Growth and Economics - Steps to Improve it.ppt

Economy will Improve if there is industrial growth and Growth in many other directions

1. 1
Growth and Economics –
Steps to Improve it

2. 2
A Long-Run Perspective
Some Simple Arithmetic
Some Basic Facts

3. 3
Key Motivation in the Study of Economic Growth:
Observation that average annual growth rates vary
substantially across countries.
Conventional neoclassical theory (attributing growth
to technological progress) has proved incapable of
explaining the wide disparities in per capita output
growth rates across countries.

4. 4
A Long-Run Perspective

5. 5
Highest per capita growth rates since 1820
concentrated in those countries that were already
the most prosperous in the early nineteenth century
(Maddison, 1995).
Overall pattern suggests convergence in income
per capita levels over the very long run among most
advanced industrial countries, but significant
divergence between rich and poor countries over
time.
From 1870 to 1990, the ratio of per capita incomes
between the richest and poorest countries
increased by a factor of five (Pritchett, 1997).
Facts:

6. 6
Large disparities in growth behavior within the
developing world, both across countries and over
time.
From 1973-92 average growth rates per annum:
-1.7% in Ethiopia and Peru.
6.9% in South Korea.

7. 7
Some Simple Arithmetic

8. 8
Growth and Standards of Living
How Fast Do Economies Catch Up?

9. 9
Growth and Standards of Living
Small differences in output growth between countries
result in large differences in standards of livings over
long periods.
Consider the U.S. and India:
Income per capita in 1992: $21,558 in the U.S.,
$1,348 in India (measured in 1990 U.S. dollars);
Apply annual growth rate of 1.8% in the U.S. and
1.2% in India for the next two centuries (based on
observed growth rates for 1913-92);

10. 10
By 2100, per capita income will have reached
$21,558(1.018)
108
= $148,036 (U.S),
$1,348(1.012)
108
= $4,889 (India).
India’s income per person, as a percentage of
U.S. income per person, will have fallen to 3.3%
in 2100 from 6.3% in 1992. U.S. per capita
income will have risen by a factor of 7 while
India’s level will have risen by only a factor of
3.63. .

11. 11
How Fast Do Economies Catch Up?
Question: Using the growth rates from the last
example, how long will it take each country to double
per capita income?
For India, doubling income in Nyears requires that
y
N= 21,348 = 1,348(1.012)
N
so that,
2 = (1.012)
N
and,
N= ln2/ln(1.012) 58.11.

12. 12
For the U.S., the same calculation yields,
N = ln2/ln(1.018) 38.5.
Another question:
India's objective now is to attain a per capita income
that is equal to 30% of the level of the United States
by 2100. By how much should India grow per year?
Let y
0
US
(y
0
IN
) denote per capita income in the
United States (India) in the year 1992, and g
US=
0.018 and g
INthe average growth rate over the
period 1913-92 for each country.

13. 13
Since it takes 108 years to reach 2100 beginning
in 1992, the value of g
INthat is to be calculated is
the solution of,
0.3y
0
US
(1.018)
108
=y
0
IN
(1 + g
IN)
108
.
Solving for g
IN, the target growth rate of output
must be about 3.3% per annum---almost three
times the level observed during the period 1913-
92.
If India grows by a slightly lower number, 3.0%
per annum, in the year 2100 its per capita income
will be only about 22% of the U.S. level.

14. 14
Some Basic Facts

15. 15
Output Growth, Factor Inputs, and Population
Saving, Investment, and Growth
Poverty and Growth
Inequality, Growth and Development
Trade, Inflation, and Financial Deepening

16. 16
Output growth, Factor Inputs
and Population
Fact 1. Output per worker(or average labor
productivity) tends to grow over time, albeit at
widely different ratesacross countries.
Fact 2. The rate of growth of factor inputs(capital
and labor) does not fully account for the rate of
growth of output.
Fact 3. The mean growth rate of output is unrelated
to the initial levelof per capita income across
countries (Figure 10.1).

