Global Economic GrowthYour Role in This Emerging PhenomenonDean Thomas W. Gilligan

State of Global PovertyWorld Bank Analysis on Povertyhttp://devdata.worldbank.org/atlas-mdg/Significant fraction of humans live in extreme povertyThis poverty has dire consequencesRate at which this poverty is falling varies widely across regionsSome areas are improving swiftly (e.g., China)Some areas are “hard cases” (e.g., Africa)Surprisingly, its mostly very good news80/20 versus 20/80 (The Bottom Billion, P. Collier)

Purpose of Tonight’s LectureTrends in Global Economic ProsperityMeasuring Economic ProsperityEconomic Prosperity and Human Well-BeingSome Facts about Economic Prosperity in the Developed and Emerging WorldKey Determinants of Economic Growth Challenges to Economic GrowthEconomic Growth and Income InequalityEconomic Growth and the EnvironmentYour Part in Emerging Global ProsperityGreat chance to make a BIG difference

Measurement of Economic ProsperityGross Domestic Product (GDP)Value of all goods and services produced and sold through market exchange?At a particular point in time?Admits dynamic comparisons Growth rate computations Within a particular location or industry?Admits geographic and sectoral comparisons Relative market performanceFairly controversial (conceptually)What does it mean? Are people better off with more active markets? (more later)What does it not measure?

Gross Domestic Product (GDP)Expenditure Approach to GDP Accounting:United States, 2008National Spending Identity: GDP = C + I + G + (EX – IM)Source: U.S. Bureau of Economic Analysis

Historical Trends in U.S. GDPHow has the U.S. economy grown and its components changed over time?The answer requires some caveats:Must adjust for changes in inflationLet’s use prices in some base year to compute “real GDP” across many different yearsAccounts for GDP changes due to price differencesMust adjust for changes in populationLet’s divide GDP by population to compute a “GDP per capita”Accounts for GDP changes due to entirely to population growth

U.S. Economy Over TimeThe CAGR of Real GDP Per Capita over the 1967-2007 period was 2%Source: Economic Report of the President

Geographic Trends in GDPHow different are economies over the globe?The answer requires a currency standard or conversion to compare GDPsOne could use existing exchange rates (ERs)Biased by relative prices of int’l traded stuffOne could use exchange rates that represent relatively equal purchasing power across nationsPurchasing Power Parity (PPP): Currency ratio (i.e., exchange rate) that implies rough equality of buying power across two countries.PPPs are typically close but not identical to ERs

GDP Per Capita in Developed WorldSource: U.S. Department of Labor, Bureau of Labor Statistics

GDP Per Capita in BRIC CountriesSource: Organization for Economic Cooperation and Development

Money and Human Well-BeingDoes Money Guarantee Happiness?We know miserable people of substantial meansDoes Money Preclude Happiness?If you believe this I volunteer to helpMight Money Contribute to Well-Being?How can it? Where should we look?Health outcomesLongevity – Does wealth contribute to length of life?Child Welfare – Does wealth reduce infant mortality?Self-Assessed SatisfactionAre people with more income happier?

Per Capita GDP and Life ExpectancySource: Maddison, 2007

GDP Per Capita and Childhood Health

GDP Per Capita and Satisfaction

Facts About Economic ProsperityGDP Per Capita Varies Enormously Among NationsGDP Per Capita Varies Enormously within Most NationsCurrent high levels of GDP Per Capita are a relatively recent phenomenonGDP Per Capita Growth Varies Widely in the Recent Capitalist EpochThere have been growth successesThere have been growth failures

Prosperity Varies Across Nations

Prosperity Varies Within Nations - USASources: U.S. Census Bureau forGross Income and the HeritageFoundation for Net Income.The 90th percentile in household income is over 11 times that of the 10th percentile. The 10th percentile household income is $12,162 in 2007 dollars.Net household income adjusts gross income for taxes, capital gains and losses, non-cash governmental transfers, the EITC, employee health benefits and differences in the size of persons per quintile.

High GDP Per Capita is a Modern Event

GDP Per Capita Growth Various Greatly

What Causes GDP Per Capita Growth?Source: Cowen & Tabarrok

Innovation and GDP GrowthTechnical Knowledge MattersInnovations raise labor and capital productivityGreat inventions over time wheel, writing, padded horse collar, mechanical clock, movable type, steam engine, textile manufacturing, network electricity, mass production, transistor, ARPANET, polymerase chain reaction Scientific Revolution, 1550-1750Major implications for navigation, understanding of the earth’s environment (e.g., weather, geology, etc.), medicine, and other important disciplinesIndustrial Revolution (textiles, energy, metallurgy)Equip per head grew by multiple of 250, 1820-2000

Organization and GDP Growth Composition MattersOrganization affects labor and capital productivityImportant Organizational InnovationsAccounting (for information and control)IT today serves much the same roleBanking, Capital Markets and InsuranceTo help finance and under-write large-scale enterprises (e.g., shipping and trading companies, railroad lines, mass manufacturing, etc.)Nation StateReduced fragmentation of political power whichfacilitated trade and enforce property rightsencouraged innovation and protect patentsMercantilist commercial policies were restrictive, though

Human Capital and GDP Per Capita

Physical Capital and GDP Per Capita

History and GDP Per CapitaGreat News! Catch-Up GrowthGermany and Japan after WWIIChina and India today

GDP Per Capita and CorruptionGreat News! It’s Hard, But WeKnow How to Fix Corruption

Equality and GDP Per Capita GrowthDoes Growth Promote Income EqualityWhy might it not?Relative returns to skilled and unskilled laborTechnological substitution of unskilled laborWhy might it?Spread of education reduces wage differencesWealth begets charity and progressive taxationYes, with a couple exceptionsOil-producing countries of the Middle EastAnd, in recent years, the United StatesUp until the last quarter century, income inequality in the U.S. had been falling with its peer countries

A Measure of Income InequalityA

Income Inequality Across NationsDevelopedEconomiesEmerging EconomiesSource: Central Intelligence Agency, 2006

Environment and GDP Per CapitaDoes Growth Harm the Environment?Why might it?Developed economies are energy intensive; more pollution and greenhouse gas emissionsDeveloped economies use modern technology, including chemical intensive farmingWhy might it not?Beyond some level, developed economies use resources more efficiently and demand cleaner air and water for better health outcomesEmerging economies find the opportunity costs of pollution mitigation too “expensive;” these economies are focused on basic human needs

Environment and GDP Per CapitalEvidence is preliminary and inconclusiveCross-Country ComparisonsAtmospheric concentrations of sulfur dioxide, nitrous oxide, carbon monoxide, smoke and lead from gasoline rise through income levels of around $8,000 and decrease thereafter. The same is true for fecal and heavy metals (e.g., lead, arsenic, cadmium, mercury, and nickel) contamination of rivers. Oxygen in rivers declines with early development but then increases.B.M. Friedman, Moral Consequences of Economic Growth

Your Role in This DramaYou’re among the less than 2% of the world’s population with a college degreeEducation and Capital contribute to growthYou understand science and technologyInnovation and creativity contribute to growthYou’re organizationally sophisticatedNew methods (e.g., microfinance) contribute to growthYou’re intolerant of corruptionTransparency and accountabilityYou’re informed, aware and committed