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The Copernican Revolution in the Study of
Economic Growth
John Ross (Chongyang Institute for Financial Studies, Renmin Uni...
Present policy in many countries is based on boosting
TFP growth – why this won’t work
A ‘Copernican revolution’- measurement and
observation typically play a revolutionary role in science
• Science states tha...
From the 1950s-1990s there was a contradiction
between the theory of economic growth and the facts of
economic growth
• A ...
Solow’s quantitative errors in the original growth
accounting framework
• The well known problem TFP is calculated as a re...
The steps to the official revolution in the measurement
of the driving forces of economic growth
Study of the causes of economic growth over
the long term
The work of Maddison
• Already by the 1970s Maddison had demonstrated via study
of long term economic growth that fixed in...
Conclusion of the study of long term trends in
economic growth
The historical rise in the proportion of investment in
GDP – England/UK
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
1680 1720 17...
The historical rise in the proportion of investment in
GDP – United States
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
1680 1720...
The historical rise in the proportion of investment in
GDP – West Germany
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
1680 1720 ...
The historical rise in the proportion of investment in
GDP - Japan
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
1680 1720 1760 18...
The historical rise in the proportion of investment in
GDP – the ‘Asian Tiger Economies’
0%
5%
10%
15%
20%
25%
30%
35%
40%...
The historical rise in the proportion of investment in
GDP - China
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
1680 1720 1760 18...
The historical rise in the proportion of investment in
GDP - India
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
1680 1720 1760 18...
The historical rise in the proportion of investment in
GDP - Vietnam
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
1680 1720 1760 ...
Why Asia grew so fast - world distribution of rates of
fixed investment
Source: World Bank
Development of statistical methods for study of
economic growth over the short term
The work of Jorgenson and the official change in the
US/UN/OECD methods of calculation of factors in
economic growth
On ba...
The factual results of the ‘Copernican Revolution’
• Solow’s ‘finding’ that TFP was the main factor in economic
growth was...
Intermediate products
Intermediate products - Jorgenson’s findings on the US
US – Sources of Output Growth
GDP
Growth TFP Labour Capital
Interme...
Intermediate products - the conclusion for Asian
economies
• For South Korea, Hak K. Pyo, Keun-Hee Rhee and Bongchan
Ha fo...
The ‘Solow factors’ of production
The ‘Solow factors’ of production
2.9%
1.6%
0.8%
0.5%
4.3%
2.5%
1.2%
0.6%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5...
‘Solow factors’ of production in developing economies
Capital
60%
TFP
10%
Labour
Quantity
27%
Labour Quality
3%
% Contribu...
‘Solow factors’ of production in advanced economies
Capital
63%
TFP
10%
Labour
Quantity
15%
Labour Quality
11%
% Contribut...
Large economies are more dominated by capital
investment than small ones
Average Contributions to GDP Growth 1992-2014
% o...
For a detailed study specifically of the Asian economies
see Vu (2013)
So n light of the development or more accurate methods
of measurement now no contradiction of the facts and
economic theor...
Works cited
• Abramovitz, M. (1956), “Resource and Output Trends in the United States since 1870,”
American Economic Revie...
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The Copernican Revolution in the Study of Economic Growth

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Presentation to the G20 Think Tank Kick-off Meeting for the 2016 Beijing G20 Summit

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The Copernican Revolution in the Study of Economic Growth

  1. 1. The Copernican Revolution in the Study of Economic Growth John Ross (Chongyang Institute for Financial Studies, Renmin University of China) G20 China Kickoff Meeting -14 December 2015)
  2. 2. Present policy in many countries is based on boosting TFP growth – why this won’t work
  3. 3. A ‘Copernican revolution’- measurement and observation typically play a revolutionary role in science • Science states that if the facts and a theory do not coincide it is the theory that has to be abandoned not the facts • When Galileo turned the newly invented telescope on Jupiter and saw its moons the earth centred theories of the universe collapsed • Darwin’s observations in the Galapagos Islands and Latin America led to the theory of evolution: "such facts undermine the stability of Species“, "one species does change into another"
  4. 4. From the 1950s-1990s there was a contradiction between the theory of economic growth and the facts of economic growth • A theory of economic growth said that growth was primarily due to Total Factor Productivity (TFP) – Solow (1957) • The facts of rapidly growing economies, above all in Asia, showed rapidly growing economies were dominated by factor accumulation of capital and labour – Young (1995) • The prediction was therefore that the Asian economies would drastically slow down – Krugman (1994) • The facts were that they didn’t! • Science demands that where facts and theory don’t coincide the theory has to change not the facts