17. 17Source: World Bank.
Figure 10.1
Average Rate of Growth Per Capita and
Proportion of GNP Per Capita to US GNP Per Capita
(1980-95)
Average rate of GNP growth per capita (1980-95)
Proportion of GNP per capita to US GNP per capita (1980, in US Dollars)
00.40.81.21.6
-12
-8
-4
0
4
8
12

18. 18
Fact 4. Population growth ratesare negatively
relatedwith both the level of income per capita and
the rate of growthof income per capita across
countries (Figure 10.2).

19. 19Figure 10.2a
Population Growth and Real Income Per Capita
(Averages over 1980-95)
Source: World Bank.
1/ In terms of US dollars at 1987 prices.
21222324252627
1
2
3
4
Population (average annual growth rate)
Log of Real GNP per capita 1/
Côte d'Ivoire
Ghana
Tanzania
Bolivia
Nepal
Pakistan
Zambia
Morocco
Jamaica
Zimbabwe
Philippines
Colombia
Nigeria
India
Peru
Panama
Tunisia
Brazil
Chile
Costa Rica
Venezuela
Bangladesh
Thailand
Indonesia
Korea
Algeria
Malaysia

20. 20Figure 10.2b
Population Growth and Real Income Per Capita
(Averages over 1980-95)
Source: World Bank.
-4-202468
0.5
1
1.5
2
2.5
3
3.5
4
Population (average annual growth rate)
GDP growth rate per capita
Côte d'Ivoire
Zambia
Nigeria
Algeria
Philippines
Venezuela
Zimbabwe
Bolivia
Tanzania
Peru
Ghana
Morocco
Brazil
Panama
Tunisia
Jamaica
Costa Rica
Bangladesh
Nepal
Pakistan
Colombia
India
Chile
Malaysia
Indonesia
Thailand
Korea

21. 21
Saving, Investment, and Growth
Fact 5. Saving ratesare positively relatedto the
leveland the growth rateof income per capita
(Figure 10.3).
Fact 6. Both the rate of growth of investmentand
the share of investment in output are positively
related to the rate of growth of income per capita.
See figure 10.4.
Figure 10.5 also displays the role of human capital
accumulation in the growth process through two
proxies: the gross enrollment ratioand the adult
literacy rate.

22. 22Figure 10.3a
Saving Rate and Per Capita Income
(Averages over 1980-95)
Source: World Bank.
1/ In terms of US dollars at 1987 prices.
2.12.22.32.42.52.62.7
0
5
10
15
20
25
30
35
Gross domestic savings (% of GDP)
Log of Real GNP per capita 1/
Côte d'Ivoire
Ghana
Tanzania
Bolivia
Nepal
Pakistan
Zambia
Morocco
Jamaica
Zimbabwe
Philippines
Colombia
Nigeria
India
Peru
Panama
Tunisia
Brazil
Chile
Costa Rica
Venezuela
Bangladesh
Thailand
IndonesiaKorea
Algeria
Malaysia

23. 23Figure 10.3b
Saving Rate and Per Capita Income
(Averages over 1980-95)
Source: World Bank.
-4-202468
0
5
10
15
20
25
30
35
40
Gross domestic savings (% of GDP)
GDP growth rate per capita
Côte d'Ivoire
Ghana
TanzaniaBolivia
Nepal
Pakistan
Zambia
MoroccoJamaica
Zimbabwe
Philippines
Colombia
Nigeria
India
Peru
Panama
Tunisia
Brazil
Chile
Costa Rica
Venezuela
Bangladesh
Thailand
Indonesia
Korea
Algeria
Malaysia

