The document discusses how growth policy should be tailored based on a country's level of development. It provides examples showing that policies like competition, education, labor market flexibility, and finance are more growth-enhancing for countries closer to the technological frontier, while policies like primary education are more important for countries farther below the frontier. The document also emphasizes the importance of proper governance of growth policies and industrial policy targeted at competitive sectors.

1. Rethinking Growth Policy
Philippe Aghion

2. EU versus US
 1970’s: EU average annual growth
rate of per capita GDP: 3.5% versus
1.5% in US
 1995-2006: EU per capita GDP was
growing at less than 2% versus 3% in
US

3. Latin America versus Asia
 Average growth rate over 1960-200
period in Brazil lies between 2.5% and
3%...versus 7% in Singapore and
Taiwan, 6.5% in South Korea, 6% in
Hong Kong, 5% in Thailand.

4. Main debates
 Does policy matter for growth as
long as countries have good
institutions?
 Washington consensus: does one
size fit all: stabilize, liberalize,
privatize?
 Should we preclude any form of
industrial policy?
 Role and size of the state?

5. Growth diagnostics?
 How can one binding constraints on
growth?
 Using prices (Hausmann-Rodrik-
Velasco)?
 Alternative approach?

6. A paradigm for analyzing
growth policy

7. Schumpeterian Paradigm
 Innovation is driven by entrepreneurial
investments (R&D…) which are
themselves motivated by the prospect
of monopoly rents

8. Schumpeterian Paradigm
 Frontier innovation and imitation
requires different sets of policies and
institutions

9. Schumpeterian Paradigm

10. 1st idea: Appropriate growth
policies
 During the post-war period, growth in
European countries was driven by
imitation
 Over time, and particularly with
globalization, innovation has become
the driving force of growth
 Innovation requires flexibility and
turnover, and different policies and
institutions

11. Example 1: Competition &
Growth
 Competition/entry is more growth-
enhancing for countries or sectors that
are closer to technological frontier
 Competition/entry is more growth
enhancing in countries or states with
less regulated labor markets

13. 1991 Liberalization in India
Trade liberalization
– Large-scale abandonment of extensive system of quantitative
restrictions in the form of import licensing
– Average percentage point reduction 51% during 1990-7,
maximum of 270%, 97% of products affected
Foreign Investment and Technology Agreements
– Opening up of industries for automatic approval of foreign
technology agreements and investment of up to 51% equity
– Foreign Investment Promotion Board (up to 100% equity)
Industrial Delicensing
– Large-scale removal of industrial licensing, retained in a few
sectors (eg Motor Cars and Leather)
13

14. Baseline Results :
Investment
14

15. Robustness : Patenting
Activity
15

16. Discussion with Dany Rodrik
 Is external competition enough to stimulate
growth in countries like India or South Africa?
 Is there opposition between competition policy
and industrial policy?

17. Example 2: Education
 Graduate education is more growth-
enhancing closer to technological
frontier
 Undergraduate +primary/secondary
education is more growth enhancing
farther below technological frontier
 Question: governance of education?

19. Example 3: Labor market
flexibility
 Labor market flexibility is more growth
enhancing the closer a country is to the
technological frontier
 Question: how to make labor market flexibility
efficient and socially acceptable?

20. EPL
Variable eq1 eq2 eq3 eq4 eq5
Leader MFP growth 0.02949 0.02996 0.02830 0.02813
Gap to Leader -0.00858*** -0.00836***
EPL -0.00000
EPL, for highest tercile 0.00002 -0.00009** -0.00011** -0.00015***
EPL, for middle tercile 0.00004* 0.00002 0.00001 0.00001
EPL, for lowest tercile 0.00004 -0.00005 0.00002 0.00003
MFP Gap, for highest tercile -0.01261*** -0.00816 -0.00547
Gap, for middle tercile -0.00276 -0.00174 -0.00210
Gap, for lowest tercile -0.00901*** -0.01095*** -0.01173***
EPL*Gap, for highest tercile -0.00017 -0.00029*
EPL*Gap, for middle tercile -0.00004 -0.00003
EPL*Gap, for lowest tercile 0.00012* 0.00014**
Leader growth, for highest tercile 0.13600***
Leader growth, for middle tercile 0.00817
Leader growth, for lowest tercile -0.02597
legend: * p<.1; ** p<.05; *** p<.01

