Many times over the past fifty years, we economists thought we had found the right answer to economic growth. It started w...
Many times over the past fifty years, we economists thought we had found the right answer to economic growth. It started w...
Theelusivequestforgrowth          Economists’          adventures and misadventures          in the Tropics
Why growth matters!
We don’t care about rising GDP per capita            for its own sake!
We care because it betters the lot of the poor and reduces the proportion of people who are poor!
We care because people can eat moreand buy more medicines for their babies!
After many years of attempts and international aid       we’ve achieved almost nothing. Why?
Where the “aid for investment”  idea initially comes from.
Great Depression leads to highunemployment. Excess of labour  makes machines the binding   constraint on production.      ...
On the other side, Soviet Union“success” by industrialization  (through forced saving and heavy investment in physical  ca...
So in1946, Harod-Domar comes   up with the idea that GDP     growth is proportional  to the share of investment       spen...
Poor countries didn’t havemoney to invest in capital...“This financing gap must befilled in by foreign donors to help poor...
“How long it takes for aid to increase  investment and in turn growth?”              This years aid                     → ...
Good idea. Let’s check results:From a list of 138 countries only in 4 countries the investment  of previous year was relat...
IL!!     FA PICE
Conclusion“Although investment in physical  capital may be considered a     necessary condition for       development, it ...
Solow found the reason why...
“The way to increase production per worker is to increase machines            per worker.”But as machines per worker incre...
It’s the technology, stupid.   Technical progress will avoiddiminishing returns, because each  worker becomes more efficie...
Anyway Solow’s theories were basedon US data, and were never intended  to be applied to other countries,        nonetheles...
Trying to grow by heavy investmentin physical capital alone was another           useless panacea.
So, if investment in capital and the technologic factors have failed...  It must be the education then...
This is how the thinking went...“The level of education of the overall  population of a particular countrydetermine its ab...
On the other hand...Creating skills where there exists notechnology to use them is not going    to foster economic growth.
The education explosion 1960-1990           An example,   Niger’s secondary schooling          16% in 1960         to 45% ...
The education explosion 1960-1990             1960,       29 countries with      no college students.            By 1990, ...
Is education worthless?97520-2     Senegal      Botswana      Madagascar     Ghana         Lesotho       Growth in years o...
What would you do if you lived in acountry where you feel overqualified –   where there are no machines to     apply your ...
The creation of skills in peoplewill respond to incentives to invest           in the future.
Education didn’t work either.  “To increase GDP per capita,         we could try to  decrease population growth.”Let’s giv...
“Population control is the elixir that would avoid catastrophic   starvation and enable poor    nations to become rich”
But the figures show thatfood production grew much faster         than population.So, the “control population” theory     ...
This “aid for nothing” didn’t work.But it had to be repaid somehow.
The developing countries declaredin the 1980´s that they weren’t able        to service their loans      from commercial b...
So, to avert growth collapse,the World Bank thought they had        a good solution...     “Adjustment Lending”
Aid and lending to developing   countries conditional on their          policy reforms.Instead of aid financing investment...
The lending was still there,but the growth didn’t show up.
The World Bank predictionsoverestimated long-run growth inadjustment lending recipients by     3.5 percentage points!
The real per capita growth rate of the typical developing country between      1980 and 1998 was zero!
IL!!     FA PICE
What would you do if your parents  give you money in advance   if you promise to improve          your grades?
This was actuallylending without adjustment.
The loans were there, but thegovernments didn’t adjust or reform            for growth. Nevertheless they got their loans.
A government that was irresponsible   before the adjustment loan has    unchanged incentives to be  responsible after the ...
Consequence: Bad Policies
Staying poor and unreformed is a way to get more loans!
A possible Solution: “Aid contests” Based on aids that reward goodpolicies, and not just promises of           good polici...
The more indebted, the better
Debt forgiveness as a solution?
