Lecture 1: Questions and Data

Dr. Tiago V. de V. Cavalcanti1

1 University

of Cambridge

Part IIB, Paper 2: Economic Growth Cambridge Lent 2013

Main questions in social science

1. Why are there countries so rich and others so poor? 2. Why do growth rates vary across countries and over time? 3. What are the policies that can change growth in the short and long run? 4. Why do some countries take off while others fall behind? 5. Does the enjoyment of the rich somehow depend on the continued suffering of the poor? 6. Can all countries have the level of development of the rich countries?

Jared Diamond on Guns, Germs and Steel

Yalis question

Cross-Country Income Differences

0.35

0.3

1970
0.25

Density of countries

0.2

0.15

0.1

0.05

7 8 9 10 log of GDP per capita, PPP adjusted (US$, 2005)

11

12

Cross-Country Income Differences

0.35

0.3

1970
0.25

1990

Density of countries

0.2

0.15

0.1

0.05

7 8 9 10 log of GDP per capita, PPP adjusted (US$, 2005)

11

12

Cross-Country Income Differences

0.35

0.3

1970
0.25

1990

2010

Density of countries

0.2

0.15

0.1

0.05

7 8 9 10 log of GDP per capita, PPP adjusted (US$, 2005)

11

12

Cross-Country Income Differences: Pop. Weighted Density

0.45

0.4

Density of countries, weighted by population

0.35

0.3

0.25

1970
0.2

0.15

0.1

0.05

7 8 9 10 log of GDP per capita, PPP adjusted (US$, 2005)

11

12

Cross-Country Income Differences: Pop. Weighted Density

0.7

0.6 Density of countries, weighted by population

1990

0.5

0.4

0.3

1970
0.2

0.1

7 8 9 10 log of GDP per capita, PPP adjusted (US$, 2005)

11

12

Cross-Country Income Differences: Pop. Weighted Density

0.7

0.6 Density of countries, weighted by population

1990

0.5

2010
0.4

0.3

1970
0.2

0.1

7 8 9 10 log of GDP per capita, PPP adjusted (US$, 2005)

11

12

World Income Distribution

Denitions (World Bank) 1. Low income countries: under $995. Many African countries fall under this category, as do countries such as Bangladesh, Haiti, Myanmar and Nepal. 846m people, average $509. 2. Low middle-income countries: $996$3,945; members include China, India, Nicaragua, Nigeria, and Thailand. 3.8b people, average $3397. 3. Upper middle-income countries: $3,946$12,195. Richer Latin American economies, such as Argentina and Brazil, countries such as Lebanon, South Africa and Turkey. 1b people, average $7,500. 4. High income countries: above $12195. US, Western and Northern Europe, Japan, Singapore, some Middle East countries. 1.1b people, average $40,400.

World Income Distribution

Denitions (World Bank) 1. 70% world pop (low + low middle) have 16% of world income. 2. Norway ($85,000) 500 times as rich as Democratic Republic of Congo, 150 times as rich as Bangladesh.

Lots of Movement Within the Distribution

1.5
CHE

1970 GDP per capita relative to the US level (GDPUS= 20,435.85, 2005 US $)

1.25

US

AUT FRA

0.75
JPN

0.5

VNZ ARG

0.25

BRA

0.25 0.5 0.75 1 1.25 1950 GDP per capita relative to the US level (GDPUS= 13,069.2, 2005 US $)

1.5

Lots of Movement Within the Distribution

1.5

1990 GDP per capita relative to the US level (GDPUS=31,388.79, 2005 US $)

1.25

NOR

US

AUS

0.75
HKG

SGP

0.5
KOR

0.25

BWA BRA

VNZ ARG

0.25 0.5 0.75 1 1.25 1970 GDP per capita relative to the US level (GDPUS=20435.85, 2005 US $)

1.5

Lots of Movement Within the Distribution

2 =41,365, 2005 US$) 2010 GDP per capita relative to the US level (GDPpc

1.8

1.6

US

1.4
SGP NOR

1.2

1
HKG GBR

US

0.8
KOR

0.6

0.4
CHN BRA VNZ

0.2

0.2 0.4 0.6 0.8 1 1.2 1990 GDP per capita relative to the US level (GDPpc

US

1.4 1.6 1.8 =31,388.79, 2005 US$)

Some Stylized Facts

1. Prior to 1700, living standard were roughly constant over time and did not vary much across countries (Malthusian era).

