empirical evidence of cross-country linkages between governance and growth as we go along

  7. What makes countries grow • First things first: Output is produced by labor, capital, and other inputs • Output per capita can grow through accumulation of capital through saving and investment • Output per capita, however, cannot grow through population growth, on the contrary • But, output per capita can grow through improvements in labor, via investments in human capital: Education and health care • Investment and education: Key drivers of growth

  8. What makes countries grow • Why do education and health care matter? • Because they increase labor productivity • This is also why technological progress is good for growth • Technological progress enables firms to squeeze more output from given inputs • But so does increased efficiency! • Latin American story about air fares • Increased efficiency is tantamount to technological progress, which helps growth

  9. efficiency and growth • In sum, output per capita depends on the quantity and quality of inputs • Quantity of inputs can be increased through accumulation, esp. capital accumulation • Quality of inputs – their productivity! – can be increased through increased efficiency • Education and health • Liberalization • Stabilization • Privatization • Aspects of institutions Policies Check them out one by one

  10. Education and growth POLICIES r = rank correlation • Education lifts labor productivity, thereby increasing overall economic efficiency and growth of output • From unskilled to skilled labor • Data for 131 countries, 1960-2000 r = 0.50

  11. fertility and growth POLICIES • There is another way to provide more and better education to children • Produce fewer children to increase their average “quality” • 163 countries, 1960-2000 r = -0.54

  12. Public Health and growth POLICIES • Good public health, reflected in longevity, is also conducive to increased labor productivity and economic growth • 156 countries,1960-2000 r = 0.54

  13. Public Health and growth POLICIES • Increased spending on health care also spurs economic growth • Close connection between public health and health care, i.e., between output and input • 162 countries,1960-2000 r = 0.40

  14. liberalization and growth POLICIES • Liberalization of prices increases efficiency in resource allocation • Liberalization of trade increases efficiency in division of labor • 163 countries,1960-2000 r = 0.26

  15. liberalization and growth POLICIES • Exports are not a good indicator of openness because size matters • So look at import duties as well • Higher duties hurt growth, but connection is weak • 147 countries,1960-2000 r = -0.23 r = 0.20

  16. liberalization and growth POLICIES • Economic theory is clear, from Adam Smith (1776) on: external as well as internal trade is good for growth • Good external governance is good for growth • Autarky spells disaster, always and everywhere Darkness in North-Korea

  17. stabilization and growth POLICIES • Stabilization increases efficiency by reducing production distortions, uncertainty, inflation tax, andovervaluation • 164 countries,1960-2000 r = -0.46 r = -0.46

  18. stabilization and growth POLICIES • High inflation is a sure sign of lax fiscal and monetary policies, so sound policies support rapid growth • Sound financial institutions, incl. independent central banks, also support rapid growth r = -0.46 r = -0.46

  19. privatization and growth POLICIES • Privatization replaces political motives by profit motive in business • Private enterprise is usually more efficient than state-owned enterprises • 38 countries, 1978-92 r = -0.35

  20. Pause: where do we stand? • Growth differentials across countries can be traced to several different interconnected factors • Private initiatives • Investment • Fertility • Public policies • Education • Health care • Liberalization • Stabilization • Privatization Overlaps between private and public spheres

  21. Pause: where do we stand? • This is not all, however • Institutions and geography • Institutions (Aspects of social capital) • Corruption • Inequality • Liberal democracy • Geography • Primary production (Agriculture, mining, etc.) • Natural resource dependence • Institutions or geography? • False contrast • There is room for both, side by side

  22. Corruption and growth INSTITUTIONS • Two views • Corruption greases wheels of production and exchange and thus helps growth • Corruption breeds inefficiency and hurts growth • 88 countries,1960-2000 r = 0.69 More corruption

  23. Corruption and growth INSTITUTIONS • So, good business governance is good for growth • Argument can be extended to other aspects, such as secure property rights and effective bankruptcy laws • Same story r = 0.69 More corruption

  24. inequality and growth INSTITUTIONS • Two views • Inequality sharpens incentives and thus helps growth • Inequality endangers social cohesion and hurts growth • 117 countries,1960-2000 r = -0.27

  25. Liberty and growth INSTITUTIONS • Two views • Political oppression restrains special interest groups and thus helps growth • Political oppression breeds inefficiency and hurts growth • 117 countries,1960-2000 r = -0.64

  26. Democracy and growth INSTITUTIONS • Again, two views • Democracy plays into hands of special interest groups that hurt growth • Democracy facilitates change of government and helps growth • 143 countries, 1960-2000 r = 0.50 r = 0.48

  27. manufacturing and growth INSTITUTIONS • Manufacturing is an important source of technological innovation and progress and thereby also of economic growth • 156 countries,1960-2000 r = 0.48

  28. Agriculture and growth INSTITUTIONS • Agriculture and mining are low-skill labor intensive and offer few spillover benefits to other industries • Natural resources: Mixed blessing if not well managed • 156 countries,1960-2000 r = 0.48 r = -0.59

  29. In conclusion • 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 through good governance: judicious policy undertakings and sound institutions • Education, family planning, health care • Free trade, stable prices, private enterprise • Honesty, equality, liberty, democracy • Not too much dependence on agriculture and natural resources THE END

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