Transcript MACROECONOMICS AND THE GLOBAL BUSINESS ENVIRONMENT

MACROECONOMICS
UNDERSTANDING THE GLOBAL ECONOMY
Endogenous Growth and Convergence
1
Copyright © 2012 John Wiley & Sons, Inc. All rights reserved.
6-2
Key Concepts
 Endogenous growth
 Conditional convergence
 Poverty traps
 Steady state determinants
6-3
Sources of growth
 Exogenous growth (Solow model)



Capital produces growth until economy
reaches steady state
Continuous growth arises from technological
progress
Technological progress is exogenous to model
 Endogenous growth

Provide explanation internal to the model
6-4
Constant MPK
Output
Output = AK
K: Capital
Y: Output
A: Parameter
s: Investment Rate
Investment = sY
Depreciation
Capital Stock
6-5
Constant MPK
Output
Output = AKLb
Investment = sY
Depreciation
K0
K1
Capital Stock
6-6
Does constant MPK make sense?
 Interaction between physical and human
capital


Suppose increase in K induces increase in
human capital?
Consider IT investment and education
 This represents a spillover effect
6-7
In equation form
Output = A x (Human capital)b x Ka x Lc
Output = A x (DxK)b x Ka x Lc
Output = A x (D)b x Ka+b x Lc
6-8
Social versus Private Return
Output = A x (DxK)b x Ka x Lc
Private Return
measured by this
term
6-9
Social versus Private Return
Output = A x (DxK)b x Ka x Lc
Extra return due to
spillover effect
6-10
Marginal product of capital
Case: a + b < 1
Cost of Capital, r/p
Social MPK
Private MPK
KP
KS
Capital Stock
6-11
Marginal product of capital
Effect of subsidy
Private MPK
Social MPK
Cost of Capital
Cost of Capital with subsidy
KP
KS
Capital Stock
6-12
Poverty Traps
Marginal product of capital
 Increasing MPK
MPK
Cost of Capital, r/p
K0
Capital Stock
MPK is less than cost of capital, so capital decreases to zero
6-13
Poverty Traps
Marginal product of capital
 Increasing MPK
MPK
Cost of Capital, r/p
K0
Capital Stock
MPK is higher than cost of capital, so capital increases continuously
6-14
Why increasing MPK?
 Agglomeration
 Interdependencies in inputs
 Spillovers
Increasing MPK leads to income
divergence between sectors
(states, countries, etc.)
6-15
Just the facts, Ma’am
 What does the data say about convergence?
 What does convergence mean empirically?


Levels of income should coincide in the long
run
Low income countries grow faster than high
income countries

Higher MPK for low income countries
6-16
Growth and per capita GDP
9%
Average GDP growth 1960-2007
8%
7%
6%
5%
4%
3%
2%
1%
0%
0
500
1000
1500
2000
2500
3000
GDP per capita 1960, USD
3500
4000
4500
6-17
Income per Capita and Growth
Rank of Income in 1960
top
2nd
3rd
bottom
2
2.1
2.2
2.3
2.4
Annual GDP per capita growth 1960-2007 %
2.5
6-18
Convergence in OECD Economies
Average GDP growth 1060-2007
6%
5%
4%
3%
2%
1%
0%
0
1000
2000
3000
GDP per capita 1960 USD
4000
5000
6-19
Convergence across US States
6-20
Conditional Convergence
 Little evidence of convergence across all
countries
 Some evidence of convergence for select,
similar countries
 Countries may have different steady states
6-21
Two Steady States
Output
Real GDP
Depreciation
Investment (30% of GDP)
Investment (20% of GDP)
SS 1
SS 2
Capital Stock
6-22
What determines the steady state?
 Level of investment and savings
 Accumulation of human capital (education)
 Government policies
 Economic environment (e.g., corruption,
property rights, crime)
6-23
Empirical Evidence
 Data supports conditional convergence
 Investment, education, health have positive
effects on growth
 Effects of other variables are harder to
discern in available data
6-24
Determinants of steady state for selected
countries.
6-25
Determinants of steady state for selected
countries.
6-26
Why is Africa so poor?
1999-2011
1973–98
1950–73
1913–50
World
Africa
Latin America
1870–1913
Asia (exc. Japan)
Western Europe
1820–70
0
2
4
6
Average GDP per capita growth
8
6-27
Possible explanations
 Ethnic/linguistic diversity
 Climate and disease
 Colonial influence
 The impact of aid
6-28
Institutional Quality in Africa
Africa is characterized by poor governance and institutional
quality, although there are some exceptions. Countries are
ranked by percentile (0 is the worst and 100 is the best).
6-29
Artificial Borders
Europe Asia
Percent of population belonging to groups
partitioned by border
Fractal Index of borders (low figure =
straighter borders)
Africa
North
South
America America
19.9
20.6
48.0
7.6
15.2
0.052
0.037
0.028
0.027
0.036
Although North America has the most artificially
straight borders, Africa’s borders separate a far
higher share of its ethnic groups.
6-30
Geographical Characteristics of
Selected Regions
6-31
GDP per Capita by Latitude
70
60
50
40
Latitude
30
20
10
Equator
-5
-15
-25
-35
-45
0
5000
10000
15000
20000
GDP per capita 2005-2007 $
25000
30000
6-32
Urbanization in 1500 versus GDP
per capita in 2008
$64,000
SINGAPORE
USA
AUSTRALIA
CANADA
LOG GDP PER CAPITA, PPP, 2010
$32,000
HONG KONG
NEW ZEALAND
ARGENTINA
MALAYSIA
PANAMA
CHILE
MEXICO
URUGUAY
COSTA RICA
BRAZIL
PERU
VENEZUELA JAMAICA
TUNISIA
COLOMBIA
DOMINICAN REP.
EL SALVADOR
ECUADOR
BELIZE
GUYANA
EGYPT
SRI LANKA
ALGERIA
GUATEMALA
PARAGUAY
INDONESIA
BOLIVIA
$16,000
$8,000
$4,000
PHILIPINNES
INDIA
VIETNAM
MOROCCO
HONDURAS
NICARAGUA
LAOS PAKISTAN
$2,000
BANGLADESH
HAITI
$1,000
0
2
4
6
8
10
12
URBANISATION IN 1500
14
16
18
20
6-33
The Curse of Natural Resources
6-34
Major Aid Donors
20
15
$ billion p.a. (LHS)
% of GNI (RHS)
1.0%
0.8%
0.6%
10
0.4%
5
0
0.2%
0.0%
6-35
Major Aid Recipients
7
6
35%
$ billion p.a. (LHS)
% of GNI (RHS)
30%
5
25%
4
20%
3
15%
2
10%
1
5%
0
0%
6-36
Evidence on the Impact of Aid
Hypothesis Tested
Number of Studies evaluated Consensus of Results
Does aid increase Saving
and Investment?
43
75% of aid is crowded out by
lower saving.
Does aid increase Growth?
103
No significant effect
Is aid effective in moderation
but harmful in excess?
22
No evidence
Is aid more effective when
policy is good?
28
No evidence
Is aid effective when local
institutions are strong?
10
Some evidence but too few
studies
The balance of evidence suggests that development aid
has no significant effect on economic development.
6-37
Summary
 Constant MPK
 Increasing MPK (spillovers and interactions)
 Poverty traps
 Factors affecting steady state
 The example of Africa
 Aid
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