Development Lecture in Honour of Angus Maddison | Rethinking Growth Policy
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Development Lecture in Honour of Angus Maddison | Rethinking Growth Policy

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On the occasion of the OECD Development Centre’s 50th Anniversary, Philippe Aghion, Professor of Economics at Harvard University, presented the Inaugural Development Lecture in honour of Angus ...

On the occasion of the OECD Development Centre’s 50th Anniversary, Philippe Aghion, Professor of Economics at Harvard University, presented the Inaugural Development Lecture in honour of Angus Maddison, a renowned scholar on quantitative macroeconomic history and one of the founding fathers of the OECD Development Centre whose work has greatly influenced the development policy debate. The Lecture, entitled “Revisiting growth diagnostics” was given on 29 February 2012. The presentation and discussions that followed enriched the work of the Centre and in particular the next editions of the Development Centre’s Perspectives on Global Development.

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Development Lecture in Honour of Angus Maddison | Rethinking Growth Policy Development Lecture in Honour of Angus Maddison | Rethinking Growth Policy Presentation Transcript

  • Rethinking Growth PolicyPhilippe Aghion
  • EU versus US 1970’s: EU average annual growth rate of per capita GDP: 3.5% versus 1.5% in US 1995-2006: EU per capita GDP was growing at less than 2% versus 3% in US
  • Latin America versus Asia Average growth rate over 1960-200 period in Brazil lies between 2.5% and 3%...versus 7% in Singapore and Taiwan, 6.5% in South Korea, 6% in Hong Kong, 5% in Thailand. View slide
  • Main debates Does policy matter for growth as long as countries have good institutions? Washington consensus: does one size fit all: stabilize, liberalize, privatize? Should we preclude any form of industrial policy? Role and size of the state? View slide
  • Growth diagnostics? How can one binding constraints on growth?  Using prices (Hausmann-Rodrik- Velasco)?  Alternative approach?
  • A paradigm for analyzinggrowth policy
  • Schumpeterian Paradigm Innovation is driven by entrepreneurial investments (R&D…) which are themselves motivated by the prospect of monopoly rents
  • Schumpeterian Paradigm Frontier innovation and imitation requires different sets of policies and institutions
  • Schumpeterian Paradigm
  • 1st idea: Appropriate growthpolicies During the post-war period, growth in European countries was driven by imitation Over time, and particularly with globalization, innovation has become the driving force of growth Innovation requires flexibility and turnover, and different policies and institutions
  • Example 1: Competition &Growth Competition/entry is more growth- enhancing for countries or sectors that are closer to technological frontier Competition/entry is more growth enhancing in countries or states with less regulated labor markets
  • 1991 Liberalization in IndiaTrade liberalization – Large-scale abandonment of extensive system of quantitative restrictions in the form of import licensing – Average percentage point reduction 51% during 1990-7, maximum of 270%, 97% of products affectedForeign Investment and Technology Agreements – Opening up of industries for automatic approval of foreign technology agreements and investment of up to 51% equity – Foreign Investment Promotion Board (up to 100% equity)Industrial Delicensing – Large-scale removal of industrial licensing, retained in a few sectors (eg Motor Cars and Leather) 13
  • Baseline Results :Investment14
  • Robustness : PatentingActivity15
  • Discussion with Dany Rodrik Is external competition enough to stimulate growth in countries like India or South Africa? Is there opposition between competition policy and industrial policy?
  • Example 2: Education Graduate education is more growth- enhancing closer to technological frontier Undergraduate +primary/secondary education is more growth enhancing farther below technological frontier Question: governance of education?
  • Example 3: Labor marketflexibility Labor market flexibility is more growth enhancing the closer a country is to the technological frontier Question: how to make labor market flexibility efficient and socially acceptable?
