PPT 80s Growth

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ECN202: Macroeconomics
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?”
2011 Shares of World GDP &
Population
60%
54%
The haves
50%
Pop
40%
The have nots
36%
36%
33%
30%
20%
16%
GDP
12%
12%
10%
1%
0%
High income
Upper middle income Lower middle income
Low income
2011 GDP per capita PPP (US$)
45,000
40,000
38,471
The haves
35,000
The have nots
30,000
25,000
20,000
15,000
10,815
10,000
5,000
3,824
1,372
High income
Upper middle income Lower middle income
Low income
It was not always this way
GDP per capita: Years 0 & 1000 AD
700
Shared poverty
600
500
400
300
200
100
0
Western
Europe
Eastern
Europe
Latin
America
Asia
Africa
US
GDP per capita: 1500 & 1820
1400
We get separation
1200
1000
800
600
400
200
0
Western
Europe
Eastern
Europe
Latin
America
Asia
Africa
US
Shares of World GDP
80%
A shift in the balance of power
70%
14%
US &
W. Europe
60%
10%
50%
52%
40%
30%
57%
50%
20%
China
& India
10%
16%
0%
0
1500
1913
Economic Growth: The Long View
GDP per capita: Western Europe & China
25,000
20,000
15,000
10,000
5,000
0
0
500
1000
1500
2000
How did it happen?
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
Average annual growth rate of real
GDP
6.0%
5.0%
4.0%
Annual growth rates picked up after
the industrial revolution in the
1700s
4.9%
3.2%
3.0%
2.0%
1.8%
1.5%
1.0%
0.0%
0.0%
0.1%
0.3%
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.”
Is economic growth progress?
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
China
This is what is behind the economic growth
160
140
US
120
100
80
India
60
40
20
0
2000
2010
2020
2030
2040
2050
Features of growth: Post WW II
1. Dramatic swing in transitional economies after
fall of communism.
Real GDP average growth rate
IMF
Country Group Name
Advanced economies
1980s 1990s 2000s
2.7
2.8
2.1
Major advanced economies (G7)
Newly industrialized Asia
European Union
Emerging and developing
Central and eastern Europe
Commonwealth of Independent
States
Developing Asia
2.6
7.4
1.8
3.1
2.1
2.5
6.2
2.1
3.6
1.7
1.8
5.0
2.0
6.4
4.0
5.9
6.1
-5.6
7.3
6.5
8.7
Latin America and the Caribbean
Middle East and North Africa
Sub-Saharan Africa
2.0
0.9
2.3
3.1
4.3
2.3
3.3
5.0
5.8
Features of growth: Post WW II
2. Decline of Africa.
Real GDP average growth rate
IMF
Country Group Name
Advanced economies
1980s 1990s 2000s
2.7
2.8
2.1
Major advanced economies (G7)
Newly industrialized Asia
European Union
Emerging and developing
Central and eastern Europe
Commonwealth of Independent
States
Developing Asia
2.6
7.4
1.8
3.1
2.1
2.5
6.2
2.1
3.6
1.7
1.8
5.0
2.0
6.4
4.0
5.9
6.1
-5.6
7.3
6.5
8.7
Latin America and the Caribbean
Middle East and North Africa
Sub-Saharan Africa
2.0
0.9
2.3
3.1
4.3
2.3
3.3
5.0
5.8
Features of growth: Post WW II
3. Volatility of Middle East
Real GDP average growth rate
IMF
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
Latin America and the Caribbean
Middle East and North Africa
Sub-Saharan Africa
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
6.1
-5.6
7.3
6.5
8.7
2.0
0.9
2.3
3.1
4.3
2.3
3.3
5.0
5.8
Features of growth: Post WW II
4. Slow growth of developed (rich) world
Real GDP average growth rate
IMF
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
Latin America and the Caribbean
Middle East and North Africa
Sub-Saharan Africa
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
6.1
-5.6
7.3
6.5
8.7
2.0
0.9
2.3
3.1
4.3
2.3
3.3
5.0
5.8
Features of growth: Post WW II
5. Emergence of Asia
Real GDP average growth rate
IMF
Country Group Name
Advanced economies
1980s 1990s 2000s
2.7
2.8
2.1
Major advanced economies (G7)
Newly industrialized Asia
European Union
Emerging and developing
Central and eastern Europe
Commonwealth of Independent
States
Developing Asia
2.6
7.4
1.8
3.1
2.1
2.5
6.2
2.1
3.6
1.7
1.8
5.0
2.0
6.4
4.0
5.9
6.1
-5.6
7.3
6.5
8.7
Latin America and the Caribbean
Middle East and North Africa
Sub-Saharan Africa
2.0
0.9
2.3
3.1
4.3
2.3
3.3
5.0
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%
6.7%
6%
5.5%
5%
4%
3%
3.6%
3.0%
2.6%
2.2%
2%
1.4%
1%
0%
China
India
Japan
Asian
Tigers
W.
