Role of Government and Economic Growth

Role of Government and
Economic Growth
LEA conference Road to prosperity - economic
globalization versus economic localization
Vilnis Zakrevskis
M. Econ., Dipl. Eng.
http://www.makroekonomika.org
Page 2 Vilnis Zakrevskis, M. Econ., Dipl. Eng. Vilnis Zakrevskis, M. Econ., Dipl. Eng.
Growth and Development - Proximate causes
Economic Growth
HEALTH, EDUCATION, WEALTH, CULTURE, ENVIRONMENT, ETC.
Human Society Development
POSITIVE TRADE BALANCE (EXPORTS > IMPORTS)
Competitive and Advanced Manufacturing
Physical Capital Productivity
Human capital Labour
HEALTH
TECHNOLOGY
EFFICIENCY EDUCATION
Deeper roots of Growth by The GrowthCommission
Root of Prosperity
Productive Work the base of the Human Development
Work generates tangible and intangible products and is the
base of national and human prosperity and development.
Everyone has the responsibility to make his own contribution
to society according to his or her ability and capability. Such
work should be honoured and make the appropriately
rewarded. The State should ensure that honest and
productive work is sufficient basis for a decent life.
13 Success Stories of Sustained, High Growth
Source: World Bank
Economy Period of high
growth**
Per capita income at the
beginning and 2005***
Botswana 19602005 210 3,800
Brazil 19501980 960 4,000
China 19612005 105 1,400
Hong Kong, China* 19601997 3,100 29,900
Indonesia 19661997 200 900
Japan* 19501983 3,500 39,600
Korea, Rep. of* 19602001 1,100 13,200
Malaysia 19671997 790 4,400
Malta* 19631994 1,100 9,600
Oman 19601999 950 9,000
Singapore* 19672002 2,200 16,400
Taiwan, China* 19652002 1,500 25,400
Thailand 19601997 330 2,400
*Economies that have reached industrialized countries per capita income levels.
**Period in which GDP growth was 7 percent per year or more.
***In constant US$ of 2000.
Sustainable high-growth framework
Source: Adapted from The Growth Report, Strategies for Sustained Growth and Inclusive Development,
Commission on Growth and Development, 2008 The International Bank for Reconstruction and Development /
The World Bank.
Leadership
and Effective
Government
Capitalizing on
global economy
High rates of
saving and
investment
Macroeconomic
stability
Resource
allocation by
market
Growth framework: Capitalizing on global economy
a. Import ideas, technology, and know-how
b. Export goods to the deep and elastic global market
Capitalizing on
global economy
High rates of saving
and investment
Resource allocation by
market
Macroeconomic
stability
Leadership and
Effective
Government
Growth framework: Macroeconomic stability
Capitalizing on global
economy
and investment
market
Macroeconomic
stability
Leadership and
Effective
Government
a. Avoiding volatility and unpredictability
b. Fiscal responsibility
c. Responding to external shocks
Growth framework: High rates of saving and investment
economy
High rates of
saving and
investment
Resource allocation
by market
Macroeconomic
stability
Leadership and
Effective
Government
Future orientation: public and private investment
Growth framework: Resource allocation by market
economy
and investment
Resource
allocation by
MARKET
Macroeconomic
stability
Leadership and
Effective
Government
o Entrepreneurship
o Efficiency from the mechanism of prices
o Competition
o Incentives to meet demand
o Decentralized decision making
o Mobility of resources
Growth framework: Leadership and Effective Government
economy
and investment
market
Macroeconomic
stability
Committed,
Credible,
Capable
Government
o Credible vision and a strategy
o Intertemporal choices
o Decades long commitment
o Trust
Six killer Apps of West by Niall Ferguson
Work Ethics of
Protestant
Christianity
Competition
Science
Rule of Law &
Property rights
Medicine
The consumer
society
Source: Adapted from Ferguson (2012)
Page 13 Vilnis Zakrevskis, M. Econ., Dipl. Eng.
Global Competitiveness Index: LV, EE, FI
0
1
2
3
4
5
6
7
1. Institcijas
2. Infrastruktra
3.
Makroekonomisk
4. Veselba un
primr izgltba
5. Vidj, augstk
un ma izgltba
6. Preu tirgus
efektivitte
7. Darba tirgus
efektivitte
8. Finanu tirgus
attstbas lmenis
9. Tehnoloisk
gatavba
10. Atvrtba un
tirgus lielums
11.
Uzmjdarbbas
12. Inovcijas
GCI 2010-11: Latvia and Finland
Latvija Somija
0
2
4
6
8
1. Institcijas
2. Infrastruktra
3.
