Economic Growth and poverty reduction

ECONOMIC GROWTH AND

POVERTY REDUCTION

Thorvaldur GylfasonJoint Vienna Institute/

Institute for Capacity DevelopmentDistance Learning Course on

Financial Programming and PoliciesVienna, Austria

NOVEMBER 26–DECEMBER 7, 2012

I. Determinants of growth1) Saving and investment2) Efficiency

a) Liberalizationb) Stabilizationc) Privatizationd) Educatione) Financef) Diversificationg) Institutions

II. Pictures of growthIII. Empirical evidence

OUTLINE

Time

Natio

nal e

cono

mic

outp

ut

Actual outputPotential output

Business cyclesin the short run

Economic growthin the long run

Downswing

Upswing

ECONOMIC GROWTH:SHORT RUN VS. LONG RUN

To analyze changes in actual output from year to year – in the short runNeed short-run macroeconomic theory

Keynesian or neoclassical

To analyze the path of potential output over long periodsNeed modern theory of economic

growthNeoclassical or endogenous

ECONOMIC GROWTH:SHORT RUN VS. LONG RUN

Time

Natio

nal e

cono

mic

outp

ut

Rapid growth

Slow growth

West-Germany : East-GermanyAustria : Czech RepublicFinland : EstoniaTaiwan : ChinaSouth Korea : North Korea

Botswana : NigeriaKenya : TanzaniaThailand : BurmaTunisia : MoroccoSpain : ArgentinaMauritius : Madagascar

Economic system

Economic policy?

GROWING TOGETHER,GROWING APART

Years

Outp

ut p

er c

apita

Case B: 2% a year

Case A: 0.4% a year

Aspects of efficiency Economic system Economic policy

Threefold difference after 60 years

0 60

China – Europe:1:1 in 1400

1:20 in 1989GROWING APART

SOURCES OF GROWTH:INVESTMENT AND EDUCATION

Growth

Investment Education

+ +

+ denotes a positive effect in the direction shown


Growth


+ +

Adam Smith knew all this, and more, as did Arthur Lewis


Growth


+ +

Robert Solow raised doubts about long-run linkages

MORE SOURCES OF GROWTH:TRADE, STABILITY, NATURE

Growth

Investment

X

Education

+ +

Arthur Lewis: X can be trade, stable politics, good weather


Growth

Investment

X

Education

+ +

But Solow carried the day: long-run growth is exogenous!


Growth

Investment

Trade

Education

+ +

Suppose X is openness to trade; then …

+

Traces the rate of growth of output per capita to a single source:• Technological progress

Hence, long-run growth is immune to economic policy, good or bad

“To change the rate of growth of real output per head you have to change the rate of technical progress.”

ROBERT M. SOLOW

THE NEOCLASSICAL THEORY OF EXOGENOUS GROWTH

Traces the rate of growth of output per capita to three main sources:

• Saving• Efficiency• Depreciation

“The proximate causes of economic growth are the effort to economize, the accumulation of knowledge, and the

accumulation of capital.”W. ARTHUR LEWIS

THE NEW THEORY OF ENDOGENOUS GROWTH

You may recognize the endogenous growth model as a reinterpretation of the Harrod-Domar model

where growth depends on• The saving rate• The capital/output ratio• The depreciation rate

ENDOGENOUS GROWTH IN THE HARROD-DOMAR MODEL

Four building blocks S = I

Saving equals investment in equilibrium S = sY

Saving is proportional to income I = K + K

Investment involves addition to capital stock

Y = EK Output depends on quality and quantity of

capital

A SIMPLE MODEL OF ENDOGENOUS GROWTH

Let’s do the arithmetic: S = sY = I = K + K = Y/E + Y/E Rearranging terms we find Y/E = sY - Y/E

