Historic Growth and Contemporary Development

Lessons and Controversies

Outline:

Economics of Growth Kuznets six characteristics of economic growth Conclusions on interdependence of growth Appropriate technology and employment generation (pp. 252-254) Chenerys Patterns of development Case study: East Asian miracle/crisis 2

The Growth Game

Growth rates of national income are followed closely by policy-makers In order to better understand contemporary growth prospects, it is useful to examine historical growth patterns

The Economics of Growth: Capital, Labor, and Technology

Three factors/ components of economic growth Capital accumulation results from an increase in capital stock and improved human resources Population and eventually labor force growth- shifts in PPF Technological progress - L/K augmenting
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The Economics of Growth: Capital, Labor, and Technology

Capital accumulation
Physical capital stock Infrastructure Human capital

Population and labor force growth

Effect of increases in physical and human resources on PPF Resource growth is not a necessary condition for SR growth
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The Economics of Growth: Capital, Labor, and Technology

Technological progress Neutral Saving

Labor saving Capital saving

Augmenting
Labor- augmenting Capital- augmenting
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The Historical Record: Kuznets Six Characteristics of Modern Economic Growth

Based on the analysis of historical growth of national incomes in developed countries, Prof. Simon Kuznets has identified three principal components for a countrys economic growth:
Sustained rise in national output Technological advancement is a necessary but not sufficient condition for continuous economic growth Technological innovation and social innovation are concomitant
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The Historical Record: Kuznets Six Characteristics of Modern Economic Growth

Six features present in the growth process of every developed nation are: 1. High rates of per capita output and population growth 2. High rates of total factor productivity increase 3. High rates of economic structural transformation 4. High rates of social, political, and ideological transformation 5. International economic outreach for markets and raw materials 6. Limited international spread of this economic growth to 1/3 of the worlds population
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High rates of per capita output and TFP

On average, between 1770 and 2000, countries that are now industrialized had real GNP growth 3% per year population growth 1% per year per capita output 2% per year
TFP: It is the output per unit of all inputs and measures the efficiency with which all inputs are used It represents technology and accounts for about 50 t0 75% of historical growth per capita in industrialized economies
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Factor Accumulation Accounts for Only a Fraction of Growth

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Social and ideological transformation

Modernization Ideals include
Rationality Economic planning Social and economic equalization Improved institutions and attitudes

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Interdependence of growth characteristics

Rising TFP High per capita output

High per capita income & consumption

Structural changes in production and labor

Economic growth + technological changes

International outreach

Self-generating economic growth

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Chenerys Patterns of Development

Chenery and colleagues examined patterns of development for developing countries at different percapita income levels during the post-war period. Major hypothesis is that development is an identifiable process of growth and change whose main features are similar in all countries. The empirical studies identified several characteristic features of economic development:
Shift from agriculture to industrial production Steady accumulation of physical and human capital Change in consumer demands Increased urbanization Decline in family size Demographic transition

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Chenerys Patterns of Development

The model recognizes that differences in development occur among countries due to :
Resource endowment and size Government policies and objectives Availability of external capital and technology International trade environment

A correct mix of policies based on observed patterns occurring in all countries during the development process can generate growth Emphasis on patterns rather than theory may lead the countries to draw wrong conclusions (reverse causality??).
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The Limited Value of the Historical Growth Experience: Differing Initial Conditions

Physical and human resource endowments

Developing countries have poor endowments of both Developing countries are faced with technology and ingenuity gaps

Relative levels of per capita income and GNP

LDCs have lower living standards than historical living standards in present developed nations

Climatic differences
Tropical vs temperate
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The Limited Value of the Historical Growth Experience: Differing Initial Conditions

Population size, distribution, and growth

Exceed the historical growth rates of developed countries (2% per annum)

Historical role of international migration

Illegal immigration of unskilled workers Brain drain

International trade benefits

Deteriorating terms of trade for developing countries Existence of barriers to trade

R and D capabilities
Economic dualism
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The Limited Value of the Historical Growth Experience: Differing Initial Conditions

Institutional stability and flexibility

Recent political independence Transitional economies

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Economic convergence?

Reasons to expect convergence of incomes between developed and developing nations:

Technology transfer to developing countries Rapid factor accumulation in developing countries Advantages of backwardness

Incomes would tend to equalize conditional on key variables such as population growth No evidence of unconditional convergence but there is evidence of convergence among OECD countries
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Divergence in the World as a Whole

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Convergence among OECD Countries

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Fiscal balances and Savings

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Macroeconomic Indicators

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External debt

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Private capital flows

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Case Study: Asias Miracle: Readings

Taiwan - Inside the Miracle: A Development Success Story at http://wps.aw.com/aw_todarosmit_econdevelp_8/ 0,6111,284582-,00.html "Growth in East Asia: What We Can and What We Cannot Infer" provides a succinct overview of the debate about East Asia's rapid growth before the debt crisis of 1997at http://www.imf.org/external/pubs/ft/issues1/index. htm. The diagrams on slides #27 and 28 are sourced from this article.
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