Engines of Growth and

Africa’s Economic Performance

ECON 3510

(Text Chapter 5)

May 13, 2010

Approach of Text Outline Approaches to explaining economic

growth and standards of living; 1.”Elementary Engines of Growth” (Theft, Cartels,

Prices)

2. “Static Engines…” (“Putting idle resources to work, Allocative efficiency, Comparative advantage)

3. Accumulation of Productive Resources (Physical Capital, Human Capital,

4. Dynamic Effects (Increasing returns, learning by doing)

5. Technological Change

6. Agglomerative Effects

Examine relevance of each approach to Africa

I. “Elementary Engines of Growth”

1. Theft via Conquest; taxation of the vanquished.

Enslavement of the vanquished

2. Cartel Formation (a la OPEC)

3. International Commodity Price Fluctuations

Relevance for Africa?

“Static Engines of Growth” 1. “Vent for Surplus” or “Put idle resources to

work” How? ….

2. “Allocative Efficiency”: allocate resources in the most efficient way possible. How? “get the prices right; cut interference by the state; anti-combines policy…

3. Trade & Comparative Advantage

Relevance for Africa?

Author’s Conclusion: These are important, but do not explain the rise of

incomes in DMEs or middle income LDCs

Productivity: Its Role and Determinants

A country’s standard of living depends on its ability to produce goods and services, i.e. “Productivity”

Productivity refers to the quantity of goods and services that a worker can produce for each hour of work.

What explains productivity?

Example of the role of Productivity in shaping Production per person:

Agriculture in Canada and Africa Generally

Canada: - most up-to-date technologies (seeds, machines etc.)- large farms, much land per farm family; - much machinery, equipment, buildings & livestock per farm; - much education per farmer; - serviced by a broad range of other activities (machine dealers, transport, fertilizer firms, R&D, etc.)

** about 4% of the labour force is in agriculture; yet Canada has large “net exports” of food.

Sub-Saharan African Agriculture:- traditional simple technologies;- small farms; little land per farm family;- reliance on simple hand tools, e.g. hoes, machetes and pangas;- little education for farm people;

“Great skill; simple technology”

** around 60-80% of the labour force in African countries is in agriculture.

Result:

One Canadian farm worker feeds +/- 25 to 30 people, plus exports;

One African farm family feeds itself and about one additional person on average.

Implications ??

How Is Productivity Determined?

The Factors of Production include:1. Physical CapitalPhysical Capital2. Human Capital2. Human Capital3. Natural Resources3. Natural Resources4. Technological Knowledge4. Technological Knowledge

Capital is a produced factor of production, i.e. capital is an input into the production process that in the past was an output from production.

To which I would add

5. “Enterpreneurship” and 5. “Enterpreneurship” and

6. “Social Capital”6. “Social Capital”

The Factors of Production: 1. Physical Capital

The stock of equipment and structures that are used to produce goods and services.

Examples:

Produced through investment.\

How to achieve growth? Save and Invest in Physical Capital

As a theory of growth?Necessary but Insufficient

Relevance for Africa?

The Factors of Production: 2. Human CapitalThe economist’s term for the knowledge and skills that

workers acquire through education, training, and experience.

Like physical capital, human capital raises a nation’s ability to produce goods and services.

Produced through investmentProduced through investment in people in people

EExamples: xamples: family environment, health, education, family environment, health, education,

nutrition, sanitation, on-the-job training; water nutrition, sanitation, on-the-job training; water

availabilityavailability

As a “Theory of Growth”? As a “Theory of Growth”? Important but not the whole storyImportant but not the whole story

Relevance for Africa?

Inputs used in production that are provided by Mother Nature, such as land, rivers, and mineral deposits.– They may not be necessary for an economy to be highly

productive– but they sure can help

[or sometimes hinder: the “curse of oil wealth”]

– Renewable Resources: Trees, forests, fish stocks

– Non-Renewable Resources: Oil, natural gas; minerals of various sorts

[Note: These also usually require Investment for their harnessing by humans]

Relevance for Africa?

The Factors of Production: 3. Natural Resources

The Factors of Production: 4. Technological KnowledgeTechnological Knowledge

Definition: The understanding of the ways to produce goods and services; how factors of production of all kinds can be combined to produce goods and services

Human Capital refers to the resources expended transmitting this understanding to the labour force.

Note: Both of these are produced by “investment:”– Education, training & learning of all sorts; and – R&D

Technological Change: a “dynamic” factor:Includes:

– Embodied tech in capital equipment– Embodied in Consumer Goods– Scientific & tech journals, texts and

publications– Patents, intellectual property– Process technology– Embedded in people’s brains and

capabilities– In established enterprisesCan raise the productivity of Labour and

Capital and can economize on resources.

