Regional Economic Policies

Prof. Cristina Brasili

2014-2015

Regional Economic Policies

Prof. Cristina Brasili

2014-2015

Growth TheoryGrowth Theory

Economic Growth and the factors Economic Growth and the factors which contribute to itwhich contribute to it

1.1.Economic GrowthEconomic Growth

We would like to respond to the question posed by We would like to respond to the question posed by Helpman in 2004:Helpman in 2004:

““What makes some countries rich and others What makes some countries rich and others poor?”poor?”

1.1.Economic GrowthEconomic Growth

In the pre-industrial period production and In the pre-industrial period production and population growth followed a malthusian modelpopulation growth followed a malthusian model

“ “extensive” economic growth:extensive” economic growth: Growth close to 0Growth close to 0 Unchanged standard of livingUnchanged standard of living

1.1. Economic GrowthEconomic Growth

Source: an elaboration of Maddison's data Source: an elaboration of Maddison's data

667445

6.012

0

1000

2000

3000

4000

5000

6000

7000

World per capita GDP over the last 2000 years in 1990 dollars

Economic GrowthEconomic Growth

The phases of economic development after the The phases of economic development after the start of the industrial revolutionstart of the industrial revolution

““Intensive” modern growth began with the Intensive” modern growth began with the industrial revolution:industrial revolution:-production grew more than the population which -production grew more than the population which meant that there wasmeant that there was

An increase in productivityAn increase in productivity

Around 1820 the world's population reached one Around 1820 the world's population reached one billionbillion

1. Economic Growth1. Economic Growth

Maddison identified five phases of economic Maddison identified five phases of economic development after the start of the industrial development after the start of the industrial revolution:revolution:

1.1. 1820-18701820-18702.2. 1870-19131870-19133.3. 1913-19501913-19504.4. 1950-19731950-19735.5. 1973 to today1973 to today

1.1.Economic GrowthEconomic Growth

There are four principal causes of growth:There are four principal causes of growth:

1.1. Technological progressTechnological progress

1.1. The accumulation of physical capitalThe accumulation of physical capital

1.1. The growth of knowledgeThe growth of knowledge

1.1. The progressive integration of the world economyThe progressive integration of the world economy

Structural changes in the economy and the Structural changes in the economy and the availability of natural resources have also played availability of natural resources have also played important roles in growth important roles in growth

1.1.Economic GrowthEconomic Growth

The motors of economic growth:The motors of economic growth:Technological progressTechnological progress

The industrial revolution involved changes The industrial revolution involved changes in productivity, resources and the in productivity, resources and the productive processes.productive processes.

- Mechanisation of workMechanisation of work- Natural vegetal, animal and mineral Natural vegetal, animal and mineral

resources and raw materials, later replaced resources and raw materials, later replaced by artificial onesby artificial ones

- The substitution of natural sources of The substitution of natural sources of energy by artificial ones (Watt's steam energy by artificial ones (Watt's steam engine, mechanical energy obtained from engine, mechanical energy obtained from coal)coal)

1.1.Economic GrowthEconomic Growth

- Between 1820 and 1990 income increased Between 1820 and 1990 income increased 14 fold in real terms, while energy 14 fold in real terms, while energy consumption increased 7 fold.consumption increased 7 fold.

- However there was a 14 fold increase in However there was a 14 fold increase in useful energy consumption useful energy consumption

1.1.Economic GrowthEconomic Growth

Technological innovation takes place at Technological innovation takes place at different scales: different scales:

- incremental improvements- incremental improvements (or (or learning by doinglearning by doing) )

- Completely new inventions- Completely new inventions (or (or changing the technological paradigms changing the technological paradigms Rossi S. 2009) and their general useRossi S. 2009) and their general use

1.1.Economic GrowthEconomic Growth

The wave of technological progress The wave of technological progress

- textiles 1762-94- textiles 1762-94-railways 1830-47-railways 1830-47-mass production techniques and the -mass production techniques and the

automobile industry, late19automobile industry, late19thth - early 20 - early 20thth Century Century

-Information technology 1961--Information technology 1961-19811981

1.1.Economic GrowthEconomic Growth

Modern economic growth is characterised by:Modern economic growth is characterised by:

Rapid growth in per capita productivityRapid growth in per capita productivity Increase in the productivity of the workforceIncrease in the productivity of the workforce Profund changes in the economic structureProfund changes in the economic structure Changes in the social structure and the Changes in the social structure and the

governing ideology governing ideology The more developed nations tend to take over The more developed nations tend to take over

other countriesother countries Economic growth only affects a limited areaEconomic growth only affects a limited area

1.1.Economic GrowthEconomic Growth

Modern growth causes a significant Modern growth causes a significant increase in international inequality. increase in international inequality.

