ACADEMY OF ECONOMIC STUDIES BUCHAREST DOCTORAL SCHOOL OF
ACADEMY OF ECONOMIC STUDIES, BUCHAREST DOCTORAL SCHOOL OF FINANCE AND BANKING DETERMINANTS OF ECONOMIC GROWTH IN TRANSITION COUNTRIES MSc Student: Dan Cătăneţ Supervisor: Professor Moisă Altăr Bucharest, July 2003 DOCTORAL SCHOOL OF FINANCE AND BANKING - July
DETERMINANTS OF ECONOMIC GROWTH IN TRANSITION COUNTRIES Contents 1. Introduction 2. Review of the Literature 3. Framework for the Analysis of Growth Determinants 4. The used data sources and the methodology of adaptation 5. The presentation of the obtained results 6. Conclusions DOCTORAL SCHOOL OF FINANCE AND BANKING - July
DETERMINANTS OF ECONOMIC GROWTH IN TRANSITION COUNTRIES 1. Introduction At the beginning of the transition period the output has been decreasing in mainly all the countries, but the recovery which followed to this period was very variable between these countries. Using the general framework for analyzing the determinants of the economic growth we would like to analyze the way in which certain determinants of the economic growth have affected between 1990 - 1999 its evolution, for the countries involved in the transition process. Initial conditions : the initial level of real GDP per capita, the initial level of school enrolment and life expectancy at birth Control and environmental variables : the inflation level, the budgetary deficit, the ratio of general government final consumption expenditure on GDP, the investment, the savings, the fertility rate, and the M 2 level on GDP • panel data with observations, on 5 years period time, between 1980 -1999 • estimation method: feasible GLS (general least squares) DOCTORAL SCHOOL OF FINANCE AND BANKING - July
DETERMINANTS OF ECONOMIC GROWTH IN TRANSITION COUNTRIES 2. Review of the Literature • Neoclassical growth model developed by Ramsey (1928), Solow (1956), Cass (1965), and Koopmans(1965) - conditional convergence • Romer (1986, 1987, and 1990), Lucas (1988) and Rebelo (1991) have developed endogenous growth models, introducing government policies, human capital and diffusion of technology, which allow spillover effects and increasing returns. • The standard empirical framework derives more from the neoclassical growth model extended to incorporate government policies and human capital. • Growth regressions have had considerable success explaining the crosscountry variation in growth rates. Barro (1991) started this large literature with a regression that emphasized initial income, primary and secondary enrollment, political instability, and deviations from purchasing power parity. Barro (1997) obtained the fact that it is verified the hypothesis of conditional convergence. DOCTORAL SCHOOL OF FINANCE AND BANKING - July
DETERMINANTS OF ECONOMIC GROWTH IN TRANSITION COUNTRIES For a given starting level of real per capita GDP, the growth rate is enhanced by higher initial schooling and life expectancy, lower fertility, lower government consumption, better maintenance of the rule of law, lower inflation, and improvements in the terms of trade. For given values of these and other variables, growth is negatively related to the initial level of real per capita GDP. Initial level of GDP per capita is one of the most robust determinants of the economic growth Doppelhofer, Miller and Sala-i-Martin (2000) • economic growth is negatively associated with inflation, large budget deficits, and distorted foreign exchange markets - Fischer (1993) • consistent negative relation between growth and the budgetary deficits - Easterly and Rebelo (1992) • negative relation between growth and inflation - Gregorio (1993), Gzfason (1991), De Long and Summers (1992), Barro (1997) • inflation is negatively affecting the economic growth and influencing the performance in the financial sector - Levine and Smith (1999) and Acemoglu, Johnson, Robinson and Thaicharoen (2002) DOCTORAL SCHOOL OF FINANCE AND BANKING - July
DETERMINANTS OF ECONOMIC GROWTH IN TRANSITION COUNTRIES • financial development, most frequently measured by the ratio of M 2 on GDP, is a robust causal determinant of economic growth - King and Levine (1993), Levine and Zervos (1993) and Levine, Loayaza and Beck (1999) • stock markets and banks positively influence economic growth and realize a more efficient allocation of the resources - Beck and Levine (2001) • developing the infrastructure (telephone lines per capita) initial conditions - Canning and Fay (1993), Esterlay and Levine (1997) • developed institutions are important for economic growth - Knack and Keefer (1995) • growth is more rapid when macroeconomic stabilization is undertaken early and the greater the extent of structural reforms- Berg, Borensztein, Sahay and Zettelmeyer (1999), Fischer and Sahay (2000) DOCTORAL SCHOOL OF FINANCE AND BANKING - July
