A Quick and Dirty Look at Growth & Development

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Timothy Devinney Page 1

A Quick and Dirty Look at Growth &A Quick and Dirty Look at Growth &

DevelopmentDevelopment

Timothy M. Devinney


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Who is Being Described?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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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-widetrading system leading to trade increasing much more quickly the growth in any one

country.


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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 totaloutput.


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Approaches to Economic GrowthApproaches to Economic Growth

Solows Growth Theory

Krugmans Input Theory

Endogenous Growth Theory

Porters Diamond Theory

Neo-Institutional Theory


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Solow Growth TheorySolow 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: SingaporeA Case on Growth: Singapore(Source: Krugman, Foreign Affairs, 1994)(Source: Krugman, Foreign Affairs, 1994)

x 1966 - 1990 GDP growth averaged 8.5% per annum

x Per capita income growth averaged 6.6% per annum (three times the rate in

the US)

x How was this achieved?

Employment: The employed share of the population rose from 27% to 51% Education: In 1966 > 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%

x Is this sustainable?


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x 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.

x 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

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


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Stages of Development Based on Factor InputStages of Development Based on Factor Input

DevelopmentDevelopment

Acquisition Adaptation Improvement

Vietnam

Malaysia

Singapore KoreaChina

Hong Kong

JapanIndia

Indonesia


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Porters DiamondPorters Diamond

Firm Strategy,

Structure and

Rivalry

Demand ConditionsSupply Conditions

Related and Supporting

Industries

Chance

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 FourA Sample of Countries Based on Porter's Four

StagesStages

Factor Investment Innovation Wealth

Burma Taiwan USA

Vietnam Korea Japan

China Singapore Germany

Russia Czech Rep

South Africa Sweden

India

EstoniaAustralia


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Growth in Output, Productivity, EmploymentGrowth in Output, Productivity, Employment

and the Level of R&Dand the Level of R&D

Growth in Mfg

Output per

Worker

Growth in Total

Factor

Productivity

Growth in Mfg

Employment

Business

Expenditure on

R&D/GDP

Australia 2.9% 0.7% -0.80% 0.74%

Hong Kong 4.8% 2.5% 0.60% NA

India 3.3% 0.1% 1.20% 0.19%

Japan NA 1.2% 2.35% 1.87%

Korea 7.3% 1.4% 5.50% 1.74%

Malaysia NA 1.0% 0.04% 0.46%

Philippines 2.8% NA 1.50% 0.01%

Singapore 2.8% 0.1% 5.70% 0.75%

Taiwan 4.1% 1.5% 5.60% 1.03%

Thailand 4.9% 1.9% 5.10% 0.01%Other Countries 3.2% 1.9% -0.59% 1.10%

Source: Young,European Economic Review, 1994; O


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Explaining Economic GrowthExplaining Economic Growth

Source of Growth Rank Percent of Variance

Explained

Investment 2 18%

Primary Education 1 46%

Secondary Education 3 6%

Population Growth 4 6%

Total 79%


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The Neo-Institutional TheoryThe Neo-Institutional Theory

x 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:3 private property

3 rule of law

3 freedom of exchange (free trade)

Wealth creation versus rent seeking


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Economic Freedom and Economic GrowthEconomic Freedom and Economic Growth

-7.0%

-5.0%

-3.0%

-1.0%

1.0%

3.0%

5.0%

7.0%

9.0%

11.0%

0 0.5 1 1.5 2 2.5 3 3.5 4 4.5

Economic Freedom

Econom

icGrowth

Correlation = -0.55


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Characterising Legal and Regulatory InstitutionsCharacterising Legal and Regulatory Institutions

Legal Environment Regulatory Environment

Invisible Hand Government not above the law

and uses its power to supply

minimal public goods. Courts

enforce contracts.

Government follows the

rules. Regulation is minimal

and there is little corruption.

Helping Hand Government is above the lawbut uses power to help

business. State officials

enforce contracts.

Government aggressivelyregulates to promote

business. Organised

corruption.

Grabbing Hand Government is above the law

and uses power to extract rents.

The legal system does not

work. Mafia replaces the state

as enforcer.

Predatory regulations.

Disorganised corruption.

