The Future of Growth. Dani Rodrik August 2011

Transcription

1 The Future of Growth Dani Rodrik August 2011

2 An extraordinary decade year smoothed trend actual Growth trends in world economy: GDP per capita growth rates,

3 with sharply diverging performance year smoothed developed countries growth smoothed developing countries growth Developed Developing Growth trends in developed and developing countries,

4 Growth was widespread, for once year Asia (excl. Japan) Africa Latin America Developing country growth trend by region,

5 What s new in the post-crisis environment Advanced countries hobbled by high public debt Lower growth in the North Eurozone preoccupied with its crisis Doubts about cross-border financial flows From a multilateral regime to a G-0? Can developing country growth be sustained in this environment?

6 Growth theory (1) Rate of economic growth is a function of convergence gap closing existing gaps in knowledge and capital-labor ratios So growth rate of rich countries largely irrelevant unless it affects possibilities of catch-up

7 Convergence gap remains very large year All developing countries Latin America Asia Africa Ratio of developing to developed GDP per capita by region

8 Growth theory (2) But convergence is conditional depends on doing the right things And not clear we have a good handle on what the right things are the new consensus is about search and pragmatism rather than ready-made of list of to-do s

9 This time will be different? Policies are much better in conventional sense Macro stability and low inflation Openness to world economy Improved governance But these tend to increase resilience without necessarily igniting or sustaining growth

10 Not all countries with improved policies do better Brazil Mexico Growth rates of Brazil and Mexico by period

11 How the original Washington Consensus has turned into non-operational truisms I would suggest that the rate at which countries grow is substantially determined by three things: their ability to integrate with the global economy through trade and investment; their capacity to maintain sustainable government finances and sound money; and their ability to put in place an institutional environment in which contracts can be enforced and property rights can be established. I would challenge anyone to identify a country that has done all three of these things and has not grown at a substantial rate. But: -- Larry Summers (2003) ability to do X and capacity to manage Y do not tell us what the requisite policies area and if we try to give it operational content, it turns out that the immediate implications are not quite consistent with the evidence

12 So -- ability to integrate with the global economy through trade and investment low barriers to trade and capital flows? but what about Latin America? --capacity to maintain sustainable government finances and sound money low budget deficits, independent central banks and inflation targeting? again, what about Latin America? --ability to put in place an institutional environment in which contracts can be enforced and property rights can be established private property rights and American-style investor protection legislation? What about China and Vietnam?

13 A change in emphasis in thinking on growth (1) Presumptive strategies ISI Washington Consensus U.N. Millennium Project, MDGs Governance agenda Long laundry list of reforms In a wide range of areas: trade, fiscal, legal, regulatory, health, education, etc. Focus on complementarity of reforms rather than prioritization or sequencing A bias towards universal recipes, bestpractices, and rules of thumb

14 A change in emphasis in thinking on growth (2) Diagnostic strategies We do not know ex ante what works and what doesn t Need to look for binding constraints Which tend to be context-specific Experimentation central part of discovery Monitoring and evaluation equally central Focus on selective, more narrowly targeted reforms Based on the idea that there exists lots of slack Well targeted reforms can produce a big bang Suspicious of best-practice, universal remedies Looking for policy innovations that unlock local second-best/political complications

15 A change in emphasis in thinking on growth (3) The structural transformation imperative Economic growth is fueled by movement of resources from low- to high-productivity activities key role of modern tradable goods and services need to focus on entire economy, not just misallocation within modern industries, on the most competitive industries Key question is what constrains this process Government versus market failures Economy-wide remedies versus short-cuts Selective interventions targeted at binding constraints are more likely to be effective

16 dispersion in labor -.3 productivity across broad -.2 sectors Productivity gaps within economy are large, but diminish over the course of development NGA MWI SEN ETH KEN ZMB GHA BOL IND THA CHN IDN BRA COL PER PHL VEN MYS KOR TWN NLD DNK HKG MEX TURCHL ARG ZAF UKM SGP ESP JPN USA CRI MUS ITA SWE FRA Economy-wide lnlabprod05 labor productivity Relationship between inter-sectoral productivity gaps and income levels

17 Productive heterogeneity in the economy Indian labor productivity as percent of U.S., % of employment 11% of employment 2% of employment Manufacturing has the greatest potential to create jobs, yet is among the least productive activities outside of agrculture

18 Heterogeneity within organized manufacturing Indian labor productivity as percent of China, % of formal manuf. empl. 1.4 % of formal manuf. empl. 20% of formal manuf. empl.

19 Log labor productivity across 4-digit manufacturing industries Productivity dispersion within manufacturing x India China

20 Are resources moving in the right direction within manufacturing? Structural change within manufacturing has reduced labor productivity growth of the sector by 0.9% p.a. during basic chemicals above average productivity below average productivity 171 textiles, spinning, weaving transport equip. nec gen. purpose mach other chemicals grain mill products, etc change in employment share,

21 How China fits Pragmatic, often heterodox solutions to overcome political constraints and second-best complications Two-track pricing insulates public finance from the provision of supply incentives Household responsibility system obviates the need for explicit privatization Township and village enterprises overcome weaknesses in legal (thirdparty) enforcement of contracts Special economic zones provide export incentives without removing protection for state firms (and hence safeguard employment) Federalism, Chinese-style generates incentives for policy competition and institutional innovation Exchange-rate protection subsidizes manufactures following WTO entry Strategic and sequential approach targeting one binding constraint at a time First agriculture, then industry, then foreign trade, then finance Remaining institutional challenges Especially with regard to political democracy and the rule of law

22 Source: Heilmann (2008) Chinese experimentation

23 industrial empoyment share (orthogonal.05 part) Undervaluation, industrial employment and growth Industrial employment and growth Undervaluation and industrial employment industrial employment share undervaluation index Each observation is a country over a 5-year period. Initial income and fixed effects for countries and time periods included.

24 Role of the real exchange rate The undervaluation index is the price level of Indian goods relative to other countries, corrected for the Balassa-Samuelson-effect.

25 Conclusions The presence of a large convergence gap ensures significant potential for rapid economic growth in developing world, regardless of what happens in the rich countries Fulfilling this potential requires ongoing process of diversification and structural change This process is not automatic, especially in countries with an initial comparative advantage in primary products It necessitates pragmatic, experimental policies that support new industries These are often unconventional policies Require a supportive external environment Will WTO/IMF, advanced countries condone such policies?