Promoting Economic Growth

from the book

The Economic Way of Thinking
de Paul Heyne, Peter Boettke y David Prychitko

Profesor: Fernando Monterroso V.

Law and Economics
Escuela de Negocios
Universidad Francisco Marroquín
Tercer Ciclo 2018
 Un sistema económico
• An economic system is a social system through which
people cooperate in creating and using resources to
satisfy one another's wants. Why do some systems
accomplish so much more than others? That's the subject of this
chapter. Some nations, of course, start off with fewer natural
resources than others. But differences of natural endowment
cannot begin to explain the enormous differences in wealth and
welfare between rich Singapore and poor India, or between rich
Switzerland and poor Nigeria. Nor can the ratios of population to
land explain all or even most of the observed differences between
the wealth of some nations and the poverty of others. The 37,000
square kilometers of the Netherlands support 16 million people
far more munificently than the 45,000 square kilometers of
Estonia support one-tenth that number-not to mention the fact
that the people of the Netherlands created a substantial amount
of the land on which they live.
 La clasificación entre ricos y pobres es PIB per cápita

• The middle-income economies are those of Latin America,

from Mexico to the tip of South America (except for Nicaragua,
Honduras, Haiti, and Guyana, which are low income), South
Africa and the countries of northern Africa, for the most part
the nations of the Middle East from Greece and Turkey to Iran
and Saudi Arabia, the nations of central and eastern Europe
that were part of the Soviet empire until 1989, most of the
republics in the former USSR, plus Thailand, Malaysia,
Indonesia, and the Philippines.
• The criterion used by the World Bank to classify
each country is gross national product per capita,
which is GNP divided by population. Because those
who measure the total income and product of the world's
nations emphasize gross domestic product, and gross national
product is for most purposes practically the same as gross
domestic product, we'll focus on gross domestic product in
explaining the significance and the limitations of this criterion
of wealth or poverty.
 El crecimiento económico surgió en Europa
Occidental

• A fundamental objection to exploitation as a general explanation

of the great contrast today between wealthy and poor nations
arises from the fact that some of the poorest nations of the
world, such as Ethiopia, were never subjected to conquest or
colonization, and some of the wealthiest, such as Switzerland,
never conquered or colonized. Military power seems to have
been much more the effect than the cause of economic growth.
There can be no doubt, however, that economic
growth was first discovered or invented in Western
Europe. When Marx and Engels celebrated in 1848 the
productive achievements of "bourgeois society" over
the preceding 100 years, they were looking almost
exclusively at what had happened in Europe and its
extensions: the United States, Canada, and Australia.
Outside these countries, increases in per capita GDP had been
quite unremarkable.
 El desarrollo económico es una función
de tres cosas
• The unprecedented phenomenon of sustained economic growth emerged in human
history because some nations of the world managed to create conditions under
which the vast majority of their people could specialize and exchange. The essential
precondition was and is a stable social order in which the rule of law is well
established so that people can initiate projects with reasonable confidence that they
will be able to enjoy the results of their efforts.
• One way to think about this is that economic development is really a
function of three things: people, resources, and institutions. People,
however, are really a factor that must be treated as given. We might like it if people
were friendlier and nicer, but we cannot really control that. We also do not have
direct control over the natural endowment of resources. We might hope for better
weather and more productive land, but that is not something our choices directly
determine. But we do have some command over the institutions that
govern the way we interact with one another and the way we utilize
resources. This is why fundamental institutions (such as the rule of
law), and not the supply of natural resources or the level of human
capital investment, are vital to economic development. These institutions
provide the rules of the game under which we interact and realize the gains from
exchange.
 Un requisito indispensable es el comercio
• Another important prerequisite is the possibility of exchanging both
goods and ideas at low cost. Specialization cannot proceed if people
cannot trade, and they won't be able to trade if the cost of moving
goods is higher than the prospective gains from trade. The
exchange of ideas is also important, perhaps much more important
than Adam Smith and other early economists realized. The
geography of Europe was thus a major factor in the nurture of
economic growth. Europe's many good harbors along extensive
coastlines and its numerous broad rivers, flowing through level
plains and kept navigable throughout the year by melting snow from
the mountains, enabled the people of Europe to trade goods and
ideas over wide areas at low cost.
• Extensive specialization cannot progress very far without the accumulation of
additional capital. Those who produce goods for the use of others, generally
unknown to them and often far away, must be able to live during the steadily
lengthening period of time between the beginning of the production process and
the receipt of income from the sale of what they have produced. Economic growth
consequentIy presupposes the accumulation of stocks of consumption goods to
tide producers over the period of production, goods that function as capital
because they are produced goods whose use increases the future rate of
production.
 La innovación tecnológica es un factor importante en
el crecimiento económico

