Thursday, 20 November 2008



November 19, 2008
International finance and economic growth - Dani Rodrik's weblog
The Commission on Growth and Development has put out a nice survey by Maury Obstfeld of the impact of international finance on growth in developing countries. Here is the first part of the abstract:
Despite an abundance of cross‐section, panel, and event studies, there is strikingly little convincing documentation of direct positive impacts of financial opening on the economic welfare levels or growth rates of developing countries. The econometric difficulties are similar to those that bedevil the literature on trade openness and growth, though if anything, they are more severe in the context of international finance. There is also little systematic evidence that financial opening raises welfare indirectly by promoting collateral reforms of economic institutions or policies. At the same time, opening the financial account does appear to raise the frequency and severity of economic crises. Nonetheless, developing countries continue to move in the direction of further financial openness.
The paradox that Obstfeld points to is an important one, which has long puzzled me. Why have so many developing countries embraced financial globalization despite the hard-to-locate benefits and all-too-apparent costs? Obstfeld's preferred answer is this:
A plausible explanation is that financial development is a concomitant of successful economic growth, and a growing financial sector in an economy open to trade cannot long be insulated from cross‐border financial flows. This survey discusses the policy framework in which financial globalization is most likely to prove beneficial for developing countries. The reforms developing countries need to carry out to make their economies safe for international asset trade are the same reforms they need to carry out to curtail the power of entrenched economic interests and liberate the economy’s productive potential.
This is an interesting hypothesis, but I am not sure I agree with the final sentence. Some of the most stupendous development successes of our time have been based on subsidized credit, a certain dose of financial repression, development banking, and managed exchange rates, all of which require controlled, rather than liberalized, finance. See South Korea, Taiwan (both of them during the 1960s and 1970s), and China, in particular.
I think an alternative explanation is ideology and the zeitgeist. The dominant narrative of multilateral institutions, the G-7 and most economists has been very kind to financial globalization--lack of evidence notwithstanding. The policy and intellectual climate has been hostile to managing capital flows. So governments have been reluctant to deviate from the norm lest they become identified as renegades.
While we are on international finance, see also Henry from Crooked Timber, who elaborates on the dilemma of global finance in a world of divided sovereignty.
Posted at 02:23 PM Comments (8) TrackBack

Financial globalisation and productivity growth
M. Ayhan Kose, Eswar Prasad, Marco E. Terrones, 5 January 2009
There is a vast empirical literature analysing the impact of financial openness on economic growth but far less attention has been paid to its effects on productivity growth. This is surprising given the strong evidence that productivity growth is the main driver of long-term economic growth. This column argues that financial openness in fact has a positive impact on productivity growth, although the effects are subtle.

Science,Technology, and Innovation - Capacity Building for Sustainable Growth and Poverty Reduction
Edited by Alfred Watkins and Michael Ehst
2008 The International Bank for Reconstruction and Development/The World Bank 236 p.

Robert Watson, Michael Crawford and Sara Farley
World Bank Policy Research Working Paper 3026, April 2003 62 p.


THE DAY AFTER TOMORROW: A Handbook on the Future of Economic. + GoogleDocs - livro Banco Mundial (2010)


The Economist; 1/4/92, Vol. 322 Issue 7740, p15-18
Until recently, economics had little of interest to say about economic growth. Now this is changing. The effects could be profound

