Title: Global Economic Development Last class
1Global Economic DevelopmentLast class
Putting everything together Questions Why count
ries differ in levels of output, in output growth
rates and, more generally, economic development?
More general question, how to increase happiness
in the world?
2- Final objective of research on economic and
social development
- Happiness of members of society they should
feel satisfied and full-filled in their lives
- It includes
- Freedom choose way of living, choose type of
work, choose partners, friends
- (Amartya Sen Development as freedom)
- Good health
- Self-respect
- Good education
- Leisure time
- Joy
- Hope of improvement
- Determinants of happiness
- economic (in these the economist focus mostly)
- power relations not directly related to
economics (racial power, gender power)
3- Three determinants of happiness in which
economists focus (and it is reasonable that they
focus in these determinants)
- Average income per capita in society (in other
words, is the society rich or poor?)
- Inequality in income per capita (in other words,
is society fair or unfair at one point in time?)
(Of course there is decreasing marginal value of
increased equality) - Upward mobility (in other words, is society fair
or unfair intertemporally?)
- Why these determine (in part) happiness?
- Freedom is scarce if you can not choose (say,
between owning a home and improve it or renting
or between having a car or biking). Without
income most people can not develop a free life. - Without some basic income, people can not get
education, health care, leisure.
- With too much economic inequality, power
relations determine choice and again there is no
freedom.
- With no upward mobility there is no hope of
improvement.
4- So, what determines the economic determinants of
happiness.
- First, what determines average income per capita
in society?
- Proximate causes
- Physical capital e.g. a machine, a road, rival
goods (embodied technology)
- Technology (or knowledge) e.g. the contents of
an engineering book, non-rival good
- Human capital e.g. skills of a person, rival
good (embodied knowledge)
- Social capital e.g. trust, non-rival good
- Organizational capital e.g. knowledge of an
optimal process by a firm, rival good (it is
similar to human capital, but the knowledge is
embodied in a group of persons, a firm, instead
of an individual) - Natural resources (geography) e.g. land,
minerals, rival goods
5- What is important in this classification?
- Which resources are subject to decreasing
returns and which to constant or increasing
returns? Technology improvement (knowledge) seems
at the core of the possibility of permanent
growth in income per capita - Observe the complementarities
- i) sophisticated physical capital must be used
with high human capital
- ii) technology improvements are caused by
increased human capital, but also led to increase
in human capital (though not always) (for
example information technology creates a demand
for computer engineers, but computer engineers
create new IT technologies) -
- Next step
- What determines the growth and levels of the
resources?
6- At the center of the process of growth of income
per capita, I would put the division of labor and
production specialization.
- This, as emphasized by Adam Smith, causes three
effects
- Increase dexterity of workmen (increase human
capital)
- Savings in time in changing activities (increase
in organizational capital)
- Promotes invention of machines (increase in
technology and physical capital)
- The division of labor is accompanied by emergence
of local trade (trade between people in different
occupations) and international trade (trade
between countries that specialize in different
goods) - Trade makes the diffusion of disembodied
technology (knowledge) across people and
countries much easier (there is contact and
communication).
7- But what are the determinants of the division of
labor, which determine the accumulation of
resources as well as the creation of new
technologies, which determine growth rates of
income per capita, which determine levels of
income per capita, which determine (partly)
happiness? - Extent of the market (including population size
and income of those people)
- Coordination costs
- Knowledge
- Observe that there at least to circular flows
here
- extent of the market causes division of labor
causes increase in resources per capita causes
increase in income per capita which increase the
extent of the market - general knowledge increases the division of labor
which increases general knowledge)
8What determines the extent of the market and the
coordination costs? Answer Institutions. These a
re the rules of the game, or the constraints of
it. And here is where the government is
fundamental. These can be formal (e.g. protecti
on of property rights by law) or informal (e.g.
protection of property rights by ethic behaviour
or by watch of neighbours), political
institutions (e.g. constitution) or economic
institutions (e.g. regulation)
Institutions can be good or bad in the first
case they increase the coordination costs and
reduce the extent of the market, in the second
they do the opposite. So institutions determine t
he division of labor which determine in turn
productivity. Also, institutions determine that t
he resources are used in productive activities
and not destructive. In other words they diminish
as much as possible disorder (market failures)
and dictatorship (government failures or grabbing
hand). Institutions should be constructed to
reduce conflicts wars, strikes, lawsuits, crime.
9- A few more points
- Social capital increases financial development
that makes accumulation of capital easier
- Human capital accumulation is accompanied by
reduction in fertility which makes most of the
production growth to be translated into income
per capita growth - Population growth extends the market as well as
extend the pool for ideas and technology
innovations.
- Medical knowledge diminishes mortality and
increases longevity which increases the return to
human capital.
- Observe that the conditions of Rodrik appear
repeatedly
- protection of property rights and enforcement of
contracts reduces coordination costs and
increases the returns to accumulation of capital
- macroeconomic stability satisfies the same
purpose
- integration into world markets increases the
extent of the market and increases the diffusion
of disembodied technology
- social cohesion and political stability reduce
conflicts
10- But what about the other economic objectives
reduction of inequality and increase in upward
mobility.
- There may be some trade-offs.
- Protection of property rights can increase
average income per capita but not decrease
inequality. It seems that is what happened in
Latin America for some periods of its history
(for example, 1880-1930). - The institution of inheritance can increase the
incentive to accumulate capital by the parent but
decrease the social mobility of the society.
- But, it seems to me, that generally there is no
trade-off good institutions should increase
average income per capita, decrease inequality
and increase upward mobility. For example, as
Schwartz mentions, focused increase in public
schools funding would increase the skills of
relatively bad students, increase their
productivity and therefore increase the
productivity of the whole society. - A reduction in uncertainty would increase the
savings of the population, increase the financial
development and increase credit where the
marginal product is higher, including poor but
talented people and entrepreneurs. (One can see
this in upward mobility of immigrants).
11Another caveat is that good institutions for
growth can be no so good for happiness. As
economic determinants of happiness are not the
only determinants, if institutions for growth
also affect the other determinants, it could be
affecting negatively happiness through this
other channel. As we have seen, power is another
determinant of freedom and happiness. Some
authors noticed that with the end of slavery
black population income per capita might have
diminished (Fogel). But most surely their
happiness increased. Freedom is determined not
only by income per capita but also by power
relations. Again, this caveat does not seem too i
mportant. Power and income are more and more
correlated. Today good institutions that promote
increase income per capita seem also to improve
other direct causes of happiness.
12- Recommendations
- So what are the recommendations, actions for the
future?
- For governments
- i) Debate should not be about laissez-faire vs.
interventionism it should be about wise (or
common-sense or efficient) regulation vs. stupid
(or inefficient) regulation. Or, in other words,
institutions that balance efficiently
(minimizing) disorder and dictatorship. - ii) World is changing fast. Regulations should
be flexible so that they can change with the
world.
- iii) Institutions should try to diminish
coordination costs (in particular, conflicts) and
increase the extent of the market.
- iv) Main objectives (reduce uncertainty for
majority of actors but not by reducing mobility
or dynamism)
- social cohesion
- macro stability
- defense of property rights and contract
enforcement
- integration to world economy
13-
- For firms
- Look for opportunities in services markets (or
more sophisticated markets)
- Look for opportunities in emerging markets (as a
higher and higher fraction of the world is
developing)
- Look for opportunities in markets that focus in
aging consumers (as the age structure of the
population is changing).