21. Example 4: Finance
 As country moves closer to frontier,
needs to rely more on equity finance and
stock markets

22. Preliminary results
Finance, Growth and Distance to Frontier
Value Added Growth, 1980-1990
OLS IV OLS IV
Stock Market * Financial Dependence 0.065 0.035 -0.008 -0.139
[.026]** [.023] [.058] [.069]**
Stock Market * Fin Dep * Dist to Frontier 0.289 1.072
[.327] [.448]**
Private Lending * Fin Dep 0.059 0.029 0.059 0.036
[.036]* [.028] [.034] [.027]
Private Lending * Fin Dep * Dist to Frontier -0.528 -0.919
[.164] [.243]***
Observations 972 661 887 638
R-squared 0.3 0.3 0.38 0.36
Country & Sector Dummies included.
* significant at 10%; ** significant at 5%; *** significant at 1%

23. Identifying binding constraints on growth (1)
 Significant variables:
- Investment in higher education
- Liberalization of product and labor markets
- Employment duration and rate
23
Aghion - Cette - Cohen - Pisani Les leviers de la croissance française

24. Identifying binding constraints on growth (2)
Catching up with
scandinavian countries
Effets au bout de … 5 ans 10 ans 15 ans
Reforming higher education
Effets :
. Croissance annuelle moyenne du PIB, en points 0,1 0,3 0,4
. Niveau du PIB, en % 0,6 1,9 3,9
Reforming product and labor markets
Effets :
. Croissance annuelle moyenne du PIB, en points 0,2 0,2 0,2
. Niveau du PIB, en % 0,9 2,1 3,3
24
Aghion - Cette - Cohen - Pisani Les leviers de la croissance française

25. Identifying binding constraints on growth (3)
3,5
3
2,5
2
1,5
1
0,5
0
2008-2012 2013-2017 2018-2022 Long terme
Enseignement supérieur
Réforme des marchés des produits et du travail
Augmentation de l'input en travail (emploi et durée)
Croissance potentielle 'spontanée'
25
Aghion - Cette - Cohen - Pisani Les leviers de la croissance française

26. 2d idea: governance
 Growth investments should be targeted and
properly governed

27. Example 1: Education
 Quality, not just quantity, of
investment matters
 Two illustrations
 PISA and growth
 Investing more in more autonomous
universities, is more growth-enhancing

28. PISA and growth

29. Years of schooling and growth

30. Autonomy of universities Autonomie
30
Source : The Governance and Performance of ResearchUniversities: Evidence from Europe and the U.S. – P. Aghion et alii – NBER avril
2009

31. Example 2: Industrial Policy
 Over time, and particularly since the 1980s,
economists have come to dislike sectoral
(“industrial”) policy on two grounds:
 (i) it focuses on big incumbents (‘national
champions);
 (ii) governments are not great in ‘picking
winners’.
 Current dominant view is that sectoral policy
should be avoided especially when it
undermines competition

32. Industrial Policy (2)
Several reasons for a rethink
 New post-crisis realism: laissez-faire complacency by
several governments has led to inefficient growth of
non-tradable sectors at the expense of tradables
 Climate change: path dependence in the direction of
innovation leads firms that have innovated dirty in the
past will keep on innovating dirty in the future, hence
role for government to redirect technical change
 China: a big deployer of sectoral aid, whose success
induces other countries to try and emulate its
economic policies

33. Industrial Policy (3)
 The question is not so much whether or not
we should forbid or preclude industrial policy,
but rather how industrial policy should be
designed and governed.
 Some new ideas
 Selection of sectors: skill-biased (Nunn-Trefler
(2010)); competitive sectors (this paper);
 Governance: do not focus aid on one firm in a
sector, minimize concentration of aid (this paper).
33

34. Industrial Policy (4)
 Current work with Mathias Dewatripont, Luosha
Du, Ann Harrison, and Patrick Legros
 Panel data of Chinese firms, 1988-2007
 Industrial firms from NBS: annual survey of all
firms with more than 5 million RMB sales
 Regress TFP on:
 Subsidies received by firm as a share of sales
 COMP=1 - LERNER INDEX
 Sector-level controls, firm and time fixed effects

