Transcript Document

Chapter 18
Policies and
Prospects for
Global Economic
Growth
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
Introduction
Some governments have sought to promote economic
growth by providing funds to help entrepreneurs open
new businesses.
Many observers, however, question whether
government officials are better able than private
investors to identify entrepreneurial ideas worthy of
funding.
This chapter will help you understand the basis of this
criticism.
Learning Objectives
• Explain why population growth can have
uncertain effects on economic growth
• Understand why the existence of dead capital
retards investment and economic growth in
much of the developing world
• Describe how government inefficiencies have
contributed to the creation of relatively large
quantities of dead capital in the world’s
developing nations
Learning Objectives (cont'd)
• Discuss the sources of international
investment funds for developing nations and
identify obstacles to international investment
in these nations
• Identify the key functions of the World Bank
and the International Monetary Fund
• Explain the basis for recent criticisms of
policymaking at the World Bank and the
International Monetary Fund
Chapter Outline
• Labor Resources and Economic Growth
• Capital Goods and Economic Growth
• Private International Financial Flows as a
Source of Global Growth
• International Institutions and Policies for
Global Growth
Did You Know That ...
• In Zimbabwe, the cost of registering business property to
meet the legal requirements for operating a business is nearly
25 percent of the value of that property, as compared to 0.5
percent for the United States?
• These figures help economists understand the determinants
of global economic growth—the topic of this chapter.
Labor Resources and Economic Growth
• Population growth does not necessarily
translate into an increase in labor resources
• In poor areas, many people do not join the
labor force, or they may remain unemployed
for long periods
Labor Resources and Economic Growth
(cont'd)
• We can express the growth rate of per capita real GDP in a
nation as the difference between the rate of growth in real
GDP and the population growth rate:
Ratio of growth of
per capita real GDP
rate of growth in
rate of growth of
=
–
real GDP
population
– Example: If real GDP grows at a rate of 4% per year and population
growth increases from 2 to 3%, then per capita real GDP will decline,
from 2% to 1%
Labor Resources and Economic Growth
(cont'd)
• The arithmetic of the relationship between
economic growth and population growth can
be misleading
• Population growth can affect the growth rate
of real GDP (e.g., with higher labor force
participation rate)
• Whether population growth hinders or
contributes to economic growth depends on
where you live
Table 18-1 Population Growth and Growth in Per Capita Real
GDP in Selected Nations Since 1970
Labor Resources and Economic Growth
(cont'd)
• The role of economic freedom
– A crucial factor influencing economic growth is the
relative freedom of a nation’s residents
– Only 17 nations, with 17% of the world’s people,
grant their residents high degrees of economic
freedom
International Policy Example: Freedom of Information and
Growth in Developing Nations
• The Indian government requires farmers to sell soybeans to
middlemen who in turn resell the beans in wholesale markets.
• The middlemen used to have an advantage in price
negotiations because they had up-to-the-minute data about
wholesale soybean prices.
• Today, farmers can obtain current wholesale soybean prices
through a wholesale buyer’s network of Internet kiosks. This
information has enable farmers to bargain for better prices on
their corps.
• The resulting higher farmer profits have led to increases in the
supply and consumption of soybean in India.
Labor Resources and Economic Growth
(cont'd)
• Economic Freedom
– The rights to own private property and to
exchange goods, services, and financial assets
with minimal government interference
Labor Resources and Economic Growth
(cont'd)
• The role of political freedom
– Political freedom: the right to openly support and
democratically select national leaders
– Economic freedom tends to stimulate economic
growth, which then leads to more political
freedom
Labor Resources and Economic Growth
(cont'd)
• Question
– Why do you suppose that per capita real GDP
appears to be related to the extent to which the
rule of law prevails?
