Chapter 9 Global economic growth and development

Both Keynesian and Washington Consensus economists agree that intellectual property rights are important for encouraging investments in R&D. This is consistent with Keynesian theories of government intervention. It would require the most non-interventionist economist to argue outright against the issuing of patents. But what if: The patent is used to gouge consumers on a necessity such as medicines? Patents run out long after the good has become obsolete? Patents are held to prevent innovation? NiMH batteries and Chevron, pharmaceutical patents. The primary, initial, research expenditures were performed by the federal government at taxpayer expense? Chapter 9 Global economic growth and development

Is the only “right” established in the initial text of the Constitution (prior to the Bill of Rights). Initially 14 years, increased to 17 years in the 1890s. WTO changes in 1995 extended this to 20 years. Does 20 years make sense? There could potentially be no limit to the price a patient with good insurance might be willing to pay to save their lives. Today’s new technology could be obsolete next year. What if the government investment in the technology exceeded the investment made by the business? A patent is a right to a monopoly. Should the granting of that right come with any responsibilities? The right to patent

There are some investments that have been made that have had huge commercial applications, but that the initial investments were made by government. These investments required huge resources without necessarily providing promises of profits. The NIH: the virtual elimination of pandemics in the US. Putting a man on the moon: satellite communications Improved military/government systems of communication: the Internet Major R&D investments

Per capita real GDP growth rates Other compensations than income? How do we compare? Hours worked per week fell as one income families became the norm.

The benefits of economic growth that are listed are not necessarily realized regardless of the economic growth. Data compiled over time has shown that these benefits tend to be realized with shared growth where workers share in the increases in gains of their own productivity. Benefits and costs of economic growth

Environmental pollution and urban congestion are much more severe problems in countries where there are few regulations to prevent these negative externalities. Environmental pollution is the transfer of costs from polluters to society. A company dumps pollutants into the water and children downstream end up with leukemia. A coal powered electrical generator without an appropriate scrubber induces asthma in children and generates acid rain which kills vegetation, poisons water, and eats away at structures, often in other states. Costs of economic growth

Shared growth: As workers become more productive, they share in the revenue increases of efficiency. In the graph below we see workers sharing in productivity increases until the oil crises of the 1970s. Reductions in taxes at the top changed the incentive structure of businesses. Higher profits no longer meant higher taxes and businesses were able to keep more of the profits not paid to workers. Labor productivity

Saving can be either a leakage from the economy or an injection into the economy. Investments are those savings that are used to make the economy more productive. Those measures that are seen as components of GDP qualify as investments; starting a new business, expanding production capacity, building a new home, or even investing in your own education (Although considered consumption in national accounting). A savings account allows the savings of one person to be used as an investment by another. Hoarding is savings that are not utilized in investments. They are those activities that are specifically not included in counting GDP growth. Sitting in cash, purchasing assets in markets with the hope of selling them at a higher price at a later date, and other speculative ventures are leakages from the economy. Buying gold, real estate, commodities futures, or stocks without the intention of consuming. Buying a gold necklace or a new house to live in is consumption, adding to GDP. Buying a new house or gold with the intention to hold until the price goes up is hoarding. saving

So you save some money from your wages. What do you do with it? That would depend on your incentives. Whether you are saving for a specific venture or simply for your retirement, you need to put that money somewhere in order to hedge against inflation. If inflation is 2%, you will need a 2% return in order to break even. So, if a savings account pays .9% but your 401k or IRA offers historically (not guaranteed) a 3% return (tax deductible depending on the instrument), you will make the logical move to go with the higher return. This shifts money from the savings account (investment through others) to mutual funds and the stock market (speculative venture). Effect of interest rates on saving China

Some economists advocate for low rates of interest. The feeling is that if those rates are low, entrepreneurs and businesses will expand production capabilities. Clearly, interest rates influence decisions in both savings and investment, but which system provides better macroeconomic outcomes? Interest rates and debt

Low interest rates discourage saving and encourages consumption and borrowing. Consumption previously supported by saving becomes supported by borrowing. Low interest rates and increased spending today leads to decreased spending tomorrow. Interest rates and consumption

Asian nations that were able to break out of the circle of poverty experienced by 3rd world nations did so in large part through interest rates. Interest rates were high for the majority of the population, encouraging savings. Exporters of those industries the state wanted to develop (consumer durables and later, hi-tech) were given preferable interest rates for production investments. In these Asian nations the central bank was controlled by the government. The asian miracle

Argued that spending based on credit and spending based on savings initially look the same. Both will appear to represent economic growth. However, spending based on credit is unsustainable in the long run and ultimately leads to cycles of boom and bust. This argument is routinely interpreted as being in reference to government spending, but it applies as well to the greater macroeconomy. Austrian school