LITTLE to say about growth? Surely economists talk of nothing else? Forecasters argue indefatigably about growth this year (even this quarter) and next. Economic advisers tell ministers that this tax cut or that increase in public spending will be good for growth. To some critics, indeed, the trouble with economics is precisely that its obsession with growth leaves issues such as sustainability out of account. True enough: economists are interested in growth. The trouble is that, even by their standards, they have been terribly ignorant about it. The depth of that ignorance has long been their best-kept secret.
What has kept it hidden is the distinction between short-term growth and long-term. To predict whether an economy's output will increase from one year to the next, no proper theory of growth is required--nor is one used. Economists look first at the gap between an economy's current output and its capacity for production, then at the forces (consumer confidence, the stock-building cycle, the state of other economies and what have you) that will affect this gap in the months ahead. Out of that comes a forecast of growth.
Such forecasts are informative enough to be taken seriously by governments and financial markets. But they merely predict fluctuations around a trend, in the course of one business cycle. For long-term forecasting--estimating how far output will increase from one decade to the next--this approach is no use, because what matters here is not the gap between output and capacity, but the long-term trend of capacity itself.
Why has growth in productivity slowed in America in the past two decades? Did the reforms of the Thatcher years raise Britain's long-term rate of growth? Why have the economies of Japan, South Korea, Taiwan and the other Asian dragons expanded at an astonishing pace in the past 40 years, while much of Africa has stagnated or declined? How long will the ex-communist countries of Eastern Europe and the Soviet Union take to catch up with the West? To answer these questions needs something that economics has so far been unable to provide: an understanding of the forces that drive long-term growth.
Mainstream economics does have a theory of long-term growth. It was devised by Robert Solow, of the Massachusetts Institute of Technology, in the 1950s, and has been much modified and improved since then. But this so-called neoclassical theory is patently inadequate--so much so that its teachings have had virtually no influence on policy-makers. Only now are there signs of a change. The defects of the theory are the starting-point for new ideas which, with luck, may end the short-termism of economics and push long-term growth to the front of policy-makers' minds.
The heart of the neoclassical theory is an equation, called the production function, which says that the output of an economy depends on the amount of capital and labour employed. The theory also made some linked assumptions about this relationship. First, if you double the amount of both capital and labour, you will get twice as much output. This is the assumption of constant returns to scale. Second, if you add more capital to any given labour force, or more labour to any given stock of capital, you will get successively smaller increases in output: for each factor of production, holding the other fixed, there are diminishing returns.
These assumptions seemed plausible. Reassuringly, they were also consistent with the imagined world that economists call perfect competition. But they have a striking implication. In an economy where the stock of capital is rising faster than the labour force, the return to new investment (ie, to a further increase in the capital stock) should fall with time. For today's industrial countries, this has not happened: the returns to investment have been higher in the past few decades than they were in the late 19th and early 20th centuries.
In the same way, the theory implies that poor countries should find it easy to grow much faster than rich ones: investment in a country with little capital should spur output more powerfully than a proportionate amount of investment in a country with plenty. Again, the facts do not bear this out. The chart shows how GDP per head grew between 1960 and 1985 in 114 countries, ranked (poor-to-rich, left-to-right) by their GDP per head at the start of the period. If poor countries had found it easier to grow faster than rich ones, the points on this scatter-graph would cluster along a downward-sloping line, from top left to bottom right. Take the Asian dragons and the rich countries alone, and that seems to be so. Add in the rest of the world, however, and the trend vanishes.
To both these difficulties, the neoclassical theory has an answer: technological progress. Though returns diminish as more capital is added to the economy, that effect is offset by the flow of new technology. This could explain why rates of return have stayed high in the industrial countries and, arguably, why most poor countries have not grown faster than rich ones.
Yet the theory still looks odd. For instance, it implies that a sustained increase in investment will not, of itself, raise an economy's long-term rate of growth. As the capital stock grows, more of each year's investment must be set aside to replace old machines as they wear out. An increase in investment, says the theory, will cause the capital stock to grow--but only until investment is again exactly sufficient to hold the amount of capital steady. So a permanent increase in investment--say, from 10% of GDP to 12% of GDP each year--will cause only a transitory increase in the capital stock, and hence in output. Ultimately, therefore, technological progress, not investment, is the engine of growth.
That makes it crucial to understand what technological progress is, and how it happens (we shall print an article on that next week). Neoclassical theory has no convincing answer. It supposes, in effect, that new technologies rain down from heaven as random scientific breakthroughs. In statistical terms, technological progress is simply ``the residual''--the thing that accounts for any growth that cannot be accounted for in other ways. When economists apply the theory to real economies, they get a poor fit. Typically, studies find that increases in capital and labour account for half or less of the growth in output. The rest is put down to technological progress or, as the residual is also known, ``total factor productivity''. The neoclassical theory can explain only half of what it purports to explain.
For 30 years the larger part of economic growth was thus consigned to a black box; the best that mainstream economics could do was to offer a choice of fancy labels for it. Outside the mainstream, and in a disconnected way, economists worked for years on how to look inside the box and make sense of the contents. Only recently have these strands of work begun to be drawn together into a radically new theory of growth.
With hindsight, intellectual historians will probably date the revival of growth theory to 1983 and a University of Chicago doctoral thesis entitled ``Dynamic Competitive Equilibria with Externalities, Increasing Returns and Unbounded Growth''. Its author was Paul Romer, now a professor at the University of California at Berkeley and a fellow of the Canadian Institute for Advanced Research. Since then, he and a growing band of economists have built parts of a theory that seems likely to fit the facts. The work is still providing as many new questions as answers to old ones, but the outline of the next orthodoxy is now discernible.
Recall that the neoclassical theory takes into account just two factors of production: capital and labour. In effect, Mr Romer and his colleagues add another: knowledge. This makes the theoretical production function much more plausible, in several ways.
First, the new theory recognises that knowledge (eg, about how to make things) can raise the return on investment. This accounts for the evidence on rates of return over time, and the non-convergence of growth rates among countries. Second, whereas in the neoclassical theory technological progress just happens, in the new theory knowledge is a factor of production which, like capital, has to be paid for by forgoing current consumption. Economies have to invest in knowledge in the same way that they invest in machines. Third, since past investment in capital may make it more profitable to accumulate knowledge, the new theory admits the possibility of a virtuous circle in which investment spurs knowledge and knowledge spurs investment. This in turn implies that a sustained increase in investment can permanently raise a country's growth rate--an idea that the traditional theory denied.
