DevelopmentStrategy

• 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

PPP’s1. 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 .

kjv

k kj ANCp p

PPP XrateClassification Name 20051101 Food and non-alcoholic beverages 8.81547906 7.781102 Alcoholic beverages and tobacco 10.1680743 7.781103 Clothing and footwear 6.11435997 7.781104 Housing, water, electricity, gas and other fuels 9.09847987 7.781105 Furnishings, household equipment and household maintenance 7.61334163 7.781106 Health 2.9312812 7.781107 Transport 9.40016616 7.781108 Communication 6.83789147 7.781109 Recreation and culture 5.24897067 7.781110 Education 3.25951882 7.781111 Restaurants and hotels 8.98215569 7.781112 Miscellaneous goods and services 5.61784877 7.781501 Machinery and equipment 7.5934365 7.781502 Construction 4.15019416 7.78

Hong Kong PPP per Category

WDI provides PPP data for many countries using US$ as anchor currency

PPP Conversion Factor

• PPP is a value weighted average of relative prices of all K goods.

1 2$ 1 2

1 2...

,......,

Kj j jAC K

j j j j KANC ANC ANC

nn jj

j

p p pPPP w w w

p p p

v w V

PPP 2010

PPP PPP/XR XRChina 3.94638098 0.582922 6.770269Hong Kong 5.34545752 0.688032 7.769167Korea 827.345987 0.71566 1156.061Japan 111.389068 1.268959 87.77988Singapore 1.04012836 0.762831 1.363508

One benchmark for thinking about whether a currency is undervalued or overvalued. If PPP < XR, then domestic goods are relatively cheap, currency is undervalued.

GDP in Intl$• PPP’s are used to construct comparable

measures of GDP for multiple countries by converting them into international dollars.

$[ $] jINTLjj

GDPGDP Intl

PPP

GDP per capita, PPP (current international $)2005

Hong Kong SAR, China $35,677.92China $4,114.57India $2,299.76Indonesia $3,216.81Malaysia $11,754.53Korea, Rep. $22,783.27Thailand $6,750.94Singapore $45,374.24

Per capita GDP in international dollars is headline way of comparing living standards.

Atlas Conversion Method

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20120

10000

20000

30000

40000

50000

60000GDP pe Capita, US$

Hong Kong SAR, China Singapore

Axis

Met

hod

• Use real GDP growth rates to construct path of constant price International $GDP for comparisons of production levels across time and space.

GDP per Capita, PPP

0.00

10,000.00

20,000.00

30,000.00

40,000.00

50,000.00

60,000.00

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Con

stan

t 200

5 In

tern

atio

nal $

Singapore Hong Kong

• Developing countries tend to be relatively cheap with PPP’s 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.

GDP per Capita vs. Productivity

• Per Capita GDP can be broken down into two parts:

GDPper

Capita=

ProductivityGDPper

Engaged Person

Employment RateEngaged Person

perCapita

X

Bosnia and Herzegovina Egypt Philippines Jamaica Lesotho Ghana Slovenia South Korea Norway0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

Employment per Capita, 2011Fr

actio

n of

Pop

ulati

on

Most differences due to Worker Productivity

Congo - KinshasaRwanda Bangladesh Nigeria Moldova Georgia Botswana Malaysia Russia Croatia Denmark Singapore0

20000

40000

60000

80000

100000

120000

140000

160000

180000

GDP per Worker, 2011

2005

Intl

$

. Productivity

• Productivity can be broken down into two parts:

ProductivityGDPper

Hour=

ProductivityGDPper

Engaged Person

Hour per

Engaged PersonX

Netherl

ands

Norway

Luxe

mbourg

Belgium

Trinidad

and To

bago

United Kingd

omAustr

ia

Finlan

d

New Ze

aland

United St

ates

Canad

a

Barbad

os

Slova

kia

Czech Rep

ublic

Cypru

sBraz

il

Turke

y

Estonia

Israe

l

Portuga

l

Colombia

Jamaic

a

Greece

Mexico

Taiw

an

Singa

pore0

500

1000

1500

2000

2500

Hours Worked per Worker, 2011Ho

urs

Jamaic

a

ColombiaPeru

Mexico

Bulgaria

Latvia

Poland

Hungary

Barbad

os

South Korea

Czech Rep

ublic

Greece

Israe

l

New Ze

aland

Malta

Icelan

d

Singa

pore Italy

Finlan

dSp

ain

Swed

en

Denmark

German

y

Irelan

d

Netherl

ands

Norway

0

10

20

30

40

50

60

70

80

Productivity per Hour20

05 In

tl $

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

Total Economy Database Link

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.

