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Why Growth Rates Differ
Chapter 8-3
Why Growth Rate Differ?

A number of factors influence
differences among countries in
their growth rates.
Why Growth Rates Differ?
Policies and institutions that alter
Growth:
 savings and investment spending
 foreign investment
 education
 infrastructure
 research and development
 political stability
 the protection of property rights
Saving and Investment
Spending
To increase Physical Capital an economy
must engage in Investment Spending
 Sources for Investment Spending:

Household saving
 Government saving
 Foreign saving


This makes banking system important to the economy
Foreign Investment
Private Savings=Investment Spending
When: Private Savings < Investment Spending
Foreign investment covers the shortfall
Is Foreign Investment
good or bad?
Eventually foreigners have to be
repaid with Interest and/or Profit
 Some Economist argue: Increase
in Real GDP generated by foreign
investment is greater than what is
paid out.


They bring new technology that
diffuses through the economy.
Education
This affects Human Capital
 Statistical analysis comparing different
countries suggests that education has
more impact on growth than increase
in Physical Capital

Infrastructure

Roads, Power lines, Clean Water, Basic
Public Health and other underpinnings
for the economic activities
Research & Development

Spending to create and implement new
technologies
Political stability, Property
rights and Govt. Intervention

Political stability and protection of
property rights are crucial
ingredients in long-run economic
growth.

There’s not much point in investing in
a business if rioting mobs are likely
to destroy it or saving your money if
someone with political connections
can steal it.
Political stability, Property
rights and Govt. Intervention

Even when governments aren’t
corrupt, excessive government
intervention can be a brake on
economic growth.

If large parts of the economy are
supported by government subsidies,
protected from imports, or otherwise
insulated from competition,
productivity tends to suffer because
of a lack of incentives.
Poor Countries Regulate Business
the most…