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Major project to compare prices internationally implemented by the World Bank with the help of UN and national statistical agencies. • ICP has been implemented by UN Statistical Office since 1968. Link
PPP’s • Divide expenditures into k = 1,..,K categories of goods. • All j = 1,..J countries (in 2005, J = 146) report total expenditure in domestic currency of all categories . • Sample prices of representative goods from each category in each country. • Construct average of those prices (relative to “anchor” economy) for each country j basic heading type of good k .
WDI provides PPP data for many countries using US$ as anchor currency Hong Kong PPP per Category
PPP Conversion Factor • PPP is a value weighted average of relative prices of all K goods.
PPP 2010 One benchmark for thinking about whether a currency is undervalued or overvalued. If PPP < XR, then domestic goods are relatively cheap, currency is undervalued.
GDP in Intl$ • PPP’s are used to construct comparable measures of GDP for multiple countries by converting them into international dollars. Per capita GDP in international dollars is headline way of comparing living standards.
Use real GDP growth rates to construct path of constant price International $GDP for comparisons of production levels across time and space.
Developing countries tend to be relatively cheap with PPP’s being lower than exchange rates. • OECD countries tend to have more similar price structures, though they tend to be relatively more expensive. • High income, non-OECD countries tend to be relatively cheap. • Compare values measured in different currencies using the PPP and exchange rate method.
GDP per Capita vs. Productivity • Per Capita GDP can be broken down into two parts: GDP per Capita Productivity GDP per Engaged Person Employment Rate Engaged Person per Capita = X
. Productivity • Productivity can be broken down into two parts: Productivity GDP per Hour Hour per Engaged Person Productivity GDP per Engaged Person = X
Labor Productivity Data • Key source for international comparisons in productivity is the Total Economy Database • Originally developed at University of Groningen Growth and Development Centre. Link Total Economy Database Link
Patterns of Economic Growth • Developed Economies experienced a golden age of per capita GDP growth during post-war period but have experienced slower growth since 1973 • Many developing economies also experienced fast growth during 1950-1973 but slowed markedly during 1973-1998. Some developing economies (India, Africa) have experienced a growth resurgence since then.
Productivity Catch Up: EuropeSource: Groningen Growth & Development Center 2009 Intl$, GDP per Hour Worked (Y/L)
Productivity Catch Up: East AsiaSource: Groningen Growth & Development Center 2009 Intl$, GDP per Hour Worked (Y/L)
Productivity Catch Up?: Latin AmericaSource: Groningen Growth & Development Center 2009 Intl$, GDP per Hour Worked (Y/L)
Capital Accumulation • Capital Formation – Stock of equipment, machines, structures. • Incremental increase in capital is investment less some measure of depreciation
Capital Productivity • Capital Productivity: Capital investment is a central part of advancing productivity in developing economy but displays diminishing returns.
Measuring Capital ReturnsICOR Incremental Capital –Output Ratio: Ratio of constant dollar investment to increase in output • Measures number of dollar of investment needed to produce an extra dollar of output. LINK • ICOR is volatile, must take long run averages.
Tne Role of Government DevelOPMENT POLICY
Structuralist Theory • Two kinds of economies • Developed • Underdeveloped • Key difference: Rich, developed economies dominated by industry; poor, underdeveloped dominant in agriculture and resources. • Development policy: shift countries from underdeveloped to developed.
Government Intervention • Capital is in short supply in developing economies so must be directed toward building of heavy industry. • Coordination failures – Set of infrastructure necessary to build the industrial economy has multiple inputs that must come on line at the same time. No need for a dam if there is no power network, no need for a power network if there are no factories, no need for factories if there is no power network. • Government can coordinate big push toward industrial development: Rosenstein-Rodan. • Example: India Link • Example: Brazil Link
Industrialization Structuralist Theory Predictions • Rosenstein-Rodan: Growth potential, combination of degree of investment and capacity to organize investment
Structuralist Theory and Trade • UNCTAD Economist Raul Prebisch developed the idea that prices of primary products would fall in value relative to manufactured goods. Link • International trade would always leave underdeveloped economies impoverished. • Use of tariffs and trade restrictions to develop domestic manufacturing sector. • Dependency Theory: International trade enforces a system of power that relegates developing countries to producing raw material and cheap labor. Lesson: self-reliance.
Criticisms • High cost of imports and import substitutes reduces economic efficiency making people poorer. • Developing economies operate on too small of a scale to be efficient in capital heavy goods. • Created monopolies protected from competition • Source of corruption Link - Krueger.
Washington Consensus • Fiscal Discipline.- Balanced Budget. • Reordering Public Expenditure Priorities. Eliminate biased subsidies, increase health, education and infrastructure. • Tax Reform. Broad tax base with moderate marginal tax rates. • Liberalizing Interest Rates • Competitive Exchange Rate http://www.iie.com/publications/papers/williamson0904-2.pdf
Identified as a consensus for development by policymakers in Washington (World Bank, IMF) and particularly Latin America. • Trade Liberalization • Liberalization of Inward Foreign Direct Investment. • Privatization. • Deregulation. specifically on easing barriers to entry and exit. • Property Rights
Neo-classical ViewPhysical & Human Capital Deepening • High investment rates beginning in 1970’s • Rapid growth in education rates. • Macroeconomic Stability: Low inflation, small budget deficits • Market Orientation: South Korea vs. North Korea
Revisionist View • East Asia not exemplar of Washington Consensus • Government heavily involved in the economy • Developmental State – Chalmers Johnson • Ideological devotion to development • Independent bureaucracy embedded within the economy playing a leading role. • Developing industries protected from international competition • Friedrich List’s American system
World Bank View • High levels of investment supported by high level of savings • Government institutions: Savings banks and mandatory provident funds developed to overcome market failures • Expansion in Education Broad based rather than concentrated in elite
Government Intervention • “Market friendly” – Macroeconomic stability and strong property rights encourage private investment but,… • Strong Bureaucratic State to Promote Growth Key Interventions • Financial repression to promote corporate investment • Allocation of Resources (Credit & Foreign Exchange) to Export Industries
Market Failure: Externalities • Some economic activities creates negative spillovers: Pollution, Crime • Private benefits but public costs. • Some economic activities create positive spillovers: knowledge. Developing new knowledge may create public benefits that will accrue to people who do not pay for the costs
Pillars of East Asian Growth MiracleWorld Bank Chief Economist View • Gov’t intervention in East Asia overcomes market failures • Underdeveloped financial markets – gov’t intervention fills • Gov’t intervention supports knowledge producing activities. • Technical education and research • Deliberative councils, research consortia • FDI • Export industries
Foreign Direct Investment Two key elements need to be emphasized in the definition of FDI: • long-term nature or of “lasting interest.” • the investor has a “significant degree of influence” on the management of the enterprise. For operational purposes, 10 per cent of the voting shares or voting power is the level of ownership necessary for a direct investment interest to exist (IMF, 1993, paragraph 362; OECD, 2008, paragraph 117) UNCTAD Training Manual on Statistics for FDI and the Operations of TNCs Volume I FDI Flows and Stocks LINK