Elusive Quest for
Growth:
Is innovation engine of
growth?
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
1981
2001
st
ca
t ra
s ia
lA
a
ri c
r ld
Af
Wo
r an
ha
Sa
bca
Su
f ri
ia
hA
As
or t
&N
ia
n
Ce
er i
Ea
As
e&
Am
le
u th
st
r op
t in
dd
So
Mi
La
Eu
Ea
180
160
140
120
100
80
60
40
20
0
What countries grew most rapidly?
Highest Growth Countries 23 years
China
8.23%
Korea, Rep.
5.97%
Ireland
4.70%
Thailand
4.66%
Botswana
4.63%
Mauritius
4.35%
Singapore
3.99%
India
3.69%
Hong Kong, China
3.61%
Malaysia
3.43%
“Elusive quest” for the growth:
Economists’ thoughts on growth
1.
2.
3.
4.
5.
6.
Investment & Savings; 50’s & 60’s
Trade and Export Performance ; 70’s
Macro/Structural Policies; 80’s & 90’s
Human Capital; 90’s
Governance, Investment climate; 2000’s
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.
2.
3.
4.
Investment / GDP Ratio
Export / GDP ratio or index of “trade openness”
Governance Index
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)
–
2.
Governance, Primary education, financial sector,
Export-led Growth (Higher Income Countries)
–
–
–
Export and FDI promotion
Investment in physical capital
Secondary Education
“Innovative” Technology-led Growth (Advanced
Countries)
3.
–
–
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%
Lower
Higher
Vo
ic e
Po
Co
Re
G
Ru
g.
l. S o v .
rru
l
e
Qu
Ef f
of
p
t ab
a
ec
l it y L a w t io n
i lit
t
iv e
y
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
25%
20%
15%
10%
5%
0%
-5%
-10%
-15%
-20%
Lower
Higher
Vo
ic e
Ru
le
of
Go
La
w
v.
Ef f
Re
ec
t iv
gu l
e.
at o
Co
ry
rru
pt i
on
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%
Lower
Higher
10%
5%
0%
Vo
ic
e
Ru
le
Go
of
La
w
v.
Re
Ef
fe
ct
iv
gu
e.
Co
la
to
ry
rr
up
t io
n
Policy implication
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
to
70
70
s
s
to
80
80
s
s
to
90
90
s
s
to
00
s
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%
Lower
Higher
10.00%
0.00%
-10.00%
-20.00%
60s to70s
70s to 80s 80s to 90s 90s to 00s
Investment has negligible
correlation with growth after 70s
50%
40%
30%
20%
Lower
Higher
10%
0%
-10%
-20%
60s to70s
70s to 80s
80s to 90s
90s to 00s
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%
Lower
Higher
60
s
to
70
70
s
s
to
80
80
s
s
to
90
90
s
s
to
00
s
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
Is Macro/Structural reform
an engine of growth?
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%
Lower
Higher
-30%
-40%
-50%
60
s
to
70
70
s
s
to
80
80
s
s
to
90
90
s
s
to
00
s
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%
Lower
Higher
0.00%
-10.00%
-20.00%
60
s
to
70
70
s
s
to
80
80
s
s
to
90
90
s
s
to
00
s
Is Export an engine of
growth?
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
50%
40%
30%
20%
10%
Lower
Higher
0%
-10%
-20%
-30%
60
s
to
70
70
s
s
to
80
80
s
s
to
90
90
s
s
to
00
s
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%
12.5%
11.5%
11.0%
10.8%
10.6%
10.0%
10.0%
9.1%
8.8%
OO
OOO
OO
OOOO
OOO
O
OO
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%
Lower
Higher
70
s
to
80
80
s
s
to
90
90
s
s
to
00
s
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
Is Education an engine of
Growth?
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
60%
50%
40%
30%
Lower
Higher
20%
10%
0%
-10%
70s to 80s
80s to 90s
90s to 00s
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%
Lower
Higher
30%
20%
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%
Lower
Higher
70s to 80s
80s to 90s
90s to 00s
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
Is ICT Engine of Growth?
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%
30%
20%
10%
Lower
Higher
0%
-10%
-20%
-30%
-40%
70s to 80s
80s to 90s
90s to 00s
Is Innovation Engine of
Growth?
•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%
Lower
Higher
R&
D
Re
se
ar c
Te
he
r
ch
nic
ian
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
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
-5%
-10%
Lower
Higher
Patents
Journal
Implications:
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
Thank you !!
• Contact: [email protected]
• Website: www.netgrowth.com
open content, knowledge sharing website
for ICT strategy