Zara Mahmood September 24 13 EC102 Lecture 6 Convergence and Development Convergence Convergence Poor countries will grow faster than richer countries and eventually catch up in terms of GDP per capita Why would we expect convergence o Technology transfer Can be adopted and adapted by other countries o Poorer countries can attract more capital Can turn financial capital into more physical capital Low K stock High MPk High returns to investment Higher domestic saving and higher investment by foreigners Absolute Convergence inevitable will happen for every country in the world eventually Doesn t seem to be the case Contingent Convergence It will happen IF certain conditions are present Three Approaches to Development Environmental Approach Jeff Sachs o Geography o Climate o Endemic disease o Inaccessibility of trade routes landlocked countries Zara Mahmood September 24 13 EC102 o Lack of natural resources o Policy implications Contributors to poverty in the third world International Trade Approach a country will grow fast or not depending on the extent to which it is integrated with the wider world economy o Two dimensions of integration into the world economy Trade in goods and services Import substituting industrialization Import substituting industrialization country will do everything themselves without imports didn t work Capital inflows financial capital savings stocks bonds FDI FDI foreign direct investment open a business in a foreign country o Trade is big determinant to how fast you will grow o Technology transfer cannot happen without contact with outside world o In favor of globalization Institutional Approach Unless you get your institutions right nothing else is going to happen o Without this no amount of financial imports aid will help Legal system Political system Monetary stability Corruption GROWTH POLICIES What can governments do to promote long run economic growth Even small differences in growth rates compounded over the years can lead to major differences in standards of living o High payoff to government policies that increase growth rates Enhancing Property Rights and the Rule of Law Market system cannot work well unless property rights are enforced Developing countries rule of law and property rights are undermined by Property rights are unlikely to be secure in countries that are afflicted by government corruption wars and civil strife Improving Health and Education Poor health is a major impediment to growth in some countries Important interaction between health and economic growth o As peoples health improves and they become stronger and less susceptive to disease they also become more productive Zara Mahmood September 24 13 EC102 Increasing returns to human capital o Productivity increases as the total stock of human capital increase Rising incomes that result from economic growth can help developing countries deal with brain drain Brain Drain highly educated and successful individuals leaving developing countries for high income countries Policies That Promote Technological Change Technological change is more important than increases in capital for long run growth Government policies that facilitate access to technology are crucial for low income countries Foreign Direct Investment foreign firms are allowed to build new facilities or to buy domestic firms Helps low income countries Government policies can aid the growth of technology by subsidizing research and development High income countries Policies That Promote Saving and Investment Firms turn to the loanable funds market to finance expansion and research and development Policies that increase the incentives t save and invest will increase the equilibrium level of loanable funds and may increase the level of real GDP per capita Governments also increase incentives for firms to engage in investment in physical capita by using investment tax credits o Allow firms to deduct from their taxes some fraction of the funds they have spent on investment Is Economic Growth Good or Bad Economic growth is desirable and governments should undertake policies that will increase growth rates Economic growth may be contributing to global warming deforestation o Opposition to global warming