In short, the new theory is capable of explaining the world as it actually is. In his most recent work, Mr Romer has elaborated it, to take four factors of production into account: capital, unskilled labour, human capital (measured by years of education, for instance) and ideas (which might be measured by patents). Not everyone thinks that an improvement. But whether with three factors or four, Mr Romer's theory has one most uncomfortable consequence. It is flatly inconsistent with the idea of perfect competition--the theoretical underpinning not just of the neoclassical theory of growth but of a good part of modern economics. No wonder the old theory, despite its obvious drawbacks, survived so long.
Why is the new theory inconsistent with perfect competition? Because perfect competition means that firms are price-takers: they accept the price that rules in the market and cannot change it. Under constant returns to scale, as assumed by the old theory, this can be so. If firms cut their prices to win a bigger share of the market, they achieve no further economies of scale and therefore risk losing money.
With three (or more) factors, the assumption of constant returns to scale no longer stands up. Taking all the factors together, the production function shows increasing returns: if you double all the factors, output more than doubles. In this theoretical world, firms can cut prices, raise output and--thanks to lower costs--make a bigger profit than before. With increasing returns, therefore, competition is imperfect--another way of saying that firms are price-setters, not price-takers. This change may seem insignificant. In fact it turns economic theory inside out.
Despite that, Mr Romer's approach is likely to form the basis of mainstream thinking on growth during the coming years. Many recent advances in economic theory have started from, or ended up at, the idea of imperfect competition. This is partly because economists now have the mathematical techniques that are needed to explore it. Abandoning the assumption of perfect competition no longer means abandoning most formal analysis of economic systems. In this respect, the new growth theory is in tune with the times. The new theory is attractive in another way too. Because it simply brings new factors into the neoclassical production function, it can be seen--despite its far-reaching implications--as an extension of the existing orthodoxy. That makes it easier to digest.
If Mr Romer's approach is to be the new orthodoxy, its principal challenger will probably be a theory developed by Maurice Scott, of Nuffield College, Oxford. Though appealing, his theory is less digestible. The differences between the two shed light on the questions that the new generation of growth theorists will have to grapple with.
Mr Scott agrees that the neoclassical production function is no use. But rather than modify it, he wants to abandon it entirely. The core of his argument echoes an old debate in economics. He says that the measure of capital that appears in the production function is fundamentally incorrect.
The production function is concerned with the change in the net stock of capital--ie, with gross investment less depreciation. This implies that depreciation is a physical process that reduces the productivity of capital; as it were, a reduction in the number of machines in the economy. Wrong, says Mr Scott. Machines that are properly maintained can run at their designed capacity for years--long after the production function regards them as having evaporated. That is why some economists prefer a different measure of change, gross investment less scrapping. Wrong again, says Mr Scott. Machines are mostly scrapped when they become profitless. They may still be making things, but they are not adding to net output. So no productive capital is lost when they are scrapped.
This suggests that simple gross investment, without deductions, is the best measure of change in the capital stock. Yes--but there is a problem, says Mr Scott. It does not follow, as you might think, that the sum of all past gross investment provides a good measure of the stock, because there is no way of knowing how much each bit of old capital is contributing to total output. Regrettably, the idea of a production function that links the level of output to the level of capital must be abandoned. The best one can do is use changes in capital--gross investment--to explain changes in output.
Like Mr Romer, Mr Scott regards technological progress as crucial for understanding growth. In his theory, though, technological progress does not appear as a separate influence: he treats gross investment and technological progress as one and the same thing. At first sight, this view may seem puzzling, but there is plenty of evidence to support it. In a classic study, ``Invention and Economic Growth'', Jacob Schmookler analysed nearly 1,000 major inventions in four industries (farming, railways, oil-refining and paper-making) around the world between 1800 and 1957. Where a stimulus for the invention could be identified, it was in nearly every case an economic one (ie, the invention was needed for some industrial purpose); in not a single case was the stimulus a particular scientific discovery.
Clearly, scientific progress broadens the possibilities for useful innovation. But the evidence suggests that, as Mr Scott says, ``inventions are motivated and caused by similar factors to those which cause investment, that is, by their expected profitability''. Innovation does not pour down from heaven, as in the neoclassical world. Nor is technological progress, or ``knowledge'', a commodity distinct from new capital, one that has to be separately invested in, as in the Romer models. Knowledge and investment, Mr Scott argues, are inextricably bundled up together.
In his most recent work, Mr Romer, in contrast, insists that the analytical effort of separating the two is worthwhile. Why have decades of heavy investment yielded so little in India and so much in South Korea and Taiwan? Perhaps because India's investment happened behind trade and foreign-investment barriers that kept out knowledge of new techniques and products, whereas the dragons' investment was mixed with a copious supply of new ideas. If nothing else, the debate over the new growth theories has revealed how bad economists have been at thinking about the national and global transmission of economic knowledge--production methods, designs for products and other forms of intellectual property.
Much of the new work on growth has so far been abstract and theoretical; non-economists can fairly wonder whether the effort will prove worthwhile. It will. Already the new growth theory is yielding results.
Studies by Robert Barro, of Harvard University, and others have used Mr Romer's approach in empirical studies that compare growth rates in many different countries. In statistical terms, the approach seems to work. In economic terms, its results are striking: lack of human capital (ie, education), not lack of investment in physical capital, is what prevents poor countries from catching up with rich ones. In a similar vein, Daniel Cohen, of CEPREMAP in Paris, has estimated feasible long-term growth rates for the reforming economies of Eastern Europe (where standards of education are comparatively high); he arrived at growth rates of income per person that ranged between 3% and 3.5% a year.
Richard Baldwin, of Columbia University, has used a Romer model to estimate the effects of the EC's single-market programme on growth. Traditional growth theory simply could not address such a question: it contained no mechanism by which trade liberalisation (or indeed anything but ``technological progress'') could raise the long-term rate of growth. In the Romer framework, trade liberalisation is likely (though not certain) to raise the long-term rate of growth, by stimulating investment. The European Commission's Cecchini report concluded that the 1992 programme would raise the EC's output once and for all by between 2.5% and 6.5%, with no permanent effect on growth. Using the Romer framework, Mr Baldwin predicted not only a bigger one-off gain but also a permanent increase in the annual growth rate, of 0.25-0.9 of a percentage point.
As such studies multiply, the value of the new growth theory will become clearer. But it is to be hoped that its biggest effect will be to reorder the economic-policy agenda. This is influenced more than most politicians would admit by debates that they barely understand--witness Keynes and demand management after 1945, or Milton Fried-man and the monetarism of the 1970s. The new growth theory confirms that governments are mistaken to concentrate so exclusively on the business cycle. If, however indirectly, it leads them instead to think harder about education, investment, research and development, trade reform, intellectual-property rights and so on, it will be a breakthrough indeed.