DETERMINANTS OF ECONOMIC GROWTH IN TRANSITION COUNTRIES 3. Framework for the Analysis of Growth Determinants The general framework for the determinants of the economic growth follows the extension of the neoclassical model, which relates the real per capita growth rate with two kinds of variables: the initial and the control variables and environmental variables. - Barro, Sala-i-Martin (1995), Barro (1997, 2001), Fischer (1993), Esterlay (2001), Doppelhofer, Miller and Sala-i-Martin (2000), Beck and Levine (2001) - initial levels and the state variables: the initial level of physical capital highlighted as GDP per capita, and the initial level of human capital, as a level of education, expressed by the secondary and tertiary school enrolment, and as a state of health, expresses by the fertility rate -control variables, which characterizes the governmental policies and the economic agents’ decisions: the general government final consumption expenditure on GDP, the gross capital formation, the savings on GDP, the fertility rate, the inflation level, the budgetary deficit on GDP, M 2 on GDP and the trade on GDP DOCTORAL SCHOOL OF FINANCE AND BANKING - July
DETERMINANTS OF ECONOMIC GROWTH IN TRANSITION COUNTRIES We can write therefore, as a function, for a country, the growth rate of GDP per capita as: (1) where y* and h* represent the initial conditions, respectively y* is the initial level of GDP per capita, and h* the initial level of human capital (expresses by the secondary school enrolment, the life expectancy at birth, etc. ). The omitted variables, denoted by ……. , comprise an array of control and environmental influences. These variables would include preferences for saving and fertility, the government policies with respect to spending, and so on. The Solow-Swan and Ramsey models predict that, for given values of environmental and control variables an equi-proportionate increase in y* and h* would reduce Dy in eq. 1. Because of diminishing returns to reproducible factors, that is why richer country tends to grow at a slower rate. In these models, the control variables determine the steady state of the output per capita. DOCTORAL SCHOOL OF FINANCE AND BANKING - July
DETERMINANTS OF ECONOMIC GROWTH IN TRANSITION COUNTRIES Therefore, a change of the savings rate will affect the economic growth for certain levels of state variables. In the model where enters also the human capital for a certain level y*, a higher level of the human capital h* have the tendency to increase the economical growth rate from the above mentioned equation. So, even if the influence of on Dy is negative, the influence of the human capital on Dy h* will be positive. Theories of technological diffusion assume that more human capital (on the form of education, experience and health) increases the ability to absorb new technologies. Romer (1986, 1987, and 1990), Lucas (1988) and Rebelo (1991) have developed endogenous growth models, introducing government policies, human capital and diffusion of technology, which allow spillover effects and increasing returns. DOCTORAL SCHOOL OF FINANCE AND BANKING - July
DETERMINANTS OF ECONOMIC GROWTH IN TRANSITION COUNTRIES In the empirical implementation we shall use the initial level of GDP per capita from the growth equation from above, under the form log(y*). The negative coefficient of this variable represents the convergence rate. For h* we shall be using the initial level of the secondary or tertiary school enrolment rate and the logarithm of life expectancy at birth as an initial level. In the basic regression, as control variables who characterizes the environment we shall use the general government final consumption expenditure on GDP, the gross capital formation, the savings on GDP, the fertility rate, the inflation level, the budgetary deficit on GDP, M 2 on GDP and the trade on GDP. DOCTORAL SCHOOL OF FINANCE AND BANKING - July