  5. 5. Solow’s quantitative errors in the original growth accounting framework • The well known problem TFP is calculated as a residual – a ‘measure of our ignorance’- Abramovitz (1956) • An omission from the growth accounting framework • Did not include intermediate products • Errors with the growth accounting framework • Did not control for changes in quality of labour • Did not control for changes in the quality of capital inputs • Therefore an erroneous conclusion – TFP was the main source of economic growth
  6. 6. The steps to the official revolution in the measurement of the driving forces of economic growth
  7. 7. Study of the causes of economic growth over the long term
  8. 8. The work of Maddison • Already by the 1970s Maddison had demonstrated via study of long term economic growth that fixed investment was the decisive ‘factor of production’ in economic development and he extended this in later studies. • Maddison’s analysis of why the US attained first place among economies. ‘The rate of US domestic investment was nearly twice the US level for the sixty year period 1890-1950. Its level of capital stock per person employed was twice as high as that of the UK in 1890, and its overwhelming advantage in this respect over all other countries continued until the early 1980s. ‘ (Maddison 1991)
  9. 9. Conclusion of the study of long term trends in economic growth
  10. 10. The historical rise in the proportion of investment in GDP – England/UK 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 1680 1720 1760 1800 1840 1880 1920 1960 2000 Gross Domestic Fixed Capital Formation % of GDP UK
  11. 11. The historical rise in the proportion of investment in GDP – United States 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 1680 1720 1760 1800 1840 1880 1920 1960 2000 Gross Domestic Fixed Capital Formation % of GDP UK US
  12. 12. The historical rise in the proportion of investment in GDP – West Germany 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 1680 1720 1760 1800 1840 1880 1920 1960 2000 Gross Domestic Fixed Capital Formation % of GDP UK US Germany
  13. 13. The historical rise in the proportion of investment in GDP - Japan 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 1680 1720 1760 1800 1840 1880 1920 1960 2000 Gross Domestic Fixed Capital Formation % of GDP UK US Germany Japan
  14. 14. The historical rise in the proportion of investment in GDP – the ‘Asian Tiger Economies’ 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 1680 1720 1760 1800 1840 1880 1920 1960 2000 Gross Domestic Fixed Capital Formation % of GDP UK US Germany Japan South Korea
  15. 15. The historical rise in the proportion of investment in GDP - China 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 1680 1720 1760 1800 1840 1880 1920 1960 2000 Gross Domestic Fixed Capital Formation % of GDP UK US Germany Japan South Korea China
  16. 16. The historical rise in the proportion of investment in GDP - India 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 1680 1720 1760 1800 1840 1880 1920 1960 2000 Gross Domestic Fixed Capital Formation % of GDP UK US Germany Japan South Korea China India
  17. 17. The historical rise in the proportion of investment in GDP - Vietnam 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 1680 1720 1760 1800 1840 1880 1920 1960 2000 Gross Domestic Fixed Capital Formation % of GDP UK US Germany Japan South Korea China India Vietnam
  18. 18. Why Asia grew so fast - world distribution of rates of fixed investment Source: World Bank
  19. 19. Development of statistical methods for study of economic growth over the short term
  20. 20. The work of Jorgenson and the official change in the US/UN/OECD methods of calculation of factors in economic growth On basis of work of Jorgenson at Harvard University and collaborators • 1979 Panel to Review Productivity Statistics of the National Research Council, chaired by Albert Rees. • 1983 US Bureau of Labor Statistics (BLS) adopts constant quality index of capital input • 1994 BLS adopts constant quality index of labour input as well • 2001 OECD adopts written Measuring Productivity • 2007 UN incorporates price and quantity of capital services into the revision of the System of National Accounts (SNA) • 2009 OECD manual Measuring Capital. Therefore official transformation in the official method of calculation of national accounts
  21. 21. The factual results of the ‘Copernican Revolution’ • Solow’s ‘finding’ that TFP was the main factor in economic growth was simply based on wrong methods of measurement • The order of importance of factors of production, proceeding from the most important to the least important is (i) Intermediate products (ii) Capital investment (iii) Labour inputs (iv) TFP
  22. 22. Intermediate products
  23. 23. Intermediate products - Jorgenson’s findings on the US US – Sources of Output Growth GDP Growth TFP Labour Capital Intermediate inputs Average annual change 1977-2000 (median) 2.7% 1985-1995 2.4% 0.3% 1.0% 1.2% 1996-2000 4.3% 0.9% 1.3% 2.1% 2000-2006 2.8% 1.0% 0.3% 1.4% Source: Calculated from (Jorgenson and Vu, 2007) Table 2 and (Jorgenson, Mun and Stiroh 2005) Table 4.8
  24. 24. Intermediate products - the conclusion for Asian economies • For South Korea, Hak K. Pyo, Keun-Hee Rhee and Bongchan Ha found regarding material intermediate inputs: ‘The relative magnitude of contribution to output growth is in the order of: material, capital, labour, TFP then energy.’ • For Taiwan Province of China, analysing 26 sectors in 1981- 99, Chi-Yuan Liang found regarding intermediate material inputs: ‘Material input is the biggest contributor to output growth in all sectors during 1981-99, except… seven’. • For mainland China, Ren and Sun found that in the period 1981-2000, subdivided into 1984-88, 1988-94 and 1994-2000: ‘Intermediate input growth is the primary source of output growth in most industries.’
