Economic  Policy  #07 Growth  Policies Growth  Policies • Measuring  growth • Stylized  fact  about  growth • Growth  enhancing  policies EP#07:  Growth  policies 2 Growth  vs.  stabilization  policies • Stabilization  policy  seeks  to  mitigate  short-­‐term  cyclical   fluctuations  whereas  growth  policies  aim  at  raising   potential  level  of  production  in  the  long  run. • But,  there  are  interrelations  between  long-­‐term  trends   and  short-­‐term  fluctuations  because  of: – precautionary  behavior:  excessive  inflation  is  bad  for   long-­‐term  growth – unemployment  hysteresis:  skills  of  unemployed   workers  deteriorate   and  they  become  less  employable   even  in  boom EP#07:  Growth  policies 3 Why  growth  matters • Anything  that  effects  the  long-­‐run  rate  of  economic   growth  – even  by  a  tiny  amount  – will  have  huge  effects   on  living  standards  in  the  long  run.       1,081.4%243.7%85.4% 624.5%169.2%64.0% 2.5% 2.0% …100 years…50 years…25 years percentage increase in standard of living after… annual growth rate of income per capita EP#07:  Growth  policies 4 Three  stories  of  economic  growth:   success,  disappointment  and  failure EP#07:  Growth  policies 5 Aplikace. Hospodářská politika a ekonomický růst: úspěch, zklamání a selhání… 28 ?'**5HHK(J,H344",#0+5#0K(3#@(U3,I'.5( Measuring  economic  growth • GDP  per  person  (per  capita)  corresponds  to  the  average   standard  of  living   • Labor  productivity   reflects  effectiveness  of  production   system   • HDI  or  GNP  =>  measure  of  development   • Comparability   issues  (prices,  exchange  rates  ...)   • GDP  per  person  is  not  well-­‐being – correction   for:  pollution,  working  time,  life   expectancy,  precariousness,  inequality,  sustainability EP#07:  Growth  policies 6 Economic  growth:  CPEs  vs.  Western   Europe EP#07:  Growth  policies 7 Aplikace. Ekonomický růst: CPE vs. západní Evropa Burda & Wyplosz Macroeconomics 3rd ednOXFORD UNIVERSITY PRESS Figure 18.5 -2% -1% 0% 1% 2% 3% 4% 5% 6% Bulgaria Czechoslovakia Hungary Poland Romania USSR Yugoslavia China Western Europe 1950-73 1973-92 Economic growth under socialism vs. W. Europe Some  stylized  facts  about  growth #1  Growth  is  a  recent  phenomenon   by  historical  standards. World growth over the very long run ur steps GDP ~100$/person until late Middle-Ages (0.2% annual growth) 1800: 200 $/person 1914: 1000 $/person 2000: 6500 $/person h century: Sequences of strong growth interrupted by wars 9 World GDP per person since year 1 Source: Maddison (2007). EP#07:  Growth  policies 8 Some  stylized  facts  about  growth #2  GDP  per  person  and  productivity   can  experience   significant  synchronous  and  asynchronous  inflections  across   countries  at  similar  development  levels EP#07:  Growth  policies 9 Some  stylized  facts  about  growth #3  Some  countries  have  caught  up  towards  the  richest   countries,  some  have  not  and  even  further  diverged. Aplikace. Konvergence ekonomické úrovně? 33EP#07:  Growth  policies 10 Some  stylized  facts  about  growth #4  No  stable  relationship  between  inequality  and  growth,   but  growth  tends  to  increase  inequality  within  rich   countries. #5  Among  advanced  economies,  technological   change  and   growth  may  increase  income  inequalities.   EP#07:  Growth  policies 11 Growth  and  income  distribution:  a  two   way  relationship Growth  →  inequality   • Kuznets  (1955):  U-­‐shaped  relationship  between   development  level  and  income  inequality   • Unequal  access  to  finance,  education Inequality  →  growth   • Risk  of  political  instability/deadlock   • Demand  for  redistributive  taxation  (Alesina and  Rodrik,   1994)   • Trickle-­‐down   growth:  “A  rising  tide  lifts  all  boats”  (J.F.   Kennedy)   EP#07:  Growth  policies 12 Growth  and  income  distribution Fig.  GDP  per  capita  versus  Gini  coefficient   wth and income distribution: a two-way relationship shaped n development equality inance, butive taxation k, 1994) th: “A rising (J.F. Kennedy) GDP per capita versus Gini coefficient Source: CIA Factbook. EP#07:  Growth  policies 13 Theoretical  background Making the best out of theory Y = A . F(K,L) • In the short run (a few months to a few years), potential output is exogenous; growth is dominated by cyclical fluctuations and by stabilization policies • In the medium run (a few years), governments can influence potential output through investment and labor supply • In the long run (many years), GDP and the labor/capital mix are determined Education, innovation, structural reform, market structure… Labor supply and labor marketsInvestment and capital markets EP#07:  Growth  policies 14 Theoretical  background  (cont.) • In  the  short  run  (a  few  months  to  a  few  years),   potential  output  is  exogenous;  growth  is  dominated   by  cyclical  fluctuations  and  by  stabilization  policies   • In  the  medium  run  (a  few  years),  governments  can   influence  potential  output  through  investment  and   labor  supply   • In  the  long  run  (many  years),  GDP  and  the   labor/capital  mix  are  determined  by  demography,   technology,  institutions  and  market  structures   EP#07:  Growth  policies 15 Education • Public  financing  is  justified  by  credit  constraints  and   unequal  access  to  knowledge  It  is  difficult  to  assess   private  and  social  return  to  human  capital   – relative  returns  of  primary  vs  secondary  education   depend  on  ‘distance  to  frontier’   Discrepancy  between  Europe  and  US  in  total  expenditures   on  tertiary  education.  