DETERMINANTS OF ECONOMIC GROWTH IN TRANSITION COUNTRIES 4. The used data sources and the methodology of adaptation - panel data with observation on 5 years. These are average values of the indicators on 5 years time periods, between 1980 -1999. At the observation for the variables which represent the initial conditions, we shall use the data from the beginning of each period. The four periods are: 1 for 1980 -1984, 2 for 1985 -1989, 3 for 1990 -1994, 4 for 1995 -1999. The initial indicators are for 1980 at period 1, 1985 for period 2, 1990 for the period 3, and 1995 for the last period. The data which we are using are taken from the World Development Indicators 2002, World Bank and they consist in over 20 indicators reported by the World Bank on 167 countries between 1980 -2000. In regressions we shall use the maximum number of countries and periods shown by the available information. DOCTORAL SCHOOL OF FINANCE AND BANKING - July
DETERMINANTS OF ECONOMIC GROWTH IN TRANSITION COUNTRIES • GDPcgr - GDP per capita growth as an average of the period • ln. GDPs - ln(GDP per capita (constant 1995 US$) ) from the first year at the beginning of the period • lngdpi - ln(GDP per capita, PPP (current international $) ) from the first year at the beginning of the period • ln. Lifs - ln(Life expectancy at birth, total (years) ) from the first year at the beginning of the period • Sch. Ss - School enrollment, secondary from the first year at the beginning of the period • Sch. Ts - School enrollment, tertiary from the first year at the beginning of the period • Savi - Gross domestic savings (on GDP) as an average of the period • Kfg - Gross capital formation (on GDP) as an average of the period • Infl - Inflation, consumer prices as an average of the period • G - General government final consumption expenditure (on GDP) as an average of the period • Trad - Trade (on GDP) as an average of the period (exports + imports on GDP) DOCTORAL SCHOOL OF FINANCE AND BANKING - July
DETERMINANTS OF ECONOMIC GROWTH IN TRANSITION COUNTRIES • Unem - Unemployment, total (on total labor force) as an average of the period • BD - Budget Deficit [(-1)*Overall budget balance, including grants (on GDP) ] as an average of the period. (for central government only) • CA - Current account balance (on GDP) as an average of the period • FDI - Foreign direct investment, net inflows (on GDP) as an average of the period. • Fert - Fertility rate, total (births per woman) as an average of the period • M 2 - Money and quasi money (M 2) on GDP as an average of the period • Dsov - dummy for the former Soviet Union countries (1 if the country is ex. SU and 0 if it is not) The analyzed countries in the process of transition: • 9 Central and Eastern European countries (CEE): Albania, Bulgaria, Croatia, Czech Republic, Hungary, Poland, Romania, Slovak Republic, and Slovenia; • the Baltics countries: Estonia, Latvia, and Lithuania; • 8 Former Soviet Union countries (FSU) : Armenia, Belarus, Georgia, Kazakhastan, Kyrgyz Republic, Moldova, Russia, and Ukraine. DOCTORAL SCHOOL OF FINANCE AND BANKING - July
DETERMINANTS OF ECONOMIC GROWTH IN TRANSITION COUNTRIES The basic regression is: (2) where the dependent variable Growth is the real growth of the GDP per capita, X is the matrix of the variables which express the initial conditions and Y is the matrix of the control variables. estimation method: feasible GLS (general least squares) (Eviews 4) Due to the variable variances of the waste between countries, we shall use a feasible GLS that assuming the presence of cross-section heteroskedasticity. In order to allow variances within a cross-section to differ across time we shall use White Heteroskedasticity Covariance, which estimate covariances that are robust to general heteroskedasticity. In order to use as much as possible data, due to the fact that there are some observations missing at some countries, we shall be working with unbalanced data. DOCTORAL SCHOOL OF FINANCE AND BANKING - July
DETERMINANTS OF ECONOMIC GROWTH IN TRANSITION COUNTRIES 5. The presentation of the obtained results We shall analyze the relation between the economic growth for the countries that are passing trough the transition process, and variables describing the initial conditions, like the following: the initial level of the GDP per capita logarithm, the initial level of the secondary and tertiary school enrollment and the initial level of the life expectancy at birth logarithm; and also a series of control variables that characterize the environment and the macroeconomic policies, like the level of savings on GDP, the gross capital formation, the inflation, the budgetary deficit on GDP, the level of general government final consumption expenditure on GDP, M 2 on GDP, trade on GDP, and the fertility rate for 20 countries, passing through the transition process. DOCTORAL SCHOOL OF FINANCE AND BANKING - July
