STAGES OF DEVELOPMENT, ECONOMIC POLICIES
AND NEW WORLD ECONOMIC
ORDER
Victor Polterovich and
Vladimir Popov
INITIAL CONDITIONS AND INITIAL CONDITIONS AND ECONOMIC POLICIESECONOMIC POLICIES
Initial conditions Level of technological development (GDP per capita)
Quality of institutions(CPI index)
LOW HIGH
LOW
Accumulation of FOREXIncrease in gov.rev/GDP ratioDecrease in tariff protection
No such countries
HIGH
Accumulation of FOREXIncrease in gov.rev/GDP ratioIncrease in tariff protection
Decrease in FOREXIncrease/decrease in gov.rev/GDP ratioDecrease in tariff protection
Introduction Introduction
Two recent papers by Acemoglu, Two recent papers by Acemoglu, Aghion, Zilibotti (2002a,b) offer a Aghion, Zilibotti (2002a,b) offer a model to demonstrate the model to demonstrate the dependence of economic policies on dependence of economic policies on the distance to the technological the distance to the technological frontier.frontier.
A general idea is to run regressions of the following type:
GR = Control variables + bX(a -Y), where
GR is rate of growth (or another outcome indicator);
X is a policy variable (level of tariffs, speed of foreign exchange reserves accumulation, etc.);
b, a are regression coefficients; Y is a characteristics of stage of development
of a country (GDP per capita, an institutional indicator or their combinations).
TARIFFSTARIFFSFig. 1. Increase in the ratio of exports to GDP and average annual growth
rates of GDP per capita in 1960-99, %
R2 = 0,1883
-2
-1
0
1
2
3
4
5
6
7
-30 -20 -10 0 10 20 30 40 50 60 70
Increase in the ratio of exports to GDP in 1960-99, p.p.
Ave
rag
e a
nn
ual
gro
wth
rat
es
of
GD
P
pe
r ca
pit
a in
196
0-99
, %
Botswana
S. KoreaHong Kong
ThailandJapan
Niger
IrelandMalaysiaPortugal
Trinidad and Tobago
Zambia
Guyana
Iceland
Sri Lanka
TARIFFSTARIFFS
Fig. 2. Average share of exports and investment in GDP in 1960-99, %
R2 = 0,1359
5
10
15
20
25
30
35
40
45
0 20 40 60 80 100 120 140 160 180
Average share of exports in GDP in 1960-99, %
Ave
rag
e s
hare
of
in
ve
stm
en
t in
GD
P in
1960-9
9, %
Singapore
Luxembourg
BhutanSt. Kitts and Nevis
Sierra Leone
MicronesiaWest Bank and Gaza
TARIFFSTARIFFSFig. 3. Import duties as a % of import in 1975-99 and the increase in export as a
% of GDP in 1980-99, p.p.
R2 = 0,0001
-50
-30
-10
10
30
50
70
0 5 10 15 20 25 30 35 40 45 50
Import duties as a % of import, average 1975-99
Incr
eas
e in
th
e r
atio
of
exp
ort
to
GD
P in
19
80-9
9, p
.p.
