Economics for Leaders World History Centuries –without productivity growth –without economic...

Economics for Leaders

World History

Centuries – without productivity growth– without economic growth

… without population growth


World Events & Population Growth

≈ 1750


World GDP per capitaSource: http://econ161.berkeley.edu/tceh/2000/world_gdp/estimating_world_gdp.html

178138133

6539

679

98

0

1000

2000

3000

4000

5000

6000

0 200 400 600 800 1000 1200 1400 1600 1800 2000

Year

19

90

do

lla

rs

World GDP per capita – last 2000 years

Source: http://econ161.berkeley.edu/tceh/2000world_gdp/estimating_world_gdp.html

http://econ161.berkeley.edu/tceh/2000world_gdp/estimating_world_gdp.html


Country 1500 1700 1850 1900 1950 1970 1980 1990 2000

United States 400 527 1,806 4,091 9,561 15,030 18,577 23,201 28,403

Canada 400 430 1,330 2,911 7,291 12,050 16,176 18,872 22,366

France 727 910 1,597 2,876 5,271 11,664 15,106 18,093 21,277

Japan 500 570 679 1,180 1,921 9,714 13,428 18,789 21,051

United Kingdom 714 1,250 2,330 4,492 6,939 10,767 12,931 16,430 20,159

Germany 688 910 1,428 2,985 3,881 10,839 14,114 15,929 18,982

Italy 1,100 1,100 1,350 1,785 3,502 9,719 13,149 16,313 18,786

Mexico 425 568 674 1,366 2,365 4,320 6,320 6,085 7,249

Brazil 400 459 686 678 1,672 3,057 5,198 4,923 5,556

China 600 600 600 545 448 778 1,061 1,871 3,421

India 550 550 533 599 619 868 938 1,309 1,885

Total Africa 414 421 500 601 890 1,355 1,538 1,449 1,474

http://www.ggdc.net/maddison/

Source: GDP data from Angus Maddison, "Historical Statistics of the World Economy: 1-2003 AD.“

Real GDP Per Capita

Relatively poor

Relatively rich

(real = inflation-adjusted to 1990 dollars)


Country 1500 1700 1850 1900 1950 1970 1980 1990 2000

United States 400 527 1,806 4,091 9,561 15,030 18,577 23,201 28,403

Canada 400 430 1,330 2,911 7,291 12,050 16,176 18,872 22,366

France 727 910 1,597 2,876 5,271 11,664 15,106 18,093 21,277

Japan 500 570 679 1,180 1,921 9,714 13,428 18,789 21,051

United Kingdom 714 1,250 2,330 4,492 6,939 10,767 12,931 16,430 20,159

Germany 688 910 1,428 2,985 3,881 10,839 14,114 15,929 18,982

Italy 1,100 1,100 1,350 1,785 3,502 9,719 13,149 16,313 18,786

Mexico 425 568 674 1,366 2,365 4,320 6,320 6,085 7,249

Brazil 400 459 686 678 1,672 3,057 5,198 4,923 5,556

China 600 600 600 545 448 778 1,061 1,871 3,421

India 550 550 533 599 619 868 938 1,309 1,885

Total Africa 414 421 500 601 890 1,355 1,538 1,449 1,474

Real GDP Per Capita

Relative stagnation

Economic take-off

http://www.ggdc.net/maddison/

Source: GDP data from Angus Maddison, "Historical Statistics of the World Economy: 1-2003 AD.“



Country 1500 1700 1850 1900 1950 1970 1980 1990 2000

United States 400 527 1,806 4,091 9,561 15,030 18,577 23,201 28,403

Canada 400 430 1,330 2,911 7,291 12,050 16,176 18,872 22,366

France 727 910 1,597 2,876 5,271 11,664 15,106 18,093 21,277

Japan 500 570 679 1,180 1,921 9,714 13,428 18,789 21,051

United Kingdom 714 1,250 2,330 4,492 6,939 10,767 12,931 16,430 20,159

Germany 688 910 1,428 2,985 3,881 10,839 14,114 15,929 18,982

Italy 1,100 1,100 1,350 1,785 3,502 9,719 13,149 16,313 18,786

Mexico 425 568 674 1,366 2,365 4,320 6,320 6,085 7,249

Brazil 400 459 686 678 1,672 3,057 5,198 4,923 5,556

China 600 600 600 545 448 778 1,061 1,871 3,421

India 550 550 533 599 619 868 938 1,309 1,885

Total Africa 414 421 500 601 890 1,355 1,538 1,449 1,474

Real GDP Per Capita

Source: GDP data from Angus Maddison, "Historical Statistics of the World Economy: 1-2003 AD.“ http://www.ggdc.net/maddison/