Multiplying by E and dividing by Y gives

Y/Y = sE -


Bottom line g = sE - Rate of economic growth equals Saving rate

times Efficiency (i.e., the output/capital ratio)

minus Depreciation


Three implications for growth

0dsdg

0dEdg

0d

dg

Saving is good for growth

Efficiency helps growth

Depreciation hurts growth

WHAT THIS MEANSg = sE -

IMPORTANCE OF GROWTH Our standard of living today depends

solely, by definition, on economic growth Rich countries are rich because they grew

rapidly over long periods Poor countries are poor because they did

not grow rapidly enough So why do some countries grow more

rapidly than others? Why, e.g., did Thailand leave Zambia so far

behind in one generation? Hard to think of anything else (Lucas)

GROWING APART:THAILAND AND ZAMBIA Thailand and

Zambia started out in a similar position and grew apart

Thailand pursued growth-friendly policies, stressing liberal trade, stability, private enterprise, and education

GDP per capita 1965-2004 (US$ at 2000 prices)

0

400

800

1,200

1,600

2,000

2,400

65 70 75 80 85 90 95 00

THAILANDZAMBIA

Thailand 4.7% per yearZambia -1.5% per year

1.06239 = 10.4


GROWING APART:SWEDEN AND ARGENTINA Argentina and

Sweden went hand in hand 1900-1930, and then grew apart

Sweden pursued free trade, liberal democracy, and income equality, and avoided high inflation

Argentina did not

0

4,000

8,000

12,000

16,000

20,000

24,000

1900 1925 1950 1975 2000

ARGENTINASWEDEN

Sweden 2.1% per yearArgentina 1.0% per year

1.011103 = 3.1


Argentina and Spain went hand in hand 1965-1970, and then grew apart

Spain pursued free trade and price stability through EU membership and adopted democracy

Argentina lacked stability

GROWING APART:SPAIN AND ARGENTINA

4,000

6,000

8,000

10,000

12,000

14,000

16,000

65 70 75 80 85 90 95 00

SPAINARGENTINA

Spain 2.7% per yearArgentina 0.6% per year

1.02139 = 2.2


Botswana and Nigeria went hand in hand 1965-1970, and then grew apart

Botswana stressed education and resisted corruption

Nenadi Usman, Nigeria’s finance minister: “Oil has made us lazy”

GROWING APART:BOTSWANA AND NIGERIA

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

65 70 75 80 85 90 95 00

BOTSWANANIGERIA

Botswana 7.1% per yearNigeria 0.6% per year

1.06539 = 11.7


Mauritius did many things right and reaped rapid growth

Madagascar’s economy has remained at a standstill all this time for many reasons, as we will see shortly

GROWING APART:MAURITIUS AND MADAGASCAR

0

1,000

2,000

3,000

4,000

5,000

65 70 75 80 85 90 95 00

MAURITIUSMADAGASCAR

Mauritius 4.3% per yearMadagascar -1.2% per year

1.05539 = 8.1

A TALE OF TWO COUNTRIES

Country A Country B


In % Country A Country B

Girls at primary school

100 72




100 72Investment ratio

25 11





25 11Export ratio 58 23





25 11Export ratio 58 23Primary export ratio

33 80






33 80Inflation 10 18






33 80Inflation 10 18Growth per capita 1960-2002

4.3 -1.2


And the countries are: Country A Country B





4.3 -1.2


And the countries are: Mauritius Madagasc

arGirls at primary school

100 72Investment ratio 25 11Export ratio 58 23Primary export ratio


4.3 -1.2


Mauritius did many things right and reaped rapid growth

Madagascar has been at a standstill all this time for many reasons, including too little investment, trade, and education, as we will see shortly

GROWING APART:MAURITIUS AND MADAGASCAR

0

1,000

2,000

3,000

4,000

5,000

65 70 75 80 85 90 95 00

MAURITIUSMADAGASCAR

Mauritius 4.3% per yearMadagascar -1.2% per year

1.05539 = 8.1

ENDOGENOUS VS. EXOGENOUS GROWTH The neoclassical view

that economic growth in the long run is merely a matter of technology does not throw much light on the impressive growth performance of Asia since the 1960s, or on growth differentials

The new view that long-run growth depends on saving

and efficiency is more illuminating Besides, it’s not really new, because

Adam Smith knew this (1776)

