Carlos Andres Rodriguez Herrera 1 31 23 Principles of Macroeconomics ECON 2002 01 Chapter 18 Policies and Prospects for Global Economic Growth Introduction For years a large portion of Mongolia s capital equipment including drills and excavators has been idle Brief intervals of meager economic growth have been followed by periods of stagnation Suddenly however Mongolia s longer term economic situation appears brighter The change is due to a government plan to issue shares of ownership in future returns from the mining of cooper and coal After reading this chapter you will understand why the granting of private ownership shares has had a significant impact on Mongolia s economic growth 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 Describe how government inefficiencies have contributed to the creation of relatively large quantities of dead capital in the world s developing nations Discuss the sources of international investment funds for developing nations and identify obstacles to international investment in these nations Identify the key function 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 Chapter Outline Labor Resources and Economic Growth Capital Goods and Economic Growth Private International Financial Flows as a Source of Global Growth International Institutions and Policies for Global Growth 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 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 The Ohio State University 1 The arithmetic of the relationship between economic growth and population growth can be misleading Population growth can affect the growth rate of real GDP e g with higher labor force participation rate Whether population growth hinders or contributes to economic growth depends on where you live The role of economic freedom A crucial factor influencing economic growth is the relative freedom of a nation s residents Only 17 nations with 17 of the world s people grant their residents high degrees of economic freedom Economic Freedom The rights to own private property and to exchange goods services and financial assets with minimal government interference The role of political freedom Political freedom the right to openly support and democratically select national leaders Economic freedom tends to stimulate economic growth which then leads to more political freedom Capital Goods and Economic Growth A fundamental problem developing countries face is that a significant portion of their capital goods or manufactured resources that may be used to produce other items in the future is what economists call dead capital Dead Capital Any capital resource that lacks clear title of ownership A resource that people cannot readily allocate to its most efficient use Is among the most significant impediments to growth in poor nations Dead capital and inefficient production Nontransferable physical structures are valued at more than 9 trillion in developing nations Dead capital and economic growth Disincentives to invest in new capital goods can greatly hinder economic growth Government inefficiencies investment and growth Governments in many of the world s poorest nations place tremendous obstacles in the way of entrepreneurs These entrepreneurs are interested in owning capital goods and directing them to profitable opportunities In a nation with a stifling government bureaucracy regulating the uses of capital goods newly created capital will all too likely become dead capital Thus government inefficiency can be a major barrier to economic growth 2006 Nobel Peace Prize winner Muhammad Yunus of Bangladesh contends that access to private credit is vital for promoting economic growth in poverty stricken countries Micro lenders are banking institutions that specialize in making very small loans to entrepreneurs trying to lift themselves form poverty Access to credit matters Carlos Andres Rodriguez Herrera 1 31 23 Private International Financial Flows as a Source of Global Growth Question Answers Given the large volume of inefficiently employed capital goods in developing nations what can be done to promote greater global growth One approach is to rely on private markets Another is to entrust the world s governments Private investment in developing nations Each year since 1995 at least 150 billion in private funds have flowed to developing nations in the form of purchases of bonds or stock Nearly all funds that flow into developing countries due so to finance investment projects in those nations Economists group international flows of investment funds into three categories 1 Loans from banks and other sources 2 Portfolio investment 3 Foreign direct investment Portfolio Investment The purchase of less than 10 of the shares of ownership in a company in another nation Foreign Direct Investment The acquisition of more than 10 of the shares of ownership in a company in another nation Obstacles to international investment Markets for loans bonds and stocks in developing countries susceptible to problems relating to asymmetric information Asymmetric information as a barrier to financing global growth Adverse selection problems arise Moral hazard problems also arise International Financial Crisis The rapid withdrawal of foreign investments and loans from a nation International Institutions and Policies for Global Growth Since 1945 the world s governments have taken an active role in supplementing private markets Two international institutions the World Bank and the International Monetary Fund have been at the center of government directed efforts The World Bank A multinational agency that specializes in making loans to about 100 developing nations in an effort to promote their long term development and growth Loans are made to finance improved irrigation systems roads and better hospitals The International Monetary Fund A multinational organization that aims to promote world economic growth through more financial stability The IMF assists