1980s: Economic Growth nations "justify their existence, in large part, by securing their citizens' well-being, whether by creating and maintaining jobs, providing a social safety net, or protecting the environment,"

A Divided World
"key global problem of the final years of the twentieth century: unbalanced wealth and resources, unbalanced demographic trends , and the relationship between them....we are heading into the twenty-first century in a world consisting of the most part of a relatively small number of rich, satiated, demographically stagnant societies and a large number of poverty-stricken, resourcedepleted nations whose populations are doubling every twenty five years or less.
”
How did this happen because it was not always this way? In this unit we will look at the topic of economic growth since it is responsible for this divided world. We ’ll start with a few headlines and then look at some graphs that capture the essence of the problem and then we ’ll look more closely at the process of economic growth to see what separates the winners from the losers.

In the news
1.
“The wrong way to grow”
2.
“Are world income converging?”
3.
“Why nations fail; The origins of power, prosperity and poverty ”
4.
“Growth tends to slow when GDP per head reaches a certain threshold. China is getting close ”
5.
“Crony capitalism comes home”
6.
“How Jack Frost separates rich, poor”
7.
“Geography is destiny”
8.
”To sustain growth, the world needs to save more”
9.
“Is oil wealth a blessing or a curse?”
10.
“Which came first – democracy or growth?”

60%
50%
40%
30%
54%
2011 Shares of World GDP &
Population
The haves
33%
36%
Pop
36%
The have nots
20%
16%
GDP
12% 12%
10%
0%
High income Upper middle income Lower middle income
1%
Low income

45 000
40 000
35 000
30 000
25 000
20 000
15 000
10 000
5 000
-
2011 GDP per capita PPP (US$)
38 471
The haves
10 815
The have nots
3 824
High income Upper middle income Lower middle income
1 372
Low income

700
600
500
GDP per capita: Years 0 & 1000 AD
Shared poverty
400
300
200
100
0
Western
Europe
Eastern
Europe
Latin
America
Asia Africa US

GDP per capita: 1500 & 1820
1400
1200
We get separation
1000
800
600
400
200
0
Western
Europe
Eastern
Europe
Latin
America
Asia Africa US

80%
70%
60%
50%
40%
30%
20%
10%
0%
Shares of World GDP
A shift in the balance of power
14%
10%
US &
W. Europe
52%
57%
50%
0 1500
China
& India
16%
1913

25 000
Economic Growth: The Long View
GDP per capita: Western Europe & China
20 000
15 000
10 000
5 000
0
0 500 1000 1500 2000

Small differences matter in long-run
In 60 years here is what $1,000 grows to @
1% = $1,800
2% = $3,200
3% = $5,900

6,0%
5,0%
4,0%
3,0%
2,0%
1,0%
0,0%
Average annual growth rate of real
GDP
Annual growth rates picked up after the industrial revolution in the
1700s
0,0%
0,1%
0,3%
1,5%
1,8%
4,9%
3,2%

Why does this look different from the previous graph?

What caused the separation?
Collapse of China
“The world history of technology is the story of a long, protracted inversion. As late as the end of the fist millennium of our era, the civilizations of Asia were well ahead of Europe in wealth and knowledge. The Europe of what we call the Middle Ages (say, tenth century) had regressed from the power and pomp of Greece and
Rome, had lost much of the science it had once possessed, and seen its economy retreat into generalized autarky…. Five hundred years later the tables had turned.
”

What caused the separation?
Collapse of the Middle East
“A millennium ago, around roughly the tenth century, the
Middle East was an economically advanced region of the world, as measured by standard of living, technology, agricultural productivity, literacy or institutional creativity. Only China might have been more developed. …By the nineteenth century, the entire
Middle East was clearly “ underdeveloped ” relative to western Europe and its offshoots in the new world; and by the twenty-first century it had fallen markedly behind parts of the Far East as well.”

Growth is good!!
1.
"states justify their existence, in large part, by securing their citizens' well-being, whether by creating and maintaining jobs, providing a social safety net, or protecting the environment."
Gaddis,
"Living in Candlestick Park." The Atlantic Monthly April 1999 p 67
2. "Another set of arguments [for economic growth] is political —having to do with the claim that economic
[growth] engenders greater political stability and reduced potential for conflict."
Lawrence Summers in
"Reflections on managing global integration “
3. "The success or failure of any country over the next thirty years hinges on growth."
Hamish McRae, The World in
2020

Growth is “ not so ” good!!!
1. "Historically, the biggest constraints on growth have come mainly from three sources: political conflict rooted in a clash of interests or ideologies; social stress arising from economic disparities that produce misery amid wealth; and, finally, and increasingly in the future, ecological constraints on growth.
“
2.
“ It is time to understand the environment for what it is: the national-security issue of the early twenty-first century.
”
Robert Kaplan, “ The Coming Anarchy ”

Energy Use
200
180
160
140
120
100
80
60
40
20
0
2000
This is what is behind the economic growth
2010 2020 2030 2040
China
US
India
2050

Features of growth: Post WW II
1. Dramatic swing in transitional economies after fall of communism.