ONE CRUCIAL IMPLICATION OF ENDOGENOUS GROWTH The neoclassical view

If two countries are identical (same saving rate, same population growth, same technology), then their income per head will ultimately be the same

This means that poor countries must grow faster than – catch up with! – rich countries: “conditional convergence”

Endogenous growth theory does not have this implication

+denotes a positive effect in the direction shown

– denotes a negative effect in the direction shown

ENTER INITIAL INCOME

Growth

Investment

Trade

Initial income

Natural capital

Education

+

+ +

–

–

Conditional convergence

Once the main determinants of growth have been taken into account, initial income will have a negative effect on growth

Conditional convergence does not entail absolute convergence

164 countries from 1960 to 2000

CONDITIONAL CONVERGENCE

-8

-6

-4

-2

0

2

4

6

8

5 6 7 8 9 10 11 12

GNP per capita 1965 (log)

Gro

wth

of G

NP

per

cap

ita 1

960-

2000

(%)

Poor countries grow faster than rich ones if

Growth is inversely related to initial income, or if

Regression of current income on initial income produces a slope coefficient that is smaller than one

ABSOLUTE CONVERGENCE?

45o5

6

7

8

9

10

11

12

5 6 7 8 9 10 11 12

GNP per capita 1965 (log)

GN

P p

er c

apita

200

0 (lo

g)45o

SOURCES OF GROWTH I: SAVING AND INVESTMENT Fits real world experience quite well

In East Asia, saving rates of 30-40% of GDP went along with rapid economic growth

In several African economies, saving rates of around 10% of GDP went for a long time hand in hand with economic stagnation

In OECD countries, saving rates of about 20% of GDP went along with respectable growth

Important implication for policy Economic stability with low inflation and

positive real interest rates spurs saving, which is good for growth

An increase in investment by 8% of GDP is associated with an increase in per capita growth by one percentage point per year

Quantity and quality Cause and effect World Bank data for

164 countries and 40 years, 1960-2000

INVESTMENT AND GROWTH r = rank correlation

-8

-6

-4

-2

0

2

4

6

5 10 15 20 25 30 35 40 45

Investment (% of GDP)Per

cap

ita g

row

th a

djus

ted

for i

nitia

l inc

ome

(%) r =

0.42

Also fits experience quite well Technical progress is good for growth

because it allows us to squeeze more output out of given inputs

And that is exactly what increased efficiency is all about!

Thus, technology is best viewed as an aspect of general economic efficiency

Important implication for policy Everything that increases efficiency, no

matter what, is also good for growth

SOURCES OF GROWTH II: EFFICIENCY

AGAIN: WHAT MAKES COUNTRIES GROW? First things first: Output is produced by

labor, capital, and other inputs Output per capita can grow through

accumulation of capital through saving and investment, as we have seen

Output per capita, however, cannot grow through population growth, as we will see

But, output per capita can grow through improvements in labor, via investments in human capital: Education and health care Investment and education: Key drivers of

growth

Education and health care make labor force more efficient

Technological progress enhances efficiency

Liberalization of prices and trade increases efficiency: good for growth

Stabilization reduces the inefficiency associated with inflation: good for growth

Privatization reduces the inefficiency of state-owned enterprises: good for growth

The possibilities are virtually endless!

WHAT MAKES COUNTRIES GROW? A LONGER LIST

WHAT MAKES COUNTRIES GROW Why do education and health care matter? Because they increase labor productivity This is also why technological progress is

good for growth Technological progress enables firms to

squeeze more output from given inputs But so does increased efficiency!

