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ROBERT TOWNSEND: In terms of
where we are in the class,

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00:00:32,479 --> 00:00:34,190
it seems like we
just got started,

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00:00:34,190 --> 00:00:36,170
but it's actually
the third lecture.

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00:00:36,170 --> 00:00:38,150
So after the end
of the day, we're

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00:00:38,150 --> 00:00:40,930
almost 1/4 done with a class.

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00:00:40,930 --> 00:00:41,430
It's scary.

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00:00:45,540 --> 00:00:48,373
Yeah, it's bad
news, not good news.

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00:00:48,373 --> 00:00:50,040
There's another way
to think about that,

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00:00:50,040 --> 00:00:53,440
which is there's no final exam.

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00:00:53,440 --> 00:00:55,590
There are homeworks--
they're coming--

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00:00:55,590 --> 00:00:57,690
and TA sessions.

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00:00:57,690 --> 00:01:00,180
But part of the
course is for you

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00:01:00,180 --> 00:01:04,440
to write a research proposal,
not a paper exactly,

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00:01:04,440 --> 00:01:07,690
but a research proposal.

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00:01:07,690 --> 00:01:09,540
So that kind of
leads me into what

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00:01:09,540 --> 00:01:18,270
we're up to today and some sort
of encouragement and caution.

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00:01:18,270 --> 00:01:22,440
We are trying to do
several things at once.

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00:01:22,440 --> 00:01:25,650
One, of course, is to
look at particular papers

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00:01:25,650 --> 00:01:29,940
in the literature as exemplary
of what is out there.

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00:01:29,940 --> 00:01:34,320
And actually, there, it
matters to get into the details

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00:01:34,320 --> 00:01:36,170
and really understand
the mechanics

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00:01:36,170 --> 00:01:37,560
and a few of the surprises.

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00:01:37,560 --> 00:01:40,110
Some things are not
straightforward.

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00:01:40,110 --> 00:01:44,220
And even narrowly, it will
raise questions about what

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00:01:44,220 --> 00:01:46,290
if they had assumed
this instead of that,

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00:01:46,290 --> 00:01:48,840
or is there some
extension to this model,

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00:01:48,840 --> 00:01:50,730
or there's something
I just really dislike

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00:01:50,730 --> 00:01:52,147
about this model?

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00:01:52,147 --> 00:01:52,980
You'll get inspired.

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00:01:55,877 --> 00:01:56,710
So we're doing that.

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00:01:56,710 --> 00:02:01,060
But I'm also trying
to provide overviews

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00:02:01,060 --> 00:02:04,330
so you can actually see where
these particular trees fall

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00:02:04,330 --> 00:02:05,890
in the forest.

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00:02:05,890 --> 00:02:09,110
And I'm not saying it's easy.

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00:02:09,110 --> 00:02:11,200
It's not easy for me.

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00:02:11,200 --> 00:02:14,860
And I, for example, spent
the weekend just thinking

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00:02:14,860 --> 00:02:19,390
about lecture one, lecture
two, and lecture three,

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00:02:19,390 --> 00:02:22,900
sort of of writing up
English paragraphs about what

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00:02:22,900 --> 00:02:26,300
are these papers really
telling us and so on.

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00:02:26,300 --> 00:02:29,680
So my point is be
patient with yourself.

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00:02:29,680 --> 00:02:31,630
Don't be surprised
if occasionally it's

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00:02:31,630 --> 00:02:35,170
a bit bewildering because we
are covering a lot of material.

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00:02:35,170 --> 00:02:38,680
But the reward will come
when you're thinking.

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00:02:38,680 --> 00:02:41,320
Go back over the lectures,
think about the details

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00:02:41,320 --> 00:02:42,890
of particular papers.

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00:02:42,890 --> 00:02:44,560
Maybe think about
it in the context

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00:02:44,560 --> 00:02:47,170
of your potential
research proposal,

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00:02:47,170 --> 00:02:49,330
in terms of what you
might like to do,

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00:02:49,330 --> 00:02:51,625
and I think you'll see
things start coming together.

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00:02:54,450 --> 00:02:55,305
Yo.

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00:02:55,305 --> 00:02:56,805
AUDIENCE: Can you
talk a little more

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00:02:56,805 --> 00:02:59,760
about the logistics
of the proposal?

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00:02:59,760 --> 00:03:03,190
So one thing is I was supposed
to talk to you before.

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ROBERT TOWNSEND: That
would be good, yeah.

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00:03:05,100 --> 00:03:06,490
As I said, I'm usually around.

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00:03:06,490 --> 00:03:08,710
I try to stay
around after class.

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00:03:08,710 --> 00:03:10,990
I'm happy to iterate.

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00:03:10,990 --> 00:03:12,760
It's like a research
conversation.

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00:03:12,760 --> 00:03:13,870
You're thinking about x.

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00:03:13,870 --> 00:03:16,690
You can get my reaction to
it, get Whit's reaction to.

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It

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AUDIENCE: And how far can we
go from this, from the macro

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development into something else?

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00:03:28,330 --> 00:03:30,896
It has to be something that's--

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[INTERPOSING VOICES]

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ROBERT TOWNSEND: We should talk.

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00:03:37,030 --> 00:03:40,942
I'm not sure what
you're asking me.

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00:03:40,942 --> 00:03:43,750
AUDIENCE: If I am doing
something that's more

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00:03:43,750 --> 00:03:45,560
micro-related, would that be--

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ROBERT TOWNSEND: Oh, there's a
whole micro part of the class.

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00:03:49,000 --> 00:03:50,500
We just haven't
gotten there yet.

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00:03:50,500 --> 00:03:52,090
There's, like, two
lectures away, we

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go through a whole
measurement lecture.

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And then we spend
almost the rest

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00:03:56,770 --> 00:04:00,340
of the class talking about
micro tests of this and that.

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00:04:00,340 --> 00:04:03,010
And then we reintegrate
it and get sort of

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00:04:03,010 --> 00:04:04,450
moved back toward the macro.

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00:04:04,450 --> 00:04:07,090
Sometimes I teach
the micro first,

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00:04:07,090 --> 00:04:09,220
waiting forever to
get to the macro part.

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00:04:09,220 --> 00:04:12,230
This time we kind of
reversed it the other way.

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00:04:12,230 --> 00:04:14,566
So micro is fine.

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00:04:14,566 --> 00:04:16,566
AUDIENCE: And just in
terms of timing, I forgot.

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00:04:16,566 --> 00:04:18,422
When is the proposal due?

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00:04:18,422 --> 00:04:20,769
Is it at the end
of your part, or--

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00:04:20,769 --> 00:04:23,590
ROBERT TOWNSEND: The
end of my part, yeah.

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00:04:23,590 --> 00:04:26,940
And we reserve the last class,
and I can make it longer.

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00:04:26,940 --> 00:04:29,050
As many of you as
possible should

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00:04:29,050 --> 00:04:33,250
think about actually presenting
and getting some practice

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00:04:33,250 --> 00:04:34,680
at presenting your ideas.

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00:04:37,690 --> 00:04:38,500
OK.

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00:04:38,500 --> 00:04:41,800
So today is mostly,
almost all of it,

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00:04:41,800 --> 00:04:45,790
about limited commitment in
terms of obstacles to trade.

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00:04:45,790 --> 00:04:50,170
And I'll try to highlight
where that's coming up.

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00:04:50,170 --> 00:04:54,630
The topic, is of course,
macro-ish, growth, TFP,

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00:04:54,630 --> 00:04:56,860
inequality.

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00:04:56,860 --> 00:04:59,400
But it has these financial
market imperfections.

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00:04:59,400 --> 00:05:01,525
And of course, that's the
bridge back to the micro.

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00:05:04,270 --> 00:05:07,180
And the introductory
part of this,

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00:05:07,180 --> 00:05:11,260
where I'm doing the big
picture, the forest,

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00:05:11,260 --> 00:05:15,940
is broken down into three
segments, one of which

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00:05:15,940 --> 00:05:17,980
is highlighted, here
but I should tell you

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00:05:17,980 --> 00:05:18,850
about the other two.

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00:05:18,850 --> 00:05:21,220
First of all, we're
going to start

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00:05:21,220 --> 00:05:23,590
talking about transitions.

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00:05:23,590 --> 00:05:26,800
I was doing that last time.

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00:05:26,800 --> 00:05:30,150
Some of this literature
is all about transitions

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00:05:30,150 --> 00:05:33,055
and about financial reforms
or real sector reforms.

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00:05:36,110 --> 00:05:41,050
There is a second part of this
introductory section which is

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00:05:41,050 --> 00:05:42,970
entirely about cross-section.

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00:05:42,970 --> 00:05:47,260
It's comparing one country
to another, and most of that

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00:05:47,260 --> 00:05:49,110
is in steady state.

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00:05:51,710 --> 00:05:56,870
And finally, there is the
link between the two, which

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00:05:56,870 --> 00:06:00,710
is how much of
transitional dynamics

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00:06:00,710 --> 00:06:03,950
is really going to solve
the entire problem,

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00:06:03,950 --> 00:06:06,750
and can you save your
way out of constraints

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00:06:06,750 --> 00:06:09,620
so that steady states look very
different from the transitions,

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00:06:09,620 --> 00:06:12,140
or is there something left over.

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00:06:15,600 --> 00:06:21,590
So you start off with what's in
the news all the time, rightly

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00:06:21,590 --> 00:06:23,450
so, which is China.

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00:06:26,980 --> 00:06:29,634
And this paper is called
Growing Like China.

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00:06:32,600 --> 00:06:36,360
And the question
starts with a puzzle.

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00:06:36,360 --> 00:06:40,310
How can it be that a country
with measured high rates

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00:06:40,310 --> 00:06:47,030
of return is nevertheless
kind sending its funds abroad

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00:06:47,030 --> 00:06:49,355
for investing in low
rate of return assets?

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00:06:53,540 --> 00:06:57,980
And China's in the
news for many reasons,

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but among other things,
it's just really

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00:07:00,500 --> 00:07:04,040
almost the fastest
growth rate in the world,

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00:07:04,040 --> 00:07:06,860
and there's lots of
structural shifts going

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00:07:06,860 --> 00:07:13,480
on in terms of sectors and
a lot of privatization.

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00:07:13,480 --> 00:07:17,180
We have return
investments above 20%.

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00:07:17,180 --> 00:07:20,910
Savings rates have been
even higher than that.

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00:07:20,910 --> 00:07:26,840
And China's accumulating-- its
savings well exceeds its demand

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00:07:26,840 --> 00:07:30,590
for credit, and its
foreign reserves

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00:07:30,590 --> 00:07:34,950
have to go to
trillions or something,

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00:07:34,950 --> 00:07:43,750
from $21 billion to
$2,130,000,000 and so on.

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00:07:43,750 --> 00:07:44,880
So here is another picture.

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00:07:44,880 --> 00:07:49,230
This is those numbers.

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00:07:49,230 --> 00:07:51,240
This is foreign reserves
and the difference

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00:07:51,240 --> 00:07:53,850
between deposits and loans.

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00:07:53,850 --> 00:07:56,590
And not only is the difference
between deposits and loans

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00:07:56,590 --> 00:07:59,910
high, it keeps getting
bigger and bigger,

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00:07:59,910 --> 00:08:03,550
as do the foreign reserves
as a percent of GDP.

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00:08:07,270 --> 00:08:08,890
You probably know this history.

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00:08:11,590 --> 00:08:16,430
There was talks of
reforms way back in 1978.

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A lot of people date
the real turn in 1992,

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00:08:20,380 --> 00:08:24,100
although additional
things happened in 1997.

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00:08:24,100 --> 00:08:27,520
Just to look ahead a
bit, the next paper

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00:08:27,520 --> 00:08:34,500
we're going to talk about
is where Kaboski Shin,

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00:08:34,500 --> 00:08:39,000
and they look at reforms
across a bunch of countries.

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00:08:39,000 --> 00:08:42,360
And they used this 1992 date.

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00:08:42,360 --> 00:08:44,340
But I think for any
particular country,

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it's kind of problematic
to pick one year

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00:08:46,470 --> 00:08:48,525
and say this is the
year of the reform.

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Very high investment rates.

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00:08:55,190 --> 00:08:57,620
39% of GDP.

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00:08:57,620 --> 00:09:01,525
Rate of return on capital,
at most, has fallen.

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00:09:01,525 --> 00:09:02,025
To 21%.

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00:09:04,590 --> 00:09:10,350
Rate of return on capital in
manufacturing is close to 35%.

166
00:09:10,350 --> 00:09:12,780
Money should be flowing
in there, not flowing out.

167
00:09:20,730 --> 00:09:27,030
This is DPTE, I think, is
developing private enterprise

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00:09:27,030 --> 00:09:29,760
as opposed to
state-owned enterprise.

169
00:09:29,760 --> 00:09:34,770
And here you can see
early on, in 1992,

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00:09:34,770 --> 00:09:38,520
the private sector was employing
relatively few workers.

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00:09:38,520 --> 00:09:42,310
But this has been
increasing so that--

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00:09:42,310 --> 00:09:45,810
I guess this graph's
ending in 2006.

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00:09:45,810 --> 00:09:49,129
Private sector is now
like 50% of employment.

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00:09:56,620 --> 00:10:01,930
And here is the picture of
the share of investment.

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00:10:01,930 --> 00:10:04,200
And this is a big part
of the story financed

176
00:10:04,200 --> 00:10:09,180
by bank loans, distinguishing
state-owned enterprise

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00:10:09,180 --> 00:10:13,740
from basically these
developing private enterprise.

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00:10:13,740 --> 00:10:17,610
So the point is, the
money from the banks

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00:10:17,610 --> 00:10:24,190
is going into these state-owned,
state-operated manufacturing

180
00:10:24,190 --> 00:10:25,330
and other enterprises.

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00:10:25,330 --> 00:10:29,620
They're getting something like
35%, if not 40% of their money

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00:10:29,620 --> 00:10:35,200
not from internal finance, but
externally through these banks.

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00:10:35,200 --> 00:10:37,720
And the opposite is true.

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00:10:37,720 --> 00:10:39,340
At best, this is now 10%.

185
00:10:39,340 --> 00:10:41,460
It used to be, like, 5%.

186
00:10:41,460 --> 00:10:46,740
So the private sector
is financing itself

187
00:10:46,740 --> 00:10:51,860
with saving and
internal investment.

188
00:10:56,500 --> 00:10:59,710
So what's the story here?

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00:10:59,710 --> 00:11:02,860
It's going to be a
story of reforms,

190
00:11:02,860 --> 00:11:08,380
and then this shrinking,
inefficient, state-operated

191
00:11:08,380 --> 00:11:14,020
sector releasing labor into
the rest of the economy.

192
00:11:17,290 --> 00:11:19,120
And in fact, what's
going on here

193
00:11:19,120 --> 00:11:22,810
is even though in principle,
the production functions have

194
00:11:22,810 --> 00:11:27,130
diminishing returns, you don't
suffer from diminishing returns

195
00:11:27,130 --> 00:11:30,220
for a long time
because you can get

196
00:11:30,220 --> 00:11:33,640
all this quote, unquote
labor that's being released

197
00:11:33,640 --> 00:11:35,470
by the other sector.