Malthus (1978) - Sex and Food: Population when unchecked, increases in a geometrical ratio. Subsistence increases only in an arithmetical ratio. A slight acquaintance with number will show the immensity of the rst power in comparison of the second. - The only sustainable society will be the one with a constant living standard; - Any positive shock on productivity (ex., new arable land) would imply an increase in population and therefore in the mortality rate.

2. Around 1700, England began to experience sustained increases in per capita output. 3. Other countries started to experience increases in per capita income shortly after England (Western Europe and the U.S.)

Malthus Theory
2.5

Population

1.5

Output

0.5

0.5

1.5

Malthus Theory
2.5

Population

1.5

Productivity

Output

0.5

0.5

1.5

GDP per capita growth and population growth

Income and welfare

Is income per capita a sufcient statistic for the welfare of the average citizen?
1. Differences in income per capita have strong implications for differences in standards of living: nutrition, literacy, infant mortality, life expectancy,... - See gapminder: http://www.gapminder.org/

Human Development Index. Three components to the index:

1. Life expectancy at birth; 2. Education, combine mean/expected years of schooling; 3. logarithm of GNI per capita.

Ii =

x xmin , xmax xmin

1 1 1

3 3 3 IEduc IIncome . HDI = ILife

Human Development Index

Implicit (subjective) weighting scheme. One way (of many) to combine Implicit development indicators.
1. 2. 3. 4. 5. 6. 2010: US rank (4) differential -6 (HDI vs GNI). 2010: UK rank (28) differential +7 (HDI vs GNI). 2010: Kuwait rank (63) differential -57 (HDI vs GNI). 2010: Brazil rank (84) differential +10 (HDI vs GNI). 2010: China rank (101) differential +7 (HDI vs GNI). 2010: India ran (134) differential +10 (HDI vs GNI).

Does everyone benet from economic growth?

Table: Real Income Growth by Groups, 1993-2010, Saez and Piketty (2012)

1993-2010 1993-2000 2000-2002 2002-2007 2007-2009 2009-2010

Average Income Real Growth 13.8% 31.5% -11.7% 16.1% -17.4% 2.3%

Top 1% Incomes Real Growth 58.0% 98.7% -30.8% 61.8% -36.3% 11.6%

Bottom 99% Incomes Real Growth 6.4% 20.3% -6.5% 6.8% -11.6% 0.2%

Fraction of Total Growth (or loss) Captured by the top 1% 52% 45% 57% 65% 49% 93%

Measurement of standards of living I

Sen (1999), Development as Freedom: human freedoms (broadly dened) primary end and principal means of development

5 instrumental categories
1. Political freedom to select, scrutinize, and criticize leaders; 2. Economic facilities to enjoy and utilize economic resources; 3. Social opportunities: health, education etc; 4. Transparency guarantees: freedom of transaction, legal protection; 5. Protective security: avoid extreme poverty.

Measurement of standards of living I

Sen (1999), Development as Freedom: human freedoms (broadly dened) primary end and principal means of development

5 instrumental categories
1. Political freedom to select, scrutinize, and criticize leaders; 2. Economic facilities to enjoy and utilize economic resources; 3. Social opportunities: health, education etc; 4. Transparency guarantees: freedom of transaction, legal protection; 5. Protective security: avoid extreme poverty.

Measurement of standards of living I

Sen (1999), Development as Freedom: human freedoms (broadly dened) primary end and principal means of development

5 instrumental categories
1. Political freedom to select, scrutinize, and criticize leaders; 2. Economic facilities to enjoy and utilize economic resources; 3. Social opportunities: health, education etc; 4. Transparency guarantees: freedom of transaction, legal protection; 5. Protective security: avoid extreme poverty.

Measurement of standards of living I

Sen (1999), Development as Freedom: human freedoms (broadly dened) primary end and principal means of development

5 instrumental categories
1. Political freedom to select, scrutinize, and criticize leaders; 2. Economic facilities to enjoy and utilize economic resources; 3. Social opportunities: health, education etc; 4. Transparency guarantees: freedom of transaction, legal protection; 5. Protective security: avoid extreme poverty.

