Reinert/Windows on the World Economy, 2005 Growth, Trade, and Development CHAPTER 20.

Reinert/Windows on the World Economy, 2005

Growth, Trade, and Development

CHAPTER 20


2

Introduction

In 2000, per capita GNP in Ghana was only US$350 Malaysia and Thailand were $3,400 and $2,000,

respectively Ghana has slipped behind Ghana’s 1998 human development index was

0.548, ranking 129th in the world Reflects a relatively low life expectancy and

unsatisfactory educational attainment How can Ghana “get somewhere” rather than “go

nowhere?” What roles might trade, education, and health play

in this process?


3

Old Growth Theory

Why was Ghana’s 2000 per capita income $350 rather than $1,350 or $10,350?

A first attempt to answer such questions was provided by Nobel Laureate Robert Solow (1956) Now known as the “old” growth theory

• Begins with an intensive production function which relates two economic variables

Per capita income or per capita output (y) Capital-labor ratio (k)

Positive relationship between capital-labor ratio and per capita income For example, as capital-labor ratio increases and each worker has

more physical capital to work with, per capita income increases Known as capital deepening Relationship is decreasingly positive Result of diminishing returns to labor and capital Thus, increases in k at lower levels add more to per capita income than

increases in k at higher levels


4

Figure 20.1. The Intensive Production Function and Capital Deepening


5

Sources of Per Capita Income Increases

Capital deepening Technological change

Improvements in technology shift graph upward How fast can increases in capital-labor

rations or improvements in technology make economies grow? Most economies grow only a few percentage

points each year


6

Figure 20.2. Technological Change in the Intensive Production Function


7

Table 20.1. How Fast Do Economies Grow?


8

Old Growth Theory

Increases in k require increases in the capital stock that more than offset any increases in population

Increases in capital stock require investment Investment requires saving

Domestic Investment = Domestic Savings + Foreign Savings Increases in per capita incomes through capital deepening

require investment Investment has two sources

• Domestic savings (household and government)• Foreign savings

In the absence of technological improvements these are the only sources of growth in per capita incomes

Increases must be large enough to increase capital stock sufficiently so it more than offsets any increase in population

If they are not k and y will fall even though capital stock increases through investment


9

Figure 20.3. An Open Economy with Government, Savings, and Investment


10

Old Growth Theory

Increasing domestic savings is often a matter of making institutions available to households of economy Institutions should be as broad-based as possible

• Accessible to rich and poor, rural and urban Increasing government savings is a matter of decreasing

government expenditures and increasing government tax revenues Caveat—some types of government expenditures (e.g. education)

can positively affect level of technology Some government investments are complementary to private

investments Increasing foreign savings is a matter of increasing capital

account surplus on balance of payments Pay attention to form and magnitude of capital account surplus

• Large capital account surpluses based on short-term investments are risky and could be damaging in long run


11

Old Growth Theory

Leaves a lot to be explained Solow residual

Amount of unexplained growth in per capita incomes

In practice residuals can be quite large How can we begin to account for this

unexplained growth? Question that “new” growth theory attempts to

answer


12

New Growth Theory and Human Development

A number of new growth theory models emphasize role of human capital in addition to labor and physical capital Acknowledges that labor is more than just hours worked

• Reflects skills, abilities, and education Appears to be a direct link between human capital and

technological efficiency Greater levels of education and training allow an

economy to operate in a state of greater technical efficiency

Technology is now an endogenous variable that can be influenced by education and training policies


13

Figure 20.4. Unexplained Growth in Per Capita Incomes


14

Figure 20.5. Human Capital and Unexplained Growth in Per Capita Incomes


15

New Growth Theory and Human Development

Inclusion of human capital in a growth model suggests there might be some important relationships among components of human development index (HDI) Education has a direct impact on HDI through its one-

third weight• Can also have an indirect impact via its impact on human capital

And on per capita income through intensive production function

Health also has a direct impact on HDI through its one-third weight

• Might also contribute to human capital and therefore have an indirect impact on HDI via per capita income

• Educated persons (particularly women) contribute to healthy children who are more likely to become educated


16

Figure 20.6. Education, Health, Growth, and Human Development


17

Trade, Education, and Growth

Many economists suggest that countries’ openness to international trade has a positive impact on growth in per capita incomes and human development Might be a way forward for countries such as Ghana