198
00:11:35,470 --> 00:11:38,440
In some sense we saw this
already with the Thai model

199
00:11:38,440 --> 00:11:43,120
last time, where we had
labor and agriculture

200
00:11:43,120 --> 00:11:46,330
at subsistence wages
being able to flow

201
00:11:46,330 --> 00:11:48,100
toward these entrepreneurs.

202
00:11:48,100 --> 00:11:49,360
That's kind of happening here.

203
00:11:49,360 --> 00:11:51,700
It's not out of
agriculture, it's

204
00:11:51,700 --> 00:11:54,650
out of government, enterprise.

205
00:11:54,650 --> 00:11:58,690
And there are some very
related seminal pieces.

206
00:11:58,690 --> 00:12:04,240
Arthur Lewis, one of the
pioneers of development

207
00:12:04,240 --> 00:12:07,660
economics, and more
recently, Jaume Ventura,

208
00:12:07,660 --> 00:12:12,730
have talked about how you can
prevent diminishing returns

209
00:12:12,730 --> 00:12:13,660
from kicking in.

210
00:12:18,960 --> 00:12:20,640
This is their view
of the literature.

211
00:12:20,640 --> 00:12:22,590
I'm going to skip it.

212
00:12:22,590 --> 00:12:26,580
You can look at
these slides later.

213
00:12:26,580 --> 00:12:29,730
Authors kind of
have different views

214
00:12:29,730 --> 00:12:31,590
of what they do relative
to the literature

215
00:12:31,590 --> 00:12:34,240
than the literature has about
what these guys are doing.

216
00:12:34,240 --> 00:12:35,382
Yes.

217
00:12:35,382 --> 00:12:37,480
AUDIENCE: In China
is there evidence

218
00:12:37,480 --> 00:12:51,505
of in the time series of like
convergence in [INAUDIBLE]

219
00:12:51,505 --> 00:12:52,880
ROBERT TOWNSEND:
I don't remember

220
00:12:52,880 --> 00:12:55,400
the panel aspect of that.

221
00:12:55,400 --> 00:12:59,090
I mean, there is kind
of an average going

222
00:12:59,090 --> 00:13:01,550
on here between these
inefficient state-owned

223
00:13:01,550 --> 00:13:03,620
enterprises and the
private sector ones.

224
00:13:03,620 --> 00:13:06,320
And they go to an
extreme that the return

225
00:13:06,320 --> 00:13:09,230
in the private sector
is basically constant.

226
00:13:09,230 --> 00:13:14,930
If the aggregate's rising,
it's because you're shifting

227
00:13:14,930 --> 00:13:17,740
more and more toward these--

228
00:13:17,740 --> 00:13:18,350
yes.

229
00:13:18,350 --> 00:13:20,892
AUDIENCE: I'm not sure that I
understood exactly the argument

230
00:13:20,892 --> 00:13:22,800
they were [INAUDIBLE].

231
00:13:22,800 --> 00:13:27,210
So was the idea that if I were
a local investor in China,

232
00:13:27,210 --> 00:13:29,060
I want to invest in
the private sector,

233
00:13:29,060 --> 00:13:31,490
but I wouldn't be able to
because that money that

234
00:13:31,490 --> 00:13:33,485
goes into the
financial sector China

235
00:13:33,485 --> 00:13:35,110
is funneled to
state-owned enterprises?

236
00:13:35,110 --> 00:13:36,027
ROBERT TOWNSEND: Yeah.

237
00:13:38,240 --> 00:13:40,670
It's not modeled
deeply, but the idea

238
00:13:40,670 --> 00:13:43,970
is there's constraints
on the borrowers.

239
00:13:43,970 --> 00:13:47,120
The private enterprise
sector would

240
00:13:47,120 --> 00:13:50,540
like to borrow because the
rate of return is really high,

241
00:13:50,540 --> 00:13:52,380
and they would make more money.

242
00:13:52,380 --> 00:13:54,920
But there is a simple,
basically constraint

243
00:13:54,920 --> 00:13:57,140
on the amount they're
able to borrow.

244
00:13:57,140 --> 00:14:00,830
So this is the limited
commitment/collateral

245
00:14:00,830 --> 00:14:02,310
constraint.

246
00:14:02,310 --> 00:14:03,380
And that's the break.

247
00:14:03,380 --> 00:14:06,080
That's the key thing
that's preventing the money

248
00:14:06,080 --> 00:14:09,440
from flowing, so they can't flow
from one sector to the other.

249
00:14:09,440 --> 00:14:14,540
It flows out because the country
overall is getting wealthier.

250
00:14:17,400 --> 00:14:19,410
OK.

251
00:14:19,410 --> 00:14:21,510
But this is one of
the papers where

252
00:14:21,510 --> 00:14:26,160
we're going to go and study
the tree in some detail.

253
00:14:26,160 --> 00:14:29,865
And it's trickier than then
this English might imply.

254
00:14:39,900 --> 00:14:41,210
So this is the Buera Shin.

255
00:14:41,210 --> 00:14:44,270
Sorry, this one
doesn't have Kaboski.

256
00:14:44,270 --> 00:14:47,030
As the co-author,
unlike what I said.

257
00:14:47,030 --> 00:14:49,520
This is called Financial
Frictions and the Persistence

258
00:14:49,520 --> 00:14:53,030
of History, A
Quantitative Explanation

259
00:14:53,030 --> 00:14:57,050
so you know a lot of
people beyond China

260
00:14:57,050 --> 00:15:03,800
have remarked on how successful
Asian economies have been

261
00:15:03,800 --> 00:15:06,590
postwar for Japan and so on.

262
00:15:06,590 --> 00:15:10,040
And so they're going to study
the so-called Asian miracle

263
00:15:10,040 --> 00:15:15,600
economies, and they're
going to date the reforms.

264
00:15:19,230 --> 00:15:22,860
And what their paper
is about is basically

265
00:15:22,860 --> 00:15:25,590
if something had been
kind of a roadblock,

266
00:15:25,590 --> 00:15:28,710
and you remove the roadblock,
then these economies

267
00:15:28,710 --> 00:15:31,190
might look like solo economies.

268
00:15:31,190 --> 00:15:37,580
And we'd expect a
very rapid convergence

269
00:15:37,580 --> 00:15:39,930
as capital increases.

270
00:15:39,930 --> 00:15:43,530
But in fact, when you calibrate
these miracle economies the way

271
00:15:43,530 --> 00:15:47,640
you would a solo model at
reasonable parameter values,

272
00:15:47,640 --> 00:15:51,240
although they're growing
remarkably over 20-,

273
00:15:51,240 --> 00:15:54,330
30-year periods, their growth
rates are lower than you would

274
00:15:54,330 --> 00:15:59,010
predict and convergence is
slower than what a simple solo

275
00:15:59,010 --> 00:16:00,000
model would predict.

276
00:16:02,775 --> 00:16:04,400
So they're going to
do this experiment.

277
00:16:04,400 --> 00:16:08,900
Now the thing, again, that's
going to be the key element

278
00:16:08,900 --> 00:16:13,440
here is something like
a collateral constraint.

279
00:16:13,440 --> 00:16:16,440
So you have all this churning
and reallocation going on,

280
00:16:16,440 --> 00:16:20,290
but it can't happen right away.

281
00:16:20,290 --> 00:16:29,550
In fact, investment rates
rise, total productivity rises.

282
00:16:29,550 --> 00:16:32,910
But it takes quite awhile.

283
00:16:35,520 --> 00:16:38,190
What countries are
we talking about?

284
00:16:38,190 --> 00:16:42,330
Japan, Korea-- that's
South Korea, by the way--

285
00:16:42,330 --> 00:16:47,100
Malaysia, Singapore,
Taiwan, Thailand.

286
00:16:47,100 --> 00:16:50,720
Apologies for listing Taiwan
separately from China.

287
00:16:50,720 --> 00:16:54,210
I'm not going to get into
big diplomatic issues here.

288
00:16:59,540 --> 00:17:01,070
And this I already said.

289
00:17:01,070 --> 00:17:03,500
If you want to know something
about the parameters they

290
00:17:03,500 --> 00:17:05,888
stick in, you can look at it.

291
00:17:05,888 --> 00:17:07,430
But here are some
beautiful pictures.

292
00:17:07,430 --> 00:17:17,200
So we have, say, per worker,
GDP relative to the US,

293
00:17:17,200 --> 00:17:21,640
this one is US
worker productivity,

294
00:17:21,640 --> 00:17:27,470
and it's GDP divided by workers.

295
00:17:27,470 --> 00:17:31,640
And you can begin to see the
labels of the countries here.

296
00:17:31,640 --> 00:17:34,230
This is the dating
of the reform.

297
00:17:34,230 --> 00:17:35,900
Talk about 1992 for China.

298
00:17:35,900 --> 00:17:41,000
Each country, they--
heroically, I'm sorry, confess.

299
00:17:41,000 --> 00:17:43,738
I mean, if you read the
history of Korea or Taiwan

300
00:17:43,738 --> 00:17:46,280
or whatever, it's really, really
hard to come up with a date,

301
00:17:46,280 --> 00:17:47,120
but they did.

302
00:17:52,530 --> 00:17:53,700
Thailand is in here.

303
00:17:53,700 --> 00:17:57,780
That's cool because we can
compare it to other papers

304
00:17:57,780 --> 00:17:58,450
and so on.

305
00:17:58,450 --> 00:17:59,010
Japan.

306
00:17:59,010 --> 00:18:00,390
Singapore.

307
00:18:00,390 --> 00:18:01,960
That's per worker GDP.

308
00:18:01,960 --> 00:18:03,240
This is the investment out.

309
00:18:03,240 --> 00:18:06,240
Oh, this black line is kind
of the unweighted average

310
00:18:06,240 --> 00:18:09,680
over all these countries.

311
00:18:09,680 --> 00:18:11,850
TFP.

312
00:18:11,850 --> 00:18:18,570
And private credit
relative, again, to the US.

313
00:18:18,570 --> 00:18:22,740
By the way, this is
that Thai credit boom

314
00:18:22,740 --> 00:18:24,360
we talked about last time.

315
00:18:24,360 --> 00:18:24,975
Yes.

316
00:18:24,975 --> 00:18:27,890
AUDIENCE: How important is the
assignment of the zero date

317
00:18:27,890 --> 00:18:29,040
here?

318
00:18:29,040 --> 00:18:30,900
ROBERT TOWNSEND:
They do not report.

319
00:18:30,900 --> 00:18:34,650
Presumably they played around.

320
00:18:34,650 --> 00:18:36,660
I hope they didn't cook it.

321
00:18:36,660 --> 00:18:38,010
I doubt they did.

322
00:18:38,010 --> 00:18:39,598
I know them quite well.

323
00:18:39,598 --> 00:18:43,020
AUDIENCE: [INAUDIBLE] And it's
just like in the series here.

324
00:18:43,020 --> 00:18:47,950
It looks like if you do the plus
or minus two or three years,

325
00:18:47,950 --> 00:18:49,890
you still get similar breaks.

326
00:18:49,890 --> 00:18:52,360
Maybe not plus two.

327
00:18:52,360 --> 00:18:55,230
ROBERT TOWNSEND: Well,
you kind of hope that--

328
00:18:55,230 --> 00:18:58,590
I mean, that kind of comes with
the fact that things are slow.

329
00:18:58,590 --> 00:19:02,370
Even if you believe that it's
a radical reform, the way they

330
00:19:02,370 --> 00:19:05,020
construct their model economy,
it will happen slowly.

331
00:19:05,020 --> 00:19:09,880
So if you're off by a couple
of years in your dating,

332
00:19:09,880 --> 00:19:11,310
I don't know.

333
00:19:11,310 --> 00:19:13,620
There's hardly anything
here that really jumps.

334
00:19:13,620 --> 00:19:14,710
That's what you're saying.

335
00:19:14,710 --> 00:19:16,572
If you look at that line.

336
00:19:16,572 --> 00:19:18,030
For none of the
countries is there,

337
00:19:18,030 --> 00:19:21,690
like, something popping up.

338
00:19:21,690 --> 00:19:23,190
There's a slide
with interest rates.

339
00:19:23,190 --> 00:19:24,930
I didn't quite understand those.

340
00:19:24,930 --> 00:19:26,460
But that could
just be the reforms

341
00:19:26,460 --> 00:19:28,780
because interest rates are--

342
00:19:28,780 --> 00:19:34,020
however, that said,
ironically, their focus

343
00:19:34,020 --> 00:19:42,420
is on subsidies and taxes
distorting the economy.

344
00:19:42,420 --> 00:19:46,380
And then the reform is
elimination of those wedges,

345
00:19:46,380 --> 00:19:50,750
but they leave the
financial sector intact.

346
00:19:50,750 --> 00:19:53,350
So forget what I said about
the interest rate picture.

347
00:19:56,870 --> 00:20:02,110
So here are these same, or
related variables, GDP, TFP,

348
00:20:02,110 --> 00:20:04,250
investment rates, and so on.

349
00:20:04,250 --> 00:20:06,250
Now keep an eye.

350
00:20:06,250 --> 00:20:07,525
The black lines are--

351
00:20:11,820 --> 00:20:18,250
the light gray line
is the actual data.

352
00:20:18,250 --> 00:20:21,390
So this is what we're
trying to get at.

353
00:20:21,390 --> 00:20:26,300
I think that's an average
over the countries.

354
00:20:26,300 --> 00:20:29,730
And here's this interest rate
one that I don't understand.

355
00:20:29,730 --> 00:20:35,220
But anyway-- oh, and then
there's two other lines here.

356
00:20:35,220 --> 00:20:40,530
The dotted one is
where you basically

357
00:20:40,530 --> 00:20:44,880
eliminate the financing
constraint in their model.

358
00:20:44,880 --> 00:20:48,420
And the lambda they
use, largely, this 1.35,

359
00:20:48,420 --> 00:20:50,800
is the black line.

360
00:20:50,800 --> 00:20:53,760
So what they're
claiming, and you

361
00:20:53,760 --> 00:20:56,230
can decide whether
you believe it or not,

362
00:20:56,230 --> 00:21:05,130
is that largely the data
are close to the black line

363
00:21:05,130 --> 00:21:07,890
and pretty far away
from the dotted line

364
00:21:07,890 --> 00:21:16,830
so that the financial frictions
really help in the explanation.

365
00:21:16,830 --> 00:21:20,310
So I'm frowning when
I'm looking at this.

366
00:21:20,310 --> 00:21:24,650
And then you should be inspired
because this is a famous paper,

367
00:21:24,650 --> 00:21:26,720
I think rightly so.

368
00:21:26,720 --> 00:21:27,830
And they're candid.

369
00:21:27,830 --> 00:21:28,850
Look at the data.

370
00:21:28,850 --> 00:21:31,310
It's like I showed
you my Thai data.

371
00:21:31,310 --> 00:21:33,560
I mean, it's not like
they're hitting a home

372
00:21:33,560 --> 00:21:36,360
run on all these variables.