The present inequalities have their The present inequalities have their origin in the period of sustained origin in the period of sustained growth.growth.

1.1.Economic GrowthEconomic Growth

In 1820 there were similar conditions In 1820 there were similar conditions for development, but the per capita for development, but the per capita GDP in Europe was three times that GDP in Europe was three times that of Africa, while today it is 13 times of Africa, while today it is 13 times greater.greater.

1.1.Economic GrowthEconomic Growth

Long term growth and the economic Long term growth and the economic cycle cycle

Reasonably large fluctuations in Reasonably large fluctuations in growth inside the long term trends of growth inside the long term trends of a period.a period.Gap between actual and potential Gap between actual and potential productionproduction

1.1.Economic GrowthEconomic Growth

Economic cycle Economic cycle

Fluctuations due to shocks which Fluctuations due to shocks which impact the aggregate demand impact the aggregate demand

for consumption and investment (as in the for consumption and investment (as in the present crisis) or shocks which affect the present crisis) or shocks which affect the total supply (increases in the price of the total supply (increases in the price of the productive factors)productive factors)

1.1.Economic GrowthEconomic Growth

Growth and the economic cycle: the cases Growth and the economic cycle: the cases of the USA, Japan and the Congoof the USA, Japan and the Congo

- USA: a regular annual growth rate of 1.9%. USA: a regular annual growth rate of 1.9%. Today a US citizen has a standard of living Today a US citizen has a standard of living which is 12 times greater than that of a US which is 12 times greater than that of a US citizen in 1870citizen in 1870

- Japan: slow growth until 1950. After WWII Japan: slow growth until 1950. After WWII an annual growth rate of 4.5%. For a man of an annual growth rate of 4.5%. For a man of 70 his standard of living has increased more 70 his standard of living has increased more than eight fold during his lifetimethan eight fold during his lifetime

1.1.Economic GrowthEconomic Growth

Growth and the economic cycle: the cases of Growth and the economic cycle: the cases of the USA, Japan and the Congothe USA, Japan and the Congo

- Congo: the population grew very rapidly Congo: the population grew very rapidly between 1950 and 2003, at 2.7% per between 1950 and 2003, at 2.7% per year, while production only grew by 0.8% year, while production only grew by 0.8% annually. This means that the per capita annually. This means that the per capita GDP fell by -1.9% per year and was GDP fell by -1.9% per year and was halved over a period of 38 years halved over a period of 38 years

1.1.Economic GrowthEconomic Growth

Growth and the economic cycle: Growth and the economic cycle: over a long period of time small over a long period of time small differences in the annual growth differences in the annual growth rate result in great differences in rate result in great differences in incomeincome

1.1.Economic GrowthEconomic Growth

Economic growth: Past rates of economic Economic growth: Past rates of economic growth explain at a statistically significant growth explain at a statistically significant level (correlation 0.65) the present levels of level (correlation 0.65) the present levels of development (for the period between 1960 development (for the period between 1960 and 2003 for 156 countries)and 2003 for 156 countries)

However the conditions have changed in However the conditions have changed in many countries with the passage of timemany countries with the passage of time

1.1.Economic GrowthEconomic Growth

Economic growth: it is important to study Economic growth: it is important to study paths of growthpaths of growth

If however the levels of growth are compared If however the levels of growth are compared with the rates of growth, there were high with the rates of growth, there were high levels of levels of instabilityinstability in the periods between in the periods between 1960 and 1980 and between 1980 and 20031960 and 1980 and between 1980 and 2003

1.1.Economic GrowthEconomic Growth

-Human development -Human development An alternative approach to using per An alternative approach to using per

capita income capita income

-Proposed by Amartya Sen -Proposed by Amartya Sen

1.1.Economic GrowthEconomic Growth

Let us return to the original question:Let us return to the original question: ““What makes some countries rich and What makes some countries rich and

others poor?”others poor?”

