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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 Deepening

  • 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 Production Function

  • 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 Investment

  • 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 Investment

  • 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 Investment

  • 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 Capita Incomes

  • 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 Development

  • 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 Development

  • 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 Development

  • 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

Education Development

  • 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 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 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 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 Development

  • Educational levels of women contributes positively and significantly to child health

    • Mediating factors

      • Hygiene

      • Nutrition

      • Child-care factors

Population issues
Population Issues Development

  • 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 Development

  • 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