Motoo Kusakabe ,
Senior Counselor to the President
EBRD

Goal of my Presentation
• Has determinant of growth changed as economy becomes “global knowledge economy”?
• Did such change take place only for higher income countries? Or the changes took place also in lower-income countries?

Has the Poverty reduced?
• Extreme Poverty Head-Count (less than $1 a day)
– 1981; 166 million people
– 2001; 108 million (35% reduction)
• Reduction is mainly in East Asia and South
Asia
• Sub-Saharan Africa, CIS; poverty increased
• Latin America; almost no reduction

180
160
140
120
100
80
60
40
20
0
E as t A sia
E ur op e
&
Ce
La tin
A m er nt ra l A sia ic
M id dle a
S
E as t &
N ou th or th
A sia
A fri
S ub ca
-S ah ar an
A
W or ld fri ca
1981
2001

What countries grew most rapidly?
Highest Growth Countries 23 years
China 8.23%
Korea, Rep.
Ireland
Thailand
Botswana
Mauritius
Singapore
India
Hong Kong, China
Malaysia
5.97%
4.70%
4.66%
4.63%
4.35%
3.99%
3.69%
3.61%
3.43%

“Elusive quest” for the growth:
Economists’ thoughts on growth
1. Investment & Savings; 50’s & 60’s
2. Trade and Export Performance ; 70’s
3. Macro/Structural Policies; 80’s & 90’s
4. Human Capital; 90’s
5. Governance, Investment climate; 2000’s
6. Innovation, Entrepreneurship, ICT

Orthodox view on economic growth:
1. Neo-classical view plus “growth regression”
2. GDP growth rate is regressed by various indicators cross country
3. Identify “Robust” explanatory variables
• Robustness means significant correlation at
5% levels and having the right sign, regardless of other control variables

Four “Robust Factors” of growth
• Studies identified Four Robust Factors of
Growth:
1. Investment / GDP Ratio
2. Export / GDP ratio or index of “trade openness”
3. Governance Index
4. Initial GDP per capita
• Most of other indicators are “fragile” in explaining growth
– Education, financial, macro, innovation,etc

Traditional View on Growth:
Three stage of development
1.
Basic economic governance (Lower Income
Countries)
–
Governance, Primary education, financial sector,
2.
Export-led Growth (Higher Income Countries)
–
Export and FDI promotion
–
Investment in physical capital
–
Secondary Education
3.
“Innovative” Technology-led Growth (Advanced
Countries)
–
Innovation, R&D, ICT
–
Tertiary Education

Is Governance Engine of
Growth?
• Governance is considered as an important determinant for growth.
• How is the empirical evidence?

High correlations, if we take simple correlation
• Correlation between governance indicators (2004) and growth rate during past 23 years
80.00%
70.00%
60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
Voic e
Pol.
Sta
Gov bilit
. Eff y
Reg
. Q ectiv
Rule e ualit y
Cor aw rupt ion
Lower
Higher

Governance had a smaller or negative impact on growth in the next decade
•
Correlation between governance indicators in 90s and economic growth in 2000’s
0%
-5%
-10%
-15%
-20%
25%
20%
15%
10%
5%
Voic e
Rule
of L
Gov aw
. Eff
Reg ectiv e.
ulat ory
Corr uptio n
Lower
Higher

Higher growth produces better governance later
• Correlations between Per capita GDP growth rates in 90’s
Governance Indicators in 2000’s and
35%
30%
25%
20%
15%
10%
5%
0%
Vo ice
Ru le of
La w
Go v.
Re gu
Eff ec tiv e.
lat ory
Co rru ptio n
Lower
Higher

It is an over-expectation that governance can produce higher growth, particularly in lower income countries
In higher income countries, competing for
FDIs, governance becomes more important, but it has a relatively small impact on growth

Is Saving/investment an engine of growth?
• Economist, like Rostow, thought that investment decides the economic growth and lack of saving in developing countries is the source of slow growth.
• Role of International aid was thought to fill the gap between necessary investment and actual domestic savings

Traditional view on saving & investment
• Increase domestic savings and domestic investment & FDIs is most important
• Financial Gap approach: if the domestic saving is short of covering investment needs, rely on foreign aid and foreign borrowing to invest
• International aid is focused on large infrastructure projects

If we look at more carefully the causality,
• To examine the “causality”, correlation of saving and investment in one decade on the economic growth of the next decades are calculated.

Savings have a negative correlation with next decades’ growth
30%
20%
10%
0%
-10%
-20%
-30%
-40%
-50%
-60%
60 s t o7
0s
70 s t o 8
0s
80 s t o 9
0s
90 s t o 0
0s Lower
Higher

Growth has a positive impact on savings in succeeding decades
• Correlation between GDP per capita growth rates &
Gross Domestic Saving Ratio in the succeeding decades
40.00%
30.00%
20.00%
10.00%
0.00%
-10.00%
-20.00%
60s to70s 70s to 80s 80s to 90s 90s to 00s
Lower
Higher

Investment has negligible correlation with growth after 70s
50%
40%
30%
20%
10%
0%
-10%
-20%
60s to70s 70s to 80s 80s to 90s 90s to 00s
Lower
Higher

Rather growth causes higher investment in the succeeding decades
60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
-10.00%
-20.00%
60 s t o7
0s
70 s t o 8
0s
80 s t o 9
0s
90 s t o 0
0s
Lower
Higher

Savings & Investment:
Policy implication
• Increase in savings & investment does not automatically bring about higher growth
• More often higher investment in inefficient projects through external borrowing caused problem
• Higher economic growth will increase the savings & investment

Bad macro/structural policies were considered to be the cause of slow economic growth
World Bank /IMF launched the “structural adjustment” approach in 80s. What is its relevance to economic growth?

