Growth

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• Growth The Role of the State

LT Jeff Betz Comparative Economics Professor
Looney
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Questions

• Which is a better indicator of growth
• Economic or Political Freedom
• How should the role of the state/International
  Institutions evolve due to globalization
• Case Studies India China

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Objectives

• Determine what are contributing factors to growth
• How to properly manage those factors in global
  economy
• Role of government
• Examine specific cases for evidence

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Theoretical Approaches

• Neo-Classical Theory individuals and firms make
  rational decisions to maximize utility and
  profits, these actions drive the economy through
  the law of supply and demand
• Neo-Liberal Theory Extension of Neo-Classical
  where rational actions should be free from any
  constraints. The market will maintain itself and
  any government interference will only hamper
  growth
• Neo-Structural Theory Stucturalism with
  elements of Neo-Liberalism. Some government
  intervention is required to correct market flaws
  and protect the public.

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Economic vs. Political Freedom

• Which is better determinant of growth?
• Robert Barrow - Economic Freedom
• Joseph Siegle - Political Freedom
• Robert Looney - Neo-Structural elements are
  required

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Robert Barro

• Examined issue from both sides
• Effects of democracy on growth moderately
  negative
• Led to his theory concerning non-linear
  relationship between democracy and growth
• Effects of growth on democracy significantly
  positive
• Concludes that West should export economic system
  over political system, because economic freedom
  with lead to growth, which will then lead to
  democracy

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Joseph Siegle

• Rejects development first theory supported by
  Barro
• Poor democracies grow faster than poor
  autocracies because they are more stable
• Throws out cases like China and Singapore as the
  exception rather than the rule

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And the Winner Is

• Economic freedoms
• Siegle overlooks the importance of corruption and
  rule of law, which is factored into Barros
  regressions (considered elements of economic
  freedom)
• Countries that have scored low on EFW in
  corruption are growing faster - regardless of
  democracy or autocracy
• Empirical data suggests that economic freedoms
  alone should be enough for growth

HOWEVER
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Robert Looney

• Example of Iraq
• 100 economic freedom for reconstruction - that
  has failed miserably
• Poorly implemented, more government control
  needed to correct the flaws in the market
  (Neo-Structural)
• Illustrates that economic freedom alone is not
  enough - stability is required

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Role of the State

• Established economic freedoms imposed in stable
  corruption free environment most effect path to
  growth with proper involvement of the state in
  economy
• How do we define proper?
• Neo-Liberal vs. Neo-Structural
• Washington Consensus vs. Post-WC
• Vito Tanzi vs. Josephy Stiglitz

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Vito Tanzi

• Pro-Washington Consensus
• Too much state involvement
• Economic decisions for political reasons
• Loss of efficiency and growth
• Too much govt. spending too much taxation,
  hurts economy
• Govt spending can be reduced w/o drop in standard
  of living
• Current spending policy and fiscal termites on
  collision course

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Joseph Stiglitz

• Post Washington Consensus
• WC is incomplete and improperly implemented
• Used as cure-all w/o regard for particular
  condition of a state
• Failure of WC in East Asia Crisis
• Too much focus on inflation and deficits not on
  macro-economic stability
• Govt must intervene in economy to compliment it
  and make it healthier

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Conlcusions

• Both agree state should serve a strong regulatory
  function
• Both agree that state is too large and needs to
  focus on core responsibilities
• Tanzi describes very narrowly
• Stiglitz includes social elements such as
  environment and education
• This is where they diverge
• Neither addresses issues of global governance

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Kaushik Basu

• Expands upon Stiglitz
• Discusses issues of global governance
• Assumption of Rationality
• Rethinking global democracy

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Assumption of Rationality

• False assumption that is in-grained into Western
  economic thought
• Moral code against physical theft
• But what if someone is outwitted
• No moral code against being tricked out of
  property
• No safeguards against this has led to unfairness
  in global contracts and unwillingess of states
  to do business because of this fear

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Re-Thinking Global Democracy

• IMF current arrangement
• Countries who pay more, have more say
• Widely seen as fair by the West

BUT
What if I said Bill Gates should get more votes
in domestic politics because he pays more taxes?
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Kaushik Basu

• Argument highlights need for global governance
• Standards in fair trade, environmental
  protection, etc.
• Issues that effect all countries should be
  addressed globally
• Would increase overall stability and welfare

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Case Studies

• 1st Question examined economic vs. political
  freedoms
• 2nd Question examined where boundary of state
  involvement should lie
• 3rd Question case study to bring all this theory
  to bear on reality

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China vs. India

• Autocracy vs. Democracy
• Economic freedom vs. Political Freedom
• So why has China grown faster
• Economic Freedom
• Heavy regulation to reduce corruption
• Complimentary involvement of state in economy
• Started on path to economic reform first and has
  more human capital

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China vs. India

• Why has India grown slower
• Too much regulation
• Too much government involvement in economy
• Protectionism
• Inconsistent economic policy due to politics
• Has not invested in human capital
• Education
• If consistent reform is implemented constraints
  to Indias growth would be removed and already
  high growth rate would accelerate further

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Questions?

• Or that uneasy silence that follows oral
  presentations?