Capital Goods and Economic Growth
• A fundamental problem developing countries
face is that a significant portion of their
capital goods, or manufactured resources
that may be used to produce other items in
the future, is what economists call dead
capital
Capital Goods and Economic Growth
(cont'd)
• Dead Capital
– Any capital resource that lacks clear title of
ownership
– A resource that people cannot readily allocate to
its most efficient use
– Is among the most significant impediments to
growth in poor nations
Capital Goods and Economic Growth
(cont'd)
• Dead capital and inefficient production
– Nontransferable physical structures are valued at
more than $9 trillion in developing nations
• Dead capital and economic growth
– Disincentives to invest in new capital goods can
greatly hinder economic growth
Capital Goods and Economic Growth
(cont'd)
• Government inefficiencies, investment, and
growth
– Governments in many of the world’s poorest
nations place tremendous obstacles in the way of
entrepreneurs
– These entrepreneurs are interested in owning
capital goods and directing them to profitable
opportunities
Capital Goods and Economic Growth
(cont'd)
• Government inefficiencies, investment, and
growth
– In a nation with a stifling government bureaucracy
regulating the uses of capital goods, newly created
capital will all too likely become dead capital
– Thus, government inefficiency can be a major
barrier to economic growth
Figure 18-1 Bureaucratic Inefficiency
and Economic Growth
Capital Goods and Economic Growth (cont’d)
• Access to credit matters
– 2006 Nobel Peace Prize winner Muhammad Yunus
of Bangladesh contends that access to private
credit is vital for promoting economic growth in
poverty-stricken countries
– Microlenders are banking institutions that
specialize in making very small loans to
entrepreneurs trying to lift themselves from
poverty
Figure 18-2 The Ratio of Private Credit to GDP in
Selected Nations
Private International Financial Flows as a Source of
Global Growth
• Question
– Given the large volume of inefficiently employed
capital goods in developing nations, what can be
done to promote greater global growth?
Private International Financial Flows as a Source of
Global Growth (cont'd)
• Answers
– One approach is to rely on private markets
– Another is to entrust the world’s governments
Private International Financial Flows as a Source of
Global Growth (cont'd)
• Private investment in developing nations
– Each year since 1995, at least $150 billion in
private funds have flowed to developing nations in
the form of purchases of bonds or stock
– Nearly all funds that flow into developing
countries due so to finance investment projects in
those nations
Private International Financial Flows as a Source of
Global Growth (cont'd)
• Economists group international flows of
investment funds into three categories
1. Loans from banks and other sources
2. Portfolio investment
3. Foreign direct investment
Private International Financial Flows as a Source of
Global Growth (cont'd)
• Portfolio Investment
– The purchase of less than 10% of the shares of
ownership in a company in another nation
• Foreign Direct Investment
– The acquisition of more than 10% of the shares of
ownership in a company in another nation
Figure 18-3 Sources of International
Investment Funds
Private International Financial Flows as a Source of
Global Growth (cont'd)
• Obstacles to international investment
– Markets for loans, bonds, and stocks in developing
countries susceptible to problems relating to
asymmetric information
Private International Financial Flows as a Source of
Global Growth (cont'd)
• Asymmetric information as a barrier to
financing global growth
– Adverse selection problems arise
– Moral hazard problems also arise
Private International Financial Flows as a Source of
Global Growth (cont'd)
• Question
– To what countries do most residents of developing
nations allocate the majority of their own foreign
direct investment?
Why Not … direct more foreign aid to poor nations to help them
grow faster?
• Government officials have fewer incentives than do private
parties when they consider lending to firms in developing
nations.
• Government officials use “other people’s money”—the funds
of taxpayers.
• In contrast, private individuals and firms will earn lower
returns or even incur losses if they fail to do their best to
evaluate risks arising from asymmetric information problems.
Private International Financial Flows as a Source of
Global Growth (cont'd)
• International Financial Crisis
– The rapid withdrawal of foreign investments and
loans from a nation
International Institutions and Policies
for Global Growth
• Since 1945, the world’s governments have
taken an active role in supplementing private
markets
• Two international institutions, the World Bank
and the International Monetary Fund, have
been at the center of government-directed
efforts
International Institutions and Policies for Global Growth
(cont'd)
• The World Bank
– A multinational agency that specializes in making
loans to about 100 developing nations in an effort
to promote their long-term development and
growth
– Loans are made to finance improved irrigation
systems, roads, and better hospitals
Figure 18-4 Distribution of World Bank
Lending Since 1990
International Example: How Cellphones Are Fueling Economic
Development
• In many developing nations, firms have trouble
communicating effectively with customers and employees
because postal and telecommunications services are
inefficient.
• World Bank economists have found that business
communications flourish once cellular networks have been
established.
