Rethinking the Boundaries of Business School

1. MGRECON 301 Global Economic Environment of the FirmProfessor John ColemanDuke UniversityFuqua School of Business 2012 Rethinking the Boundaries of Business School

2. Production and Long-Term Growth

3. Sustained Growth and Country-Level Income Inequality are Modern Phenomena World-Wide Per-Capita GDP

4. Most of the World is Poor Total 2007 World Population: 6.6 billion

5. The 21st Century may be the Century of Convergence • 2007 population • 6.6 billion - World • 1.3 billion - China • 1.1 billion - India • China and India represent 36 percent of the world’s population

6. How does output increase? Key to our analysis of growth will be the production function Can boost output by increasing factor inputs or using inputs more efficiently

7. Aggregate Production Function • Aggregate production function for the US: y = A k.3n.7 • y = real output (income) • k = physical stock of capital • n = labor input per unit of time • A = level of efficiency or total factor productivity (TFP)

8. Calibrating the Aggregate Production Function The production function is motivated by this fact: • Labor income share is consistently 70% of national income • Capital income share is 30% of national income

9. Labor Income Share of GDP Distribution of National Income, 1994 Employee Compensation as Percentage of GNP 1959-1999 (very stable over time at 70%)

10. US Production Function: Measurement • y, k, measured in billions of 1992 dollars. • n measured in millions of workers. • A is computed by using the production function

11. Output per worker • Labor productivity is output per worker • Living standard is determined by • A: efficiency (or TFP) • k/n: capital per worker

12. International Differences in Output per Worker contribution from Source: Hall and Jones, QJE(1999) Output per Worker = (Capital per Worker contribution) X (TFP)

13. Growth Accountingand Efficiency of the Economy • Growth-accounting equation: • The labor contribution to growth: 0.7 * % growth of labor • Capital contribution to growth: 0.3 * % growth in capital • Growth-accounting equation (per capita):

14. Growth Accountingfor the United States, 1948-2000 growth rate growth rate per capita

15. Recent Productivity in the US

16. Does TFP growth explain convergence?

17. TFP relative to the US

18. Growth Accounting is Everywhere

19. TFP Convergence Assumption Level of TFP U.S TFP growth at constant 1.3% Developing country TFP Income per capita relative to the US (time)

20. Why Care About TFP? • Sustained Growth not possible without TFP growth • Incentive to invest related to return to capital---this falls rapidly to zero without TFP growth • Without TFP growth income will stop growing

21. Law of Diminishing Returns MPK Capital

22. Soviet Union had no TFP growth—return to capital fell to zero

23. Growth from 1,000,000 BC to now • Pre-Industrial Revolution stagnation in per-capita income • Industrial Revolution and TFP • Growing Income Inequality • 21st Century may be the Century of Convergence

24. Lucas: The Industrial Revolution • Malthusian trap • Fixed vs. reproducible inputs • Demographic transition

25. Understanding efficiency • Higher A implies that the economy is more efficient • More output can be produced with the same inputs (labor and capital) • What drives A?

26. Innovation and TFP Growth

27. Technology Adoption Rates Differ Dramatically Across Countries Appropriate Technology?

28. Learning by doing and TFP growth In New Economy same effect is achieved by using computers and other IT --- this also raises y/n.

29. What determines TFP?

30. Relationship between Income and Growth

31. Open Countries Tend to Converge Open: (1) effective protection rates < 40%, (2) quotas on < 40% of imports, (3) no currency controls or currency black markets, (4) no export marketing board, and (5) not socialist.

32. Institutions that Foster Growth • Different types and purposes of institutions • property rights • regulatory institutions • macroeconomic stabilization • social insurance • conflict management

33. The Colonial Origins of Institutions and Development • Life expectancy for European colonists differed greatly by region of colonization • Low mortality regions encouraged the development of governance that replicated home institutions (e.g., United States, Australia, and New Zealand) • High mortality regions encouraged the development of extractive states which set up repressive institutions to maximize the extraction of resources (e.g., Congo and Gold Coast) • Early development of institutions have persistent effects on today’s institutions • But institutions can still change today Source: Acemoglu, Johnson, and Robinson, AER(2001)

34. Growth and Radical Institutional Change: The French Revolution • Ancien Régime in France/Europe • Landed nobility imposed feudalism/serfdom, which tied peasants to land and restricted a free labor market (recall that the vast majority of labor was in agriculture) • Urban oligarchy controlled major occupations by guilds, significantly limiting competition and restricting adoption of new technology • Nobility and clergy were exempted from many taxes, and indeed imposed taxes of their own, and were subject to different laws and courts • French Revolution of 1789 • Abolished feudalism • Abolished guilds and internal tariffs • Significant reduction of power of nobility and clergy • Declaration of equality before the law for all citizens • French Revolution Expanded into parts of Europe • Toppled established regime in Belgium, the Netherlands, Italy, Switzerland, and parts of Germany • New regimes persisted even after the French left Growth under new regime Growth under old regime Source: Acemoglu, Contoni, Johnson, and Robinson, “The Consequences of Radical Reform: The French Revolution,” 2009

35. The World Bank • Created out of Bretton Woods in 1944 • Prior to 1980 focus on loans tied to specific projects in developing countries • Later focused on adjustment lending that were meant to encourage policies to promote overall growth and lower inflation • Some successes: Ghana, Mauritius • What went wrong? • Debt relief created poor incentives • Poor performing countries received as much or more follow-on loans as other countries • WB/IMF gave 18 adjustment loans to Côte d'Ivoire, despite persistent budget deficits of 14 percent of GDP • WB/IMF gave 22 adjustment loans to Pakistan, despite persistent budget deficits of 7 percent of GDP • Adjustment lending to many corrupt governments: 46 adjustment loans to Congo, Bangladesh, Liberia, Haiti, Paraguay, Guyana, and Indonesia Source: Easterly, The Elusive Quest for Growth, 2002.

36. Charter Cities?Optional Topic from www.chartercities.org Charter cities offer a truly global win-win solution. These cities address global poverty by giving people the chance to escape from precarious and harmful subsistence agriculture or dangerous urban slums. Charter cities let people move to a place with rules that provide security, economic opportunity, and improved quality of life. Charter cities also give leaders more options for improving governance and investors more opportunities to finance socially beneficial infrastructure projects. All it takes to grow a charter city is an unoccupied piece of land and a charter. The human, material, and financial resources needed to build a new city will follow, attracted by the chance to work together under the good rules that the charter specifies. 20 min video http://www.chartercities.org/video Paul Romer

37. Course Outline • Growth and Institutions • Labor and Trade • International Capital Flows; Supply-Side Economics • Financial Crisis

38. Country Intl. $ Country Intl. $ Growth and Institutions 2009 per-capita real (PPP) GDP for select countries

39. Labor and Trade

40. International Capital Flows Supply-Side Economics

41. Financial Crisis