Inflation has a strong negative impact on growth in the next decades
•
Correlations between inflation rate (CPI) and per capita GDP growth rates in the succeeding decades
20%
10%
0%
-10%
-20%
-30%
-40%
-50%
Lower
Higher
60 s t o7
0s
70 s t o 8
0s
80 s t o 9
0s
90 s t o 0
0s

Government consumptions has a mixed results on growth?
Correlation between general government final consumption (GDP ratio) and per capita GDP growth in the succeeding decades
40.00%
30.00%
20.00%
10.00%
0.00%
-10.00%
-20.00%
60 s t o7
0s
70 s t o 8
0s
80 s t o 9
0s
90 s t o 0
0s
Lower
Higher

Structural adjustment approach also encouraged open trade policy. Many countries promoted export, particularly hi-tech export.
How effective were such policies?

Strong correlation between export to growth
• Correlations between the increase of export share in GDP and growth in the next decades
10%
0%
-10%
-20%
-30%
50%
40%
30%
20%
60 s t o7
0s
70 s t o 8
0s
80 s t o 9
0s
90 s t o 0
0s
Lower
Higher

What factors explain the high export growth?
 IT Export performance
• 1. China
• 2. Korea
• 3. Thailand
• 4. Ireland
• 5. Malaysia
• 6. Hong Kong
• 7. Bangladesh
• 8. Mexico
• 9. India
• 10. Syria
13.7% OO
12.5% OOO
11.5% OO
11.0% OOOO
10.8% OOO
10.6% O
10.0%
10.0% OO
9.1%
8.8%

Foreign Direct Investment has a strong impact on growth in higher income countries
• Correlations between Gross Foreign Direct Investment (% of GDP) and
GDP per capita growth rate in the succeeding decades
60%
50%
40%
30%
20%
10%
0%
-10%
-20%
70 s t o 8
0s
80 s t o 9
0s
90 s t o 0
0s
Lower
Higher

Export: Policy implication
• Export is the most important growth determinant both in lower & higher income countries
• Growth of Export/GDP is the good measure of efficiency & competitiveness of the economy
• Export growth is strongly related to hightech, ICT related export

Education was seen as the most important determinant for growth. What is the best strategy for education?

Primary education had a strong impact on growth
• Correlations between School Enrollment, Primary (% net) to the per capita GDP growth rates in the succeeding decades
20%
10%
0%
-10%
60%
50%
40%
30%
70s to 80s 80s to 90s 90s to 00s
Lower
Higher

Secondary education has increased impact on growth
• Correlations between School Enrollment, Secondary (Net) and Per capita GDP growth rates in the succeeding decades
60%
50%
40%
30%
20%
Lower
Higher
10%
0%
70s to 80s 80s to 90s 90s to 00s

Tertiary education had a mixed impact on growth
• Correlations between School Enrollment, Tertiary, (gross) to Per capita DGP growth rates in the succeeding decades
50%
40%
30%
20%
10%
0%
-10%
-20%
-30%
-40%
-50%
70s to 80s 80s to 90s 90s to 00s
Lower
Higher

Policy implications
• Primary education has a strong growth impact in lower income countries
• Secondary education has a strong impact on growth in higher income countries and more recently in lower income countries
• Tertiary education used to be a negative correlation with growth, but it becomes important recent decades even in lower income countries

Taiwan, Korea, Singapore, Ireland, India, China achieved a high growth through ICT
ICT was seen by many economists as a major engine for growth

Telephone became a strong engine of growth in lower income countries
•
Correlations between Telephone mainlines (per 1000 people) and Per capita GDP growth rates in the succeeding decades
50%
40%
-10%
-20%
-30%
-40%
30%
20%
10%
0%
70s to 80s 80s to 90s 90s to 00s
Lower
Higher

•Innovation needs a R&D process to produce new products and processes
• Is such research capability necessary for developing countries?
• Such innovation actually lead to higher growth for these countries?

R&D capacity do have a strong impact on growth
• Correlations between Innovation-related indicators in 1990s and Per capita GDP growth in 2000s
60%
50%
40%
30%
20%
10%
0%
-10%
-20%
R&D Res earc her
Tec hnic ian
Lower
Higher

Patent & Science Articles matter for growth
• Even in Lower-income countries, patents and scientific journal articles
(in 90s) are strongly correlated to growth in 2000s
10%
5%
0%
-5%
-10%
45%
40%
35%
30%
25%
20%
15%
Patents Journal
Lower
Higher

Growth factors has changed from physical capital to knowledge capital, even for lower income countries

What is the change in growth factors?
• Globalization of the world economy
– Traditional three stage development pattern is no longer feasible
• Even lower income countries must compete in “knowledge economy”
– Positive export promotion strategy to position in growing market
– Investment in higher education
– Investment in R&D and scientific staff

National Innovation System
• Creating a “National Innovation System” is vital for the growth in competing in global knowledge economy
• Asian type innovation system is still very relevant for developing countries
– Government role
– Universities’ role
– Highly trained workforce

New direction of development cooperation
• Creation of a National Innovation System
– Science & Technology policies
– University reform
– ICT strategy
– Entrepreneurship support
• Asian experience is more relevant
– Japan, Korea, Taiwan, Malaysia, Singapore
– Different strategies but in the same direction

• Contact: mkusakabe@ebrd.com
• Website: www.netgrowth.com
open content, knowledge sharing website for ICT strategy