Determinants of long-term economic growth  Economic systems  Economic policies  Economic institutions  Economic systems  Economic policies  Economic institutions Explaining why growth rates differ

Questions  If the economic systems adopted by two countries are not completely different, is it nonetheless possible to trace the differences in their economic performance to their different economic policies?  Or does technology dictate growth differentials in such cases?  Or perhaps geography?  Or history?  Or all of the above?  If the economic systems adopted by two countries are not completely different, is it nonetheless possible to trace the differences in their economic performance to their different economic policies?  Or does technology dictate growth differentials in such cases?  Or perhaps geography?  Or history?  Or all of the above?

Examination of economic growth in theory and practice  Growth performance of four pairs or clusters of countries since 1970  Low- and middle-income countries  But most of the points to emerge apply to high-income countries as well  Those economies have developed quite differently over the past years despite roughly comparable initial conditions

The four clusters  Thailand and Burma  Botswana, Nigeria, and Ghana  Uruguay, Argentina, and Spain  Madagascar and Mauritius  Thailand and Burma  Botswana, Nigeria, and Ghana  Uruguay, Argentina, and Spain  Madagascar and Mauritius

Burma and Thailand  Burma  1962: General Ne Win came to power  ‘victorious march towards socialism’  self-reliance  but active client of IMF  1970s: respectable growth  rising investment  centrally planned  poor quality  stagnant export  1980s: something had gone seriously wrong  Burma  1962: General Ne Win came to power  ‘victorious march towards socialism’  self-reliance  but active client of IMF  1970s: respectable growth  rising investment  centrally planned  poor quality  stagnant export  1980s: something had gone seriously wrong  Thailand  rising export ratio  strong saving and investment performance  banking system strongly influenced by politicians   quality of investment questionable  strong education record  : GNP per capita increased by more than 5% per year on average compared with 1% in Burma  Thailand  rising export ratio  strong saving and investment performance  banking system strongly influenced by politicians   quality of investment questionable  strong education record  : GNP per capita increased by more than 5% per year on average compared with 1% in Burma

Burma and Thailand: GNP per capita, (constant 1987 US$, 1960=100)

Burma and Thailand  Burma  spurts of rapid growth  depressed investments of low quality  plummeting exports  deteriorating education  evaporation of expertise  political control of economic affairs  Burma  spurts of rapid growth  depressed investments of low quality  plummeting exports  deteriorating education  evaporation of expertise  political control of economic affairs  Thailand  The stock-market crash in not likely to dim long-run prospects  Thailand’s growth prospects continue to look bright  Thailand’s economy seems basically sound In 1990, Burma’s military junta refused to abide by the general election victory of the opposition, led by Aung San Suu Kyi In 1996, the universities were shut down Rapid growth over the long haul does not always have to be smooth

Selected countries: Overview

Botswana, Nigeria, and Ghana  Botswana  world record in growth  GDP per capita has grown by 7.5% per year since 1966  dependent on natural resources - diamonds  80% of exports  40% of GDP  democratic  well-managed resources  strong education  stable economic development  11% average inflation rate  Botswana  world record in growth  GDP per capita has grown by 7.5% per year since 1966  dependent on natural resources - diamonds  80% of exports  40% of GDP  democratic  well-managed resources  strong education  stable economic development  11% average inflation rate  Nigeria  oil price increase in world markets  income per capita rose fourfold  poor investment  unproductive capital  collapse of output  low investment since 1980s  oil exports crowded out non- oil exports (90% of total)  natural resources: a mixed blessing?  Nigeria  oil price increase in world markets  income per capita rose fourfold  poor investment  unproductive capital  collapse of output  low investment since 1980s  oil exports crowded out non- oil exports (90% of total)  natural resources: a mixed blessing?

Botswana, Nigeria, and Ghana  Nigeria  oil  80% of government revenue  20% of GDP  ruled by military on and off  19% inflation on average  Nigeria  oil  80% of government revenue  20% of GDP  ruled by military on and off  19% inflation on average  Ghana  model client of IMF and World Bank since 1980s  increasing foreign trade  increasing investment  a turning point  exports of goods and services rising  net foreign direct investment flowing into Ghana 3.6% of GDP in 1995 compared with 2.4% in Nigeria  36% inflation on average  Ghana  model client of IMF and World Bank since 1980s  increasing foreign trade  increasing investment  a turning point  exports of goods and services rising  net foreign direct investment flowing into Ghana 3.6% of GDP in 1995 compared with 2.4% in Nigeria  36% inflation on average Abundant natural resource wealth can turn out to be, at best, a mixed blessing

Botswana, Ghana, and Nigeria: GNP per capita, (current US$, Atlas method)

Uruguay, Argentina, and Spain  Uruguay  abundant resources  dedication to social security and social services  South American welfare state  active role of government  protectionism  declining GNP per capita  today: quite closed economy  rampant inflation  Uruguay  abundant resources  dedication to social security and social services  South American welfare state  active role of government  protectionism  declining GNP per capita  today: quite closed economy  rampant inflation  Argentina  gradual relative decline  political development lagged behind economic progress  landowners ruled the country  blocking decentralization, democratization, and diversification away from agriculture  hardening conflict  between landowners and emerging urban classes  gradual deterioration of living standards  Argentina  gradual relative decline  political development lagged behind economic progress  landowners ruled the country  blocking decentralization, democratization, and diversification away from agriculture  hardening conflict  between landowners and emerging urban classes  gradual deterioration of living standards Economic growth is relative

Uruguay, Argentina, and Spain  Argentina  Perón president in 1946  high inflation  rapid escalation of debt  flawed economic policies  import substitution  overvaluation of the currency  insufficient competition  reduced foreign trade and dragged down living standards  civil disorder, inflation, corruption, and brain-drain  slow and uneven growth  strikingly closed economy  history of high inflation  Argentina  Perón president in 1946  high inflation  rapid escalation of debt  flawed economic policies  import substitution  overvaluation of the currency  insufficient competition  reduced foreign trade and dragged down living standards  civil disorder, inflation, corruption, and brain-drain  slow and uneven growth  strikingly closed economy  history of high inflation  Spain  joined the European Union in 1986  opened up its economy  expanded exports  Spain  joined the European Union in 1986  opened up its economy  expanded exports History matters for economic growth, as does politics and so does inflation

Argentina, Uruguay, and Spain: GNP per capita, (current US$, Atlas method)

Madagascar and Mauritius  Mauritius  mixed market economy  since 1980: income per head has increased fast  diversified economy  more open to foreign trade and investment  invests more  farther along on its way from agriculture to industry, trade, and services  sends more girls go to school  Mauritius  mixed market economy  since 1980: income per head has increased fast  diversified economy  more open to foreign trade and investment  invests more  farther along on its way from agriculture to industry, trade, and services  sends more girls go to school  Madagascar  centrally planned economy  since 1980: income per head has fallen  growth differential between the two countries has been even larger since mid-1980s  more inflation  more dependent on exports of raw materials  more indebted abroad  Madagascar  centrally planned economy  since 1980: income per head has fallen  growth differential between the two countries has been even larger since mid-1980s  more inflation  more dependent on exports of raw materials  more indebted abroad

Madagascar and Mauritius: GNP per capita, (current US$, Atlas method)

Conclusion  Country comparisons are not to be taken literally  Intended to highlight some aspects of economic growth  What do the examples have in common?  All point to economic factors rather than exogenous technology  economic system  institutions  orientation of economic policy Key distinction: Endogenous growth vs. exogenous growth This is the fundamental message of the theory of endogenous growth