• Technical innovation may in fact be the most powerful of the

forces that propel economic growth. Take transportation
systems, for example, already mentioned as a major factor in the
process of economic growth. How did people in the United States move
merchandise, ideas, and themselves in 1800? Very slowly, by today's
standards. Almost everything went by water if it was to go any long distance.
Roads were costIy to construct. They had to cross rivers and mountains and
remain passable in snow and mud. And the goods or people that traversed
them moved mostIy by literal horsepower. The accumulation of transportation
capital between 1800 and 1870, however, was not primarily the accumulation
of additional sailing ships and canals, but rather the accumulation of
additional railroad tracks, locomotives, and rolling stock, which moved
merchandise far faster per unit of capital. Thus technological innovation was
embodied in the additional capital people were acquiring. By 1940, the
internal combustion engine had created another huge increase in the
productivity of a new unit of transportation capital intended for the
movement of merchandise. As for the capital equipment that moves people
and their ideas today, we are all familiar with the jet airplane and the Internet
and their vast superiority in every dimension when compared with the capital
equipment that moved people and ideas in 1800 or even 1940.
 La oportunidad de crecimiento de los países
pobres

• Here is a role for foreign investment. Investors in wealthy

countries can lend the means with which to purchase the capital
equipment that poor countries want to purchase. Will they be
willing to do that? They will if the expected rate of return on
such investments, adjusted for risk, exceeds the expected rate of
return on alternative investments. Because a country playing
catch-up has an opportunity to grow very rapidly, the
rates of return on investment in poor countries ought
to be correspondingly high. Unfortunately, the risk on
such investments is also quite high in many cases. To the high
ordinary risks that typically come with investing in an
economically undeveloped country, risks caused by uncertainties
regarding the ready availability of complementary resources, we
must add in many cases the risks created by political instability.
 El comercio y la inversión son importantes para el
crecimiento económico

• Foreign trade and investment have made large contributions

to world economic growth, and those today who stridently
insist that "globalization" only makes the rich richer while
further impoverishing the poor ought to explain why this
should be the case now when it was not the case in the past,
even the very recent past. Nations that have been insulated from
the world economy or have chosen to insulate themselves have not
experienced notable economic growth. On the other hand, the examples
of Hong Kong (before its incorporation into China in 1997) and Singapore
should be sufficient to refute those who doubt the power of the
international division of labor to generate wealth for those who
participate in the global economy. These tiny countries, set in hostile
environments and almost totally devoid of what we ordinarily think of as
natural resources, achieved astounding records of economic growth by
throwing themselves wholeheartedly into the whirl of international trade
and investment.
 La ayuda internacional no siempre es ayuda