If the Pope, Bono and Dalai Lama    say it could be a solution…
Then poor countries couldinvest in future (education, health,          infrastructure...)
It’s now new!HIPC program started in 1985 whith partial debt forgiveness as a main            proposition.
...but they sold their future!!From 1989-1997 countries that received 33 billion of old debt         forgiveness,got for 4...
Again, financial gap policy,implies giving more loans to already     highly indebted countries! This spiral rewards irresp...
So, after all this,  What is key to the problem...?People respond to incentives
Let’s have a look at knowledge.
Knowledge leaks.Investment in knowledge does not stay with the investor but leaks to society.
Complementary knowledge.      1+1=2
Complementary knowledge.      1+1=3
Matches of skills Your success depends on the     group you belong to.  This is why high-skilled andtalented people cluste...
Leaks of knowledge + Complementary knowledge    + Matches of skills = Increasing returnsY    Knowledge, skills, technology
VirtuosityLow knowledge economy             Low rate                                  of return to                        ...
Call to action:   Government   needed!
For poor countries is time to switch on the light.
Technological progress is key.
The role of Creative Destruction      in economic growth
The process of economic growth incessantly revolutionizesthe economic structure from within, incessantly destroying       ...
Many new technologies substitute old ones.
Computers quickly substituted typewriters...
But this comes at a cost,bigger for advanced economies.Here backward countries have  the chance to leapfrog...
...right to the technological frontier.
e.g. Mobile communications areeasily adopted in areas where there         were no landlines.   This process is quick becau...
Lack of technological       Governance problems     con   knowledge              Factors in leapfrogging?No prior heavy in...
But some new technologies are not substitutes to old ones,   they are complementary   Innovation will happen where technol...
The invention     of theinternet would  be useless    without   devices.
Technological progress increases          productivity      1960-1992: differences in productivity growthaccount for over ...
But there are some barriers     to technological progress.Heavy investment                        Network effect          ...
And last but not least,technological progress also     depends on luck.
Camels saved resources…but they did not inspire railroads.             Mokyr, 1990
"Politics is the art of lookingfor trouble, finding it,misdiagnosing it,and then misapplyingthe wrong remedies.”
“Governments can kill growth”        The role of politics    and governments in growth.
Economics = long-run
Politics = short-run    Incentives?
Governments that mess around       with free market or macroeconomic stability have   a lower growth because   it lowers t...
Other ways governments       can kill growth. Bad public services increase  investment costs for firms.Bureaucracy Paperwo...
egg or                  chicken       Is the government killing growth oris the bad situation making the government take  ...
The role of luck
What would you do if every four years an earthquake destroys      your property and all     infrastructures around  in a m...
Would you have any hope     in the future?  Would you make any    investments?
Some countries are better than   others in dealing with       catastrophes.
Some countries are better than Rich      poor    others in dealing with        catastrophes.
Corruption and growth.
Growth and corruption are directly related
Do not stop from an “alto” of       mexican police.    Decentralized corruptionaffects growth to greater extent     than c...
Centralized corruption (government)        should be interested             in growth!
Polarized            Peoples
Societies unified by a commonculture and a strong middle class create a consensus for growth. Growth that includes the poor.
A hard-nosed book on the hardest of all problems:How to get the poorest countries on a pathof sustained growth (Solow)    ...
Don’t give up the quest for growth.   The problem of making poor  countries rich was much more    difficult than we though...
It’s theincentives,  stupid.
Many times over the past fifty years, we economists thought we had found the right answer to economic growth. It started w...