Measurement of standards of living I

Sen (1999), Development as Freedom: human freedoms (broadly dened) primary end and principal means of development

5 instrumental categories
1. Political freedom to select, scrutinize, and criticize leaders; 2. Economic facilities to enjoy and utilize economic resources; 3. Social opportunities: health, education etc; 4. Transparency guarantees: freedom of transaction, legal protection; 5. Protective security: avoid extreme poverty.

Measurement of standards of living II

Dasgupta (2001), correct measure is wealth, while measures such as GDP (GNP) are measures of income/expenditure

GDP does not account for depreciation of capital stock; Sustainability issues.

Avoid to make value judgments about allocation of wealth. (Different from Sens approach)

Measurement of standards of living III

Dasgupta (2001): Each generation should bequeath to its successor at least as large a productive base as inherited from its predecessor. Productive base:

Physical capital (machines, infrastructure); Natural capital (watersheds, open seas, biodiversity) Human capital Institutions

King Faisal of Saudi Arabia (1964-1975) : In one generation we went from riding camels to riding Cadillacs. The way we are wasting money, I fear the next generation will be riding camels again.

Measurement of standards of living III

Dasgupta (2001): Each generation should bequeath to its successor at least as large a productive base as inherited from its predecessor. Productive base:

Physical capital (machines, infrastructure); Natural capital (watersheds, open seas, biodiversity) Human capital Institutions

King Faisal of Saudi Arabia (1964-1975) : In one generation we went from riding camels to riding Cadillacs. The way we are wasting money, I fear the next generation will be riding camels again.

Measurement of standards of living III

Dasgupta (2001): Each generation should bequeath to its successor at least as large a productive base as inherited from its predecessor. Productive base:

Physical capital (machines, infrastructure); Natural capital (watersheds, open seas, biodiversity) Human capital Institutions

King Faisal of Saudi Arabia (1964-1975) : In one generation we went from riding camels to riding Cadillacs. The way we are wasting money, I fear the next generation will be riding camels again.

Measurement of standards of living III

Dasgupta (2001): Each generation should bequeath to its successor at least as large a productive base as inherited from its predecessor. Productive base:

Physical capital (machines, infrastructure); Natural capital (watersheds, open seas, biodiversity) Human capital Institutions

King Faisal of Saudi Arabia (1964-1975) : In one generation we went from riding camels to riding Cadillacs. The way we are wasting money, I fear the next generation will be riding camels again.

Measurement of standards of living III

Dasgupta (2001): Each generation should bequeath to its successor at least as large a productive base as inherited from its predecessor. Productive base:

Physical capital (machines, infrastructure); Natural capital (watersheds, open seas, biodiversity) Human capital Institutions

King Faisal of Saudi Arabia (1964-1975) : In one generation we went from riding camels to riding Cadillacs. The way we are wasting money, I fear the next generation will be riding camels again.

Measurement of standards of living III

Dasgupta (2001): Each generation should bequeath to its successor at least as large a productive base as inherited from its predecessor. Productive base:

Physical capital (machines, infrastructure); Natural capital (watersheds, open seas, biodiversity) Human capital Institutions

King Faisal of Saudi Arabia (1964-1975) : In one generation we went from riding camels to riding Cadillacs. The way we are wasting money, I fear the next generation will be riding camels again.

Measurement of standards of living III

Dasgupta (2001): Each generation should bequeath to its successor at least as large a productive base as inherited from its predecessor. Productive base:

Physical capital (machines, infrastructure); Natural capital (watersheds, open seas, biodiversity) Human capital Institutions

King Faisal of Saudi Arabia (1964-1975) : In one generation we went from riding camels to riding Cadillacs. The way we are wasting money, I fear the next generation will be riding camels again.