Examples:

Technological Change: a “dynamic” factor:

Relevance for Africa?

Relevance for Africa

– Existence of a “backlog” of knowledge: A broad range of newer technologies is awaiting

implementation in Africa Investment in new technologies via R & D is

expensive and out of reach

– Transfer of Tech embedded in capital goods requires high levels of Investment and Savings and/or large role for MNC. Therefore S & I are doubly important

– The possibility of “catching up” (applying newer technologies to a broad range of activities)

Via purchases of capital equipment; Via purchases of new consumer goods

(telephones, computers, drugs & medications, new plant varieties…..)

Via learning from books, manuals etc……. Via tech transfer in enterprises or purchases

of process systems

Factors of Production: 5. EntrepreneurshipNote: This is not in the text but is nonetheless important.]

Entrepreneurship: - performs a central role in an economy - largely ignored in economic theory

An entrepreneur: - perceives and seizes an opportunity for the achievement of an

objective, - visualizes and plans how the objective can be achieved, - undertakes to do everything necessary to implement the vision,” - brings together all of the other factors of production;

Entrepreneurship is the “Key Factor of Production”

Could operate in politics, academia, religion, music, sports, or any area of human endeavor.

It can be exercised in different varieties of economic system andin the private, public and voluntary sectors

Harvey Leibenstein (1968). The key author in this area identified the following roles of entrepreneurs:

– a “market connecting role,” (linking up the potential market for the outputs with the markets for all the relevant inputs);

– a “gap-filling role,” (doing what is not normally or easily done through markets);

– an “input-completing role,” (improvising the provision of all the inputs necessary for the enterprise); and

– an “enterprise creating role,” (bringing together the inputs for the production of an output over a period of time and in some sort of organization).

In pathological circumstances - entrepreneurship may become deformed. When law and order break down or when

entrepreneurial activities are illegal, entrepreneurship may become criminalized, perhaps within Mafia-like organizations.

Entrepreneurship alone is insufficient to generate growth and development.

Instead, it requires a supportive, legal, and orderly institutional environment.

[Source: H. Liebenstein, “Entrepreneurship and Development,” American Economic Review, Vol. 58 No. 2, May 1968.]

Relevance for Africa?

Agglomeration Effects– Economic Geographical Factors;– the economics of industrial location

1. Agglomerative economies (Providing cost advantages to producers)

infrastructure; skilled labour pools; availability of necessary inputs, repair services, etc. government services and bureaucracy; markets; diversified range of all economic activities financial institutions, educational institutions; technological funnel effect Amenities

2. the "clustering" phenomenon (to be elaborated in class)– Note the importance of collective action and group trust

among producers– "cumulative and circular causation“

3. Note the normal hierarchical structure of institutional structures and urbanization patterns everywhere;

– ("Central Place Hierarchies")

4. Transportation “Nodes”

Relevance for Africa– past geographical disadvantages (re

communications, rivers, roads & railways) – Future potentials will open with new transport

infrastructure– Importance of establishing health & attractive

urban centres to reap “agglomeration economies” and change the

cost/benefit calculus re industrial locationl Importance of focusing on “clusters” of economic

activities

– Importance of Imports of Capital Equipment, implieas also export orientation.

Factors of Production: 6. Social CapitalFactors of Production: 6. Social Capital

“Social Capital:” increasingly recognized as an additional “factor of production” as well as being of significance from a political science or governance perspective.

Various analysts emphasize the importance of “social capital” in an economy, and as a factor that can promote economic development and for the reduction of poverty.

[See the World Bank Web Site on social capital: http://www1.worldbank.org/prem/poverty/scapital/home.htm]

What is Social Capital?

“Social capital refers to the institutions, relationships, and norms that shape the quality and quantity of a society's social interactions..

Social capital is not just the sum of the institutions which underpin a society – it is the glue that holds them together.”

– [Source: the above-mentioned World Bank Web Site]

Social capital refers to connections among individuals – social networks and the norms of reciprocity and trustworthiness that arise from them.

Social Capital would includeSocial Capital would include – Formal institutions– the formal and informal associations between

people for many purposes: recreational, civic, economic, friendship, ethnic, ….)

– the informal relationships between people at the work-place (enterprises or governmental or “not-for-profit”), the community,

– civic responsibility at all levels (Parent teachers associations, block associations..)

– honesty, “trust” and civic virtue

How Could Social Capital be a “Factor of Production”?

1. Enterprises and bureaucratic or governmental offices can only operate effectively if there is a level of honesty and trust among the employees.