Real GDP average growth rate
Country Group Name
Advanced economies
Major advanced economies (G7)
Newly industrialized Asia
European Union
Emerging and developing
Central and eastern Europe
Commonwealth of Independent
States
Developing Asia
IMF
1980s 1990s 2000s
2.7
2.8
2.1
2.6
2.5
1.8
7.4
6.2
5.0
1.8
2.1
2.0
3.1
3.6
6.4
2.1
1.7
4.0
5.9
-5.6
6.5
6.1
7.3
8.7
Latin America and the Caribbean
Middle East and North Africa
Sub-Saharan Africa
2.0
3.1
3.3
0.9
4.3
5.0
2.3
2.3
5.8

Features of growth: Post WW II
2. Decline of Africa.

Real GDP average growth rate
Country Group Name
Advanced economies
Major advanced economies (G7)
Newly industrialized Asia
European Union
Emerging and developing
Central and eastern Europe
Commonwealth of Independent
States
Developing Asia
IMF
1980s 1990s 2000s
2.7
2.8
2.1
2.6
2.5
1.8
7.4
6.2
5.0
1.8
2.1
2.0
3.1
3.6
6.4
2.1
1.7
4.0
5.9
-5.6
6.5
6.1
7.3
8.7
Latin America and the Caribbean
Middle East and North Africa
Sub-Saharan Africa
2.0
3.1
3.3
0.9
4.3
5.0
2.3
2.3
5.8

Features of growth: Post WW II
3. Volatility of Middle East

Real GDP average growth rate
Country Group Name
Advanced economies
Major advanced economies (G7)
Newly industrialized Asia
European Union
Emerging and developing
Central and eastern Europe
Commonwealth of Independent
States
Developing Asia
IMF
1980s 1990s 2000s
2.7
2.8
2.1
2.6
2.5
1.8
7.4
6.2
5.0
1.8
2.1
2.0
3.1
3.6
6.4
2.1
1.7
4.0
5.9
-5.6
6.5
6.1
7.3
8.7
Latin America and the Caribbean
Middle East and North Africa
Sub-Saharan Africa
2.0
3.1
3.3
0.9
4.3
5.0
2.3
2.3
5.8

Features of growth: Post WW II
4. Slow growth of developed (rich) world

Real GDP average growth rate
Country Group Name
Advanced economies
Major advanced economies (G7)
Newly industrialized Asia
European Union
Emerging and developing
Central and eastern Europe
Commonwealth of Independent
States
Developing Asia
IMF
1980s 1990s 2000s
2.7
2.8
2.1
2.6
2.5
1.8
7.4
6.2
5.0
1.8
2.1
2.0
3.1
3.6
6.4
2.1
1.7
4.0
5.9
-5.6
6.5
6.1
7.3
8.7
Latin America and the Caribbean
Middle East and North Africa
Sub-Saharan Africa
2.0
3.1
3.3
0.9
4.3
5.0
2.3
2.3
5.8

Features of growth: Post WW II
5. Emergence of Asia

Real GDP average growth rate
Country Group Name
Advanced economies
Major advanced economies (G7)
Newly industrialized Asia
European Union
Emerging and developing
Central and eastern Europe
Commonwealth of Independent
States
Developing Asia
IMF
1980s 1990s 2000s
2.7
2.8
2.1
2.6
2.5
1.8
7.4
6.2
5.0
1.8
2.1
2.0
3.1
3.6
6.4
2.1
1.7
4.0
5.9
-5.6
6.5
6.1
7.3
8.7
Latin America and the Caribbean
Middle East and North Africa
Sub-Saharan Africa
2.0
3.1
3.3
0.9
4.3
5.0
2.3
2.3
5.8

Features of growth: Post WW II
6. Center of growth in Asia changed

8%
GDP Per Capita Annual Growth Rate:
1950-1980
7%
6%
5%
4%
3%
2%
1%
0%
3,0%
1,4%
6,7%
5,5%
3,6%
2,2%
2,6%
China India Japan Asian
Tigers
W.
Europe
US World

8%
GDP Per Capita Annual Growth Rate:
1980-2003
3%
2%
1%
0%
7%
6%
5%
4%
5,9%
3,5%
2,3%
5,1%
1,9%
2,1%
1,5%
China India Japan Asian
Tigers
W.
Europe
US World

1981
People living on <$1.08 a day: 1981 & 2001
(millions)
796
800 Check this out carefully because it is amazing what has happened. Look at how many in China have been lifted above abject poverty.
600
1981
475
428
400
316
271
200
2001
164
-
E. Asia
36
50
9 7
Middle East & N. Africa Latin America &
Caribbean
3
18

