INITIAL CONDITIONS AND ECONOMIC POLICIES

STAGES OF DEVELOPMENT, ECONOMIC POLICIES

AND NEW WORLD ECONOMIC

ORDER

Victor Polterovich and

Vladimir Popov

INITIAL CONDITIONS AND INITIAL CONDITIONS AND ECONOMIC POLICIESECONOMIC POLICIES

Initial conditions Level of technological development (GDP per capita)

Quality of institutions(CPI index)

LOW HIGH

LOW

Accumulation of FOREXIncrease in gov.rev/GDP ratioDecrease in tariff protection

No such countries

HIGH

Accumulation of FOREXIncrease in gov.rev/GDP ratioIncrease in tariff protection

Decrease in FOREXIncrease/decrease in gov.rev/GDP ratioDecrease in tariff protection

Introduction Introduction

Two recent papers by Acemoglu, Two recent papers by Acemoglu, Aghion, Zilibotti (2002a,b) offer a Aghion, Zilibotti (2002a,b) offer a model to demonstrate the model to demonstrate the dependence of economic policies on dependence of economic policies on the distance to the technological the distance to the technological frontier.frontier.

A general idea is to run regressions of the following type:

GR = Control variables + bX(a -Y), where

GR is rate of growth (or another outcome indicator);

X is a policy variable (level of tariffs, speed of foreign exchange reserves accumulation, etc.);

b, a are regression coefficients; Y is a characteristics of stage of development

of a country (GDP per capita, an institutional indicator or their combinations).

TARIFFSTARIFFSFig. 1. Increase in the ratio of exports to GDP and average annual growth

rates of GDP per capita in 1960-99, %

R2 = 0,1883

-2

-1

0

1

2

3

4

5

6

7

-30 -20 -10 0 10 20 30 40 50 60 70

Increase in the ratio of exports to GDP in 1960-99, p.p.

Ave

rag

e a

nn

ual

gro

wth

rat

es

of

GD

P

pe

r ca

pit

a in

196

0-99

, %

Botswana

S. KoreaHong Kong

ThailandJapan

Niger

IrelandMalaysiaPortugal

Trinidad and Tobago

Zambia

Guyana

Iceland

Sri Lanka

TARIFFSTARIFFS

Fig. 2. Average share of exports and investment in GDP in 1960-99, %

R2 = 0,1359

5

10

15

20

25

30

35

40

45

0 20 40 60 80 100 120 140 160 180

Average share of exports in GDP in 1960-99, %

Ave

rag

e s

hare

of

in

ve

stm

en

t in

GD

P in

1960-9

9, %

Singapore

Luxembourg

BhutanSt. Kitts and Nevis

Sierra Leone

MicronesiaWest Bank and Gaza

TARIFFSTARIFFSFig. 3. Import duties as a % of import in 1975-99 and the increase in export as a

% of GDP in 1980-99, p.p.

R2 = 0,0001

-50

-30

-10

10

30

50

70

0 5 10 15 20 25 30 35 40 45 50

Import duties as a % of import, average 1975-99

Incr

eas

e in

th

e r

atio

of

exp

ort

to

GD

P in

19

80-9

9, p

.p.

TARIFFSTARIFFSImport duties as a % of import, average for 1975-99, and PPP GDP per capita as a % of

the US in 1985

R2 = 0,3151

0

5

10

15

20

25

30

35

0 20 40 60 80 100 120

PPP GDP per capita as a % of the US in 1985

Imp

ort

du

tie

s a

s a

% o

f im

po

rt,

ave

rag

e f

or

1975

-99

TARIFFSTARIFFS Average tariff rate (% of import) and growth rate of per capita GDP (%) in

