What do and don't we know about why countries grow?

Congo,  Dem.  Rep.   99   297  Burundi   111   354  Guinea-­‐Bissau   128   497  Eritrea   147   584  

HaiA   410   1088  Guinea   417   1113  Bangladesh   462   1233  Kenia   464   1470  

Cape  Verde   1632   3239  Turkmenistan   1705   6138  Ecuador   1746   7402  Guatemala   1893   4367  

Chile   6229   13370  Mexico   6591   13407  CroaAa   6796   17219  Czech  Republic   7632   23341  

Market  Prices   PPP  

GDP  Per  Capita  (1/2)  in  USD  $  

Poorest

x4

x4

x4

USA  is  387  Ames  richer  than  DR  Congo  (or  145X  in  PPP  terms)  

Australia   24401   33369  Belgium   25055   33520  Germany   25420   33665  Canada   26143   36039  

Hong  Kong   34587   40599  Switzerland   37789   37780  United  States   38206   43179  Japan   40481   31484  

PPP  

Richest

x4

Market  Prices  

GDP  Per  Capita  (2/2)  in  USD  $  

CumGDPi  

0  0.1  0.2  0.3  0.4  0.5  0.6  0.7  0.8  0.9  1  

0  0.1   0.2   0.3   0.4   0.5   0.6   0.7   0.8   0.9   1  

India   China  

USA  

Bangladesh  

Pakistan  

Nigeria  

Indonesia  

Egypt  

Brazil  

Mexico  

Russia  

Japan  Germ

any  France  UK  

Italy  

CumulaAve  world  populaAon  

CumulaAve  w

orld  income  

Korea  

Global  Income  DistribuAon    

Would  you  rather  be  rich  in  a  poor  country,  or  poor  in  a  rich  

country?    (credit  to  Dani  Rodrik)  

Norway’s  poorest  5%  has  a  representaAve  income  of  ~$13K    In  Niger,  the  richest  5%  of  the  populaAon  has  a  representaAve  income  of  ~$2K  

WHAT’S  BEHIND  GROWTH?   income

institutions integration

geography exogenous

partly endogenous

endogenous endowments productivity

Source: Dani Rodrik

WHAT’S  BEHIND  GROWTH?  

HUMAN  CAPITAL  

Robert  Solow,  Nobel  Prize  in  Economics  1987  

•  Solow  developed  one  of  the  most  influenAal  economic  growth  models.  

 •  Income  growth  based  on  factor  accumulaAon  is  a  transiAonal  phenomenon,  as  countries  move  toward  a  “steady  state”.  No  growth  in  the  long  run  without  technological  advancement.  

•  Convergence:  poorer  countries  grow  faster  than  richer  countries,  as  they  “catch  up”  capital  accumulaAon.  

Years  of  schooling  and  income  per  capita  1965-­‐2005  

France  1985  US$  21315  

 Mexico  1993  10544  

Ghana  1998=1015  

GDP  per  capita  in  constant  dollars,  logs  

Thailand  2005  US$  6751  

Mexico  2005  US$  12593  

France  1993  US$  24430    

WHAT’S  BEHIND  GROWTH?   income

institutions integration

geography exogenous

partly endogenous

endogenous endowments productivity

Source: Dani Rodrik

WHAT’S  BEHIND  GROWTH?  

institutions

•  “Institutions are the humanly devised constraints that shape human interaction in a society” (North, 1990)

•  Daron Acemoglu (MIT) and his co-authors

have pioneered the theory of institutions as the main input for economic growth: •  Countries are less developed where colonizers

created “extractive” institutions (i..e. LAC, Africa)

•  Corruption, lack of trust, type of “culture”, doing business, regulations, bureaucracy, social capital, etc.

•  Markets require (proper) institutions to work.

In their absence, markets cannot work.