Latin American story about air fares Increased efficiency is tantamount to

technological progress, which helps growth

THIS IS GOOD NEWS If growth were merely a matter of

technology, we could not do much about it Except follow technology-friendly policies

by supporting R&D and such But if growth depends on saving and

efficiency, there are things that we can do, in the private sector as well as through the public sector, to foster rapid growth

Because everything that is good for saving and efficiency is also good for growth

EFFICIENCY AND GROWTH In sum, output per capita depends on the

quantity and quality of inputs Quantity of inputs can be increased

through accumulation, esp. capital accumulation

Quality of inputs – their productivity! – can be increased through increased efficiency Education and health Liberalization Stabilization Privatization Aspects of institutions

Check them out one by one

Policies

EDUCATION, HEALTH CARE, AND GROWTH Education and health care make the

work force more efficiento Need to provide primary and secondary

education to all, especially femaleso Need to provide tertiary education to a

greatly increased number of peopleo Need increased public commitment to

education as well as health careo Need both increased public expenditure

on education and probably also increased scope for private sector involvement in education and health care

EDUCATION AND GROWTH Education lifts

labor productivity, thereby increasing overall economic efficiency and growth of output

From unskilled to skilled labor

Data for 131 countries, 1960-2000

-6

-4

-2

0

2

4

6

0 20 40 60 80 100

Secondary school-enrolment rate (%)Per

cap

ita g

row

th a

djus

ted

for i

nitia

l inc

ome

(%)

r = 0.50

POLICIES

EDUCATION AND GROWTH Interpretation of

regression line: An increase in

secondary-school enrolment by 25% of each cohort goes along with an increase in per capita growth by one percentage point per year

-6

-4

-2

0

2

4

6

0 20 40 60 80 100

Secondary school-enrolment rate (%)Per

cap

ita g

row

th a

djus

ted

for i

nitia

l inc

ome

(%)

r = 0.50

POLICIES

FERTILITY AND GROWTH There is another

way to provide more and better education to children

Produce fewer children to increase their average “quality”

163 countries, 1960-2000

-8

-6

-4

-2

0

2

4

6

1 2 3 4 5 6 7 8

Fertility (number of children)Pef

r cap

ita g

row

th a

djus

ted

for i

nitia

l inc

ome

(%)

POLICIES

r = -0.54

PUBLIC HEALTH AND GROWTH Good public

health, reflected in longevity, is also conducive to increased labor productivity and economic growth

156 countries,1960-2000

-8

-6

-4

-2

0

2

4

6

30 40 50 60 70 80

Life expectancy 1960 (years)Per

cap

ita g

row

th a

djus

ted

for i

nitia

l inc

ome

(%)

POLICIES

r = 0.54

PUBLIC HEALTH AND GROWTH Increased

spending on health care also spurs economic growth

Close connection between public health and health care, i.e., between output and input

162 countries,1960-2000

-8

-6

-4

-2

0

2

4

6

0 2 4 6 8 10 12 14

Health expenditure (% of GDP)Per

cap

ita g

row

th a

djus

ted

for i

nitia

l inc

ome

(%)

POLICIES

r = 0.40

Liberalization of prices o Markets, not bureaucrats, set prices

o Mixed market economy is more efficient than central planning

o Former Soviet Union vs. the US and Europe

Liberalization of trade o Specialization according to

comparative advantageo Free trade is more efficient than self-

sufficiencyoNorth Korea vs. South Korea and

Singapore

LIBERALIZATION AND GROWTH

POLICIES

LIBERALIZATION AND GROWTH Liberalization of

prices increases efficiency in resource allocation

Liberalization of trade increases efficiency in division of labor

163 countries,1960-2000

-8

-6

-4

-2

0

2

4

6

0 40 80 120 160 200

Exports (% of GDP)Per

cap

ita g

row

th a

djus

ted

for i

nitia

l inc

ome

(%)

POLICIES

r = 0.26

LIBERALIZATION AND GROWTH Exports are not a

good indicator of openness because size matters

So look at import duties as well

Higher duties hurt growth, but connection is weak

147 countries,1960-2000

r = 0.20

-8

-6

-4

-2

0

2

4

6

0 10 20 30 40 50 60 70

Share of import duties in tax revenues (%)Per

cap

ita g

row

th a

djus

ted

for i

nitia

l inc

ome

(%)

POLICIES

r = -0.23

LIBERALIZATION AND GROWTH Economic theory is

clear, from Adam Smith (1776) on: external as well as internal trade is good for growth

