Three Lectures on Economic Efficiency and Growth

1. Three Lectures on Economic Efficiency and Growth Thorvaldur Gylfason

2. Outline and aims Present a policy-oriented overview of the theory and empirical evidence of economic growth Trace linkages between economic growth and its main determinants: saving, investment, and economic efficiency • Exogenous vs. endogenous growth • Liberalization, stabilization, privatization • Education, institutions, natural resources

3. Outline and aims Lecture I Saving, efficiency, and economic growth Lecture II Economic policy and growth Lecture III Education, natural resources, institutions, and empirical evidence

4. 1 Introduction Growth theory As old as economics itself Smith, Marshall, Schumpeter, Keynes Explicit growth theory started with Harrod and Domar in 1940s Why important? Unfashionable in 1960s and 1970s Limits to growth, etc. Growth and development

5. Growing apart Country B: 2% a year • Investment • Efficiency • Institutions • Policy Threefold difference after 60 years GNP per capita Country A: 0.4% a year 60 0 Years

6. 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 Downswing Time

7. Ísland: Landsframleiðsla og framleiðslugeta 1945-2005 Hófleg verðbólga: Undir getu Stöðnun Verðbólguárin: Yfir getu

8. Other comparisons • West-Germany vs. East-Germany • Austria vs. Czech Republic • US vs. USSR • South Korea vs. North Korea • Taiwan vs. China • Finland vs. Estonia • See my Pictures of Growth • www.hi.is/~gylfason/pictures2.htm China vs. Europe: 1:1 in 1400 1:20 in 1989

9. Further comparisons Thailand vs. Burma Mauritius vs. Madagascar Botswana vs. Nigeria Tunisia vs. Morocco Spain vs. Argentina Dominican Republic vs. Haiti

10. Singapore and Malaysia: GDP per capita 1965-2004 Constant 2000 US dollars 5.8% (1.018)39= 2.0 4.0%

11. A tale of two countries

12. A tale of two countries

13. A tale of two countries

14. A tale of two countries

15. A tale of two countries

16. A tale of two countries

17. A tale of two countries

18. A tale of two countries No Yes Yes Yes Yes No ? So, did Singapore benefit from its lack of democracy?

19. A tale of two countries Lee Kwan Yew, of Singapore (1959-1991), would not be surprised “Asian values” vs. Western democracy • “I thought then that wealth depended mainly on the possession of territory and natural resources, whether fertile land ..., or valuable minerals, or oil and gas. It was only after I had been in office for some years that I recognized ... that the decisive factors were the people, their natural abilities, education and training.”

20. Botswanaand Nigeria: GNP per capita 1965-2004 7.1% Constant 2000 US dollars (1.065)39= 11.7 0.6%

21. Spain and Argentina: GNP per capita 1965-2004 2.7% (1.019)39= 2.1 0.6%

22. Mauritius and Madagascar: GNP per capita 1965-2004 Constant 2000 US dollars 4.3% (1.055)39= 8.1 -1.2%

23. Ireland and Greece: GNP per capita 1965-2004 4.2% Constant 2000 US dollars (1.016)39= 1.9 2.6%

24. Basic growth theory Harrod-Domar model Solow model Endogenous growth model Let’s do the algebra

25. A Harrod-Domar model Two assumptions Fixed saving rate Fixed capital/output ratio Implications for growth replacement net gross

26. Harrod-Domar model Three propositions about growth Saving increases growth Efficiency increases growth v = K/Y 1/v = Y/K Depreciation reduces growth

27. Einfalt líkan um innri hagvöxt Stöldrum við: • g = sE - , svo s = 0 => g < 0 Það þarf lágmarkssparnað til að vaxa til að vega á móti afskriftum Sum lönd eru svo fátæk, að þau komast ekki upp á þröskuldinn og eru því dæmd til neikvæðs hagvaxtar: fátæktargildra Er hægt að hjálpa þeim upp á þröskuldinn?

28. Fátækt um heiminn 2001 Milljónir Samtals 2,8 milljarðar Samtals 1,1 milljarður, var 1,5 milljarðar 1981

29. Fátækt um heiminn 2001 % af mannfjölda

30. Er hægt að útrýma fátækt? Er hægt að lyfta öllum upp fyrir dollara á dag? • Hvað myndi það kosta? – að útrýma sárri fátækt Fjöldi fólks undir dollara á dag: 1,1 milljarður Meðaltekjur þeirra eru 77 sent á dag, þurfa 1,08 dollara • Munurinn er 31 sent á dag, eða 113 dollarar á ári Heildarkostnaðurinn er því 124 milljarðar dollara á ári, eða 0,6% af VLF í iðnríkjum • Minna en þau hafa lofað! – og ekki efnt

31. B Output growth equals labor force growth Solow model Four assumptions Full employment Constant growth of labor force Constant returns to scale Saving equals investment

32. Solow model Endogenous output/capital ratio Exogenous Exogenous Endogenous Need to determine k and hence y/k

33. Solow model Dynamic stability of output/capital ratio Stable equilibrium

34. Solow model Dynamic stability of output/capital ratio Stable equilibrium E

35. Solow model Two equations in two unknowns, y and k Long-run equilibrium

36. Solow model E Output per head Comparative statics: E moves in response to changes in s, A, n, and  Output/capital ratio Capital per worker

37. Solow model Four propositions about long-run growth Increased saving increases income per capita Increased efficiency increases income per capita Increased population growth reduces income per capita Increased depreciation reduces income per capita

38. GDP grows at same rate as population plus technology, so GDP per capita grows at rate q Solow model Now allow technological progress Technological progress at a fixed rate Constant returns to scale Growth depends solely on technological progress

39. Closed-form solution to Solow model Labor-augmenting technological progress

40. Closed-form solution to Solow model

41. Closed-form solution to Solow model a(+n+q) is the speed of convergence

42. Closed-form solution to Solow model time

43. Solow model: Convergence Takes 17 years to close half the gap Takes 40 years to close 80% of the gap

44. Solow model: Convergence Output per head Rich country’s initial income per head Poor country must grow faster if it is to catch up Poor country’s initial income per head Capital per worker

45. An Increase in the Saving Rate C C’ P F Output per head E Capital per worker

46. An Increase in Static Efficiency C P’ F P Output per head E Capital per worker

47. An Increase in Population Growth or Depreciation C’ C P E Output per head F Capital per worker

48. An Increase in Dynamic Efficiency (Technical Progress) C’ C F P’ P Output per head E Capital per worker

49. Solow model: Conclusion Three main points to note Long-run growth is exogenous: g = n + q • No role for economic forces, policy or institutions, just technology • But education is good for growth Model implies convergence • Poor countries grow more rapidly than rich The medium term can be quite long • Growth is endogenous for a long while

50. Solow model with education H = skilled labor L = raw labor, b = years of schooling AH grows at n + q + b Education stimulates long-run growth