1. society
2. work
3. unemployment

What Priorities and Strategy Should the
G-20 Adopt for Inclusive and Sustainable
D l
Development?
?
SUMRU ALTUG
KOÇ UNIVERSITY AND CEPR
How to re-energize the G-20: China’s Presidency
in 2016 and Its Agenda
SIIS and Friedrich Ebert Stiftung
April 23-24, 2015
Shanghai, China
A Historic Moment
 The G-20
G 20 Presidency is being assumed by China at a historic
moment.
 In 2014, China became the largest economy in the world PPP
terms according to new calculations by the IMF.
IMF
 Of the 20 entities that constitute the G-20, half are among the
emerging economies, which now constitute 50% of the world
economy.
economy
 Is this a déjà vu moment?


According to data compiled by Angus Maddison, China had the largest
economy for two millennia.
millennia
China and India together accounted for 50% of world GDP in 1820 and
China constituted 33% of the world economy at that date, a figure achieved
by the US only in 2000.
 But, in per capita real GDP terms,
 China’s real GDP per capita is still 28% of the world average in 2014.
 Nevertheless, what can we learn from the historical economic experience?
p
How to re-energize the G-20? SIIS and Friedrich Ebert Stiftung, April 23-24,2015
Lessons from Historyy I
 Ronald Findlay and Kevin O
O’Rourke
Rourke, Power and Plenty:
Trade, War and the World Economy in the Second
Millennium, (2007). Princeton University Press.
 The
Th “economic
“
i miracle”
i l ” off the
th S
Song D
Dynasty
t ((960-1279):
6
)




Agriculture was the backbone of the economy but there was also
increasing commercialization, specialization, and urbanization, an
extensive system of water transport facilitating trade across different
regions.
Government assisted the private sector in infrastructure investment,
harbors warehouses,
harbors,
warehouses and other facilities
facilities.
Reminiscent of the close collaboration between government and
business characterizing the East Asian economic miracle of our
times?
A rapid increase in productive capacity: the production of iron and
steel exceeded anything observed until the experience of England in
the 18th century. (pp. 61-66).
How to re-energize the G-20? SIIS and Friedrich Ebert Stiftung, April 23-24,2015
Lessons from Historyy II
 William Easterly,
Easterly The Elusive Quest for Growth: Economists
Economists'
Adventures and Misadventures in the Tropics (2002), The MIT Press.
“China
is the most dramatic example of having technological knowledge but failing
to sustain
i growth
h off iincome per h
head.
d The
h Chi
Chinese llearned
d to cast iiron a
millennium and a half before the Europeans. They had iron suspension bridges,
which the Europeans would later imitate. Chinese agriculture was a marvel of
hi h i ld rice
high-yield
i fields,
fi ld with
ith hydraulic
h d li engineering
i
i performing
f
i the
th iirrigation
i ti and
d
draining of fields. Chinese agriculture used the iron plow, the seed drill, weeding
rakes, the deep-tooth harrow, many types of fertilizer, and chemical and biological
pest control.
control By the time of the Ming dynasty (1368
(1368-1644),
1644) China had gunpowder,
gunpowder
the paddle wheel, the wheelbarrow, the spinning wheel, the waterwheel, printing,
paper (even the critical breakthrough of toilet paper), the compass, and triplemasted ocean-going ships.
ships But the Chinese chose not to compete in the world
economy with their advanced technology, and they closed their borders. So China
remained stagnant through the nineteenth century ... ” (pp. 175-176).
How to re-energize the G-20? SIIS and Friedrich Ebert Stiftung, April 23-24,2015
Lessons from Historyy III
 External factors also contributed to the overall development of
different regions of the world economy historically.
 Findlay and O’Rourke (2007) attribute a role to “the restrictive
monopolistic trade practices of players such as the Dutch East
India Company on the future of the Southeast Asian economy.


“While the mainland states such as Burma, Siam, and Cochinchina
…may
may have been able to sustain their earlier development …, it is
apparent that the period from 1650 to 1800 was one of at least
stagnation if not decline in the living standards of the population of
the main Indonesian islands and much of the Malay Peninsula.”
Some see this period as marking the “Origins of Southeast Asian
Poverty” (pp. 282-283.)


