Engines of Growth and Africa’s Economic Performance ECON 3510 (Text Chapter 5) May 13, 2010

1. Engines of Growth and Africa’s Economic Performance ECON 3510 (Text Chapter 5) May 13, 2010

2. Approach of Text • Outline Approaches to explaining economic growth and standards of living; 1.”Elementary Engines of Growth” (Theft, Cartels, Prices) 2. “Static Engines…” (“Putting idle resources to work, Allocative efficiency, Comparative advantage) 3. Accumulation of Productive Resources (Physical Capital, Human Capital, 4. Dynamic Effects (Increasing returns, learning by doing) 5. Technological Change 6. Agglomerative Effects • Examine relevance of each approach to Africa

3. I. “Elementary Engines of Growth” 1. Theft via Conquest; taxation of the vanquished. Enslavement of the vanquished 2. Cartel Formation (a la OPEC) 3. International Commodity Price Fluctuations Relevance for Africa?

4. “Static Engines of Growth” • “Vent for Surplus” or “Put idle resources to work” How? …. • “Allocative Efficiency”: allocate resources in the most efficient way possible. How? “get the prices right; cut interference by the state; anti-combines policy… • Trade & Comparative Advantage Relevance for Africa? Author’s Conclusion: These are important, but do not explain the rise of incomes in DMEs or middle income LDCs

5. Productivity: Its Role and Determinants A country’s standard of living depends on its ability to produce goods and services, i.e. “Productivity” Productivity refers to the quantity of goods and services that a worker can produce for each hour of work. What explains productivity?

6. Example of the role of Productivity in shaping Production per person: Agriculture in Canada and Africa Generally Canada: - most up-to-date technologies (seeds, machines etc.) - large farms, much land per farm family; - much machinery, equipment, buildings & livestock per farm; - much education per farmer; - serviced by a broad range of other activities (machine dealers, transport, fertilizer firms, R&D, etc.) ** about 4% of the labour force is in agriculture; yet Canada has large “net exports” of food.

7. Sub-Saharan African Agriculture: - traditional simple technologies; - small farms; little land per farm family; - reliance on simple hand tools, e.g. hoes, machetes and pangas; - little education for farm people; “Great skill; simple technology” ** around 60-80% of the labour force in African countries is in agriculture.

8. Result: One Canadian farm worker feeds +/- 25 to 30 people, plus exports; One African farm family feeds itself and about one additional person on average. Implications ??

9. How Is Productivity Determined? The Factors of Production include: 1. Physical Capital 2. Human Capital 3. Natural Resources 4. Technological Knowledge • Capital is a produced factor of production, i.e. capital is an input into the production process that in the past was an output from production. To which I would add 5. “Enterpreneurship” and 6. “Social Capital”

10. The Factors of Production: 1. Physical Capital The stock of equipment and structures that are used to produce goods and services. Examples: Produced through investment.\ How to achieve growth? Save and Invest in Physical Capital As a theory of growth? Necessary but Insufficient Relevance for Africa?

11. The Factors of Production: 2. Human Capital The economist’s term for the knowledge and skills that workers acquire through education, training, and experience. Like physical capital, human capital raises a nation’s ability to produce goods and services. Produced through investment in people Examples: family environment, health, education, nutrition, sanitation, on-the-job training; water availability As a “Theory of Growth”? Important but not the whole story Relevance for Africa?

12. The Factors of Production: 3. Natural Resources Inputs used in production that are provided by Mother Nature, such as land, rivers, and mineral deposits. • They may not be necessary for an economy to be highly productive • but they sure can help [or sometimes hinder: the “curse of oil wealth”] • Renewable Resources: • Trees, forests, fish stocks • Non-Renewable Resources: • Oil, natural gas; minerals of various sorts [Note: These also usually require Investment for their harnessing by humans] Relevance for Africa?