Good external governance is good for growth

Autarky spells disaster, always and everywhere

Darkness in North-Korea

POLICIES

Stabilization of prices Reduces distortions due to

inflationo Inflation distorts the choice between real

and financial capital by punishing money holdings, and thus creates inefficiency in production

o Implicit inflation tax is an inefficient taxo Inflation creates uncertainly that tends to

discourage trade and investment o Inflation tends to result in currency

overvaluation, hurting exports and growth

STABILIZATION AND GROWTH

Finance matters for growth

POLICIES

STABILIZATION AND GROWTH Stabilization

increases efficiency by reducing production distortions, uncertainty, inflation tax, andovervaluation

164 countries,1960-2000

r = -0.46

-8

-6

-4

-2

0

2

4

6

0.0 0.2 0.4 0.6 0.8 1.0

Inflation distortionPer

cap

ita g

row

th a

djus

ted

for i

nitia

l inc

ome

(%)

POLICIES

r = -0.46

STABILIZATION AND GROWTH High inflation is a

sure sign of lax fiscal and monetary policies, so sound policies support rapid growth

Sound financial institutions, incl. independent central banks, also support rapid growth

r = -0.46

-8

-6

-4

-2

0

2

4

6

0.0 0.2 0.4 0.6 0.8 1.0

Inflation distortionPer

cap

ita g

row

th a

djus

ted

for i

nitia

l inc

ome

(%)

POLICIES

r = -0.46

Model 1

Inflation distortion

-2.51(2.07)

Natural resourcesInitial incomeInvestment

Secondary educationPopulation growthAdj. R2 0.04


Inflation distortion = /(1+ ) Inflation impedes

growth

Note: t-values are shown within parentheses.

Model 1

Model 2


-2.51(2.07)

-2.46(2.37)

Natural resources

-0.09(5.75)

Initial incomeInvestment

Secondary educationPopulation growthAdj. R2 0.04 0.30


Natural resource curse

Model 1

Model 2

Model 3


-2.51(2.07)

-2.46(2.37)

-2.26(2.25)

Natural resources

-0.09(5.75)

-0.10(6.52)

Initial income

-0.45(2.67)

Investment

Secondary educationPopulation growthAdj. R2 0.04 0.30


Convergence

Model 1

Model 2

Model 3

Model 4


-2.51(2.07)

-2.46(2.37)

-2.26(2.25)

-1.95(2.25)

Natural resources

-0.09(5.75)

-0.10(6.52)

-0.07(5.01)

Initial income

-0.45(2.67)

-0.45(3.05)

Investment

0.15(5.41)

Secondary educationPopulation growthAdj. R2 0.04 0.30 0.35 0.51


Investment is good for growth

Model 1

Model 2

Model 3

Model 4

Model 5


-2.51(2.07)

-2.46(2.37)

-2.26(2.25)

-1.95(2.25)

-1.97(2.49)

Natural resources

-0.09(5.75)

-0.10(6.52)

-0.07(5.01)

-0.04(2.93)

Initial income

-0.45(2.67)

-0.45(3.05)

-1.10(5.39)

Investment

0.15(5.41)

0.09(3.36)

Secondary education

1.24(4.24)

Population growthAdj. R2 0.04 0.30 0.35 0.51 0.60


Education also boosts growth

Model 1

Model 2

Model 3

Model 4

Model 5

Model 6


-2.51(2.07)

-2.46(2.37)

-2.26(2.25)

-1.95(2.25)

-1.97(2.49)

-1.61(2.14)

Natural resources

-0.09(5.75)

-0.10(6.52)

-0.07(5.01)

-0.04(2.93)

-0.04(2.49)

Initial income

-0.45(2.67)

-0.45(3.05)

-1.10(5.39)

-1.27(6.42)

Investment

0.15(5.41)

0.09(3.36)

0.10(3.74)

Secondary education*

1.24(4.24)

1.07(3.82)

Population growth

-0.56(3.42)

Adj. R2 0.04 0.30 0.35 0.51 0.60 0.64


Population drag

Note: An increase in secondary-school enrolment by a third increases growth by 1%.