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"The Elusive Quest for Growth" book presentation

  1. 1. Many times over the past fifty years, we economists thought we had found the right answer to economic growth. It started with foreign aid to fill the gap between “necessary” investment and saving. Even after some of us abandoned the rigidity of the “necessary” investment idea, we still thought investment in machines was the key to growth. Supplementing this idea was the notion that education was a form ofaccumulating “human machinery” that would bring growth. Next, concerned about how “excess” population might overwhelm the productive capacity of the economy, we promoted population control. Then, when we realized that government policies hindered growth, wepromoted official loans to induce countries to do policy reforms. Finally, when countries had trouble repaying the loans they incurred to do policy reforms, we offered debt forgiveness. Initial text from “The Elusive Quest for Growth”
  2. 2. Many times over the past fifty years, we economists thought we had found the right answer to economic growth. It started with foreign aid to fill the gap between “necessary” investment and saving. Even after some of us abandoned the rigidity of the “necessary” investment idea, we still thought investment in machines was the key to growth. Supplementing this idea was the notion that education was a form ofaccumulating “human machinery” that would bring growth. Next, concerned about how “excess” population might overwhelm the productive capacity of the economy, we promoted population control. Then, when we realized that government policies hindered growth, wepromoted official loans to induce countries to do policy reforms. Finally, when countries had trouble repaying the loans they incurred to do policy reforms, we offered debt forgiveness.
  3. 3. Theelusivequestforgrowth Economists’ adventures and misadventures in the Tropics
  4. 4. Why growth matters!
  5. 5. We don’t care about rising GDP per capita for its own sake!
  6. 6. We care because it betters the lot of the poor and reduces the proportion of people who are poor!
  7. 7. We care because people can eat moreand buy more medicines for their babies!
  8. 8. After many years of attempts and international aid we’ve achieved almost nothing. Why?
  9. 9. Where the “aid for investment” idea initially comes from.
  10. 10. Great Depression leads to highunemployment. Excess of labour makes machines the binding constraint on production. This idea sticks.
  11. 11. On the other side, Soviet Union“success” by industrialization (through forced saving and heavy investment in physical capital) influences Western economic theories.
  12. 12. So in1946, Harod-Domar comes up with the idea that GDP growth is proportional to the share of investment spending in GDP. (His purpose was to comment on short-run business but this idea was later used to explain long-run growth for countries)
  13. 13. Poor countries didn’t havemoney to invest in capital...“This financing gap must befilled in by foreign donors to help poor countries grow.”
  14. 14. “How long it takes for aid to increase investment and in turn growth?” This years aid → this years investment → next years GDP growth
  15. 15. Good idea. Let’s check results:From a list of 138 countries only in 4 countries the investment of previous year was related to growth of current year. So it wasn’t such a good idea.
  16. 16. IL!! FA PICE
  17. 17. Conclusion“Although investment in physical capital may be considered a necessary condition for development, it is not sufficient”.
  18. 18. Solow found the reason why...
  19. 19. “The way to increase production per worker is to increase machines per worker.”But as machines per worker increase,the more machines you add, the less productivity of each single worker will increase. That’s diminishing returns!!
  20. 20. It’s the technology, stupid. Technical progress will avoiddiminishing returns, because each worker becomes more efficient thanks to better technology. Same inputs : bigger output
  21. 21. Anyway Solow’s theories were basedon US data, and were never intended to be applied to other countries, nonetheless to poor or developing ones. But they were.
  22. 22. Trying to grow by heavy investmentin physical capital alone was another useless panacea.
  23. 23. So, if investment in capital and the technologic factors have failed... It must be the education then...
  24. 24. This is how the thinking went...“The level of education of the overall population of a particular countrydetermine its ability to share in world development, to benefit from the advancement of knowledge and make progress itself while contributing to the education of others.” The Secretary General to UNESCO, Federico Mayor.
  25. 25. On the other hand...Creating skills where there exists notechnology to use them is not going to foster economic growth.
  26. 26. The education explosion 1960-1990 An example, Niger’s secondary schooling 16% in 1960 to 45% in 1990
  27. 27. The education explosion 1960-1990 1960, 29 countries with no college students. By 1990, only three countries had none.
  28. 28. Is education worthless?97520-2 Senegal Botswana Madagascar Ghana Lesotho Growth in years of schooling Growth in GDP per capita
  29. 29. What would you do if you lived in acountry where you feel overqualified – where there are no machines to apply your knowledge to?
