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Chapter OneChapter One
GROWING APARTGROWING APART
Chapter 1Chapter 1
Introduces the subject and discusses Introduces the subject and discusses why why growth mattersgrowth matters
Tells stories about different growth Tells stories about different growth performance in different countries performance in different countries around the worldaround the world
Main point: Main point: Economic policies Economic policies andand institutionsinstitutions matter for growth matter for growth
OutlineOutline
Growing ApartGrowing Apart
In other words:In other words:A view of the landscapeA view of the landscape
Diverging growth pathsDiverging growth pathsCommunism vs. capitalismCommunism vs. capitalism
Plan vs. marketPlan vs. market
Main message:Main message:
To grow or not to grow is in large measure a matter of choice
Growing ApartGrowing Apart
Great nations are never impoverished by private, Great nations are never impoverished by private, though they sometimes are by publick prodigality though they sometimes are by publick prodigality and misconduct.and misconduct.
ADAM SMITHADAM SMITH
There are many countries, not essentially different There are many countries, not essentially different either in the degree of security which they afford either in the degree of security which they afford to property, or in the moral and religious to property, or in the moral and religious instruction received by the people, which yet, instruction received by the people, which yet, with nearly equal natural capabilities, make a with nearly equal natural capabilities, make a very different progress in wealth.very different progress in wealth.
THOMAS MALTHUSTHOMAS MALTHUS
Great nations are never impoverished by private, Great nations are never impoverished by private, though they sometimes are by publick prodigality though they sometimes are by publick prodigality and misconduct.and misconduct.
ADAM SMITHADAM SMITH
There are many countries, not essentially different There are many countries, not essentially different either in the degree of security which they afford either in the degree of security which they afford to property, or in the moral and religious to property, or in the moral and religious instruction received by the people, which yet, instruction received by the people, which yet, with nearly equal natural capabilities, make a with nearly equal natural capabilities, make a very different progress in wealth.very different progress in wealth.
THOMAS MALTHUSTHOMAS MALTHUS
The beginningThe beginning
Economic growth in the long run used to be Economic growth in the long run used to be considered immune to all but technological considered immune to all but technological progressprogress
Which grew more rapidly: the United States or the Which grew more rapidly: the United States or the Soviet Union?Soviet Union?
Economists did not fully acknowledge:Economists did not fully acknowledge:destructive force of communismdestructive force of communism
effects of gross economic mismanagement in many effects of gross economic mismanagement in many parts of the worldparts of the world
Economic growth in the long run used to be Economic growth in the long run used to be considered immune to all but technological considered immune to all but technological progressprogress
Which grew more rapidly: the United States or the Which grew more rapidly: the United States or the Soviet Union?Soviet Union?
Economists did not fully acknowledge:Economists did not fully acknowledge:destructive force of communismdestructive force of communism
effects of gross economic mismanagement in many effects of gross economic mismanagement in many parts of the worldparts of the world
They failed to build the experience They failed to build the experience of communist and developing of communist and developing countries into mainstream models of countries into mainstream models of economic growtheconomic growth
Macroeconomic policyMacroeconomic policy
StabilizationStabilization
RedistributionRedistribution
StabilizationStabilization
RedistributionRedistribution
InflationInflation
Inequality in the Inequality in the distribution of distribution of income and wealthincome and wealth
InflationInflation
Inequality in the Inequality in the distribution of distribution of income and wealthincome and wealth
The main objectives of The main objectives of macroeconomic policymacroeconomic policy
Inflation, inequality, and Inflation, inequality, and inefficiency were not inefficiency were not considered harmful to considered harmful to growthgrowth
ReallocationReallocation Inefficiency
Adam SmithAdam SmithWealth of Nations
Sources of wealthSources of wealthSources of wealthSources of wealth
Division of labour Division of labour enhances efficiencyenhances efficiency
International tradeInternational trade enlarges markets enlarges markets increases efficiency increases efficiency increases wealth and growth increases wealth and growth
Nations tolerably well advanced as to skill, dexterity, Nations tolerably well advanced as to skill, dexterity, and judgment, in the application of labour, have and judgment, in the application of labour, have followed very followed very different plansdifferent plans in the general conduct in the general conduct oror direction of it; and those plans have not all been direction of it; and those plans have not all been equally favourable to the greatness of its produce.equally favourable to the greatness of its produce.
