What Causes Growth Some Conjectures

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What Causes Growth? Some Conjectures

• September 12, 2007

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Outline

• What are the sources of growth over the long-run?
  And why do countries differ in their growth
  rates?
• Conjectures
• Natural resources and endowment
• Population
• Openness, globalization and policy reform
• Institutions (democracy and property rights)
• Civil conflict
• Poverty traps the extreme poor cases

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Growth Theory The Basics (I)

• GDP as output (think of a factory or farm) what
  will make it grow?
• Investment takes place in more--and/or
  better--physical capital (plant and equipment,
  machines)
• The quantity of hours worked increases (through
  labor force growth or participation)

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Growth Theory The Basics (II)

• The quality of the labor improves (through
  investment in education and training or
  experience)
• Innovation or technological change takes place
  we discover new processes/techniques for making
  existing products, and develop altogether new
  ones

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Growth Theory the Puzzle

• But why does investment in physical and human
  capital and innovation vary across countries?
• Not just an economic question
• Tests
• explain levels of economic development (ie.,
  differences in GDP per capita) or growth rates
  (the dependent variable)
• In terms of some independent variables
• Controlling for possible confounding effects
  through multiple regression method (holding
  other things constant)

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Conjecture I Resource Endowments and Geography

• Natural resource abundance leads to higher growth
• Natural for Americans to think
• Sachs and Warner (1995) test idea
• indicator is share of natural resources
  exports/GDP
• they find negatively correlated with growth
• Resource curse examples--and counterexamples
• Richly endowed Nigeria, Ghana, Iran, Burma,
  Argentina, Venezuela
• Poorly endowed small European economies, Korea,
  Taiwan, Hong Kong, Singapore

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Resource Endowments II

• Why?
• Natural resource exports can be more prone to
  volatility and adverse movements in prices
• The discovery of natural resources can create
  booms that distort patterns of investment (the
  Dutch disease)
• Natural resource rich countries have lower tax
  bases, governments are therefore less accountable
  and more corrupt

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Resource Endowments III Geography

• But the issue might not be resource abundance but
  underlying geography
• Landlocked countries face particular problems
• Mountainous countries and also those with few
  navigable rivers or natural harbors
• From equator to 30 degrees latitude incomes are
  lower than North of 40 degrees latitude

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Gray arid. Red and orange are very high and high
vulnerability
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Conjecture II Population

• Malthus economics as the dismal science
• As GDP growth occurs, population also rises
  pushing income per capita back down toward
  subsistence
• Famines and constraints on resources ultimately
  reduce population
• Examples World Watch Institute, Population
  Action International, UN Center for Population
  and Development
• Prescription Family planning and contraception

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Population II

• If true, there should be a negative relationship
  between population growth and economic growth
• Ie., countries in which population grows more
  rapidly should see lower economic growth
• Widely studied no relationship one way or the
  other.

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Population III

• Complex dynamics between economic growth and
  population growth
• contra Malthus, as GDP increases (over some
  threshold) family size goes down
• the so-called demographic transition (see next
  slide)
• Population growth might be good
• as an input, if population can be absorbed into
  productive employment
• Large concentrations of population--for example
  in cities and urban civilizations--appear to be
  associated with innovation (the genius principle)
  and a more elaborated division of labor

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The Demographic Transition
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Population IV

• If population is not associated with growth one
  way or the other, family size may still affect
  poverty
• Low income households have larger average family
  sizes, which can
• Place burdens on parents
• Reduce resources available for children
• Create localized environmental stress, for
  example on commons (land, water, fisheries)
• Perhaps population growth is adversely related to
  growth in certain types of economies such as
  those dependent on agriculture

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Population V

• Policy conclusion family planning may increase
  choice, but
• Not clear it influences overall growth
• Demand for children may be more important than
  availability of contraception
• Although perhaps we should be more concerned
  about population growth in Malthusian
  economies those heavily dependent on
  agriculture or fragile natural resource base

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Conjecture III Policy Reform and Globalization

• In the immediate postwar period, many developing
  countries pursued inward-oriented development
  strategies that involved
• Protection (tariffs and non-tariff barriers),
  which limited trade
• Restrictions on foreign direct investment

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Policy Reform and Globalization

• Inward-looking or autarchic strategies had the
  effect of
• Limiting export opportunities
• Limiting access to capital and technology from
  abroad
• Limiting competition in the domestic market that
  was important for innovation

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The Washington Consensus

• Advanced industrial states and multilateral
  development institutions emphasize policy reforms
  that would increase economic openness
• Trade and foreign direct investment should be
  liberalized
• Government-owned enterprises should be
  privatized, including to foreigners
• Encourage competition through deregulation
• (from John Williamson, Latin American Adjustment
  How Much Has Happened?, 1990).

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Openness and Growth What Relationship?

• More open economies--ie., those which trade more
  --do appear to grow more rapidly
• But the causal relationship runs both
  ways--countries that grow more rapidly export
  more
• What about direct measures of trade barriers
  ie., tariffs?
• Era of more closed economies saw high growth, era
  of globalization has seen a mixed record of
  growth

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Openness and Economic Growth

• Policy implications
• Extreme distortions and closure almost certainly
  lower growth
• Moderate protection may not, but
• rapidity of technological change may make it
  more costly to be closed in the future
• On the other hand, following the washington
  consensus can have high social costs
  (unemployment, cuts in social services, etc.)