Source: Frye and Shliefer


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Asian HandsAsian Hands

Invisible Hand Helping Hand Grabbing Hand Invisible Hand

Hong Kong Japan China Taiwan

Singapore Korea IndiaMalaysia Indonesia

New Zealand Philippines

Australia Thailand


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Rules of Economic GrowthRules 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 GrowthThe Stability of GrowthGrowth in 1975-84 & 1985-92Growth in 1975-84 & 1985-92

-7.0%

-5.0%

-3.0%

-1.0%

1.0%

3.0%

5.0%

7.0%

9.0%

-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

Growthin1985-1

992 Correlation=0.46


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-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

-10.0% -5.0% 0.0% 5.0% 10.0% 15.0%

Growth in 1960-1965

Growthin1966-1974

Correlation=0.29


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-7.0%

-5.0%

-3.0%

-1.0%

1.0%

3.0%

5.0%

7.0%

9.0%

11.0%

-7.0% -2.0% 3.0% 8.0% 13.0% 18.0%

Growth in 1965-1974

Growthin19

85-1992

Correlation=0.10


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Economic Openness and GrowthEconomic Openness and Growth

-7.0%

-5.0%

-3.0%

-1.0%

1.0%

3.0%

5.0%

7.0%

9.0%

11.0%

0.00 50.00 100.00 150.00 200.00 250.00 300.00 350.00

Openness (Exports + Imports)/GDP

GDPGrow

th

Correlation=0.46


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Historic and Current Economic OpennessHistoric and Current Economic Openness

0.00

50.00

100.00

150.00

200.00

250.00

300.00

350.00

0.00 50.00 100.00 150.00 200.00 250.00 300.00

Openness in 1960-1965

Opennessin19

85-1992

Correlation=0.85


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Government Intervention and GrowthGovernment Intervention and Growth

-7%

-5%

-3%

-1%

1%

3%

5%

7%

9%

11%

20 40 60 80 100 120 140 160

Government Share of GDP

Grow

th

Correlation = -0.23


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Risk & Return in Economic GrowthRisk & Return in Economic Growth

Relative 3-yr

Cost of Capital

Actual 3-Yr

Return on

Equity

Investment

1994 Return on

EquityInvestment

Phillipines 2.89 229% -14.80%

Malaysia 2.50 135% -24.60%

Singapore 2.44 90% -9.10%

Thailand 2.33 149% -22.40%

China 2.19 107% -22.30%

Asean Countries 2.00 142%

Japan 1.94 11% 13.50%

Taiwan 1.89 48% 10.20%

Hong Kong 1.86 88% -32.20%

All Emerging Markets 1.58 58%

All Far East 1.56 80%

USA 1.47 33% -3.22%

Europe 1.39 24%

Indonesia 1.14 35% -20.00%

South Korea 1.08 29% 16.80%

Australia/New Zealand 1.00 30% -12.00%

Source: Micropal, Bloomberg & Author


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Risk & Return in Economic GrowthRisk & Return in Economic Growth

0.0

0.1

0.2

0.3

0.4

0.5

1.00 1.50 2.00 2.50 3.00

Cost of Capital (3-Year)

LogofR

eturn(3-Year)

E i d S i l I di tE i d S i l I di t


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Economic and Social IndicatorsEconomic and Social Indicators

Item Australia

New

Zealand Malaysia India Source of Information

2 NR 3 5 Heritage Fnd*

ion 4 NR 2.5 5 Heritage Fnd*

rnment

umption3 NR 2 3 Heritage Fnd

*

tary Policy 2 NR 1 2 Heritage Fnd*

gn Investment 2 NR 2 3 Heritage Fnd*

ng 1 NR 3 4 Heritage Fnd*

s/Prices 2 NR 2 2 Heritage Fnd*

rty Rights 1 NR 2 3 Heritage Fnd*

ation 3 NR 2 4 Heritage Fnd*

ary System 10 10 9 8 BIC**

(Mean = 7.33)

Tape 9.25 10 6 3.25 BIC**

(Mean = 6.37)

ption 10 10 6 5.25 BIC**

(Mean = 6.99)

cal Stability 8.5 8.5 8.42 7.0 BIC**

(Mean = 7.61)

linguistic

onalisation32 37 72 89 ANM

***(Mean = 34.6)

stic Economy 18 10 7 32 IMD****

(rank out of 45)

ce 15 16 19 30 IMD

****

(rank out of 45)tructure 6 7 22 43 IMD

****(rank out of 45)

gement 25 7 15 32 IMD****

(rank out of 45)

ce & Technology 42 22 29 33 IMD****

(rank out of 45)

e (Education, etc.) 31 13 34 44 IMD****

(rank out of 45)

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A Quick and Dirty Look at Growth & Development