Basically we can reply that the Basically we can reply that the difference depends on their different difference depends on their different “productivity”“productivity”

2. Growth Factors2. Growth Factors

GDP____GDP____= = GDP___GDP___ * * employed ___ employed ___ * * total workforce total workforce Popolation employed total workforce popolationPopolation employed total workforce popolation

-productivity of the work-productivity of the work-employment rate -employment rate -economic activity rate-economic activity rate

Contribute to each component of the per Contribute to each component of the per capita GDPcapita GDP

Growth factorsGrowth factors

The most relevant differences in per The most relevant differences in per capita GDP are connected to important capita GDP are connected to important differences in productivity.differences in productivity.

2. Growth Factors2. Growth Factors

Accumulation of capital plays a central role Accumulation of capital plays a central role in the neo-classical approach: in the neo-classical approach: differences in differences in development are due to the rate of savings, development are due to the rate of savings, the structure of individual preferences and the structure of individual preferences and the total productivity of the different factors. the total productivity of the different factors.

2. Growth Factors2. Growth Factors

The theory of endogenous growth The theory of endogenous growth emphasises the importance of the emphasises the importance of the accumulation of human capital and accumulation of human capital and technological progress.technological progress.

Furthermore, accumulation of capital, Furthermore, accumulation of capital, technological progress and increasing technological progress and increasing knowledge do not “contribute” to growth knowledge do not “contribute” to growth but are, indeed, GROWTH itself.but are, indeed, GROWTH itself.

2.2. Growth Factors: Growth Factors: Immediate and fundamentalImmediate and fundamental

incomeincome

Endogenous Endogenous endowment of the production factors endowment of the production factors productivityproductivity

PartiallyPartially international integration international integration istitutions istitutionsendogenousendogenous

Exogenous Exogenous geographical characteristics geographical characteristics

Fonte: Rodrik, Princeton University Press, 2003

Useful indicators of economic developmentUseful indicators of economic development

INDICATORS SOURCE

Per Capita GDP in ppp National statistical institutions (ISTAT for Italy), EUROSTAT, ONU, WB, PWT, OECD

HDI indices for human development UNDP (Human Development Report)

Gini indices National statistical institutions, EUROSTAT, ONU, WB, PWT, OECD

Poverty indices UNDP (Human Development Report)

Employment rate National statistical institutions, EUROSTAT, ONU, WB, PWT, OECD

Activity rate National statistical institutions, ONU, WB, EUROSTAT, PWT, OECD

Unemployment rate National statistical institutions, ONU, WB, EUROSTAT, PWT, OECD

Structure of the production system National statistical institutions, WB EUROSTAT, ONU, OECD

Openness of the system National statistical institutions, WB EUROSTAT,

Useful indicators of economic development (continued)Useful indicators of economic development (continued)

INDICATORS SOURCES

Indicators on FDI National statistical institutions

Indicators on education and training National statistical institutions, ONU, WB, EUROSTAT, UNESCO OECD

Indicators on R&D and economic creativity National statistical institutions, ONU, WB, EUROSTAT, OECD

Indicators on savings National statistical institutions, WB

Indicators on investment National statistical institutions, WB

Environmental indicators ONU, WB, UNDP, HDU, OECD

Health indicators OMS, ONU, WB

demographic indicators OMS, OIL, WB

Institutional indicators ONU, WB, Trasparency International etc.

BEYOND GDP: A NEW WELL-BEING INDEXPresentation and discussion of the “Stiglitz-Sen-Fitoussi” report, Bologna, December 2009

At the conference “Beginning with “beyond GDP”, Enrico Giovannini, the president of Istat, stated:In Istanbul the Prime Minister of Bhutan, Lyonpyo Jigmi y Thinley, stated: “We have used GDP to determine wrongfully what is in fact the state of well-being of a country … GDP is necessary but inadequate, and we need to develop additional indices that would tell a more comprehensive, a more holistic story about how human society is progressing … The human being has two needs, the needs of the body and the needs of the mind, and what we have focused on so far is mostly the body, perhaps only the body … So, it’s a paradigm shift that we need to make”.

In some ways we have concentrated too much on material well-being and not enough on immaterial factors. Thus we need to change the paradigms.”

To study:

Capitoli Primo e Secondo, pp.9-64 Capitolo Ottavo pp.196-229

La crescita delle nazioni, fatti e teorie di Vittorio Daniele, Rubbettino Editore, 2008

Fonte: nostre elaborazioni su dati ISTAT-COEWEB