Paul Romer's recent articles include ``Endogenous Technical Change'' (Journal of Political Economy, 1990) and ``Are Nonconvexities Important for Understanding Growth?'' (American Economic Review, 1990). Maurice Scott explains his theory in ``A New View of Economic Growth'' (Oxford University Press, 1989) and in ``Four Lectures'' (World Bank Discussion Paper 131, 1991).
Graph: Higgledy-piggledy: 114 countries: Annual growth of GDP per head, 1960-85 (Source: Summers and Heston [1988])

"Economic growth. The Economist(May 25th 1996): 23-25
The poor and the rich
In recent years, researchers have moved closer to answering the most important question in economics: why are some countries richer than others?

UNDERSTANDING growth is surely the most urgent task in economics. Across the world, poverty remains the single greatest cause of misery; and the surest remedy for poverty is economic growth. It is true that growth can create problems of its own (congestion and pollution, for instance), which may preoccupy many people in rich countries. But such ills pale in comparison with the harm caused by the economic backwardness of poor countries--that is, of the larger part of the world. The cost of this backwardness, measured in wasted lives and needless suffering, is truly vast.
     To its shame, economics neglected the study of growth for many years. Theorists and empirical researchers alike chose to concentrate on other fields, notably on macroeconomic policy. Until the 1980s, with a few exceptions, the best brains in economics preferred not to focus on the most vital issue of all. But over the past ten years or so, this has changed. Stars such as Robert Lucas of the University of Chicago, who last year won the Nobel prize in economics, have started to concentrate on growth. As he says of the subject, "the consequences for human welfare...are simply staggering. Once one starts to think about them, it is hard to think of anything else."
     Early economists certainly thought about them. Adam Smith's classic 1776 book was, after all, called an "Inquiry into the Nature and Causes of the Wealth of Nations". Many building-blocks for understanding growth derive from him. Smith reckoned that the engine of growth was to be found in the division of labour, in the accumulation of capital and in technological progress. He emphasised the importance of a stable legal framework, within which the invisible hand of the market could function, and he explained how an open trading system would allow poorer countries to catch up with richer ones. In the early 19th century, David Ricardo formalised another concept crucial for understanding growth--the notion of diminishing returns. He showed how additional investment in land tended to yield an ever lower return, implying that growth would eventually come to a halt--though trade could stave this off for a while.
     The foundations of modern growth theory were laid in the 1950s by Robert Solow and Trevor Swan. Their models describe an economy of perfect competition, whose output grows in response to larger inputs of capital (ie, physical assets of all kinds) and labour. This economy obeys the law of diminishing returns: each new bit of capital (given a fixed labour supply) yields a slightly lower return than the one before.
     Together, these assumptions give the neoclassical growth model, as it is called, two crucial implications. First, as the stock of capital expands, growth slows, and eventually halts: to keep growing, the economy must benefit from continual infusions of technological progress. Yet this is a force that the model itself makes no attempt to explain: in the jargon, technological progress is, in the neoclassical theory, "exogenous" (ie, it arises outside the model). The second implication is that poorer countries should grow faster than rich ones. The reason is diminishing returns: since poor countries start with less capital, they should reap higher returns from each slice of new investment.
Theory into practice
Do these theoretical implications accord with the real world? The short answer is no. The left-hand (see 
chart) chart on the next page shows average growth rates since 1870 of 16 rich countries for which good long-term data exist. Growth has indeed slowed since 1970. Even so, modern growth rates are well above their earlier long-run average. This appears to contradict the first implication, that growth will slow over time. It may be that an acceleration of technological progress accounts for this, but this should hardly console a neoclassical theorist, because it would mean that the main driving force of growth lies beyond the scope of growth theory .
     What about the second implication--are poor countries catching up? The right-hand chart overleaf plots, for 118 countries, growth rates between 1960 and 1985 against their initial 1960 level of GDP per person. If poor countries were catching up, the plots on the chart should follow a downward-sloping pattern: countries that were poorer in 1960 should have higher growth rates. They do not. Indeed, if there is any discernible pattern in the mass of dots, it is the opposite: poorer countries have tended to grow more slowly.
     Having arrived at neoclassical growth theory, however, economics by and large forgot about the subject. It had a model that was theoretically plausible, but did not seem to fit the facts. How best to proceed was unclear. Then, after a pause of 30 years, along came "new growth theory".
     This new school has questioned, among other things, the law of diminishing returns in the neoclassical model. If each extra bit of capital does not, in fact, yield a lower return than its predecessor, growth can continue indefinitely, even without technological progress. A seminal paper was published in 1986 by Paul Romer (see
references). It showed that if you broaden the idea of capital to include human capital (that is, the knowledge and skills embodied in the workforce), the law of diminishing returns may not apply. Suppose, for example, that a firm which invests in a new piece of equipment also learns how to use it more efficiently. Or suppose it becomes more innovative as a by-product of accumulating capital. In either case, there can be increasing, not decreasing, returns to investment.
