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
Schumpeterian Paradigm
Frontier innovation and imitation requires different sets of policies and institutions
Schumpeterian Paradigm
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
13
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)
14
Baseline Results : Investment
15
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
23
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
24
Identifying binding constraints on growth (2)
Aghion - Cette - Cohen - Pisani Les leviers de la croissance française
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
25
Identifying binding constraints on growth (3)
Aghion - Cette - Cohen - Pisani Les leviers de la croissance française
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
30
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
33
Industrial Policy (3)
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).
Industrial Policy (4)
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
Industrial Policy (5)
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
Top Related