• We worried a moment ago about the danger that governments granting aid to
other governments would interfere in the domestic affairs of the recipient
country. We need to balance that against the fear that they will not interfere.
The fact is that many recipient countries use foreign aid in ways
that fail to advance economic growth. The aid may even reduce
the rate of economic growth. How could a gift of capital reduce
a country's growth rate? At worst, you might think, it would only
do no good. But the capital received from donor countries is
almost inevitably going to be employed in conjunction with
domestic resources- Iand, labor, domestic capital-that would
otherwise have been employed somewhere else. Thus foreign aid that
is allocated to useless projects-useless in the sense that they make no
contribution to economic growth, such as a four-Iane highway to the ruler's
country palace, or a national airline that mainly transports politicians and
bureaucrats to Alpine vacations, or even a dam that looks impressive but does
not manage to produce valuable electricity or irrigation water-such aid will
make a negative contribution to economic growth in the recipient country. The
opportunity cost of putting foreign aid to work in a country is not zero.
 La ayuda debe ir hacia los que van a
aprovecharla
• Foreign aid can also prop up bad governments whose policies are designed
to enrich a favored few or keep the ruling parties in power even if that
retards economic growth. When you think about it carefully you realize that
government-to-government aid is interference by the donor government in
the domestic affairs of the recipient country. If you don't see why, ask
yourself how people who would like to overthrow a tyrannical government
regard grants from other countries that flow through their own rulers. The
question thus becomes not whether but how governments or international
agencies extending assistance to the governments of poor countries ought
to interfere. If the goal is to lift people out of poverty, then aid
should be channeled to countries with good economic policies
and lots of poor people. Although there is certainly room for
disagreement about exactly what constitutes the best
economic policy in particular situations, we know a great deal
about what works and what does not. The basic problem is
not ignorance so much as political incentives that keep those
in charge from doing what even they know ought to be done.
 A la inversión privada le conviene el
progreso económico

• There are several reasons why private investment

can usually do more to accelerate economic growth
than aid from foreign governments or official
international agencies. One is that private
investment is often accompanied by people who
know how to use it.

• A more important reason is that private investors,

at least in the absence of corrupt relations with
local officials, urgently want economic growth,
because that is what will make their investments
profitable. Private investors are not much inclined toward
projects that look impressive but don't create more value than
they use up. They are fairly diligent about seeing to it that the
capital they lend finds productive uses.
 La educación de la mujer es importante para el
crecimiento económico

• One sound policy that poor nations ought to pursue more

diligently than many now do is basic education, especially
for women. A literate population is another important
precondition for rapid economic growth. And by
neglecting the education of girls, many poor countries are
willfully depriving themselves of valuable resources.
Chapter 11 argued that income inequalities among persons in the
United States are attributable primarily to differences not in the
amount of physical capital that they own, but differences in the value
of their human capital. It is the possession above all of productive
knowledge and skills that makes individuals wealthy. How much
does human capital contribute to growth in the wealth of nations?
 Mayor riqueza lleva a más educación

• It is difficult if not impossible to give a quantitative answer to this

question, in large part because one way in which wealthy nations spend
their income is by providing schooling more generously for their citizens.
Schooling is a consumption good as well as a capital good. Because
increased wealth leads to additional schooling and also to
more knowledge acquired in other ways, we can't estimate
with any confidence the precise contribution that human
capital makes to the process of economic growth. We can
be sure, however, that it is important. Could technical
progress have made such a large contribution to economic
growth in the absence of an educated populace? It seems
most unlikely. The knowledge and skills of the people who develop new
products for Microsoft had to be matched by an increase in the
knowledge and skills of those who use Microsoft products if those
products were to be more than mere toys. The complex machinery that
enables us to do so many things so much more easily has to be repaired
as well as designed and manufactured.
 El uso del conocimiento es un factor crucial en
el desarrollo económico
• Most people think in terms of given endowments of factors and the
earth´s natural resources . But if we go beyond that common
assumption and think outside the box a little, we find knowledge to
be the crucial factor in the process of economic growth.
It is not ´´things" that are lacking in the poor countries of
the world. It's ideas. For the greater part of human history
oil had no practical value. It was nothing less than an act
of human intelligence that eventually saw a way of using oil
to serve human purposes. Julian Simon, an economist who had
quite the ability to think outside the box, put it this way: ´´Resources
come out of people's minds more than out of the ground or the air´´
Natural resources are, of course, found in the physical world around us,
but Simon's point is that it takes human minds to discover and employ
those resources. What we might take today as an obvious way to use a
natural resource-say, the use of silicon in computer chips-is, in fact, an
inherited deposit of human knowledge and intelligence.
 Hay un correlación entre libertad
económica y crecimiento económico

