1. Chapter 19 Policies and Prospects for Global Economic Growth

2. Slide 19-2 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?

3. Slide 19-3 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

4. Slide 19-4 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

5. Slide 19-5 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

6. Slide 19-6 Chapter Outline Labor Resources and Economic Growth Capital Goods and Economic Growth Private International Financial Flows as a Source of Global Growth Private International Financial Flows as a Source of Global Growth International Institutions and Policies for Global Growth International Institutions and Policies for Global Growth

7. Slide 19-7 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?

8. Slide 19-8 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

9. Slide 19-9 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.

10. Slide 19-10 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

11. Slide 19-11 Population Growth Table 19-1

12. Slide 19-12 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

13. Slide 19-13 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.

14. Slide 19-14 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.

15. Slide 19-15 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.

16. Slide 19-16 Capital Goods and Economic Growth Capital goods are manufactured resources that can be used to produce items for later consumption.

17. Slide 19-17 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.

18. Slide 19-18 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

19. Slide 19-19 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

20. Slide 19-20 Bureaucratic Inefficiency and Economic Growth Figure 19-1

21. Slide 19-21 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.

22. Slide 19-22 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.

23. Slide 19-23 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.

24. Slide 19-24 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

25. Slide 19-25 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.

26. Slide 19-26 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

27. Slide 19-27 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

28. Slide 19-28 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.

29. Slide 19-29 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.

30. Slide 19-30 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.

31. Slide 19-31 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.

32. Slide 19-32 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

33. Slide 19-33 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.

34. Slide 19-34 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.

35. Slide 19-35 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

36. Slide 19-36 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

37. End of Chapter 19 Policies and Prospects for Global Economic Growth