Productivity Catch Up: EuropeSource: Groningen Growth & Development Center

2009 Intl$, GDP per Hour Worked (Y/L)

1950 % of US 2009 % of USUSA 18.89 100.0% 58.98 100.0%

France 7.95 42.1% 54.65 92.7%Germany 6.45 34.1% 53.46 90.6%

Italy 6.57 34.8% 41.01 69.5%UK 11.49 60.8% 50.76 86.1%

Productivity Catch Up: East Asia Source: Groningen Growth & Development Center

1963 % of US 2009 % of USUSA 18.89 100.0% 58.98 100.0%

Hong Kong 10.28 54.4% 39.98 67.8%Japan 7.39 39.1% 39.91 67.7%

Singapore 7.94 42.0% 38.22 64.8%South Korea 2.86 15.1% 27.03 45.8%

Taiwan 2.95 15.6% 36.65 62.1%

2009 Intl$, GDP per Hour Worked (Y/L)

Productivity Catch Up?: Latin America

Source: Groningen Growth & Development Center

1950 % of US 2009 % of USUSA 18.89 100.0% 58.98 100.0%

Argentina 8.05 42.6% 21.35 36.2%Brazil 3.33 17.6% 11.48 19.5%Chile 5.72 30.3% 15.48 26.2%

Mexico 7.01 37.1% 17.26 29.3%

2009 Intl$, GDP per Hour Worked (Y/L)

Capital Accumulation

• Capital Formation – Stock of equipment, machines, structures.

• Incremental increase in capital is investment less some measure of depreciation

Capital Productivity

• Capital Productivity: Capital investment is a central part of advancing productivity in developing economy but displays diminishing returns.

19501952

19541956

19581960

19621964

19661968

19701972

19741976

19781980

19821984

19861988

19901992

19941996

19982000

20022004

20062008

20100

50000

100000

150000

200000

250000

300000

350000

Capital stock at current PPPs (in mil. 2005US$) per persons engaged

BrazilFranceSouth KoreaUnited States

2005

Intl.

$

19501952

19541956

19581960

19621964

19661968

19701972

19741976

19781980

19821984

19861988

19901992

19941996

19982000

20022004

20062008

20100

0.1

0.2

0.3

0.4

0.5

0.6

0.7

Capital Productivity

Brazil France South Korea United States

Measuring Capital ReturnsICOR

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

• ICOR is volatile, must take long run averages.

1

1

Const.$t

t Const.$ Const.$t t

GFCFICOR

GDP GDP

1 1

1 1

1

1

Const.$ Const.$t tConst.$ Const.$

t tConst.$ Const.$

t tConst.$

t

GFCF GFCF

GDP GDPQGDP GDPt

GDP

ICORg

19751976

19771978

19791980

19811982

19831984

19851986

19871988

19891990

19911992

19931994

19951996

19971998

19992000

20012002

20032004

20052006

20072008

20092010

20110

1

2

3

4

5

6

7

8

9

10

ICOR, Korea, 5 year Rolling Averages

DEVELOPMENT POLICYTne Role of Government

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.

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 Link• Example: Brazil Link

Industrialization

Structuralist Theory• Rosenstein-Rodan: Growth

potential, combination of degree of investment and capacity to organize investment

Predictions

Structuralist Theory and Trade• UNCTAD Economist Raul Prebisch developed the

idea that prices of primary products would fall in value relative to manufactured goods. Link

• 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.

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 competition4. Source of corruption Link - Krueger.