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Conjecture IVInstitutions and Governance

• Good governance the problem of circularity
• Countries that do well are well-governed
• Two possibilities
• property and contracting rights
• democracy

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Property Rights and Growth

• Property rights the ability of individuals to
  use, transfer and reap returns on property
• Contracting rights ability to enforce enforce
  contracts
• Violations of property rights from
• Expropriation by governments (nationalization,
  confiscatory taxation) the predatory state
• Crime and extortion
• Weak legal protections
• Growth will be higher if individuals can reap the
  gains from investments and risks that they take
• Incentives matter

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Property Rights II

• How to measure property rights?
• Mostly investor perceptions of legal environment,
  ease of doing business and corruption
• Countries that protect property rights do appear
  to experience higher growth
• but with interesting exceptions China
• and why do some countries have better property
  rights protection than others? Some speculations
  about growth in the very long run.

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Democracy and Growth I

• Does democracy lead to higher growth?
• Better able to protect property rights
• Better investment in human capital and social
  service
• Better social capital and higher levels of
  participation

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Democracy and Growth II

• Przeworski et. al. test systematically no
  relationship
• On average, democracies and authoritarian regimes
  perform the same
• But the range of performance is wider in
  authoritarian regimes
• miracles such as China, Korea, Taiwan, Chile
• But also the worst disasters, such as Haiti,
  Romania, Zaire, Cambodia, North Korea

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Conjecture V the Importance of Security

• The Long Peace among the major powers since
  1945 provided foundation for continued expansion
  among advanced industrial states
• But absence of war among major powers was
  associated with
• Interstate wars and interventions in developing
  countries and
• extensive civil conflict
• Massive displacement of peoples

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War and Growth

• War can act as a stimulusand
• May increase subsequent growth positively once
  finished, because of reconstruction (so-called
  phoenix effects Germany and Japan)
• But wars are obviously destructive of
  infrastructure, capital and people where and when
  they are being fought.

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Interstate Wars Since 1945, including wars of
independence (WI)
Africa Algeria WI, 1954-1962 Angola WI
1961-1975 Cameroon WI 1955-1960
Eritrea-Ethiopia 1998-2002 Guinea-Bissau WI
1962-1974 Kenya WI, 1952-1963 Madagascar WI
1947-48 Mozambique WI 1965-1975 Tunisia
1952-54 Asia Afghan-Soviet War 1979-1988
Cambodia 1970-1979 India-China, 1962
India-Pakistan 1971 Indonesia WI, 1945-49
Korean War 1950-53 Laos 1960-73 Vietnam WI,
Vietnam War and wars with Cambodia and China,
1946-1975, 1978-79, 1987 Latin
America Argentina-Britain (Falklands/Malvinas),
1982, plus US intervention in Dominican Republic
1965 El Salvador civil war 1979-90 Guatamala
1954 Haiti 1991-94 Nicaraguan civil war
1981-88 Panama 1989 Middle East Iran-Iraq
1980-1988 First and Second Gulf Wars 1991
2003-present Israel and its neighbors 1948-49,
1956, 1967-70, 1973, 1982-present
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Civil Wars Ongoing or Ended in Last 10 Years
Africa Angola, 1995-1997, 1998-2002 Burundi,
1988-1991, 1993-2001 First Congo War, Zaire etc,
1996-1997 Second Congo War, DRC, 1998-present
Republic of the Congo, 1997, 1998 Côte d'Ivoire,
1999-2000, 2002-present Liberia, 1989-1996,
1999-present Rwanda, 1990-1997 Sierra Leone,
1991-2002 Somalian Civil War, 1991-present
Sudanese Civil War, Sudan, 1955-1972,
1983-present Uganda, 1987-present Asia Cambodia,
1978-1993, 1997-1998 East Timor/Indonesia,
1975-1999 Nepalese People's War, Nepal,
1996-present Philippines (Mindanao), 1972-1996
Sri Lanka (Tamil succession), 1983-2001 Latin
America Colombia, 1964-present Guatemala,
1960-1996 Chiapas, Mexico, 1994-present Middle
East Afghanistan, 1992-2002 Kurdistan, Iraq,
Kurdish Democratic Party, Patriotic Union of
Kurdistan, 1961-1970, 1988-2003 Israel,
1967-present Yemen, 1979-1989, 1994,
2000s Former Socialist Countries First Chechen
War (1994-1996) Second Chechen War
(1999-present), Chechnya, Russia Georgian Civil
War, Abkhazia, South Ossetia in Georgia Yugoslav
wars, Yugoslavia, 1991-1995, 1996-1999, 2001
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Number of Conflicts by Type, 1946-2002 (at least
25 battle deaths)
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Conjecture VI Poverty Traps

• Is there something distinctive about countries
  characterized by extreme poverty
• in which conditions of poverty themselves
  contribute to the perpetuation of poverty?
• The problems of the least developed countries
  (LDCs)

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Least Developed Countries, 2005 Approximately 11
of world population, 0.6 of GDP
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Poverty Traps

• Policy conclusion we have to think differently
  about the problems facing extremely poor
  countries with generalized poverty than others
• Aid is likely to be extremely important

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Summary I

• Growth is important in alleviating poverty in any
  given economy
• And differences in growth rates over time are an
  important determinant of the distribution of
  income across countries (divergence or
  inter-country income inequality)

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Summary Five Conjectures on Growth
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Summary II

• Note the foregoing is a summary of the
  relationship between these variables and growth
• and we are therefore only examining their
  effects on poverty and inequality indirectly
• For example, civil wargtlow growthgtincrease in
  poverty
• But perhaps they have direct effects
• Ie., democracygtpoverty reduction