373
00:21:36,360 --> 00:21:41,468
Some of them look pretty far
away from either prediction.

374
00:21:44,100 --> 00:21:48,240
But again, I think they want
you to see the other end of it,

375
00:21:48,240 --> 00:21:51,330
that the transitions
at the dotted line

376
00:21:51,330 --> 00:21:56,370
are just much faster than
sometimes even in their model,

377
00:21:56,370 --> 00:21:58,240
but certainly,
then, in the data.

378
00:21:58,240 --> 00:22:03,612
That's the point of the paper
is how to slow down the growth.

379
00:22:03,612 --> 00:22:06,020
AUDIENCE: [INAUDIBLE]
So what you're saying

380
00:22:06,020 --> 00:22:10,000
is that the lambda,
1.35, is what they use?

381
00:22:10,000 --> 00:22:11,930
So they basically
say that the reforms

382
00:22:11,930 --> 00:22:14,270
don't eliminate everything.

383
00:22:14,270 --> 00:22:16,183
So there's still a lot of--

384
00:22:16,183 --> 00:22:17,100
ROBERT TOWNSEND: Yeah.

385
00:22:17,100 --> 00:22:22,580
So the idea is you've got these
lazy, untalented, rich firms

386
00:22:22,580 --> 00:22:26,180
that are overfunded because
they're getting a subsidy.

387
00:22:26,180 --> 00:22:30,350
And you've got these lean, high
productivity, private sector

388
00:22:30,350 --> 00:22:31,700
firms--

389
00:22:31,700 --> 00:22:36,680
not state versus private, but in
this case, private with talent

390
00:22:36,680 --> 00:22:38,810
and private without talent.

391
00:22:38,810 --> 00:22:43,850
And then you kind of
eliminate the subsidies end

392
00:22:43,850 --> 00:22:45,680
and the taxes.

393
00:22:45,680 --> 00:22:50,330
And resources would like to flow
to the high productivity firms,

394
00:22:50,330 --> 00:22:52,820
but it doesn't happen
right away because you

395
00:22:52,820 --> 00:22:55,370
jam into these
financing constraints.

396
00:22:55,370 --> 00:22:57,830
So it takes a long time.

397
00:22:57,830 --> 00:23:04,100
Now their model is going to have
forward-looking entrepreneurs.

398
00:23:04,100 --> 00:23:08,600
So these guys who are
talented but constrained,

399
00:23:08,600 --> 00:23:10,670
now not suffering from
taxes or something,

400
00:23:10,670 --> 00:23:13,970
they're going to be
saving at high rates

401
00:23:13,970 --> 00:23:17,300
to try to overcome the
financing constraints.

402
00:23:17,300 --> 00:23:19,460
And eventually that kicks
in, but it takes time

403
00:23:19,460 --> 00:23:22,970
to accumulate capital
sufficiently high value

404
00:23:22,970 --> 00:23:26,930
to be able to collateralized it
to borrow some multiple and so

405
00:23:26,930 --> 00:23:28,962
on.

406
00:23:28,962 --> 00:23:31,763
AUDIENCE: How do
they [INAUDIBLE]??

407
00:23:31,763 --> 00:23:33,430
ROBERT TOWNSEND:
They're using something

408
00:23:33,430 --> 00:23:37,630
like the initial external
finance ratio credit

409
00:23:37,630 --> 00:23:39,730
to GDP, which varies
across country.

410
00:23:39,730 --> 00:23:41,280
Yeah, so it's not--

411
00:23:41,280 --> 00:23:42,280
I don't know which land.

412
00:23:42,280 --> 00:23:43,780
Maybe that was a
particular country,

413
00:23:43,780 --> 00:23:45,490
and I didn't pay
enough attention

414
00:23:45,490 --> 00:23:47,410
when I grabbed their slide.

415
00:23:47,410 --> 00:23:50,030
But it's different, certainly,
for different countries.

416
00:23:56,420 --> 00:23:58,610
And then they make a point
about these companies

417
00:23:58,610 --> 00:24:02,990
hiring more and more workers
and getting bigger and bigger.

418
00:24:02,990 --> 00:24:07,200
And there's something
about factory employment

419
00:24:07,200 --> 00:24:10,650
you might want to
take a look at.

420
00:24:10,650 --> 00:24:14,130
I'm not sure which data
set I grabbed that from.

421
00:24:14,130 --> 00:24:16,110
So the model we've
kind of talked

422
00:24:16,110 --> 00:24:23,350
about how they pick parameters.

423
00:24:26,720 --> 00:24:28,310
Last lecture I
was kind of making

424
00:24:28,310 --> 00:24:32,310
a big deal about estimating
parameters from micro data.

425
00:24:32,310 --> 00:24:36,080
This is more in the macro
tradition, where they're

426
00:24:36,080 --> 00:24:38,570
calibrating parameters or
initial conditions the way

427
00:24:38,570 --> 00:24:40,580
we were just discussing.

428
00:24:59,502 --> 00:25:00,460
So we've said all this.

429
00:25:08,430 --> 00:25:14,140
There is one exercise they do
at the end, where they basically

430
00:25:14,140 --> 00:25:17,650
liberalize the financial
sector, not just get rid

431
00:25:17,650 --> 00:25:21,700
of all the taxes and subsidies.

432
00:25:21,700 --> 00:25:23,020
Their language is a bit tricky.

433
00:25:23,020 --> 00:25:25,870
I read it three or four times
until I finally understood

434
00:25:25,870 --> 00:25:27,280
what they were saying.

435
00:25:27,280 --> 00:25:31,100
They actually said that
helps slow things down.

436
00:25:31,100 --> 00:25:34,040
Now what they really
meant is the target

437
00:25:34,040 --> 00:25:35,810
is better than it
was before, and it's

438
00:25:35,810 --> 00:25:37,370
going to take a
little longer to get

439
00:25:37,370 --> 00:25:42,690
there because the steady
state is quote, better.

440
00:25:42,690 --> 00:25:51,170
But in any event, I'm
not going to focus.

441
00:25:51,170 --> 00:25:54,830
This is practically the
last slide from them,

442
00:25:54,830 --> 00:25:58,180
but you do need to face
choices about what reforms

443
00:25:58,180 --> 00:26:02,260
you're looking at
in a given economy.

444
00:26:02,260 --> 00:26:05,560
And what I didn't say
last time, and this

445
00:26:05,560 --> 00:26:07,630
could have been in
the other lecture,

446
00:26:07,630 --> 00:26:12,090
is that if you look at,
in this case, Thailand,

447
00:26:12,090 --> 00:26:17,610
and you look at measures of
total factor productivity,

448
00:26:17,610 --> 00:26:21,920
you get the usual
sort of factor shares.

449
00:26:21,920 --> 00:26:24,200
Capital has the highest share.

450
00:26:24,200 --> 00:26:27,920
Land, someone asked me
about, is relatively low.

451
00:26:27,920 --> 00:26:32,000
Factor growth, well, this is
the increasing capitalization

452
00:26:32,000 --> 00:26:33,620
of the economy.

453
00:26:33,620 --> 00:26:38,330
And then share times growth rate
kind of makes a contribution.

454
00:26:38,330 --> 00:26:42,320
That factors
contribution to GDP.

455
00:26:42,320 --> 00:26:48,350
And you can see a capital share
is almost equal to the total.

456
00:26:48,350 --> 00:26:52,800
So again, this is
capitalization going on.

457
00:26:52,800 --> 00:27:00,280
And as you get these
shifts out of sectors,

458
00:27:00,280 --> 00:27:05,500
and this is a quick review,
we have the ratio of credit

459
00:27:05,500 --> 00:27:09,650
to GDP on one scale and
financial access on the other.

460
00:27:09,650 --> 00:27:13,240
And you can see this
turning point in 1986.

461
00:27:13,240 --> 00:27:16,660
That's the credit expansion
measured at both the micro

462
00:27:16,660 --> 00:27:18,730
and at the macro level.

463
00:27:18,730 --> 00:27:23,680
And the point here
about TFP is if you

464
00:27:23,680 --> 00:27:28,860
feed that in through the model
we talked about last time,

465
00:27:28,860 --> 00:27:31,080
not only do you get
TFP, can actually

466
00:27:31,080 --> 00:27:35,130
decompose actual TFP in Thailand
into the contribution that's

467
00:27:35,130 --> 00:27:38,730
coming from this financial
deepening effect.

468
00:27:38,730 --> 00:27:44,003
And this is the fit of
the model predicted TFP

469
00:27:44,003 --> 00:27:47,280
to the measured Thai
version of TFP that's coming

470
00:27:47,280 --> 00:27:48,540
from financial deepening.

471
00:27:48,540 --> 00:27:52,290
So roughly, that financial
liberalization in Thailand--

472
00:27:52,290 --> 00:27:55,590
not other reforms, in this
case, just looking at financial

473
00:27:55,590 --> 00:27:56,820
reforms--

474
00:27:56,820 --> 00:28:00,780
actually explains something
like 78% of Thai TFP growth.

475
00:28:03,940 --> 00:28:08,740
And that kind of thing now,
for us, in Thailand, it's

476
00:28:08,740 --> 00:28:11,550
all on the extensive margin.

477
00:28:11,550 --> 00:28:13,980
But for them, all of
their reallocation stuff

478
00:28:13,980 --> 00:28:16,440
is going on the
intensive margin.

479
00:28:16,440 --> 00:28:18,780
There is no sector
in their model

480
00:28:18,780 --> 00:28:22,470
that could not get credit
at least up to capital,

481
00:28:22,470 --> 00:28:24,600
whereas in Thailand,
they just didn't

482
00:28:24,600 --> 00:28:29,110
have bank branches in
many parts of the country.

483
00:28:29,110 --> 00:28:30,870
So it's a different
interpretation.

484
00:28:33,790 --> 00:28:38,680
Now you know not everyone agrees
with what's going on in China.

485
00:28:38,680 --> 00:28:44,330
This paper is about
lifecycle savings.

486
00:28:44,330 --> 00:28:56,000
And they claim that the other
guys are missing the point.

487
00:28:56,000 --> 00:29:01,220
And in particular, savings
rates between the US and China

488
00:29:01,220 --> 00:29:03,950
varied a lot.

489
00:29:03,950 --> 00:29:08,450
And they used to be more
similar than they are now.

490
00:29:08,450 --> 00:29:11,540
In 1988, savings rate
across the household sector

491
00:29:11,540 --> 00:29:13,790
was roughly 5%.

492
00:29:13,790 --> 00:29:18,990
And basically, 20 years
later, savings rate in China

493
00:29:18,990 --> 00:29:22,365
is up to 30% and the
US declined to 2.5%.

494
00:29:26,290 --> 00:29:30,610
And all the while, the
interest rates are coming down.

495
00:29:30,610 --> 00:29:33,190
So this is a puzzle for them.

496
00:29:33,190 --> 00:29:35,580
You know, what's going on?

497
00:29:35,580 --> 00:29:40,730
Well, they construct a life
cycle model, basically.

498
00:29:51,920 --> 00:29:54,140
They construct a
life cycle model,

499
00:29:54,140 --> 00:29:57,350
and they're going to say,
basically, in the US,

500
00:29:57,350 --> 00:30:00,320
young people are
saving less and less.

501
00:30:00,320 --> 00:30:02,200
Guess I should do a poll.

502
00:30:02,200 --> 00:30:07,740
Do graduate students save or
borrow up to your constraints?

503
00:30:07,740 --> 00:30:09,740
But in the US-- sorry,
I'm making light of it--

504
00:30:12,380 --> 00:30:15,980
young people are
saving less and less.

505
00:30:15,980 --> 00:30:17,970
Actually, they're
borrowing more and more.

506
00:30:17,970 --> 00:30:20,390
So the decline in the
world interest rates

507
00:30:20,390 --> 00:30:23,660
made credit cheaper
for young households.

508
00:30:23,660 --> 00:30:26,330
And they're taking
advantage of it.

509
00:30:26,330 --> 00:30:31,940
In China, it's the
the middle aged guys

510
00:30:31,940 --> 00:30:35,030
who are saving more and more.

511
00:30:35,030 --> 00:30:37,230
Now the interest rate could
have gone the other way.

512
00:30:37,230 --> 00:30:41,210
But this is one of these cases
where the income effect trumps

513
00:30:41,210 --> 00:30:43,370
the substitution effect.

514
00:30:43,370 --> 00:30:47,090
And eat now, eat later.

515
00:30:47,090 --> 00:30:48,380
There's two goods.

516
00:30:48,380 --> 00:30:50,660
What's the Engel
curve, so to speak?

517
00:30:50,660 --> 00:30:54,320
Higher incomes have generated
higher savings in China.

518
00:30:57,920 --> 00:31:01,580
So time and time again, the
moral is you have a model.

519
00:31:01,580 --> 00:31:03,170
You may see things
that don't fit.

520
00:31:03,170 --> 00:31:04,670
We already have.

521
00:31:04,670 --> 00:31:12,110
Somebody else will come along
and try to exploit more data,

522
00:31:12,110 --> 00:31:15,350
and either add to the puzzle
or provide an explanation

523
00:31:15,350 --> 00:31:19,160
for things that weren't
fitting so well.

524
00:31:19,160 --> 00:31:21,530
Each model, by
construction, is not

525
00:31:21,530 --> 00:31:23,150
trying to get at everything.

526
00:31:23,150 --> 00:31:24,620
Don't fall into that trap.

527
00:31:24,620 --> 00:31:28,250
It's easy to think, if
only we get it right,

528
00:31:28,250 --> 00:31:30,260
we'll have a totally realistic.

529
00:31:30,260 --> 00:31:32,660
All these models are
abstractions, to some degree,

530
00:31:32,660 --> 00:31:36,710
and they're kind of telling a
story about the growth process

531
00:31:36,710 --> 00:31:37,800
that's informative.

532
00:31:37,800 --> 00:31:41,180
And if there are too
many moving parts,

533
00:31:41,180 --> 00:31:43,490
not only could we not
tell a consistent story,

534
00:31:43,490 --> 00:31:45,620
we're going have
trouble computing it.

535
00:31:45,620 --> 00:31:47,870
So what's very
typical here is to try

536
00:31:47,870 --> 00:31:53,280
to explain why TFP
varies across countries.

537
00:31:53,280 --> 00:31:58,370
There's a huge literature on
this called growth accounting.

538
00:31:58,370 --> 00:32:03,320
And they're going
to attempt to model.

539
00:32:03,320 --> 00:32:07,040
This is where the Hsieh Klenow
stuff, in terms of measurement,

540
00:32:07,040 --> 00:32:07,700
comes in.

541
00:32:10,920 --> 00:32:13,230
But they're going to
feature something not just

542
00:32:13,230 --> 00:32:14,580
in the aggregate.

543
00:32:14,580 --> 00:32:18,240
They're going to feature the
fact that poor, low income

544
00:32:18,240 --> 00:32:23,130
countries not only have low
TFP, they have big differences

545
00:32:23,130 --> 00:32:25,680
across sectors in
terms of productivity

546
00:32:25,680 --> 00:32:27,540
and relative prices.

