A Quick and Dirty Look at Growth

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A Quick and Dirty Look at Growth Development

• Timothy M. Devinney

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Who is Being Described?
The rates of economic growth .... are
impressive. National income is planned to be 160
percent of that five years ago, an increase of
10.5 percent a year. Although these figures are
slightly lower than claimed in prior forecasts,
they are three times those claimed for the United
States. Similarly, it is expected that in five
years wages will be 130 percent of their current
level. It should be roughly a decade and a half
before the productivity of ______ surpasses that
of the United States. If in the future the
populace should begin to exercise control over
the proportion of national income devoted to
consumption as compared to investment this might
reduce future rates of economic growth
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Who is Being Described?
The significant break with the past was the fact
that the population growth rate accelerated to
7. In addition to the striking increase in
exports (an eight-fold increase in thirty years)
much of the growth in income could be attributed
to increases in agricultural output. ..... There
were two reasons associated why the upsurge in
overseas trade took place. Firstly, there was
the growth in the diversity of new industries.
Secondly, there was the growing development of a
world-wide trading system leading to trade
increasing much more quickly the growth in any
one country.
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Who is Being Described?
How did they do it? .....Economic growth depends
on two factors increases in the supply of
productive resources inputs and improvements in
techniques of production or technology
efficiency. In terms of labour inputs, labour
employed in the economy grew at an annual rate
twice the population growth rate. To the
increase in the number of workers we must add an
improvement in the quality of the work force that
resulted from the government's large expenditures
on schools and universities. ..... When we look
at the growth of capital stock, we find what is
the single most distinctive element of the
processes by which the country has attained its
growth. Over the last 38 years, the capital
stock rose at an extraordinary rate, increasing
by 6.5 percent per year. 37 years ago the level
of capital investment was 8 percent of GDP.
Today the figure is on the order of 31 percent of
total output.
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Approaches to Economic Growth

• Solows Growth Theory
• Krugmans Input Theory
• Endogenous Growth Theory
• Porters Diamond Theory
• Neo-Institutional Theory

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Solow Growth Theory

• Determinants of Growth
• Productivity (Output per man)
• Productivity (Output per unit of capital)
• Stock of Capital
• Flow of Labour
• Q F(K, L)

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A Case on Growth Singapore(Source Krugman,
Foreign Affairs, 1994)

• 1966 - 1990 GDP growth averaged 8.5 per annum
• Per capita income growth averaged 6.6 per annum
  (three times the rate in the US)
• How was this achieved?
• Employment The employed share of the population
  rose from 27 to 51
• Education In 1966 gt 50 of the population had
  no formal education
• In 1990 66 of the population had 12 years of
  schooling
• Investment In 1966 investment as a percent of
  GDP was 11
• In 1990 investment as a percentage of GDP was
  40
• Is this sustainable?

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A Case on Growth Singapore(Source Krugman,
Foreign Affairs, 1994)

• Is this sustainable?
• Employment Employment share doubled. It can't
  double again and as the population ages and
  becomes wealthier it should actually decline
• Education Everyone in Singapore can't go on to
  get a doctorate
• Investment 40 is an astonishing number and 70
  would be absurd. We would also expect as wealth
  rises that more of output is used for
  consumption.
• Is the Singapore example relevant for the rest of
  Asia?
• Yes. Other countries have similar patterns
  (e.g., Malaysia)
• No. Singapore as a city-state has unique
  characteristics that make it easier to develop

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Stages of Development Based on Factor Input
Development
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Porters Diamond
Chance
Firm Strategy, Structure and Rivalry
Demand Conditions
Supply Conditions
Related and Supporting Industries
Government
Source M. Porter, The Competitive Advantage of
Nations, New York Free Press, 1990.
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A Sample of Countries Based on Porter's Four
Stages
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Growth in Output, Productivity, Employment and
the Level of RD
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Explaining Economic Growth
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The Neo-Institutional Theory

• Political and economic institutions are the
  fundamental determinants of growth not factor
  endowmentsfor example, after WWII both North and
  South Korea possessed the same factor endowments
• These institutions define the opportunity set
  and incentive structures at work in an economy.
  The most important of these institutions are
• private property
• rule of law
• freedom of exchange (free trade)
• Wealth creation versus rent seeking

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Economic Freedom and Economic Growth
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Characterising Legal and Regulatory Institutions
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Asian Hands
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Rules of Economic Growth

• Output is driven by the quantity, quality and
  distribution of inputs
• Current growth says nothing about the
  sustainability of growth in the long run
• Exports are a limited means to growth
• Economic growth requires economic freedom
• Wheres theres return, theres risk

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The Stability of Growth Growth in 1975-84
1985-92
9.0
7.0
5.0
Correlation0.46
3.0
1.0
Growth in 1985-1992
-1.0
-3.0
-5.0
-7.0
-7.0
-5.0
-3.0
-1.0
1.0
3.0
5.0
7.0
9.0
11.0
13.0
Growth in 1975-1984
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The Stability of GrowthGrowth in 1960-65
1966-74
20.0
15.0
Correlation0.29
10.0
5.0
Growth in 1966-1974
0.0
-5.0
-10.0
-10.0
-5.0
0.0
5.0
10.0
15.0
Growth in 1960-1965
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The Stability of Growth Growth in 1965-74
1985-92
11.0
9.0
7.0
5.0
Correlation0.10
3.0
Growth in 1985-1992
1.0
-1.0
-3.0
-5.0
-7.0
-7.0
-2.0
3.0
8.0
13.0
18.0
Growth in 1965-1974
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Economic Openness and Growth
11.0
9.0
7.0
Correlation0.46
5.0
3.0
GDP Growth
1.0
-1.0
-3.0
-5.0
-7.0
0.00
50.00
100.00
150.00
200.00
250.00
300.00
350.00
Openness (Exports Imports)/GDP
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Historic and Current Economic Openness
350.00
Correlation0.85
300.00
250.00
200.00
Openness in 1985-1992
150.00
100.00
50.00
0.00
0.00
50.00
100.00
150.00
200.00
250.00
300.00
Openness in 1960-1965
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Government Intervention and Growth
11
9
7
5
3
Growth
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Correlation -0.23
-1
-3
-5
-7
20
40
60
80
100
120
140
160
Government Share of GDP
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Risk Return in Economic Growth
Source Micropal, Bloomberg Author
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Risk Return in Economic Growth
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Economic and Social Indicators