  • EPL                        Variable     eq1             eq2             eq3             eq4             eq5                       Leader MFP growth   0.02949         0.02996        0.02830         0.02813                                          Gap to Leader  -0.00858***     -0.00836***                                                                               EPL  -0.00000                                                                              EPL, for highest tercile    0.00002       -0.00009**      -0.00011**      -0.00015***            EPL, for middle tercile    0.00004*        0.00002         0.00001         0.00001               EPL, for lowest tercile    0.00004       -0.00005         0.00002         0.00003          MFP Gap, for highest tercile                  -0.01261***     -0.00816        -0.00547               Gap, for middle tercile                  -0.00276        -0.00174        -0.00210               Gap, for lowest tercile                  -0.00901***     -0.01095***     -0.01173***       EPL*Gap, for highest tercile                                   -0.00017        -0.00029*          EPL*Gap, for middle tercile                                   -0.00004        -0.00003           EPL*Gap, for lowest tercile                                    0.00012*        0.00014**  Leader growth, for highest tercile                                                    0.13600***  Leader growth, for middle tercile                                                    0.00817     Leader growth, for lowest tercile                                                   -0.02597     legend: * p<.1; ** p<.05; *** p<.01
  • Example 4: Finance As country moves closer to frontier, needs to rely more on equity finance and stock markets
  • Preliminary results Finance, Growth and Distance to Frontier Value Added Growth, 1980-1990 OLS IV OLS IVStock Market * Financial Dependence 0.065 0.035 -0.008 -0.139 [.026]** [.023] [.058] [.069]**Stock Market * Fin Dep * Dist to Frontier 0.289 1.072 [.327] [.448]**Private Lending * Fin Dep 0.059 0.029 0.059 0.036 [.036]* [.028] [.034] [.027]Private Lending * Fin Dep * Dist to Frontier -0.528 -0.919 [.164] [.243]***Observations 972 661 887 638R-squared 0.3 0.3 0.38 0.36Country & Sector Dummies included.* significant at 10%; ** significant at 5%; *** significant at 1%
  • Identifying binding constraints on growth (1) Significant variables: - Investment in higher education - Liberalization of product and labor markets - Employment duration and rate 23Aghion - Cette - Cohen - Pisani   Les leviers de la croissance française
  • Identifying binding constraints on growth (2) Catching up with  scandinavian countries  Effets au bout de …  5 ans 10 ans 15 ans Reforming higher education Effets : . Croissance annuelle moyenne du PIB, en points 0,1 0,3 0,4 . Niveau du PIB, en % 0,6 1,9 3,9 Reforming product and labor markets Effets : . Croissance annuelle moyenne du PIB, en points 0,2 0,2 0,2 . Niveau du PIB, en % 0,9 2,1 3,3 24Aghion - Cette - Cohen - Pisani   Les leviers de la croissance française
  • Identifying binding constraints on growth (3)3,5 32,5 21,5 10,5 0 2008-2012 2013-2017 2018-2022 Long terme Enseignement supérieur Réforme des marchés des produits et du travail Augmentation de linput en travail (emploi et durée) Croissance potentielle spontanée 25 Aghion - Cette - Cohen - Pisani   Les leviers de la croissance française
  • 2d idea: governance Growth investments should be targeted and properly governed
  • Example 1: Education Quality, not just quantity, of investment matters Two illustrations  PISA and growth  Investing more in more autonomous universities, is more growth-enhancing
  • PISA and growth
  • Years of schooling and growth
  • Autonomy of universities Autonomie 30Source : The Governance and Performance of ResearchUniversities: Evidence from Europe and the U.S. – P. Aghion et alii – NBER avril 2009
  • Example 2: Industrial Policy Over time, and particularly since the 1980s, economists have come to dislike sectoral (“industrial”) policy on two grounds:  (i) it focuses on big incumbents (‘national champions);  (ii) governments are not great in ‘picking winners’. Current dominant view is that sectoral policy should be avoided especially when it undermines competition
  • Industrial Policy (2)Several reasons for a rethink  New post-crisis realism: laissez-faire complacency by several governments has led to inefficient growth of non-tradable sectors at the expense of tradables  Climate change: path dependence in the direction of innovation leads firms that have innovated dirty in the past will keep on innovating dirty in the future, hence role for government to redirect technical change  China: a big deployer of sectoral aid, whose success induces other countries to try and emulate its economic policies
