2. Efficiency, Asia, and Economic Growth Thorvaldur Gylfason

3. Growing Together, Growing Apart Time National economic output Spain vs. Argentina Thailand vs. Burma Finland vs. Estonia West Germany vs. East Germany South Korea vs. North Korea Botswana vs. Nigeria Tunisia vs. Morocco Mauritius vs. Madagascar Taiwan vs. China Rapid growth Slow growth

4. Economic Growth: The Short Run vs. the Long Run Time National economic output Actual output Potential output Business cycles in the short run Economic growth in the long run Downswing Upswing The crisis of 1997-98 is irrelevant to Asia’s long-term growth potential

5. Economic Growth: The Short Run vs. the Long Run To analyze the movements of actual output from year to year, viz., in the short run Need short-run macroeconomic theory Keynesian or neoclassical To analyze the path of potential output over long periods Need modern theory of economic growth Neoclassical or endogenous

6. Traces the rate of growth of output per capita to a single source: Technological progress Hence, economic growth in the long run is immune to economic policy, good or bad “To change the rate of growth of real output per head you have to change the rate of technical progress.” ROBERT SOLOW The Neoclassical Theory of Exogenous Economic Growth

7. The New Theory of Endogenous Economic Growth “The proximate causes of economic growth are the effort to economize, the accumulation of knowledge, and the accumulation of capital.” ARTHUR LEWIS Traces the rate of growth of output per capita to three mains sources: SavingEfficiencyDepreciation

8. Exogenous vs. Endogenous Growth The neoclassical view that economic growth in the long run is merely a matter of technology does not throw much light on the spectacular growth performance of Asia since the 1960s The new view that long-run growth depends on saving, efficiency, and depreciation is more illuminating Besides, it’s not really new, because Adam Smith knew this (1776)

9. Sources of Endogenous Growth Saving Fits the Asian experience very well No coincidence that saving rates of 30-40% of GDP went along with rapid economic growth No coincidence either that many African economies with saving rates around 10% of GDP have been stagnant Important implication for economic policy Economic stability with low inflation and positive real interest rates encourages saving, and thus is good for growth

10. Sources of Endogenous Growth Efficiency Also fits the Asian experience very well Technical progress good for growth because it allows us to squeeze more output from given inputs But that is exactly what increased efficiency is all about! Thus, technology is best viewed as just one aspect of general economic efficiency Important implication for economic policy Everything that increases economic efficiency, no matter what, is also good for growth

11. Sources of Endogenous Growth Efficiency Liberalization of prices and trade increases efficiency, and thus is good for growth Stabilization reduces the inefficiency associated with inflation, and thus is good for growth Privatization reduces the inefficiency associated with state-owned enterprises, and thus … Education makes the labor force more efficient Technological progress also enhances efficiency The possibilities are virtually endless!

12. Sources of Endogenous Growth This is good news for Asia If growth were merely a matter of technology, we would not be able to do much about it Except to follow technology-friendly policies by supporting R&D and such But if growth depends on saving and efficiency, there are things that we can do, in the private sector as well as through the public sector, to foster rapid economic growth Because everything that is good for saving and efficiency is also good for growth

13. Economic Growth Prospects for Asia They look bright Impressive track record since the mid-1960s High saving rates channeled, mostly, into high-quality investment Strong emphasis on efficiency 1. Liberal price and trade regimes 2. Low inflation 3. Strong private sector 4. More and better education 5. Limited natural resources 6. Flexible labor markets fundamentals are strong The crisis of 1997-98 does not seem to dim Asia’s long-run growth prospects because the fundamentals are strong

14. Natural Resources and Economic Growth Abundant natural resources appear harmful to growth

15. Natural Resources and Corruption Abundant natural resources appear conducive to corruption

16. Rigidity of European labor markets Centralized wage bargains Detailed regulations Rigidity of European labor markets Centralized wage bargains Detailed regulations Labor Markets and Growth Flexible labor markets in the USA job creation US labor markets are more conducive to job creation than European labor markets distribution of income... but at the cost of a less even distribution of income in America than in Europe

17. Unemployment and Growth Europe vs. East Asia Labor markets in East Asia are more flexible and less centralized than in Europe Since 1980 unemployment in East Asia has generally been lower than in Europe In flexible labor markets wage claims accord more closely with productivity developments Europe vs. East Asia Labor markets in East Asia are more flexible and less centralized than in Europe Since 1980 unemployment in East Asia has generally been lower than in Europe In flexible labor markets wage claims accord more closely with productivity developments Advantages of efficiency through non-intervention by the State are no smaller, and no less tangible, in labor markets than in other markets

18. Unemployment and Growth Flexible labor markets seem to have contributed significantly to East Asia’s rapid economic growth over the past 30 years Efficiency and flexibility are not, however, the sole desirable attributes of labor market arrangements There is also a basic human need for a fair system of social security including unemployment insurance designed to fend off the worst social and economic ramifications of economic shocks Flexible labor markets seem to have contributed significantly to East Asia’s rapid economic growth over the past 30 years Efficiency and flexibility are not, however, the sole desirable attributes of labor market arrangements There is also a basic human need for a fair system of social security including unemployment insurance designed to fend off the worst social and economic ramifications of economic shocks

19. In Conclusion Much progress in economic policy around the world in the 1990s Growth-friendly reforms widely embraced among ordinary people and politicians across the political spectrum, not only in Asia, but also, increasingly, in other parts of the world Therefore, the medium-to-long-term growth outlook for Asia is bright as long as... Much progress in economic policy around the world in the 1990s Growth-friendly reforms widely embraced among ordinary people and politicians across the political spectrum, not only in Asia, but also, increasingly, in other parts of the world Therefore, the medium-to-long-term growth outlook for Asia is bright as long as...

20. In Conclusion ‘Reformers have the idea that change can be achieved by brute sanity’ George Bernard Shaw To grow or not to grow is in large measure a matter of choice … economic and institutional reforms continue so as to preserve a healthy climate for saving, high-quality investment, and increased efficiency across the board