TARIFFSTARIFFSImport duties as a % of import, average for 1975-99, and PPP GDP per capita as a % of
the US in 1985
R2 = 0,3151
0
5
10
15
20
25
30
35
0 20 40 60 80 100 120
PPP GDP per capita as a % of the US in 1985
Imp
ort
du
tie
s a
s a
% o
f im
po
rt,
ave
rag
e f
or
1975
-99
TARIFFSTARIFFS Average tariff rate (% of import) and growth rate of per capita GDP (%) in
1870-90 and 1890-1913
R2 = 0,0721
-0,5
0,0
0,5
1,0
1,5
2,0
2,5
3,0
0 10 20 30 40 50 60
Average tariff rate in 1870-90 and 1890-1913
Gro
wth
rat
e o
f p
er
cap
ita
GD
P in
187
0-18
90 a
nd
in 1
890-
1913
, %
MEX, 1890-1913AUS, 1890-1913
ARG, 1870-90
CAN, 1890-1913
RUS, 1870-90
ARG, 1890-1913
USA, 1870-1890
RUS, 1890-1913
MEX, 1870-90
India, 1890-1913India, 1870-90
TARIFFSTARIFFS
We tried to find a GDP per capita threshold for We tried to find a GDP per capita threshold for the 19th century using data from (Irwin, 2002), the 19th century using data from (Irwin, 2002), but failed. The best equation linking growth rates but failed. The best equation linking growth rates in 1870-1913 to GDP per capita and tariff rates in 1870-1913 to GDP per capita and tariff rates (27 countries, two periods – 1870-90 and 1890-(27 countries, two periods – 1870-90 and 1890-1913 – 54 observations overall) is: 1913 – 54 observations overall) is:
Regression for 1870-1913Regression for 1870-1913 GROWTH = 0.24 + 0.04*Y – 0.0004*Y2 – 0.05*T + GROWTH = 0.24 + 0.04*Y – 0.0004*Y2 – 0.05*T +
0.001*T0.001*T22 + 0.0006*Y*T, + 0.0006*Y*T, Where Y – GDP per capita in 1870 nor 1890 Where Y – GDP per capita in 1870 nor 1890
respectively, T – average tariff rates respectively, T – average tariff rates (R(R22adj. = 33%, all coefficients significant at 11% adj. = 33%, all coefficients significant at 11%
level or less).level or less).
DATA - CPIDATA - CPI Corruption perception index (CPI) for Corruption perception index (CPI) for
1980-85 – these estimates are 1980-85 – these estimates are available from Transparency available from Transparency International for over 50 countriesInternational for over 50 countries
CPI = 2.3 + 0,07*Ycap75us, CPI = 2.3 + 0,07*Ycap75us, N=45, R2 =59%, T-statistics for N=45, R2 =59%, T-statistics for
Ycap75 coefficient is 9. 68. Ycap75 coefficient is 9. 68. CORRres = 10 – [CPI – (2.3 + CORRres = 10 – [CPI – (2.3 +
0.07*Ycap75us)] = 12.3 – CPI + 0.07*Ycap75us)] = 12.3 – CPI + 0.07*Ycap75us0.07*Ycap75us
DATA: RISKDATA: RISK RISK84-90 – average investment risk
index for 1984-90, varies from 0 to 100, the higher, the better investment climate
RISK = 62.1 + 0.19Ycap75us, N= 88, RISK = 62.1 + 0.19Ycap75us, N= 88, RR22=36%, T-statistics for Ycap75us =36%, T-statistics for Ycap75us coefficient is 3.95. coefficient is 3.95.
RISKres = RISK84-90 – (62.1 + RISKres = RISK84-90 – (62.1 + 0.19Ycap75us) +1000.19Ycap75us) +100
TARIFFSTARIFFS GROWTH=CONST.+CONTR.VAR.+Tincr.(0.06– GROWTH=CONST.+CONTR.VAR.+Tincr.(0.06–
0.004Ycap75us–0.004CORRpos–0.005T0.004Ycap75us–0.004CORRpos–0.005T))
GROWTH, is the annual average growth rate of GDP GROWTH, is the annual average growth rate of GDP per capita in 1975-99, per capita in 1975-99,
the control variables are population growth rates the control variables are population growth rates during the period and net fuel imports (to control for during the period and net fuel imports (to control for “resource curse”), “resource curse”),
T – average import tariff as a % of import in 1975-99,T – average import tariff as a % of import in 1975-99, Tincr. – increase in the level of this tariff (average Tincr. – increase in the level of this tariff (average
tariff in 1980-99 as a % of average tariff in 1971-80), tariff in 1980-99 as a % of average tariff in 1971-80), Ycap75us – PPP GDP per capita in 1975 as a % of the Ycap75us – PPP GDP per capita in 1975 as a % of the
US level, US level, CORR pos – positive residual corruption in 1975, CORR pos – positive residual corruption in 1975,
calculated as explained earlier. calculated as explained earlier. R2=40%, N=39, all coefficients are significant at 5% R2=40%, N=39, all coefficients are significant at 5%
level, except the last one (33%), but exclusion of the level, except the last one (33%), but exclusion of the last variable (a multiple of T by Tincr.) does not ruin last variable (a multiple of T by Tincr.) does not ruin the regression and the coefficients do not change the regression and the coefficients do not change much.much.