Idea is technological efficiency responds to two impulses Domestic innovation and accumulation of human capital through

education positively affects domestic innovation Absorption of new technology from the rest of the world

• Thought that openness to trade, particularly exports, facilitate this absorption of technology

• Exports generate additional technology gains on supply side of the economy

Has caused a number of international economic institutions (especially World Bank) to call for export promotion as an important development strategy

Contrasts with import substitution in which domestic industrialization occurs in response to tariff and quota protection


18


Edwards (1998) used statistical techniques to show that the more open countries are to international trade, the faster their growth in per capita incomes

All exports do not necessarily generate positive technological externalities Levin and Raut (1997) showed these externalities are

notably absent in primary product exports• Characterize many developing countries, including Ghana

Some agreement that accumulation of human capital is an important prerequisite to absorption of technology from abroad


19


Some empirical evidence to support conclusion that human capital and manufactured exports interact positively in supporting growth of per capita incomes Levin and Raut’s (1997) evidence shows contribution of

human capital depends on level of manufactured exports• Contribution of manufactured exports depends on level of human

capital

• Trade and education can contribute to increases in per capita incomes and, thereby, to HDI both directly and indirectly

Interaction is restricted to manufactured exports


20

Figure 20.7. Export Externalities for Ghana


21

Education Given the obviously limited nature of educational resources, it is often

important to distinguish among primary, secondary, and tertiary (higher) education

Evidence suggests primary education plays a particularly important role in development process Psacharopoulos (1985) and (1994) has shown that the social returns on

investments in primary education exceed social returns on investments in secondary or tertiary education

• Suggests that primary education should be a first priority in development strategies

Significant gender aspect to educational levels Often educational levels (and therefore literacy rates) are lower for girls and

women than for boys and men Increased educational levels for women have important implications in health

and population Psacharopoulos (1994) and Schultz (2002) have shown social returns to

education for women are higher than those for men


22

Table 20.2. Education Indicators


23

Health and Development

Contributes to effectiveness of labor in both its hours-worked and human capital dimensions

Per capita income perspective views health as well as education as a means to economic development In contrast, human development perspective views health

as an end

Improved health contributes directly to human development via life expectancy component of HDI


24


Quantitative indicators of the health of a country’s population include Demographic indicators such as life expectancy

and infant and child mortality• May not fully reflect health of surviving population

Morbidity indicators• Difficult to collect

Health service indicators• Ignore quality measures


25


Interdisciplinary field involving economists, sociologists, anthropologists, health professionals, and public policy professionals

Agreement that child morbidity and mortality are important indicators of general state of health in a country

Leading contributors to child morbidity and mortality Diarrhea Respiratory infections (e.g. pneumonia) Undernourishment Vaccination-preventable diseases (e.g. measles) Violence in certain countries


26


Educational levels of women contributes positively and significantly to child health Mediating factors

• Hygiene

• Nutrition

• Child-care factors


27

Table 20.3. Health Indicators


28

Population Issues

Interdisciplinary field in which economists, sociologists, anthropologists, health professional, and public policy professionals are all involved

Important variables in study of population and development are Crude birth rate (rb)

• Number of live births per 1,000 population Crude death rate (rd)

• Number of deaths per 1,000 population These rates together determine natural rate of population growth (a

percentage measure)• Important because, along with rate of growth of physical capital, it

determines level of capital-labor ratio, k In turn, determines level of per capita income, y The higher is the natural rate of population growth, the less likely will

increases in investment translate into increases in per capita income


29

Population Issues

Causal chain determining natural rate of population growth Primary factors

Socio-cultural factors such as availability of birth control and role of women

• More favorable is a society to full participation of women, the lower the total fertility rate

Level of per capita income is also important• Higher the level, the lower the total fertility rate

Higher the level of women’s education, the lower the total fertility rate• Total fertility rate contributes positively and directly to crude birth rate

and, in turn, positively to natural rate of population growth Health policies can contribute to level of child mortality Higher the level of women’s education, the lower will be

child mortality Child mortality contributes positively and directly to the crude death

rate and, in turn, negatively to the natural rate of population growth


30

Figure 20.8. Explaining the Natural Rate of Population Growth

Reinert/Windows on the World Economy, 2005 Growth, Trade, and Development CHAPTER 20.

Documents

capital stock increases

capital deepeningsources

capital deepeningrelationship

physical capital

capitallabor rations

sources of growth

old growth theorybegins

old growth theorywhy