1870-90 and 1890-1913

R2 = 0,0721

-0,5

0,0

0,5

1,0

1,5

2,0

2,5

3,0

0 10 20 30 40 50 60

Average tariff rate in 1870-90 and 1890-1913

Gro

wth

rat

e o

f p

er

cap

ita

GD

P in

187

0-18

90 a

nd

in 1

890-

1913

, %

MEX, 1890-1913AUS, 1890-1913

ARG, 1870-90

CAN, 1890-1913

RUS, 1870-90

ARG, 1890-1913

USA, 1870-1890

RUS, 1890-1913

MEX, 1870-90

India, 1890-1913India, 1870-90

TARIFFSTARIFFS

We tried to find a GDP per capita threshold for We tried to find a GDP per capita threshold for the 19th century using data from (Irwin, 2002), the 19th century using data from (Irwin, 2002), but failed. The best equation linking growth rates but failed. The best equation linking growth rates in 1870-1913 to GDP per capita and tariff rates in 1870-1913 to GDP per capita and tariff rates (27 countries, two periods – 1870-90 and 1890-(27 countries, two periods – 1870-90 and 1890-1913 – 54 observations overall) is: 1913 – 54 observations overall) is:

Regression for 1870-1913Regression for 1870-1913 GROWTH = 0.24 + 0.04*Y – 0.0004*Y2 – 0.05*T + GROWTH = 0.24 + 0.04*Y – 0.0004*Y2 – 0.05*T +

0.001*T0.001*T22 + 0.0006*Y*T, + 0.0006*Y*T, Where Y – GDP per capita in 1870 nor 1890 Where Y – GDP per capita in 1870 nor 1890

respectively, T – average tariff rates respectively, T – average tariff rates (R(R22adj. = 33%, all coefficients significant at 11% adj. = 33%, all coefficients significant at 11%

level or less).level or less).

DATA - CPIDATA - CPI Corruption perception index (CPI) for Corruption perception index (CPI) for

1980-85 – these estimates are 1980-85 – these estimates are available from Transparency available from Transparency International for over 50 countriesInternational for over 50 countries

CPI = 2.3 + 0,07*Ycap75us, CPI = 2.3 + 0,07*Ycap75us, N=45, R2 =59%, T-statistics for N=45, R2 =59%, T-statistics for

Ycap75 coefficient is 9. 68. Ycap75 coefficient is 9. 68. CORRres = 10 – [CPI – (2.3 + CORRres = 10 – [CPI – (2.3 +

0.07*Ycap75us)] = 12.3 – CPI + 0.07*Ycap75us)] = 12.3 – CPI + 0.07*Ycap75us0.07*Ycap75us

DATA: RISKDATA: RISK RISK84-90 – average investment risk

index for 1984-90, varies from 0 to 100, the higher, the better investment climate

RISK = 62.1 + 0.19Ycap75us, N= 88, RISK = 62.1 + 0.19Ycap75us, N= 88, RR22=36%, T-statistics for Ycap75us =36%, T-statistics for Ycap75us coefficient is 3.95. coefficient is 3.95.

RISKres = RISK84-90 – (62.1 + RISKres = RISK84-90 – (62.1 + 0.19Ycap75us) +1000.19Ycap75us) +100

TARIFFSTARIFFS GROWTH=CONST.+CONTR.VAR.+Tincr.(0.06– GROWTH=CONST.+CONTR.VAR.+Tincr.(0.06–

0.004Ycap75us–0.004CORRpos–0.005T0.004Ycap75us–0.004CORRpos–0.005T))

GROWTH, is the annual average growth rate of GDP GROWTH, is the annual average growth rate of GDP per capita in 1975-99, per capita in 1975-99,

the control variables are population growth rates the control variables are population growth rates during the period and net fuel imports (to control for during the period and net fuel imports (to control for “resource curse”), “resource curse”),

T – average import tariff as a % of import in 1975-99,T – average import tariff as a % of import in 1975-99, Tincr. – increase in the level of this tariff (average Tincr. – increase in the level of this tariff (average

tariff in 1980-99 as a % of average tariff in 1971-80), tariff in 1980-99 as a % of average tariff in 1971-80), Ycap75us – PPP GDP per capita in 1975 as a % of the Ycap75us – PPP GDP per capita in 1975 as a % of the