24. 24Figure 10.4a
Investment Growth and Growth
(Averages over 1980-95)
Source: World Bank.
Real gross domestic investment growth
Real GDP growth per capita
-4-202468
-10
-6
-2
2
6
10
14
Nigeria
Zambia
Algeria
Bolivia
Venezuela
TunisiaMorocco
Philippines
Zimbabwe
Peru
Brazil
Ghana
Jamaica
Nepal
Bangladesh
PakistanIndia
Costa Rica
MalaysiaKorea
ColombiaThailand
Chile
Indonesia

25. 25Figure 10.4b
Investment Share, and Growth
(Averages over 1980-95)
Source: World Bank.
Gross domesticiInvestment (% GDP)
-4-202468
5
10
15
20
25
30
35
India
Jamaica
Thailand
Korea
Nepal
Chile
Bangladesh
Morocco
Bolivia
Brazil
Nigeria
Philippines
Indonesia
Malaysia
Côte d'Ivoire
Tunisia
Panama
Zambia
Ghana
Pakistan
Tanzania
Zimbabwe
Peru
Venezuela
Costa Rica
Colombia
Algeria
Real GDP growth per capita

26. 26Figure 10.5a
Enrollment Ratio and Growth
Source: World Bank.
1/ The gross enrollment ratio is the ratio of total enrollment, regardless of age, to the population of the age
group that officially corresponds to the level of education shown.
-4-20246810
20
40
60
80
100
120
140
160
Primary school enrollment in percent, 1985
1
/
Pakistan
Bangladesh
Côte d'Ivoire
Nigeria
Morocco
Nepal
Thailand
Ghana
Zambia
Honduras
India
Colombia
Bolivia
Costa Rica
Malaysia
Indonesia
Brazil
Algeria
Jamaica
Panama
Tunisia
Venezuela
Botswana
Philippines
Zimbabwe
Chile
Singapore
Peru
Korea
GNP per capita annual growth rate (%), 1985-96

27. 27Figure 10.5b
Literacy Rate and Growth
Source: World Bank.
2/ The adult illiteracy rate is the proportion of adults aged 15 and above who cannot, with understanding, read and
write a short, simple statement on their everyday life.
GNP annual growth rate (%), 1980-93
-4-20246810
0
10
20
30
40
50
60
70
80
90
Adult illiteracy rate (in percent), 1985
2
/
Pakistan
Bangladesh
Côte d'Ivoire
Nigeria
Morocco
Nepal
Thailand
Ghana
Zambia
Honduras
India
Colombia
Bolivia
Costa Rica
Malaysia
Indonesia
Brazil
Algeria
Jamaica
Panama
Tunisia
Venezuela
Botswana
Philippines
Zimbabwe
Chile
Peru
Korea
GNP per capita annual growth rate (%), 1985-96
Singapure

28. 28
Poverty and Growth
Two indicators typically used to measure poverty:
poverty headcount index: measures the proportion
of individuals or households earning less than a given
absolute level of income;
poverty gap:average shortfall of the income of the
poor with respect to the poverty line, multiplied by the
headcount ratio.

29. 29
Ravallion and Chen (1997) used both types of
indicators and arrived at the following results
(Figure 10.6):
incidence of poverty in developing countries,
measured by headcount index, fell between 1987
and 1993, from 31% to 29%;
depthof poverty (average distance below the
poverty line), changed little;
rural poor are still poorer than urban poor;
differences across regions; poverty incidence fell in
East Asia, South Asia and the MENA region and
rose in Eastern and Central Europe, Latin America,
and sub-Saharan Africa.