An ameliorating factor for Southeast Asia was the presence of trade with
China both overland and through the increasing maritime presence of
China,
Chinese merchants.
By the late 17th century, a shift occurred in trade away from the West and
towards China (pp
(pp. 282-284).
4)
How to re-energize the G-20? SIIS and Friedrich Ebert Stiftung, April 23-24,2015
More Recent Evidence: China
 Typically,
Typically sectoral change,
change labor and capital accumulation
accumulation,
and TFP emerge as the “proximate” causes of growth in
discussions of countries’ growth experiences.
 Zhu (2012) examines China’s
China s growth experience both
historically and since 1978.
 He argues that Chinese real GDP started to diverge from that
i Western
in
W t
Europe
E
beginning
b i i ffrom 1500 b
butt thi
this di
divergence
gained force in the 19th and mid 20th centuries.
 He further shows that China’s growth and the remarkable
catch-up
t h
off its
it per capita
it after
ft 1978
8 iis essentially
ti ll d
due tto
productivity growth, not capital accumulation.
 He argues that the reasons behind this productivity growth are
“ d l and
“gradual
d persistent
i
institutional
i i i
l change
h
and
d policy
li reform
f
that have reduced policy distortions and improved
incentives…” (pp. 103-104)
How to re-energize the G-20? SIIS and Friedrich Ebert Stiftung, April 23-24,2015
More Recent Evidence: Turkeyy
 S.
S Altug,
Altug A.
A Filiztekin,
Filiztekin and S.
S Pamuk (2008) examine Turkey
Turkey’ss
growth between 1880-2005 based on 5 sub-periods.
 They show that Turkey’s GDP per capita has fluctuated around a
value of 25% of Western Europe + US levels during this period.
 They note that that there are also three “puzzles” for Turkey’s
experience since 1950
a low rate of capital
p
accumulation,,
 a low rate of sectoral transformation;
 a low rate of growth of TFP.



They further examine the growth experience of Turkey from the
viewpoint of
 educational policies and human capital accumulation;
 its institutional environment and evolution;;
 the role of macroeconomic policymaking.
Moreover, they note that the incentives of different groups may be
relevant for the effectiveness of such factors.
How to re-energize the G-20? SIIS and Friedrich Ebert Stiftung, April 23-24,2015
A Brief Look at Human Capital
p
 The role of human capital on economic growth needs little
elaboration.



Lucas (1988) and Romer (1990a) develop endogenous growth models in
which human capital
p
and endogenous
g
technological
g
p
progress
g
lead to
continuous growth.
Romer (1990b) shows empirically that the initial level of literacy affects
subsequent investment and hence, growth in a given economy.
Barro (2001) finds positive effects of the initial quantity of schooling as well
as its average quality on decadal growth in a cross-sectional regression of
100 countries between 1965-1995.
 Human capital
p
mayy also have an effect on the q
qualityy of institutions.
 This idea goes back to Aristotle and recognizes the impact of an educated
citizenry in “resolving their differences through negotiation and voting
rather than violent disputes.”
 As
A Glaeser
Gl
ett all (2004) note,
t education
d
ti is
i needed
d d for
f courts
t to
t function
f
ti
properly, for corruption to be rooted out, and for the rule of law to be
implemented efficiently.
How to re-energize the G-20? SIIS and Friedrich
Ebert Stiftung, April 23-24,2015
An Education Map
p
From: 6.5. Naci Mocan Blog http://www.sixandahalf.net/
How to re-energize the G-20? SIIS and Friedrich Ebert Stiftung, April 23-24,2015
Institutions
 Define institutions as a formal or informal set of rules that




constrain human interactions in the economic, political or social
sphere.
Th id
The
idea th
thatt iinstitutions
tit ti
are a k
key d
determinant
t
i
t off growth
th h
has
witnessed a revival [see Douglass North and others]
The disparity in observed income worker i.e., productivity, across
countries may only be explained by differences in social
infrastructure [Hall and Jones (1999)]
“Social
Social infrastructure: The institutions and government policies
that determine the economic environment within which individuals
accumulate skills and firms accumulate capital and produce
output.
output.”
In addition to their role for individual countries, the structure of
international institutions also matters for global economic activity.
How to re-energize the G-20? SIIS and Friedrich Ebert Stiftung, April 23-24,2015
International Institutions
 The role of international institutions in creating a favorable
governance environment has received increased scrutiny in
recent years, and is especially relevant in a G-20 context.
 The principal international institutions of economic
governance have been the IMF, the World Bank, and the
World Trade Organization (WTO).
(WTO)
 Milner (2005) discusses the normative issues and empirical
evidence regarding the role of these institutions.


