Transcript Chapter 19 - The Citadel

Chapter 19
Policies
and Prospects
for Global
Economic Growth
Introduction
What legal documents would you have
to file if you started your own business
in the U.S.? Relatively few, compared
with other countries.
Why do bureaucratic restrictions on
business formation slow the pace of
economic growth?
Slide 19-2
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
Slide 19-3
Learning Objectives
 Describe how government inefficiencies have
contributed to the creation of relatively large
quantities of dead capital in the world’s
developing nations
 Discuss the rationales for foreign financing of
investment in developing nations and explain
how developing countries benefit from
international capital investment
Slide 19-4
Learning Objectives
 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
Slide 19-5
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
Slide 19-6
Did You Know That...
 Around the globe, much housing is not
legally owned and thus cannot easily be
bought and sold?
 The market value of real estate in
developing nations that is not legally owned
is nearly as high as the market value of
publicly traded firms in those nations?
 The lack of clear property rights hinders the
ability of residents to obtain insurance and
credit and to rent out the property?
Slide 19-7
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
Slide 19-8
Population Growth
 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.
 For example, if real GDP grows at a rate of 5
percent per year and population growth is 3
percent annually, then per capita real GDP will
expand by 2 percent annually.
Slide 19-9
Population Growth
and Economic Growth
 An increase in population can provide
more labor resources
 An international comparison does not
show a clear relationship between
population growth and economic
growth rates
Slide 19-10
Population Growth
Table 19-1
Slide 19-11
Economic Freedom
 Economic freedom refers to the rights to
own property and to exchange goods, as
well as to hold and exchange financial
assets with minimal government
interference
Slide 19-12
Economic Freedom
 Only 17 countries grant their residents
complete economic freedom.
 These countries together account for
17 percent of the world’s population,
but they produce 81 percent of world
output.
Slide 19-13
Political Freedom
 Political freedom refers to the right to
openly support and democratically
select national leaders
– The relationship between the degree of
political freedom in a country and the
pace of economic growth in complex.
Slide 19-14
Political Freedom
 The evidence also suggests that
greater democracy might reduce
economic growth if the political
freedom allows special-interest groups
to protect themselves by restricting
competition.
Slide 19-15
Capital Goods
and Economic Growth
 Capital goods are manufactured
resources that can be used to produce
items for later consumption.
Slide 19-16
Dead Capital
and Inefficient Production
 Dead capital is the set of capital goods
lacking clear title of ownership.
 Inefficiencies result because the lack of
clear ownership hinders the ability of
these resources to be transferred or
insured.
Slide 19-17
Dead Capital
and Inefficient Production
 Consider the hypothetical case of
someone who unofficially owns a
dilapidated apartment building
– If the building is better suited for an
alternative use, the owner will not be able
to transfer title through sale or lease to
someone who could direct the resource to
its better use
Slide 19-18
Dead Capital
and Economic Growth
 If the inefficiencies of dead capital
discourage wise capital investment, the pace
of economic growth will be dampened
 Heavy government regulation over the
ownership of productive resources and the
corruption it frequently engenders can result
in large stocks of dead capital
Slide 19-19
Bureaucratic Inefficiency and
Economic Growth
Figure 19-1
Slide 19-20
International Example:
The Cost of Enforcing Contracts
 Since the time of Adam Smith,
economists have recognized the
importance of being able to enforce
contracts.
 If contracts are not enforceable, then
economic arrangements will remain
simplistic and short-term.
Slide 19-21
International Example:
The Cost of Enforcing Contracts
 The costs of enforcing a contract are time
and money spent in legal procedures.
 On a global basis, those costs within the
U.S. are relatively low.
 Consequently, consumers and firms in the
U.S. expect that if they enter a contract, the
agreement will be honored.
Slide 19-22
Private International Financial Flows
as a Source of Global Growth
 The market-based approach to
promoting global growth
– Portfolio investment and foreign direct
investment are replacing bank loans as
the primary source of international
investment financing.
– The issues surrounding dead capital may
explain this trend.
Slide 19-23
Private International Financial Flows
as a Source of Global Growth
 What are some obstacles to
international investment?
– Asymmetric information results in
problems of adverse selection and moral
hazard
– Networks of financial intermediation are
not well established in many developing
economies
Slide 19-24
Incomplete Information and
International Financial Crises
 Such a crisis occurs when there is a
rapid withdrawal of loans from a
country.
 It may take years for a country to
recover from a financial crisis, because
potential investors may be reluctant to
loan funds again until they see other
investors doing the same.
Slide 19-25
International Institutions and
Policies for Global Growth
 The World Bank
– Loans long-term funds for capital
investment projects to about 100
developing nations
– Address poverty issues in developing
economies
Slide 19-26
International Institutions and
Policies for Global Growth
 The International Monetary Fund
– Maintains a system of lending
mechanisms among countries so as
maintain international financial stability
Slide 19-27
International Policy Example:
The IMF Cost to Taxpayers
 Funds provided by U.S. taxpayers to
the IMF are in turned loaned to IMF
member nations who will later repay
these amounts.
 In this sense, as a taxpayer you are
also an investor in IMF-funded
projects.
Slide 19-28
International Policy Example:
The IMF Cost to Taxpayers
 The rate of return on these investment
projects is typically lower than market
interest rates.
 This financing, provided by the U.S.
taxpayers, comes at an opportunity cost of
other projects that could be funded.
 Nations borrowing from the IMF receive an
implicit subsidy.
Slide 19-29
Criticisms of the World Bank and IMF
 The World Bank was created in order
to provide capital for projects that
would face a challenge in attracting
private funds.
 Yet, many World Bank loans are made
in countries where private funding
would likely be available.
Slide 19-30
Criticisms of the World Bank and IMF
 World Bank and IMF funding may lay the
groundwork for a later financial crisis :
– Private lenders may view World Bank backing as
a sign that a project is financially safe, and
consequently not asses the risks adequately
themselves.
– Governments may permit risky financial practices
among firms and investors if they view IMF
assistance as a safety net.
Slide 19-31
The World Bank and the IMF:
Looking Ahead
 How will these institutions be designing
future policies?
– More of an emphasis on putting basic
market foundations in place by
guaranteeing property and contract rights
– Some economists advocate providing
direct financial assistance to governments
taking a hard line against corruption
Slide 19-32
Issues and Applications:
Doing Business in Bolivia
 There are 11 legal steps required to
establish a business in Bolivia, and the
cost of completing the procedures is
more than the average annual per
capita Bolivian GDP.
 Once the business is operating, there
are further requirements about the
salary and bonuses paid to employees.
Slide 19-33
Issues and Applications:
Doing Business in Bolivia
 Some firms cannot comply with these
requirements, and so they operate
unofficially.
 But owners of these unofficial
businesses have no property rights
regarding their enterprises, and this
creates dead capital.
Slide 19-34
Summary Discussion
of Learning Objectives
 Effects of population growth and
personal freedoms on economic
growth
 Why dead capital deters investment
and slows economic growth
 Government inefficiencies and dead
capital in developing nations
Slide 19-35
Summary Discussion
of Learning Objectives
 Why foreign residents invest in developing
countries and how these nations benefit
from international investment
 The functions of the World Bank and the
International Monetary Fund
 The basis for recent criticisms of World Bank
and IMF policymaking
Slide 19-36
End of
Chapter 19
Policies
and Prospects
for Global
Economic Growth