13. The Factors of Production: 4. Technological Knowledge Definition: The understanding of the ways to produce goods and services; how factors of production of all kinds can be combined to produce goods and services Human Capital refers to the resources expended transmitting this understanding to the labour force. Note: Both of these are produced by “investment:” • Education, training & learning of all sorts; and • R&D

14. Technological Change: a “dynamic” factor: Includes: • Embodied tech in capital equipment • Embodied in Consumer Goods • Scientific & tech journals, texts and publications • Patents, intellectual property • Process technology • Embedded in people’s brains and capabilities • In established enterprises Can raise the productivity of Labour and Capital and can economize on resources. Examples:

15. Technological Change: a “dynamic” factor: Relevance for Africa?

16. Relevance for Africa • Existence of a “backlog” of knowledge: • A broad range of newer technologies is awaiting implementation in Africa • Investment in new technologies via R & D is expensive and out of reach • Transfer of Tech embedded in capital goods requires high levels of Investment and Savings and/or large role for MNC. Therefore S & I are doubly important

17. The possibility of “catching up” (applying newer technologies to a broad range of activities) • Via purchases of capital equipment; • Via purchases of new consumer goods (telephones, computers, drugs & medications, new plant varieties…..) • Via learning from books, manuals etc……. • Via tech transfer in enterprises or purchases of process systems

18. Factors of Production: 5. EntrepreneurshipNote: This is not in the text but is nonetheless important.] Entrepreneurship: - performs a central role in an economy • largely ignored in economic theory An entrepreneur: • perceives and seizes an opportunity for the achievement of an objective, • visualizes and plans how the objective can be achieved, • undertakes to do everything necessary to implement the vision,” • brings together all of the other factors of production; Entrepreneurship is the “Key Factor of Production” Could operate in politics, academia, religion, music, sports, or any area of human endeavor. It can be exercised in different varieties of economic system andin the private, public and voluntary sectors

19. Harvey Leibenstein (1968). The key author in this area identified the following roles of entrepreneurs: • a “market connecting role,” (linking up the potential market for the outputs with the markets for all the relevant inputs); • a “gap-filling role,” (doing what is not normally or easily done through markets); • an “input-completing role,” (improvising the provision of all the inputs necessary for the enterprise); and • an “enterprise creating role,” (bringing together the inputs for the production of an output over a period of time and in some sort of organization).

20. In pathological circumstances - entrepreneurship may become deformed. When law and order break down or when entrepreneurial activities are illegal, entrepreneurship may become criminalized, perhaps within Mafia-like organizations. • Entrepreneurship alone is insufficient to generate growth and development. Instead, it requires a supportive, legal, and orderly institutional environment. [Source: H. Liebenstein, “Entrepreneurship and Development,” American Economic Review, Vol. 58 No. 2, May 1968.] Relevance for Africa?

21. Agglomeration Effects • Economic Geographical Factors; • the economics of industrial location • Agglomerative economies (Providing cost advantages to producers) • infrastructure; • skilled labour pools; • availability of necessary inputs, repair services, etc. • government services and bureaucracy; • markets; • diversified range of all economic activities • financial institutions, educational institutions; • technological funnel effect • Amenities

22. 2. the "clustering" phenomenon (to be elaborated in class) • Note the importance of collective action and group trust among producers • "cumulative and circular causation“ 3. Note the normal hierarchical structure of institutional structures and urbanization patterns everywhere; • ("Central Place Hierarchies") 4. Transportation “Nodes”

23. Relevance for Africa • past geographical disadvantages (re communications, rivers, roads & railways) • Future potentials will open with new transport infrastructure • Importance of establishing health & attractive urban centres • to reap “agglomeration economies” and change the cost/benefit calculus re industrial locationl • Importance of focusing on “clusters” of economic activities • Importance of Imports of Capital Equipment, implieas also export orientation.

24. Factors of Production: 6. Social Capital • “Social Capital:” increasingly recognized as an additional “factor of production” as well as being of significance from a political science or governance perspective. • Various analysts emphasize the importance of “social capital” in an economy, and as a factor that can promote economic development and for the reduction of poverty. [See the World Bank Web Site on social capital: http://www1.worldbank.org/prem/poverty/scapital/home.htm]

25. What is Social Capital? • “Social capital refers to the institutions, relationships, and norms that shape the quality and quantity of a society's social interactions.. • Social capital is not just the sum of the institutions which underpin a society – it is the glue that holds them together.” • [Source: the above-mentioned World Bank Web Site]

26. Social capital refers to connections among individuals – social networks and the norms of reciprocity and trustworthiness that arise from them. • Social Capital would include • Formal institutions • the formal and informal associations between people for many purposes: recreational, civic, economic, friendship, ethnic, ….) • the informal relationships between people at the work-place (enterprises or governmental or “not-for-profit”), the community, • civic responsibility at all levels (Parent teachers associations, block associations..) • honesty, “trust” and civic virtue

27. How Could Social Capital be a “Factor of Production”? 1. Enterprises and bureaucratic or governmental offices can only operate effectively if there is a level of honesty and trust among the employees. - corruption, distrust and dishonesty can lead to ineffectiveness and break down 2. The stronger the associational ties among citizens the stronger will be the cooperative efforts among people and the more effective will enterprises and bureaucracies be. Mancur Olsen disagreed: some such associations may push for their own interests at the expense of the general good. Reference: [Putnam, R. D. (1995) 'Bowling Alone: America's Declining Social Capital', Journal of Democracy 6:1, Jan, 65-78.http://muse.jhu.edu/demo/journal_of_democracy/v006/putnam.html] Relevance for Africa?

