Chapter 16

Creating an Environment for Growth and Prosperity

 

 

      I.    History of Economic Growth

            A.  Per Capita Income:  The Last 1000 years

            1. Income stagnated for the 800 years following year 1000, but growth has exploded during the last 200 years.

                        a.   (Measured in 2011 dollars) world per capita income was $1,122 in 1820 – only about 50% higher than year 1000.  By 2010, however, income had risen to $13,070 – nearly 12 times the level of 1820.

                        b.   During the past 200 years, the income growth of the high-income industrial countries (West) has been even higher –more than 20 fold

            B.  Life expectancy:  The pattern of the life expectancy data is similar to that of per capita income. 

      II.  Economic Growth, Production Possibilities, and the Quality of Life

            A.  Economic growth expands the productive capacity of an economy.

            B.  The rule of 70: dividing 70 by a country’s average growth rate gives about the number of years required for an income level to double

      III. Sources of Economic Growth and High Incomes

A.       Increases in Land and Raw Materials

B.       Increases in Labor (e.g. population boom, change in labor participation, and  immigration)

C.   Entrepreneurship, Technology, and the Discovery of Better Ways of Doing Things

            D.  Investment in Physical and Human Capital

            E.   The Institutional Environment

                F.     Gains from Trade

Think about what the United States has experienced in the past and what are the factor that would provide the best potential for future growth.  

 

      IV. What Institutions and Policies Will Promote Growth

            A.  Legal System: Secure Property Rights, Rule of Law, and Even-Handed Enforcement of Contracts

            B.  Competitive Markets

            C.   Stable Money and Prices

            D.  Minimal Regulation

            E.   The Avoidance of High Taxes

            F.   Trade Openness

            G.   Other Factors That May Influence Growth and Income

                    1. Growth of the Population

                    2. Natural Resources

                    3. Foreign Aid

                    4. Climate and Location

                 H.  Institutions, Policies, and Prosperity

                        1.   Institutions and policies matter because they shape incentives and thereby influence whether individuals engage in productive, unproductive, or even counterproductive activities.

                        2.   When institutions and policies provide secure property rights, a fair and balanced judicial system, monetary stability, and effective limits on government’s ability to transfer wealth through taxation and regulation, individuals are encouraged to engage in productive activities.

                        3.   When the legal and regulatory environment fails to protect property rights and often favors some at the expense of others, individuals are instead encouraged to engage in rent-seeking, lobbying, bribes, and other counterproductive activities.

                        4.   Unless countries adopt institutions and policies supportive of trade, entrepreneurial discovery, and private investment, they will be unable to sustain long-term growth and achieve high income levels

                  

As before think about the institutions that have developed in our past and how they contributed to the growth of the United States.  Also, think about institutions that can be improved to help strengthen growth in our future.

 

 

Over time, growth rates are crucial to economic well-being, and we do know a few things about conditions that promote growth and factors that are obstacles to growth. Investment in human and physical capital, technological progress, and efficient economic organization are important determinants of growth. Institutional arrangements that encourage investment, technological innovation, and efficient use of resources will simultaneously encourage growth. These include (1) private ownership, (2) competitive markets, (3) stable prices, (4) on open economy, (5) minimal regulation, and (6) avoidance of high marginal tax rates. On the other hand, nations that save and invest only a small proportion of their current income, impose high marginal tax rates, and follow polices that undermine property rights and cause inflation experience slower rates of economic growth.

 

Chapter 17

Institutions, Policies, and Cross-Country Differences in Income and Growth

 

OUTLINE

 

      I.    How Large are the Income Differences Across Countries?

            A.  Purchasing power parity comparisons indicate that the per person income in wealthy countries such as the United States, Ireland, and Norway is about fifty times the income level of the world’s poorest countries.

           

 

      II.  How Do Growth Rates Vary Across Countries?

A.    Who are the fasting growing countries?  Poor, rich?

 

      III. Economic Freedom as a Measure of Sound Institutions

            A.  Economists since the time of Adam Smith have generally argued that freer economies are likely to be more productive, but economic freedom is complex and very difficult to measure.

 

      IV. Institutions, Policies, and Economic Performance

A.  Countries with more economic freedom also had both a higher average per capita GDP in 2013 and more rapid average growth rates during 1990-2013.

 

      V.  Economic Freedom, Institutions, and Investment

A.  Even though wages are lower and capital less abundant in low-income countries, both private investment rates in countries with less economic freedom.

            B.  The productivity of investment is lower in countries with less economic freedom.

 

VI. Rich and Poor Nations Revisited

A.  Countries with low per capital income in 1990 dominate the list of both (1) those that have grown most rapidly and (2) those that have regressed and experience falling incomes since 1990.

B.    When low-income economies have sound institutions, they can grow rapidly because:

1.    they can merely copy or emulate technologies and business practices that have been successful in high-income countries

2.    the rate of return on investment in these low-income countries will generally be higher than in capital-rich, more advanced economies

3.    But, many low-income economies continue to perform poorly and even regress because their institutions and policies stifle gains from trade, entrepreneurship, and investment.

VII.  Economic Freedom, Institutional Quality and the Dramatic Reduction in the World Poverty Rate

A.   Since 1980, less-developed countries have narrowed the economic freedom gap relative to the high-income developed nations and they have grown more rapidly and achieved historic reductions poverty rates. Worldwide, income inequality has declined during the past three decades.

            VIII. The Declining Economic Freedom of the United States

            A.  The Economic Freedom of the United States

                  1.   During the 1980-2000 period the U.S. had the 3rd highest economic freedom rating, ranking behind only Hong Kong and Singapore.

                  2.   The Economic Freedom of the World rating of the US has declined from 8.7 in 2000 to 7.7 in 2013. 

                  3.   The U.S. ranking has slipped from 3rd to 17^th in 2013.

            B.  Implications of the Decline in the U.S. EFW Rating

                  1.   Between 2000 and 2013 the U.S. rating fell by a a full point.  While a one unit change may sound small, research indicates that it is associated with a 1% decline in the long-term, annual growth rate of real GDP.

                  2.   The following elements contributed to the decline in the US EFW rating:  higher levels of government spending, a reduction in the quality of the legal environment, higher non-tariff trade barriers, a smaller share of credit allocated to the private sector, and more restrictive regulation of business activity.