Rapid growth in emerging markets and developing economies: Now and forever?
Giang Ho, Paolo Mauro12 September 2014
Forecasters often predict continued rapid economic growth into the medium and long term for countries that have recently experienced strong growth. Is this optimism warranted by past international growth experience? This column explores this question by looking at economic growth forecasts at longer-term horizons.
Projecting a country’s economic growth into the medium term and beyond is notoriously difficult. At the same time, getting the growth projections wrong has major adverse consequences. For fiscal policymakers, overestimating future economic growth implies underestimating the government debt-to-GDP ratio that will be reached at the end of the projection period (in the absence of corrective policy measures).
The US economy performs better under Democratic presidents. Why?
Alan S. Blinder, Mark Watson04 September 2014
Since World War II, economic growth has been faster in the US under Democratic presidents than under Republican ones. This column documents that which party controls Congress does not matter for growth, that the Democratic growth advantage is concentrated in the first two years of a presidency, and that presidential party affiliation Granger-causes growth. Neither fiscal nor monetary policy can account for this gap. Instead, the factors that have explanatory promise are: shocks to oil prices, total factor productivity, European growth, and consumer expectations of future economic conditions.
Economists and political scientists – not to mention the political commentariat – have devoted a huge amount of attention to the well-established fact that faster economic growth helps re-elect the incumbent party (see, for example, Fair 2011 for the US). But what about causation in the opposite direction – from election outcomes to economic performance? It turns out that the US economy grows faster – indeed, performs better by almost every metric – when a Democratic president occupies the White House.
Just like the East Asian Tigers, the Lions of Africa are now growing much faster than the developed economies. However, this column shows that the growth escalators in Africa are different than in East Asia. The East Asian Tigers benefitted from a rapidly expanding manufacturing sector. The African Lions are benefitting from increases in productivity in the service sector, while the agricultural sector remains unproductive.
The literature on global growth convergence and divergence is vast and deep. And it is still evolving. Some have argued that global growth is actually diverging across countries. Pritchett (1977) called this “divergence, big time”, whereby the living standards of a few countries pulled away from the rest in the aftermath of the industrial revolution. Others have found evidence in favour of growth convergence.
Africa has generated a lot of enthusiasm lately. The cynical view of the continent as a hopeless basket case has been replaced by the lofty narrative of Africa Rising. This column argues that Africa’s progress is impressive, and there is more to the story than a commodity boom. But Africa is at a crossroads. The opportunities are huge, but the road ahead is long, and will require persistent and patient effort from policymakers as well as business.
Views on Africa’s growth prospects have jumped from utter pessimism to extreme enthusiasm. The latter has been centre-stage with the US–Africa Summit hosted in Washington DC from 4–6 August 2014, with the participation of top political and business leaders. My coauthors Todd Johnson and Shlomi Kramer and I have tried to take a sober assessment of Africa’s progress and prospects, looking beyond the current hype and the inevitable frustration that doing business in the region still generates (Annunziata et al. 2014).
Protection of intellectual property to foster innovations in the service sector
Masayuki Morikawa20 July 2014
Innovation is a key driver of productivity growth, but innovation in the service sector has received relatively little attention. This column shows that the total factor productivity gap between Japanese firms with and without innovations is larger in services than in manufacturing. Whereas the percentage of firms holding patents is much higher in manufacturing than in services, trade secrets are just as important in both sectors. These results suggest that the protection of trade secrets makes an important contribution to productivity growth.
Given the declining labour force due to population ageing, accelerating the productivity growth of industries – especially the service industries – is an important element of the growth strategy in Japan and most advanced countries. While there are a variety of factors affecting productivity, innovation is one of the key determinants of productivity growth. However, innovation in the service sector has not been studied well. I present findings on innovation in the service sector by focusing on the effect of intellectual property rights on innovation.
Brazil has grown rapidly and reduced poverty over the past decade, but it has grown more slowly than other emerging economies and its income per capita remains relatively low by global standards. This column points out that sectors of the Brazilian economy that have been opened up to international competition have outperformed those that remain heavily protected. Deeper integration into global markets and value chains could provide competitive pressures that would improve Brazil’s productivity and living standards.
Oleg Itskhoki, Marc Muendler, Stephen Redding, Elhanan Helpman
Despite a decade of rapid growth and falling poverty rates, Brazil has failed to match the global average for income growth – let alone to achieve the kind of impressive gains posted by other rapidly transforming emerging economies. As of 2012, Brazil had become the world’s seventh-largest economy, but it ranked only 95th in the world for gross national income per capita (IHS Economics and Country Risk data). To raise household living standards, Brazil needs to find a new formula for accelerating productivity growth.
Ejaz Ghani, William Kerr, Ishani Tewari11 July 2014
Some cities grow through specialisation others through diversity. This column measures specialisation and diversity for the manufacturing and services sectors in India. It finds that Indian districts with a broader set of industries exhibit greater employment growth. This is particularly true for low population densities, rural areas and unorganised sector, reflecting knowledge flow and the inclusive nature of employment growth due to diversity.
Urbanisation and development are tightly linked (Duranton and Puga 2013). Developing countries are urbanising at a much faster pace than developed countries. For instance, China’s and India’s economic transformation and urbanisation is happening at 100 times the scale of the first country in the world to urbanise – the UK – and in just one-tenth of the time.
Institutions, trade shocks, and regional differences in long-run educational and development trajectories
André Carlos Martínez, Aldo Musacchio, Martina Viarengo 09 July 2014
Institutions are known to play a powerful and enduring role in countries’ divergent levels of economic development. This column presents evidence that institutions matter for within-country inequality, too. In Brazil, changes in export prices and export tax revenues led to an increase in education spending in states that experienced commodity booms, which increased the number of schools and improved educational outcomes such as literacy rates. However, the effect was limited in states where slavery was predominant in colonial times.
Understanding the determinants of long-run socio-economic development is a major concern for academics and policymakers in many countries around the world. In particular, beyond understanding differences in development or educational and other outcomes across countries, the origins of within-country inequality are now a fundamental issue, given the impact inequality has on the long-run prosperity of nations.
Whereas textbook macroeconomic theory suggests that output should return to potential after a recession, there is mounting evidence that deep recessions have highly persistent effects on output. This column reports estimates of the long-term damage caused by the Great Recession. In most countries in the sample, the loss of potential output – 8.4% on average – has been almost as large as the loss of actual output. In the countries hit hardest by the recession, the growth rate of potential output is much lower today than it was before 2008.
Declan Costello, Gert Jan Koopman, Kieran Mc Morrow , Gilles Mourre, István P. Székely, Alexandr Hobza
According to macroeconomics textbooks, a fall in aggregate demand causes a recession in which output drops below potential output – the normal level of production given the economy’s resources and technology. This effect is temporary, however. A recession is followed by a recovery period in which output returns to potential, and potential itself is not affected significantly by the recession.
The CEPR Business Cycle Dating Committee recently concluded that there is not yet enough evidence to call a business cycle trough in the Eurozone. Instead, the committee has announced a 'prolonged pause' in the recession. This Vox Talk discusses the possible directions that this situation could lead to and questions whether the Great Recession has harmed the Eurozone’s long-term growth prospects to the extent that meagre growth could become the 'new normal'.