An inquiry into the nature & An inquiry into the nature & causes of the wealth of causes of the wealth of nations.nations.Why are some nations rich Why are some nations rich

and others poor?and others poor?

We draw heavily on the work of Professor We draw heavily on the work of Professor Robert Gordon, Northwestern University, Robert Gordon, Northwestern University, and Professors Gerald Dwyer, Robert and Professors Gerald Dwyer, Robert Tamura, and Scott Baier, Federal Reserve Tamura, and Scott Baier, Federal Reserve Bank of Atlanta and Clemson University.Bank of Atlanta and Clemson University.

The map we will followThe map we will follow

TheoriesTheories EvidenceEvidence ProspectsProspects What you can doWhat you can do

Theories of Economic Theories of Economic DevelopmentDevelopment

What explains ED?What explains ED?– Labor and capital employedLabor and capital employed– ClimateClimate– ReligionReligion– ConquestConquest– Access to markets and ideasAccess to markets and ideas– Natural endowmentNatural endowment– Investment in human capitalInvestment in human capital– Property rightsProperty rights– N-achievementN-achievement

And PARTICIPATION IN And PARTICIPATION IN TRADE!... which leads TRADE!... which leads to specialization!to specialization!

But what is economic But what is economic success?success?

Ultimate Measure of Ultimate Measure of Economic SuccessEconomic Success

Standard of Living = Income per capitaStandard of Living = Income per capita– 1.3% growth, doubles every 53 years 1.3% growth, doubles every 53 years

(Philippines)(Philippines)– 5.6% growth, doubles every 12 years 5.6% growth, doubles every 12 years

(Korea)(Korea) For very long-term growth or comparing For very long-term growth or comparing

rich and poor nations, income per capita rich and poor nations, income per capita and productivity are the same thingand productivity are the same thing

Not the same thing for short-term or Not the same thing for short-term or comparisons among rich nationscomparisons among rich nations

Q = f(Capital, Labor)…and Q = f(Capital, Labor)…and unexplained variationunexplained variation Note: UV is Total Factor Productivity.Note: UV is Total Factor Productivity.

Q = f(Q = f(CapitalCapital,, Labor Labor, Education, , Education, Experience, Climate, Open)Experience, Climate, Open)

Q = f(C, L, E, Cl, O, Property Rights)Q = f(C, L, E, Cl, O, Property Rights)

Q = f(C, L, E, Cl, O, P R, Demo, Q = f(C, L, E, Cl, O, P R, Demo, Corrupt) Corrupt)

And when we don’t work?

A Note on the Importance of LaborA Note on the Importance of Labor

The critical variable. Necessary but not sufficient.The critical variable. Necessary but not sufficient. What is the number of adults in a society?What is the number of adults in a society? What is the level of education and experience? What is the level of education and experience?

(Human Capital!)(Human Capital!) What share of them is available in the labor force? What share of them is available in the labor force?

(Participation rate!) Typical level: 58% Male, 43% (Participation rate!) Typical level: 58% Male, 43% Female. Turkey: 19% Female.Female. Turkey: 19% Female.

How many hours per year do they work? Europe How many hours per year do they work? Europe average is 20% less than U.S. and world. Eastern average is 20% less than U.S. and world. Eastern Europe like the world.Europe like the world.

What is the output per hour? (Productivity!)What is the output per hour? (Productivity!) What are the rules that determine holidays? What are the rules that determine holidays?

Vacations? Unemployment compensation? Hours that Vacations? Unemployment compensation? Hours that stores and businesses can be open?stores and businesses can be open?

Unemployment Rates, OECD Countries,2004

Percent of Unemployed without Work for One Year or Longer,OECD, 2004

Output per CapitaOutput per Capitaand Output per Hourand Output per Hour

Ratio of Europe to the United States, Output per Capita and Output per Hour,

selected years, 1820-2000

40

50

60

70

80

90

100

110

1820 1830 1840 1850 1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000

Per

cen

t

Output per Capita

Output/Hour

Where is the Difference?Where is the Difference?

Bart Van-Ark, Groningen Economic Development CenterBart Van-Ark, Groningen Economic Development Center

55% retail trade55% retail trade 24% wholesale trade24% wholesale trade 20% securities20% securities Rest of the economy: ZERORest of the economy: ZERO U. S. negative in telecom, U. S. negative in telecom,

backwardness of mobile phonesbackwardness of mobile phones

Dwyer-Tamura-BaierDwyer-Tamura-Baier

Their DataTheir Data

145 countries for varying numbers of years145 countries for varying numbers of years Before 1900 for 23 countriesBefore 1900 for 23 countries 98% of the population of the world in 200098% of the population of the world in 2000 Includes human capital usingIncludes human capital using

– SchoolingSchooling– ExperienceExperience

All adjusted to 1985 U.S. purchasing powerAll adjusted to 1985 U.S. purchasing power Also includes data on property rights, Also includes data on property rights,

democratic, corruption, geography, climate, democratic, corruption, geography, climate, access to markets.access to markets.

