Major project to compare prices internationally implemented by
the World Bank with the help of UN and national statistical
agencies. ICP has been implemented by UN Statistical Office since
1968. Link
Slide 3
PPPs 1.Divide expenditures into k = 1,..,K categories of goods.
2.All j = 1,..J countries (in 2005, J = 146) report total
expenditure in domestic currency of all categories. 3.Sample prices
of representative goods from each category in each country.
4.Construct average of those prices (relative to anchor economy)
for each country j basic heading type of good k.
Slide 4
Hong Kong PPP per Category WDI provides PPP data for many
countries using US$ as anchor currency
Slide 5
PPP Conversion Factor PPP is a value weighted average of
relative prices of all K goods.
Slide 6
PPP 2010 One benchmark for thinking about whether a currency is
undervalued or overvalued. If PPP < XR, then domestic goods are
relatively cheap, currency is undervalued.
Slide 7
GDP in Intl$ PPPs are used to construct comparable measures of
GDP for multiple countries by converting them into international
dollars. Per capita GDP in international dollars is headline way of
comparing living standards.
Slide 8
Atlas Conversion Method
Slide 9
Use real GDP growth rates to construct path of constant price
International $GDP for comparisons of production levels across time
and space.
Slide 10
Developing countries tend to be relatively cheap with PPPs
being lower than exchange rates. OECD countries tend to have more
similar price structures, though they tend to be relatively more
expensive. High income, non-OECD countries tend to be relatively
cheap. Compare values measured in different currencies using the
PPP and exchange rate method.
Slide 11
GDP per Capita vs. Productivity Per Capita GDP can be broken
down into two parts: GDP per Capita = Productivity GDP per Engaged
Person Employment Rate Engaged Person per Capita X
Slide 12
Slide 13
Most differences due to Worker Productivity
Slide 14
. Productivity Productivity can be broken down into two parts:
Productivity GDP per Hour = Productivity GDP per Engaged Person
Hour per Engaged Person X
Slide 15
Slide 16
Slide 17
Labor Productivity Data Key source for international
comparisons in productivity is the Total Economy Database
Originally developed at University of Groningen Growth and
Development Centre. Link Link Total Economy Database LinkLink
Slide 18
Patterns of Economic Growth Developed Economies experienced a
golden age of per capita GDP growth during post-war period but have
experienced slower growth since 1973 Many developing economies also
experienced fast growth during 1950-1973 but slowed markedly during
1973-1998. Some developing economies (India, Africa) have
experienced a growth resurgence since then.
Slide 19
Productivity Catch Up: Europe Source: Groningen Growth &
Development Center 2009 Intl$, GDP per Hour Worked (Y/L)
Slide 20
Productivity Catch Up: East Asia Source: Groningen Growth &
Development Center 2009 Intl$, GDP per Hour Worked (Y/L)
Slide 21
Productivity Catch Up?: Latin America Source: Groningen Growth
& Development Center 2009 Intl$, GDP per Hour Worked (Y/L)
Slide 22
Capital Accumulation
Slide 23
Capital Productivity Capital Productivity: Capital investment
is a central part of advancing productivity in developing economy
but displays diminishing returns.
Slide 24
Slide 25
Slide 26
Measuring Capital Returns ICOR Incremental Capital Output
Ratio: Ratio of constant dollar investment to increase in output
Measures number of dollar of investment needed to produce an extra
dollar of output. LINK LINK ICOR is volatile, must take long run
averages.
Slide 27
Slide 28
DEVELOPMENT POLICY Tne Role of Government
Slide 29
Structuralist Theory Two kinds of economies Developed
Underdeveloped Key difference: Rich, developed economies dominated
by industry; poor, underdeveloped dominant in agriculture and
resources. Development policy: shift countries from underdeveloped
to developed.
Slide 30
Government Intervention Capital is in short supply in
developing economies so must be directed toward building of heavy
industry. Coordination failures Set of infrastructure necessary to
build the industrial economy has multiple inputs that must come on
line at the same time. No need for a dam if there is no power
network, no need for a power network if there are no factories, no
need for factories if there is no power network. Government can
coordinate big push toward industrial development:
Rosenstein-Rodan. Example: India LinkLink Example: Brazil
LinkLink
Slide 31
Industrialization Structuralist Theory Rosenstein-Rodan: Growth
potential, combination of degree of investment and capacity to
organize investment Predictions
Slide 32
Structuralist Theory and Trade UNCTAD Economist Raul Prebisch
developed the idea that prices of primary products would fall in
value relative to manufactured goods. LinkLink International trade
would always leave underdeveloped economies impoverished. Use of
tariffs and trade restrictions to develop domestic manufacturing
sector. Dependency Theory: International trade enforces a system of
power that relegates developing countries to producing raw material
and cheap labor. Lesson: self-reliance.
Slide 33
Criticisms 1. High cost of imports and import substitutes
reduces economic efficiency making people poorer. 2.Developing
economies operate on too small of a scale to be efficient in
capital heavy goods. 3.Created monopolies protected from
competition 4.Source of corruption Link - Krueger.Link -
Krueger
Slide 34
Slide 35
Link
Slide 36
Washington Consensus 1.Fiscal Discipline.- Balanced Budget.
2.Reordering Public Expenditure Priorities. Eliminate biased
subsidies, increase health, education and infrastructure. 3.Tax
Reform. Broad tax base with moderate marginal tax rates.