DETERMINANTS OF ECONOMIC GROWTH IN TRANSITION COUNTRIES Selective data with the determinants of the economic growth The dependent variable is the GDP per capita growth - gdpcgr Table 1 transition countries DOCTORAL SCHOOL OF FINANCE AND BANKING - July
DETERMINANTS OF ECONOMIC GROWTH IN TRANSITION COUNTRIES Table 2 panel consisting in over 130 countries DOCTORAL SCHOOL OF FINANCE AND BANKING - July
DETERMINANTS OF ECONOMIC GROWTH IN TRANSITION COUNTRIES Table 3 panel consisting in over 130 countries DOCTORAL SCHOOL OF FINANCE AND BANKING - July
DETERMINANTS OF ECONOMIC GROWTH IN TRANSITION COUNTRIES Table 4 transition countries DOCTORAL SCHOOL OF FINANCE AND BANKING - July
DETERMINANTS OF ECONOMIC GROWTH IN TRANSITION COUNTRIES Table 5 transition countries DOCTORAL SCHOOL OF FINANCE AND BANKING - July
DETERMINANTS OF ECONOMIC GROWTH IN TRANSITION COUNTRIES Table 6 panel consisting in 100 countries DOCTORAL SCHOOL OF FINANCE AND BANKING - July
DETERMINANTS OF ECONOMIC GROWTH IN TRANSITION COUNTRIES Table 7 panel consisting in over 100 countries DOCTORAL SCHOOL OF FINANCE AND BANKING - July
DETERMINANTS OF ECONOMIC GROWTH IN TRANSITION COUNTRIES Table 8 transition countries DOCTORAL SCHOOL OF FINANCE AND BANKING - July
DETERMINANTS OF ECONOMIC GROWTH IN TRANSITION COUNTRIES Table 9 transition countries DOCTORAL SCHOOL OF FINANCE AND BANKING - July
DETERMINANTS OF ECONOMIC GROWTH IN TRANSITION COUNTRIES Table 10 transition countries DOCTORAL SCHOOL OF FINANCE AND BANKING - July
DETERMINANTS OF ECONOMIC GROWTH IN TRANSITION COUNTRIES Table 11 transition countries DOCTORAL SCHOOL OF FINANCE AND BANKING - July
DETERMINANTS OF ECONOMIC GROWTH IN TRANSITION COUNTRIES Table 12 transition countries DOCTORAL SCHOOL OF FINANCE AND BANKING - July
DETERMINANTS OF ECONOMIC GROWTH IN TRANSITION COUNTRIES The initial level of GDP per capita (LNGDPS, LNGDPI) is very significant and it's being negatively correlated with the economic growth, which confirms the conditional convergence predicted by the neoclassic economic growth models. The lower is the starting level of real per capita GDP, relative to the long-run or steady state-position, the faster is the growth rate. Economies that have less capital per worker (relative to their long-run capital per worker) tend to have higher rates of return and higher growth rates. The convergence is conditional because it depends on the other determinants of the economic growth. Therefore, the convergence for the transition countries varieties between the other determinants that are in regressions between -1% and -2% for the GDP in constant prices and the GDP at the parity of power purchase between -3% and -4%. Plus, comparative with a panel consisting in over 130 countries on the same period (1980 -1999), in the same regression the convergence for the transition countries it's stronger, as it can be noticed from the tables 4 for the transition countries and 2 for a panel consisting in over 130 countries. DOCTORAL SCHOOL OF FINANCE AND BANKING - July
DETERMINANTS OF ECONOMIC GROWTH IN TRANSITION COUNTRIES Barro using cross-section data in 1991 and panel data in 1997 has empirically obtained the negative relation between the initial level of real GDP per capita and economic growth. Similar results have been achieved by Levine and Renelt (1992). Doppelhofer, Miller, and Sala-I-Martin (2000) have obtained that the initial level of GDP per capita is one of the strongest determinants of the economic growth. The initial level of the education (SCHSS, SCHTS), expressed by the secondary school enrollment appears like a positive value in regressions, although it's not always significant. That means that a higher level of the school enrolment had a positive impact on the economic growth for the countries which are passing through the transition process. As it can be seen in the following tables 4, 5, 7, and 2, the coefficient of tertiary school enrollment level is more significant than the secondary school enrolment and is bigger comparative to the level obtained on a panel consisting in over 130 countries. That shows the fact that in the countries that are passing through the transition process and which have a population more educated, have managed to easily adapt to the new technologies and requests of the market economy. DOCTORAL SCHOOL OF FINANCE AND BANKING - July