Privatization o Profit-oriented owners and able

managers are allowed to direct enterpriseso Profit motive replaces political

considerations as the guiding principle of business operations

oProfit-maximizing owners generally appoint managers and staff on merit rather than on the basis of political connections

o Private enterprise is generally more efficient than state-owned enterprises

PRIVATIZATION AND GROWTH

POLICIES

PRIVATIZATION AND GROWTH Privatization

replaces political motives by profit motive in business

Private enterprise is usually more efficient than state-owned enterprises

38 countries, 1978-92

-6

-4

-2

0

2

4

6

8

.0 .1 .2 .3 .4

Share of SOEs in employment (%)

Per

cap

ita g

row

th (%

per

yea

r)

POLICIES

r = -0.35

SAME STORY TIME AND AGAINFree trade is good for growth

o Reduces the inefficiency that results from restrictions on trade

Price stability is good for growth o Reduces inefficiency resulting from

inflationPrivatization is good for growth

o Reduces inefficiency resulting from SOEs

Education is good for growth o Reduces the inefficiency that results

from inadequate education, and health care

POLICIES

Natural resources, if not well managed, may turn out to be, at best, a mixed blessing

Four possible channelso Dutch disease (foreign capital)o Rent seeking (social capital)o Education (human capital) o Investment (real capital)

NATURAL RESOURCES AND GROWTH

NATURAL RESOURCES AND GROWTH Dutch disease through overvaluation

Hurts level or composition of exports and FDI Rent seeking takes many forms

Protectionism, corruption, oppression Education falters

False sense of security Poor quality of policies and institutions

Investment: Same story One more thing: Resource drag

Nonrenewable natural resources are a fixed factor of production

Decreasing returns to scale

+denotes a positive effect in the direction shown

– denotes a negative effect in the direction shown

ENTER NATURAL RESOURCE DEPENDENCE

Growth

Investment

Trade

Initial income

Natural capital

Education

+

+ +

–

–

Resource curse

+ ––

MANUFACTURING AND GROWTH Manufacturing is

an important source of technological innovation and progress and thereby also of economic growth

156 countries,1960-2000

-6

-4

-2

0

2

4

6

8

0 20 40 60 80 100

Share of manufactures in exports (%)Per

cap

ita g

row

th a

djus

ted

for i

nitia

l inc

ome

(%)

INSTITUTIONS

r = 0.48

AGRICULTURE AND GROWTH Agriculture and

mining are low-skill labor intensive and offer few spillover benefits to other industries

Natural resources: Mixed blessing if not well managed

156 countries,1960-2000

r = 0.48

-8

-6

-4

-2

0

2

4

6

0 10 20 30 40 50 60 70

Primary production (% of GDP)Per

cap

ita g

row

th a

djus

ted

for i

nitia

l inc

ome

(%)

INSTITUTIONS

r = -0.59

AGRICULTURE AND GROWTH An increase in

primary production by 11% of GDP goes along with a decrease in per capita growth by one percentage point per year

r = 0.48

-8

-6

-4

-2

0

2

4

6

0 10 20 30 40 50 60 70

Primary production (% of GDP)Per

cap

ita g

row

th a

djus

ted

for i

nitia

l inc

ome

(%)

INSTITUTIONS

r = -0.59

AID AND GROWTH Foreign aid has

sometimes been compared to natural resource discoveries

Aid and growth are inversely related across countries

Cause and effect 156 countries,

1960-2000

INSTITUTIONS

-8

-6

-4

-2

0

2

4

6

-20 0 20 40 60 80

Foreign aid (% of GDP)Per

cap

ita g

row

th a

djus

ted

for i

nitia

l inc

ome

(%) r = -

0.36

SOCIAL CAPITAL AND GROWTH Three aspects of social

capital Equality Honesty Democracy

What do the data tell us?