TARIFFSTARIFFS If import duties are included into growth If import duties are included into growth
regressions without the interaction terms with regressions without the interaction terms with GDP per capita and/or a measure of institutional GDP per capita and/or a measure of institutional strength (corruption), the coefficient on import strength (corruption), the coefficient on import duties is not significant:duties is not significant:
But when interaction terms are included, all But when interaction terms are included, all coefficients become statistically significant. Here coefficients become statistically significant. Here is an additional equation that give similar is an additional equation that give similar thresholds on GDP per capita and corruption:thresholds on GDP per capita and corruption:
GROWTH=CONST+CONTR.VAR+T(0.05–0.005Ycap75us–GROWTH=CONST+CONTR.VAR+T(0.05–0.005Ycap75us–0.007Rpol)0.007Rpol)
where Rpol is the indicator of the accumulation of where Rpol is the indicator of the accumulation of foreign exchange reserves computed as foreign exchange reserves computed as explained later, in the third section, N=40, explained later, in the third section, N=40, R2=40, all coefficients significant at 8% level or R2=40, all coefficients significant at 8% level or less, control variables – positive residual less, control variables – positive residual corruption and population growth rates. corruption and population growth rates.
TARIFFSTARIFFS
GROWTH=CONST+CONTR.VAR.+T(0.005RISK–0.002Ycap75us–GROWTH=CONST+CONTR.VAR.+T(0.005RISK–0.002Ycap75us–0.3)0.3)
(N= 87, R(N= 87, R2 2 =42, all coefficients significant at 10% level =42, all coefficients significant at 10% level or less, control variables are population growth rates, or less, control variables are population growth rates, population density and total population).population density and total population).
The equation implies that for a poor country (say, with The equation implies that for a poor country (say, with the PPP GDP per capita of 20% of the US level or less) the PPP GDP per capita of 20% of the US level or less) import duties stimulate growth only when investment import duties stimulate growth only when investment climate is not very bad (RISK > 50%) – the expression climate is not very bad (RISK > 50%) – the expression in brackets in this case becomes positive. in brackets in this case becomes positive.
Foreign exchange reserves Foreign exchange reserves accumulationaccumulation
Fig. 3.1. Foreign exchange reserves as a % of GDP, average ratios for 1960-99
LibyaSaudi ArabiaMalaysia
KuwaitThailandIrelandMauritiusIsraelIran(74-99)
UAEChile
EgyptChina(77-99)Nigeria
ItalyPhilippines
Indon(67-99)FranceKorea, Rep.
Germ(91-99)Turkey(68-99)Argentina
UKBrazilIndiaRussia(93-99)MexicoJapan
Congo, Rep.
