CCIC’s Discussion:

What is sustainable growth? Does it matter? And is CIDA promoting it?

Franque Grimard

Department of Economics Institute for the Study of International Development (ISID)

McGill UniversityCanadian Economics Study Group (CDESG)

January 23, 2012

Discussion on “What is sustainable growth? Does it matter? And is CIDA promoting it?”

Economic Growth 101: Theories and Empirics Case Study: Growth in LAC Countries Canada and CIDA Comments and Suggestions

Economic Growth Basics Traditional view of capital (Harrod-Domar, Solow Models)

• Tangible, includes the economy’s stock of equipment and structures• Return to capital is the profit received by the owners of equipment and

structures A new view on capital (Mankiw, Phelps and Romer 1995)

• Capital with externalities• If new ideas arise as capital is built and others benefit

• Human capital• Capital is much broader concept than suggested by the national income accounts• People accumulate capital whenever they forgo consumption today in order to

produce more income tomorrow• Schooling and on-the-job training is also investment

Growth accounting with human-capital-adjusted labor input Modified production function to capture the

contribution of education (“brains”) and the size of the labor force (“brawn”)

• S is the years of schooling• P is participation rate• ω is returns to education

So that

SLPeH

HAKY

)1(

(B) )ˆˆ(ˆˆˆ

(A) ˆˆ)1(ˆˆ

SSPLH

AHKY

Determinants of income per capita Growth (1) After rearranging (A), substituting (B) into (A), and

representing income in per capita term we get:

• where gx is the growth rate of variable x

Income growth per capita is a result of:• Growth in technology gA• Changes in capacity which are determined by:

• Growth in the capital stock per unit of labor adjusted for skills• Growth in the labor participation rate• Growth in returns to education and years of schooling• Demographic changes leading to changes in the dependency ratio

What else? • Whatever is not explicitly in the production function: TFP

N

LP

H

KA

N

Y gSSgggg )ˆˆ(.

Determinants of income per capita Growth (2)

Total Factor Productivity, i.e. the residual between the LHS and RHS

Possible Determinants of Total Factor Productivity

• Trade• Governments• Gender• Inequality• Governance• Institutions

Determinants of TFP for income per capita Growth : Issues

Issues of causality: what determines what over what time period

Can one really say that by increasing a factor, one will then a higher TFP and consequently a higher growth rate?

Growth Diagnostics (Rodrick et al. 2006) applied to poverty analysis

Case Study: Sustainable and Inclusive Economic Growth in Latin America Definitions: “Sustainable and Inclusive” Historical Context of the Americas Inequalities (Rural, urban, gender, ethnicity) Governments Debt Crisis of the 1980s Conflicts (domestic, external)

Sustainable and Inclusive Economic Growth in the Americas (1968-2008): GDP per capita

Sustainable and Inclusive Growth in the Americas (2000-2008): Inequality

Sustainable and Inclusive Growth in the Americas 1992-2008): Inequality

Sustainable and Inclusive Economics Growth in the Americas

Factors• Past• Peace• Macroeconomic Stability• Governmental Policies: Education, Health : Policies

targeted towards the Poor Opportunitades, Bolsa Familia• Democratic Governments , center-left vs Populist governments

• Increase in TFP• International trade• Luck

Social Programs Expansion

Trade: Terms of Trade

Sustainable and Inclusive Growth in the Americas : Challenges and Constraints

Expectations: Gini Reduction should be understood in the context of a very high level.

Heterogeneity: within and across countries Infrastructure Population aging Trade, Natural Resources Economy Diversification Productivity Increase Governance Luck and Shocks

Sustainable and Inclusive Growth in the Americas: Canada’s Role

In 2009, according to DAC, Canada spent close to $US 541 millions. United States: $US 2B on LAC countries.

In 2009, remittances from workers abroad into LAC countries 56,600,951,140 US$ (US$ 56 billion), which represents about 1.7% of the total GDP of the LAC countries.

Official Development Assistance has relatively a small role, if any, in creating macroeconomic growth, as defined here.

Free trade Treaties

Canadian Government:(from the Web): CIDA’s Priority Themes

CIDA has also chosen priority themes on which to concentrate its efforts. These are areas where Canada has proven its leadership:

Increasing food security Securing the future of children and youth Stimulating sustainable economic growth

Web: CIDA’s Sustainable Economic Growth Strategy

Through the Sustainable Economic Growth Strategy, CIDA will focus its main targeted investments to support sustainable economic growth that:• Fosters a stable foundation for viable businesses and

industries to thrive• Increases opportunities for meaningful employment,

particularly in the formal economy• Maximizes the contribution of growth to the public

resources available for investment in the welfare of the population

CIDA'S Sustainable Economic Growth Strategy

The strategy also integrates environmental sustainability, equality between women and men, and governance as essential considerations to achieve sustainable economic growth.

Within the strategy, CIDA will focus on three paths: Building economic foundations Growing businesses Investing in people

Comments and Suggestions

Broad set of Principles, not a strategy per se. These principles cover a lot of ground in the

growth and poverty literature Not about Children and Youth. Not about Food Security. In 2009, $700 million over 20 or so countries. Limited Impact in terms of macroeconomic growth. More likely in micro terms, over a long period.

Comments and Suggestions

IDRC’s Supportive Inclusive Growth (SIG) program.

This “strategy” offers flexibility, particularly at the micro level.

Governance, Institutions, Infrastructure. Rights, Markets for Poor. Poverty focus: Mobile Phones