1. CCIC’s Discussion:
What is sustainable growth? Does it
matter? And is CIDA promoting it?
Franque Grimard
Department of Economics
Institute for the Study of International Development (ISID)
McGill University
Canadian Economics Study Group (CDESG)
January 23, 2012
2. Discussion on “What is sustainable
growth? Does it matter? And is CIDA
promoting it?”
Economic Growth 101: Theories and Empirics
Case Study: Growth in LAC Countries
Canada and CIDA
Comments and Suggestions
3. Economic Growth Basics
Traditional view of capital (Harrod-Domar, Solow Models)
• Tangible, includes the economy’s stock of equipment and structures
• Return to capital is the profit received by the owners of equipment and
structures
A new view on capital (Mankiw, Phelps and Romer 1995)
• Capital with externalities
• If new ideas arise as capital is built and others benefit
• Human capital
• Capital is much broader concept than suggested by the national income accounts
• People accumulate capital whenever they forgo consumption today in order to
produce more income tomorrow
• Schooling and on-the-job training is also investment
4. Growth accounting with
human-capital-adjusted labor input
Modified production function to capture the
contribution of education (“brains”) and the size of
the labor force (“brawn”)
Y AK H (1 )
H LPeS
• S is the years of schooling
• P is participation rate
• ω is returns to education
So that ˆ ˆ ˆ ˆ
Y K (1 ) H A (A)
ˆ ˆ ˆ ˆ ˆ
H L P S ( S ) (B)
5. Determinants of income per capita
Growth (1)
After rearranging (A), substituting (B) into (A), and
representing income in per capita term we get:
ˆ ˆ
g Y g A .g K g P S ( S ) g L
N H N
• where gx is the growth rate of variable x
Income growth per capita is a result of:
• Growth in technology gA
• Changes in capacity which are determined by:
• Growth in the capital stock per unit of labor adjusted for skills
• Growth in the labor participation rate
• Growth in returns to education and years of schooling
• Demographic changes leading to changes in the dependency ratio
What else?
• Whatever is not explicitly in the production function: TFP
6. Determinants of income per capita
Growth (2)
Total Factor Productivity, i.e. the residual between the
LHS and RHS
Possible Determinants of Total Factor Productivity
• Trade
• Governments
• Gender
• Inequality
• Governance
• Institutions
7. Determinants of TFP for income per
capita Growth : Issues
Issues of causality: what determines what over what
time period
Can one really say that by increasing a factor, one will
then a higher TFP and consequently a higher growth
rate?
Growth Diagnostics (Rodrick et al. 2006) applied to
poverty analysis
8. Case Study: Sustainable and
Inclusive Economic Growth in Latin
America
Definitions: “Sustainable and Inclusive”
Historical Context of the Americas
Inequalities (Rural, urban, gender, ethnicity)
Governments
Debt Crisis of the 1980s
Conflicts (domestic, external)
12. Sustainable and Inclusive Economics
Growth in the Americas
Factors
• Past
• Peace
• Macroeconomic Stability
• Governmental Policies: Education, Health : Policies
targeted towards the Poor Opportunitades, Bolsa Familia
• Democratic Governments , center-left vs Populist governments
• Increase in TFP
• International trade
• Luck
15. Sustainable and Inclusive Growth in the
Americas : Challenges and Constraints
Expectations: Gini Reduction should be understood in the
context of a very high level.
Heterogeneity: within and across countries
Infrastructure
Population aging
Trade, Natural Resources
Economy Diversification
Productivity Increase
Governance
Luck and Shocks
16. Sustainable and Inclusive Growth in the
Americas: Canada’s Role
In 2009, according to DAC, Canada spent close to $US 541
millions. United States: $US 2B on LAC countries.
In 2009, remittances from workers abroad into LAC
countries 56,600,951,140 US$ (US$ 56 billion), which
represents about 1.7% of the total GDP of the LAC
countries.
Official Development Assistance has relatively a small role,
if any, in creating macroeconomic growth, as defined here.
Free trade Treaties
17. Canadian Government:(from the
Web): CIDA’s Priority Themes
CIDA has also chosen priority themes on which to
concentrate its efforts. These are areas where
Canada has proven its leadership:
Increasing food security
Securing the future of children and youth
Stimulating sustainable economic growth
18. Web: CIDA’s Sustainable
Economic Growth Strategy
Through the Sustainable Economic Growth
Strategy, CIDA will focus its main targeted
investments to support sustainable economic
growth that:
• Fosters a stable foundation for viable businesses and
industries to thrive
• Increases opportunities for meaningful employment,
particularly in the formal economy
• Maximizes the contribution of growth to the public
resources available for investment in the welfare of the
population
19. CIDA'S Sustainable Economic
Growth Strategy
The strategy also integrates environmental
sustainability, equality between women and men,
and governance as essential considerations to
achieve sustainable economic growth.
Within the strategy, CIDA will focus on three paths:
Building economic foundations
Growing businesses
Investing in people
20. Comments and Suggestions
Broad set of Principles, not a strategy per se.
These principles cover a lot of ground in the
growth and poverty literature
Not about Children and Youth.
Not about Food Security.
In 2009, $700 million over 20 or so countries.
Limited Impact in terms of macroeconomic growth.
More likely in micro terms, over a long period.
21. Comments and Suggestions
IDRC’s Supportive Inclusive Growth (SIG)
program.
This “strategy” offers flexibility, particularly at the
micro level.
Governance, Institutions, Infrastructure.
Rights, Markets for Poor.
Poverty focus: Mobile Phones