1965

1966

1967

1968

1969

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

Brazil

1.5316346516876

7

0.3944984585491

6

0.411066719357785

2.5514402690933

2

3.8543101187526

3

5.0423496305687

1

6.4985484587375

2

7.9450394506787

5

8.4888702154720

1

8.3878131468968

9

7.7167358648675

7

7.4382297477212

5.9909608656851

6

3.8941739964415

3

3.4514491434180

8

4.2181877397413

5

1.4539564054651

1

0.677094191532297

-0.604216752155733

-0.866685339195272

-1.0479463148950

1

1.4337930417156

2

2.0963470100009

9

2.8203187658573

2

2.5127533472376

8

0.187987724462792

-1.0064936295139

3

-1.7334776744779

1

India

1.4005166090122

9

0.632763012859022

1.5632391037703

6

1.0251388678594

2

0.818886291919594

2.3192869936324

3

2.6282808974271

7

0.966630027455421

0.927753568968109

-0.138805389876475

0.6232492326551

7

0.610832015546751

2.1221676622238

5

2.5832410435860

1

1.3227291300030

7

0.8525270473063

9

1.7103920595732

0.987553752409676

1.3162865452441

3.1083798582356

5

2.8412530685551

5

2.6225524031314

6

2.7398818723977

1

3.2219374858658

2

3.6658288618155

3.7536038095313

7

3.0628380482720

3

3.4029232001224

5

Myanmar

2.2328600551471

1

1.1519187514436

9

-0.856878142635668

-1.1707050440909

4

0.5791320555271

6

-0.565854841683327

1.1798412504406

2

2.8193102789377

3

0.2946647726630

8

0.714204558015376

0.568302400583156

0.960718140653739

1.6574469240997

4

3.1284285178943

8

3.1100359140088

2

3.8599926796427

2

3.9238261521769

2

3.8664815363009

1

3.4692208981825

3

3.4512117830620

7

2.5114805304552

4

1.1361536333239

7

-0.654844007616805

-3.6451621351394

7

-3.7865093472158

8

-3.7026369184752

2

-3.5442255781992

3

-0.781860581548116

Algeria

0 -7.3571694588700

9

-0.467255878680966

2.2488071503214

7

3.0363670810828

6

3.6028352840295

2

2.3294628118479

2

5.8500821054815

3

4.5244853945

4

4.3671772042511

1

3.6298424348258

1

7.4535239031719

6

3.1124862808052

4.1228408988091

1

4.0651372333055

3

3.1756297839446

6

2.0525129381790

9

2.1893805130397

1

1.3736750132367

0.964107133336867

1.5245399180101

9

1.0585252723088

3

-0.245129457721743

-1.3903358781157

-1.5138931530168

2

-1.9706949843931

-2.1809292624165

8

-1.5925829602410

9

Kenya

0.241633145625102

4.5646067621459

6

3.3482559107281

2

3.1564620808553

3.6949837341360

3

2.3637663146782

8

3.7463026712561

8

6.3414386921911

5.8843786567262

3

5.0829220610068

2

6.1111778069028

9

2.2120000473304

0.710699521659706

0.882779624345173

1.5447380579267

7

2.4307392133448

4

2.7211276837847

3

1.1706758976739

5

0.078983511473237

-1.0493845272246

-1.2817827580768

-0.593088760773645

0.3067559009545

9

1.3068680469549

2

1.9359445611801

9

1.9826094499111

3

0.9427360006721

5

-0.290648487635036

-9

-7

-5

-3

-1

1

3

5

7

9

Per Capita GDP%

Gro

wth

Rat

e

Average Growth Rate, GDP per Capita1950-1973 1973-1998 1998-2008

12 W. Europe 3.8% 1.8% 1.7%W. Offshoots 2.4% 1.9% 1.6%F. USSR 3.3% -1.8% 7.0%8 L. America 2.6% 1.1% 1.8%Asia 3.8% 2.9% 4.6%Total Africa 1.9% 0.1% 2.3%World Total 2.9% 1.3% 2.9%

Link

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 Rates5. Competitive Exchange Rate

http://www.iie.com/publications/papers/williamson0904-2.pdf

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.