INEQUALITY AND GROWTH Two views Inequality

sharpens incentives and thus helps growth

Inequality endangers social cohesion and hurts growth

117 countries,1960-2000

-8

-6

-4

-2

0

2

4

6

10 20 30 40 50 60 70

Gini index of inequality

Per

cap

ita g

row

th a

djus

ted

for i

ntia

l inc

ome

(%)

INSTITUTIONS

r = -0.27

INEQUALITY AND GROWTH Equality is good for

growth No visible sign here

that equality stands in the way of economic growth

An increase in Gini index by 16 points goes along with a decrease in per capita growth by one percentage point per year

-8

-6

-4

-2

0

2

4

6

10 20 30 40 50 60 70

Gini index of inequality

Per

cap

ita g

row

th a

djus

ted

for i

ntia

l inc

ome

(%)

INSTITUTIONS

r = -0.27

Democracy

OligocracyAutocracy

FROM AUTOCRACY TO DEMOCRACY

INSTITUTIONS

LIBERTY AND GROWTH Two views Political oppression

restrains special interest groups and thus helps growth

Political oppression breeds inefficiency and hurts growth

117 countries,1960-2000

-6

-4

-2

0

2

4

6

0 1 2 3 4 5 6 7 8

Political oppressionPer

cap

ita g

row

th a

djus

ted

for i

nitia

l inc

ome

(%)

INSTITUTIONS

r = -0.64

DEMOCRACY AND GROWTH Again, two views Democracy plays

into hands of special interest groups that hurt growth

Democracy facilitates change of government and helps growth

143 countries, 1960-2000

r = 0.48

-8

-6

-4

-2

0

2

4

6

-12 -8 -4 0 4 8 12

DemocracyPer

cap

ita g

row

th a

djus

ted

for i

nitia

l inc

ome

(%)

INSTITUTIONS

r = 0.50

DEMOCRACY AND GROWTH Democracy is

good for growth No visible sign

here that democracy stands in the way of economic growth

A rise in democracy index by 7 points goes along with an increase in per capita growth by one percentage point per year

r = 0.48

-8

-6

-4

-2

0

2

4

6

-12 -8 -4 0 4 8 12

DemocracyPer

cap

ita g

row

th a

djus

ted

for i

nitia

l inc

ome

(%)

INSTITUTIONS

r = 0.50

CORRUPTION AND GROWTH Once more, two

views Corruption greases

wheels of production and exchange and thus helps growth

Corruption breeds inefficiency and hurts growth

88 countries,1960-2000

-6

-4

-2

0

2

4

6

0 2 4 6 8 10 12

Corruption perceptions indexPer

cap

ita g

row

th a

djus

ted

for i

nitia

l inc

ome

(%)

More corruption

INSTITUTIONS

r = 0.69

CORRUPTION AND GROWTH So, good business

governance is good for growth

Argument can be extended to other aspects, such as secure property rights and effective bankruptcy laws

Same story

-6

-4

-2

0

2

4

6

0 2 4 6 8 10 12

Corruption perceptions indexPer

cap

ita g

row

th a

djus

ted

for i

nitia

l inc

ome

(%)

More corruption

INSTITUTIONS

r = 0.69

Economic growth responds to public policy

In particular, by encouragingosaving and investment of high

qualityoforeign trade and investmentoeducation and health careoeconomic diversificationosound institutions

... the government can help foster rapid economic growth

WHAT IS THE UPSHOT?

Since the second world war it has become quite clear that rapid economic growth is available to those countries with adequate natural resources which make the effort to achieve it.

W. ARTHUR LEWIS(Accra, 1968)

SIR ARTHUR LEWIS GOT IT RIGHT

These lessons are borne out by experience from around the world

Additional lessons:Too much SOE activity hurts the quality of

investment and education — and growthToo much agriculture and, more

generally, natural resource dependence, if not well managed, hurts education, investment, and trade — and thereby also growth

Too rapid population growth also tends to impede economic growth

WHAT ELSE?

Even so, the question of rapid growth is, of course, a bit more complicated

We also need to address a host of political, social, and cultural questions as well as questions of natural conditions, climate, and public health

RESERVATIONS

But the main point remains:To grow or not to grow is in large measure a matter of choice

Many of the constraints on growth are man-made, and can be removed

CONCLUSION: IT CAN BE DONE

These slides – and more! – can be viewed on my website:

www.hi.is/~gylfason

The End

Documents

Economic Growth and poverty reduction