HK(90-99)
US
Pakistan
SingaporeBotswana (1976-99)
0 10 20 30 40 50 60 70
%
Foreign exchange reserves Foreign exchange reserves accumulationaccumulation
Fig. 3.2A. Average ratio of imports to GDP and average ratio of reserves to GDP in 1960-99, %
R2 = 0,2611
0
10
20
30
40
50
60
70
80
90
100
0 20 40 60 80 100 120 140 160 180
Import as a % of GDP
FE
R a
s a
% o
f G
DP
Lebanon
SingaporeBotswana
Malta
Foreign exchange reserves Foreign exchange reserves accumulationaccumulation
Fig. 3.3. Average ratio of gross international reserves to GDP and average annual growth rates of GDP per capita in 1960-99, %,
R2 = 0,2396
-2
0
2
4
6
0 20 40 60
Average ratio of gross international reserves to GDP
Aver
age a
nnua
l gro
wth
rate
s of
GDP
per
capi
ta
Singapore
Chad
Korea
JapanMalaysia
ThailandPortugal
Sierra-LeoneVenezuela
HK
Botswana
China
Switzerland
Foreign exchange reserves Foreign exchange reserves accumulationaccumulation
In this section we demonstrate, however, that Fig.6. Average real exchange rate versus the US $ (Year 12 = 100%) in fast
growing developing economies, year "0" denotes the point of take-off
50
70
90
110
130
150
170
190
210
230
250
-5 -3 -1 1 3 5 7 9 11 13 15 17 19 21 23 25
Botswana Chile China Egypt, Arab Rep. India Indonesia Korea, Rep. Malaysia Mauritius Singapore Sri Lanka Thailand FAST POOR
Foreign exchange reserves Foreign exchange reserves accumulationaccumulation
delta R = 38 – 11.4logYcap75 + 0.1(T/Y) + delta R = 38 – 11.4logYcap75 + 0.1(T/Y) + 0.24(delta T/Y)0.24(delta T/Y)
(R2=34%, N=82, all coefficients significant at (R2=34%, N=82, all coefficients significant at 0.1% level). 0.1% level).
Then we considered the residual as the policy-Then we considered the residual as the policy-induced change in reserves.induced change in reserves.
Afterwards we used the Afterwards we used the policy induced change policy induced change in foreign exchange reservesin foreign exchange reserves as one of the as one of the explanatory variables in growth regressions explanatory variables in growth regressions together with import taxes and change in together with import taxes and change in government revenues/GDP ratiogovernment revenues/GDP ratio
Foreign exchange reserves Foreign exchange reserves accumulationaccumulation
GROWTH= CONST.+CONTR.VAR.+ T(0.06–GROWTH= CONST.+CONTR.VAR.+ T(0.06–0.0027Ycap75us)+ Rpol (0.07-0.006T) 0.0027Ycap75us)+ Rpol (0.07-0.006T)
The control variables are the rule of law The control variables are the rule of law index for 2001, the size of the economy in index for 2001, the size of the economy in 1975, and the population growth rates in 1975, and the population growth rates in 1975-99. 1975-99.
N=74, R2=44%, all coefficients are N=74, R2=44%, all coefficients are significant at less than 10% level, except significant at less than 10% level, except for coefficients of Rpol (11%) and the PPP for coefficients of Rpol (11%) and the PPP GDP in 1975 (16%).GDP in 1975 (16%).
Foreign exchange reserves Foreign exchange reserves accumulationaccumulation GROWTH=CONST.+CONTR.VAR.+ G(0.05– GROWTH=CONST.+CONTR.VAR.+ G(0.05–
0.0003Ycap75us–0.003CORRpos)+ Rpol(0.12 – 0.0003Ycap75us–0.003CORRpos)+ Rpol(0.12 – 0.002Ycap75us) 0.002Ycap75us)
This equation implies that the growth of This equation implies that the growth of government revenues/GDP ratio is good for most government revenues/GDP ratio is good for most countries, excluding the richest ones and the most countries, excluding the richest ones and the most corrupt ones (if Ycap75us is higher than 100%, corrupt ones (if Ycap75us is higher than 100%, whereas CORRpos >7, the impact of the increase of whereas CORRpos >7, the impact of the increase of government revenues/spending on growth becomes government revenues/spending on growth becomes negative). negative).
It also allows to determine the threshold level of It also allows to determine the threshold level of GDP per capita for the impact on growth of reserve GDP per capita for the impact on growth of reserve accumulation: for countries with GDP per capita accumulation: for countries with GDP per capita higher than 60% of the US level, the accumulation of higher than 60% of the US level, the accumulation of reserves has a positive impact on growth; for richer reserves has a positive impact on growth; for richer countries the impact is negative. countries the impact is negative.