547
00:32:27,540 --> 00:32:29,550
In particular, the
manufacturing sector

548
00:32:29,550 --> 00:32:33,630
is terribly inefficient
in low income countries,

549
00:32:33,630 --> 00:32:37,740
and the price of capital is
relatively high in low income

550
00:32:37,740 --> 00:32:40,720
countries.

551
00:32:40,720 --> 00:32:44,230
And they'll construct
a model to explain

552
00:32:44,230 --> 00:32:47,020
some of those TFP differences.

553
00:32:50,340 --> 00:32:53,580
So what's the driver here?

554
00:32:53,580 --> 00:32:56,160
And this is one of the trees
we're going to study in detail,

555
00:32:56,160 --> 00:32:59,500
so I don't want to
repeat myself too much.

556
00:32:59,500 --> 00:33:01,230
But the idea they
had, just to think

557
00:33:01,230 --> 00:33:04,260
about how one model
differs from another one,

558
00:33:04,260 --> 00:33:06,510
is to introduce not
only two sectors,

559
00:33:06,510 --> 00:33:09,270
but to have varying fixed costs.

560
00:33:09,270 --> 00:33:11,880
So the idea is this
manufacturing sector,

561
00:33:11,880 --> 00:33:14,310
as opposed to what
they call services,

562
00:33:14,310 --> 00:33:19,360
is the one that has these
very big fixed costs.

563
00:33:19,360 --> 00:33:22,680
So you can imagine that
with financing constraints,

564
00:33:22,680 --> 00:33:24,780
it's very hard for
people to invest

565
00:33:24,780 --> 00:33:28,050
as they might want
to do in something

566
00:33:28,050 --> 00:33:33,000
that requires a lot of
credit because the fixed

567
00:33:33,000 --> 00:33:35,920
costs are so high.

568
00:33:35,920 --> 00:33:37,850
And they embed that
in occupation choice,

569
00:33:37,850 --> 00:33:43,020
so people are choosing
whether to be a worker

570
00:33:43,020 --> 00:33:45,750
or to operate a business in
one of the other sectors.

571
00:33:52,060 --> 00:33:57,420
So as I said, this is all
about cross-country data,

572
00:33:57,420 --> 00:34:01,560
as if every country
were in a steady state.

573
00:34:01,560 --> 00:34:04,620
So they're going to
go across countries

574
00:34:04,620 --> 00:34:09,420
that kind vary in the rate
of, say, external finance

575
00:34:09,420 --> 00:34:12,960
or private credit to
GDP, and see what else

576
00:34:12,960 --> 00:34:17,199
happens in the data as you
go across those countries.

577
00:34:20,409 --> 00:34:22,810
Where do they get
the parameters from?

578
00:34:22,810 --> 00:34:28,239
Well, day one I talked
about Rajan and Zingales.

579
00:34:28,239 --> 00:34:30,699
The other paper
does this as well.

580
00:34:30,699 --> 00:34:34,960
Basically, you act like the
US has wonderfully efficient

581
00:34:34,960 --> 00:34:36,190
credit markets.

582
00:34:36,190 --> 00:34:38,900
A little harder to
swallow these days.

583
00:34:38,900 --> 00:34:43,360
And so things like the firm
size distribution in the US

584
00:34:43,360 --> 00:34:46,120
is as it ought to
be, and everyone

585
00:34:46,120 --> 00:34:49,179
has the same technology, but
they're credit constrained

586
00:34:49,179 --> 00:34:50,889
and the US is not.

587
00:34:50,889 --> 00:34:54,699
So you sort of calibrate
the technology part

588
00:34:54,699 --> 00:34:59,500
of the model based on the
US firm size distribution,

589
00:34:59,500 --> 00:35:04,640
or in this case, manufacturing
versus services as well.

590
00:35:04,640 --> 00:35:09,540
And then you stick that into
these models of the developing

591
00:35:09,540 --> 00:35:12,030
country.

592
00:35:12,030 --> 00:35:17,340
Now quite relevant
to what we're trying

593
00:35:17,340 --> 00:35:21,690
to do in terms of micro and
macro all at the same time

594
00:35:21,690 --> 00:35:26,900
is they take that setup and
do a microfinance revolution.

595
00:35:31,140 --> 00:35:35,340
So again, there's the
usual collateral financing

596
00:35:35,340 --> 00:35:36,000
constraint.

597
00:35:39,000 --> 00:35:41,850
It varies across countries.

598
00:35:41,850 --> 00:35:47,150
And then-- maybe I
can just jump here.

599
00:35:47,150 --> 00:35:48,980
Then what they do,
so people come in

600
00:35:48,980 --> 00:35:54,480
and they have a certain
amount of wealth or assets,

601
00:35:54,480 --> 00:35:57,480
and then decide whether to be
a worker or an entrepreneur.

602
00:36:00,660 --> 00:36:03,000
Normally, the entrepreneur
faces some kind

603
00:36:03,000 --> 00:36:07,170
of financing constraint
that depends on its wealth

604
00:36:07,170 --> 00:36:11,070
and maybe on its talent,
and fee parameterizes

605
00:36:11,070 --> 00:36:14,490
how binding that constraint is.

606
00:36:14,490 --> 00:36:17,890
And here's the revolution,
which is all of a sudden,

607
00:36:17,890 --> 00:36:19,890
you don't have to
be constrained.

608
00:36:19,890 --> 00:36:27,240
You can get a loan which has
nothing to do with your talent.

609
00:36:27,240 --> 00:36:28,980
And whatever your
asset level is,

610
00:36:28,980 --> 00:36:33,940
you get to borrow a fixed
size microfinance loan.

611
00:36:33,940 --> 00:36:35,830
So they embed that.

612
00:36:35,830 --> 00:36:39,160
The point is they're going to
embed it in general equilibrium

613
00:36:39,160 --> 00:36:42,310
and then watch people
choose, kind of do

614
00:36:42,310 --> 00:36:43,720
a controlled experiment.

615
00:36:43,720 --> 00:36:48,430
Actually, what they do
is a partial equilibrium

616
00:36:48,430 --> 00:36:52,200
versus general
equilibrium version.

617
00:36:52,200 --> 00:36:55,110
So we can look at the
partial equilibrium version

618
00:36:55,110 --> 00:37:01,950
first, which basically says
that you start the economy off,

619
00:37:01,950 --> 00:37:06,930
and then you do this
microfinance innovation.

620
00:37:06,930 --> 00:37:09,150
And most things are going up.

621
00:37:09,150 --> 00:37:12,980
Certainly output and capital
are going up over time--

622
00:37:12,980 --> 00:37:19,880
sorry, it's cross-section--
go up as the amount of loan

623
00:37:19,880 --> 00:37:24,590
from the microfinance
sector increases.

624
00:37:24,590 --> 00:37:27,290
All the economies are
alike at the beginning,

625
00:37:27,290 --> 00:37:31,830
but the extent of the loan size
varies in the cross section.

626
00:37:31,830 --> 00:37:34,970
And you can see, the larger
the loan, the higher is output,

627
00:37:34,970 --> 00:37:38,630
the higher is capital
in the economy,

628
00:37:38,630 --> 00:37:41,990
and not much is
happening with TFP.

629
00:37:41,990 --> 00:37:44,660
But it general
equilibrium, and you'll

630
00:37:44,660 --> 00:37:48,910
see this more in a minute when
we go through the predecessor

631
00:37:48,910 --> 00:37:53,750
model, both the wage and the
interest rate are endogenous.

632
00:37:53,750 --> 00:37:59,360
So when you provide credit, you
start shifting the occupation

633
00:37:59,360 --> 00:38:00,740
choice of people.

634
00:38:00,740 --> 00:38:03,080
You start shifting
the amount of capital

635
00:38:03,080 --> 00:38:07,480
they want to set
up and run firms.

636
00:38:07,480 --> 00:38:10,850
That is changing the
demand for credit.

637
00:38:10,850 --> 00:38:13,550
It also, as scale
varies, changes

638
00:38:13,550 --> 00:38:17,010
the demand for employment
starts moving the wage around.

639
00:38:17,010 --> 00:38:21,050
And so the general equilibrium
effects are quite different,

640
00:38:21,050 --> 00:38:25,670
namely output doesn't
move, even across economies

641
00:38:25,670 --> 00:38:28,180
as credit is moving.

642
00:38:28,180 --> 00:38:32,300
Output, TFP, is
slightly increasing.

643
00:38:32,300 --> 00:38:38,912
And the economies are getting
less and less capital.

644
00:38:38,912 --> 00:38:40,331
Yes.

645
00:38:40,331 --> 00:38:42,230
AUDIENCE: How do we
read the [INAUDIBLE]??

646
00:38:42,230 --> 00:38:44,446
How do we read the [INAUDIBLE]?

647
00:38:59,713 --> 00:39:00,630
ROBERT TOWNSEND: Yeah.

648
00:39:00,630 --> 00:39:03,240
I guess we'd have to
dig back into the paper

649
00:39:03,240 --> 00:39:04,555
to get at the units.

650
00:39:11,040 --> 00:39:13,220
Part of it is I think
everything has been normalized

651
00:39:13,220 --> 00:39:15,630
to have the same unit.

652
00:39:15,630 --> 00:39:19,430
I think the answer is it's
all relative to this initial--

653
00:39:19,430 --> 00:39:22,670
because all three lines
have the same intercept,

654
00:39:22,670 --> 00:39:25,400
and that's not likely
in any given model.

655
00:39:25,400 --> 00:39:29,540
So this is meant to get at what
happens in the cross-section

656
00:39:29,540 --> 00:39:31,130
as you increase the
amount of credit.

657
00:39:31,130 --> 00:39:36,074
That's why they more or less
all fit on the same diagram.

658
00:39:36,074 --> 00:39:38,320
AUDIENCE: How do you
read [INAUDIBLE]??

659
00:39:38,320 --> 00:39:39,237
ROBERT TOWNSEND: Yeah.

660
00:39:39,237 --> 00:39:40,940
This is, again, a
microfinance loan.

661
00:39:40,940 --> 00:39:43,690
This is just the size
of the loan relative,

662
00:39:43,690 --> 00:39:48,270
I think this is to initial
wealth or something.

663
00:39:48,270 --> 00:39:58,170
AUDIENCE: [INAUDIBLE] down
because the guys are having

664
00:39:58,170 --> 00:40:07,410
more access to finance because
[INAUDIBLE] we get more capital

665
00:40:07,410 --> 00:40:11,473
because there are less
constrained or something.

666
00:40:11,473 --> 00:40:13,140
ROBERT TOWNSEND: I'm
trying to remember.

667
00:40:13,140 --> 00:40:16,515
It all has to do with the
interest rates and the wages.

668
00:40:20,430 --> 00:40:22,330
I think the interest
rates are going down.

669
00:40:30,500 --> 00:40:33,320
Look at one more picture
and see if that helps.

670
00:40:33,320 --> 00:40:37,050
Otherwise, we'll have
to dig out the paper.

671
00:40:37,050 --> 00:40:40,230
This is for a given
economy as you

672
00:40:40,230 --> 00:40:42,510
fix the level of the
microfinance loan

673
00:40:42,510 --> 00:40:45,530
and then vary wealth.

674
00:40:45,530 --> 00:40:55,560
So it turns out that in partial
equilibrium, more or less,

675
00:40:55,560 --> 00:40:57,900
the benefits are
the same by wealth.

676
00:40:57,900 --> 00:41:01,740
But in general equilibrium,
it's the relatively poor people

677
00:41:01,740 --> 00:41:06,290
who are able to take advantage.

678
00:41:06,290 --> 00:41:08,000
Maybe the wage is going up.

679
00:41:08,000 --> 00:41:10,640
That's part of it.

680
00:41:10,640 --> 00:41:15,040
So those untalented people who
are workers are benefiting.

681
00:41:15,040 --> 00:41:16,860
That has to be true.

682
00:41:16,860 --> 00:41:20,740
By talent, over
here, by ability,

683
00:41:20,740 --> 00:41:23,770
it's not true that
the low ability guys

684
00:41:23,770 --> 00:41:27,020
are the primary beneficiaries.

685
00:41:27,020 --> 00:41:31,360
Basically, the peak is here,
both in general and partial

686
00:41:31,360 --> 00:41:34,650
equilibrium, although
in general, you

687
00:41:34,650 --> 00:41:40,230
can see that the general
equilibrium makes the peak

688
00:41:40,230 --> 00:41:42,690
less, and it drops further.

689
00:41:42,690 --> 00:41:47,700
So the weak statement is
the most able entrepreneurs

690
00:41:47,700 --> 00:41:50,340
in the country are not
benefiting from microfinance,

691
00:41:50,340 --> 00:41:53,340
and they may actually be
hurt from microfinance

692
00:41:53,340 --> 00:41:55,890
when you take into account the
general equilibrium effect.

693
00:41:55,890 --> 00:41:59,980
I think that's also
the wage going up.

694
00:41:59,980 --> 00:42:00,480
Yes.

695
00:42:00,480 --> 00:42:02,790
AUDIENCE: So the wage is
starting point 8 Is it

696
00:42:02,790 --> 00:42:05,611
the same all the way to zero?

697
00:42:05,611 --> 00:42:07,102
The x axis?

698
00:42:13,520 --> 00:42:15,560
ROBERT TOWNSEND: I
don't recall enough

699
00:42:15,560 --> 00:42:17,870
about how they calibrated this.

700
00:42:17,870 --> 00:42:23,040
Yeah, it's either the same, or
they've truncated the ability

701
00:42:23,040 --> 00:42:26,325
distribution so the units
actually start up here at point

702
00:42:26,325 --> 00:42:29,010
8 than at 0.

703
00:42:29,010 --> 00:42:32,170
But the point is yeah,
the action is here.

704
00:42:35,210 --> 00:42:38,060
The same comment,
your same question

705
00:42:38,060 --> 00:42:42,460
would apply here in terms of
what is the scale of wealth.

706
00:42:42,460 --> 00:42:44,930
AUDIENCE: It was the same
all the way down to--

707
00:42:44,930 --> 00:42:47,138
suppose that we thought,
oh, this is not a rescaling,

708
00:42:47,138 --> 00:42:48,860
and it shoots all the
way down to the 0.

709
00:42:48,860 --> 00:42:50,610
That would be remarkable
if literally they

710
00:42:50,610 --> 00:42:54,875
were just the same
from point 8 to 0.

711
00:42:54,875 --> 00:42:57,030
And it's like the only
action occurs at the end.

712
00:42:57,030 --> 00:42:58,488
ROBERT TOWNSEND:
Remember, you have

713
00:42:58,488 --> 00:43:02,000
this crucial cutoff about who
wants to be running a firm.

714
00:43:02,000 --> 00:43:05,090
You can be a wage earner,
and whatever the wages are,

715
00:43:05,090 --> 00:43:07,700
they're fixed in equilibrium.

716
00:43:07,700 --> 00:43:10,190
That's the best option for
many, many, many people.

717
00:43:10,190 --> 00:43:14,090
You have to be sufficiently
talented to climb over

718
00:43:14,090 --> 00:43:16,905
that threshold and
want to run a firm.