30. 30Figure 10.6
Developing Countries: Poverty Measures, 1987-93
Source: Ravallion and Chen (1997, p. 374).
1/ Using an international poverty line of $1 a day per person at 1985 purchasing power parity exchange rates.
E a s t A s ia


E a s t e r n E u r o p e a n d
Ce n t r a l A s ia

L a t in A m e r ic a a n d
t h e Ca r ib b e a n

M id d le E a s t a n d
No r t h A f r ic a

S o u t h A s ia


S u b - S a h a r a n A f r ic a


T o t a l


T o t a l, e x c lu d in g
E a s t e r n E u r o p e a n d
Ce n t r a l A s ia
02040
Pe r c e n t a g e o f p o p u la t io n
c o n s u m in g le s s t h a n $ 1 a d a y
198719901993
E a s t A s ia


E a s t e r n E u r o p e a n d
Ce n t r a l A s ia

L a t in A m e r ic a a n d
t h e Ca r ib b e a n

M id d le E a s t a n d
No r t h A f r ic a

S o u t h A s ia


S u b - S a h a r a n A f r ic a


T o t a l


T o t a l, e x c lu d in g
E a s t e r n E u r o p e a n d
Ce n t r a l A s ia
01020
Po v e r t y g a p in d e x
( p e r c e n t )

31. 31
Fact 7. Durable reductions in poverty ratesrequire
maintaining sustained ratesof economic growth
over time. See Figure 10.7.
Other factors important; Agénor (1999) suggested that
inflation has a significant effect on the poor.
Figure 10.8.
Londoño and Székely have suggested that, at least in
Latin America, poverty is strongly associated with a
skewed distributionof income.
Other important variables are access to education,
health servicesand employment opportunities, and
the degree of urbanization.

32. 32Figure 10.7a
Urban Sector: Growth and People in Poverty
(Period average, in percent)
Source: World Bank.
1/ Proportion of the population earning one U.S. dollar or less, in 1985 ppp-adjusted U.S. dollars,
various survey years.
-4-20246810
0
10
20
30
40
50
60
70
Urban sector
GNP per capita annual growth rate (%), 1981-93
Korea
Thailand
Malaysia
Uruguay
Argentina
Sri Lanka
Tunisia
Nepal
Pakistan
Madagascar
Costa Rica
MoroccoVenezuela
Egypt
India
Brazil
PhilippinesColombia
Peru
Bangladesh
Ghana
People in poverty
1
/

33. 33Figure 10.7b
Rural Sector: Growth and People in Poverty
(Period average, in percent)
Source: World Bank.
1/ Proportion of the population earning one U.S. dollar or less, in 1985 ppp-adjusted U.S. dollars,
various survey years.
-4-20246810
0
10
20
30
40
50
60
70
80
Rural sector
Korea
Argentina
Uruguay
Malaysia
Thailand
Costa Rica
Pakistan
Tunisia
Morocco
Egypt
Sri Lanka
Madagascar
Venezuela
Nepal
Colombia
India
Bangladesh
Ghana
Philippines
Peru
Brazil
People in poverty
1
/
GNP per capita annual growth rate (%), 1981-93

34. 34Figure 10.8a
Latin America: Poverty and Inflation, 1970-96, 1/
Source: Londoño and Székely (1997).
1/ Extreme poverty is one U.S. dollar a day, in 1985 PPP-adjusted U.S. dollars. Moderate poverty
is two U.S. dollars a day, in 1985 PPP-adjusted U.S. dollars.
1970197219741976197819801982198419861988199019921994
0
10
20
30
40
50
0
100
200
300
400
500
600
Poverty and Inflation
Extreme PovertyModerate poverty
Inflation (Percent change, right scale)

35. 35Figure 10.8b
Latin America: Poverty and Income Inequality, 1970-96, 1/
Source: Londoño and Székely (1997).
1/ Extreme poverty is one U.S. dollar a day, in 1985 PPP-adjusted U.S. dollars. Moderate poverty
is two U.S. dollars a day, in 1985 PPP-adjusted U.S. dollars.
2/ For 13 countries.
Extreme PovertyModerate poverty
1970197219741976197819801982198419861988199019921994
0
10
20
30
40
50
50
51
52
53
54
55
56
57 Poverty and Inequality
Gini index (Weighted average, right scale) 2/

36. 36
Inequality, Growth, and Development
Three indicators of income inequality:
Share of the top to the bottom income deciles or
quintiles--only attaches weight to the two tails of the
income distribution.
Gini Coefficient.
Theil Inequality Indexis decomposed into two
terms: one that captures inequality due to
differences between groups, and another that
captures inequality within groups.