Foreign exchange reserves Foreign exchange reserves accumulationaccumulation
We also experimented with another definition of policy induced change in foreign exchange reserves, as a residual from regression linking the increase in reserves to GDP ratio to the following ratios: trade/GDP, increase in trade/GDP, external debt/GDP(ED/Y) and debt service/GDP(DS/Y):
N=59, R2=36%, all coefficients significant at less than 7%.
)/(28.0)/(2.0)/(06.0)/(6.03.3 YTYTYEDYDSR
Foreign exchange reserves Foreign exchange reserves accumulationaccumulation
GROWTH=CONST.+CONTR.VAR.+T(0.001RISK– 0.0038Ycap75us)+Rpol(0.23-0.014T),
N=48, R2 = 46, all coefficients significant at 7% or less, control variables – PPP GDP in 1975 and population growth rate.
GROWTH=CONST.+CONTR.VAR.+Gpol(0.096RISK– 6.3)+Rpol(0.31 – 0.017T),
N=28, R2 = 61, all coefficients significant at 10% or less, control variables – PPP GDP in 1975, average ratio of government revenues to GDP in 1973-75.
IMMITATION vs. INNOVATIONIMMITATION vs. INNOVATION Fig. 5. R&D expenditure and net export of technology (receipts of licence fees and royalties minus payments of licence fees and royalties) in 1980-99, % of
GDP, and PPP GDP per capita in 1999, $
R2 = 0,4742
R2 = 0,015
-3
-2
-1
0
1
2
3
0 5000 10000 15000 20000 25000 30000 35000
PPP GDP per capita in 1999, $
R&
D e
xpen
dit
ure
an
d n
et e
xpo
rt
of
tech
no
log
y
USA
UK
Colombia
Ireland
USA
Lesotho
Sweden
IMMITATION vs. INNOVATIONIMMITATION vs. INNOVATION
Fig. R&D expenditure, % of GDP
0,5
1
1,5
2
2,5
3
3,5
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999Japan
Korea, Rep.
Finland
United States
Germany
Israel
UnitedKingdomRussianFederationIndia
China
IMMITATION vs. INNOVATIONIMMITATION vs. INNOVATION GR = CONST.+CONTR.VAR.+ 0.11TT
(24.8– Ycap75us + 24.9R&D), where TT - net technology transfer in where TT - net technology transfer in
1980-99 as a % of GDP,1980-99 as a % of GDP, R&D - expenditure for research and R&D - expenditure for research and
development as a % of GDP in 1980-99development as a % of GDP in 1980-99 Control variables - investment climate Control variables - investment climate
index in 1984-90 and share of investment index in 1984-90 and share of investment in GDP in 1975-99in GDP in 1975-99
All coefficients significant at 5% level, All coefficients significant at 5% level, R2=58%R2=58%
FDI: FDI: High growth without FDI: Japan, S. Korea, HK, NorwayHigh growth without FDI: Japan, S. Korea, HK, Norway
High FDI without growth: High FDI without growth: Bolivia, Papua-New Guinea, SwazilandBolivia, Papua-New Guinea, Swaziland
Fig. 7. Average share of investment and average net inflow of FDI in GDP in 1980-99, %
R2 = 0,1278
-2
-1
0
1
2
3
4
5
6
7
10 15 20 25 30 35 40 45 50
Average share of investment in GDP in 1980-99, %
Ave
rag
e n
et in
flo
w o
f F
DI i
n 1
980-
99, %
o
f G
DP
FDIFDI GR = CONST. + CONTR. VAR. + 0.027*FDI (ICI
–58.5), where ICI – investment climate index in 1984-
90, FDI – average foreign direct investment inflow as a % of GDP in 1980-99.
Control variable - population growth rates in 1975-99.
All coefficients are significant at 5% level, R2= 23%
58.5 – level of Colombia, Costa-Rica, Kuwait, Qatar, South Africa.
