Development Lecture in Honour of Angus Maddison | Rethinking Growth Policy

Rethinking Growth Policy

Philippe 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.

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?

Growth diagnostics?

How can one binding constraints on growth?Using prices (Hausmann-Rodrik-

Velasco)?Alternative approach?

A paradigm for analyzing growth policy

Schumpeterian Paradigm

Innovation is driven by entrepreneurial investments (R&D…) which are themselves motivated by the prospect of monopoly rents


Frontier innovation and imitation requires different sets of policies and institutions

1st idea: Appropriate growth policies

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

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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 affected

Foreign 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)

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Baseline Results : Investment

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Robustness : Patenting Activity

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 market flexibility

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

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%

Finance, Growth and Distance to FrontierValue Added Growth, 1980-1990

Preliminary results

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Identifying binding constraints on growth (1)

Aghion - Cette - Cohen - Pisani Les leviers de la croissance française

Significant variables:- Investment in higher education- Liberalization of product and labor markets - Employment duration and rate

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Catching up with scandinavian countries

Effets au bout de … 5 ans 10 ans 15 ansReforming higher educationEffets :

. 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 marketsEffets :

. Croissance annuelle moyenne du PIB, en points 0,2 0,2 0,2

. Niveau du PIB, en % 0,9 2,1 3,3

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0

0,5

1

1,5

2

2,5

3

3,5

2008-2012 2013-2017 2018-2022 Long terme

Enseignement supérieurRéforme des marchés des produits et du travailAugmentation de l'input en travail (emploi et durée)Croissance potentielle 'spontanée'

2d idea: governance

Growth investments should be targeted and properly governed

Example 1: Education

Quality, not just quantity, of investment matters

Two illustrationsPISA and growthInvesting more in more autonomous

universities, is more growth-enhancing

PISA and growth

Years of schooling and growth

Autonomy of universities Autonomie

Source : The Governance and Performance of ResearchUniversities: Evidence from Europe and the U.S. – P. Aghion et alii – NBER avril 2009

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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

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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).


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


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_newproductThe 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 quartileratio_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 YesTariffs Yes Yes Yes Yes Yes Yes

3d idea: Macroeconomic policy matters for growth

Two Contrasted Views of How to Conduct 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 approachesnamely, 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 across OECD 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 mattersNot 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 growthProblem with Mincerian measure of

human capitalProblem of using interest rates to

assess credit constraints

Conclusion 3: Make growth sustainable!

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: learning from 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 from Scandinavia 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

Development Lecture in Honour of Angus Maddison | Rethinking Growth Policy

Economy & Finance

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