- corruption, distrust and dishonesty can lead to ineffectiveness and break down

2. The stronger the associational ties among citizens the stronger will be the cooperative efforts among people and the more effective will enterprises and bureaucracies be.

Mancur Olsen disagreed: some such associations may push for their own interests at the expense of the general good.

Reference: [Putnam, R. D. (1995) 'Bowling Alone: America's Declining Social Capital', Journal of Democracy 6:1, Jan, 65-78. http://muse.jhu.edu/demo/journal_of_democracy/v006/putnam.html]

Relevance for Africa?

The Production FunctionIncome depends upon Labour, Physical Capital, Human

Capital and Natural Resources: or: Y = AF(L, K, H, N)Y = AF(L, K, H, N)

where “A” is a variable that reflects production technology

Constant Returns to Scale: a doubling of inputs causes output to double as well. Then:

xY = AF(xL, xK, xH, xN)xY = AF(xL, xK, xH, xN)

Then if we set x = 1/L, then:Y/L = AF(1, K/L, H/L, N/L)Y/L = AF(1, K/L, H/L, N/L)

Meaning? Output per worker depends upon capital per worker, education etc per worker, and natural resources per worker.)

IV. Economic Growth, Development and Public Policy

Public policies, laws, traditions, and institutions are critical to transforming resources into useful output.

Governments can do many things to encourage or impede the attainment of high living standards.

Government policies:– Establish law and order, political stability

and secure property rights – Encourage investment in human capital,

esp. education, training, health ….... – Encourage saving and investment– Promote liberalized trade and technology

policies– Control of population growth– Promote research and development and

technological change

Government policies:

1. Encourage saving and investment One way to raise future productivity is to invest

more current resources in the production of capital.

Governments can encourage capital accumulation:– from domestic sources by imposing reasonable

taxes on interest and dividend income.– Provide relevant infrastructure

– From foreign sources by making such capital secure and welcome domestically.

More on Investment:

Digression on Foreign InvestmentDigression on Foreign Investment

Investment from Abroad

- Direct Investment and Portfolio Investment

Benefits from Direct Foreign Investment:

- supplements domestic savings;

- transfer of new technology, usually;

- higher-productivity job creation;

- capital goods importation in a working package;

- entrepreneurial and managerial importation;

- access to foreign markets some times.

Costs of Direct Foreign Investment:– Profit expatriation into the future;– Foreign enterprise interests may diverge from host

country’s national interest– Does technology really get “transferred “ in a

meaningful way?– Is domestic entrepreneurship promoted or stifled?– Are inappropriate consumer patterns or producer

technologies transferred from DFI? (notably for poor countries?)

Government policies: 2. Encourage education and training

Education and training are at least as important as investment in physical capital.

Considered as essential “public goods” in virtually all countries, [but also as partial “private goods” as well]

It is necessary for countries to provide basic education so that the work force can acquire the specialized skills leading to higher productivity.

The Role of Government:

3. Establish political stability, good governance and secure property rights.

– The maintenance of “law and order” are vital

– Political stability is also vital to promote savings, investment and productive activities

– Representative Democracy?

Government policies: 4. Promote Trade Liberalization

To exploit comparative advantage and maximize production and efficiency, it is important for countries to have the opportunity to sell abroad and to be able to purchase from lower opportunity cost producers.

Some countries engage in:– Inward-orientated trade policies– Outward-orientated trade policies

Contentiousness of the issue:“Globophobiacs” vs. Economists & PracticionersGlobophobiacs” vs. Economists & Practicioners

Some Examples:1. South Korea vs North Korea2. Latin American Cases3. China, 4. “Asian Tigers”5. Ireland & Estonia

Explanations?

Government policies: 5. Control of Population Growth

Population is a key determinant of a country’s labour force. Large populations tend to produce greater total GDP, however.

– Higher GDP doesn’t mean “higher well-being”, GDP per personGDP per person is more accurate.

– High population growth reduces GDP per per person.person.

Government policies: 6. Research and Development

Fundamental Research: in Universities, public sector and private enterprises;

Expensive; of lesser relevance for many African countries at this time

Innovation and applied technological advancement: usually implemented by private firms and public agencies.– Important at this time

Government’s role is to encourage applied research and development of new technologies and

Hans Rosling on Information regarding Development

http://video.google.ca/videoplay?docid=2670820702819322251

Hans Rosling, Professor of International Health, Karolinska Institutet, Stockholm, Sweden since 1998, uses animated charts and minimalistic diagrams to explain the world we live in. Poverty, income levels, income distribution and health can be seen at once shaping or being shaped by world events, technology and the passing of time.

“Gapminder World” (Rosling’s Website)http://www.gapminder.org/