• Beginning in the 1980s, a group of economists sought to capture these insights using traditional empirical
techniques. In consultation with Milton Friedman and other market-oriented economists,
Walter Block, James Gwartney, and Robert Lawson developed an Economic Freedom
Index and then correlated their index with measures of economic growth. Their results,
originally published in 1996, presented data on world development from 1975 to 1995. Since that time,
Gwartney and Lawson have annually updated their study and other organizations have joined the effort to
measure the magnitude of the effect of various policies on economic growth.3 The Economic
Freedom lndex seeks to measure a country's economic policies in the dimensions of
regulation, pricing practices, monetary policy, fiscal policy, and intemational trade.
Countries that follow policies of low levels of regulation, freedom of pricing, stable monetary policy, low
levels of taxation, and open intemational trade are graded as having greater degrees of economic freedom;
whereas countries with high levels of regulation, administered pricing, inflationary monetary policy, high
levels of taxation, and closed international trade will be scored as having a lower degree of economic
freedom. The results of their initial measurements can be seen in Figure 20-l.
 Entre más libres, mayor es el PIB per cápita

• As can be seen, the countries that followed

policies that ranked the highest on the
economic freedom index (the A countries)
also had the highest levels of per capita GDP.
These aggregate correlations are worth considering
when discussing why some nations are rich and others
are poor, but an examination of the historical record
might get underneath these figures a bit more and
reveal to us in more detail the institutional prerequisites
for economic development and the causal forces that
contribute to economic development.
 La razón del crecimiento económico

• This observed correlation between economic freedom and

economic development is surely not a mere statistical association.
There is a systematic causal force, identified by Adam Smith back
in 1776, in The Wealth of Nations. People grow wealthier
when they have the freedom to participate in the
market process. The causal force is precisely what we have
been explaining throughout this textbook, starting in Chapter 2.
The economic freedom that allows people to cooperate
with one another through the voluntary exchange of
private property rights-to buy, sell, and trade as each
best sees fit under the rule of law-contributes to the
development of personal and national wealth. It
unleashes a process that allows people to seek their comparative
advantage, to find ways to produce and deliver scarce goods and
services at lower cost, and to tap the entrepreneurial motive that
drives the market process.
El caso de Korea del Sur
• The government and people of South Korea
certainly paid adequate attention to education,
including the education of women, who currently
make up more than a third of the labor force. The
country opened itself to the global economy and
made effective use of the funds that foreigners
were willing to invest in the country. Taking
advantage of a boom in international trade during
these years, South Korea concentrated on
producing exports that could be used to purchase
other goods required for development. Who would
have predicted in 1960 that 20 years later automobiles
manufactured in Korea would be competing for sales with
automobiles made in Western Europe and North America?
 El caso de Japón y Taiwan

