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Efficiency, Asia, and Economic Growth

Efficiency, Asia, and Economic Growth. Thorvaldur Gylfason. Growing Together, Growing Apart. West Germany vs. East Germany. South Korea vs. North Korea. Rapid growth. Mauritius vs. Madagascar. Botswana vs. Nigeria. Tunisia vs. Morocco. National economic output. Thailand vs. Burma.

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Efficiency, Asia, and Economic Growth

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  1. Efficiency, Asia, and Economic Growth Thorvaldur Gylfason

  2. Growing Together, Growing Apart West Germany vs. East Germany South Korea vs. North Korea Rapid growth Mauritius vs. Madagascar Botswana vs. Nigeria Tunisia vs. Morocco National economic output Thailand vs. Burma Spain vs. Argentina Finland vs. Estonia Slow growth Taiwan vs. China Time

  3. Economic Growth: The Short Run vs. the Long Run Economic growth in the long run Potential output Actual output Upswing National economic output Business cycles in the short run The crisis of 1997-98 is irrelevant to Asia’s long-term growth potential Downswing Time

  4. Economic Growth: The Short Run vs. the Long Run • To analyze the movements of actual output from year to year, viz., in the short run • Need short-run macroeconomic theory • Keynesian or neoclassical • To analyze the path of potential output over long periods • Need modern theory of economic growth • Neoclassical or endogenous

  5. The Neoclassical Theory of Exogenous Economic Growth Traces the rate of growth of output per capita to a single source: Technological progress Hence, economic growth in the long run is immune to economic policy, good or bad “To change the rate of growth of real output per head you have to change the rate of technical progress.” ROBERT SOLOW

  6. The New Theory of Endogenous Economic Growth • Traces the rate of growth of output per capita to three mains sources: • Saving • Efficiency • Depreciation “The proximate causes of economic growth are the effort to economize, the accumulation of knowledge, and the accumulation of capital.” ARTHUR LEWIS

  7. Exogenous vs. Endogenous Growth • The neoclassical view • that economic growth in the long run is merely a matter of technology does not throw much light on the spectacular growth performance of Asia since the 1960s • The new view • that long-run growth depends on saving, efficiency, and depreciation is more illuminating • Besides, it’s not really new, because Adam Smith knew this (1776)

  8. Sources of Endogenous Growth • Saving • Fits the Asian experience very well • No coincidence that saving rates of 30-40% of GDP went along with rapid economic growth • No coincidence either that many African economies with saving rates around 10% of GDP have been stagnant • Important implication for economic policy • Economic stability with low inflation and positive real interest rates encourages saving, and thus is good for growth

  9. Sources of Endogenous Growth • Efficiency • Also fits the Asian experience very well • Technical progress good for growth because it allows us to squeeze more output from given inputs • But that is exactly what increased efficiency is all about! • Thus, technology is best viewed as just one aspect of general economic efficiency • Important implication for economic policy • Everything that increases economic efficiency, no matter what, is also good for growth

  10. Sources of Endogenous Growth • Efficiency • Liberalization of prices and trade increases efficiency, and thus is good for growth • Stabilization reduces the inefficiency associated with inflation, and thus is good for growth • Privatization reduces the inefficiency associated with state-owned enterprises, and thus … • Education makes the labor force more efficient • Technological progress also enhances efficiency • The possibilities are virtually endless!

  11. Sources of Endogenous Growth • This is good news for Asia • If growth were merely a matter of technology, we would not be able to do much about it • Except to follow technology-friendly policies by supporting R&D and such • But if growth depends on saving and efficiency, there are things that we can do, in the private sector as well as through the public sector, to foster rapid economic growth • Because everything that is good for saving and efficiency is also good for growth

  12. Economic Growth Prospects for Asia • They look bright • Impressive track record since the mid-1960s • High saving rates • channeled, mostly, into high-quality investment • Strong emphasis on efficiency • 1. Liberal price and trade regimes • 2. Low inflation • 3. Strong private sector • 4. More and better education • 5. Limited natural resources • 6. Flexible labor markets The crisis of 1997-98 does not seem to dim Asia’s long-run growth prospects because the fundamentals are strong

  13. Natural Resources and Economic Growth Abundant natural resources appear harmful to growth

  14. Natural Resources and Corruption Abundant natural resources appear conducive to corruption

  15. Labor Markets and Growth • Rigidity of European labor markets • Centralized wage bargains • Detailed regulations • Flexible labor markets in the USA • US labor markets are more conducive to job creation than European labor markets • ... but at the cost of a less even distribution of income in America than in Europe

  16. Unemployment and Growth • Europe vs. East Asia • Labor markets in East Asia are more flexible and less centralized than in Europe • Since 1980 unemployment in East Asia has generally been lower than in Europe • In flexible labor markets wage claims accord more closely with productivity developments • Advantages of efficiency through non-intervention by the State are no smaller, and no less tangible, in labor markets than in other markets

  17. Unemployment and Growth Flexible labor markets seem to have contributed significantly to East Asia’s rapid economic growth over the past 30 years Efficiency and flexibility are not, however, the sole desirable attributes of labor market arrangements There is also a basic human need for a fair system of social security including unemployment insurance designed to fend off the worst social and economic ramifications of economic shocks

  18. In Conclusion • Much progress in economic policy around the world in the 1990s • Growth-friendly reforms widely embraced • among ordinary people and politicians across the political spectrum, not only in Asia, but also, increasingly, in other parts of the world • Therefore, the medium-to-long-term growth outlook for Asia is bright • as long as ...

  19. In Conclusion … economic and institutional reforms continue so as to preserve a healthy climate for saving, high-quality investment, and increased efficiency across the board ‘Reformers have the idea that change can be achieved by brute sanity’ George Bernard Shaw To grow or not to grow is in large measure a matter of choice

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