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Global Economic Development Last class

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More general question, how to increase happiness in the world? ... Today good institutions that promote increase income per capita seem also to ... – PowerPoint PPT presentation

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Title: Global Economic Development Last class


1
Global 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)

8
What 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).

11
Another 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).
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