US level, US level, CORR pos – positive residual corruption in 1975, CORR pos – positive residual corruption in 1975,

calculated as explained earlier. calculated as explained earlier. R2=40%, N=39, all coefficients are significant at 5% R2=40%, N=39, all coefficients are significant at 5%

level, except the last one (33%), but exclusion of the level, except the last one (33%), but exclusion of the last variable (a multiple of T by Tincr.) does not ruin last variable (a multiple of T by Tincr.) does not ruin the regression and the coefficients do not change the regression and the coefficients do not change much.much.

TARIFFSTARIFFS If import duties are included into growth If import duties are included into growth

regressions without the interaction terms with regressions without the interaction terms with GDP per capita and/or a measure of institutional GDP per capita and/or a measure of institutional strength (corruption), the coefficient on import strength (corruption), the coefficient on import duties is not significant:duties is not significant:

But when interaction terms are included, all But when interaction terms are included, all coefficients become statistically significant. Here coefficients become statistically significant. Here is an additional equation that give similar is an additional equation that give similar thresholds on GDP per capita and corruption:thresholds on GDP per capita and corruption:

GROWTH=CONST+CONTR.VAR+T(0.05–0.005Ycap75us–GROWTH=CONST+CONTR.VAR+T(0.05–0.005Ycap75us–0.007Rpol)0.007Rpol)

where Rpol is the indicator of the accumulation of where Rpol is the indicator of the accumulation of foreign exchange reserves computed as foreign exchange reserves computed as explained later, in the third section, N=40, explained later, in the third section, N=40, R2=40, all coefficients significant at 8% level or R2=40, all coefficients significant at 8% level or less, control variables – positive residual less, control variables – positive residual corruption and population growth rates. corruption and population growth rates.

TARIFFSTARIFFS

GROWTH=CONST+CONTR.VAR.+T(0.005RISK–0.002Ycap75us–GROWTH=CONST+CONTR.VAR.+T(0.005RISK–0.002Ycap75us–0.3)0.3)

(N= 87, R(N= 87, R2 2 =42, all coefficients significant at 10% level =42, all coefficients significant at 10% level or less, control variables are population growth rates, or less, control variables are population growth rates, population density and total population).population density and total population).

The equation implies that for a poor country (say, with The equation implies that for a poor country (say, with the PPP GDP per capita of 20% of the US level or less) the PPP GDP per capita of 20% of the US level or less) import duties stimulate growth only when investment import duties stimulate growth only when investment climate is not very bad (RISK > 50%) – the expression climate is not very bad (RISK > 50%) – the expression in brackets in this case becomes positive. in brackets in this case becomes positive.

Foreign exchange reserves Foreign exchange reserves accumulationaccumulation

Fig. 3.1. Foreign exchange reserves as a % of GDP, average ratios for 1960-99

LibyaSaudi ArabiaMalaysia

KuwaitThailandIrelandMauritiusIsraelIran(74-99)

UAEChile

EgyptChina(77-99)Nigeria

ItalyPhilippines

Indon(67-99)FranceKorea, Rep.

Germ(91-99)Turkey(68-99)Argentina

UKBrazilIndiaRussia(93-99)MexicoJapan

Congo, Rep.

HK(90-99)

US

Pakistan

SingaporeBotswana (1976-99)

0 10 20 30 40 50 60 70

%


Fig. 3.2A. Average ratio of imports to GDP and average ratio of reserves to GDP in 1960-99, %

R2 = 0,2611

0

10

20

30

40

50

60

70

80

90

100

0 20 40 60 80 100 120 140 160 180

Import as a % of GDP

FE

R a

s a

% o

f G

DP

Lebanon

SingaporeBotswana

Malta


Fig. 3.3. Average ratio of gross international reserves to GDP and average annual growth rates of GDP per capita in 1960-99, %,