  • Industrial Policy (3) The question is not so much whether or not we should forbid or preclude industrial policy, but rather how industrial policy should be designed and governed. Some new ideas  Selection of sectors: skill-biased (Nunn-Trefler (2010)); competitive sectors (this paper);  Governance: do not focus aid on one firm in a sector, minimize concentration of aid (this paper).33
  • Industrial Policy (4) Current work with Mathias Dewatripont, Luosha Du, Ann Harrison, and Patrick Legros Panel data of Chinese firms, 1988-2007 Industrial firms from NBS: annual survey of all firms with more than 5 million RMB sales Regress TFP on:  Subsidies received by firm as a share of sales  COMP=1 - LERNER INDEX  Sector-level controls, firm and time fixed effects
  • Industrial Policy (5) Findings are that:  The higher competition, the more positive (or less negative) the effect of subsidies on average TFP  The overall effect of subsidies on TFP is positive if competition is sufficiently high and/or subsidies are not too concentrated among firms in the sector
  • Innovation in Products Here, we use the new product ratio as the dependent variable. New product ratio is defined as the share of output value generated by new products to the total output value. Table 6 (1) (2) (3) (4) (5) (6) Dependent: Ratio_newproduct The second quartile Ratio_subsidy 0.00397 0.00364 -1.503* -1.689** -1.508* -1.679** (0.0390) (0.0388) (0.821) (0.755) (0.816) (0.755) Competition_lerner -0.0724 -0.0798 -0.0777 (0.0789) (0.0780) (0.0720) Interaction_lerner 1.562* 1.755** 1.568* 1.744** (0.841) (0.780) (0.837) (0.780) The fourth quartile ratio_subsidy 0.00185 0.000920 -1.324 -1.029 -1.332 -1.022 (0.0351) (0.0352) (1.475) (1.442) (1.468) (1.432) competition_lerner 0.117* 0.114* 0.122* (0.0662) (0.0657) (0.0622) interaction_lerner 1.359 1.057 1.368 1.049 (1.503) (1.470) (1.495) (1.460) Horizontal Yes Yes Yes Yes Yes Yes Forward & Backward No No No No Yes Yes Tariffs Yes Yes Yes Yes Yes Yes
  • 3d idea: Macroeconomicpolicy matters for growth
  • Two Contrasted Views of How toConduct Macrooeconomic Policy Keynesian view (non-discriminatory increase in public spending) Conservative view (tax and spending cuts)
  • A Third Way There is a third way between keynesian and conservative approaches  namely, countercyclical fiscal and monetary policy to partly circumvent credit market imperfections and thereby help firms maintain their growth-enhancing investments over the cycle.
  • Fiscal Policy Over the Cycle 17 OECD countries, 45 manufacturing industries Period 1980-2005 Finding: Countercyclical fiscal  policy enhances growth more in  sectors that are more dependent on  external finance or in sectors with  lower asset tangibility
  • Fiscal countercyclicality acrossOECD countries
  • From fiscal to monetary policy More countercyclical monetary policy, i.e with lower short-run real interest rates in recessions and higher rates in booms... ....is more growth-enhancing in more credit constrained or more liquidity- constrained sectors
  • Conclusion 1: Summary Policy matters  Not just institutions! Growth policy must be “appropriate”  Interact policy with technological development or with institutional variables Governance matters  Governance of education  Governance of industrial policy
  • Conclusion 2: Growth diagnostics Do not use prices to identify binding constraints on growth  Problem with Mincerian measure of human capital  Problem of using interest rates to assess credit constraints
  • Conclusion 3: Make growthsustainable!  Correct for excessive inequality which is detrimental to growth: • It encourages capture and undermines competition and trust • The top end stops contributing to public good provision  Environment: • State intervention to foster green innovation and production
  • Developing countries: learningfrom China Fast convergence in per capita GDP and in TFP Huge surplus of foreign reserves (from 20 billion in 1992 to 2.5 trillion today) Key was reallocation of activity from SOEs to (credit-constrained) new TVEs and private enterprises (Song-Storesletten-Zilibotti; Hsieh- Klenow) Role of education and infrastructure in reallocation process?
  • Developed countries: learn fromScandinavia and Germany? Monti triangle: budget balance, growth and inclusiveness Targeted growth-enhancing investments and countercyclical macroeconomic policy Social dialogue (high unionization rates) favoring external and internal labor market flexibility Fiscal systems to help reconcile budget balance with growth investments and also help achieve inclusive growth