719
00:43:16,905 --> 00:43:19,280
And when you're running a
firm, you could be constrained.

720
00:43:19,280 --> 00:43:20,990
You could have--
like China, you could

721
00:43:20,990 --> 00:43:24,440
have very high marginal returns,
but with that collateral

722
00:43:24,440 --> 00:43:27,200
constraint, you can't
borrow very much.

723
00:43:27,200 --> 00:43:31,190
So even though you have
this amazingly high return,

724
00:43:31,190 --> 00:43:32,900
you can't exploit it.

725
00:43:32,900 --> 00:43:35,360
So the levels of
profit stay low.

726
00:43:40,020 --> 00:43:40,540
OK.

727
00:43:40,540 --> 00:43:42,130
Well, it may be
frustrating that we

728
00:43:42,130 --> 00:43:44,320
can't go into the details
of this thing more.

729
00:43:44,320 --> 00:43:47,740
But in terms of quote,
the big picture,

730
00:43:47,740 --> 00:43:51,880
you can see them making use
of these kinds of models

731
00:43:51,880 --> 00:43:55,910
to examine a very
relevant experience.

732
00:43:55,910 --> 00:43:58,750
Most evidence we
have on microcredit

733
00:43:58,750 --> 00:44:02,680
is at the micro level, and
it's almost, by construction,

734
00:44:02,680 --> 00:44:03,880
partial equilibrium.

735
00:44:06,680 --> 00:44:10,240
Joe and I tried to remedy that
because Thailand put money

736
00:44:10,240 --> 00:44:13,020
in every village, and the
villages vary in size.

737
00:44:13,020 --> 00:44:15,550
So we actually started to see
the wage moving a little bit.

738
00:44:15,550 --> 00:44:20,530
But mostly, microcredit, as
in RCTs, by construction,

739
00:44:20,530 --> 00:44:22,480
is going to have a partial
equilibrium effect.

740
00:44:22,480 --> 00:44:25,990
But these, what's
going on in Bangladesh?

741
00:44:25,990 --> 00:44:29,530
The whole country's got it.

742
00:44:29,530 --> 00:44:32,120
And we don't see the
country without it.

743
00:44:32,120 --> 00:44:35,120
But that's why we
need the model,

744
00:44:35,120 --> 00:44:38,520
to get to these counterfactuals.

745
00:44:38,520 --> 00:44:42,870
And I'm going to skip
Joaquin's dissertation.

746
00:44:42,870 --> 00:44:43,860
It's on inequality.

747
00:44:43,860 --> 00:44:47,350
It's quite interesting.

748
00:44:47,350 --> 00:44:50,360
And I'm going to skip this thing
about alleviating constraints

749
00:44:50,360 --> 00:44:51,200
in the long run.

750
00:44:51,200 --> 00:44:54,500
But we'll come back
to it in homework

751
00:44:54,500 --> 00:45:00,590
and so on with Abhijit and
Ben Moll on the persistence

752
00:45:00,590 --> 00:45:02,690
of misallocation.

753
00:45:02,690 --> 00:45:05,540
So let's get into the
details of this China paper.

754
00:45:09,110 --> 00:45:13,110
I think you spent some time
at the beginning of class.

755
00:45:13,110 --> 00:45:19,498
So maybe I can get by with
not having to re-motivate it,

756
00:45:19,498 --> 00:45:20,790
and we'll start with the model.

757
00:45:20,790 --> 00:45:24,630
So it is an overlapping
generations.

758
00:45:24,630 --> 00:45:26,130
That's always a bit heroic.

759
00:45:26,130 --> 00:45:28,878
Of course, it makes the
thing much more tractable

760
00:45:28,878 --> 00:45:30,420
because you've only
got, essentially,

761
00:45:30,420 --> 00:45:32,250
two periods of
life to worry about

762
00:45:32,250 --> 00:45:35,500
in the dynamic optimization.

763
00:45:35,500 --> 00:45:39,490
Everyone's got the same
preferences, by the way,

764
00:45:39,490 --> 00:45:42,350
whether you're
going to be a worker

765
00:45:42,350 --> 00:45:46,190
or running a private firm.

766
00:45:46,190 --> 00:45:51,950
And it's over consumption
today and consumption tomorrow.

767
00:45:51,950 --> 00:45:57,560
Theta is a power and beta
is the discount rate.

768
00:45:57,560 --> 00:46:00,030
Workers.

769
00:46:00,030 --> 00:46:02,970
There's not much of an
occupation choice thing here.

770
00:46:02,970 --> 00:46:06,660
Basically, it's almost
as if exogenously, you've

771
00:46:06,660 --> 00:46:10,770
got workers versus
entrepreneurs,

772
00:46:10,770 --> 00:46:14,300
so they downplay that
choice, unlike the paper

773
00:46:14,300 --> 00:46:15,560
we just looked at.

774
00:46:15,560 --> 00:46:18,380
Workers earn some wage.

775
00:46:18,380 --> 00:46:20,230
And what do they
do with the money?

776
00:46:20,230 --> 00:46:25,590
They can put it in the bank
at some interest rate RT.

777
00:46:25,590 --> 00:46:27,960
We'll come back to
that momentarily.

778
00:46:27,960 --> 00:46:33,650
Entrepreneurs are managers
in entrepreneurial firms,

779
00:46:33,650 --> 00:46:36,950
and they earn
something that makes

780
00:46:36,950 --> 00:46:39,590
them want to do that rather
than be a wage earner.

781
00:46:39,590 --> 00:46:42,110
Now I just got done saying
that there's not really

782
00:46:42,110 --> 00:46:44,690
any essential occupation
choice, but that's

783
00:46:44,690 --> 00:46:47,000
because they parameterize
this thing so

784
00:46:47,000 --> 00:46:50,450
that this return that
an entrepreneur can get

785
00:46:50,450 --> 00:46:56,700
is always greater than
the wage in equilibrium

786
00:46:56,700 --> 00:46:59,840
at the parameters they choose.

787
00:46:59,840 --> 00:47:01,468
What can they do
with their money?

788
00:47:01,468 --> 00:47:03,260
They could also put
their money in the bank

789
00:47:03,260 --> 00:47:06,500
at the same rate of
interest, or they

790
00:47:06,500 --> 00:47:08,480
could put it in their firm.

791
00:47:08,480 --> 00:47:10,430
But like we've been
saying, the rate of return

792
00:47:10,430 --> 00:47:15,983
is going to be really high on
internal self-financed savings.

793
00:47:15,983 --> 00:47:18,150
So that's what they're going
to do with their money.

794
00:47:18,150 --> 00:47:20,820
They don't put it in the bank.

795
00:47:20,820 --> 00:47:23,250
So that's higher than the rate.

796
00:47:23,250 --> 00:47:30,760
And some sort of things
to keep an eye on.

797
00:47:30,760 --> 00:47:33,490
The population is
growing at some rate.

798
00:47:33,490 --> 00:47:35,800
I don't know why they did that.

799
00:47:35,800 --> 00:47:43,920
I don't know whether they needed
to get the model paths closer

800
00:47:43,920 --> 00:47:45,160
to the data.

801
00:47:45,160 --> 00:47:46,770
But anyway, that
is in the model,

802
00:47:46,770 --> 00:47:51,810
and I'm not going to
talk about it very much.

803
00:47:51,810 --> 00:47:53,820
Big story is
productivity differences

804
00:47:53,820 --> 00:47:57,030
between state and
private enterprise.

805
00:48:00,242 --> 00:48:01,700
And here's the
production function.

806
00:48:01,700 --> 00:48:05,330
So there's two types
of technologies.

807
00:48:05,330 --> 00:48:10,340
There's kind of a centralized
and a decentralized technology.

808
00:48:10,340 --> 00:48:14,880
The decentralized technology
is going to require managers.

809
00:48:14,880 --> 00:48:17,730
In effect, the
centralized one doesn't

810
00:48:17,730 --> 00:48:20,510
take advantage of
having managers,

811
00:48:20,510 --> 00:48:21,520
and I'll tell you why.

812
00:48:21,520 --> 00:48:23,250
It's pretty artificial.

813
00:48:23,250 --> 00:48:26,400
But for now, just
note some things here.

814
00:48:30,460 --> 00:48:33,600
There is this exogenous
technological progress,

815
00:48:33,600 --> 00:48:36,680
so that's kind of
classic macro stuff.

816
00:48:36,680 --> 00:48:38,250
This A has a T on it.

817
00:48:38,250 --> 00:48:40,380
It's going to be
growing over time.

818
00:48:40,380 --> 00:48:43,680
But it's labor augmenting.

819
00:48:43,680 --> 00:48:45,960
It's not sitting out here
in front of the production

820
00:48:45,960 --> 00:48:47,800
function.

821
00:48:47,800 --> 00:48:50,530
It'll be there in a minute,
but it's going to carry,

822
00:48:50,530 --> 00:48:54,125
inherit this 1 minus alpha
when you pull it outside.

823
00:48:57,130 --> 00:48:58,660
Here's the Chi thing.

824
00:48:58,660 --> 00:49:04,450
So if you're in the
decentralized private sector,

825
00:49:04,450 --> 00:49:10,050
then that technology
is augmented by Chi.

826
00:49:10,050 --> 00:49:11,320
Chi is greater than 1.

827
00:49:16,640 --> 00:49:21,430
Now the idea is, why
doesn't everyone do this?

828
00:49:21,430 --> 00:49:24,670
And even the
state-financed firms,

829
00:49:24,670 --> 00:49:25,825
they kind of tell a story.

830
00:49:28,940 --> 00:49:31,510
And the story is basically--

831
00:49:35,410 --> 00:49:38,836
let's look at the
decentralized firm first.

832
00:49:38,836 --> 00:49:42,130
The decentralized
firm has capital.

833
00:49:42,130 --> 00:49:47,300
Initially, it comes
from somewhere.

834
00:49:47,300 --> 00:49:51,320
But during the production
period, it's predetermined,

835
00:49:51,320 --> 00:49:54,800
and then they can hire labor,
and they can hire managers.

836
00:49:54,800 --> 00:49:58,220
Managers need to be
paid some compensation.

837
00:50:01,850 --> 00:50:02,940
Why this thing?

838
00:50:02,940 --> 00:50:08,110
So the idea here is a manager
can basically steal the output,

839
00:50:08,110 --> 00:50:08,920
walk off with it.

840
00:50:12,200 --> 00:50:17,340
And so that's the psi,
the pitchfork thing.

841
00:50:17,340 --> 00:50:19,970
So that's kind of like
the financial distortion.

842
00:50:19,970 --> 00:50:22,610
That's going to
drive this thing.

843
00:50:22,610 --> 00:50:26,920
The higher is phi, the
more the manager can steal.

844
00:50:26,920 --> 00:50:28,170
And in fact, here's the thing.

845
00:50:28,170 --> 00:50:31,230
They're saying
monitoring somehow

846
00:50:31,230 --> 00:50:34,800
prevents these hired
managers from walking off

847
00:50:34,800 --> 00:50:36,210
with anything, but everything.

848
00:50:36,210 --> 00:50:39,000
But only the decentralized
firms have this monitoring

849
00:50:39,000 --> 00:50:40,150
technology.

850
00:50:40,150 --> 00:50:44,280
The state-operated enterprises
are so darn inefficient

851
00:50:44,280 --> 00:50:46,582
that basically,
psi is equal to 1.

852
00:50:46,582 --> 00:50:51,220
So forget having managers.

853
00:50:51,220 --> 00:50:52,420
So that's the story.

854
00:50:52,420 --> 00:50:58,680
But it's really rigged, meant
to tell a little deeper story

855
00:50:58,680 --> 00:51:02,060
than just imposing a
finance constraint.

856
00:51:02,060 --> 00:51:03,620
So this will be at equality.

857
00:51:03,620 --> 00:51:06,050
You're going to have to pay
the managers that amount

858
00:51:06,050 --> 00:51:08,540
just so they don't steal.

859
00:51:08,540 --> 00:51:10,250
And then plug that
in, and you get

860
00:51:10,250 --> 00:51:15,500
the sort of maximization
problem, which

861
00:51:15,500 --> 00:51:17,030
is now just maximizing.

862
00:51:19,630 --> 00:51:22,900
And you can see, after you pull
out the factor labor, factor

863
00:51:22,900 --> 00:51:26,740
productivity, that you
get stealing is not good.

864
00:51:26,740 --> 00:51:28,960
That lowers it, that
chi is greater than 1

865
00:51:28,960 --> 00:51:31,360
raised to a power,
that raises it.

866
00:51:31,360 --> 00:51:35,510
So this is kind of the
productivity effect

867
00:51:35,510 --> 00:51:37,690
of running a private firm.

868
00:51:37,690 --> 00:51:39,070
Yes.

869
00:51:39,070 --> 00:51:40,010
AUDIENCE: [INAUDIBLE]

870
00:51:40,010 --> 00:51:41,468
ROBERT TOWNSEND:
It's fixed so far.

871
00:51:41,468 --> 00:51:45,050
But it's actually going to be
determined in this overlapping

872
00:51:45,050 --> 00:51:46,580
generations model.

873
00:51:46,580 --> 00:51:49,250
People who plan to
be entrepreneurs

874
00:51:49,250 --> 00:51:50,765
in the second period will save.

875
00:51:56,226 --> 00:52:00,110
AUDIENCE: This would have
been identical [INAUDIBLE]..

876
00:52:00,110 --> 00:52:02,110
ROBERT TOWNSEND: Yeah,
you could have done that.

877
00:52:08,380 --> 00:52:08,880
OK.

878
00:52:12,247 --> 00:52:13,390
I said this.

879
00:52:25,650 --> 00:52:29,710
So this is just that
production function notation.

880
00:52:29,710 --> 00:52:31,270
It's the same
production function

881
00:52:31,270 --> 00:52:35,210
for both except for the chi.

882
00:52:35,210 --> 00:52:41,680
And the notation substitutes
in entrepreneurial firms

883
00:52:41,680 --> 00:52:45,430
versus financially
integrated firms.

884
00:52:45,430 --> 00:52:47,290
F for financially integrated.

885
00:52:47,290 --> 00:52:50,060
But they're not efficient guys.

886
00:52:50,060 --> 00:52:52,100
They're inefficient guys.

887
00:52:52,100 --> 00:52:55,280
And here's that
productivity marching along

888
00:52:55,280 --> 00:52:58,295
following this sort of
exogenous mark-off process.

889
00:53:09,830 --> 00:53:13,790
But the important friction
is when I showed you

890
00:53:13,790 --> 00:53:18,260
that problem, or maybe it's
not clear, not so clear yet

891
00:53:18,260 --> 00:53:22,640
that these private enterprise
guys are limited in the amount

892
00:53:22,640 --> 00:53:25,130
that they can borrow.

893
00:53:25,130 --> 00:53:25,701
Yes.

894
00:53:25,701 --> 00:53:27,076
AUDIENCE: So the
z is just shock?

895
00:53:30,540 --> 00:53:32,370
ROBERT TOWNSEND: It's boring.

896
00:53:32,370 --> 00:53:35,550
It's boring, but it's a big
part of real business cycle

897
00:53:35,550 --> 00:53:36,085
analysis.