R2 = 0,2396

-2

0

2

4

6

0 20 40 60

Average ratio of gross international reserves to GDP

Aver

age a

nnua

l gro

wth

rate

s of

GDP

per

capi

ta

Singapore

Chad

Korea

JapanMalaysia

ThailandPortugal

Sierra-LeoneVenezuela

HK

Botswana

China

Switzerland


In this section we demonstrate, however, that Fig.6. Average real exchange rate versus the US $ (Year 12 = 100%) in fast

growing developing economies, year "0" denotes the point of take-off

50

70

90

110

130

150

170

190

210

230

250

-5 -3 -1 1 3 5 7 9 11 13 15 17 19 21 23 25

Botswana Chile China Egypt, Arab Rep. India Indonesia Korea, Rep. Malaysia Mauritius Singapore Sri Lanka Thailand FAST POOR


delta R = 38 – 11.4logYcap75 + 0.1(T/Y) + delta R = 38 – 11.4logYcap75 + 0.1(T/Y) + 0.24(delta T/Y)0.24(delta T/Y)

(R2=34%, N=82, all coefficients significant at (R2=34%, N=82, all coefficients significant at 0.1% level). 0.1% level).

Then we considered the residual as the policy-Then we considered the residual as the policy-induced change in reserves.induced change in reserves.

Afterwards we used the Afterwards we used the policy induced change policy induced change in foreign exchange reservesin foreign exchange reserves as one of the as one of the explanatory variables in growth regressions explanatory variables in growth regressions together with import taxes and change in together with import taxes and change in government revenues/GDP ratiogovernment revenues/GDP ratio


GROWTH= CONST.+CONTR.VAR.+ T(0.06–GROWTH= CONST.+CONTR.VAR.+ T(0.06–0.0027Ycap75us)+ Rpol (0.07-0.006T) 0.0027Ycap75us)+ Rpol (0.07-0.006T)

The control variables are the rule of law The control variables are the rule of law index for 2001, the size of the economy in index for 2001, the size of the economy in 1975, and the population growth rates in 1975, and the population growth rates in 1975-99. 1975-99.

N=74, R2=44%, all coefficients are N=74, R2=44%, all coefficients are significant at less than 10% level, except significant at less than 10% level, except for coefficients of Rpol (11%) and the PPP for coefficients of Rpol (11%) and the PPP GDP in 1975 (16%).GDP in 1975 (16%).

Foreign exchange reserves Foreign exchange reserves accumulationaccumulation GROWTH=CONST.+CONTR.VAR.+ G(0.05– GROWTH=CONST.+CONTR.VAR.+ G(0.05–

0.0003Ycap75us–0.003CORRpos)+ Rpol(0.12 – 0.0003Ycap75us–0.003CORRpos)+ Rpol(0.12 – 0.002Ycap75us) 0.002Ycap75us)

This equation implies that the growth of This equation implies that the growth of government revenues/GDP ratio is good for most government revenues/GDP ratio is good for most countries, excluding the richest ones and the most countries, excluding the richest ones and the most corrupt ones (if Ycap75us is higher than 100%, corrupt ones (if Ycap75us is higher than 100%, whereas CORRpos >7, the impact of the increase of whereas CORRpos >7, the impact of the increase of government revenues/spending on growth becomes government revenues/spending on growth becomes negative). negative).

It also allows to determine the threshold level of It also allows to determine the threshold level of GDP per capita for the impact on growth of reserve GDP per capita for the impact on growth of reserve accumulation: for countries with GDP per capita accumulation: for countries with GDP per capita higher than 60% of the US level, the accumulation of higher than 60% of the US level, the accumulation of reserves has a positive impact on growth; for richer reserves has a positive impact on growth; for richer countries the impact is negative. countries the impact is negative.