EAST ASIAN MIRACLE

19651966

19671968

19691970

19711972

19731974

19751976

19771978

19791980

19811982

19831984

19851986

19871988

19891990

19911992

19931994

1995

-4

-2

0

2

4

6

8

10

12

GDP per capita growth (annual %) , 5 year averages

Hong Kong SAR, China Indonesia Korea, Rep.Malaysia Singapore ThailandLatin America & Caribbean (all income levels) Middle East & North Africa (developing only) South AsiaSub-Saharan Africa (developing only)

Neo-classical ViewPhysical & Human Capital Deepening

• High investment rates beginning in 1970’s• Rapid growth in education rates.• Macroeconomic Stability: Low inflation, small

budget deficits• Market Orientation: South Korea vs. North

Korea

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 20100

5

10

15

20

25

30

35

40

45

50

Gross capital formation (% of GDP)

Hong Kong SAR, China Indonesia Korea, Rep.Malaysia Singapore ThailandLatin America & Caribbean (all income levels) Middle East & North Africa (developing only) South AsiaSub-Saharan Africa (developing only)

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 List’s American system

Can Japan Compete?

• Japanese companies dominated a number of advanced industries from the 1980’s 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

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

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

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 20100

10

20

30

40

50

60

Gross domestic savings (% of GDP)

Hong Kong SAR, China Singapore Korea, Rep.Thailand Malaysia IndonesiaWorld Latin America & Caribbean (all income levels) Middle East & North Africa (developing only)South Asia Sub-Saharan Africa (developing only)

1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 19850

5

10

15

20

25

School enrollment, tertiary (% gross)

Indonesia Malaysia ThailandLatin America & Caribbean (developing only) Middle East & North Africa (developing only) South AsiaSub-Saharan Africa (developing only)

South Asia

Sub-Saharan Africa (developing only)

Middle East & North Africa (developing only)

Latin America & Caribbean (developing only)

Indonesia

Malaysia

Thailand

0 10 20 30 40 50 60 70 80 90 100

Literacy rate, adult total (% of people ages 15 and above)

2000 1990 1980

Government Intervention• “Market friendly” – Macroeconomic stability

and strong property rights encourage private investment but,…

• Strong Bureaucratic State to Promote GrowthKey Interventions• Financial repression to promote corporate

investment• Allocation of Resources (Credit & Foreign

Exchange) to Export Industries

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

Pillars of East Asian Growth MiracleWorld Bank Chief Economist View

• Gov’t intervention in East Asia overcomes market failures

• Underdeveloped financial markets – gov’t intervention fills

• Gov’t intervention supports knowledge producing activities.– Technical education and research– Deliberative councils, research consortia– FDI – Export industries

Foreign Direct InvestmentTwo 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 TNCsVolume I FDI Flows and Stocks LINK

Pro’s 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.

Link #1 Link #2

1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

-2

0

2

4

6

8

10

Foreign direct investment, net inflows (% of GDP)

Indonesia Malaysia ThailandArab World Latin America & Caribbean (developing only) Middle East & North Africa (all income levels)South Asia Sub-Saharan Africa (developing only)

%

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 can’t be gamed by corrumption.

New Structuralist DevelopmentStrategy

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.

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 20100.00

2.00

4.00

6.00

8.00

10.00

12.00

Korea: Average Years of Schooling, 25+

Auto Textiles and Clothing Office & Telecom Equipment

Iron and Steel Chemicals Other Machinery0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

Korea, Industry Share of Exports

1980 1990 2000 2010

Industrial Policy for 21st CenturyDani Rodrik 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

Peruvian Asparagus

• Peruvian farmers growing asparagus since 1950’s with minimal economic impact.

• In 1980’s, US gov’t sent experts for knowledge transfer.

• Gov’t started cooperative associations for technology sharing and marketing coordination.

• Gov’t invested in freezing & packing plants.• Peru now the #1 asparagus exporter.

Principles

• Upgrading not radical change• New activities only• Clear benchmarks of success• Built-in sunset clause• Subsidize activities that create information or

knowledge spillovers

Industrial Policy

• Gov’t 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.