Country 1500 1700 1850 1900 1950 1970 1980 1990 2000

United States 400 527 1,806 4,091 9,561 15,030 18,577 23,201 28,403

Canada 400 430 1,330 2,911 7,291 12,050 16,176 18,872 22,366

France 727 910 1,597 2,876 5,271 11,664 15,106 18,093 21,277

Japan 500 570 679 1,180 1,921 9,714 13,428 18,789 21,051

United Kingdom 714 1,250 2,330 4,492 6,939 10,767 12,931 16,430 20,159

Germany 688 910 1,428 2,985 3,881 10,839 14,114 15,929 18,982

Italy 1,100 1,100 1,350 1,785 3,502 9,719 13,149 16,313 18,786

Mexico 425 568 674 1,366 2,365 4,320 6,320 6,085 7,249

Brazil 400 459 686 678 1,672 3,057 5,198 4,923 5,556

China 600 600 600 545 448 778 1,061 1,871 3,421

India 550 550 533 599 619 868 938 1,309 1,885

Total Africa 414 421 500 601 890 1,355 1,538 1,449 1,474

Real GDP Per Capita

Progress

71

56

29

42

28

28

17

17

14

6

3

4

Source: GDP data from Angus Maddison, "Historical Statistics of the World Economy: 1-2003 AD.“ http://www.ggdc.net/maddison/



The Mystery of Wealth

Ample endowments of:– Energy– Timber– Fertile land

– . . . help raise wealth

BUT, they are …– only a small part of the answer to the

Wealth of Nations


Why Capitalism Triumphs . . .

. . . in the West and Fails Everywhere Else.

• Hernando DeSoto• Peruvian economist

Establish property rights– Can use ownership as collateral

• Can start businesses & participate in market economy

• http://www.youtube.com/watch?v=JWakV0L8XWI

• http://www.youtube.com/watch?v=xODUOlHJfhI

http://www.youtube.com/watch?v=JWakV0L8XWI

http://www.youtube.com/watch?v=JWakV0L8XWI

http://www.youtube.com/watch?v=xODUOlHJfhI

http://www.youtube.com/watch?v=xODUOlHJfhI


Investment

Secure property rights make investment more likely.

Property Rights allow people to obtain debt.

– Use of past and future incomes.

– Collateralization is of greatest benefit to the poor.


Investment and Growth


Without Sound Legal Institutions . . . Property Rights Hardly Exist


World Corruption Index


Do We Have a Summary Statistic

…that

– captures strength of private property rights?

– the degree of open markets?


Economic Freedom of the World

A weighted-index of variables to include:

– Legal protection• Corruption under control

– Limited government• Tax rates reasonable• Tariff rates (taxes on imports) low • Easy to start a new business• Limited government control of prices


Index of Economic FreedomHeritage Foundation – Wall Street Journal

http://upload.wikimedia.org/wikipedia/commons/6/6e/Index_of_Economic_Freedom_2010.png


World Corruption Index


2011 GDP per capita


Capitalism, Growth & Poverty

The extent to which these institutions are present is a measure of economic freedom or “capitalism”

– So, strong property rights, rule of law, and open markets makes a nation “capitalist”


Capitalism supports and promotes both entrepreneurship and innovation

– Which in turn promote economic growth

– The result is higher standards of living • at all points in the income distribution

Capitalism, Growth & Poverty


Benefits of Economic Growth

Raises standards of living by:

– reducing infant mortality


5/1000

Income Per Capita & Child Mortality

250/1000





– increasing life expectancy


Income Per Capita & Life Expectancy






– reducing child labor


Income Per Capita & Child Labor

% 10 – 14 year olds active in economy






– reducing child labor

– providing more education


Income Per Capita & Education Year: 2008

Country Education Index*

Per capita GDP Country Education

Index*Per capita

GDP

Australia 0.99 $35,677 South Africa 0.83 $3,975

Denmark 0.99 $36,604 Indonesia 0.83 $3,975

Finland 0.99 $35,426 Egypt 0.73 $5,416

New Zealand 0.99 $27,027 India 0.64 $2,972

Canada 0.99 $36,444 East Timor 0.55 $801

South Korea 0.99 $27,939 Bangladesh 0.52 $1,334

Ireland 0.99 $44,195 Papua N. G. 0.52 $2,208

France 0.98 $34,045 Mozambique 0.47 $897

Spain 0.97 $31,955 Gambia 0.44 $1,363

U.S. 0.97 $34,142 Ethiopia 0.39 $868

U.K. 0.96 $35,445 Chad 0.29 $1,455

Japan 0.95 $34,099 Niger 0.29 $684

*United Nations Education Index, 2008; World Bank GDP/capita (ppp), 2008.