We also experimented with another definition of policy induced change in foreign exchange reserves, as a residual from regression linking the increase in reserves to GDP ratio to the following ratios: trade/GDP, increase in trade/GDP, external debt/GDP(ED/Y) and debt service/GDP(DS/Y):

N=59, R2=36%, all coefficients significant at less than 7%.

)/(28.0)/(2.0)/(06.0)/(6.03.3 YTYTYEDYDSR


GROWTH=CONST.+CONTR.VAR.+T(0.001RISK– 0.0038Ycap75us)+Rpol(0.23-0.014T),

N=48, R2 = 46, all coefficients significant at 7% or less, control variables – PPP GDP in 1975 and population growth rate.

GROWTH=CONST.+CONTR.VAR.+Gpol(0.096RISK– 6.3)+Rpol(0.31 – 0.017T),

N=28, R2 = 61, all coefficients significant at 10% or less, control variables – PPP GDP in 1975, average ratio of government revenues to GDP in 1973-75.

IMMITATION vs. INNOVATIONIMMITATION vs. INNOVATION Fig. 5. R&D expenditure and net export of technology (receipts of licence fees and royalties minus payments of licence fees and royalties) in 1980-99, % of

GDP, and PPP GDP per capita in 1999, $

R2 = 0,4742

R2 = 0,015

-3

-2

-1

0

1

2

3

0 5000 10000 15000 20000 25000 30000 35000

PPP GDP per capita in 1999, $

R&

D e

xpen

dit

ure

an

d n

et e

xpo

rt

of

tech

no

log

y

USA

UK

Colombia

Ireland

USA

Lesotho

Sweden

IMMITATION vs. INNOVATIONIMMITATION vs. INNOVATION

Fig. R&D expenditure, % of GDP

0,5

1

1,5

2

2,5

3

3,5

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999Japan

Korea, Rep.

Finland

United States

Germany

Israel

UnitedKingdomRussianFederationIndia

China

IMMITATION vs. INNOVATIONIMMITATION vs. INNOVATION GR = CONST.+CONTR.VAR.+ 0.11TT

(24.8– Ycap75us + 24.9R&D), where TT - net technology transfer in where TT - net technology transfer in

1980-99 as a % of GDP,1980-99 as a % of GDP, R&D - expenditure for research and R&D - expenditure for research and

development as a % of GDP in 1980-99development as a % of GDP in 1980-99 Control variables - investment climate Control variables - investment climate

index in 1984-90 and share of investment index in 1984-90 and share of investment in GDP in 1975-99in GDP in 1975-99

All coefficients significant at 5% level, All coefficients significant at 5% level, R2=58%R2=58%

FDI: FDI: High growth without FDI: Japan, S. Korea, HK, NorwayHigh growth without FDI: Japan, S. Korea, HK, Norway

High FDI without growth: High FDI without growth: Bolivia, Papua-New Guinea, SwazilandBolivia, Papua-New Guinea, Swaziland

Fig. 7. Average share of investment and average net inflow of FDI in GDP in 1980-99, %

R2 = 0,1278

-2

-1

0

1

2

3

4

5

6

7

10 15 20 25 30 35 40 45 50

Average share of investment in GDP in 1980-99, %

Ave

rag

e n

et in

flo

w o

f F

DI i

n 1

980-

99, %

o

f G

DP

FDIFDI GR = CONST. + CONTR. VAR. + 0.027*FDI (ICI

–58.5), where ICI – investment climate index in 1984-

90, FDI – average foreign direct investment inflow as a % of GDP in 1980-99.

Control variable - population growth rates in 1975-99.

All coefficients are significant at 5% level, R2= 23%

58.5 – level of Colombia, Costa-Rica, Kuwait, Qatar, South Africa.