AGO

ALB ARGARM

ATG

AUSAUT

AZE

BDI

BEL

BENBFA

BGD

BGR

BIH

BLR

BLZ

BOL

BRA

BWA

CAF

CANCHE

CHL

CHN

CIV

CMRCOG

COL

COM

CPVCRI

CYPCZE

DEU

DJI

DMA

DNK

DOMDZAECU

EGY

ERI

ESPEST

ETH

FIN

FJI

FRA

GAB

GBR

GEO

GHA

GIN

GMB

GNB

GRCGRD

GTM

GUY

HKG

HND

HRV

HTI

HUN

IDN

IND

IRL

IRN

ISL

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JAM

JOR

JPN

KAZKEN KGZKHM

KNA KOR

LAO

LBN

LCA

LKALSO

LTU

LUX

LVA

MAR

MDA

MDG MEXMKDMLI

MLT

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MOZ MRT

MUS

MWI

MYSNAM

NER

NGA

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NLDNOR

NPL

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PAK

PAN

PERPHLPNG

POL

PRT

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RUSRW A

SAU

SDN

SEN

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SLBSLE

SLV

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SWE

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TCDTGO

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TONTTOTUN

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TZAUGA UKR

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USA

UZB

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VEN

VNM

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ZMB

-2-1

01

23

2.5 3 3.5 4 4.5 5LYPPPK

est. Rule of Law Fitted values

GDP  per  capita  (log)  

WHAT’S  BEHIND  GROWTH?   income

institutions integration

geography exogenous

partly endogenous

endogenous endowments productivity

Source: Dani Rodrik

WHAT’S  BEHIND  GROWTH?  

integration

Trade: •  Opening to trade allow us to import what we are not

good at, and export what we are good at. •  Most productive firms survive, allowing for

“reallocation” of resources to more productive activities.

Foreign Direct Investment (Capital): •  More productive firms arrive,

“spilling” their productivity to domestic firms.

Migration: •  Allows for easier trade and capital flows •  Boost knowledge diffusion across countries boosting

productivity

•  By  1960,  migrants  made  up  2.63%  of  the  global  populaAon,  whereas  exports  of  goods  and  services  accounted  for  12.7%  of  global  GDP.    

•  By  2010,  these  numbers  were  3.11%and  28.19%,  respecAvely.    

WHAT’S  BEHIND  GROWTH?   income

institutions integration

geography exogenous

partly endogenous

endogenous endowments productivity

Source: Dani Rodrik

WHAT’S  BEHIND  GROWTH?  

geography

How geography correlates with income? •  Climate defines endowments and type of

activities poor countries could made in the past (agriculture)

•  Being landlocked (or far away) reduces integration.

•  Some diseases are more prevalent in tropics (i.e. malaria), affecting productivity

•  Knowledge tends to diffuse very locally

STP

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KIR

RWA

MYS

BDI

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CMR

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CAF

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COL

BRN

GHA

SUR

IDN

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LBR

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GUY

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AGO

PAN

ETH

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GIN

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ISR

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ARGURY

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USA

CHN

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KGZ

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CAN

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BEL

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67

89

1011

Ln G

DP

Per

Cap

(in

PP

P)

0 20 40 60Absolute Latitute

lnyppppc Fitted values

Source: WDI (2008)

Absolute Latitude Vs. Ln GDP PPP Per Cap

Knowledge  intensity  

Distance  between  HQ

 and

 Sub

sidiary  

Knowledge  intensity  

Distance  between  HQ

 and

 Sub

sidiary  

Source:  Bahar,  D.  “Heavier  than  air?  Knowledge  diffusion  within  the  mul7na7onal  firm”  (2015)  

Knowledge  travels  short  geographic  distances:  even  within  a  large  MNC  

WHAT’S  BEHIND  GROWTH?   income

institutions integration

geography exogenous

partly endogenous

endogenous endowments productivity

Source: Dani Rodrik

WHAT’S  BEHIND  GROWTH?  

productivity

What is productivity?

IGNORANCE

A measure

of our OWN

Moses Abramovitz (1956)

“

”  

Technology   Management   Resource  ReallocaAon  within  and  between  firms  

Productivity Knowing how to do more with the same resources

Productive Knowledge, Development and

Growth

P  R  O  D  U  C  T  S  

C  O  U  N  T  R  I  E  S  

C  O  U  N  T  R  I  E  S  

P  R  O  D  U  C  T  S  

The

Theory of Economic Development…

If you have only one letter…

… there aren’t many words to write.

If you have three letters…

You can write:

Now you have four letters…

You can write:

Think about all the words you could write with:

You could write 595 words, such as:

The more letters you have, the more new words you can write with any extra letter…

… and longer words

Fraction of the alphabet available

Frac

tion

of P

rodu

cts

that

are

feas

ible

Increasing returns to accumulating letters

We measure accumulated knowledge based on the products a country exports

Accumulated knowledge (“# of letters”)

Inco

me

Per C

apita

Why so few countries develop? How come knowledge does not diffuse immediately from place to place?