Makroekono
4. Veselba un
primr izgltba
5. Vidj,
augstk un
6. Preu tirgus
efektivitte
7. Darba tirgus
efektivitte
8. Finanu
tirgus
9.
Tehnoloisk
10. Atvrtba
un tirgus lielums
11.
Uzmjdarb
12. Inovcijas
GCI 2010-11: Latvia and Estonia
Latvija Igaunija
but 13 countries varied in the strength and
clarity of their property rights
The Role of Government
As little as possible or Stabilize, privatize, and liberalize?
vested interests
Response to uncertainty EXPERIMENTnot paralysis
government interventions helped to discover how
best to deploy their endowments of labor, natural
resources and capital
tax breaks
directed lending
subsidized/ cheap credit
Governments may fail either because they do too little,
or because they do too much. -- Sir Arthur Lewis
direct subsidies
dedicated infrastructure
investment subsidies
administrative guidance
use of public enterprise
A bit about the GOALS
GDP= Wages (compensation of employees)
+ Interest (paidforCapital)
+ Rent (paidfor Land)
+ Profits (proprietors' +corporate)
+ Capital Consumption Allowance (Depreciation)
+ Indirect Business Taxes
Net Factor Income from Abroad
NI
If one does not know to which port one is sailing,
no wind is favorable. Lucius Annaeus Seneca
GNI
The Policy Ingredients of Growth Strategies
Ingredients, NOT a Recipe
Accumulation
Innovation
Allocation Stabilization
Inclusion
Industrial policy by Rodrik
1. Incentives only to new activities.
2. Clear benchmarks/criteria for success and failure.
3. Built-in sunset clause.
4. Public support targeting activities, not sectors.
5. Clear potential of spillovers and demonstration effects of
activities to be subsidized
6. Competent carry out agencies.
7. Close monitoring by a principal with a highest political
authority and the clear stake in the outcomes.
8. Channels of communication with the private sector.
9. Mistakes resulting in picking the losers.
10. Self renewing promotion activities for the ongoing cycle of
discovery.
The Policy Ingredients INNOVATION
o TechnologyTransfer
FDI Non-automatic channel
Attract the Right FDI
Spillowers,
Learning by doing
Creative destruction
Extract knowledge fromFDI
Beware of undue political influence
Higher education
International professors
Studies abroad
Monetery& Capital
To control inflation and to exercise some independent
control over the exchange rate (for competitive reasons or
just to control volatility) country needs capital control.
To keep the currency competitive, most of 13 have:
o regulated the amount and type of capital flows
o accumulated foreign reserves in the central bank
o None of the sustained, high-growth cases were
particularly quick to open their capital accounts
are capital markets mature?
are financial institutions strong?
is the economy diversified?
So the Role of Government
TRIAL and ERROR process of self-discovery
Growth does not just happen. It must be consciously
chosen as an overarching goal by a countrys leadership.
Development and Implementation of
Goal Oriented Policies:
Fiscal policy & Monetary policy
Industrial policy
Trade policy
Investment policy
Regional development policy
Social policy
Energy policy etc.
p.s.
Growth Commission recommendation:
Developing countries, while
resisting long-term target-setting,
should offer to cut carbon at home
if other countries are willing to pay for it.
Page 24 Vilnis Zakrevskis, M. Econ., Dipl. Eng.
Paldies vlreiz!
Additional information in Latvian:
http://www.makroekonomika.org
Thank you for attention!
Vilnis Zakrevskis
M. Econ., Dipl. Eng.
Growth framework: Importing knowledge
Learn before invent
a. FDI does not provide knowledge
b. Export goods to the deep and elastic global market
The time to comply to tax system
Source: PwC analysis.
LV - 264
EE - 65
LT - 175
How proficient are students in science and mathematics
Percentage of students at the different levels of mathematics proficiency
Source: OECD PISA 2009 Database, Tables I.3.1 and I.3.4.
Countries are ranked in descending order of the percentage of students at Levels 2, 3, 4, 5 and 6.
Top performers in reading, mathematics and science
Percentage of students reaching the two highest levels of proficiency
Source: OECD PISA 2009 Database, Tables I.2.1, I.3.1 and I.3.4.
The Policy Ingredients ACCUMULATION
o Strong Public investment >25% of GDP
Inftrastructure - in China, Thailand, Vietnam, > 7%of GDP
Not a source of government revenue!
Human Capital (health, knowledge, and skills)
Education: social return > private return
Spending Output (knowledge, cognitive abilities, social skills,
noncognitive skills)
national exams + school autonomy
Health

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