     In this and other ways, new growth theorists can explain how growth might persist in the absence of technological progress. But, they have gone on to ask, why assume away such progress? A second strand of new growth theory seeks to put technological progress explicitly into the model (making it "endogenous", in the jargon). This has obliged theorists to ask questions about innovation. Why, for instance, do companies invest in research and development? How do the innovations of one company affect the rest of the economy?
     A further divergence from the neoclassical view follows. As a general rule, a firm will not bother to innovate unless it thinks it can steal a march on the competition and, for a while at least, earn higher profits. But this account is inconsistent with the neoclassical model's simplifying assumption of perfect competition, which rules out any "abnormal" profits. So the new growth theorists drop that assumption and suppose instead that competition is imperfect. Attention then shifts to the conditions under which firms will innovate most productively: how much protection should intellectual-property law give to an innovator, for instance? In this way, and not before time, technological progress has begun to occupy a central place in economists' thinking about growth.
     In the latest resurgence of interest in growth theory, however, the original neoclassical approach has enjoyed something of a revival. Some economists are questioning whether the "new" theories really add much. For instance, the new theory emphasises human capital; arguably, this merely calls for a more subtle measure of labour than the ones used by early neoclassical theorists. More generally, it is argued that if factors of production (capital and labour) are properly measured and quality-adjusted, the neoclassical approach yields everything of value in the new theory, without its distracting bells and whistles. So it often proves in economics: the mainstream first takes affront at new ideas, then reluctantly draws on them, and eventually claims to have thought of them first.
The missing link
To non-economists, however, both approaches seem curiously lacking in one crucial respect. Whereas in popular debate about growth, government policy is usually the main issue, in both neoclassical and new growth theory discussion of policy takes place largely off-stage. To the extent that government policy affects investment, for instance, either could trace out the effects on growth--but the connection between policy and growth is tenuous and indirect. Each approach may take a strong view about the role of diminishing returns, but both remain frustratingly uncommitted about the role of government.
     An upsurge of empirical work on growth is helping to fill this hole--and, as a by-product, shedding further light on the relative merits of the new and neoclassical theories. The nuts and bolts of this work are huge statistical analyses. Vast sets of data now exist, containing information for more than 100 countries between 1960 and 1990 on growth rates, inflation rates, fertility rates, school enrolment, government spending, estimates of how good the rule of law is, and so on. Great effort has been devoted to analysing these numbers.
     One key finding is "conditional convergence", a term coined by Robert Barro, a pioneer of the new empirical growth studies. His research has found that if one holds constant such factors as a country's fertility rate, its human capital (proxied by various measures of educational attainment) and its government policies (proxied by the share of current government spending in GDP), poorer countries tend to grow faster than richer ones. So the basic insight of the neoclassical growth model is, in fact, correct. But since, in reality, other factors are not constant (countries do not have the same level of human capital or the same government policies), absolute convergence does not hold.
     Whether this is a depressing result for poor countries depends on what determines the "conditional" nature of the catch-up process. Are slow-growing countries held back by government policies that can be changed easily and quickly? Or are more fundamental forces at work?
     Most empirical evidence points to the primacy of government choices. Countries that have pursued broadly free-market policies--in particular, trade liberalisation and the maintenance of secure property rights--have raised their growth rates. In a recent paper, Jeffrey Sachs and Andrew Warner divided a sample of 111 countries into "open" and "closed". The "open" economies showed strikingly faster growth and convergence than the "closed" ones. Smaller government also helps. Robert Barro, among others, has found that higher government spending tends to be associated with slower growth.
     Human capital--education and skills--has also been found to matter. Various statistical analyses have shown that countries with lots of human capital relative to their physical capital are likely to grow faster than those with less. Many economists argue that this was a factor in East Asia's success: in the early 1960s the Asian tigers had relatively well-educated workforces and low levels of physical capital.
     A more difficult issue is the importance of savings and investment. One implication of the neoclassical theory is that higher investment should mean faster growth (at least for a while). The empirical studies suggest that high investment is indeed associated with fast growth. But they also show that investment is not enough by itself. In fact the causality may run in the opposite direction: higher growth may, in a virtuous circle, encourage higher saving and investment. This makes sense: communist countries, for instance, had extraordinarily high investment but, burdened with bad policies in other respects, they failed to turn this into high growth.
     The number-crunching continues; new growth-influencing variables keep being added to the list. High inflation is bad for growth; political stability counts; the results on democracy are mixed; and so on. The emerging conclusion is that the poorest countries can indeed catch up, and that their chances of doing so are maximised by policies that give a greater role to competition and incentives, at home and abroad.
     But surely, you might think, this hides a contradiction? The new growth theory suggests that correct government policies can permanently raise growth rates. Empirical cross-country analysis, however, seems to show that less government is better--a conclusion that appeals to many neoclassical theorists. This tension is especially pronounced for the East Asian tigers. Advocates of free markets point to East Asia's trade liberalisation in the 1960s, and its history of low government spending, as keys to the Asian miracle. Interventionists point to subsidies and other policies designed to promote investment.
