1. Lecture 5. STE’s economic performance: growth, technological progress, inequality

2. Lecture outline An initial look at growth rates Total factor productivity (TFP) Types of economic growth (extensive vs. intensive growth) Another look at growth rates Reasons for low TFP growth Inequality

3. Annual per capita GNP growth Countries1950-601970-751975-801980-85 Socialist countries 4.74.02.0 USSR3.92.71.81.1 China5.64.54.68.0 Market economies 3.72.952.61.3 USA1.51.62.61.4

4. Total f  ctor productivity Let L’=(L t+1 -L t )/L t = growth rate of labor K’= (K t+1 -K t )/K t = growth rate of capital and Y’= (Y t+1 -Y t )/Y t = growth rate of GDP And let a=wL/Y and b=rK/Y be shares of labor and capital in the economy (w and r are prices of capital and labor, respectively) ( a + b = 1 )

5. Total factor productivity (cont.) Under certain assumptions, if only the quantities of inputs change, then Y’ = aL’ + bK’ (GDP growth = growth of combined inputs) If quality of inputs improves, Y’ > aL’ + bK’ TFP growth = Y’ – (aL’ + bK’)

6. Types of growth Low TFP growth  extensive growth High TFP growth  intensive growth Limits of extensive growth: –Labor and land cannot grow fast –Diminishing marginal returns –Large amount of capital  high depreciation

7. Factor productivity (1950-60) Countries L’L’ K’K’ Combined inputs growth TFP growth Socialist countries 0.84.21.73.5 USSR1.29.43.42.4 (1.7) Market economies 0.94.71.83.0 USA1.43.61.81.3

8. Factor productivity (1960-85) Countries L’L’ K’K’ Combined inputs growth TFP growth Socialist countries 0.85.12.10.9 USSR1.37.32.80.8 Market economies 0.94.71.91.8 USA2.03.32.40.7

9. More on GDP and TFP growth USSR (growth per year): Per Capita GDP1980-85: 1.1 TFP 1980-85: -0.5 Household consumption1970-80: 2.3

10. China’s growth PC GDP growth per year: 1960-65 - 2.5% 1965-70 - 4.0% 1975-80 - 4.6% 1980-85 - 8.0% TFP growth: 1953-78: -0.7 1979-94: 3.8

11. Reasons for slowdown in the USSR and other E. European economies Increasing complexity of economy Lower oil revenues of USSR Increasing burden of military expenditures Second economy growth Calcified bureaucracy (rent-seeking  ) How was China different?

12. Income distribution Measures of income inequality Lorenz curve Gini coefficient Decile ratio

13. Lorenz curve & Gini

14. Decile ratio

15. Income inequality in selected countries (late 1980’s, exp. USA) CountryGini CoefficientDecile Ratio Czechoslovakia20.12.44 Poland26.83.31 USSR28.93.53 UK29.73.79 USA (1997)37.55.64

16. Income distribution in STE’s vs. market economies (theory) Capital ownership - allocation of capital income in STE’s - capital ownership in ME’s Progressive income taxation An alternative measure of welfare: (PC GDP)*(1-Gini coefficient)

17. Hard to measure factors Informal economy Access to goods in short supply Subsidies (housing, etc.) Unrepresentative nature of surveys in STE’s

18. Other problems with centrally planned economies Structural distortions: - overdeveloped heavy industry and construction (relative to GDP); small service sector; - prevalence of large firms and relatively few medium and small firms; - little competition among enterprises Distorted investment decision No enterprise closures Excessive vertical integration of enterprises Soft budget constraint Large and growing foreign debt

19. Did the STE’s have to reform? Reliability of growth rates ad other numbers (Law of equal cheating?) Look back at the reasons for the slowdown in growth; they were going to slow down the economy further The system’s legitimacy was based on high growth Lots of other problems Improvement in communications that facilitated comparison with other countries