MIGRATIONMIGRATIONFig. 8. Annual average growth rates of population and GDP per capita in 1960-99, %

R2 = 0,1436

-2

-1

0

1

2

3

4

5

6

0 0,5 1 1,5 2 2,5 3 3,5 4 4,5

Average annual population growth rates in 1960-99, %

Ave

rag

e an

nu

al g

row

th r

ates

of

GD

P

per

cap

ita,

196

0-99

, %

Singapore

S

S. Korea

ChinaHong Kong

Thailand

Malaysia

MIGRATIONMIGRATIONFig. 9. Growth rates of population in 2000 - natural increase and net immigration,

% of total population

R2 = 0,6531

R2 = 0,8361

-4

-3

-2

-1

0

1

2

3

4

5

6

-2 -1 0 1 2 3 4 5 6 7 8

Population growth rates, %

Nat

ura

l in

crea

se a

nd

net

im

mig

rati

on

, %

Natural increase

Net migration

Fig. 10. Growth rates of population in 2000 - natural increase and net immigration, % of total population

R2 = 0,0054

-4

-3

-2

-1

0

1

2

3

-1 -0,5 0 0,5 1 1,5 2 2,5 3 3,5 4

Natural increase, %

Net

imm

igra

tio

n, %

MIGRATIONMIGRATION

MIGRATIONMIGRATION Net migration flows are measured as the Net migration flows are measured as the

net inflow of migrants in 2000 net inflow of migrants in 2000 GR = CONST. + CONTR. VAR. + M(3.08lgY – 9.08)

where Y is PPP GDP per capita in 1975, M – net inflow of migrants in 2000 as a % of as a % of total population of receiving country (U.S. total population of receiving country (U.S. Bureau of the Census, 2002)Bureau of the Census, 2002)

Control variable - population growth rates in 1975-99.

All coefficients are significant at 10% level, R2= 22%

MIGRATIONMIGRATION Equation (6) implies that for countries with PPP

GDP of less than 10% of US level of 1975 (level of Bolivia and Cote d’Ivoire, lgY = 2.95), the impact of the immigration on growth was negative.

To put it differently, migrants coming to poor countries were probably less educated than the rest of the population, so the inflow of migrants lowered rather than increased the level of human capital.

On the contrary, immigration to rich countries provided them with a “brain gain” that outweighed the negative impact on growth associated with the increase in population growth rates.

KYOTO PROTOCOL: FREEZE THE KYOTO PROTOCOL: FREEZE THE LEVELS OF EMISSIONSLEVELS OF EMISSIONS

Fig. 11. Emissions of CO2 per capita (left scale, tons) and per $1 of PPP GDP (right scale, kg) in 1997

0

5

10

15

20

25

30

35

100 1000 10000 100000

PPP GDP per capita, 1997, log scale

Em

issi

on

s o

f C

O2

per

cap

ita,

to

ns

0

0,5

1

1,5

2

2,5

Em

issi

on

s o

f C

O2

per

$1

of

PP

P G

DP

, kg

CO2emissionsper capita,tons

CO2emissionsper $1 PPPGDP, kg

ConclusionsConclusions What is good for the West, is not

necessarily good for the South In our interdependent world “good

policies” for developing countries, whether its trade protectionism or control over short-term capital flows, in most instances cannot be pursued unilaterally, without the co-operation of the West or at least without some kind of understanding on the part of the rich countries.

ConclusionsConclusions ProtectionismProtectionism Accumulation of FOREXAccumulation of FOREX Free import of technologyFree import of technology Control over capital flowsControl over capital flows Control over “brain drain”Control over “brain drain” Control over pollutionControl over pollution Different priorities (child labor, Different priorities (child labor,

democracy, reproductive rights, animal democracy, reproductive rights, animal rights, etc.)rights, etc.)

ConclusionsConclusions It is not reasonable to apply the modern

Western patterns of tradeoffs between different development goals (wealth, education, life expectancy, equality, environmental standards, human rights, etc.) to less developed countries. Policies that prohibit child labor, for instance, may be an unaffordable luxury for developing countries, where the choice is not between putting a child to school or into a factory shop, but between allowing the child to work or to die from hunger.

INITIAL CONDITIONS AND ECONOMIC POLICIES

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