Features of growth: Post WW II
7. Widespread slowdown in growth after 1973 when OPEC "shocked" the world

Annual growth rates: World GDP
6,0%
5,0%
4,0%
3,0%
2,0%
1,0%
0,0%
4,7%
1950s
5,0%
1960s
3,8%
1970s
3,1% 3,0%
1980s 1990ss
Maddison

12,0%
Annual growth rates: World GDP
10,0%
8,0%
6,0%
4,0%
2,0%
0,0%
Japan
ROW
Western Europe
US
1950s 1960s 1970s 1980s

Growth slowdown after 1973
US Japan Germany France UK
1960-1973 4 9.6
4.4
5.7
3.1
1973-1986 2.4
3.7
1986-1990 2.6
5.1
1.8
3.4
2.3
3.3
1990-1998 3.2
1.5
1.5
(GDP annual rates of change)
1.5
1.4
3.1
2.2

Decomposition of growth: The theory
From your work with production possibility curves you know that growth can come from two sources: you can throw more resources at the problem or you can get more efficient. It turns out it makes a big difference where that growth comes from. If it comes from more resources, eventually there may not be additional resources. For example, in the US the movement of women out from the homes and into the labor force increased resources that added to national output. The problem is eventually the participation of women will equal men and there will be no surplus of women to mobilize. The same thing is true in China where the high growth rates come from the movement of people into factories, but once the move is over, growth will slow.
Productivity growth, however, is sustainable so growth can continue indefinitely if it comes from this source. Now let ’s look at the decomposition in an equation and then look at the situation in the US where two demographic shocks have affected the composition of growth.

Decomposition of growth: The theory
Growth rate version
(y/p) = (y/l) +(l/p)
– (y/p) = growth rate of GDP per person
– (y/l) = growth rate in labor productivity (intensive growth = more productive)
– (l/p) = growth rate in labor ’ s share of the population (extensive growth = more resources)
Work smarter Work harder

100,0
90,0
80,0
70,0
60,0
50,0
40,0
30,0
20,0
10,0
0,0
1950
Shock 1: Women enter labor force
Labor Force Participation Rates:
Males & Females
1960 1970 1980 1990 2000 2010

Shock 2: Boomers enter labor force
50,0
40,0
30,0
20,0
10,0
-
<5 5-14 15-24 25-34 35-44 45-54 55-64 65-75 75+
2009
2000
1990
1980
1970
1960
1950

Source: UN Medium Variant Projections, World Population Prospects: The 2008 Revision

Decomposition of growth: The reality (US)
The demographic
SHOCKS
•Labor force participation rates
•Baby boomers
1950-73
Impact – change in composition – after
1973: more from extensive growth
1973-94
1994-99
GDP
/POP
GDP
/LF
LF
/POP y/p y/l l/p
2.50% 2.40% 0.10%
1.80% 1.00% 0.80%
2.90% 2.60% 0.30%

Economic Growth Theory:
How Does It Happen?
• Classical model (depressing)
– Malthus (dismal science)
• Neoclassical model (encouraging)
– Inputs & productivity
• Physical and human capital

Factors Affecting Economic Growth
1. Location ( Guns, Germs & Steel )

Determinants of growth: Location
"distance from the equator is the single strongest predictor of long-term economic success...
“ Sac hs
Jared Diamond,
Guns, Germs, and Steel ,

Can you identify the rich and poor countries and do you see a pattern?

Factors Affecting Economic Growth
2. Structural change
1. Cost disease of service sector

Cost-disease of service sector
(2) p = w - %
D
(Q/L)
Where
• p = % D price
• w = % D wages
• % D
(Q/L) = productivity growth rate
Here is your explanation of why tuition is rising so rapidly – because productivity growth is so low in college (productivity = class size) that any wage increase will show up as a tuition increase. Compare that to manufactures (computers) where productivity grows rapidly so there can be wage increases and prices can still fall.

Factors Affecting Economic Growth
3. Technological change (R&D, patents, China &
Middle East, Rome)
4. Savings & investment (physical, human, and public capital)
– How much we spend, how we spend it, and what are the returns on the spending

Some data on who is doing the research

Some data on who is spending on the research

Some data on who is spending on the research
Steven Markovich, Promoting innovation through R&D, Council on Foreign Affairs, Nov. 5, 2012

Some data on return on education spending
Program for International Student Assessment

Some data on return on education spending
Program for International Student Assessment

Taking Stock: National Investment
“ the composition of America's public R&D has changed dramatically in recent years, and perhaps excessively.
Whereas most R&D spending was roughly flat (in constant dollars) through the 1990s, health-related R&D went soaring into the stratosphere —almost literally, given that the level now nearly matches, and may soon exceed, spending on space research at its peak, in the moonshot years. …
In sum, the demands of two politically mighty generations [boomers and retirees] have shifted government's priorities toward consumption as a general matter and, within the R&D budget, toward the sort of research that most resembles consumption.
”

