© 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko “The Economic Way of Thinking” 11 th Edition Chapter 20: Promoting Economic Growth

© 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 2 of 33 Chapter 20 Outline Introduction Who is Rich, Who is Poor? The Historical Record Sources of Economic Growth Foreign Investment Human Capital

© 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 3 of 33 Chapter 20 Outline Oil Comes From Our Minds Economic Freedom Index The Developmental Power of Private Property Rights The Asian Record Outside of Asia Appendix: The Difficulties of International GDP Comparisons

© 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 4 of 33 Introduction Economic system is a social system –People cooperate –Creating and using resources to satisfy wants Question –Why do some systems accomplish more?

© 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 5 of 33 Who is Rich, Who is Poor? World Bank –Using gross national product per capita –Classifies countries High-income economies Middle-income economies Low-income economies (<$1,000 income per resident) GNP and GDP practically the same

© 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 6 of 33 The Historical Record GDP Per Capita – 1999 –USA - $30, times 1820 level –India - $2,248 Almost 20 times 1820 level GDP growth in US – average annual rate of better than 3% between 1820 and 1999.

© 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 7 of 33 The Historical Record Explaining the difference in growth –Economic growth requires a surplus that can be invested in productive capital. Possible source of surplus –Imperialism and exploitation

© 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 8 of 33 The Historical Record Observations –Many of the poorest countries were never subjected to conquest. –Many of the richest were never colonized. From 1950 – 1973: –World economic growth – 4.9% –Per capita world growth – 2.9%

© 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 9 of 33 The Historical Record From 1973 – 1990: –Latin American growth slowed. –Soviet Union and Africa per capita income fell. –Europe’s growth rate would only double per capita income every 50 years. –Asia’s growth rate would double per capita income every 25 years.

© 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 10 of 33 Sources of Economic Growth Rule of Law Low cost systems of exchange Specialization Stocks of physical and human capital Technical innovation

© 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 11 of 33 Foreign Investment Foreign investment may create the surplus required to stimulate growth in poor countries. Private investors Foreign aid

© 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 12 of 33 Foreign Investment Issues in Private Investment –Risk of nationalization –Private investment may benefit only the political leaders

© 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 13 of 33 Foreign Investment Issues in Foreign Aid –Questions What is the quid pro quo of the giving country? How will the aid be allocated? –Aid may prop up bad governments.

© 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 14 of 33 Foreign Investment Advantages of Private Investment –Private Investors: Provide the expertise to utilize the capital they lend. More accurately measure the probability of success of a project.

© 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 15 of 33 Human Capital Education and human capital –Literacy is a precondition for economic growth. –Productive knowledge and skills makes individuals wealthy. Question –Does human capital contribute to the growth in the wealth of nations?

© 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 16 of 33 Oil Comes to Our Minds Knowledge is the crucial factor in the process of economic growth. Human intelligence eventually saw a way to use oil for human purposes.

© 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 17 of 33 Economic Freedom Index –Seeks to measure a country’s economic policies. Regulation Pricing practices Monetary policy Fiscal policy International trade

© 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 18 of 33 Economic Freedom Index Countries that followed policies ranking highest in EFI had the highest levels of per capita GDP.

© 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 19 of 33 The Developmental Power of Private Property Rights Adam Smith: The Wealth of Nations (1776) –People grow wealthier with the freedom to participate in the market process.

© 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 20 of 33 The Asian Record The Elements of Growth: –Rule of Law –Competent and honest government officials –Educated populace –Openness to international trade

© 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 21 of 33 The Asian Record South Korea, Japan and Taiwan –Invested in education, especially women’s –Embraced the global economy –Government policy maintained a market perspective and controlled inflation

© 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 22 of 33 The Asian Record 1960 – 1990 India –Per capita GDP (1990 PPP dollars) $ $2,248 55% of South Korea’s in % of South Korea’s in – 1990 India –Population increased >100% –South Korea population increased 47%

© 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 23 of 33 The Asian Record India: Limits to Growth –Resources allocated to national defense. –Did not allow markets and prices to allocate resources. –Attempted central planning –Government regulation eliminated the rule of law.

© 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 24 of 33 Outside Asia Growth Rates ( ) Country% Change Argentina17.4 Brazil41.0 Chile41.5 Colombia31.1 Mexico34.3 Peru1.0 Venezuela-.1

© 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 25 of 33 Outside Asia Latin America’s Mixed Records –Argentina (per capita GDP) 1929 – 63% of US 1999 – 38.5% of US –Venezuela (per capita GDP) 1999 – 0.1% below 1960 level

© 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 26 of 33 Outside Asia Latin America’s Mixed Records –Brazil (per capita GDP) Rose in the 1970’s Fell in the 1980’s 1999 – 4% higher than 1990 –Question What prevents the Latin American countries from establishing a consistent economic growth rate?

© 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 27 of 33 Outside Asia Per Capita GDP 1999 (in 1995 U.S. Dollars) Country Per Capita GDP Ethiopia $112 Tanzania $188 Nigeria $250 Kenya $337 Ghana $410 Cote d’Ivoire $787 Zaire (Congo) $840

© 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 28 of 33 Outside Asia Sub-Saharan Africa –Limits to economic growth Climate and geography –Lack of agricultural production –Climate related to diseases –Rivers not navigable Unstable political regimes

© 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 29 of 33 Appendix: The Difficulties of International GDP Comparisons GDP will: –Decrease as a consequence of marriages. –Increase with the rising divorce rate. GDP of low income countries will be understated. Wealth of those in wealthier countries will be exaggerated.

© 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 30 of 33 Appendix: The Difficulties of International GDP Comparisons International comparisons of per capita GDP –Distorted by common denominator – US $ –Using current exchange rate Purchasing Power Parity adjustments –Must be made for meaningful international comparisons.

© 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 31 of 33 Once Over Lightly Economic Growth and Specialization Low costs means of exchanges will increase specialization and economic growth. Rule of law also essential for economic growth. Economic growth has depended upon the accumulation of capital.

© 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 32 of 33 Once Over Lightly Openness to global economy facilitates economic growth. Capital accumulation and economic growth Human capital and economic growth Institutions of governance and economic growth Aggregate GDP analysis is difficult when comparing across different countries / currencies.

© 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 33 of 33 End of Chapter 20