Topic 5 Growth Policies Agenda Structures that promote growth Analysis of Government policy Sustainability Desirability of growth How can we encourage growth What should we target Government policies education wages Promoting Growth Government Policy Sustainability Desirability What are the components of that account for growth Recall the difference between the United States and Asian Tigers Which path would probably be better for a developing country to follow So how do we spur investment in this these area s Promoting Growth Government Policy Sustainability Desirability Human Capital Examples Education Health and Nutrition Human capital refers to investment in your labour force More education yields better skills and higher productivity Externalities More inventions lower social cost to society If interested about societal benefits read this http www bostonreview net BR37 5 ndf james heckman social mobility php Promoting Growth Government Policy Sustainability Desirability So why is this good Because education and RGDP are strongly correlated Promoting Growth Government Policy Sustainability Desirability Savings and Investment Increases in capital stock can increase production What is an example of this But there is a tradeoff If you invest more you must be Why does this tradeoff exist Promoting Growth Government Policy Sustainability Desirability So why don t all countries do this Investment takes time to show returns years or decades Promoting Growth Government Policy Sustainability Desirability So how can poor countries build capital stock Foreign Direct Investment International aid in building roads factories etc Basically building capital Foreign Portfolio Investment International agents invest in domestic firms i e buy shares make loans that the company uses to build factories Why would rich countries invest in others instead of themselves We have diminishing returns Will the 1000th machine increase production by the same as the 1st Ex Each machine produces 100 pizzas We currently produce 1 pizza by hand 1st machine Production 101 growth 1011 1 100 10 000 2nd machine Production 201 growth 201101 101 100 100 Question Which costs more Boosting growth in Switzerland or in Iraq Promoting Growth Government Policy Sustainability Desirability Do these policies work Promoting Growth Government Policy Sustainability Desirability There is one important condition however Look at the countries in the previous slide They share a common factor What is it Property Rights and Political Stability If property can be easily appropriated stolen by others you won t bother investing If government is corrupt cost of investment is high Will invest elsewhere Promoting Growth Government Policy Sustainability Desirability Some other policies Free Trade People specialize which increases efficiency and reduces prices May also increase investment Arguments against trade Read Chapter 9 Patents and Copyrights Pro Creates incentives to innovate Con Creates monopolies which may be inefficient Promoting Growth Government Policy Sustainability Desirability Population and Growth GDP vs Population Growth Promoting Growth Government Policy GDP Growth vs Population Growth Sustainability Desirability High Population Growth leads to Low RGDP Growth RGDP 1000 Growth 2 Population 1000 Growth 3 Current RGDP p c 1 New RGDP 1 2 1000 1020 New RGDP p c 1020 1 3 0 99 People are worse off on per capita basis Promoting Growth Government Policy Sustainability Desirability High Population Growth leads to Low RGDP Growth RGDP 1000 Growth 2 Population 1000 Growth 1 Current RGDP p c 1 New RGDP 1 2 1000 1020 New RGDP p c 1020 1 1 1 01 Promoting Growth Government Policy Sustainability Desirability High Population Growth leads to Low RGDP Growth Some socio economic reasons large growth hinders development Reduces the ability of households to save Requires larger investments to keep up with increased workforce Issues with urban sprawl environment High density can lead to disease and political turmoil Promoting Growth Government Policy Sustainability Desirability What are we NOT saying Yes No High Population Growth leads to Low RGDP pc growth Promoting Growth Government Policy Sustainability Desirability Low Population growth leads to High RGDP pc growth Low RGDP pc growth leads to High Population Growth High RGDP Growth leads to Low Population Growth Demographic Transition Theory Rising incomes lead to slower population growth Children become more expensive as country becomes wealthier so people have fewer children Why Longer education time so don t start working as early more activities cost money etc Promoting Growth Government Policy Sustainability Desirability Again what are we NOT saying Yes No High RGDP pc growth leads to Low Population growth Promoting Growth Government Policy Sustainability Desirability Low Population growth leads to High RGDP pc growth Low RGDP pc growth leads to High Population Growth Evaluating Government Policy And why do we need a government anyways Promoting Growth Government Policy Sustainability Desirability A government plays two roles in a market economy Regulator Equalizer Provide Legal Structure Maintain Competition prevent monopolies Promote Stability both social and economic Provide public goods and services parks schools police Redistribution of Income through taxation Reallocation of Resources especially if there are externalities such as pollution Promoting Growth Government Policy Sustainability Desirability Is private industry always preferable to government If the government policy interferes with market efficiency there is a cost In some sense we are worse off However markets are not always naturally efficient Requires perfect competition No externalities or side effects Ex pollution Promoting Growth Government Policy Sustainability Desirability Aside Government regulation of oil industry Is this a good or bad thing Without regulation what might a firm do that makes people worse off Why What action can government take to limit this behavior Promoting Growth Government Policy Sustainability Desirability Which of the following two lotteries do you prefer 1 2 Chance of winning 100 million is 1 Chance of winning nothing is 99 Chance of winning 1 500 000 is 49 Chance of winning 500 000 is 51 Expected winnings 1 million Expected winnings 990 000 Promoting Growth Government Policy Sustainability Desirability Which of the following two countries do you prefer Country A Country B Chance of
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