Knowledge has a large tacit component. Michael Polanyi (1966)

Channels for knowledge

transmission are limited to human

interaction Kenneth Arrow (1969)

Knowledge is hard to transfer and hard to acquire

Productive knowledge is also tacit

Countries face the “chicken and egg problem”

•  You cannot make watches without watchmakers •  You don’t want to be watchmaker if nobody makes watches •  You cannot become a watchmaker because there are not

watchmakers to learn from •  How does the world deal with this? •  By moving towards products that “share”

knowhow and knowledge

ELECTRONICS

MACHINERY

AIRCRAFT

BOILERS

SHIPS

METAL PRODUCTS

CONSTR. MATL. & EQPT.

HOME & OFFICE

PULP & PAPER

CHEMICALS & HEALTH

AGROCHEMICALS

OTHER CHEMICALS

INOR. SALTS & ACIDS

PETROCHEMICALS

LEATHER

MILK & CHEESE

ANIMAL FIBERS

MEAT & EGGS

FISH & SEAFOOD

TROPICAL AGRIC.

CEREALS & VEG. OILS

COTTON/RICE/SOY & OTHERS

TOBACCO

FRUIT

MISC. AGRICULTURE

NOT CLASSIFIED

TEXTILE & FABRICS

GARMENTS

FOOD PROCESSING

BEER/SPIRITS & CIGS.

PRECIOUS STONES

COAL

OIL

MINING

The process of development

•  Involves accumulating more letters (knowledge)

• …and expressing them in more words (products)

• …and in longer words (more complex products)

In a perfect world… … innovators have access to all inputs (letters)!

Emerging markets…

…tend to have many missing letters, and many “chicken and egg” problems

Ghana

GDPpc in 1960: ~USD 180

Thailand

GDPpc in 1960: ~USD 100

Vs

No differential trend in years of schooling…

Ghana’s  “Product  Space”  in  1962  

Ghana’s  “Product  Space”  in  2013  

Thailand’s  “Product  Space”  in  1962  

Thailand’s  “Product  Space”  in  2013  

Our  research  suggests  that  not  only  the  “quanAty”  of  exports  ma^er,  but  rather  the  knowledge  and  knowhow  embedded  in  the  export  basket…  

Δ

Vs 0

1000

2000

3000

4000

GD

P pe

r cap

ita (c

onst

ant 2

005

US$

)

1960 1970 1980 1990 2000 2010Year

Ghana Thailand

South  Korea:  An  Asian  “Tiger”  

1965

See  more  at  hlp://atlas.cid.harvard.edu/  

“Knowledge  and  skill  diffusion  is  the  key  to  overall  producAvity  growth  as  well  as  the  reducAon  of  inequality  both  within  and  between  countries”    (Pike^y  2014)  

.38

.4.4

2.4

4.4

6.4

8C

PS_G

ini

−5 0 5 10 15 20Time from MDP Establishment

Winner Loser

15  years  down  the  line,  the  average  “winner”  county  ranks  0.02  points  lower  in  the  Gini  coefficient,  across  all  MSAs    

Source:  Bahar,  D.  “TTes7ng  Pike>y:  A  natural  experiment  on  knowledge  diffusion  and  inequality  dynamics  in  America”,  (2015)  

A framework to think on

solving problems in developing countries…

wtf?

What’s the (market) failure?

Market failures that stop the “invisible hand” •  Unequal access to economic

resources (i.e. credit, full information, risk uncertainty)

•  Social and private returns differ, externalities (i.e. pollution, workers’ trainings, etc.)

•  Institutional failures (e.g. corruption, too much or too little regulation, etc.)

•  Poor macroeconomics (e.g. inflation or deflation)

•  Coordination failures (e.g. lack of infrastructure, lack of complementary markets)

•  A good solution understands the market failure (the cause) and not solves only a symptom •  For example: Why should the

gov’t subsidize entrepreneurs? Why can’t entrepreneurs raise money?

•  The solution must provide the proper incentives, b/c otherwise it wont work! •  Does providing mosquito

nets help reducing malaria?

•  How to determine what the market failure is? Ask questions like:

•  What is the structure of incentives that generates this problem?

•  Why hasn’t the private sector done this yet? Are the ones who overcome this failure are rare?

•  Will the solution change the incentives to achieve the goal?

For effective policy, our work to ask the “wtf” question, and why is this solution addressing the cause of the problem and not only a symptom.

“State-of-the-art” program

evaluation

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Thank you

For further questions or suggestions, email or follow me at:

db21@post.harvard.edu

@dany_bahar