Transcript How States Grow: Old Vs New Economy Soji Adelaja, Yohannes Hailu, Mark Wyckoff and Eric Bailey Presented at the 2008 World Congress on.

How States Grow:
Old Vs New Economy
Soji Adelaja, Yohannes Hailu, Mark Wyckoff and Eric Bailey
Presented at the 2008 World Congress on National Accounts
and Economic Performance Measures for Nations
May 15, 2008
Washington, D.C.
Background
• Depending on a country’s stage of economic development, the
policies and institutional arrangements needed to bring about
growth are now widely understood and increasingly being
applied.
• Globalization, emergence of the New Economy and resulting
mobility of talent, venture capital and new innovative technology
pose new challenges in understanding optimal growth strategies,
particularly in the context of the domestic economy.
• New growth levers are emerging, the impacts of which are not
well understood.
• While growth accounting included traditional growth
determinants in explaining growth, New Economy advocates
suggest a whole new set of factors (eg. talent, green
infrastructure, venture capital, patient capital, cultural assets, and
other quality of life amenities).
• How we measure economic performance depends on whether
we can capture the drivers of new growth.
What Drives Economic Growth?
Theories of Economic Growth
• Adam Smith – Nature and Causes of the Wealth of Nations
•
•
•
•
Division of labor and specialization.
Laissez-faire – minimal government interference.
Functional legal system.
Think about Russia.
• David Ricardo – International Trade and Growth
• The concept of diminishing returns
• Growth based on international trade rooted in comparative
advantage.
• Think about India.
What Drives Economic Growth?
Theories of Economic Growth
• Neo-Classical Growth Models
• These models emphasize the role of capital accumulation
• Solow-Swan model – output is produced by capital and labor, where labor
and capital productivity determines growth, given an exogenous technical
progress (measured by Solow residual or TFP)
• Model expanded by considering the role of technological progress and
human capital in explaining differences in growth across countries and in
accounting for growth.
• Think about Mexico.
• Endogenous Growth Models
• These models relaxed some earlier assumptions about economic growth
and endoenized technological progress in growth accounting
• R&D (ideas) based endogeneous growth models identify innovation as
the driver of long-term economic growth
• For instance, Eaton and Kortum (1996) identified that more than 50% of
productivity growth in OECD countries is due to innovations in the U.S.,
Germany and Japan.
• Getting there.
What Drives Economic Growth?
Theories of Economic Growth
• Evolutionary Growth Theories:
• Technological progress is a long-lasting adjustment process
• Growth theory need to be conceptualized from broader firm capabilities
than just human capital and R&D investments.
• Institutional framework under which growth happens is important
consideration.
• Getting near.
• Sources of Economic Growth – Other Ideas
• Labor force expansion; Entrepreneurship.
• Capital stock; Government policies.
• Almost there.
• Observation
• Economic knowledge about growth was based on the concept of
comparative advantage.
• In an era of globalization where tangible new assets are mobile, and
traditional assets are increasingly irrelevant, are these models relevant?
What Drives Economic Growth?
Theories of Economic Growth
• Implications to Growth Accounting
• Determination of the sources of economic growth is an
important factor in determining how such growth will be
measured.
• Growth accounting depends on how growth happens, and
how growth happens changes overtime depending on the
structure of the emerging economy.
Recent Trends
• Thepublicly
share oftraded
people
living onis $1
day hasnot
plummeted
from
• Largest
company
in aBeijing,
New York.
percent
in 1981
to 18 constructed
percent in 2004
and isnot
estimated
• The 40
biggest
refinery
is being
in India,
the Gulfto
drop to 12 percent by 2015. Poverty is falling in countries that
of Mexico.
house 80 percent of the world's population.
• The largest investment fund on the planet is in Abu Dhabi, not
London.
• Foreign students and immigrants account for almost 50
• The percent
biggest movie
industryresearchers
is Bollywood,
noU.S.
longer
Hollywood.
of all science
in the
In 2006
they
40 percent
of all PhDs.
2010, 75
• The received
largest casino
is in Macao,
which By
overtook
Laspercent
Vegas of
in all
science
PhDs in
this
country will be awarded to foreign
gambling
revenues
last
year.
students.
• In the most recent rankings, only two of the world's ten richest
people are American, but ten years ago, the United States would
have serenely topped almost every one of these categories.
• In 2006 and 2007, 124 countries grew their economies at over 4
percent a year. That includes more than 30 countries in Africa.
Source: News Week - May 12, 2008.
The New Economy Proposition
• Drivers of New Economy Growth:
•
•
•
•
•
•
•
Talent attraction.
Venture capital attraction.
Entrepreneurial culture.
Information technology.
Quality of Life.
Green Infrastructure.
Etc.
• New Economy Drivers in a Global Context
• Barriers still exist between nations due to immigration rules, risk
aversion, and the fixity of green infrastructure assets.
• New Economy Drivers in a Domestic Context
• Mobility of New Economy drivers suggests a whole new capacity
to aggregate critical new economy assets for economic advantage.
Implications to Domestic Growth Accounting
• Old Economy:
Q = (K, L, M, N).
• New Economy:
>90%
>90%
Q = (K, L, M, N | V, T, E, P).
Q = (K, L, M, N | V, T, E, P).
New Economy Proposition
Old Economy
Low Cost
Location
Companies &
Employers
Manufacturing Population
Growth
Jobs
Prosperity
Old Economy
•Old Industrial Complexes
are people magnets.
•Strategies focused on
attracting industry.
•Strategies focused on
cheap land, willing workers,
raw materials, low taxes,
etc.
New Economy
Amenities
QOL
Talented
Knowledge
Workers
Knowledge
Jobs
Population
Growth
Prosperity
New Economy
•Talent is the currency of the “New Economy”.
•Great places are talent
magnets.
•Talented create jobs.
•Strategies focused on
attracting talented people.
•Strategies focused on
attractive tolerant places
with great social, natural,
entrepreneurial, creative
and intellectual capital.
Preliminary Evidence on
Drivers of Growth
• LPI conducted a study to test the share of Old and New
Economy factors in the growth of state population, employment
and wage using a regional science framework.
• Determinants of population, employment and wage growth
between 2000 and 2005 are modeled as seemingly unrelated
regression of three equations.
Identified Variables
• Endogenous:
• Population
• Employment
• Wage
• Demographic Factors:
• % of Pop. foreign born (NE)
• % urban Pop. (NE)
• Population density (OE)
Economic Factors:
•
•
•
•
•
•
Per capita income (OE)
Unemployment rate (OE)
Housing value (OE)
GSP per capita (OE)
Value of exports (OE)
% high school completion and above
(OE)
• New Economy Factors:
•
•
•
•
•
•
•
•
Milken state tech. index (NE)
# of patents (NE)
Broadband connections (NE)
R&D expenditure (NE)
IT jobs (NE)
Creative industry jobs (NE)
Energy cost (NE)
# of women and minority owned
businesses (NE)
• Urban mass transit (NE)
• % Bachelor’s degree and above (NE)
• Green Infrastructure Factors:
• Green Plan Capacity Index (NE)
• Expenditure on green infrastructure
(NE)
• Forest acres; Park acres (NE)
• Coastline miles (NE)
• Violent crimes (OE)
Rankings
Demographic Variables = population density, % foreign born, % urban, % minority. Economic Variables =
wage, PCI, unemployment, GSP per capita, housing value. New Economy Variables = broadband connections,
minority firms, R&D expenditure, energy costs, patents, Milken tech index. Green Infrastructure Variables =
miles of shores, Green Plan Capacity Index, acres of forest and state parks, expenditure on green infrastructure.
Mean Rank and Performance
Income mean Rank Relationship
45,000
40,000
35,000
PCI
30,000
25,000
Mean Rank
20,000
Linear (Mean
Rank)
15,000
10,000
5,000
0
0.00
5.00
10.00
15.00
20.00
Mean Rank
25.00
30.00
35.00
40.00
Empirical Findings
• Change in population equation:
• Model performance – R-squared is 0.91.
• Drivers of population change are:
• State per capita income (+)
• Amenities (Green Plan Capacity Index) (+)
• % foreign born (+)
• Urban mass transit (-)
• Regional dummies: WSC (+), ESC (+), SA(+)
• Share of New Economy Drivers:
• Using R-squared decomposition, the share of New
Economy factors that determine population change
(minority population, air quality, other amenities, Milken
tech index, Green Plan Capacity Index) is estimated at 97%.
Empirical Findings
• Change in employment equation:



Model performance – R-squared is 0.83.
Drivers of employment change are:
• Educational attainment (+)
• Amenities (Green Plan Capacity Index (+), state parks (+))
• Housing value (-)
• % urban population (+)
• Regional dummies: MT (+), PAC (+), ESC (+), SA (+)
Share of New Economy Drivers:
• Using R-squared decomposition, the share of New Economy factors
that determine employment change (patents, broadband connection,
minority owned firms, higher education, amenities, % urban
population) is estimated at 63%.
Empirical Findings
• Change in wage equation:



Model performance – R-squared is 0.88.
Drivers of wage change are:
• # of IT jobs (+)
• Broadband connections (+)
• Educational attainment (+)
• Amenities (green infrastructure) (+)
• Crime (-)
• Regional dummies: PAC (+), MA (+)
Share of New Economy Drivers:
• Using R-squared decomposition, the share of New Economy factors
that determine wage changes (% minority, IT jobs, broadband
connections, minority firms, % creative industry jobs, expenditure on
green infrastructure, higher education) is estimated at 87%.
Implications to Economic
Performance Measurements
• The dominance of New Economy factors in driving growth is
increasingly becoming an economic reality.
• This poses numerous implications to the way we measure
productivity and growth:
• What is the productivity contribution of talent?
• What is the productivity and growth contribution of venture capital?
• What is the productivity and growth contribution of green infrastructure
assets?
• How do we measure these variables to account for their role in determining
growth and productivity?
• Understanding and accounting for the role of New Economy
factors in determining growth and productivity could potentially
add to the accuracy of economic performance measures.
• As we worry about national growth accounting, we should worry
about domestic growth accounting.
Thank you!