ADAM SMITHADAM SMITH
private enterpriseprivate propertygood governancefree trade
private enterpriseprivate propertygood governancefree trade
Determinants of long-Determinants of long-termtermeconomic growtheconomic growth
Economic systemsEconomic systems
Economic policiesEconomic policies
Economic institutionsEconomic institutions
Economic systemsEconomic systems
Economic policiesEconomic policies
Economic institutionsEconomic institutions
Communism: on Communism: on the scrapheap of the scrapheap of
historyhistory
Mixed market Mixed market economy: the only economy: the only
game in towngame in town
Explaining why Explaining why growth rates differgrowth rates differ
QuestionsQuestions
If the economic systems adopted by two If the economic systems adopted by two countries are not completely different, is it countries are not completely different, is it nonetheless possible to trace the differences nonetheless possible to trace the differences in their economic performance to their in their economic performance to their different different economic policieseconomic policies??
Or does Or does technologytechnology dictate growth differentials dictate growth differentials in such cases?in such cases?
Or perhaps Or perhaps geographygeography??
Or Or historyhistory??
Or all of the above?Or all of the above?
If the economic systems adopted by two If the economic systems adopted by two countries are not completely different, is it countries are not completely different, is it nonetheless possible to trace the differences nonetheless possible to trace the differences in their economic performance to their in their economic performance to their different different economic policieseconomic policies??
Or does Or does technologytechnology dictate growth differentials dictate growth differentials in such cases?in such cases?
Or perhaps Or perhaps geographygeography??
Or Or historyhistory??
Or all of the above?Or all of the above?
Examination of economic Examination of economic growth in theory and practicegrowth in theory and practice
Growth performance of four pairs orGrowth performance of four pairs or clusters of countriesclusters of countries since 1970since 1970
Low-Low- andand middle-incomemiddle-income countriescountries
But most of the points to emerge apply But most of the points to emerge apply to to high-incomehigh-income countries as well countries as well
Those economies have developed quiteThose economies have developed quite differentlydifferently over the past 30-40 years over the past 30-40 years despite roughly comparabledespite roughly comparable initial initial conditionsconditions
The four The four clustersclusters
Thailand and BurmaThailand and Burma
Botswana, Nigeria, and GhanaBotswana, Nigeria, and Ghana
Uruguay, Argentina, and SpainUruguay, Argentina, and Spain
Madagascar and MauritiusMadagascar and Mauritius
Thailand and BurmaThailand and Burma
Botswana, Nigeria, and GhanaBotswana, Nigeria, and Ghana
Uruguay, Argentina, and SpainUruguay, Argentina, and Spain
Madagascar and MauritiusMadagascar and Mauritius
Burma and Burma and ThailandThailand
BurmaBurma1962: General Ne Win 1962: General Ne Win came to powercame to power
‘‘victorious march towards victorious march towards socialism’socialism’
self-relianceself-reliancebut active client of IMF but active client of IMF
1970s: respectable growth1970s: respectable growth
rising investmentrising investmentcentrally planned centrally planned poor poor qualityquality
stagnant exportstagnant export
1980s: something had 1980s: something had gone seriously wronggone seriously wrong
BurmaBurma1962: General Ne Win 1962: General Ne Win came to powercame to power
‘‘victorious march towards victorious march towards socialism’socialism’
self-relianceself-reliancebut active client of IMF but active client of IMF
1970s: respectable growth1970s: respectable growth
rising investmentrising investmentcentrally planned centrally planned poor poor qualityquality
stagnant exportstagnant export
1980s: something had 1980s: something had gone seriously wronggone seriously wrong
ThailandThailandrising export ratiorising export ratio
strong saving and strong saving and investment performanceinvestment performance
banking system strongly banking system strongly influenced by politicians influenced by politicians
quality of investment quality of investment questionablequestionable
strong education recordstrong education record
1960-1994: GNP per capita 1960-1994: GNP per capita increased by more than 5% increased by more than 5% per year on average per year on average compared with 1% in compared with 1% in BurmaBurma