  30. 30. The creation of skills in peoplewill respond to incentives to invest in the future.
  31. 31. Education didn’t work either. “To increase GDP per capita, we could try to decrease population growth.”Let’s give some cash for condoms.
  32. 32. “Population control is the elixir that would avoid catastrophic starvation and enable poor nations to become rich”
  33. 33. But the figures show thatfood production grew much faster than population.So, the “control population” theory I L !! was not well grounded. FA PIC E
  34. 34. This “aid for nothing” didn’t work.But it had to be repaid somehow.
  35. 35. The developing countries declaredin the 1980´s that they weren’t able to service their loans from commercial banks. Banks would not lend more money.Without new loans developing countries could not service the old loans!!
  36. 36. So, to avert growth collapse,the World Bank thought they had a good solution... “Adjustment Lending”
  37. 37. Aid and lending to developing countries conditional on their policy reforms.Instead of aid financing investment, the new panacea was now aid financing reform.
  38. 38. The lending was still there,but the growth didn’t show up.
  39. 39. The World Bank predictionsoverestimated long-run growth inadjustment lending recipients by 3.5 percentage points!
  40. 40. The real per capita growth rate of the typical developing country between 1980 and 1998 was zero!
  41. 41. IL!! FA PICE
  42. 42. What would you do if your parents give you money in advance if you promise to improve your grades?
  43. 43. This was actuallylending without adjustment.
  44. 44. The loans were there, but thegovernments didn’t adjust or reform for growth. Nevertheless they got their loans.
  45. 45. A government that was irresponsible before the adjustment loan has unchanged incentives to be responsible after the adjustment loan.
  46. 46. Consequence: Bad Policies
  47. 47. Staying poor and unreformed is a way to get more loans!
  48. 48. A possible Solution: “Aid contests” Based on aids that reward goodpolicies, and not just promises of good policies.
  49. 49. The more indebted, the better
  50. 50. Debt forgiveness as a solution?
  51. 51. If the Pope, Bono and Dalai Lama say it could be a solution…
  52. 52. Then poor countries couldinvest in future (education, health, infrastructure...)
  53. 53. It’s now new!HIPC program started in 1985 whith partial debt forgiveness as a main proposition.
  54. 54. ...but they sold their future!!From 1989-1997 countries that received 33 billion of old debt forgiveness,got for 41 billion of new debt!
  55. 55. Again, financial gap policy,implies giving more loans to already highly indebted countries! This spiral rewards irresponsible governments!
  56. 56. So, after all this, What is key to the problem...?People respond to incentives
  57. 57. Let’s have a look at knowledge.
  58. 58. Knowledge leaks.Investment in knowledge does not stay with the investor but leaks to society.
  59. 59. Complementary knowledge. 1+1=2
  60. 60. Complementary knowledge. 1+1=3
  61. 61. Matches of skills Your success depends on the group you belong to. This is why high-skilled andtalented people cluster in someplaces, namely, NY, London and the Barcelona GSE High-skilled workers are more productive in a high-skilled economy.
  62. 62. Leaks of knowledge + Complementary knowledge + Matches of skills = Increasing returnsY Knowledge, skills, technology
  63. 63. VirtuosityLow knowledge economy Low rate of return to investment in knowledge No additional knowledge Knowledge increases and leaks People prefer consumption People over invest in investment knowledge No investment In knowledge Rate of Return to knowledge increases High rate of return to investment in knowledge High knowledge economy Viciousness
  64. 64. Call to action: Government needed!
  65. 65. For poor countries is time to switch on the light.
  66. 66. Technological progress is key.
  67. 67. The role of Creative Destruction in economic growth
  68. 68. The process of economic growth incessantly revolutionizesthe economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative destruction is the essential fact about capitalism. Joseph Schumpeter, 1942
  69. 69. Many new technologies substitute old ones.