Europe
US
World
8%
GDP Per Capita Annual Growth Rate:
1980-2003
7%
6%
5.9%
5.1%
5%
4%
3.5%
3%
2.3%
1.9%
2%
2.1%
1.5%
1%
0%
China
India
Japan
Asian
Tigers
W.
Europe
US
World
1981
People living on <$1.08 a day: 1981 & 2001
(millions)
800
796
Check this out carefully because it is amazing
what has happened. Look at how many in China
have been lifted above abject poverty.
600
475
1981
428
400
316
271
200
164
2001
9
E. Asia
7
Middle East & N. Africa
36
50
3
Latin America &
Caribbean
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%
5.0%
4.7%
4.0%
3.8%
3.1%
3.0%
1980s
1990ss
3.0%
2.0%
1.0%
0.0%
1950s
1960s
1970s
Maddison
Annual growth rates: World GDP
12.0%
10.0%
8.0%
Japan
6.0%
ROW
4.0%
Western Europe
US
2.0%
0.0%
1950s
1960s
1970s
1980s Maddison
1990ss
Growth slowdown after 1973
US
Japan
4
9.6
4.4
5.7
3.1
1973-1986 2.4
3.7
1.8
2.3
1.4
1986-1990 2.6
5.1
3.4
3.3
3.1
1990-1998 3.2
1.5
1.5
1.5
2.2
1960-1973
Germany
France UK
(GDP annual rates of change)
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
Shock 1: Women enter labor force
Labor Force Participation Rates:
Males & Females
100.0
90.0
80.0
70.0
60.0
50.0
40.0
30.0
20.0
10.0
0.0
1950
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
Impact – change in
composition – after
1973: more from
extensive growth
GDP
/POP
GDP
/LF
LF
/POP
y/p
y/l
l/p
1950-73
2.50%
2.40%
0.10%
1973-94
1.80%
1.00%
0.80%
1994-99
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
moon-shot 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
GDP Per Capita Annual Growth
Rate:1950-1980
8%
7%
6.7%
6%
5.5%
5%
4%
3%
3.6%
3.0%
2.6%
2.2%
2%
1.4%
1%
0%
China
India
Japan
Asian TigersW. Europe
US
World
7%
6%
GDP Per Capita Annual Growth Rate:
1980-2003
5.9%
5.1%
5%
4%
3.5%
3%
2.3%
1.9%
2%
2.1%
1.5%
1%
0%
China
India
Japan
Asian
Tigers
W.
Europe
US
World
6. Institutions
1.
2.
3.
4.
5.
6.
Religion
Market-oriented (capitalist vs communist)
Openness
Political stability
Rule of law / property rights
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
Dealing
Ease of
with
Doing Starting a
Getting Registerin Getting Protecting
Constructi
Business Business
Electricity g Property Credit Investors
on
Rank
Permits
1
2
3
4
5
15
16
20
48
49
71
73
78
91
99
107
118
129
132
4
6
1
13
33
10
16
106
36
25
72
84
146
151
108
98
110
95
173
2
1
6
17
8
106
9
14
36
155
142
103
31
181
28
105
62
83
182
5
4
32
19
14
95
6
2
130
80
68
107
59
114
155
171
112
185
105
36
60
2
25
6
53
32
81
141
28
42
39
150
44
48
126
59
175
94
12
4
4
4
23
12
70
23
40
83
83
104
83
70
40
70
167
83
23
2
3
1
6
32
6
32
100
49
10
70
49
117
100
169
32
139
25
49
Paying
Taxes
5
4
21
69
13
6
54
72
107
17
80
131
56
122
138
162
113
97
152
Trading
Enforcing Resolving
Across
Contracts Insolvency
Borders
1
2
25
22
4
28
23
13
61
182
78
55
62
68
74
85
121
119
127
12
10
17
6
34
63
90
5
76
28
40
160
87
19
44
155
45
182
184
2
17
13
16
10
9
15
19
26
55
124
31
50
82
149
78
122
119
116
Ease of Starting a Business Index: World Bank
Country
Starting a
Business
Country
Starting a
Country
Business
Starting a
Business
Country
Starting a
Business
New Zealand
Australia
1
Armenia
11
Russia
101
Côte d'Ivoire
176
2
Puerto Rico
12
Germany
106
Iraq
177
Canada
3
United States
13
Yemen
110
Suriname
178
121
West Bank and
Gaza
179
Congo, Rep.
180
136
Chad
181
182
Singapore
4
Macedonia
Hong Kong
14
Brazil
5
Mauritius
Kyrgyz
Republic
15
Spain
6
Taiwan, China
16
Greece
Georgia
Rwanda
7
Madagascar
17
Uganda
141
Equatorial
Guinea
8
Azerbaijan
18
China
151
Haiti
183
Belarus
Ireland
9
United Kingdom
19
Algeria
156
Eritrea
183
10
Samoa
20
Indonesia
166
Djibouti
185
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