ThailandThailandrising export ratiorising export ratio
strong saving and strong saving and investment performanceinvestment performance
banking system strongly banking system strongly influenced by politicians influenced by politicians
quality of investment quality of investment questionablequestionable
strong education recordstrong education record
1960-1994: GNP per capita 1960-1994: GNP per capita increased by more than 5% increased by more than 5% per year on average per year on average compared with 1% in compared with 1% in BurmaBurma
0
100
200
300
400
500
600
1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993
Burma
Thailand
Burma and Thailand: GNP per capita, 1960-1994 (constant 1987 US$, 1960=100)Fig 1.1Fig 1.1
Burma and ThailandBurma and Thailand
BurmaBurmaspurts of rapid growthspurts of rapid growth
depressed investments of low depressed investments of low qualityquality
plummeting exportsplummeting exports
deteriorating educationdeteriorating education
evaporation of expertiseevaporation of expertise
political control of economic political control of economic affairsaffairs
BurmaBurmaspurts of rapid growthspurts of rapid growth
depressed investments of low depressed investments of low qualityquality
plummeting exportsplummeting exports
deteriorating educationdeteriorating education
evaporation of expertiseevaporation of expertise
political control of economic political control of economic affairsaffairs
ThailandThailandthe stock-market crash in 1997-8 not the stock-market crash in 1997-8 not likely to dim long-run prospectslikely to dim long-run prospects
Thailand’s growth prospects continue Thailand’s growth prospects continue to look brightto look bright
Thailand’s economy seems basically Thailand’s economy seems basically soundsound
In 1990, Burma’s military junta refused to abide by the general election victory of the opposition, led by Aung San Suu Kyi
In 1996, the universities were shut down
Rapid growth over the long haul does not always have to be smooth
Fix Yellow signsFix Yellow signs
Annualaveragegrowth ofGNP percapita1970-1995 (in%)
GNP percapita1995(USD,adjustedforpurchasingpower)
Investmentaspercentageof GNP1995
Exports ofgoods andservices aspercentageof GNP1995
Enrollmentinsecondaryeducationaspercentageof relevantage group1993
Annualaverageinflation1970-1995(in %)
BBuurrmmaa 11..22 …… 1122 22 …… 1133
TThhaaiillaanndd 55..22 77,,554400 4433 4422 3377 66
BBoottsswwaannaa 77..33 55,,558800 2255 4499 5522 1111
NNiiggeerriiaa --00..99 11,,222200 99 2244 2299 1199
GGhhaannaa --11..22 11,,999900 1199 2255 3366 3366
UUrruugguuaayy 00..22 66,,663300 1144 1199 8811 6611
AArrggeennttiinnaa --00..44 88,,331100 1188 99 7722 118800
SSppaaiinn 22..00 1144,,552200 2211 2244 8877 1111
MMaaddaaggaassccaarr --22..44 664400 1111 2233 1144 1166
MMaauurriittiiuuss 33..11 1133,,221100 2255 5588 5599 1100
Table 1.1
Select
ed co
untries
:
Select
ed co
untries
:
Overv
iew
Overv
iew
Botswana, Nigeria, Botswana, Nigeria, and Ghanaand Ghana
BotswanaBotswanaworld record in growthworld record in growth
GDP per capita has grown by GDP per capita has grown by 7.5% per year since 19667.5% per year since 1966
dependent on natural resources dependent on natural resources - diamonds- diamonds
80% of exports80% of exports
40% of GDP40% of GDP
democraticdemocratic
well-managed resourceswell-managed resources
strong educationstrong education
stable economic developmentstable economic development
11% average inflation rate11% average inflation rate
BotswanaBotswanaworld record in growthworld record in growth
GDP per capita has grown by GDP per capita has grown by 7.5% per year since 19667.5% per year since 1966
dependent on natural resources dependent on natural resources - diamonds- diamonds
80% of exports80% of exports
40% of GDP40% of GDP
democraticdemocratic
well-managed resourceswell-managed resources
strong educationstrong education
stable economic developmentstable economic development
11% average inflation rate11% average inflation rate
NigeriaNigeriaoil price increase in world oil price increase in world markets markets income per capita income per capita rose fourfold rose fourfold poor poor investment investment unproductive unproductive capital capital collapse of output collapse of output
low investment since 1980slow investment since 1980s
oil exports crowded out non-oil exports crowded out non-oil exports (90% of total)oil exports (90% of total)
natural resources: a mixed natural resources: a mixed blessing?blessing?