One view of their role is that such “institutions constrain the behavior of
the most powerful countries and provide information and monitoring
capacities that enable states to cooperate.”
However, obtaining evidence of the role of such institutions is
complicated by the presence of (i) counterfactuals and (ii) selection bias.
How to re-energize the G-20? SIIS and Friedrich Ebert Stiftung, April 23-24,2015
International Institutions: Evidence
 Milner argues that the current international institutions “were
were
designed to help developed economies create a cooperative and
stable world economy in a non-globalized world” [my emphasis].
 A variety of scholars cited by Milner argue that the existing
international institutions have not had the benefits to developing
countries that they were intended to. Some potential reasons:
 The process of globalization or countries
countries’ own domestic policies may
have swamped any effect of these institutions.
 The governance structure, voting shares, etc. of international
st tut o s have
a e not
ot kept
ept pace with
t tthee eco
economic
o c aand
d po
political
t ca
institutions
resurgence of the developing world.
 Private financial flows, not public flows, now constitute the majority
of the funding sources to developing economies and hence, their
i
interests
may also
l h
have ascendancy
d
iin iinternational
i
l iinstitutions.
i i
 Lack of effective monitoring of the international institutions
themselves may prevent an accounting of successes/failures.
How to re-energize the G-20? SIIS and Friedrich Ebert Stiftung, April 23-24,2015
Macroeconomic Policymaking
y
g
 Prudent macro-economic
macro economic policy-making
policy making is usually stressed from
the viewpoint of short-term fluctuations. However, long-term
sustainable g
growth mayy also require
q
measures to




keep inflation low;
keep budget deficits and debt under control;
promote openness in trade;
promote financial deepening
p
p
g and financial integration.
g
 The East Asian countries have been known for prudent
macroeconomic policies.


Even following the 1997 financial crisis, the economies of East Asia have
shown a rapid recovery. Likewise, the East Asian countries, including China,
rebounded faster after the 2008 financial crisis.
H
However,
the
h stimulus
i l measures iimplemented
l
d iin Chi
China d
during
i the
h global
l b l
financial crisis have been accompanied by rapid credit expansion, leading to
an increase in the overall debt-GDP ratio from 158% in 2007 to 282% in
2014.
How to re-energize the G-20? SIIS and Friedrich
Ebert Stiftung, April 23-24,2015
Macroeconomic Policymaking:
y
g Evidence
 Rojas-Suarez
Rojas Suarez (2015) examines the indicators of
macroeconomic resilience to external factors before
2007 and in 2014 for 21 emerging economies,
including China.


The main result of this paper is that initial economic
conditions, in particular, the policy decisions taken in a precrisis period, matter for financial stability and economic
growth in the p
g
post-crisis p
period.
Macroeconomic resilience is defined as a situation in which a
sharp contraction of economic activity, a severe decline the
rate of growth of economic credit and/or the emergence of
deep instabilities in the financial sector does not occur in
response to a negative shock.
How to re-energize the G-20? SIIS and Friedrich Ebert Stiftung, April 23-24,2015
Indicators of Macroeconomic Resilience
 Two dimensions of macroeconomic resilience and the
associated indicators
1. Ability
y to withstand a negative
g
shock: cost and availabilityy of
external financing
2. The capacity to implement policy measures to counteract
the effects of the shock
 For the 1. dimension, the indicators that matter are
 CA to GDP ratio: matters if the external shock is a financial
shock (i.e. increase in US rates) or a trade shock which may
indirectly affect financing through trade finance
 External
E t
ld
debt
bt to
t GDP ratio:
ti iindicator
di t off solvency
l
conditions
diti
 Short-term external debt to international reserves ratio:
indicator of liquidity
q
y conditions
How to re-energize the G-20? SIIS and Friedrich Ebert Stiftung, April 23-24,2015
Indicators
d cato s o
of Macroeconomic
ac oeco o c Resilience
es e ce (co
(cont.)
t)
 For the 2.
2 dimension,
dimension the indicators that matter are
 General government fiscal balance-GDP ratio: influences the ability to
counteract negative shocks through fiscal measures
 Government debt-GDP ratio: determines the ability to undertake
countercyclical fiscal policy
 (Squared) deviation of inflation from its target value: determines the ability
to implement countercyclical monetary policy at the time of the shock
 A financial fragility measure: accounts for credit booms or busts
 In 2007, Emerging Asia ranks highly but by 2014, there is a
deterioration in the overall rankings of some economies of the region,
suggesting the need for further prudence.
prudence
 Nevertheless, China maintains a high ranking of 3 in 2014 (down from
2 in 2007).
 Latin America (with the exception of Chile) and Emerging Europe tend
to fare badly overall in 2007; there is some improvement in 2014 for
the latter but not for the former. Furthermore, among Emerging Asia
g of India and Malaysia
y deteriorate significantly.
g
y
countries,, the rankings
How to re-energize the G-20? SIIS and Friedrich Ebert Stiftung, April 23-24,2015
Priorities for the G-20 Presidencyy
 Sustainable and inclusive growth is the product of many
interrelated factors, and may have roots in countries’
historical experiences.
 The new G-20
G 20 Presidency can formulate new priorities based
on these findings.
1.