     Reflecting the present spirit of rapprochement between the growth models, it is now widely argued that this contradiction is more apparent than real. Work by Alwyn Young, popularised by Paul Krugman, has shown that much of the Asian tigers' success can be explained by the neoclassical model. It resulted from a rapid accumulation of capital (through high investment) and labour (through population growth and increased labour-force participation). On this view, there is nothing particularly miraculous about Asian growth: it is an example of "catch-up". Equally, however, the outlines of East Asian success fit the new growth model. Endogenous growth theory says that government policy to increase human capital or foster the right kinds of investment in physical capital can permanently raise economic growth.
     The question is which aspect of East Asian policies was more important--which, up to a point, is the same as asking which growth model works best. Although debate continues, the evidence is less strong that micro-level encouragement of particular kinds of investment was crucial in Asia. Some economists dissent from that judgment, but they are a minority. Most agree that broader policies of encouraging education, opening the economy to foreign technologies, promoting trade and keeping taxes low mattered more.
One more heave
There is no doubt that the neoclassical model of the 1950s, subsequently enhanced, together with the theories pioneered by Mr Romer, have greatly advanced economists' understanding of growth. Yet the earlier doubt remains. Both models, in their purest versions, treat the role of government only indirectly. The new empirical work on conditional convergence has set out to put this right. The fact remains that in the earlier theoretical debate between the neoclassical and the new schools, the question that matters most--what should governments do to promote growth?--was often forgotten.
     A new paper by Mancur Olson makes this point in an intriguing way. The starting-point for today's empirical work is a striking fact: the world's fastest-growing economies are a small subgroup of exceptional performers among the poor countries. Viewed in the earlier theoretical perspective, this is actually rather awkward. Mr Romer's theories would lead you to expect that the richest economies would be the fastest growers: they are not. The basic neoclassical theory suggests that the poorest countries, on the whole, should do better than the richest: they do not. Neither approach, taken at face value, explains the most striking fact about growth in the world today.
     Mr Olson argues that the simplest versions of both theories miss a crucial point. Both assume that, given the resources and technology at their disposal, countries are doing as well as they can. Despite their differences, both are theories about how changes in available resources affect output--that is, both implicitly assume that, if resources do not change, output cannot either. But suppose that poor countries simply waste lots of resources. Then the best way for them to achieve spectacular growth is not to set about accumulating more of the right kind of resources--but to waste less of those they already have.
     Marshalling the evidence, Mr Olson shows that slow-growing poor countries are indeed hopelessly failing to make good use of their resources. Take labour, for instance. If poor countries were using labour as well as they could, large emigrations of labour from poor to rich countries (from Haiti to the United States, for instance) ought to raise the productivity of workers left behind (because each worker now has more capital, land and other resources to work with). But emigration does not have this effect.
     Data on what happens to migrants in their new homes are likewise inconsistent with the two growth theories. Immigrants' incomes rise by far more than access to more capital and other resources would imply. It follows that labour (including its human capital, entrepreneurial spirit, cultural traits and the rest) was being squandered in its country of origin. When workers move, their incomes rise partly because there is more capital to work with--but also by a further large margin, which must represent the wastage incurred before. Mr Olson adduces similar evidence to show that capital and knowledge are being massively squandered in many poor countries.
     This offers a rationale for the pattern of growth around the world--a rationale that, consistent with the recent work on conditional convergence, places economic policies and institutions at the very centre. According to this view, it is putting it mildly to say that catch-up is possible: the economic opportunities for poor countries are, as the tigers have shown, phenomenal. The problem is not so much a lack of resources, but an inability to use existing resources well. It is surely uncontroversial to say that this is the right way to judge the performance of communist countries (those exemplars of negative value-added) before 1989. Mr Olson's contention is that most of today's poor countries are making mistakes of an essentially similar kind.
     The question still remains: what are the right policies? One must turn again to the empirical evidence. That seems a frustrating answer because, suggestive though recent work on conditional convergence may be, such findings will always be contested. Citizens of the world who sensibly keep an eye on what economists are up to can at least take pleasure in this: the profession has chosen for once to have one of its most vigorous debates about the right subject.
Main papers cited
"Increasing Returns and Long-Run Growth". By Paul Romer. Journal of Political Economy, 1986.
"Economic Reform and the Process of Global Integration". By Jeffrey Sachs and Andrew Warner. Brookings Papers on Economic Activity, 1995.
"The Tyranny of Numbers: Confronting the Statistical Realities of the East Asian Experience". By Alwyn Young.
NBER working paper 4680, 1994.
"Big Bills Left on the Sidewalk: Why Some Nations Are Rich, and Others Poor" .
By Mancur Olson. Journal of Economic Perspectives, forthcoming. 