MIGRATIONMIGRATIONFig. 8. Annual average growth rates of population and GDP per capita in 1960-99, %
R2 = 0,1436
-2
-1
0
1
2
3
4
5
6
0 0,5 1 1,5 2 2,5 3 3,5 4 4,5
Average annual population growth rates in 1960-99, %
Ave
rag
e an
nu
al g
row
th r
ates
of
GD
P
per
cap
ita,
196
0-99
, %
Singapore
S
S. Korea
ChinaHong Kong
Thailand
Malaysia
MIGRATIONMIGRATIONFig. 9. Growth rates of population in 2000 - natural increase and net immigration,
% of total population
R2 = 0,6531
R2 = 0,8361
-4
-3
-2
-1
0
1
2
3
4
5
6
-2 -1 0 1 2 3 4 5 6 7 8
Population growth rates, %
Nat
ura
l in
crea
se a
nd
net
im
mig
rati
on
, %
Natural increase
Net migration
Fig. 10. Growth rates of population in 2000 - natural increase and net immigration, % of total population
R2 = 0,0054
-4
-3
-2
-1
0
1
2
3
-1 -0,5 0 0,5 1 1,5 2 2,5 3 3,5 4
Natural increase, %
Net
imm
igra
tio
n, %
MIGRATIONMIGRATION
MIGRATIONMIGRATION Net migration flows are measured as the Net migration flows are measured as the
net inflow of migrants in 2000 net inflow of migrants in 2000 GR = CONST. + CONTR. VAR. + M(3.08lgY – 9.08)
where Y is PPP GDP per capita in 1975, M – net inflow of migrants in 2000 as a % of as a % of total population of receiving country (U.S. total population of receiving country (U.S. Bureau of the Census, 2002)Bureau of the Census, 2002)
Control variable - population growth rates in 1975-99.
All coefficients are significant at 10% level, R2= 22%
MIGRATIONMIGRATION Equation (6) implies that for countries with PPP
GDP of less than 10% of US level of 1975 (level of Bolivia and Cote d’Ivoire, lgY = 2.95), the impact of the immigration on growth was negative.
To put it differently, migrants coming to poor countries were probably less educated than the rest of the population, so the inflow of migrants lowered rather than increased the level of human capital.
On the contrary, immigration to rich countries provided them with a “brain gain” that outweighed the negative impact on growth associated with the increase in population growth rates.
KYOTO PROTOCOL: FREEZE THE KYOTO PROTOCOL: FREEZE THE LEVELS OF EMISSIONSLEVELS OF EMISSIONS
Fig. 11. Emissions of CO2 per capita (left scale, tons) and per $1 of PPP GDP (right scale, kg) in 1997
0
5
10
15
20
25
30
35
100 1000 10000 100000
PPP GDP per capita, 1997, log scale
Em
issi
on
s o
f C
O2
per
cap
ita,
to
ns
0
0,5
1
1,5
2
2,5
Em
issi
on
s o
f C
O2
per
$1
of
PP
P G
DP
, kg
CO2emissionsper capita,tons
CO2emissionsper $1 PPPGDP, kg
ConclusionsConclusions What is good for the West, is not
necessarily good for the South In our interdependent world “good
policies” for developing countries, whether its trade protectionism or control over short-term capital flows, in most instances cannot be pursued unilaterally, without the co-operation of the West or at least without some kind of understanding on the part of the rich countries.
ConclusionsConclusions ProtectionismProtectionism Accumulation of FOREXAccumulation of FOREX Free import of technologyFree import of technology Control over capital flowsControl over capital flows Control over “brain drain”Control over “brain drain” Control over pollutionControl over pollution Different priorities (child labor, Different priorities (child labor,
democracy, reproductive rights, animal democracy, reproductive rights, animal rights, etc.)rights, etc.)
ConclusionsConclusions It is not reasonable to apply the modern
Western patterns of tradeoffs between different development goals (wealth, education, life expectancy, equality, environmental standards, human rights, etc.) to less developed countries. Policies that prohibit child labor, for instance, may be an unaffordable luxury for developing countries, where the choice is not between putting a child to school or into a factory shop, but between allowing the child to work or to die from hunger.