37. 37
Gini coefficient:
Derived from the Lorenz curvewhich displays
cumulative share of total income received by
cumulative shares of the population.
Measures the area between the Lorenz curve for a
population and the line of perfect equality; it varies
between 0 (maximum equality) and unity (maximum
inequality). See Figure 10.9.

38. 38Figure 10.9
The Lorenz Curve and the Gini Coefficient
0102030405060708090100
0
20
40
60
80
100
Cumulative percentage of total income
Line of equal incomes
Cumulative percentage of total population
A
A'
B
B'

39. 39
Evidence on Growth and Income Distribution
Data does not show clear pattern between the rate
of growth of income per capita in developing
countries and two measures of income inequality:
the ratio of the share of the richest 20% to the share
of the poorest 20%, and the Gini coeficient. See
Figure 10.10.

40. 40Figure 10.10a
Growth and Income Distribution
(Average over 1981-93)
Source: World Bank.
GNP per capita annual growth rate (%), 1981-93
Ratio of income share of the highest 20% to lowest 20%
-5-2.502.557.510
0
5
10
15
20
25
30
35
Côte d'Ivoire
Zambia
Peru
Algeria
Bolivia
Venezuela
Philippines
Ghana
Nepal
Bangladesh
India
Pakistan
IndonesiaKorea
Thailand
Singapore
Malaysia
Costa Rica
Colombia
Kenya
Botswana
Chile
Zimbabwe
Honduras
Panama
Brazil
Tanzania
Tunisia
Morocco
Nigeria
Jamaica

41. 41Figure 10.10b
Growth and Income Distribution
(Average over 1981-93)
Source: World Bank.
GINI index
GNP per capita annual growth rate (%), 1981-93
-5-4-3-2-101234567
20
30
40
50
60
70
Pakistan
Indonesia
India
Ghana
NepalNigeriaTanzania
AlgeriaMorocco
Tunisia
Philippines
Jamaica
Bolivia
Peru
Costa Rica
Thailand
Zambia
Malaysia
Colombia
Honduras
Venezuela
Chile
Panama
Zimbabwe
Kenya
Brazil
Bangladesh
Côte d'Ivoire

42. 42
Link between inequality, the pattern of growth,
and development:
Kuznets hypothesis: income inequality increases
in the early stages of development and then
decreases.
Inverted-U shape reflects view that economic
development involves a transition from a low-
productivity, agrarian economy to a high-
productivity, industrial economy.
Industrial incomes, distributed less equally than
agricultural incomes, become more important
during industrialization, leading to greater
inequality.

43. 43
Industry then takes over, average incomes rise,
earnings differentials fall.
Growth is first unequalizing, then equalizing.
Early evidence broadly confirmed inverted-U patter
with inequality lowest in low-income and high income
countries and highest in middle-income countries.
Recent studies (Bruno, Ravallion, and Squire, 1998
and Fishlow, 1995) have failed to corroborate this
result.
Fact 8: The link between income inequality and
growth appears to be non-linear, but there remains
some controversy about the nature and robustness
of this relationship.

44. 44
Education Inequality and Income Distribution
Psacharopoulos et al. (1995) and Londoño and
Székely (1997) suggest strong relationship between
educational inequality and income inequality.
Lipton and Ravallion suggest that the relationship is
nonlinear:
During first phases of growth in education, income
inequality actually rises; for example, an increase
from 1 to 2 years of education is typically
associated with a 3 -point increase in the Gini
coefficient.

