ECN202: Macroeconomics

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, resource-depleted 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 newsIn 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?”

The haves

The have nots

GDP

Pop

The haves

The have nots

It was not always this way

Shared poverty

We get separation

China& India

A shift in the balance of power

Economic Growth: The Long View

How did it happen?

Small differences matter in long-run

In 60 years here is what $1,000 grows to @

1% = $1,8002% = $3,2003% = $5,900

Annual growth rates picked up after the industrial revolution in the 1700s

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

http://www.theatlantic.com/issues/99apr/9904candlestick.htm

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”

Growth is “not so” good!!!

US

China

India

This is what is behind the economic growth

Features of growth: Post WW II

1. Dramatic swing in transitional economies after fall of communism.

Real GDP average growth rate

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

IMF


2. Decline of Africa.



IMF


3. Volatility of Middle East



IMF


4. Slow growth of developed (rich) world



IMF


5. Emergence of Asia



IMF


6. Center of growth in Asia changed

Check this out carefully because it is amazing what has happened. Look at how many in China have been lifted above abject poverty.


7. Widespread slowdown in growth after 1973 when OPEC "shocked" the world

Maddison

Maddison

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 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

(GDP annual rates of change)(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

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

Decomposition of growth: The reality (US)

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%

The demographic SHOCKS•Labor force participation rates•Baby boomers

Impact – change in composition – after 1973: more from extensive growth

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...“ Sachs

Jared Diamond, Guns, Germs, and Steel,

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


2. Structural change 1. Cost disease of service sector

Cost-disease of service sector

(2) p = w - % (Q/L)Where• p = % price• w = % wages• % (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.


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

Steven Markovich, Promoting innovation through R&D, Council on Foreign Affairs, Nov. 5, 2012

Some data on who is spending on the research

Program for International Student Assessment

Some data on return on education spending

Program for International Student Assessment

Some data on return on education spending

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.”


5. Openness

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?

• “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

What does this tell us about economic growth?

Economy

Ease of Doing

Business Rank

Starting a Business

Dealing with

Construction

Permits

Getting Electricity

Registering Property

Getting Credit

Protecting Investors

Paying Taxes

Trading Across

Borders

Enforcing Contracts

Resolving Insolvency

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

Ease of Doing Business Index: World Bank

CountryStarting a Business




New Zealand 1 Armenia 11 Russia 101 Côte d'Ivoire 176

Australia 2 Puerto Rico 12 Germany 106 Iraq 177

Canada 3 United States 13 Yemen 110 Suriname 178

Singapore 4 Mauritius 14 Brazil 121West Bank and Gaza 179

Macedonia 5Kyrgyz Republic 15 Spain Congo, Rep. 180

Hong Kong 6 Taiwan, China 16 Greece 136 Chad 181

Georgia 7 Madagascar 17 Uganda 141Equatorial Guinea 182

Rwanda 8 Azerbaijan 18 China 151 Haiti 183

Belarus 9 United Kingdom 19 Algeria 156 Eritrea 183

Ireland 10 Samoa 20 Indonesia 166 Djibouti 185

Ease of Starting a Business Index: World Bank

Documents

ECN202: Macroeconomics