  25. 25. The ‘Solow factors’ of production
  26. 26. The ‘Solow factors’ of production 2.9% 1.6% 0.8% 0.5% 4.3% 2.5% 1.2% 0.6% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% GDP Capital Labour TFP Sources of GDP Growth 1992-2014 Average annual % increase for advanced and development economies Advanced Economies Developing Economies Source: Calculated from The Conference Board. The Conference Board Total Economy Database 2015
  27. 27. ‘Solow factors’ of production in developing economies Capital 60% TFP 10% Labour Quantity 27% Labour Quality 3% % Contribution to Growth in Developing Economies 1992-2014 Capital TFP Labour Quantity Labour Quality Source: Calculated from The Conference Board. 2015. The Conference Board Total Economy Database, May 2015
  28. 28. ‘Solow factors’ of production in advanced economies Capital 63% TFP 10% Labour Quantity 15% Labour Quality 11% % Contribution to Growth in Advanced Economies 1992-2014 Capital TFP Labour Quantity Labour Quality Source: Calculated from The Conference Board. The Conference Board Total Economy Database 2015
  29. 29. Large economies are more dominated by capital investment than small ones Average Contributions to GDP Growth 1992-2014 % of World GDP1 Annual % growth % contribution to GDP growth Economic groups2 GDP Capital Labour TFP Capital Labour TFP All economies 94 3.6 2.1 1.0 0.5 61 29 10 20 largest economies 75 3.2 2.1 0.8 0.4 67 24 9 G7 32 1.6 1.0 0.4 0.2 69 17 14 Smaller economies3 19 3.7 2.1 1.1 0.6 60 30 10 Correlation to GDP growth - R2 All economies .44 .27 .18 20 largest economies .78 .19 .33 G7 .86 .86 .04 Smaller economies .35 .31 .15 Starting year adopted as the earliest available data for Russia, however a control calculation from 1990 excluding Russia shows no significant difference in pattern. 1 Calculated in World Bank current dollar PPPs 2 Groups ranked by World Bank current dollar PPPs 3 All economies excluding the 20 largest economies Source: Calculated from The Conference Board Total Economy Database™, May 2015
  30. 30. For a detailed study specifically of the Asian economies see Vu (2013)
  31. 31. So n light of the development or more accurate methods of measurement now no contradiction of the facts and economic theory! But the policy that economic development can primarily be driven by TFP has to be abandoned Or to put it simply Solow quantification was wrong and it is necessary for economic policy and theory to understand this and its implications
  32. 32. Works cited • Abramovitz, M. (1956), “Resource and Output Trends in the United States since 1870,” American Economic Review, V. 46: 5-23. • Jorgenson, D. W. (2009). Introduction to The Economics of Productivity. In D. W. Jorgenson (Ed.), The Economics of Productivity (pp. ix-xxviii). Cheltenham, UK: Edward Elgar. • Jorgenson, D.W., Mun S. Ho, Stiroh K.J. (2005), Growth of U.S. Industries and Investments in Information Technology and Higher Education : http://www.nber.org/chapters/c10627 • Jorgenson, D. W. & Vu, K. M. (2007). Information Technology and the World Growth Resurgence, German Economic Review, Volume 8, Issue 2, pages 125–145, May 2007 • Krugman, P. (1994). The Myth of Asia's Miracle. Foreign Affairs, 73(6), 62-78. • Maddison, A. (1991). Dynamic Forces in Capitalist Development. Oxford, UK: Oxford University Press. • Solow, R. M. (1957, August). Technical change and the Aggregate Production Function. Review of Economics and Statistics(3), 312-320. • Vu, K. M. (2013). The Dynamics of Economic Growth - Policy Insights from Comparative Analyses in Asia. Cheltenham, UK and Northampton, M.A., US: Edward Elgar. • Young, A. (1995, August). The tyranny of numbers: confronting the statistical reality of the East Asian growth experience. Quarterly Journal of Economics, 110, 641-680.

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