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Elusive Quest for Growth: Is innovation engine of growth? Motoo Kusakabe, Senior Counselor to the President EBRD

Elusive Quest for Growth: Is innovation engine of growth?

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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”? - PowerPoint PPT Presentation

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Page 1: Elusive Quest for Growth: Is innovation engine of growth?

Elusive Quest for Growth:

Is innovation engine of growth?

Motoo Kusakabe,

Senior Counselor to the President

EBRD

Page 2: Elusive Quest for Growth: Is innovation engine of growth?

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?

Page 3: Elusive Quest for Growth: Is innovation engine of growth?

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

Page 4: Elusive Quest for Growth: Is innovation engine of growth?

020406080

100120140160180

East Asia

Europe & Central Asia

Latin America

Middle East & N

orth Africa

South AsiaSub-Saharan A

frica

World

19812001

Page 5: Elusive Quest for Growth: Is innovation engine of growth?

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%

Page 6: Elusive Quest for Growth: Is innovation engine of growth?

“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

Page 7: Elusive Quest for Growth: Is innovation engine of growth?

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

Page 8: Elusive Quest for Growth: Is innovation engine of growth?

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

Page 9: Elusive Quest for Growth: Is innovation engine of growth?

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

Page 10: Elusive Quest for Growth: Is innovation engine of growth?

Is Governance Engine of Growth?

• Governance is considered as an important determinant for growth.

• How is the empirical evidence?

Page 11: Elusive Quest for Growth: Is innovation engine of growth?

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

Page 12: Elusive Quest for Growth: Is innovation engine of growth?

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

Page 13: Elusive Quest for Growth: Is innovation engine of growth?

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

Page 14: Elusive Quest for Growth: Is innovation engine of growth?

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

Page 15: Elusive Quest for Growth: Is innovation engine of 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

Page 16: Elusive Quest for Growth: Is innovation engine of growth?

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

Page 17: Elusive Quest for Growth: Is innovation engine of growth?

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.

Page 18: Elusive Quest for Growth: Is innovation engine of growth?

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

Page 19: Elusive Quest for Growth: Is innovation engine of growth?

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

Page 20: Elusive Quest for Growth: Is innovation engine of growth?

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

Page 21: Elusive Quest for Growth: Is innovation engine of growth?

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

Page 22: Elusive Quest for Growth: Is innovation engine of growth?

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

Page 23: Elusive Quest for Growth: Is innovation engine of growth?

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?

Page 24: Elusive Quest for Growth: Is innovation engine of 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

Page 25: Elusive Quest for Growth: Is innovation engine of growth?

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

Page 26: Elusive Quest for Growth: Is innovation engine of growth?

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?

Page 27: Elusive Quest for Growth: Is innovation engine of growth?

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

Page 28: Elusive Quest for Growth: Is innovation engine of growth?

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%

Page 29: Elusive Quest for Growth: Is innovation engine of growth?

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

Page 30: Elusive Quest for Growth: Is innovation engine of growth?

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

Page 31: Elusive Quest for Growth: Is innovation engine of growth?

Is Education an engine of Growth?

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

Page 32: Elusive Quest for Growth: Is innovation engine of growth?

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

Page 33: Elusive Quest for Growth: Is innovation engine of growth?

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

Page 34: Elusive Quest for Growth: Is innovation engine of growth?

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

Page 35: Elusive Quest for Growth: Is innovation engine of growth?

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

Page 36: Elusive Quest for Growth: Is innovation engine of growth?

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

Page 37: Elusive Quest for Growth: Is innovation engine of 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

Page 38: Elusive Quest for Growth: Is innovation engine of growth?

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?

Page 39: Elusive Quest for Growth: Is innovation engine of growth?

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

Page 40: Elusive Quest for Growth: Is innovation engine of growth?

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

Page 41: Elusive Quest for Growth: Is innovation engine of growth?

Implications:

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

Page 42: Elusive Quest for Growth: Is innovation engine of growth?

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

Page 43: Elusive Quest for Growth: Is innovation engine of growth?

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

Page 44: Elusive Quest for Growth: Is innovation engine of growth?

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

Page 45: Elusive Quest for Growth: Is innovation engine of growth?

Thank you !!• Contact: [email protected]

• Website: www.netgrowth.com

open content, knowledge sharing website for ICT strategy