Second –period consumption, C2 Figure 10 Intertemporal Spending with high interest rates Budget constraint with high interest rate B C2H C1H First –period consumption, C1

Second –period consumption, C2 Figure 11 Intertemporal Spending with low interest rates C2L A Budget constraint with low interest rate C1L First –period consumption, C1

The Organization for Economic Cooperation and Development (OECD) data indicates that the United States is one of the highest spenders per student within the organization, yet we are falling further behind other nations in measures of academic success. Education and human capital

Data regarding education in the United States is difficult to compile. The data from the OECD includes private expenditures, as well as those by federal, state, and local governments. As governments cut budgets, we see the federal government providing less to states and states providing less to local governments. The cost of a boarding school ranges from $15,000 to $50,000. Education and human capital

An increase in GDP per capita requires that the rate of GDP growth exceed the rate of population growth. Note that in the chart, those regions that continue to lag economically (South America, Africa, and the Middle East) have high fertility rates. Population growth and economic growth

As indicated in the text, changes in economic incentives and infant mortality play a role in decreased fertility rates. Child labor laws and Social Security moved children from being a necessity to being a luxury. In W. W. Rostow’sThe Stages of Economic Growth, the pre-conditions for take off requires a shift from traditional society to one which embraces science and technology, a more secular society. With secularism could come a greater acceptance of forms of birth control. Population growth and economic growth 1965 birth control legalized

Another effect of reduced fertility rates means higher levels of disposable income. Compare two single income families, one with two children and one with six children. Assume they have the same income. The family with six children will have less money for luxuries and leisure activities. They will also have less money available for saving. A family that may be living hand to mouth is unlikely to buy the newest cel phone, whereas the family with greater levels of disposable income may have cel phones for the entire family. Reduced fertility rates

Thomas Malthus was following the popular economic assumption of ceteris paribus or all else remaining the same. Malthus had not anticipated the agricultural production of the US heartland, crop rotation, and hundreds of other technological advances in agricultural production. He also would not have foreseen government interventions in the markets of foodstuffs to provide a secure and consistent supply of nutrition. These interventions include subsidies, protectionist policies, guaranteed minimum prices, and government provided crop insurance. I could not say whether, on balance, those interventions have been more beneficial or harmful, but clearly the world is producing more food per capita. Ceteris paribus, he would have been right. The problem is that things do not stay the same, particularly with humans who excel at adaptation of our environment. Thomas Malthus

Do not confuse with competitive advantage. The textbook emphasizes free trade and comparative advantage as the pathway to successful economic development, but this is not how Western Europe, the United States, and the more advanced East Asian nations became the economic powerhouses that they have become. All practiced some form of import substitution industrialization and protectionist tariff policies. South Korea had absolutely no comparative advantages to producing steel. When President Park Chung-Hee decided to build a steel plant for self-sufficiency, he was heavily advised against it. POSCO is now 146th largest corporation (Forbes) in the world, the 4th largest steel manufacturer by tonnage, and the largest steel manufacturer by market value. Comparative advantage

The textbook discusses Brazil (with natural resources) and Japan (without natural resources) as having different levels of economic success. This characterization can be extrapolated to their larger regions. Development in these two regions followed substantially different paths. South America generally followed a path of shifting back and forth between economic ideologies. Socialism would be tried until it failed. Laissez-faire capitalism would be tried until it failed as well. The East Asian nations followed pragmatic economic policies geared to shared economic growth with hands-on intervention by economic technocrats. Best described as a mixed economy as are nearly all of the more advanced economies. East asiavs south america

This is how nations have developed throughout history. Great wealth is developed through the manufacturing phase which eventually becomes accumulated in fewer and fewer hands. As accumulated wealth is transformed into political power, the policy preferences of the economic elite become the policy of governments. Free trade is encouraged and the economy is weakened while a select few grow wealthy. This was true of Spain, Great Britain, and the United States both now and prior to the Great Depression. Agriculture, manufacturing, and tertiary

The East Asian nations did, indeed, develop a system of property rights AFTER implementing land reforms that redistributed agricultural lands. They also developed educated populations as a part of the policy of shared growth. They actually took a part in creative destruction by making quotas in exporting goods a precondition for receiving favorable interest rates. System of property rights

In shifting back and forth between socialist and laissez-faire economic policies, natural resources were very poorly managed. Natural resources would be nationalized under socialist regimes and mismanaged. Often union workers demanded wage rates that priced these resources out of the market. Once the socialist regime failed, the natural resources would be privatized by being sold off to the highest bidder, usually a foreign company, at unfavorable terms. How much would you pay for a resource that may be nationalized again? http://www.reuters.com/article/2010/06/24/us-venezuela-nationalizations-idUSTRE65N0UM20100624 South american mismanagement

Chapter 9 Global economic growth and development