us treasury: bretton
TRANSCRIPT
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New Policiesfor Economic Development
John B. Taylor Under Secretary for International AffairsUnited States Treasury
Bretton Woods Committee Annual MeetingJune 6, 2002
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1.3 billion people, less than $1 per day½ world’s population, less than $2 per day
U.S. average, $90 day. Why? *Map source: World Bank
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The Key to Poverty Reduction
is Higher Productivity Jobs • Productivity = output (Y) per hour of work (L) = Y/L
– Sometimes called labor productivity
• It’s “the explanation” why some countries are rich andother countries are poor • Countries that are behind in productivity are behind in
income per capita
• Productivity growth is how to achieve higher income per capita
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A Founding Principle of IDA
“The purposes of the Association are to promote economic development, increase productivity and thus raise standards of living in the less-developed areas of theworld.…The Association shall be guided in
all its decisions by the provisions of thisArticle.” -- Articles of Agreement for the
International Development Association
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Economic Growth Theory•
Growth accounting: higher productivity jobs (Y/L)requires more capital (K/L) or better technology (T)• If there are no impediments to the flow and use of
technology and capital , then countries or regions
that are behind in productivity should have higher productivity growth: they should be catching-up
• Three issues: – Capital should flow to where returns are relatively high – Spread of technology through education, foreign direct
investment, internet, etc. – Private sector is the creator of higher productivity jobs
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Florida
Texas
New York
California
Illinois
3.5
3.0
2.5
2.0
1.5
1.0
0.5
GROWTH RATE OFINCOME PER CAPITA, 1880-1980
300 1,000 5,000
INCOME PER CAPITA IN 1880
(RATIO SCALE)
States in the United States:Catch-Up Clearly Seen
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1.5%
2.5%
3.5%
4.5%
0 3000 6000 9000 12000 15000 18000
REAL GDP PER CAPITA IN 1960 (1995
NNUAL GROWTH RATE OF REALDP PER CAPITA, 1960-1999 More Advanced Countries:
Catch-Up Seen Here Too
Portugal
Greece Spain
Italy
Sweden
Ireland
UK Denmark
Belgium
Norway
Canada
Austria
Luxembourg
U.S. TurkeyFrance
Netherlands
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-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
0 2,000 4,000 6,000 8,000 10,00012,00014,00016,00018,000
REAL GDP PER CAPITA IN 1960 (1995
NNUAL GROWTH RATE OF REALDP PER CAPITA, 1960-1999 All Countries: Not Much
Catch-Up Seen YetSingaporeKorea
Hong KongJapan
U.S.
Nigeria
Bangladesh
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Recent Productivity Trends
• East Asia 5.5• United States 2.1• Europe 1.2
• Latin America 0.7• Middle East -0.1• Africa (Sub-Saharan) -0.5
Annual laborproductivity growth,
1991-99 (%)
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An Addition to the Millennium
Goals: Productivity Growth • Countries with lower productivity than the U.S.
should grow faster than the U.S.
• The greater the productivity gap between the U.S.and a country the greater should be the productivity growth rate in that country
• Could the goal be quantified?
– Productivity gap 5 times growth rate difference 3 – Productivity gap 10 times growth rate difference 5 – Productivity gap 100 times growth rate difference 9
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Poverty and Productivity Growth
• Some argue that the focus on economic growthwill mean less focus on poverty reduction
• Simple logic: With productivity 100 times lower in poor countries, “catch up” in average incomescompletely dominates changes in incomedistribution
• Empirical studies demonstrate that higher productivity growth increases the income per capita of the lowest quintile by about the sameamount as the other quintiles
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Why Isn’t There More Catch Up?
• Very difficult question• Key factor: impediments and disincentives
to the spread and to the application of technology and capital
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Reasons for Lack of Catch Up• Poor governance
– weak rule of law, corruption – creates disincentives to invest, to start up new firms, to
expand existing firms• Poor education
– reduces human capital – impedes adoption of new technologies
• Restrictions on economic transactions – lack of openness to trade, state monopolies, andexcessive regulation
– reduce incentives for innovation and investment needed
to boost productivity
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The New Agenda
• Increase foreign aid – (1) Funding for Millennium Challenge Account to
increase to $5 billion a year by 2006 — a 50% increaseover and above existing U.S. development assistance – (2) Contribution to World Bank’s International
Development Association (IDA) increase by 18%
– (3) Larger fraction of IDA aid in form of outright grantsrather than loans
• Let good performance determine which countriesget aid for economic development
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Millennium Challenge Account
• Good policy performance in three areas: – “Ruling justly” (lack of corruption) – “Investing in people” (good education, health policy) – “Encouraging economic freedom” (reduce trade barriers)
• Theory and evidence says that these will increase productivity growth
• Now working on objective criteria in each area: – using “growth regression” research over last 10 years – needs to be simple, robust
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Funding for the Millennium
Challenge Account
2004 2005 2006
ODA Millennium Challenge Account
$10 Billion
$15 Billion
Est. $1.7B Est. $3.3B
$5B
*ODA held constant for presentational purposes
Continuingin Out Years
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Results-Based IDA Replenishment
• U.S. is proposing to increase IDA contribution by18% in the current replenishment – Year One: $850 million – Year Two: $950 million – Year Three: $1,050 million
• Each $100 million increment in year two and three
would depend on performance in combatingdisease and improving education
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