NigeriaNigeriaoil price increase in world oil price increase in world markets markets income per capita income per capita rose fourfold rose fourfold poor poor investment investment unproductive unproductive capital capital collapse of output collapse of output
low investment since 1980slow investment since 1980s
oil exports crowded out non-oil exports crowded out non-oil exports (90% of total)oil exports (90% of total)
natural resources: a mixed natural resources: a mixed blessing?blessing?
Botswana, Nigeria, Botswana, Nigeria, and Ghanaand Ghana
NigeriaNigeriaoiloil
80% of government revenue80% of government revenue
20% of GDP20% of GDP
ruled by military on and offruled by military on and off
19% inflation on average19% inflation on average
NigeriaNigeriaoiloil
80% of government revenue80% of government revenue
20% of GDP20% of GDP
ruled by military on and offruled by military on and off
19% inflation on average19% inflation on average
GhanaGhanamodel client of IMF and model client of IMF and World Bank since 1980sWorld Bank since 1980s
increasing foreign tradeincreasing foreign trade
increasing investmentincreasing investment
1982 - a turning point1982 - a turning point
exports of goods and exports of goods and services risingservices rising
net foreign direct net foreign direct investment flowing into investment flowing into Ghana 3.6% of GDP in 1995 Ghana 3.6% of GDP in 1995 compared with 2.4% in compared with 2.4% in NigeriaNigeria
36% inflation on average36% inflation on average
GhanaGhanamodel client of IMF and model client of IMF and World Bank since 1980sWorld Bank since 1980s
increasing foreign tradeincreasing foreign trade
increasing investmentincreasing investment
1982 - a turning point1982 - a turning point
exports of goods and exports of goods and services risingservices rising
net foreign direct net foreign direct investment flowing into investment flowing into Ghana 3.6% of GDP in 1995 Ghana 3.6% of GDP in 1995 compared with 2.4% in compared with 2.4% in NigeriaNigeria
36% inflation on average36% inflation on average
Abundant natural resource wealth can turn out to be, at best, a mixed blessing
0500100015002000250030003500
BotswanaGhanaNigeria
Botswana, Ghana, and Nigeria: GNP per capita, 1970-1995 (current US$, Atlas method)Fig 1.2
Uruguay, Uruguay, Argentina, and Argentina, and SpainSpain
UruguayUruguayabundant resourcesabundant resources
dedication to social security dedication to social security and social services and social services
South American welfare stateSouth American welfare state
active role of governmentactive role of government
protectionismprotectionism
declining GNP per capitadeclining GNP per capita
today: quite closed economytoday: quite closed economy
rampant inflationrampant inflation
UruguayUruguayabundant resourcesabundant resources
dedication to social security dedication to social security and social services and social services
South American welfare stateSouth American welfare state
active role of governmentactive role of government
protectionismprotectionism
declining GNP per capitadeclining GNP per capita
today: quite closed economytoday: quite closed economy
rampant inflationrampant inflation
ArgentinaArgentinagradual relative declinegradual relative decline
political development political development lagged behind economic lagged behind economic progressprogress
landowners ruled the landowners ruled the countrycountry
blocking decentralization, blocking decentralization, democratization, and democratization, and diversification away from diversification away from agricultureagriculture
hardening conflict hardening conflict between landowners and between landowners and emerging urban classesemerging urban classes
gradual deterioration of gradual deterioration of living standardsliving standards
ArgentinaArgentinagradual relative declinegradual relative decline
political development political development lagged behind economic lagged behind economic progressprogress
landowners ruled the landowners ruled the countrycountry
blocking decentralization, blocking decentralization, democratization, and democratization, and diversification away from diversification away from agricultureagriculture
hardening conflict hardening conflict between landowners and between landowners and emerging urban classesemerging urban classes
gradual deterioration of gradual deterioration of living standardsliving standardsEconomic growth Economic growth
is relativeis relative
