Weil Economic Growth Solutions Chapter 8.zip
Monnie Trbovich
Income growth rates vary among countries and also vary during recent decades. The difference between increased output due to business cycles or due to economic growth is mainly time related. Growth is characterized as a long-run trend, whereas business cycles can be defined as short term fluctuations, like recessions, i.e. deviations from the long run trend.
Factors which influence economic growth immediately are referred to as proximate causes of economic growth. The opposite is called ultimate causes of economic growth, which has only an indirect influence)
A question that often has been asked is what influence an increase in savings would have on economic growth. Well the answer is that an increase in savings would raise the growth rate of output in the years immediately after it took place, but eventually the growth rate would return to its original level. However the growth rate has not changed in the long run, the level of output would be higher than it would have been when savings had not been increased.
Robert Solow formulated the neoclassical economic growth model which incorporates Labour, Capital and technological change to explain differences in levels of income per capita and called this model the Solow model. The model focuses on the amount of physical capital that each worker has to work with.
The main link between the population size, the population growth and economic growth is that an increase in the population will increase the input factor labour but also the need for the supply of natural resources.
The idea that economic growth is the best way to reduce fertility was summarized at an United Nations(UN) conference in 1974. What was said there, is that the higher the developmental statues of an economy, the lower the fertility rate. There are four channels that discuss why development leads to lower fertility:
From the A.D. 500 to 1500, income per capita in Europe did not grow at all. The population only grew at a rate of 0.1% during this period. The value of A rose with 1.39. In the period after this from 1500-1700, there was a fast increase of economic growth in Europe. Both income per capita and A rose. But still this these growth rates of productivity were extremely slow compared to growth rates in the world today.
The governmental intervention in the economy affects various resorts of economic growth we have already dealt with. It influences the quality and quantity of factor accumulation, both human and physical, either through education (human), or investment in infrastructure (physical), but also it yields an impact on the pace of technological change through its patent system. But the most important role of the government regarding the economy is the efficiency to build a profound framework consistent of taxation, administration of laws, regulation and other tools to build a stable basis of economic activities.
The normative approach: aimed at advising government on how it should act. It follows the prescriptive path, asking for the ideal behaviour, or what the government should do in order to promote economic growth.
For the reasons above a government might decide to intervene strongly in the economy and plan economic activities central. Even though economists with a free-market orientation stress the failure of central governmental planning, there are some successful examples, in which government intervention lead to high economic growth.
South Korea and Taiwan, for example succeeded with a mix of public enterprises and infant industry protection to reach a high level of growth and development. The reasons why government planning worked well are that the bureaucracy worked efficient and that public enterprises had to function after the profit seeking aspect and could be therefore easily transformed into private enterprises. But in most cases, the central planning policies did not succeed to encourage economic growth.
Governments might not choose for the best policies as a tactic in order to keep in the position to wield power. For example, as a growth of the economy would only influence one part of the population, which does unfortunately not belong to the elective group of the ruling government, the government might not have interest to persuade economic growth then. A historic example of the latter is Russia, which feared in the early 19th century riots, as industrial workers would be concentrated in cities (not farmers on the countryside anymore) and industrialization would threaten the wealth of elites. Therefore Russia stayed backward in its economic development.
Income inequality has a positive effect on economic growth through the instrument of physical capital, the savings rate. As the income increases, the savings rate will raise simultaneously, e.g. a person who earns more tends to save more.
The opposite effect of inequality (positive for Physical, negative for Human Capital) has a different implication for different economic situations. Consider the economic stage at the end of the 19th century. Since the driving force of the economic development was physical accumulation, e.g. technological change, a strong income inequality could have been beneficial for economic growth, because the inequality is positive for physical capital accumulation. On the other hand, growth in developing countries today is more Human Capital based therefore income inequality has a highly negative impact on economic growth.
Not only are appropriate measurements for culture hard to find, it is also difficult to estimate the exact impact on economic growth. Therefore, we will try to approach the cultural influence by taking a closer look at subtopics of culture:
The technological level and hence the economic growth are dependent on the willingness of a society to adapt and recognize the value of foreign ideas. The difference in that willingness also determines developing gaps, for example when comparing Japan and the Islamic world. Japan, which is one of the most economically successful nations, was willing to absorb new technologies developed in Europe or the USA. On the other hand, the Islamic world showed the tendency to refuse to incorporate foreign technologies, which hindered economic growth.
Even though institutions and government regulations secure many business transactions, some are purely built on trust for both parties to fulfil an agreement. The degree of trustworthiness attributed to the members of a society influence economic growth; there is a strong positive correlation between investment and the percentage of the society that claims that most people can be trusted.
The quality of social and cultural attributes and behaviour in a society is referred to with Social Capability. High social capability attributes enable the country to take economic opportunities, including technology transfer, factor flows of trade. First mentioned by Moses Abramovitz, Social Capability includes the determinants, which influence economic growth:
After we examined the effects of Culture on economic growth, we shall turn to the question of what determines Culture. The factors of Culture include religion or history to name a few, but we will only consider factors which are exposed to economic influence. That includes the Climate and Natural Resources, Cultural Homogeneity or Population density impact.
The level of Cultural Homogeneity, i.e. the degree to which a society is solely consistent of only one culture influences economic growth through the channels of social capital, including that social networks might be stronger if people share one culture or the level of trust is higher between people of the same culture.
A highly ethnical fractionated society has a negative impact on economic growth, due to a negative correlation between income and the index of ethnic fractionalization. Underlying possible reasons are difficulties of governance or historical reasons, like colonization. Besides ethnical, also linguistic and religious fractionalization tend to have an influence on economic growth. Linguistic fractionalization has, like the ethnical a negative impact for the same reason, that social capital is easier with two people sharing one language.
We already noted that there is a relationship between cultural attributes and economic performance. However, it is appropriate to believe that economic growth alters culture. Factors of economic growth, like foreign ideas, Urbanization or increase educational level have a large-scale impact on cultural values.
The government is able, through various channels to determine the facets of culture. Governmental interaction might have the primary aim to target especially cultural change, or cultural change might only be a by-product of certain policies. The reason for government interaction in culture can have a non-economic (like the creation of a national unity) or economic promoting nature (e.g. promoting growth through modernization).
The difference between increased output due to business cycles or due to economic growth is mainly time related; Growth is characterized as a long-run trend, whereas business cycles can be defined as short term fluctuations, like recessions, i.e. deviations from the long run trend.
The main linkage between the population size, the population growth and economic growth is that an increase in the population will increase the input factor, labour but also the need for the supply of natural resources.
Thomas Malthus (1766-1834) observed that, without resource or health (fertility) constraints population will grow unlimited. Therefore, growth is only constraint by limiting circumstances, like poverty. In the inversion of that argument, the Malthusian model states that population growth reduces of income per capita, and will hence threaten chance of economic growth. Thus population growth will, after Malthus not improve the standard of living.
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