28. The Production Function Income depends upon Labour, Physical Capital, Human Capital and Natural Resources: or: Y = AF(L, K, H, N) where “A” is a variable that reflects production technology Constant Returns to Scale: a doubling of inputs causes output to double as well. Then: xY = AF(xL, xK, xH, xN) Then if we set x = 1/L, then: Y/L = AF(1, K/L, H/L, N/L) Meaning? Output per worker depends upon capital per worker, education etc per worker, and natural resources per worker.)

29. IV. Economic Growth, Development and Public Policy • Public policies, laws, traditions, and institutions are critical to transforming resources into useful output. • Governments can do many things to encourage or impede the attainment of high living standards.

30. Government policies: • Establish law and order, political stability and secure property rights • Encourage investment in human capital, esp. education, training, health ….... • Encourage saving and investment • Promote liberalized trade and technology policies • Control of population growth • Promote research and development and technological change

31. Government policies: 1. Encourage saving and investment • One way to raise future productivity is to invest more current resources in the production of capital. • Governments can encourage capital accumulation: • from domestic sources by imposing reasonable taxes on interest and dividend income. • Provide relevant infrastructure • From foreign sources by making such capital secure and welcome domestically.

32. More on Investment: Digression on Foreign Investment Investment from Abroad - Direct Investment and Portfolio Investment Benefits from Direct Foreign Investment: - supplements domestic savings; - transfer of new technology, usually; - higher-productivity job creation; - capital goods importation in a working package; - entrepreneurial and managerial importation; - access to foreign markets some times.

33. Costs of Direct Foreign Investment: • Profit expatriation into the future; • Foreign enterprise interests may diverge from host country’s national interest • Does technology really get “transferred “ in a meaningful way? • Is domestic entrepreneurship promoted or stifled? • Are inappropriate consumer patterns or producer technologies transferred from DFI? (notably for poor countries?)

34. Government policies: 2. Encourage education and training • Education and training are at least as important as investment in physical capital. • Considered as essential “public goods” in virtually all countries, [but also as partial “private goods” as well] • It is necessary for countries to provide basic education so that the work force can acquire the specialized skills leading to higher productivity.

35. The Role of Government:3. Establish political stability, good governance and secure property rights. • The maintenance of “law and order” are vital • Political stability is also vital to promote savings, investment and productive activities • Representative Democracy?

36. Government policies: 4. Promote Trade Liberalization • To exploit comparative advantage and maximize production and efficiency, it is important for countries to have the opportunity to sell abroad and to be able to purchase from lower opportunity cost producers. • Some countries engage in: • Inward-orientated trade policies • Outward-orientated trade policies

37. Contentiousness of the issue: “Globophobiacs” vs. Economists & Practicioners Some Examples: 1. South Korea vs North Korea 2. Latin American Cases 3. China, 4. “Asian Tigers” 5. Ireland & Estonia Explanations?

38. Government policies: 5. Control of Population Growth • Population is a key determinant of a country’s labour force. Large populations tend to produce greater total GDP, however. • Higher GDP doesn’t mean “higher well-being”, GDP per person is more accurate. • High population growth reduces GDP per person.

39. Fundamental Research: in Universities, public sector and private enterprises; Expensive; of lesser relevance for many African countries at this time Innovation and applied technological advancement: usually implemented by private firms and public agencies. Important at this time Government’s role is to encourage applied research and development of new technologies and Government policies: 6. Research and Development

40. Hans Rosling on Information regarding Development • http://video.google.ca/videoplay?docid=2670820702819322251 “Gapminder World” (Rosling’s Website) http://www.gapminder.org/ Hans Rosling, Professor of International Health, KarolinskaInstitutet, Stockholm, Sweden since 1998, uses animated charts and minimalistic diagrams to explain the world we live in. Poverty, income levels, income distribution and health can be seen at once shaping or being shaped by world events, technology and the passing of time.