• A recent World Bank study further found that adding an extra
10 cellphones per 100 people in a typical developing country
raises the nation’s average annual rate of economic growth by
0.8 percentage point.
International Institutions and Policies for Global Growth
(cont'd)
• The International Monetary Fund
– A multinational organization that aims to promote
world economic growth through more financial
stability
– The IMF assists developing countries primarily by
making loans to their governments
International Institutions and Policies for Global Growth
(cont'd)
• When a country joins the IMF, it deposits
funds into an account called a quota
subscription
– A nation’s account with the International
Monetary Fund, denominated in special drawing
rights
International Institutions and Policies for Global Growth
(cont'd)
• These funds are measured in terms of an
international unit of accounting called special
drawing rights (SDRs)
• SDRs have a value based on a weighted
average of four key currencies
– The euro, the pound sterling, the yen, and the
dollar
– At present, one SDR is equal to just under $1.50
International Institutions and Policies for Global Growth
(cont'd)
• The World Bank’s Mission
– To make loans to developing nations that fund
projects incapable of attracting private financing
from investors at home or abroad
– The World Bank makes many loans to countries
that have no trouble attracting financing
– Some observers contend that a number of
countries that receive funds are inappropriate
recipients of development assistance (i.e. China)
International Institutions and Policies for Global Growth
(cont'd)
• Asymmetric information and the World Bank
and the IMF
– Conditions on loans exist to reduce adverse
selection and moral hazard problems but are
often imprecise
– Have the World Bank and the IMF contributed to
international financial crises?
International Institutions and Policies for Global Growth
(cont'd)
• Rethinking long-term development lending: a
main theme of development economics has
been market reforms
– Markets work better when a developing nation
has more effective institutions
• Basic property rights
• Well-run legal systems
• Uncorrupt government agencies
International Institutions and Policies for Global Growth
(cont'd)
• Alternative institutional structures for limiting
financial crises
– Many proposals for change diverge sharply
– Economists recommend improvements in
standards
You Are There: Putting Meager Capital to Work in India
• In India, streets are becoming more crowded with street
vendors who have lost their jobs during the worldwide
economic downturn.
• Consequently, market clearing prices in the street market are
declining fast, while police officers are soliciting higher bribes
in exchange for not enforcing the laws limiting street selling.
Issues & Applications: Supporting Private Entrepreneurs with
Public Funds
• Some governments try to promote entrepreneurship by
providing public support to the entrepreneurs that their
officials conclude are most likely to succeed.
• Their efforts, however, rarely succeed in promoting economic
growth due to asymmetric information problems—the adverse
selection problem in identifying entrepreneurs most likely to
succeed; and the moral hazard problem with entrepreneurs
receiving the funds.
Summary Discussion of Learning
Objectives
• Effects of population growth and personal
freedoms on economic growth
– Increased population growth has contradictory
effects on economic growth
– There is evidence of a positive relationship
between economic freedom and growth
Summary Discussion of Learning
Objectives (cont'd)
• Why dead capital deters investment and slows
economic growth
– Few people in less developed countries establish
legal ownership of capital
– Unofficially owned resources are known as dead
capital
– In many developing nations, there is a disincentive
to accumulate capital, which limits growth
prospects
Summary Discussion of Learning
Objectives (cont'd)
• Government inefficiencies and dead capital in
developing nations
– A negative relation between government
inefficiency and economic growth
Summary Discussion of Learning
Objectives (cont'd)
• Sources of international investment funds and
obstacles to investing in developing nations
– Sources include bank loans, portfolio investment,
and foreign direct investment
– Obstacles include problems relating to asymmetric
information such as adverse selection and moral
hazard
Summary Discussion of Learning
Objectives (cont'd)
• The functions of the World Bank and the
International Monetary Fund
– The World Bank’s function is to finance capital
investment
– A fundamental duty of the IMF is to stabilize
international financial flows
Summary Discussion of Learning
Objectives (cont'd)
• The basis for recent criticisms of the World
Bank and IMF policymaking
– The World Bank has extended credit to companies
and governments that could have obtained private
funds
– The World Bank and IMF have failed to effectively
deal with adverse selection and moral hazard,
suggesting more stringent conditions on credit
access are needed