Economics focus
The growth of growth theory
The riddle of technology and prosperity is explored in a fine new book
May 18th 2006 | from the print edition

FIFTY years ago, Robert Solow published the first of two papers on economic growth that eventually won him a Nobel prize. Celebrated and seasoned, he was thus a natural choice to serve on an independent “commission on growth” announced last month by the World Bank. (The commission will weigh and sift what is known about growth, and what might be done to boost it.) Natural, that is, except for anyone who takes his 1956 contribution literally. For, according to the model he laid out in that article, the efforts of policymakers to raise the rate of growth per head are ultimately futile.A government eager to force the pace of economic advance may be tempted by savings drives, tax cuts, investment subsidies or even population controls. As a result of these measures, each member of the labour force may enjoy more capital to work with. But this process of “capital-deepening”, as economists call it, eventually runs into diminishing returns. Giving a worker a second computer does not double his output.Accumulation alone cannot yield lasting progress, Mr Solow showed. What can? Anything that allows the economy to add to its output without necessarily adding more labour and capital. Mr Solow labelled this font of wealth “technological progress” in 1956, and measured its importance in 1957. But in neither paper did he explain where it came from or how it could be accelerated. Invention, innovation and ingenuity were all “exogenous” influences, lying outside the remit of his theory. To practical men of action, Mr Solow's model was thus an impossible tease: what it illuminated did not ultimately matter; and what really mattered, it did little to illuminate.
Related topics
Paul Romer