Factors Affecting Economic Growth
5. Openness

4%
3%
2%
1%
0%
8%
7%
6%
5%
3,0%
China
GDP Per Capita Annual Growth
Rate:1950-1980
1,4%
India
6,7%
5,5%
3,6%
2,2%
Japan Asian TigersW. Europe US
2,6%
World

4%
3%
2%
1%
7%
GDP Per Capita Annual Growth Rate:
1980-2003
5,9%
6%
5,1%
5%
3,5%
2,3%
1,9%
2,1%
1,5%
0%
China India Japan Asian
Tigers
W.
Europe
US World

6. Institutions
1. Religion
2. Market-oriented (capitalist vs communist)
3. Openness
4. Political stability
5. Rule of law / property rights
6. Colonial legacy
“Through a broad multiplicity of historical examples, they show how institutional developments … have had enormous consequences. The openness of society, its willingness to permit creative destruction, and the rule of law appear to be decisive for economic development.”
Why Nations Fail: The Origins of Power, Prosperity, and Power by Daron Acemoglu and James Robinson
Now let’s look at a few international comparisons

What does this tell us about economic growth?

What does this tell us about economic growth?
• “When a society moves from rulers who demand money in exchange for protection (and under implicit threat of violence) to nonviolent rulers who charge taxes in a framework of law, the stage is set for economic growth. The Romans were the first in the West to establish a wide area within which business could be transacted relatively safely.”
Peter Temin, "The Economy of the Early Roman Empire," Journal of Economic
Perspectives, Winter 2006
• “The Chinese state was always stepping in to interfere with private enterprise, to take over certain activities, to prohibit and inhibit others, to manipulate prices, to exact bribes. Still, the goal, the aim, the ideal was the ineffable stillness of immobility... The ingenuity and inventiveness of the Chinese, which have given so much to mankind, would no doubt have enriched China further and probably brought it to the threshold of modern industry, had it not been for this stifling state control.” David Landes, "Why Europe and the West? Why Not China?," JEP Spring
2006

Ease of Doing Business Index:
World Bank
Economy
Singapore
Hong Kong
New Zealand
United States
Denmark
Ireland
Taiwan, China
Germany
Mexico
Kazakhstan
Turkey
Italy
Greece
China
Vietnam
Pakistan
Yemen, Rep.
Bangladesh
India
Ease of
Doing
Business
Rank
107
118
129
132
48
49
71
73
15
16
20
78
91
99
1
2
3
4
5
Starting a
Business
Dealing with
Constructi on
Permits
4 2
Getting
Electricity
6
1
13
33
1
6
17
8
5
4
32
19
14
Registerin g Property
25
6
36
60
2
10
16
106
146
151
108
36
25
72
84
98
110
95
173
106
9
14
36
155
142
103
31
181
28
105
62
83
182
95
6
2
130
80
68
107
59
114
155
171
112
185
105
126
59
175
94
141
28
42
39
150
44
48
53
32
81
Getting
Credit
Protecting
Investors
Paying
Taxes
12
4
4
4
23
12
70
23
40
83
83
104
83
70
40
70
167
83
23
6
32
100
117
100
169
49
10
70
49
32
139
25
49
6
32
2
3
1
107
17
80
131
56
122
138
6
54
72
162
113
97
152
5
4
21
69
13
Trading
Across
Borders
61
182
78
55
28
23
13
62
68
74
85
121
119
127
1
2
25
22
4
Enforcing
Contracts
Resolving
Insolvency
76
28
40
160
63
90
5
87
19
44
155
45
182
184
12
10
17
6
34
26
55
124
31
50
82
149
9
15
19
78
122
119
116
2
17
13
16
10

Ease of Starting a Business Index:
World Bank
Country
Starting a
Business
Country
Starting a
Business
Country
Starting a
Business
New Zealand
Australia
Canada
Singapore
Macedonia
Hong Kong
Georgia
Rwanda
Belarus
Ireland
1
2
3
Armenia
Puerto Rico
United States
4
5
6
Mauritius
Kyrgyz
Republic
Taiwan, China
11 Russia
12 Germany
13 Yemen
14 Brazil
15 Spain
16 Greece
7
8
Madagascar
Azerbaijan
9 United Kingdom
10 Samoa
17 Uganda
18 China
19 Algeria
20 Indonesia
101
106
110
121
136
141
151
156
166
Country
Starting a
Business
Côte d'Ivoire
Iraq
Suriname
West Bank and
Gaza
Congo, Rep.
Chad
Equatorial
Guinea
Haiti
Eritrea
Djibouti
176
177
178
182
183
183
185
179
180
181