2.

1
1.
Openness and trade, especially regional trade, were a primary
source of historical development.
development
The G-20 should continue policies that promote openness and
equitable trade among its members. The new AIIB is a right step in
this direction that will facilitate regional development and trade.
The initial conditions regarding human capital matter for future
growth, and countries with favorable demographics can maintain
positive growth trajectories.
Cai Fang and Lu Yang of CASS argue that China can increase its potential
growth rate from 6.7% to 7.5% from 2016 to 2020 by increasing average
years of schooling by one year.
They also propose a further relaxation of the one
one-child
child policy and an
increase in the mandatory retirement age.
How to re-energize the G-20? SIIS and Friedrich Ebert Stiftung, April 23-24,2015
Priorities for the G-20 Presidencyy
 There is strong evidence that the institutional environment matters for
future growth.
 More tellingly, the role international institutions in promoting
development is also gaining increasing scrutiny.


The G-20 presidency should work towards reforming the governance of
existing international institutions to better reflect the increasing importance
of developing or emerging economies in the global economy.
Recently Desai (2015) has proposed that a leading policymaker from
Recently,
Singapore be appointed as the managing director of the IMF as
acknowledgement of the growing clout of emerging economies.
 Recognizing the global sources of problems and the global of nature of
solutions
l
ffor individual
d d l countries.



The global economy has become increasingly interdependent and integrated.
The G-20 presidency should work towards implementing macroeconomic
policies that recognize this interdependence.
interdependence
Raghuram Rajan, the governor of the Reserve Bank of India, has proposed
that developed economy central banks should alert emerging economies to
potential p
p
policyy shifts.
How to re-energize the G-20? SIIS and Friedrich
Ebert Stiftung, April 23-24,2015
References
 Altug,
Altug S.,
S A
A. Filiztekin,
Filiztekin and S.
S Pamuk (2008).
(2008) “Sources
Sources of Long-term
Long term





Economic Growth for Turkey, 1880-2005,” European Review of
Economic History 12(3), pp. 393-430
Desai, M. (2015). “Why Singapore’s Tharman Should Run for Top IMF
Post,” OMFIF Briefing www.omfif.rog
Easterly W
Easterly,
W. (2002) The Elusive Quest for Growth: Economists
Economists'
Adventures and Misadventures in the Tropics. The MIT Press.
Fang, C. and Yang, L. (2015). “A New Age of Chinese Growth,” East
A i F
Asia
Forum, 12 A
April
il www.eastasiaforum.org
t i f
Findlay, R. and K. O’Rourke (2007). Power and Plenty: Trade, War
and the World Economy
y in the Second Millennium. Princeton
University Press.
Glaeser, E., R. La Porta, F. Lopez-de-Silanes, and A. Schleifer (2004).
“Do
Do Institutions Cause Growth?
Growth?” Journal of Economic Growth 9,
9 271271
303
How to re-energize the G-20? SIIS and Friedrich Ebert Stiftung, April 23-24,2015
References
 Hall,
Hall R
R. and C.
C Jones (1999)
(1999). “Why
Why Do Some Countries Produce So






Much More Output than Others?” Quarterly Journal of Economics
114(1), 83-116
Milner,, H. (2005).
(
5) “Globalization,, Development,
p
, and International
Institutions: Normative and Positive Perspectives,” Perspectives on
Politics, 3(4), 833-856.
Lucas, R. (1988). “On the Mechanics of Development Planning,”
J
Journal
l off Monetary
M
E
Economics
i 22, 3-42.
Roajas-Suares, L. (2015). “Emerging Market Macroeconomic
Resilience: Today versus Pre-Global Crisis,” Center for Global
Development www.cgd.org
Development,
www cgd org
Romer. P. (1990a). “Endogenous Technological Change,” Journal of
Political Economy 98(5), Part 2.
Romer P.
Romer,
P (1990b)
(1990b). “Human
Human Capital and Growth: Theory and
Evidence,” Carnegie-Rochester Conference Series on Public Policy
Zhu, X. (2012). “Understanding China’s Growth: Past, Present, and
Future,” Journal of Economic Perspectives 26(4), 103
Future,
103-124.
124.
How to re-energize the G-20? SIIS and Friedrich Ebert Stiftung, April 23-24,2015