4.Liberalizing Interest Rates 5.Competitive Exchange Rate
http://www.iie.com/publications/papers/williamson0904-2.pdf
Slide 37
6.Trade Liberalization 7.Liberalization of Inward Foreign
Direct Investment. 8.Privatization. 9.Deregulation. specifically on
easing barriers to entry and exit. 10. Property Rights Identified
as a consensus for development by policymakers in Washington (World
Bank, IMF) and particularly Latin America.
Slide 38
EAST ASIAN MIRACLE
Slide 39
Slide 40
Neo-classical View Physical & Human Capital Deepening High
investment rates beginning in 1970s Rapid growth in education
rates. Macroeconomic Stability: Low inflation, small budget
deficits Market Orientation: South Korea vs. North Korea
Slide 41
Slide 42
Revisionist View East Asia not exemplar of Washington Consensus
Government heavily involved in the economy Developmental State
Chalmers Johnson Ideological devotion to development Independent
bureaucracy embedded within the economy playing a leading role.
Developing industries protected from international competition
Friedrich Lists American system
Slide 43
Can Japan Compete? Japanese companies dominated a number of
advanced industries from the 1980s and experienced high growth up
to that period with slower subsequent growth. Japan: Known for
industrial policy activism through Ministry for Industry, Trade and
Investment. MITI approach was to encourage cooperation by companies
in key industries. allow cartels and even encourage formation.
Limit foreign trade & investment Link
Slide 44
Competitive Outcomes Low returns on capital Firms emphasize
market share, maintenance of employment Intense domestic
competition in some sectors especially those internationally
successful ones. Sectors with government sponsored cartels or
planning, low competition, low success
Slide 45
World Bank View High levels of investment supported by high
level of savings Government institutions: Savings banks and
mandatory provident funds developed to overcome market failures
Expansion in Education Broad based rather than concentrated in
elite
Slide 46
Slide 47
Slide 48
Slide 49
Government Intervention Market friendly Macroeconomic stability
and strong property rights encourage private investment but, Strong
Bureaucratic State to Promote Growth Key Interventions Financial
repression to promote corporate investment Allocation of Resources
(Credit & Foreign Exchange) to Export Industries
Slide 50
Market Failure: Externalities Some economic activities creates
negative spillovers: Pollution, Crime Private benefits but public
costs. Some economic activities create positive spillovers:
knowledge. Developing new knowledge may create public benefits that
will accrue to people who do not pay for the costs
Slide 51
Pillars of East Asian Growth Miracle World Bank Chief Economist
View World Bank Chief Economist View Govt intervention in East Asia
overcomes market failures Underdeveloped financial markets govt
intervention fills Govt intervention supports knowledge producing
activities. Technical education and research Deliberative councils,
research consortia FDI Export industries
Slide 52
Foreign Direct Investment Two key elements need to be
emphasized in the definition of FDI: 1.long-term nature or of
lasting interest. 2.the investor has a significant degree of
influence on the management of the enterprise. For operational
purposes, 10 per cent of the voting shares or voting power is the
level of ownership necessary for a direct investment interest to
exist (IMF, 1993, paragraph 362; OECD, 2008, paragraph 117) UNCTAD
Training Manual on Statistics for FDI and the Operations of TNCs
Volume I FDI Flows and Stocks LINK
Slide 53
Pros and Cons of FDI Pro: i.Increased domestic capital
formation. ii.FDI brings superior technology iii.Increases domestic
competition iv.Gives access to export markets. v.FDI more stable
than loans or capital flows. Con: i.Multinationals may interfere
with local political economy. ii.Foreign nationals fill top jobs.
LinkLink #1LinkLink #2
Slide 54
Slide 55
Export Industries and Knowledge Export industries must use
advanced technology Export firms compete in foreign countries and
learn international best practices. Successful export firms
demonstrate comparative advantage benefit imitators Success in
export markets is an objective standard of performance that cant be
gamed by corrumption.
Slide 56
New Structuralist Development Strategy New Structural Economics
by Justin Lin New Structural Economics by Justin Lin Countries have
grown more developed by Investing in physical and human capital but
Comparative advantage depends on level of capital. Focusing on
areas of comparative advantage requires structural change as
country develops.
Slide 57
Slide 58
Slide 59
Industrial Policy for 21 st Century Dani Rodrik Link Link
Development is the process of creating new industries, not only
upgrading but diversifying. Two roles for government Pioneer firms
take risks entering into new industries, generate information about
which sorts of products an economy is good at, but this can be
copied by competitors. Industries rely on a network of suppliers
and supporting industries. Building a new industry might require
co-ordination. Korean microwaves vs. Taiwan bicycles: Not
necessarily comparative advantage
Slide 60
Peruvian Asparagus Peruvian farmers growing asparagus since
1950s with minimal economic impact. In 1980s, US govt sent experts
for knowledge transfer. Govt started cooperative associations for
technology sharing and marketing coordination. Govt invested in
freezing & packing plants. Peru now the #1 asparagus
exporter.
Slide 61
Principles Upgrading not radical change New activities only
Clear benchmarks of success Built-in sunset clause Subsidize
activities that create information or knowledge spillovers
Slide 62
Industrial Policy Govt institutions need close connections with
business to discover what might work/is working. Close connections
with bureaucracy may lead to corruption. Elements of Successful
Architecture Political support from top leaders. Deliberative
coordination councils. Mechanisms of transparency and
accountability.