  70. 70. Computers quickly substituted typewriters...
  71. 71. But this comes at a cost,bigger for advanced economies.Here backward countries have the chance to leapfrog...
  72. 72. ...right to the technological frontier.
  73. 73. e.g. Mobile communications areeasily adopted in areas where there were no landlines. This process is quick because there are no vested interests. (i.e. prior heavy investment)
  74. 74. Lack of technological Governance problems con knowledge Factors in leapfrogging?No prior heavy investments: Younger population less vested interests pro Imitation
  75. 75. But some new technologies are not substitutes to old ones, they are complementary Innovation will happen where technology is already highly advanced. Some new inventions give new life to existing inventions. Technologies may be complementary to skills.
  76. 76. The invention of theinternet would be useless without devices.
  77. 77. Technological progress increases productivity 1960-1992: differences in productivity growthaccount for over 90 percent of differences across countries in per capita growth
  78. 78. But there are some barriers to technological progress.Heavy investment Network effect Good governanceNonappropriability Obsolescense Vested interests
  79. 79. And last but not least,technological progress also depends on luck.
  80. 80. Camels saved resources…but they did not inspire railroads. Mokyr, 1990
  81. 81. "Politics is the art of lookingfor trouble, finding it,misdiagnosing it,and then misapplyingthe wrong remedies.”
  82. 82. “Governments can kill growth” The role of politics and governments in growth.
  83. 83. Economics = long-run
  84. 84. Politics = short-run Incentives?
  85. 85. Governments that mess around with free market or macroeconomic stability have a lower growth because it lowers the incentives.
  86. 86. Other ways governments can kill growth. Bad public services increase investment costs for firms.Bureaucracy Paperwork in some countries is a big obstacle tocreate new enterprises (and its plagued by bribery issues).
  87. 87. egg or chicken Is the government killing growth oris the bad situation making the government take desperate measures?
  88. 88. The role of luck
  89. 89. What would you do if every four years an earthquake destroys your property and all infrastructures around in a matter of seconds after great effort?
  90. 90. Would you have any hope in the future? Would you make any investments?
  91. 91. Some countries are better than others in dealing with catastrophes.
  92. 92. Some countries are better than Rich poor others in dealing with catastrophes.
  93. 93. Corruption and growth.
  94. 94. Growth and corruption are directly related
  95. 95. Do not stop from an “alto” of mexican police. Decentralized corruptionaffects growth to greater extent than centralized one. Everyone tries to maximize his share.
  96. 96. Centralized corruption (government) should be interested in growth!
  97. 97. Polarized Peoples
  98. 98. Societies unified by a commonculture and a strong middle class create a consensus for growth. Growth that includes the poor.
  99. 99. A hard-nosed book on the hardest of all problems:How to get the poorest countries on a pathof sustained growth (Solow) The WB ... encourages gadflies like me [Easterly] to find a new jobWhat do the others say? Where is Stiglitz?Every college student who protests against free trade...should read this book. (Romer)
  100. 100. Don’t give up the quest for growth. The problem of making poor countries rich was much more difficult than we thought. But we have learned something: The fifty past years is a story of failed incentives! We have to find the right incentives for governments, donors and individuals!
  101. 101. It’s theincentives, stupid.
  102. 102. Many times over the past fifty years, we economists thought we had found the right answer to economic growth. It started with foreign aid to fill the gap between “necessary” investment and saving. Even after some of us abandoned the rigidity of the “necessary” investment idea, we still thought investment in machines was the key to growth. Supplementing this idea was the notion that education was a form ofaccumulating “human machinery” that would bring growth. Next, concerned about how “excess” population might overwhelm the productive capacity of the economy, we promoted population control. Then, when we realized that government policies hindered growth, wepromoted official loans to induce countries to do policy reforms. Finally, when countries had trouble repaying the loans they incurred to do policy reforms, we offered debt forgiveness.

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