898
00:53:36,085 --> 00:53:37,710
The whole point of
real business cycles

899
00:53:37,710 --> 00:53:41,520
is those aggregate shocks
are driven by basically

900
00:53:41,520 --> 00:53:44,150
something like z or TFP.

901
00:53:44,150 --> 00:53:48,750
So they inherited
that part of it.

902
00:53:48,750 --> 00:53:51,600
I'll show you where it enters.

903
00:53:51,600 --> 00:53:56,520
It's going to generate some
exogenous this growth rate.

904
00:53:56,520 --> 00:53:59,550
But it's not going to be
enough to explain China.

905
00:53:59,550 --> 00:54:00,960
As we were saying
earlier, you've

906
00:54:00,960 --> 00:54:05,640
got to put in some other
financing restrictions

907
00:54:05,640 --> 00:54:08,160
to try to match
up with the data.

908
00:54:08,160 --> 00:54:08,660
OK.

909
00:54:08,660 --> 00:54:12,290
So the rate on
deposits is going to be

910
00:54:12,290 --> 00:54:15,350
equal to the rate at which
you can lend internationally.

911
00:54:15,350 --> 00:54:18,510
This is, like, US
Treasuries, and that's

912
00:54:18,510 --> 00:54:19,440
where the money goes.

913
00:54:22,740 --> 00:54:28,500
Lending, there's a little bit of
a markup, sort of not modeled.

914
00:54:28,500 --> 00:54:33,330
You have to charge more on your
lending rate since some of it

915
00:54:33,330 --> 00:54:36,450
gets chewed up in the
intermediation process.

916
00:54:36,450 --> 00:54:40,380
And this [INAUDIBLE] thing
is basically that markup.

917
00:54:40,380 --> 00:54:42,390
So it subtracts off
from the lending rate

918
00:54:42,390 --> 00:54:45,330
to be equal to the deposit rate.

919
00:54:49,060 --> 00:54:49,780
OK.

920
00:54:49,780 --> 00:54:50,905
So we do a little algebra.

921
00:54:57,420 --> 00:55:00,990
And I'll try to
let you know where

922
00:55:00,990 --> 00:55:04,110
the equations are coming from.

923
00:55:04,110 --> 00:55:11,720
So this kappa, not k, is a
ratio of capital to labor.

924
00:55:11,720 --> 00:55:15,770
But the labor is augmented by
that augmenting technological

925
00:55:15,770 --> 00:55:17,130
progress.

926
00:55:17,130 --> 00:55:19,550
So as you may know, if you've
worked through these things

927
00:55:19,550 --> 00:55:23,270
before, you have a Cobb
Douglas production function.

928
00:55:23,270 --> 00:55:26,190
You want to look for
wages and interest rates.

929
00:55:26,190 --> 00:55:32,870
Well, for example, the
marginal product of capital

930
00:55:32,870 --> 00:55:36,920
will be set equal to
quote, an interest rate,

931
00:55:36,920 --> 00:55:39,380
in this case the lending
rate, because that's

932
00:55:39,380 --> 00:55:40,940
where you can borrow.

933
00:55:40,940 --> 00:55:43,010
And it ends up being--

934
00:55:43,010 --> 00:55:43,685
it is this.

935
00:55:46,830 --> 00:55:49,680
Over the weekend I reworked
all these equations just

936
00:55:49,680 --> 00:55:52,350
to make sure I could
do the algebra.

937
00:55:52,350 --> 00:55:53,730
This one's pretty standard.

938
00:55:53,730 --> 00:55:55,947
Some of them get a bit
tricky, but it probably

939
00:55:55,947 --> 00:55:57,780
is going to take too
much of our time to try

940
00:55:57,780 --> 00:56:02,175
to do it from scratch here.

941
00:56:02,175 --> 00:56:04,300
But I will try to give you
some guidance about what

942
00:56:04,300 --> 00:56:09,160
substitutions are going on and
why they're doing it this way.

943
00:56:09,160 --> 00:56:12,910
The wage is the marginal
product of labor,

944
00:56:12,910 --> 00:56:15,700
and this is an
expression for the wage.

945
00:56:15,700 --> 00:56:20,800
Now that seems odd, except
why not solve for labor?

946
00:56:20,800 --> 00:56:29,400
The point really is that
this is fixed from abroad.

947
00:56:29,400 --> 00:56:32,110
That's going to fix kappa.

948
00:56:32,110 --> 00:56:36,490
And once kappa is fixed,
then basically the wage

949
00:56:36,490 --> 00:56:40,540
is going to be
constant if it were not

950
00:56:40,540 --> 00:56:42,200
for that technological progress.

951
00:56:42,200 --> 00:56:45,160
So the general equilibrium
is made a lot easier

952
00:56:45,160 --> 00:56:47,950
here because they're able
to get these closed form

953
00:56:47,950 --> 00:56:49,840
solutions for the wage
and the interest rate.

954
00:57:00,870 --> 00:57:06,510
So again, where we're going is
resources are going to flow.

955
00:57:06,510 --> 00:57:09,990
Labor in particular is
going to start flowing out

956
00:57:09,990 --> 00:57:13,170
of the state-owned enterprises,
but it doesn't do anything

957
00:57:13,170 --> 00:57:15,040
to the wage.

958
00:57:15,040 --> 00:57:17,430
And the interest rates are
pinned down internationally.

959
00:57:17,430 --> 00:57:20,500
So to the extent the economy's
getting richer and richer

960
00:57:20,500 --> 00:57:22,420
and there's no place
for that money to go,

961
00:57:22,420 --> 00:57:23,420
it's going to go abroad.

962
00:57:25,930 --> 00:57:26,560
Yes.

963
00:57:26,560 --> 00:57:39,120
AUDIENCE: [INAUDIBLE]
to provide entrepreneurs

964
00:57:39,120 --> 00:57:41,620
with the incentives
to work as manager,

965
00:57:41,620 --> 00:57:48,340
and they have to be greater
than this wage [INAUDIBLE]..

966
00:57:48,340 --> 00:57:51,210
How to guarantee [INAUDIBLE].

967
00:57:51,210 --> 00:57:54,530
ROBERT TOWNSEND: Well, they
set the parameters such

968
00:57:54,530 --> 00:57:55,250
that that's true.

969
00:58:03,080 --> 00:58:04,760
There's always this
tension about where

970
00:58:04,760 --> 00:58:07,700
the parameters come from.

971
00:58:07,700 --> 00:58:10,140
So I'm drawn to micro
data because then I

972
00:58:10,140 --> 00:58:12,710
can estimate something that
I'm willing to believe.

973
00:58:12,710 --> 00:58:15,240
Other people like
to calibrate them.

974
00:58:15,240 --> 00:58:17,055
Now, if you're telling
a story, the story

975
00:58:17,055 --> 00:58:18,680
of China through the
lens of this model

976
00:58:18,680 --> 00:58:21,290
is going to be consistent
with big chunks of the data.

977
00:58:21,290 --> 00:58:23,720
So they're probably just
happy to find a parameter that

978
00:58:23,720 --> 00:58:27,130
makes the story accurate.

979
00:58:27,130 --> 00:58:34,810
Different people have
different tolerance levels.

980
00:58:34,810 --> 00:58:37,470
OK.

981
00:58:37,470 --> 00:58:41,280
So here are these
private sector firms.

982
00:58:41,280 --> 00:58:47,430
After you substitute in for
m in a previous expression

983
00:58:47,430 --> 00:58:51,090
that we just talked about,
it's just choosing employment.

984
00:58:51,090 --> 00:58:54,800
And you get the first
order condition.

985
00:58:54,800 --> 00:58:59,150
Now this is a trick that
turned out to be handy.

986
00:58:59,150 --> 00:59:00,172
Why isn't the wage?

987
00:59:00,172 --> 00:59:01,880
Well, they took the
first order condition

988
00:59:01,880 --> 00:59:05,015
and they multiplied
by n, and they put n

989
00:59:05,015 --> 00:59:07,280
on both sides of this thing.

990
00:59:07,280 --> 00:59:08,930
So there is a
substitution in there.

991
00:59:08,930 --> 00:59:13,310
That's because this
analytic expression--

992
00:59:13,310 --> 00:59:16,340
the wage bill turns
out to get used later

993
00:59:16,340 --> 00:59:18,860
and they wanted an
expression for it.

994
00:59:18,860 --> 00:59:19,640
What is n?

995
00:59:19,640 --> 00:59:21,170
Basically, it's this thing.

996
00:59:23,710 --> 00:59:26,580
So the employment in
these private sector firms

997
00:59:26,580 --> 00:59:28,485
is proportional to the capital.

998
00:59:31,370 --> 00:59:33,730
In fact, many, many
things, almost everything

999
00:59:33,730 --> 00:59:36,760
in this model, is going to
be proportional to capital.

1000
00:59:39,930 --> 00:59:44,160
and the thing that
does move, if anything,

1001
00:59:44,160 --> 00:59:45,810
is basically this productivity.

1002
00:59:45,810 --> 00:59:51,490
But a certain ratios are
going to stay constant,

1003
00:59:51,490 --> 00:59:53,650
even if some of the
levels are moving.

1004
00:59:53,650 --> 00:59:56,540
So here is the wage.

1005
00:59:56,540 --> 01:00:00,800
We substitute that
wage back into 2,

1006
01:00:00,800 --> 01:00:05,000
and we get this
expression for the profits

1007
01:00:05,000 --> 01:00:06,650
of the private sector.

1008
01:00:06,650 --> 01:00:10,890
And the point is this thing
on the right-hand side,

1009
01:00:10,890 --> 01:00:12,540
it's just linear.

1010
01:00:12,540 --> 01:00:15,150
So despite what
you might thought

1011
01:00:15,150 --> 01:00:17,490
would be the
diminishing returns,

1012
01:00:17,490 --> 01:00:20,430
the fact is they're able
to hire enough labor

1013
01:00:20,430 --> 01:00:22,380
on the extensive
margin at a fixed wage

1014
01:00:22,380 --> 01:00:24,940
so they don't get hit with
those diminishing returns.

1015
01:00:24,940 --> 01:00:29,140
And for the transition
that they want to analyze,

1016
01:00:29,140 --> 01:00:33,180
it's basically what
they call a AK model,

1017
01:00:33,180 --> 01:00:34,650
not to confuse the notation.

1018
01:00:34,650 --> 01:00:39,300
It's linear, so basically,
Rho is really high.

1019
01:00:39,300 --> 01:00:41,280
I'm going to go bananas.

1020
01:00:41,280 --> 01:00:43,650
Give me more k.

1021
01:00:43,650 --> 01:00:44,220
K is good.

1022
01:00:44,220 --> 01:00:45,060
I can make money.

1023
01:00:45,060 --> 01:00:47,580
Rho is a lot higher than R.

1024
01:00:47,580 --> 01:00:48,635
No, no, no, no.

1025
01:00:48,635 --> 01:00:50,010
There's going to
be a constraint.

1026
01:00:50,010 --> 01:00:51,510
That's the financing constraint.

1027
01:00:51,510 --> 01:00:58,760
But it really helps the
dynamics to figure it out.

1028
01:00:58,760 --> 01:01:00,640
So again, what is that Rho?

1029
01:01:00,640 --> 01:01:03,330
It's this thing.

1030
01:01:03,330 --> 01:01:05,365
And these are all
basically parameters,

1031
01:01:05,365 --> 01:01:06,240
interest rates fixed.

1032
01:01:06,240 --> 01:01:10,990
Alpha's labor productivity,
capital productivity.

1033
01:01:10,990 --> 01:01:14,130
Pitchfork v was a
distortion from stealing,

1034
01:01:14,130 --> 01:01:16,827
that chi was this
exogenous productivity

1035
01:01:16,827 --> 01:01:17,910
in the state-owned sector.

1036
01:01:17,910 --> 01:01:20,820
Everything on the right-hand
side is just a number.

1037
01:01:20,820 --> 01:01:23,940
And this thing is
set, parameter choice

1038
01:01:23,940 --> 01:01:26,430
set to be greater than 1.

1039
01:01:26,430 --> 01:01:29,620
So that's going to be
the driver of China.

1040
01:01:32,267 --> 01:01:34,850
And it would happen right away
if it weren't for the borrowing

1041
01:01:34,850 --> 01:01:35,420
constraint.

1042
01:01:35,420 --> 01:01:38,730
So where do you get money from?

1043
01:01:38,730 --> 01:01:40,930
OK, a little lesson on
financing, which you

1044
01:01:40,930 --> 01:01:41,800
already know.

1045
01:01:41,800 --> 01:01:45,250
But in the notation,
we asked about k.

1046
01:01:45,250 --> 01:01:48,100
Where did k come from?

1047
01:01:48,100 --> 01:01:52,210
K, at the beginning of the
period, is predetermined,

1048
01:01:52,210 --> 01:01:56,590
but it came from last period
saving and from the amount

1049
01:01:56,590 --> 01:01:58,850
that they borrowed.

1050
01:01:58,850 --> 01:02:01,410
So that's the timing.

1051
01:02:01,410 --> 01:02:03,390
And it's the saving of
the entrepreneur who's

1052
01:02:03,390 --> 01:02:07,460
going to be running that
firm when they're older,

1053
01:02:07,460 --> 01:02:11,030
and they save when
they're young.

1054
01:02:11,030 --> 01:02:11,530
OK.

1055
01:02:11,530 --> 01:02:18,070
So this L is kind of like
L, liquidity, the amount you

1056
01:02:18,070 --> 01:02:20,450
can borrow, could be 0.

1057
01:02:20,450 --> 01:02:34,040
But basically you've got to pay
back those loans because you

1058
01:02:34,040 --> 01:02:35,990
borrow them at interest.

1059
01:02:35,990 --> 01:02:40,580
And so the amount
you've got to pay back

1060
01:02:40,580 --> 01:02:43,055
is going to be bounded
by your profit.

1061
01:02:46,080 --> 01:02:48,120
And then they're
kind of rewriting

1062
01:02:48,120 --> 01:02:49,170
the expression for that.

1063
01:02:53,310 --> 01:02:57,580
So we imagine this is binding.

1064
01:02:57,580 --> 01:03:00,840
This is where the
credit constraint is.

1065
01:03:00,840 --> 01:03:05,490
You're limited to pay back
the loan out of, basically,

1066
01:03:05,490 --> 01:03:10,080
next period's profits,
or a proportion of it,

1067
01:03:10,080 --> 01:03:12,690
I should say, with factor eta.

1068
01:03:12,690 --> 01:03:16,050
So the so-called
leverage ratio, which

1069
01:03:16,050 --> 01:03:19,350
is credit to the total
amount of financing,

1070
01:03:19,350 --> 01:03:22,290
both internal and
external, is basically

1071
01:03:22,290 --> 01:03:24,932
just this fixed number.

1072
01:03:24,932 --> 01:03:26,640
A lot of this we've
already talked about.

1073
01:03:26,640 --> 01:03:29,610
We just threw in
another parameter.

1074
01:03:34,860 --> 01:03:35,360
OK.