DETERMINANTS OF ECONOMIC GROWTH IN TRANSITION COUNTRIES The initial level of the education represented by the average number of school years or by the secondary and tertiary school enrolment on panel data and cross-country, has highlighted as an important determinant of the economic growth by Barro (1991, 1997, 1999); Levine and Renelt (1992), Benhabib and Spiegel (1994) and Doppelhofer, Miller and Sala-i-Martin (2000). The correlation between the initial level of the life expectancy at birth logarithm (LNLIFS) for the transition countries is positive, of a bigger value, but more insignificant than on panel data with over 100 countries. Barro (1996) and Doppelhofer, Miller and Sala-i-Martin (2000) have achieved the fact that the economic growth it's increased by a higher initial level. The gross capital formation on GDP (KFG, formerly gross domestic investment) it's positively correlated with the economic growth and for the countries which are passing through the transition process enter significantly in regressions, like it can be seen in the above tables. Among the ones who have achieved the fact that the level of investment on GDP it's an important determinant of the economic growth, we can mention Barro (1989); De. Long and Summers (1991), Mankiw, Romer and Weil (1992), Levine and Renelt (1992) and Hugo (1999). DOCTORAL SCHOOL OF FINANCE AND BANKING - July
DETERMINANTS OF ECONOMIC GROWTH IN TRANSITION COUNTRIES The saving on GDP (SAVI) is also a determinant of the economic growth. Its level and significance are more reduced in the transition countries. In literature, Levine and Renelt (1992); Bernanke and Gurkaynak (2001), have obtained a positive correlation between savings and growth. The level of the governmental expenses on GDP (G) it's negatively correlated with the economic growth and with a bigger absolute value for the transition countries comparative with a panel consisting in over 100 countries, as it can be noticed in tables 2 and 4. That means that for a certain level of the other determinants for the countries in transition with a smaller involvement of the state through the governmental expenses it's being raised the economic growth. Barro (1991, 1997) showed that this is negative on a panel consisting on over 100 countries. The macroeconomic variables: budgetary deficit and the inflation enter significantly in regression with the expected value. DOCTORAL SCHOOL OF FINANCE AND BANKING - July
DETERMINANTS OF ECONOMIC GROWTH IN TRANSITION COUNTRIES The budgetary deficit (BD) has a negative strong impact on the economic growth for the transition countries, showed on tables 5, 8 and 10. At the beginning of the transition period, the deficit has grown due to the fact that the budgetary resources have decreased, but due to the weak budgetary constraints, have affected negatively the economic growth. The negative impact of the budgetary deficit on the economic growth has been pointed out by Stanely Fischer (1993), Easterly and Rebelo (1993), Mankiw and Ball (1995). The inflation (INFL) is being significant negatively correlated with the economic growth for the transition countries. An increased inflation, when the other determinants are constant, has negative effects on the economic growth. The inflation stabilization is one of the most important successes achieved by the transition countries. The negative impact of a increased inflation and its fluctuation have been studied by De Gregorio (1992, 1993); Fischer (1993), Barro (1995, 1997); Esterly and Bruno (1995) and Sarel (1996). DOCTORAL SCHOOL OF FINANCE AND BANKING - July
DETERMINANTS OF ECONOMIC GROWTH IN TRANSITION COUNTRIES The development of the financial sector quantified by the M 2 on GDP (M 2), has been representing a determinant factor as it allows an efficient resources allocation. Its significance it's more reduced for the transition countries than on a panel with over 100 countries. King and Levine (1993), Levine and Zervos (1993) Rajan and Zingales (1998), Demirgüç-Kunt and Maksimovic (1999), Beck, Levine and Loayza (1999), Easterly (2001) have also shown the fact that the development of the financial banking sector is very important for the growth. The fertility (FERT) is negatively influencing the economic growth also in the transition countries having a bigger value in regressions, but a smaller significance. Barro (1991, 1997) has pointed out that an increased fertility rate will develop a re-orientation of the resources towards increasing the life expectancy at birth, rather than towards the goods production. DOCTORAL SCHOOL OF FINANCE AND BANKING - July
