Knowledge, Human Capital, Markets and Economic Growth in Modern Economies Gary S. Becker University of Chicago June 2, 2005 Beijing, China China Center for Economic Research

An Investment in Knowledge Pays the Best Interest

Investment in Human Capital as percentage of GDP United States Sources: Own calculations based on World Health Organization and, UNESCO, UIS Global Statistics. 17 – 25+ Percent % 4 – 6% 4 – 8% ??? Schooling On the Job Training Health Adult Education

Wage Premiums by Education Level United States Source: Murphy, Erin S. “How pervasive are the Gains from Schooling.” St. Norbert College, Working Paper, April 2003.

Change in College/High School Wage Gap for European Countries Cohorts Specific Changes Born Born Years 80s90s% Change80s90s%Change Austria % %85, 97 Denmark % %85, 95 Finland % %87, 93 France % %90, 98 Germany % %85, 97 Italy % %87, 98 Netherlands % %86, 96 Portugal % %85, 93 Switzerland % %92, 98 UK % %85, 95 Source: Brunello, Giorgio, Simona Comi and Claudio Lucifora. The College Wage Gap in 10 European Countries: Evidence from Two Cohorts. IZA Discussion Papers 228, Institute for the Study of Labor (IZA), 2000.

Returns to Education - China 1988, 2002 YearSampleRate of Return to Education Adjustment for Income Growth in Future 1988Urban3.3%9.3% 2000Urban11.1%17.1% Sources: 1988: Johnson, Emily N., and Chow, Gregory C. (1997). 2000: Heckman and Li (2003).

Returns to Education - Japan 2000 YearRate of Return to Education 20008% Source: Blondal (2002).

Returns to English and Schooling by Year- Men Aged India Adjustment for Income Growth in Future: 10% + 4% = 14% English Schooling Source: Provided by Mark R. Rosenzweig from his own calculations.

Labor Productivity Growth United States 1995 – 2005 Source: Bureau of Labor Statistics.

Total Factor Productivity (TFP) in Non-Agriculture United States 1800 – 1940 TFP non-agricultural sector Source: Greenwood, J., and Seshadri, A. "The U.S. Demographic Transition". AEA Paper and Proceedings, → → → → 1.78

Age-Earnings profile for Males United States Source: Bureau of Labor Statistics.

Age-Earnings profile for Males Japan Source: Statistics and Information Department Minister's Secretariat. Ministry of Health, Labour and Welfare, Japan.

Economic Gains from Reductions in Mortality United States – Aggregate Gains (billions of $1996) Males21,21512,13913,22346,577 Females15,8636,9793,46126,303 Total37,07819,11716,68572,880 Source: Murphy, K.M., and Topel, R. H. The Economic Value of Medical Research. In Measuring the Gains from Medical Research: An Economic Approach, edited by K.M. Murphy and R. H. Topel. Chicago: The University of Chicago Press

The Economic Value of Reducing Cancer and Heart Diseases Mortality by 10% for the Total Population in United States Disease Category Increase in Value of Life (Billions of Dollars) Total Population Cancer$4,359 Heart Diseases$4,085 Source: Murphy, K.M., and Topel, R. H The Economic Value of Medical Research. In Measuring the Gains from Medical Research: An Economic Approach, edited by K. M. Murphy and R.H. Topel, The University of Chicago Press, 2003.

Cross-Country Regression to the Mean in Income per Capita Source: Becker, G. S., Philipson, T., and Soares, R. The Quantity and Quality of Life and the Evolution of World Inequality. American Economic Review, forthcoming. y = * x

Cross-Country Regression to the Mean in Full-Income y = * x Source: Becker, G. S., Philipson, T., and Soares, R. The Quantity and Quality of Life and the Evolution of World Inequality. American Economic Review, forthcoming.

The Heritage Foundation/Wall Street Journal Index of Economic Freedom 2005 Rank - Economic Freedom (Out of 155 countries) Country 1Hong Kong 2Singapore 3Luxembourg 4Estonia 5Ireland 6New Zealand 7United Kingdom 8Denmark 9Iceland 10Australia 39Japan 112China 118India

Basically China ranks low in the following items: Trade Policy (but 1 point better than in 2004) Fiscal Burden (0.3 points better than in 2004) Foreign investment Banking and Finance: Four state-owned banks, which have a combined market share of nearly 70 percent, dominate the banking sector. Property Rights: China's judicial system is weak. The Economist Intelligence Unit reports that "many [foreign firms] prefer arbitration because of concerns about the speed and impartiality of the courts. Regulation

Japan ranks low in the following items: Fiscal Burden: In 2003, government expenditures as a share of GDP decreased 0.4 percentage point to 38.3 percent, compared to a 0.6 percentage point increase in Banking and Finance: Japan’s banking system, although competitive, suffers from a large number of non-performing loans. Banks often make loans on criteria other than creditworthiness. Regulation: According to the U.S. Department of Commerce, “Japan’s reputation for protectionism and red tape…is well deserved…. [T]he Japanese economy remains over-regulated and those regulations can be used to hinder foreign firms’ attempts to gain access to the market.”

Conclusions Human Capital has become increasingly important. Showed growth in returns to schooling, health. On the job training also important Perhaps in midst of technological revolution that will last for decades. Human capital investment requires flexible economic system to be most productive: Capital markets, labor and product markets.