Oil Sustainability for Major Oil Exporters

Esfahani, Mohaddes and Pesaran (2012)

Table: Oil Reserves and Production for Major Oil Exporters, averages over 2006-2008

Country

Oil Reserves (Billion Barrels) 4.0 138.1 101.5 43.1 12.3 37.2 8.1 264.2 119.7

Indonesia Iran Kuwait Libya Mexico Nigeria Norway Saudi Arabia Venezuela

Oil ReserveProduction Ratio (Years) 11.2 87.7 102.9 65.0 9.8 44.9 8.5 67.6 124.7

Oil Exports (Million Barrels per day) 0.3 2.6 1.7 1.4 1.7 2.2 2.0 7.1 1.9

Oil Exports Revenue-GDP Ratio (%) 2.0 25.3 39.7 55.5 4.7 35.6 14.3 49.7 23.3

Measurement of standards of living IV

Net National Product (NNP): Deducts from GNP depreciation to maintain the capital base measure for sustainable income.
1. Nonrenewable resource (ex., cooper): Stockcooper = Extraction Shadow pricecooper = Extraction (rcooper costextrc) 2. Renewable resource (ex., forest): Stockforest (rforest costextrc ) 3. Human capital (ex., education): Stockeduca Shadow priceeduc 4. Physical capital 5. Productivity (TFP Growth - Solow Decomposition)

Measurement of standards of living IV

Net National Product (NNP): Deducts from GNP depreciation to maintain the capital base measure for sustainable income.
1. Nonrenewable resource (ex., cooper): Stockcooper = Extraction Shadow pricecooper = Extraction (rcooper costextrc) 2. Renewable resource (ex., forest): Stockforest (rforest costextrc ) 3. Human capital (ex., education): Stockeduca Shadow priceeduc 4. Physical capital 5. Productivity (TFP Growth - Solow Decomposition)

Measurement of standards of living IV

Net National Product (NNP): Deducts from GNP depreciation to maintain the capital base measure for sustainable income.
1. Nonrenewable resource (ex., cooper): Stockcooper = Extraction Shadow pricecooper = Extraction (rcooper costextrc) 2. Renewable resource (ex., forest): Stockforest (rforest costextrc ) 3. Human capital (ex., education): Stockeduca Shadow priceeduc 4. Physical capital 5. Productivity (TFP Growth - Solow Decomposition)

Measurement of standards of living IV

Net National Product (NNP): Deducts from GNP depreciation to maintain the capital base measure for sustainable income.
1. Nonrenewable resource (ex., cooper): Stockcooper = Extraction Shadow pricecooper = Extraction (rcooper costextrc) 2. Renewable resource (ex., forest): Stockforest (rforest costextrc ) 3. Human capital (ex., education): Stockeduca Shadow priceeduc 4. Physical capital 5. Productivity (TFP Growth - Solow Decomposition)

Measurement of standards of living IV

Net National Product (NNP): Deducts from GNP depreciation to maintain the capital base measure for sustainable income.
1. Nonrenewable resource (ex., cooper): Stockcooper = Extraction Shadow pricecooper = Extraction (rcooper costextrc) 2. Renewable resource (ex., forest): Stockforest (rforest costextrc ) 3. Human capital (ex., education): Stockeduca Shadow priceeduc 4. Physical capital 5. Productivity (TFP Growth - Solow Decomposition)

Measurement of standards of living IV

Net National Product (NNP): Deducts from GNP depreciation to maintain the capital base measure for sustainable income.
1. Nonrenewable resource (ex., cooper): Stockcooper = Extraction Shadow pricecooper = Extraction (rcooper costextrc) 2. Renewable resource (ex., forest): Stockforest (rforest costextrc ) 3. Human capital (ex., education): Stockeduca Shadow priceeduc 4. Physical capital 5. Productivity (TFP Growth - Solow Decomposition)

Example: Natural Capital Stock

Arrow, Dasgupta, Goulder, Mumford and Oleson (2012)

336

Table 1. Natural capital stocks: quantities, prices and values, 19952000 (prices in 2000 US$, stock values in 2000 US$ billions) Natural gas Bauxite Copper 0.10 0.09 0.01 2,231 1,513 718 70.89 6.29 2.04 2.00 0.04 25 17 8 16.64 0.32 4.96 4.90 0.04 15.39 0.04 15.00 0.00 0.39 2,231 46 989 10 1,242 35 49.08 545.9 3.14 13.77 0.01 0.01 11.61 11.00 0.00 0.00 0.00 10.9m 10.7m 20.7m 1.03 0.18 Forest Timber benets 26.105 26.976 0.871 129 30 99 2578.18 86.07 11.753 12.450 0.698 61 19 42 487.97 28.96 0.01 0.01 15.718 15.224 0.300 0.302 0.002 3,149 946.05 1779.70 5694.73 5.74 7.68 0.167 0.177 0.010 2,432 406.31 2027.81 3854.52 24.15 6.90 0.405 0.395 TOTAL natural capital

Kenneth J. Arrow et al.