The law of diminishing returns holds great sway over the economic imagination. But its writ has not gone unchallenged. A fascinating new book, “Knowledge and the Wealth of Nations” by David Warsh, tells the story of the rebel economics of increasing returns. A veteran observer of dismal scientists at work, first at the Boston Globe and now in an online column called Economic Principals, Mr Warsh has written the best book of its kind since Peter Bernstein's “Capital Ideas”.
Diminishing returns ensure that firms cannot grow too big, preserving competition between them. This, in turn, allows the invisible hand of the market to perform its magic. But, as Mr Warsh makes clear, the fealty economists show to this principle is as much mathematical as philosophical. The topology of diminishing returns is easy for economists to navigate: a landscape of declining gradients and single peaks, free of the treacherous craters and crevasses that might otherwise entrap them.The hero of the second half of Mr Warsh's book is Paul Romer, of Stanford University, who took up the challenge ducked by Mr Solow. If technological progress dictates economic growth, what kind of economics governs technological advance? In a series of papers, culminating in an article in the Journal of Political Economy in 1990, Mr Romer tried to make technology “endogenous”, to explain it within the terms of his model. In doing so, he steered growth theory out of the comfortable cul-de-sac in which Mr Solow had so neatly parked it.The escape required a three-point turn. First, Mr Romer assumed that ideas were goods—of a particular kind. Ideas, unlike things, are “non-rival”: everyone can make use of a single design, recipe or blueprint at the same time. This turn in the argument led to a second: the fabrication of ideas enjoys increasing returns to scale. Expensive to produce, they are cheap, almost costless, to reproduce. Thus the total cost of a design does not change much, whether it is used by one person or by a million.Blessed with increasing returns, the manufacture of ideas might seem like a good business to go into. Actually, the opposite is true. If the business is free to enter, it is not worth doing so, because competition pares the price of a design down to the negligible cost of reproducing it. Unless idea factories can enjoy some measure of monopoly over their designs—by patenting them, copyrighting them, or just keeping them secret—they will not be able to cover the fixed cost of inventing them. That was the final turn in Mr Romer's new theory of growth.
As useful as poetryHow much guidance do these theories offer to policymakers, such as those sitting on the World Bank's commission? In Mr Solow's model, according to a common caricature, technology falls like “manna from heaven”, leaving the bank's commissioners with little to do but pray. Mr Romer's theory, by contrast, calls for a more worldly response: educate people, subsidise their research, import ideas from abroad, carefully gauge the protection offered to intellectual property.But did policymakers need Mr Romer's model to reveal the importance of such things? Mr Solow has expressed doubts. Despite the caricature, he did not intend in his 1956 model to deny that innovation is often dearly bought and profit-driven. The question is whether anything useful can be said about that process at the level of the economy as a whole. That question has yet to be answered definitively. In particular, Mr Solow worries that some of the “more powerful conclusions” of the new growth theory are “unearned”, flowing as they do from powerful assumptions.At one point in Mr Warsh's book, Mr Romer is quoted comparing the building of economic models to writing poetry. It is a triumph of form as much as content. This creative economist did not discover anything new about the world with his 1990 paper on growth. Rather, he extended the metre and rhyme-scheme of economics to capture a world—the knowledge economy—expressed until then only in the loosest kind of doggerel. That is how economics makes progress. Sadly, it does not, in and of itself, help economies make progress.

Un Banco Mundial para un nuevo mundo
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Reinventing the World Bank
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Gregor Peter Schmitz - DER SPIEGEL
Em Washington D.C. (Estados Unidos) 29/02/201200h00

De uma verdade a outra - Le Monde Diplomatique Como o Banco Mundial passou de um desenvolvimentismo autoritário à crença absoluta nos valores do mercado — e por que esta última lhe permite cooptar algumas ONGs, especialmente sob o mote da "boa governança"...

Banco Mundial pede à China para afrouxar as rédeas sobre a economia
David Barboza
In: NYT, by UOL Internacional 04/03/201200h00
Comunicar erroImprimir
Um novo estudo produzido em parceria com o Banco Mundial alerta que o motor de crescimento da China pode parar durante as próximas décadas, a menos que o país altere seu modelo de desenvolvimento e repense o papel do governo na administração da economia.
No relatório “China 2030”, escrito em parceria com o Centro de Pesquisa em Desenvolvimento, uma organização de pesquisa do governo chinês,...

Nova liderança para o Banco Mundial 
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O Banco Mundial precisa ser comandado por um especialista em desenvolvimento internacional, em vez de executivos de banco ou políticos

Provável futuro presidente do banco mundial, médico coreano-americano elogia programa brasileiro anti-aidsISABEL FLECK
O fato de ter sido levado com só cinco anos aos EUA -país onde cresceu e obteve cidadania depois- não fez com que Jim Yong Kim, 52, candidato americano à presidência do Banco Mundial, perdesse a identidade com o mundo em desenvolvimento.
É o que o virtual próximo presidente da instituição sustenta, após receber apoio de europeus e do Japão para o posto -que muitos defendem seja ocupado por um cidadão do mundo emergente.
Kim concorre com dois representantes de países em desenvolvimento: a ministra nigeriana das Finanças, Ngozi Okonjo-Iweala, e o ex-ministro das Finanças colombiano José Antonio Ocampo.
"Nasci na Coreia [do Sul], deixei o país enquanto ainda estava em uma situação de pobreza. Cresci nos EUA, mas conheço profundamente o que é viver na pobreza", disse em entrevista exclusiva à Folha, em Brasília, onde encerrou um tour por países emergentes e em desenvolvimento -mais o Japão.
Em campanha, o candidato evitou falar sobre temas espinhosos, como o impacto do protecionismo das grandes economias e regulamentação do mercado financeiro. .....

Outra Economia: Sucessão no Banco Mundial divide o planeta

Jim Yong Kim e José Antonio Ocampo representam duas visões distintas, fato inédito na história da instituição

Por Jim Yong Kim
Estou convencido de que podemos acelerar o progresso na luta contra a pobreza e em prol da equidade social, aproveitando os conhecimentos que já existem no mundo inteiro
Jornal VALOR ECONÔMICO, 24-03-2014

O Relatório Meltzer de 2000 e a reforma do Banco Mundial e do FMI
João Márcio Mendes PereiraI
IProfessor adjunto do curso de História e do Programa de Pós-Graduação em História da Universidade Federal 
Rural do Rio de Janeiro (UFRRJ) (


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