Uruguay, Uruguay, Argentina, and Argentina, and SpainSpain
ArgentinaArgentinaPerón president in 1946 Perón president in 1946
high inflationhigh inflation
rapid escalation of debtrapid escalation of debt
flawed economic policiesflawed economic policiesimport substitutionimport substitution
overvaluation of the currencyovervaluation of the currency
insufficient competitioninsufficient competition
reduced foreign trade and reduced foreign trade and dragged down living standardsdragged down living standards
civil disorder, inflation, civil disorder, inflation, corruption, and brain-drain corruption, and brain-drain slow and uneven growthslow and uneven growth
strikingly closed economystrikingly closed economy
history of high inflationhistory of high inflation
ArgentinaArgentinaPerón president in 1946 Perón president in 1946
high inflationhigh inflation
rapid escalation of debtrapid escalation of debt
flawed economic policiesflawed economic policiesimport substitutionimport substitution
overvaluation of the currencyovervaluation of the currency
insufficient competitioninsufficient competition
reduced foreign trade and reduced foreign trade and dragged down living standardsdragged down living standards
civil disorder, inflation, civil disorder, inflation, corruption, and brain-drain corruption, and brain-drain slow and uneven growthslow and uneven growth
strikingly closed economystrikingly closed economy
history of high inflationhistory of high inflation
SpainSpainjoined the European joined the European Union in 1986Union in 1986
opened up its economyopened up its economy
expanded exportsexpanded exports
SpainSpainjoined the European joined the European Union in 1986Union in 1986
opened up its economyopened up its economy
expanded exportsexpanded exports
History matters for History matters for economic growth, as economic growth, as does politics ...does politics ...
... and so does ... and so does inflationinflation
Argentina, Uruguay, And Spain: GNP per capita, 1970-1995 (current US$, Atlas method)
02,0004,0006,0008,00010,00012,00014,00016,000
Argentina
Uruguay
Spain
Fig 1.3
and
Madagascar and Madagascar and MauritiusMauritius
MauritiusMauritiusmixed market economymixed market economy
since 1980: income per since 1980: income per head has increased fasthead has increased fast
diversified economydiversified economy
more open to foreign trade more open to foreign trade and investmentand investment
invests moreinvests more
farther along on its way farther along on its way from agriculture to from agriculture to industry, trade, and industry, trade, and servicesservices
sends more girls go to sends more girls go to schoolschool
MauritiusMauritiusmixed market economymixed market economy
since 1980: income per since 1980: income per head has increased fasthead has increased fast
diversified economydiversified economy
more open to foreign trade more open to foreign trade and investmentand investment
invests moreinvests more
farther along on its way farther along on its way from agriculture to from agriculture to industry, trade, and industry, trade, and servicesservices
sends more girls go to sends more girls go to schoolschool
MadagascarMadagascarcentrally planned centrally planned economyeconomy
since 1980: income per since 1980: income per head has fallenhead has fallen
growth differential growth differential between the two between the two countries has been even countries has been even larger since mid-1980slarger since mid-1980s
more inflationmore inflation
more dependent on more dependent on exports of raw materialsexports of raw materials
more indebted abroadmore indebted abroad
MadagascarMadagascarcentrally planned centrally planned economyeconomy
since 1980: income per since 1980: income per head has fallenhead has fallen
growth differential growth differential between the two between the two countries has been even countries has been even larger since mid-1980slarger since mid-1980s
more inflationmore inflation
more dependent on more dependent on exports of raw materialsexports of raw materials
more indebted abroadmore indebted abroad
05001000150020002500300035004000
Madagascar
Mauritius
Madagascar and Mauritius: GNP per capita, 1970-1995(current US$, Atlas method)Fig 1.4
ConclusionConclusion
Country comparisons are not to be taken literally Country comparisons are not to be taken literally intended to intended to highlighthighlight some aspects of economic some aspects of economic growthgrowth