1075
01:03:35,360 --> 01:03:40,820
So back to the entrepreneur
maximizing utility

1076
01:03:40,820 --> 01:03:44,150
with those preferences.

1077
01:03:44,150 --> 01:03:50,220
When they're young,
they're basically

1078
01:03:50,220 --> 01:03:55,890
getting the managerial
compensation less the savings.

1079
01:03:55,890 --> 01:03:59,880
And when they're older, they
get the return on the enterprise

1080
01:03:59,880 --> 01:04:07,050
that they're quote,
running, plus

1081
01:04:07,050 --> 01:04:12,590
they get this extra kick because
the more they can borrow at RL,

1082
01:04:12,590 --> 01:04:16,010
which is fixed, given that
Rho E is higher than that,

1083
01:04:16,010 --> 01:04:19,580
they get a return
on the resources

1084
01:04:19,580 --> 01:04:23,550
that they got from externally.

1085
01:04:23,550 --> 01:04:26,100
So they have money from
their own internal rate,

1086
01:04:26,100 --> 01:04:28,350
on their own savings,
and then money

1087
01:04:28,350 --> 01:04:31,130
from, quote, profits
that they get

1088
01:04:31,130 --> 01:04:36,240
being able to borrow at a lower
rate than their rate of return.

1089
01:04:36,240 --> 01:04:40,890
And you can decompose this
into the return, the premium,

1090
01:04:40,890 --> 01:04:46,420
and the leverage ratio,
all in a given period,

1091
01:04:46,420 --> 01:04:49,540
multiplied by the savings rate.

1092
01:04:49,540 --> 01:04:50,920
When we get to
measurement, we're

1093
01:04:50,920 --> 01:04:54,250
going to talk a lot about
where does wealth come from.

1094
01:04:54,250 --> 01:04:55,820
Wealth comes from saving.

1095
01:04:55,820 --> 01:04:58,120
There's a savings
rate, and then there's

1096
01:04:58,120 --> 01:05:00,040
the rate of return
you get on saving,

1097
01:05:00,040 --> 01:05:04,040
which is like TFP, or
basically factor productivity.

1098
01:05:04,040 --> 01:05:09,400
This is effect, with some
leverage, the productivity you

1099
01:05:09,400 --> 01:05:11,020
get on given levels of saving.

1100
01:05:14,920 --> 01:05:16,690
The point is that this
is all a constant,

1101
01:05:16,690 --> 01:05:24,330
so the savings is just going
to be proportional to m.

1102
01:05:24,330 --> 01:05:26,310
Now again, I looked at
this over the weekend.

1103
01:05:26,310 --> 01:05:27,390
I'm like, huh?

1104
01:05:27,390 --> 01:05:29,040
How is that coming from this?

1105
01:05:29,040 --> 01:05:32,390
Well, no, no, you got
to go back up here.

1106
01:05:32,390 --> 01:05:34,960
And remember, you're going
to get an Euler equation

1107
01:05:34,960 --> 01:05:40,540
because you're going to be
sacrificing consumption today

1108
01:05:40,540 --> 01:05:43,630
as you say more, and you're
going to get something out

1109
01:05:43,630 --> 01:05:46,060
tomorrow with a fixed return.

1110
01:05:46,060 --> 01:05:48,970
And given these preferences
raised to a power theta,

1111
01:05:48,970 --> 01:05:53,630
you get a nice expression
for the savings rate.

1112
01:05:53,630 --> 01:05:55,930
The rate is constant,
and it's just

1113
01:05:55,930 --> 01:06:00,760
proportional to their income.

1114
01:06:00,760 --> 01:06:01,950
So again, do you like it?

1115
01:06:01,950 --> 01:06:02,550
I don't know.

1116
01:06:02,550 --> 01:06:03,797
It's special.

1117
01:06:03,797 --> 01:06:05,005
But it's part of the algebra.

1118
01:06:07,830 --> 01:06:09,470
It's easy to tell
the story in English.

1119
01:06:09,470 --> 01:06:10,940
When you get to
the equations, you

1120
01:06:10,940 --> 01:06:13,380
realize assumptions
are being made.

1121
01:06:13,380 --> 01:06:13,880
Yes.

1122
01:06:13,880 --> 01:06:16,100
Question?

1123
01:06:16,100 --> 01:06:29,850
AUDIENCE: [INAUDIBLE]

1124
01:06:29,850 --> 01:06:32,060
ROBERT TOWNSEND: Yeah.

1125
01:06:32,060 --> 01:06:34,550
The way I'm giving
this, probably not

1126
01:06:34,550 --> 01:06:36,350
the most complimentary way.

1127
01:06:36,350 --> 01:06:39,560
I'm basically saying they're
making up the parameters.

1128
01:06:39,560 --> 01:06:41,300
If there's something
disciplining

1129
01:06:41,300 --> 01:06:45,200
the other parameters, then
you need eta to be less than 1

1130
01:06:45,200 --> 01:06:47,390
in order to be
able to tell this.

1131
01:06:47,390 --> 01:06:49,190
And the other papers
in the literature

1132
01:06:49,190 --> 01:06:51,610
are clearly doing that.

1133
01:06:51,610 --> 01:06:55,565
AUDIENCE: But my question is,
why do you need an extra--

1134
01:06:55,565 --> 01:06:57,190
these firms have to
pay their managers.

1135
01:06:57,190 --> 01:06:58,918
So the chi has to be--

1136
01:06:58,918 --> 01:07:00,960
ROBERT TOWNSEND: Yeah,
it's a very good question.

1137
01:07:00,960 --> 01:07:01,835
And we'd have to go--

1138
01:07:04,760 --> 01:07:08,250
unless it pops up shortly
in the next few equations,

1139
01:07:08,250 --> 01:07:10,490
then I would have to
go back to the paper

1140
01:07:10,490 --> 01:07:12,530
and tell you which
particular piece of data

1141
01:07:12,530 --> 01:07:15,980
are they trying to fit for which
they need that eta as opposed

1142
01:07:15,980 --> 01:07:17,660
to the other things.

1143
01:07:20,880 --> 01:07:25,410
So then we get to the
aggregate dynamics.

1144
01:07:25,410 --> 01:07:30,270
Well, this is the return
on Firm I. But it's linear,

1145
01:07:30,270 --> 01:07:34,480
so basically you can
you can aggregate up.

1146
01:07:34,480 --> 01:07:36,480
So you're really
going to use or abuse

1147
01:07:36,480 --> 01:07:38,100
this algebra pretty heavily.

1148
01:07:38,100 --> 01:07:41,610
The linearity makes it easy
to get the total output

1149
01:07:41,610 --> 01:07:44,670
in the entrepreneurial sector.

1150
01:07:44,670 --> 01:07:47,100
Now here are some
other ingredients.

1151
01:07:47,100 --> 01:07:49,740
We've already seen
that wages and levels

1152
01:07:49,740 --> 01:07:52,320
are proportional to output
because of the stealing

1153
01:07:52,320 --> 01:07:54,420
parameter.

1154
01:07:54,420 --> 01:07:57,600
But output, we already
just saw on the last slide,

1155
01:07:57,600 --> 01:07:58,755
is proportional to capital.

1156
01:08:01,700 --> 01:08:07,220
Also, managers save a constant
rate out of their earnings.

1157
01:08:07,220 --> 01:08:12,620
And we just saw that the
leverage ratio is constant.

1158
01:08:12,620 --> 01:08:14,810
So lots of things are constants.

1159
01:08:14,810 --> 01:08:16,790
Other things are proportional.

1160
01:08:16,790 --> 01:08:21,260
Basically, the capital
stock is the key driver.

1161
01:08:21,260 --> 01:08:28,284
And it's moving with exogenous
technological progress.

1162
01:08:31,040 --> 01:08:38,029
So the ratio of output
from one period to the next

1163
01:08:38,029 --> 01:08:40,670
is the same as the ratio
of the capital from one

1164
01:08:40,670 --> 01:08:42,560
period to the next,
and they're all

1165
01:08:42,560 --> 01:08:44,295
equal to this common constant.

1166
01:08:49,649 --> 01:08:52,665
So the entrepreneurial
sector, therefore, is growing.

1167
01:08:52,665 --> 01:08:54,290
We've gone from levels
to growth rates.

1168
01:08:54,290 --> 01:08:55,529
That's the point.

1169
01:08:55,529 --> 01:08:58,140
So now we can talk
about how fast

1170
01:08:58,140 --> 01:09:00,359
is the private sector
in China growing.

1171
01:09:07,420 --> 01:09:09,160
Here's the financially
integrated,

1172
01:09:09,160 --> 01:09:12,550
inefficient
government-financed firms.

1173
01:09:12,550 --> 01:09:15,770
And this is another
expression for output.

1174
01:09:15,770 --> 01:09:20,819
This is the output of the
private enterprise sector.

1175
01:09:20,819 --> 01:09:22,750
Just to take you
through the algebra

1176
01:09:22,750 --> 01:09:25,470
so it's not too
much of a mystery,

1177
01:09:25,470 --> 01:09:31,740
they've deliberately gotten
this term in the expression.

1178
01:09:31,740 --> 01:09:34,859
That was the whole point of
re-manipulating the output.

1179
01:09:34,859 --> 01:09:39,090
And this expression is
something you can figure out

1180
01:09:39,090 --> 01:09:42,810
from all the other things we
did on the past four slides.

1181
01:09:42,810 --> 01:09:45,149
So you get a simple
expression in terms

1182
01:09:45,149 --> 01:09:53,550
of kappa and parameters for this
adjusted ratio of total capital

1183
01:09:53,550 --> 01:09:56,880
to total labor.

1184
01:09:56,880 --> 01:10:00,130
You start substituting
that in here.

1185
01:10:00,130 --> 01:10:01,890
That's where it went.

1186
01:10:01,890 --> 01:10:05,040
And you do a little
more manipulation,

1187
01:10:05,040 --> 01:10:11,910
and you can get output per
worker in the whole economy.

1188
01:10:11,910 --> 01:10:18,000
So this is a version of labor
productivity for all of China.

1189
01:10:18,000 --> 01:10:21,320
And of course, output is the
sum of the output in the two

1190
01:10:21,320 --> 01:10:21,890
sectors.

1191
01:10:21,890 --> 01:10:27,780
Total labor is still n here.

1192
01:10:27,780 --> 01:10:32,110
But you can look at output as
a function of labor employment

1193
01:10:32,110 --> 01:10:35,230
from these tricks,
controlling for kappa

1194
01:10:35,230 --> 01:10:37,870
and this productivity,
and you finally

1195
01:10:37,870 --> 01:10:41,080
get the story, the
bottom line, which

1196
01:10:41,080 --> 01:10:45,360
is the total output of
the economy is growing.

1197
01:10:45,360 --> 01:10:46,840
Why?

1198
01:10:46,840 --> 01:10:49,050
One, not too surprising.

1199
01:10:49,050 --> 01:10:52,060
It's exogenous
technological progress.

1200
01:10:52,060 --> 01:10:57,280
But the other is that
this thing is growing.

1201
01:10:57,280 --> 01:11:00,910
So employment in the
enterprise sector

1202
01:11:00,910 --> 01:11:03,550
relative to the whole
economy, this thing

1203
01:11:03,550 --> 01:11:09,170
is going up because the
enterprise sector is expanding,

1204
01:11:09,170 --> 01:11:12,657
drawing employment slowly.

1205
01:11:12,657 --> 01:11:13,740
And here are the diagrams.

1206
01:11:19,400 --> 01:11:24,140
So one thing, I made a
little joke about Thailand

1207
01:11:24,140 --> 01:11:27,260
exhausting agriculture and
no one living there anymore,

1208
01:11:27,260 --> 01:11:30,110
and how you got this
knife edge on the wage.

1209
01:11:30,110 --> 01:11:32,750
They also have the
same thing going on.

1210
01:11:32,750 --> 01:11:35,435
At some point, this process
slows down or stops.

1211
01:11:38,540 --> 01:11:45,260
Now eventually, you'll
draw employment out

1212
01:11:45,260 --> 01:11:47,760
of that state-owned sector.

1213
01:11:47,760 --> 01:11:49,460
It will disappear.

1214
01:11:49,460 --> 01:11:53,610
And at that point the wage
is going to start to go up.

1215
01:11:53,610 --> 01:11:56,970
This isn't totally realistic
because the wages are rising

1216
01:11:56,970 --> 01:11:59,020
in China, to some extent.

1217
01:11:59,020 --> 01:12:02,870
But they were low
for quite a while.

1218
01:12:02,870 --> 01:12:03,590
I don't know.

1219
01:12:03,590 --> 01:12:05,750
The date's supposed to be 1992.

1220
01:12:05,750 --> 01:12:07,580
Yes.

1221
01:12:07,580 --> 01:12:10,560
This is the firm
employment share, which

1222
01:12:10,560 --> 01:12:12,395
again, goes up until it hits 1.

1223
01:12:14,950 --> 01:12:16,990
So you see the parallel
with what we did before.

1224
01:12:16,990 --> 01:12:18,880
It's just we've
relabeled the sector,

1225
01:12:18,880 --> 01:12:22,900
and the algebra and the
assumptions are different.

1226
01:12:22,900 --> 01:12:26,350
But here you get output
growing, and then

1227
01:12:26,350 --> 01:12:29,320
you hit the sort of
diminishing returns at cap

1228
01:12:29,320 --> 01:12:30,910
T. Is the end of China.

1229
01:12:30,910 --> 01:12:32,230
No, just kidding.

1230
01:12:32,230 --> 01:12:34,990
I keep looking at these guys.

1231
01:12:34,990 --> 01:12:37,855
The T is when you've exhausted
this transition process.

1232
01:12:42,790 --> 01:12:44,800
And here's the foreign
surplus to GDP.

1233
01:12:44,800 --> 01:12:47,620
We'll get to that in a minute.

1234
01:12:47,620 --> 01:12:49,300
And here's the
aggregate savings rate

1235
01:12:49,300 --> 01:12:51,950
going up very dramatically.

1236
01:12:51,950 --> 01:12:54,340
So by the way, that
demography paper

1237
01:12:54,340 --> 01:12:56,650
that claimed other
people don't get

1238
01:12:56,650 --> 01:12:58,420
an increase in the
aggregate savings rate

1239
01:12:58,420 --> 01:13:00,650
is wrong because it is
happening in this model.

1240
01:13:00,650 --> 01:13:01,150
Yes.

1241
01:13:01,150 --> 01:13:06,370
AUDIENCE: Do we know from
later on the data from China

1242
01:13:06,370 --> 01:13:08,560
on, I guess, state and
private employment,

1243
01:13:08,560 --> 01:13:10,120
and also, like
you're saying, data

1244
01:13:10,120 --> 01:13:13,540
on the wage, if we're
to believe this model,

1245
01:13:13,540 --> 01:13:15,550
how long the
transition will go on.

1246
01:13:18,980 --> 01:13:21,740
ROBERT TOWNSEND: Well, I
guess that's the key question,

1247
01:13:21,740 --> 01:13:25,190
and I don't think
they focused on that,

1248
01:13:25,190 --> 01:13:29,360
unlike the previous paper.