45. 45
Turning point arises when work force attains
between 5 and 6 years of education. e.g. on
passing from 6 to 7 years, Gini falls by .5 point,
from 9 to 10 years, Gini falls by 2 points.
Other Factors and Income Distribution
Cardoso et al. (1995) identified inflation and
unemployment as determinants of income inequality
in Brazil during the 1980s.
Relationship between inflation and income
inequality as nonlinear (Bulir, 1998); inflation
reduction from very high levels reduces income
inequality while further reductions towards very low
levels bring on negligible improvements.

46. 46
Trade, Inflation, Financial Deepening
Fact 9:export and import volume growth both
positively related output growth. evidence on
correlation between openness and growth less robust.
Figure 10.11.
Figure 10.12.
Fact 10: inflation-growthrelationship; negative and
nonlinear,
key for advocatingmacroeconomic stability;
nonlinear: reductions in inflation from a low (high)
base have negligible (significant) impacts on
growth.
Figure 10.13.

47. 47Figure 10.11a
Exports and Growth
(Averages over 1980-95)
Source: World Bank.
Growth in export volumes
Real GDP growth per capita
-4-202468
-5
0
5
10
15
20
Zimbabwe
Nigeria
Côte d'Ivoire
Bolivia
Venezuela
AlgeriaJamaica
Morocco
Tanzania
Peru
Brazil
Ghana
PhilippinesIndia
Costa Rica
ChilePakistan
Korea
Zambia
Panama
Indonesia
MalaysiaNepal
Thailand
Colombia
Bangladesh
Tunisia

48. 48Figure 10.11b
Imports and Growth
(Averages over 1980-95)
Source: World Bank.
Growth in import volumes
Real GDP growth per capita
-4-202468
-10
-5
0
5
10
15
Zambia
Algeria
Nigeria
Zimbabwe
Côte d'Ivoire
Morocco
Brazil
Bangladesh
India
Tunisia
Tanzania
Jamaica
Panama
Indonesia
Nepal
Pakistan
Venezuela
GhanaChile
BoliviaPhilippines
Costa Rica
Korea
Colombia
Malaysia
Thailand
Peru

49. 49Figure 10.12
Openness and Growth
(Averages over 1980-95)
1/ Openness is measured by the ratio of the sum of exports of goods and services and imports of goods
and services (both at current prices), relative to GDP at current prices.
Source: World Bank.
Index of openness (in percent)
1
/
Real GDP growth per capita
-4-202468
0
50
100
150
200
Zimbabwe
Nigeria
Côte d'Ivoire
Bolivia
Venezuela
Algeria
Jamaica
Morocco
Tanzania
Peru
Brazil
Ghana
Philippines
India
Costa Rica
Chile
Pakistan
Korea
Zambia
Panama
Indonesia
Malaysia
Nepal
Thailand
Colombia
Bangladesh
Tunisia

50. 50Figure 10.13
Inflation and Growth
(Average annual % change, 1980-95)
Source: World Bank.
-4-202468
0
10
20
30
40
50
Inflation
Panama
Malaysia
Thailand
Korea
Morocco
Tunisia
BangladeshCôte d'Ivoire
Indonesia
Pakistan
India
Nepal
Philippines
Chile
Algeria
Costa Rica
Zimbabwe
Colombia
Jamaica
Tanzania
Ghana
Venezuela
Nigeria
Zambia
Real GDP growth per capita

51. 51
Fact 11:financial system developmentis
positively related to the rate of growth of output.
Figure 10.14.

52. 52Figure10.14
Private Sector Credit and Growth
(Average annual % change, 1980-95)
Source: World Bank.
-4-202468
0
10
20
30
40
50
60
70
80
90
Credit to private sector ( in percent of GDP)
Panama
MalaysiaThailand
Korea
Morocco
Tunisia
Bangladesh
Côte d'Ivoire
Indonesia
Pakistan
India
Nepal
Philippines
Chile
Algeria
Costa Rica
Zimbabwe
Colombia
Jamaica
Tanzania
Ghana
Venezuela
Nigeria
Zambia
Real GDP growth per capita
Bolivia
Peru
Brazil