Elusive Quest for Growth:

Is innovation engine of growth?

Motoo Kusakabe,

Senior Counselor to the President

EBRD

Goal of my Presentation• Has determinant of growth changed as

economy becomes “global knowledge economy”?

• Did such change take place only for higher income countries? Or the changes took place also in lower-income countries?

Has the Poverty reduced?• Extreme Poverty Head-Count (less than $1

a day)– 1981; 166 million people– 2001; 108 million (35% reduction)

• Reduction is mainly in East Asia and South Asia

• Sub-Saharan Africa, CIS; poverty increased• Latin America; almost no reduction

020406080

100120140160180

East Asia

Europe & Central Asia

Latin America

Middle East & N

orth Africa

South AsiaSub-Saharan A

frica

World

19812001

What countries grew most rapidly?Highest Growth Countries 23 years

China 8.23%

Korea, Rep. 5.97%

Ireland 4.70%

Thailand 4.66%

Botswana 4.63%

Mauritius 4.35%

Singapore 3.99%

India 3.69%

Hong Kong, China 3.61%

Malaysia 3.43%

“Elusive quest” for the growth:Economists’ thoughts on growth

1. Investment & Savings; 50’s & 60’s

2. Trade and Export Performance ; 70’s

3. Macro/Structural Policies; 80’s & 90’s

4. Human Capital; 90’s

5. Governance, Investment climate; 2000’s

6. Innovation, Entrepreneurship, ICT

Orthodox view on economic growth:1. Neo-classical view plus “growth

regression”

2. GDP growth rate is regressed by various indicators cross country

3. Identify “Robust” explanatory variables• Robustness means significant correlation at

5% levels and having the right sign, regardless of other control variables

Four “Robust Factors” of growth• Studies identified Four Robust Factors of

Growth: 1. Investment / GDP Ratio 2. Export / GDP ratio or index of “trade openness” 3. Governance Index4. Initial GDP per capita

• Most of other indicators are “fragile” in explaining growth– Education, financial, macro, innovation,etc

Traditional View on Growth:Three stage of development1. Basic economic governance (Lower Income

Countries)– Governance, Primary education, financial sector,

2. Export-led Growth (Higher Income Countries)– Export and FDI promotion– Investment in physical capital– Secondary Education

3. “Innovative” Technology-led Growth (Advanced Countries)

– Innovation, R&D, ICT– Tertiary Education

Is Governance Engine of Growth?

• Governance is considered as an important determinant for growth.

• How is the empirical evidence?

High correlations, if we take simple correlation• Correlation between governance indicators (2004) and

growth rate during past 23 years

0.00%10.00%20.00%30.00%40.00%50.00%60.00%70.00%80.00%

VoicePol. Stability

Gov. Effective

Reg. Quality

Rule of Law

Corruption

LowerHigher

Governance had a smaller or negative impact on growth in the next decade• Correlation between governance indicators in 90s and

economic growth in 2000’s

-20%-15%-10%-5%0%5%

10%15%20%25%

VoiceRule of Law

Gov. Effective.

Regulatory

Corruption

LowerHigher

Higher growth produces better governance later• Correlations between Per capita GDP growth rates in 90’s

Governance Indicators in 2000’s and

0%

5%

10%

15%

20%

25%

30%

35%

VoiceRule of Law

Gov. Effective.

Regulatory

Corruption

LowerHigher

Policy implicationIt is an over-expectation that governance can produce higher growth, particularly in lower income countriesIn higher income countries, competing for FDIs, governance becomes more important, but it has a relatively small impact on growth

Is Saving/investment an engine of growth?

• Economist, like Rostow, thought that investment decides the economic growth and lack of saving in developing countries is the source of slow growth.

• Role of International aid was thought to fill the gap between necessary investment and actual domestic savings

Traditional view on saving & investment• Increase domestic savings and domestic

investment & FDIs is most important• Financial Gap approach: if the domestic

saving is short of covering investment needs, rely on foreign aid and foreign borrowing to invest

• International aid is focused on large infrastructure projects

If we look at more carefully the causality,

• To examine the “causality”, correlation of saving and investment in one decade on the economic growth of the next decades are calculated.

Savings have a negative correlation with next decades’ growth

-60%-50%-40%-30%-20%-10%

0%10%20%30%

60s to70s

70s to 80s

80s to 90s

90s to 00sLowerHigher

Growth has a positive impact on savings in succeeding decades• Correlation between GDP per capita growth rates &

Gross Domestic Saving Ratio in the succeeding decades

-20.00%

-10.00%

0.00%

10.00%

20.00%

30.00%

40.00%

60s to70s 70s to 80s 80s to 90s 90s to 00s

LowerHigher

Investment has negligible correlation with growth after 70s

-20%

-10%

0%

10%

20%

30%

40%

50%

60s to70s 70s to 80s 80s to 90s 90s to 00s

LowerHigher

Rather growth causes higher investment in the succeeding decades

-20.00%

-10.00%0.00%

10.00%20.00%30.00%40.00%50.00%60.00%

60s to70s

70s to 80s

80s to 90s

90s to 00s

LowerHigher

Savings & Investment:Policy implication• Increase in savings & investment does not

automatically bring about higher growth

• More often higher investment in inefficient projects through external borrowing caused problem

• Higher economic growth will increase the savings & investment

Is Macro/Structural reform an engine of growth?