Effect of U.K. Institutions Effect of U.K. Institutions and Geography on the and Geography on the PhilippinesPhilippines Philippines hasPhilippines has

– Labor productivity 7 percent of U.S.Labor productivity 7 percent of U.S.– Capital productivity 25 percent of U.S.Capital productivity 25 percent of U.S.

If Philippines had U.K. geographyIf Philippines had U.K. geography– Labor productivity would be 28 percentLabor productivity would be 28 percent– Capital productivity would be 26 percentCapital productivity would be 26 percent

If Philippines had U.K. institutionsIf Philippines had U.K. institutions– Labor productivity would be 75 percentLabor productivity would be 75 percent– Capital productivity would be 58 percentCapital productivity would be 58 percent

ProspectsProspects

Measure of Economic Output:Measure of Economic Output: Purchasing Power Parity (2005) Purchasing Power Parity (2005)

NationNation GDP $ Per CapitaGDP $ Per CapitaNorway, U.S., Ireland Norway, U.S., Ireland ~ $41,000~ $41,000Iceland, Denmark, Canada ~ $35,000Iceland, Denmark, Canada ~ $35,000H.K., Austria, Switzerland ~ $33,000H.K., Austria, Switzerland ~ $33,000

Japan, Germany, U.K.Japan, Germany, U.K. ~ $31,500~ $31,500France, Italy, Singapore ~ $29,000France, Italy, Singapore ~ $29,000

Portugal, Czech Rep.Portugal, Czech Rep. ~ $19,000~ $19,000Malaysia, RussiaMalaysia, Russia ~ $11,000 ~ $11,000Bulgaria, Romania, Brazil ~ $ 9,000Bulgaria, Romania, Brazil ~ $ 9,000

Ukraine, China, AlgeriaUkraine, China, Algeria ~ $ 7,200~ $ 7,200Yemen, Ethiopia, Congo ~ $ 750Yemen, Ethiopia, Congo ~ $ 750

Growth Competitiveness Index Growth Competitiveness Index RankingsRankings

World Economic Forum 2006World Economic Forum 2006

Country Country Ranking Competition Ranking Competition ScoreScore

SwitzerlandSwitzerland 11 5.815.81Finland, Sweden and Denmark 2, 3 and 4Finland, Sweden and Denmark 2, 3 and 4

SingaporeSingapore 55 5.635.63United StatesUnited States 66 5.615.61

JapanJapan 77 5.605.60GermanyGermany 88 5.585.58U.K.U.K. 1010 5.545.54EstoniaEstonia 2525 5.125.12Czech Rep.Czech Rep. 2929 4.744.74Slovak Rep.Slovak Rep. 3737 4.554.55IndiaIndia 4343 4.444.44

PolandPoland 4848 4.304.30ChinaChina 5454 4.244.24AngolaAngola 125125 2.502.50

Growth Competitiveness Growth Competitiveness FactorsFactors

1. Public Institutions:1. Public Institutions:Property Rights, Ethics, Judicial and Property Rights, Ethics, Judicial and Government Integrity, Security, Government Integrity, Security, Needless Regulation, Government Needless Regulation, Government WasteWaste

2. Infrastructure2. Infrastructure3. Macroeconomy3. Macroeconomy

Inflation, Debt, SavingsInflation, Debt, Savings(see (see www.weforum.orgwww.weforum.org for details) for details)

Growth Competitiveness Growth Competitiveness FactorsFactors

4. Health and Primary Education4. Health and Primary Education

5. Higher Education and Training5. Higher Education and Training

6. Market Efficiency6. Market Efficiency

Distortions (subsidies), Tax, Distortions (subsidies), Tax, CorruptionCorruption

7. Technological Readiness7. Technological Readiness

8. Business Sophistication8. Business Sophistication

9. Innovation9. Innovation

IP Protection; R&DIP Protection; R&D

Corruption Perception Index Corruption Perception Index 2006: Transparency 2006: Transparency InternationalInternational NationNation Ranking Ranking Score ScoreFinland, Iceland, N.Z.Finland, Iceland, N.Z. 11 9.69.6Denmark, SingaporeDenmark, Singapore 44 9.59.5U.K., Luxembourg, AustriaU.K., Luxembourg, Austria 1111 8.68.6GermanyGermany 1616 8.08.0JapanJapan 1717 7.67.6Belgium, Chile, U.S.Belgium, Chile, U.S. 2020 7.37.3Italy, Czech, SlovakiaItaly, Czech, Slovakia 4646 4.84.8Poland, Jamaica, TurkeyPoland, Jamaica, Turkey 6161 3.73.7China, Brazil, Mexico, IndiaChina, Brazil, Mexico, India 7070 3.33.3Ukraine, Georgia, MaliUkraine, Georgia, Mali 9999 2.82.8Russia, Rwanda, Nepal 121Russia, Rwanda, Nepal 121 2.52.5Iraq, Burma, Haiti Iraq, Burma, Haiti 161 161 1.91.9

