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  LPeS
• 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)

9. Sustainable and Inclusive Economic Growth in
the Americas (1968-2008): GDP per capita

10. Sustainable and Inclusive Growth in the
Americas (2000-2008): Inequality

11. Sustainable and Inclusive Growth in the
Americas 1992-2008): Inequality

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

13. Social Programs Expansion

14. Trade: Terms of Trade

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