Is Economic Growth Good for the Poor?

Is Economic Growth Good for the Poor?


Who Are the Poor: Extreme PovertyWorld Bank’s Dollar-a-Day Line– Less than $1.25 per day– Purchasing power parity (ppp)


Extreme/Absolute Poverty$1.25 per Day

Unthinkable poverty in U.S. terms– In U.S., 80-90% of poor (below US poverty line)

• Color television, Microwave, Cell phone• Clean running water

Extreme Poverty– Near 0% have above amenities

• Spend 73% of budget on food–over 50% of children malnourished


1,290,000,000

Extreme Poverty

World BankAbout 22% of world’s population

( < $1.25/day )


Economic Terminology

Absolute Poverty– measured against a designated minimum

threshold of material well-being (a standard) • current standard = $1.25/day PPP

Relative Poverty – identified by comparing levels of material

well-being experienced by different individuals or groups


Does Economic Growth . . .. . . improve the lives of the poor

by making the pie bigger?

Bigger “slice” means higher standard of

living


Recent History

Since 1750, world has made progress in battle against absolute poverty

– experiencing a decline in the

• percentage of the population that is poor


% of World Population in Extreme Poverty


More Recent History

But inroads against absolute poverty have been – especially noteworthy in last 25 years.

For the first time in human history, the world is experiencing not only a decline in the:

• percentage of the population that is poor

and in the

• total number of poor


Number of People in Extreme Poverty

1980


The Good News & The Bad News

# People Living on < $1/day(millions)

1987 1990 1998 2000

East Asia & Pacific 418 472 267 261

Source: http://www.worldbank.org/poverty/data/trends/income.htm#table1 & Global Economic Prospects and the Developing Countries, 2005. http://siteresources.worldbank.org/INTGEP2005/Resources/GEP107053_Ch01.pdf

217 227 302 323Sub-Saharan Africa

http://www.worldbank.org/poverty/data/trends/income.htm

http://siteresources.worldbank.org/INTGEP2005/Resources/GEP107053_Ch01.pdf

http://siteresources.worldbank.org/INTGEP2005/Resources/GEP107053_Ch01.pdf


Source: World Bank Poverty and Inequality Databasehttp://databank.worldbank.org/Data/Views/Reports/TableView.aspx (April 30, 2012)

The Good News & the Bad News …

The Good News & Some Encouraging News …

http://databank.worldbank.org/Data/Views/Reports/TableView.aspx


So . . . Does Economic Growth

. . . improve the lives of the poor by making the pie bigger?

Bigger “slice” means higher standard of

living


Our inference?

When the rich get richer . . . .

The poor get richer too!


Economic Growth offers

a way out!

Annual Growth and Poverty Reduction

Source: World Bank Poverty and Inequality Databasehttp://databank.worldbank.org/Data/Views/Reports/TableView.aspx

http://databank.worldbank.org/Data/Views/Reports/TableView.aspx


Sources: The World Bank Group. 2012. http://devdata.worldbank.org/data-query/ and CIA World Fact Book 2002. http://www.umsl.edu/services/govdocs/wofact2002/index.html (Data cited are most recent available as of 2012.)

Average Income Shares of Poor of Country’s Population (gross national income per person)

http://devdata.worldbank.org/data-query/

http://www.umsl.edu/services/govdocs/wofact2002/index.html


Economic Freedom and Income Level of Poorest 10%

Source: EFW 2007, Exhibit 1.10.


Conclusion

What is GDP?– Total market value of all final goods and services

produced in economy in a year.

What is best measure of nation’s standard of living?– GDP per capita


Conclusion

How increase GDP per capita?– Increase GDP– Decrease population growth rate

How increase in GDP?– Greater productivity


Conclusion

How increase productivity?– Technical knowledge – Physical capital– Human capital

How encourage physical & human capital, entrepreneurship, etc.?– Economic system & institutions supporting:

• Property rights• Free and open markets


Conclusion

Do all boats rise with economic growth?– Yes, all boats rise– But not likely at equal rates.


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