But  money  is  not  enough.. EP#07:  Growth  policies 16 Spending  on  tertiary  education  (%   GDP) EP#07:  Growth  policies 17 Next, the shift to the ISCED system has produced a slight change to the way attainment data is presented. Basically, they make it easier to tease-out different levels of attainment above the bachelor’s level; but this makes no difference for Canada, because we can’t Source:  OECD  (2015) R&D  and  innovation • Market  imperfection:   investments  to  R&D  are   constrained  by  the  unavailability  of  funds • Social  return  on  research  spending  generally  exceeds  its   private  return =>  Public  funding  of  fundamental  research  and  university   clusters   =>  Incentives  to  private  funding  of  applied  research   – Intellectual  protection   – Innovation-­‐friendly   competition  regime   =>  Channelling private  savings  towards  R&D  and   innovative  SME  financing,  e.g.  through  tax  rebates   EP#07:  Growth  policies 18 Unequal  R&D  effort • R&D  expenditures: – Discrepancy  among  countries  (see  next  slide) • Different  dynamics:   – US:  new  innovating  SMEs   – EU:  firms  already  in  place   • In  the  US,  innovating  firm  creation  encouraged   by:   – risk  capital  and  initial  public  offerings   – lower  entry  cost   EP#07:  Growth  policies 19 EP#07:  Growth  policies 20 Public  infrastructures • Government  intervention  is  needed,    because: – many  infrastructures  are  natural  monopolies – infrastructures   involve  externalities – market  cannot  finance  infrastructures  by  itself =>  European  networks  program,  public-­‐private   partnerships EP#07:  Growth  policies 21 Labor  supply • How  to  increase  labor  supply? – Through  family-­‐oriented   policies   – Immigration   – Welfare-­‐to-­‐work: • in-­‐work  benefits • pension  reforms EP#07:  Growth  policies 22 EP#07:  Growth  policies 23 xception of Sweden, the other countries' rates have been steadily increasing. As addressed below, these trends are the esult of sometimes opposing forces that reflect changes across countries in social preferences for work and the pursuit of higher education. Labor Force Participation of the Young Source:  Dvorkin&Shell (2015) Making  markets  work  better  (cont.) Fig.  Product  market  regulation  and  labor  productivity   acceleration   in  OECD  countries Making markets wor • Labor – Fa – Im – W – Hi • Savin – Lo co – Ch – Pu Eu EP#07:  Growth  policies 24 Developing  financial  markets • Often  neglected  in  growth  strategies   • Channels  on  influence  on  long-­‐term  growth: – lower  cost  of  capital   – Higher  savings – Better  allocation  of  capital   • Major  issue  in  post  crisis  period:  is  there  a  trade-­‐off   between  financial  stability  and  growth?   EP#07:  Growth  policies 25 Growth  and  institutions Institutions: “The  humanly  devised  constraints  that   structure  human  interaction.   They  are  made  up  of  formal   constraints  (rules,  laws,  constitutions),  informal  constraints   (norms  of  behavior,  conventions,  and  self-­‐imposed  codes  of   conduct),  and  their  enforcement  characteristics.”   D.  North  and  R.  Fogel (1990)   d institutions straints that structure human interaction. They es, laws, constitutions), informal constraints self-imposed codes of conduct), and their d R. Fogel (1990) Douglass North 1920- Robert Fogel 1926- EP#07:  Growth  policies 26 Improving  institutions General  recommendations: • create  legal  framework   which  is  conducive  to  private   initiative • put  in  place  effective  market  regulation • achieve  macroeconomic   stability It  is  difficult  to  identify  a  set  of  specific  recommendations   because  of  different  institutional  set-­‐ups. EP#07:  Growth  policies 27 Growth  and  institutions Growth and institutions • Institutions: “The humanly devised constraints that structure human interact are made up of formal constraints (rules, laws, constitutions), informal co (norms of behavior, conventions, and self-imposed codes of conduct), a enforcement characteristics.” D. North and R. Fogel (1990) Source: Ould Aoudia & M Institutional Pro www.cepii.fr/fra nstitutions.htm Douglass North 1920- EP#07:  Growth  policies 28 Reference  textbook Bénassy-­‐Quéré,  A.  et  al.  Economic  Policy  :  Theory   and  practise.  Oxford  University  Press,  2010.   Chap.  5 EP#07:  Growth  policies 29