World Bank Rankings World Bank Rankings (2006):(2006):www.doingbusiness.orgwww.doingbusiness.org

EconomyEconomy Ease of DoingEase of Doing Starting a Dealing Starting a Dealing withwith

Business Business Business Business LicensesLicenses

SingaporeSingapore 11 1111 88United StatesUnited States 33 33 2222Hong KongHong Kong 55 55 6464JapanJapan 1111 1818 22Czech Rep.Czech Rep. 5252 7474 110110ChinaChina 9393 128128 153153RussiaRussia 9696 3333 163163IndiaIndia 134134 8888 155155

World Bank Rankings World Bank Rankings (2006):(2006):www.doingbusiness.orgwww.doingbusiness.org

EconomyEconomy Hiring and Registering Hiring and Registering GettingGetting

Firing Property Firing Property Credit Credit

SingaporeSingapore 33 1212 77United StatesUnited States 11 1010 77Hong KongHong Kong 1616 6060 22JapanJapan 3636 3939 1313Czech Rep.Czech Rep. 4545 5858 2121ChinaChina 7878 2121 101101RussiaRussia 8787 4444 159159IndiaIndia 112112 110110 6565

World Bank Rankings World Bank Rankings (2006):(2006):www.doingbusiness.orgwww.doingbusiness.org

EconomyEconomy Protecting Protecting Paying Trading Paying Trading AcrossAcross

Investors Taxes Investors Taxes BordersBorders

SingaporeSingapore 22 88 44United StatesUnited States 55 6262 1111Hong KongHong Kong 33 55 11JapanJapan 1212 9898 1919Czech Rep.Czech Rep. 8383 110110 4141ChinaChina 8383 168168 3838RussiaRussia 6060 9898 143143IndiaIndia 3333 158158 139139

World Bank Rankings World Bank Rankings (2006):(2006):www.doingbusiness.orgwww.doingbusiness.org

EconomyEconomy Enforcing Enforcing Closing a Closing a Ease of Ease of DoingDoing

Contracts Business Contracts Business BusinessBusiness

SingaporeSingapore 2323 22 11United StatesUnited States 66 1616 33Hong KongHong Kong 1010 1414 5 5 JapanJapan 55 11 1111Czech Rep.Czech Rep. 5757 113113 5252ChinaChina 6363 7575 9393RussiaRussia 2525 8181 9696IndiaIndia 173173 133133 134134

Best Outsourcing LocationBest Outsourcing LocationA.T. Kearney (Global Management A.T. Kearney (Global Management Consulting Co.) 2005 RankingsConsulting Co.) 2005 Rankings

RankRank CountryCountry Total ScoreTotal Score11 IndiaIndia 6.876.8722 ChinaChina 6.146.1433 MalaysiaMalaysia 6.076.0744 PhilippinesPhilippines 5.875.8755 SingaporeSingapore 5.735.7366 ThailandThailand 5.725.727-87-8 Czech Republic/ChileCzech Republic/Chile 5.585.5899 CanadaCanada 5.525.521010 BrazilBrazil 5.505.50

Most Globalized Countries Most Globalized Countries (2006) (2006) A.T. Kearney & Carnegie A.T. Kearney & Carnegie EndowmentEndowment

for International Peace (2004 data)for International Peace (2004 data)

Country Total Economic Personal Technological Country Total Economic Personal Technological PoliticalPolitical

RankRank Integration Contact Connectivity Integration Contact Connectivity Engage. Engage.

Singapore 1Singapore 1 11 33 1212 2929Switzerland 2Switzerland 2 99 11 77 2323U.S.U.S. 3 3 5858 4040 11 4141IrelandIreland 4 4 44 22 1414 77U.K.U.K. 12 12 2525 1414 88 44Czech R. 16Czech R. 16 55 66 2222 3535Germany 18Germany 18 4141 2828 1616 1111Hungary 20Hungary 20 77 1717 2727 2020PolandPoland 33 33 3030 3232 3131 2525ChinaChina 51 51 2828 5555 5050 47 47

N-AchievementN-Achievement

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Questions for DiscussionQuestions for Discussion

1.1. What explains the sharp difference in What explains the sharp difference in GDP per capita as between Europe and GDP per capita as between Europe and the United States?the United States?

2.2. Desoto proposes turning squatters in Desoto proposes turning squatters in urban slums into property owners. urban slums into property owners. How would you do that?How would you do that?

3.3. Many countries limit the number of Many countries limit the number of hours a person can work each week. hours a person can work each week. Assess the relative merits of such rules.Assess the relative merits of such rules.