DETERMINANTS OF ECONOMIC GROWTH IN TRANSITION COUNTRIES The trade does not significantly enter in regressions. More significant enters the current account that appears to be in an opposite relation with the economic growth. If we introduce also a dummy variable for the former Soviet Union countries as it can be notice from table 10, we shall notice that the regional variable DSOV for the former Soviet Union countries is significant and it in negative relation with the economic growth in tables 8, 10, 11, and 12. It has an approximate level of -5%. The unemployment is significantly correlated with the economic growth for the transition countries between 1990 -1999 as it can be see in tables 9 and 12. A higher unemployment expresses a stronger implementation of the reforms, pointing out the fact that the countries that have made more profound reforms have registered higher growths. On a longer period of time, in a panel of over 100 countries, this is opposite correlated with the economic growth as it can be seen in table 6. DOCTORAL SCHOOL OF FINANCE AND BANKING - July
DETERMINANTS OF ECONOMIC GROWTH IN TRANSITION COUNTRIES At the beginning of the transition period, the output has decreased in all the countries, but the recovery that followed varied a lot between these countries. An important contribution to these differences was brought by the macroeconomic policies but also the initial specific conditions for every country. Fischer and Sahay (2000) have brought a lot of arguments to the fact that an important role in economy's recovery in transition is represented by the macroeconomic stabilization and the structural reforms. Fischer's article has as a conclusion the fact that the recovery was faster and the faster was the reforms implementation speed was higher; the higher was the economic growth. DOCTORAL SCHOOL OF FINANCE AND BANKING - July
DETERMINANTS OF ECONOMIC GROWTH IN TRANSITION COUNTRIES 6. Conclusions My conclusions were that the determinants of the economical growth were significant and had an impact more important for the economical growth in the case of the countries in transition, than for a panel of more than 100 countries. With respect to government policies, the evidence indicates that smaller government consumption, lower budget deficits and current account deficits, and lower inflation enhance the growth rate of real per capita GDP in the transition countries. Increases in gross capital formation and savings, and improvements in the business environment increase growth. Growth is also stimulated by greater starting levels of life expectancy and of higher tertiary school enrollment, by lower fertility rates, and by and the development of the financial sector. For given values of these variables, growth is higher if a country begins with a lower starting level of real per capita GDP; that is, the data reveal a pattern of condition convergence. DOCTORAL SCHOOL OF FINANCE AND BANKING - July
DETERMINANTS OF ECONOMIC GROWTH IN TRANSITION COUNTRIES Over the transition period there has been a positive relation between the economic growth and the unemployment level, which indicates the fact that the restructuring has been an important factor for the growth. All these factors represent important determinants for the transition countries and had a big impact upon the growth. For the first period of time (1990 - 1995), a low economic growth was determined by large budget deficits, by the high level of inflation, by current account deficits, by the low life expectancy, by the low gross capital formation and by the very low level of savings. During the recovery of the second period (1996 -2000), the implementation of the reforms, the reducing of the inflation and of budget deficits, the grow of the gross capital formation and of the level of the savings, the improvement of the business environment and of the life expectancy, the grow of the enrolments in the tertiary education and the reducing government final consumption expenditure all of them were important for growth. DOCTORAL SCHOOL OF FINANCE AND BANKING - July
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DETERMINANTS OF ECONOMIC GROWTH IN TRANSITION COUNTRIES Thank you. DOCTORAL SCHOOL OF FINANCE AND BANKING - July
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