Oil

Iron

Gold

Lead 0.02 0.02 0.00 823 634 189 4.23 0.45

Nickel Phosphate 4.20 4.00 0.20 42 35 7 30.83 1.47

Zinc

Land

United States Capital stock 1995 54.91 10.22 Capital stock 2000 40.28 7.50 Change in stock 14.63 2.73 Average price 20.21 102 Extraction cost 17.73 88 Accounting price 2.48 14.55 1995 stock value 136.15 148.69 Value of change 36.27 39.66 China Capital stock 1995 27.88 2.48 Capital stock 2000 22.02 2.37 Change in stock 5.87 0.12 Average price 20.21 102 Extraction cost 14.18 44 Accounting price 6.03 58.28 1995 stock value 168.02 144.67 Value of change 35.36 6.76 Brazil Capital stock 1995 Capital stock 2000 15.27 13.41 0.31 0.28

0.03 0.01 0.03 0.01 0.00 0.00 823 7,394 696 7,038 126 356 4.19 2.90 0.40 0.09

2,619.42

Example: Natural Capital Stock

Arrow, Dasgupta, Goulder, Mumford and Oleson (2012)

Table 2. Components of comprehensive investment (in 2000 US$ billions) Natural capital United States 1995 capital stock 2000 capital stock Change 19952000 Percentage change Growth rate China 1995 capital stock 2000 capital stock Change 19952000 Percentage change Growth rate Brazil 1995 capital stock 2000 capital stock Change 19952000 Percentage change Growth rate 5,694.73 5,702.41 7.68 0.13% 0.03% 3,854.52 3,847.62 6.90 0.18% 0.04% 2,688.40 2,619.42 68.98 2.57% 0.52% Human capital 60,086.93 64,802.68 4,715.75 7.85% 1.52% 8,492.93 9,394.69 901.76 10.62% 2.04% 7,157.81 8,248.34 1,090.53 15.24% 2.88% Reproducible capital 13,430.66 15,923.83 2,493.17 18.56% 3.46% 3,706.23 6,471.69 2,765.46 74.62% 11.79% 1,728.80 1,756.91 28.11 1.63% 0.32% Oil net capital gains Carbon damages TOTAL 79,212.320 84,889.968 5,677.648 7.17% 1.39% Environment and Development Economics 16,053.680 19,398.916 3,345.236 20.84% 3.86% 11,575.010 12,463.094 888.084 7.67% 1.49% (continued)

1,367.38

171.572

305.80

9.284

119.05

42.526

341

Growth rates of per-capita comprehensive wealth

Arrow, Dasgupta, Goulder, Mumford and Oleson (2012)

Table 3. Growth rates (%) of per capita comprehensive wealth, adjusted for technological change (3) Per capita comprehensive wealth growth rate, accounting for population growth [(1) (2)] 0.22 2.92 0.01 0.86 0.79 (5) Per capita comprehensive wealth growth rate, accounting for TFP growth [(3) + (4)] 1.70 5.63 0.14 2.70 2.94

(1) Comprehensive wealth growth rate United States China Brazil India Venezuela 1.39 3.86 1.49 2.60 1.15

(2) Population growth rate 1.17 0.94 1.50 1.74 1.98

(4) TFP growth rate 1.48 2.71 0.15 1.84 2.12

(6) Per capita GDP growth rate 2.93 7.60 0.50 3.99 1.20

Environment and Development Economics

Note: The TFP growth rate reported in column (4) is obtained from Klenow and Rodriquez-Clare (2005).

343

Outline of Remaining Lectures

1. Lecture 2: Neo-classical (Solow-Swan) growth model 2. Lecture 3: Empirical evidence: convergence, income distribution 3. Lecture 4: Human capital models of economic growth 4. Lecture 5: Technology and Endogenous Growth 5. Lecture 6: R&D models of economic growth 6. Lecture 7: Limits of Growth: Natural resources and growth 7. Lecture 8: Institutions, policies and economic growth