What do the examples have What do the examples have in commonin common??All point toAll point to economic factorseconomic factors rather than rather than exogenous exogenous technologytechnology
economic systemeconomic system
institutionsinstitutions
orientation of economic policyorientation of economic policy
Key distinction: Key distinction: Endogenous growth Endogenous growth vs. exogenous vs. exogenous growthgrowth
This is the fundamental This is the fundamental message of the theory of message of the theory of endogenous growth endogenous growth
Aims of the bookAims of the book
AA.. By interpreting the theory of economic growth, old and By interpreting the theory of economic growth, old and new, in nontechnical language in order to identify the new, in nontechnical language in order to identify the main sources of growthmain sources of growth
BB.. By emphasizing the economic policy implications of the By emphasizing the economic policy implications of the theory of growth and its empirical relevancetheory of growth and its empirical relevance
CC.. By demonstrating how, in theory and practice, By demonstrating how, in theory and practice, economic growth depends crucially on choices that economic growth depends crucially on choices that people make, individually and collectivelypeople make, individually and collectively
AA.. By interpreting the theory of economic growth, old and By interpreting the theory of economic growth, old and new, in nontechnical language in order to identify the new, in nontechnical language in order to identify the main sources of growthmain sources of growth
BB.. By emphasizing the economic policy implications of the By emphasizing the economic policy implications of the theory of growth and its empirical relevancetheory of growth and its empirical relevance
CC.. By demonstrating how, in theory and practice, By demonstrating how, in theory and practice, economic growth depends crucially on choices that economic growth depends crucially on choices that people make, individually and collectivelypeople make, individually and collectively
Since the second world war it has become quite Since the second world war it has become quite clear that rapid economic growth is available to clear that rapid economic growth is available to those countries with adequate natural resources those countries with adequate natural resources which make the effort to achieve it.which make the effort to achieve it.
ARTHUR LEWISARTHUR LEWIS
Illuminate and simplify the subject and make it accessible to laymen Illuminate and simplify the subject and make it accessible to laymen and studentsand students
Questions for reviewQuestions for review
1.1. Does economic growth matter? To whom? Why? Does economic growth matter? To whom? Why?
2.2. Consider two countries, A and B, with the same national Consider two countries, A and B, with the same national income per capita in the year 2000. Suppose that in country income per capita in the year 2000. Suppose that in country A national income grows at 4% a year on average and the A national income grows at 4% a year on average and the population remains unchanged, whereas in country B population remains unchanged, whereas in country B national income grows by 2% per year and the population national income grows by 2% per year and the population increases by 1% a year. If these growth rates continue increases by 1% a year. If these growth rates continue indefinitely, what will the ratio of income per head in country indefinitely, what will the ratio of income per head in country B to that in country A be in 2025? What will it be in 2050?B to that in country A be in 2025? What will it be in 2050?
3.3. In 1970, per capita GNP in the United Kingdom was about In 1970, per capita GNP in the United Kingdom was about twice as high as that of Hong Kong. From 1970 to 1995, the twice as high as that of Hong Kong. From 1970 to 1995, the annual average rate of growth of per capita GNP was 1.8% in annual average rate of growth of per capita GNP was 1.8% in the United Kingdom compared with 5.8% in Hong Kong. In the United Kingdom compared with 5.8% in Hong Kong. In 1995, the number of mobile phones per 1,000 people was 98 1995, the number of mobile phones per 1,000 people was 98 and 129 in the two countries. Do you want to guess which of and 129 in the two countries. Do you want to guess which of the two countries had more mobile phones per capita?the two countries had more mobile phones per capita?
Classroom Classroom discussiondiscussion