35. Industrial Policy (5)
 Findings are that:
 The higher competition, the more positive (or
less negative) the effect of subsidies on average
TFP
 The overall effect of subsidies on TFP is positive
if competition is sufficiently high and/or subsidies
are not too concentrated among firms in the
sector

36. Innovation in Products
 Here, we use the new product ratio as the dependent variable. New product
ratio is defined as the share of output value generated by new products to
the total output value.
Table 6
(1) (2) (3) (4) (5) (6)
Dependent: Ratio_newproduct
The second quartile
Ratio_subsidy 0.00397 0.00364 -1.503* -1.689** -1.508* -1.679**
(0.0390) (0.0388) (0.821) (0.755) (0.816) (0.755)
Competition_lerner -0.0724 -0.0798 -0.0777
(0.0789) (0.0780) (0.0720)
Interaction_lerner 1.562* 1.755** 1.568* 1.744**
(0.841) (0.780) (0.837) (0.780)
The fourth quartile
ratio_subsidy 0.00185 0.000920 -1.324 -1.029 -1.332 -1.022
(0.0351) (0.0352) (1.475) (1.442) (1.468) (1.432)
competition_lerner 0.117* 0.114* 0.122*
(0.0662) (0.0657) (0.0622)
interaction_lerner 1.359 1.057 1.368 1.049
(1.503) (1.470) (1.495) (1.460)
Horizontal Yes Yes Yes Yes Yes Yes
Forward & Backward No No No No Yes Yes
Tariffs Yes Yes Yes Yes Yes Yes

37. 3d idea: Macroeconomic
policy matters for growth

38. Two Contrasted Views of How to
Conduct Macrooeconomic Policy
 Keynesian view (non-discriminatory
increase in public spending)
 Conservative view (tax and spending
cuts)

39. A Third Way
 There is a third way between
keynesian and conservative
approaches
 namely, countercyclical fiscal and
monetary policy to partly circumvent
credit market imperfections and
thereby help firms maintain their
growth-enhancing investments over
the cycle.

40. Fiscal Policy Over the Cycle
 17 OECD countries, 45 manufacturing
industries
 Period 1980-2005
 Finding: Countercyclical fiscal
policy enhances growth more in
sectors that are more dependent on
external finance or in sectors with
lower asset tangibility

41. Fiscal countercyclicality across
OECD countries

43. From fiscal to monetary policy
 More countercyclical monetary policy,
i.e with lower short-run real interest
rates in recessions and higher rates in
booms...
 ....is more growth-enhancing in more
credit constrained or more liquidity-
constrained sectors

44. Conclusion 1: Summary
 Policy matters
 Not just institutions!
 Growth policy must be “appropriate”
 Interact policy with technological
development or with institutional variables
 Governance matters
 Governance of education
 Governance of industrial policy

45. Conclusion 2: Growth diagnostics
 Do not use prices to identify binding
constraints on growth
 Problem with Mincerian measure of
human capital
 Problem of using interest rates to
assess credit constraints

46. Conclusion 3: Make growth
sustainable!
 Correct for excessive inequality which
is detrimental to growth:
• It encourages capture and undermines
competition and trust
• The top end stops contributing to public
good provision
 Environment:
• State intervention to foster green
innovation and production

47. Developing countries: learning
from China
 Fast convergence in per capita GDP and in
TFP
 Huge surplus of foreign reserves (from 20
billion in 1992 to 2.5 trillion today)
 Key was reallocation of activity from SOEs to
(credit-constrained) new TVEs and private
enterprises (Song-Storesletten-Zilibotti; Hsieh-
Klenow)
 Role of education and infrastructure in
reallocation process?

48. Developed countries: learn from
Scandinavia and Germany?
 Monti triangle: budget balance, growth and
inclusiveness
 Targeted growth-enhancing investments and
countercyclical macroeconomic policy
 Social dialogue (high unionization rates)
favoring external and internal labor market
flexibility
 Fiscal systems to help reconcile budget balance
with growth investments and also help achieve
inclusive growth