Bad macro/structural policies were considered to be the cause of slow economic growth

World Bank /IMF launched the “structural adjustment” approach in 80s. What is its relevance to economic growth?

Inflation has a strong negative impact on growth in the next decades

• Correlations between inflation rate (CPI) and per capita GDP growth rates in the succeeding decades

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

LowerHigher

Government consumptions has a mixed results on growth?Correlation between general government final consumption (GDP

ratio) and per capita GDP growth in the succeeding decades

-20.00%

-10.00%

0.00%

10.00%

20.00%

30.00%

40.00%

60s to70s

70s to 80s

80s to 90s

90s to 00s

LowerHigher

Is Export an engine of growth?

Structural adjustment approach also encouraged open trade policy. Many countries promoted export, particularly hi-tech export.How effective were such policies?

Strong correlation between export to growth• Correlations between the increase of export share in GDP and

growth in the next decades

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60s to70s

70s to 80s

80s to 90s

90s to 00s

LowerHigher

What factors explain the high export growth?IT Export performance

• 1. China 13.7% OO• 2. Korea 12.5% OOO• 3. Thailand 11.5% OO• 4. Ireland 11.0% OOOO• 5. Malaysia 10.8% OOO• 6. Hong Kong 10.6% O• 7. Bangladesh 10.0%• 8. Mexico 10.0% OO• 9. India 9.1%• 10. Syria 8.8%

Foreign Direct Investment has a strong impact on growth in higher income countries

-20%-10%

0%10%20%30%40%50%60%

70s to 80s

80s to 90s

90s to 00s

LowerHigher

• Correlations between Gross Foreign Direct Investment (% of GDP) and GDP per capita growth rate in the succeeding decades

Export: Policy implication• Export is the most important growth

determinant both in lower & higher income countries

• Growth of Export/GDP is the good measure of efficiency & competitiveness of the economy

• Export growth is strongly related to high-tech, ICT related export

Is Education an engine of Growth?

Education was seen as the most important determinant for growth. What is the best strategy for education?

Primary education had a strong impact on growth• Correlations between School Enrollment, Primary (% net) to the per

capita GDP growth rates in the succeeding decades

-10%

0%

10%

20%

30%

40%

50%

60%

70s to 80s 80s to 90s 90s to 00s

LowerHigher

Secondary education has increased impact on growth• Correlations between School Enrollment, Secondary (Net) and Per

capita GDP growth rates in the succeeding decades

0%

10%

20%

30%

40%

50%

60%

70s to 80s 80s to 90s 90s to 00s

LowerHigher

Tertiary education had a mixed impact on growth• Correlations between School Enrollment, Tertiary, (gross)

to Per capita DGP growth rates in the succeeding decades

-50%-40%

-30%-20%

-10%0%

10%20%30%

40%50%

70s to 80s 80s to 90s 90s to 00s

LowerHigher

Policy implications• Primary education has a strong growth

impact in lower income countries• Secondary education has a strong impact on

growth in higher income countries and more recently in lower income countries

• Tertiary education used to be a negative correlation with growth, but it becomes important recent decades even in lower income countries

Is ICT Engine of Growth?

Taiwan, Korea, Singapore, Ireland, India, China achieved a high growth through ICT ICT was seen by many economists as a major engine for growth

Telephone became a strong engine of growth in lower income countries• Correlations between Telephone mainlines (per 1000 people) and Per

capita GDP growth rates in the succeeding decades

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

70s to 80s 80s to 90s 90s to 00s

LowerHigher

Is Innovation Engine of Growth?

•Innovation needs a R&D process to produce new products and processes• Is such research capability necessary for developing countries?• Such innovation actually lead to higher growth for these countries?

R&D capacity do have a strong impact on growth• Correlations between Innovation-related indicators in 1990s and Per

capita GDP growth in 2000s

-20%-10%

0%10%20%30%40%50%60%

R&DResearcher

Technician

LowerHigher

Patent & Science Articles matter for growth• Even in Lower-income countries, patents and scientific journal

articles (in 90s) are strongly correlated to growth in 2000s

-10%-5%0%5%

10%15%20%25%30%35%40%45%

Patents J ournal

LowerHigher

Implications:

Growth factors has changed from physical capital to knowledge capital, even for lower income countries

What is the change in growth factors?• Globalization of the world economy

– Traditional three stage development pattern is no longer feasible

• Even lower income countries must compete in “knowledge economy”– Positive export promotion strategy to position

in growing market– Investment in higher education– Investment in R&D and scientific staff

National Innovation System• Creating a “National Innovation System” is

vital for the growth in competing in global knowledge economy

• Asian type innovation system is still very relevant for developing countries– Government role– Universities’ role– Highly trained workforce

New direction of development cooperation• Creation of a National Innovation System

– Science & Technology policies– University reform– ICT strategy– Entrepreneurship support

• Asian experience is more relevant– Japan, Korea, Taiwan, Malaysia, Singapore– Different strategies but in the same direction

Thank you !!• Contact: mkusakabe@ebrd.com

• Website: www.netgrowth.com

open content, knowledge sharing website for ICT strategy