1249
01:13:29,360 --> 01:13:33,030
The data, you're reminding me
to say something about that.

1250
01:13:33,030 --> 01:13:35,300
So they actually
look by, I guess,

1251
01:13:35,300 --> 01:13:39,440
it's province within China.

1252
01:13:39,440 --> 01:13:42,470
And they're saying that areas
with growth in private sector

1253
01:13:42,470 --> 01:13:46,760
employment are areas that are
basically having high savings

1254
01:13:46,760 --> 01:13:47,600
rates.

1255
01:13:47,600 --> 01:13:50,820
So they're actually fitting
it a bit within the country.

1256
01:13:50,820 --> 01:13:55,830
The other thing I remember
to say is China Data Center.

1257
01:13:55,830 --> 01:14:01,780
So as per our continuing
conversation about GIS,

1258
01:14:01,780 --> 01:14:04,290
there's a --they're
housed at Michigan,

1259
01:14:04,290 --> 01:14:07,350
partly funded by Michigan,
but also Purdue and the Luce

1260
01:14:07,350 --> 01:14:09,060
Foundation and so on--

1261
01:14:09,060 --> 01:14:15,390
and they are putting tons
of data on GIS archive,

1262
01:14:15,390 --> 01:14:17,250
and you can generate maps.

1263
01:14:17,250 --> 01:14:20,550
Actually, MIT is a subscriber,
so you can get a lot of this

1264
01:14:20,550 --> 01:14:23,010
if you go to MIT GIS.

1265
01:14:23,010 --> 01:14:26,010
You can find China Data Center.

1266
01:14:26,010 --> 01:14:28,170
I actually put it on my
syllabus and I'd forgotten

1267
01:14:28,170 --> 01:14:30,142
to mention it up to this point.

1268
01:14:30,142 --> 01:14:32,100
So there's probably a
lot of interesting things

1269
01:14:32,100 --> 01:14:35,053
you could do with
the Chinese data.

1270
01:14:35,053 --> 01:14:37,470
I'm not saying they have all
of it there, and some of it's

1271
01:14:37,470 --> 01:14:39,380
confidential.

1272
01:14:39,380 --> 01:14:39,880
All right.

1273
01:14:44,900 --> 01:14:47,510
Here's the story of
the capital outflows.

1274
01:14:47,510 --> 01:14:49,750
You've got investment.

1275
01:14:49,750 --> 01:14:51,400
Well, you've got deposits.

1276
01:14:51,400 --> 01:14:53,450
Little lesson on flow of funds.

1277
01:14:53,450 --> 01:14:57,710
You've got the deposits
coming from the workers.

1278
01:14:57,710 --> 01:14:59,570
Wages times employment.

1279
01:14:59,570 --> 01:15:06,610
And they're going to put
that times a parameter.

1280
01:15:06,610 --> 01:15:09,140
They do eat some.

1281
01:15:09,140 --> 01:15:12,270
And that money has
to go somewhere.

1282
01:15:12,270 --> 01:15:17,248
It can go into investment,
or it could go in lending

1283
01:15:17,248 --> 01:15:18,290
to the rest of the world.

1284
01:15:18,290 --> 01:15:20,660
And they actually
solve this equation

1285
01:15:20,660 --> 01:15:22,100
with all this other
algebra, which

1286
01:15:22,100 --> 01:15:23,510
by now is too bewildering.

1287
01:15:23,510 --> 01:15:25,820
You wouldn't be
able to replicate it

1288
01:15:25,820 --> 01:15:26,780
right off your head.

1289
01:15:26,780 --> 01:15:34,010
But basically, this borrowing
is coming from a constant term,

1290
01:15:34,010 --> 01:15:35,450
lending to the
rest of the world--

1291
01:15:35,450 --> 01:15:36,450
funny thing to call it--

1292
01:15:36,450 --> 01:15:43,310
B is coming from a constant term
this increase in TFP, partly,

1293
01:15:43,310 --> 01:15:45,150
that's driving it,
and then this thing.

1294
01:15:45,150 --> 01:15:48,470
So the big story
here is that when

1295
01:15:48,470 --> 01:15:51,840
the state owned enterprise
sector is shrinking,

1296
01:15:51,840 --> 01:15:54,300
it's releasing resources.

1297
01:15:54,300 --> 01:15:56,780
They're the big
borrowers, and so they're

1298
01:15:56,780 --> 01:15:59,320
borrowing less and less.

1299
01:15:59,320 --> 01:16:02,290
So that's a big part of
the money going abroad.

1300
01:16:05,100 --> 01:16:05,600
OK.

1301
01:16:05,600 --> 01:16:07,700
So I'm going to just
settle on giving you

1302
01:16:07,700 --> 01:16:14,750
an outline of this paper and
let you look at the slides

1303
01:16:14,750 --> 01:16:19,380
at your leisure, so to speak.

1304
01:16:19,380 --> 01:16:25,200
This is the motivation
we've talked about,

1305
01:16:25,200 --> 01:16:27,961
which is relative prices in TFP.

1306
01:16:31,650 --> 01:16:33,060
Let me find key equations.

1307
01:16:37,350 --> 01:16:38,970
So there's two
sectors, and there's

1308
01:16:38,970 --> 01:16:42,060
a fixed cost, which is
higher in manufacturing

1309
01:16:42,060 --> 01:16:44,310
than service sector.

1310
01:16:44,310 --> 01:16:49,110
There is this entrepreneurial
ability, and there's wealth,

1311
01:16:49,110 --> 01:16:51,690
and then there's
this credit friction.

1312
01:16:51,690 --> 01:16:59,910
Now again, this
production technology

1313
01:16:59,910 --> 01:17:01,590
looks like Cobb Douglas.

1314
01:17:01,590 --> 01:17:03,450
It has decreasing
returns to scale,

1315
01:17:03,450 --> 01:17:11,510
but it's augmented by z, which
was a, sort of a version of it.

1316
01:17:11,510 --> 01:17:15,470
And now what makes
this more challenging

1317
01:17:15,470 --> 01:17:21,570
is it's supposed to have
a realistic optimization,

1318
01:17:21,570 --> 01:17:23,550
infinite horizon.

1319
01:17:23,550 --> 01:17:27,400
Everyone is maximizing
discounted expected utility.

1320
01:17:27,400 --> 01:17:29,310
There's no heterogeneity.

1321
01:17:29,310 --> 01:17:32,210
But good luck solving this.

1322
01:17:32,210 --> 01:17:36,900
They do, or partly computing.

1323
01:17:36,900 --> 01:17:39,190
So it's sort of a CDS.

1324
01:17:39,190 --> 01:17:41,970
There are two goods, the service
sector and the manufacturing

1325
01:17:41,970 --> 01:17:43,500
sector.

1326
01:17:43,500 --> 01:17:48,300
And this pitchfork thing is sort
of the weight between the two.

1327
01:17:48,300 --> 01:17:50,640
You're picking up
parameters, by the way.

1328
01:17:50,640 --> 01:17:52,200
Be mindful of that.

1329
01:17:52,200 --> 01:17:57,900
Beta, sigma, something
that looks like an epsilon.

1330
01:17:57,900 --> 01:18:00,360
And this phi.

1331
01:18:00,360 --> 01:18:02,430
And there's going to
be a calibration slide.

1332
01:18:02,430 --> 01:18:06,460
They're going to have to
choose all of these and others.

1333
01:18:06,460 --> 01:18:12,090
So here's a picture
like the one I showed.

1334
01:18:12,090 --> 01:18:14,100
From the point of a
person, you start off

1335
01:18:14,100 --> 01:18:17,610
with a certain amount of
wealth from previous period,

1336
01:18:17,610 --> 01:18:20,105
and then you get a draw
of your talent, which

1337
01:18:20,105 --> 01:18:21,480
can vary depending
on whether you

1338
01:18:21,480 --> 01:18:24,870
go into the small
or the large sector.

1339
01:18:24,870 --> 01:18:30,095
You could be a worker and just
work and produce and consume.

1340
01:18:32,600 --> 01:18:36,530
Or you could go into one of
these sector J's and produce.

1341
01:18:36,530 --> 01:18:37,220
This is work.

1342
01:18:37,220 --> 01:18:38,630
This is produce and consume.

1343
01:18:38,630 --> 01:18:42,170
Now this gamma, this is a
bit more realistic version

1344
01:18:42,170 --> 01:18:47,790
of talent or productivity.

1345
01:18:47,790 --> 01:18:51,450
This z that you have
at the beginning

1346
01:18:51,450 --> 01:18:55,720
is likely to be the
same at the end.

1347
01:18:55,720 --> 01:19:01,650
But every so often,
you lose your ability,

1348
01:19:01,650 --> 01:19:06,120
or this is a stand-in for
sectors that are changing

1349
01:19:06,120 --> 01:19:07,995
in an unmodeled way here.

1350
01:19:07,995 --> 01:19:09,870
In fact, they're going
to draw this parameter

1351
01:19:09,870 --> 01:19:15,440
from exits of firms in the US.

1352
01:19:15,440 --> 01:19:17,990
Bad stuff happens, you
have to go out of business,

1353
01:19:17,990 --> 01:19:19,276
technologically.

1354
01:19:24,060 --> 01:19:28,100
So you have these
value functions.

1355
01:19:28,100 --> 01:19:31,350
They're going to
have to iterate.

1356
01:19:31,350 --> 01:19:34,440
You have ability
and wealth today,

1357
01:19:34,440 --> 01:19:37,860
and you're going to
try to maximize wealth,

1358
01:19:37,860 --> 01:19:40,940
your value for
wealth and ability

1359
01:19:40,940 --> 01:19:45,390
tomorrow with your
contemporaneous utility,

1360
01:19:45,390 --> 01:19:46,150
the choices.

1361
01:19:46,150 --> 01:19:49,380
This is classic, very
limited market-type stuff.

1362
01:19:49,380 --> 01:19:51,750
You basically
[INAUDIBLE] or save.

1363
01:19:51,750 --> 01:19:55,490
Maybe you could borrow
if this goes negative.

1364
01:19:55,490 --> 01:19:58,770
You've got uses and
sources of resources.

1365
01:19:58,770 --> 01:20:02,700
You've got your wealth with
interest today, and the wage

1366
01:20:02,700 --> 01:20:03,900
if you're a worker.

1367
01:20:03,900 --> 01:20:07,010
And you could either
eat it or save it.

1368
01:20:07,010 --> 01:20:10,880
Now this p is because capital
is denominated in units

1369
01:20:10,880 --> 01:20:12,780
of the manufacturing good.

1370
01:20:12,780 --> 01:20:15,350
So we've got a price, not just
a wage and an interest rate,

1371
01:20:15,350 --> 01:20:16,490
to worry about.

1372
01:20:16,490 --> 01:20:22,590
If you're an entrepreneur, it
looks a lot more complicated.

1373
01:20:22,590 --> 01:20:26,270
But actually, this is the
key financing constraint.

1374
01:20:26,270 --> 01:20:30,710
So your capital can be
higher than your wealth.

1375
01:20:30,710 --> 01:20:36,510
But it's limited, and I'll show
you where it's coming from.

1376
01:20:36,510 --> 01:20:39,890
So otherwise, this is
like that LEB thing.

1377
01:20:39,890 --> 01:20:41,570
You've got profits,
and then if you're

1378
01:20:41,570 --> 01:20:44,360
in the intermediated sector,
you have this return on wealth.

1379
01:20:46,920 --> 01:20:52,170
Basically they could have
done it many, many ways.

1380
01:20:52,170 --> 01:20:56,250
They just basically say, you
can run off with the capital.

1381
01:20:56,250 --> 01:20:57,960
So the idea is you borrow.

1382
01:20:57,960 --> 01:21:00,510
You don't have to repay,
but you pay for it.

1383
01:21:00,510 --> 01:21:02,970
You lose the collateral,
which is the wealth you had

1384
01:21:02,970 --> 01:21:04,980
squirreled away in the bank.

1385
01:21:04,980 --> 01:21:11,380
And then from then on,
you're on your own.

1386
01:21:11,380 --> 01:21:14,710
So they get of this
autarchy thing,

1387
01:21:14,710 --> 01:21:19,900
and the borrowing size is
limited by the temptation

1388
01:21:19,900 --> 01:21:23,000
to run off into autarchy,
despite the loss of wealth,

1389
01:21:23,000 --> 01:21:25,850
because you get to keep that k.

1390
01:21:25,850 --> 01:21:28,490
But you do have to pay
workers, for some reason.

1391
01:21:28,490 --> 01:21:30,560
Never quite sure
why they did that.

1392
01:21:33,560 --> 01:21:35,100
OK.

1393
01:21:35,100 --> 01:21:39,180
So then what they
have to do is compute

1394
01:21:39,180 --> 01:21:45,217
the stationary equilibrium,
which is basically a mapping.

1395
01:21:45,217 --> 01:21:47,550
You've got all these many
people with different wealths,

1396
01:21:47,550 --> 01:21:49,890
all these many people
with different talents,

1397
01:21:49,890 --> 01:21:53,430
and you get this mapping
till it settles down.

1398
01:21:53,430 --> 01:21:55,800
That's what a
stationary steady state

1399
01:21:55,800 --> 01:22:00,170
means, that those
histograms settle down.

1400
01:22:00,170 --> 01:22:03,160
And at the steady state, you'll
get interest rates and so on.

1401
01:22:06,940 --> 01:22:08,800
So they start
grabbing parameters

1402
01:22:08,800 --> 01:22:11,320
to match firm size
distributions.

1403
01:22:11,320 --> 01:22:14,250
They aggregate up.

1404
01:22:14,250 --> 01:22:18,570
They have the lazy
entrepreneurs who

1405
01:22:18,570 --> 01:22:21,930
aren't so talented versus the
poor guys who are talented

1406
01:22:21,930 --> 01:22:23,820
but have very low wealth.

1407
01:22:23,820 --> 01:22:26,160
And that's what's creating
the credit friction.

1408
01:22:26,160 --> 01:22:29,320
We've talked about that.

1409
01:22:29,320 --> 01:22:32,850
And then they try to match.

1410
01:22:32,850 --> 01:22:39,310
Now again, is this bragging
rights, or is it a sad story?

1411
01:22:39,310 --> 01:22:41,710
So you can decide here.

1412
01:22:41,710 --> 01:22:44,950
Basically, these
diamonds, they're

1413
01:22:44,950 --> 01:22:50,380
calibrated predictions of
capital output, TFP, and worker

1414
01:22:50,380 --> 01:22:52,660
as you vary across countries.

1415
01:22:52,660 --> 01:22:59,010
And the data are all down here,
in many of these instances.

1416
01:22:59,010 --> 01:23:00,810
So clearly a lot more to do.

1417
01:23:00,810 --> 01:23:04,270
But up to the point
that they wrote this,

1418
01:23:04,270 --> 01:23:06,440
no one had done anything
like this before.

1419
01:23:06,440 --> 01:23:09,250
So I think I'll
just skip the rest

1420
01:23:09,250 --> 01:23:11,280
because I want to end on time.

1421
01:23:11,280 --> 01:23:13,440
So thank you.