• The records of Japan and Taiwan over this period were

similar to that of South Korea, both in the rates of
economic growth achieved and in the policies generally
pursued. An educated populace willing to work hard and
to save, operating within a framework of stable rules of
the game, taking cues from the price system, open to the
world economy, and not hampered by excessive
government spending or rapid inflation can take
advantage of the technology developed by more advanced
nations to grow rapidly and to narrow substantially the
gap between themselves and the very wealthiest nations
of the world. Japan did more than narrow the gap, becoming itself
one of the wealthiest countries. In 1960, per capita gross domestic
product in Japan was 35 percent of per capita GDP in the United
States. In 1999, it was 78 percent.
 El caso de la India
• Although there have been signs over the last decade of reform on these
counts, India displayed extreme reluctance to let prices
allocate resources and a strong preference for lodging
authority in government bureaucrats. The government
engaged in extensive distortion of prices throughout this
period. Some prices were suppressed for the stated
purpose of protecting poor people, although they did not
always have this effect. As you may remember from earlier
chapters, governments that hold down prices do not
thereby reduce scarcity. They are much more likely to
aggravate scarcity by discouraging suppliers. Moreover, prices
held down by law don't assure the poor that they will be able to obtain
the goods whose prices are being suppressed ostensibly for their
benefit. Competition will move to other margins, and the poor are often
no more capable of competing effectively on these margins than they
are of competing on the margin of price.
 Más sobre el caso de la India
• The Indian government also distorted prices, in effect, by refusing to pay
attention to the information prices provided. Central planning as
practiced in the USSR enjoyed a considerable reputation in
the 1960s (largely undeserved, as we subsequently learned),
and government leaders in India allowed themselves to be
seduced by the Soviet model. The result was a great deal of
waste, reckoned again in terms of economic growth
forgone, as investment was directed toward projects that
ultimately proved incapable of generating revenues in
excess of costs. In those sectors of the economy that the
government did not attempt to plan, entrepreneurs were
systematically discouraged by the regulations of
bureaucrats whose authorizations were required to do
almost everything. The rule of law does not exist in an economic
system where government licenses are required for most economic
decisions and those licenses are granted or withheld in an arbitrary
manner, according to little more than the will of the relevant
bureaucrat. Arbitrary government is the very opposite of the rule of law,
and it functions as a crushing damper on enterprise.
 Los casos en Latino America
• The countries of Latin America have had a very mixed record on economic
growth since World War lI. The mixed record of Latin American economies has
been mixed over time as well as space.
• In 1929, per capita GDP in Argentina was 63 percent of the U .S. level and
Argentina ranked among the wealthy countries of the world; it was only 38.5
percent of the U.S. level in 1999.
• Per capita GDP in Venezuela in 1999 was 0.1 percent below what it had been
in 1960.
• In Brazil, per capita GDP rose rapidly in the 1970s but fell in the 1980s; in
1990, it was 8 percent below what it had be en in 1980. In 1999, it was 4
percent higher than where it had been in 1990.
• Chile went through two economic revolutions during this period, both of
which had major effects on its economy. The Chilean economy has seemingly
stabilized in recent years, enjoying 19 percent growth from 1990 to 1999.
Economic policies in Peru varied during this time between what can only be
called absurd to what might be called reasonably sensible.
 La inestabilidad no ayuda para
establecer un Estado de Derecho

Variable economic policies have been the rule in Latin

America rather than the exception, which makes it
difficult to generalize about the causes of economic
growth in these countries and the causes of their failure
to grow. The safest generalization might be
that unstable governments cannot establish
the rule of law and that Latin American
governments have been notoriously unstable.
 No estamos condenados a la pobreza

• The experiences of Asia over the past decades

assure us that policies do matter. Other Asian
countries have not done as well as Japan, Korea,
Taiwan, Hong Kong, or Singapore. But
Thailand, Malaysia, and China have experienced
respectable rates of economic growth, giving us
reason to believe that poverty is not the
unavoidable fate of any nation in today's world.
Policies, however, are set by governments, and we cannot
count on those who set policies always to favor economic
growth over narrower goals of their own that are not
compatible with growth.
 Once over lightly 1. El crecimiento
económico es
reciente
• Economic growth entered the world only within the past
few centuries, in company with a rapidly expanding division of
2. Transporte
labor or specialization, making its first appearance in Europe and its barato y el
offshoots. flujo de ideas
son
• Low-cost means of transporting people, merchandise, and importantes
ideas have been an important precondition for increasing 3. Establecer un
specialization and the economic growth that it generates.
Estado de
Derecho es
• Another essential condition for economic growth within a society is esencial para
the establishment of clear, generally accepted, and well-
enforced rules of the game, or the rule of law. lograr el
crecimiento
• Economic growth has depended upon the accumulation of
económico
capital, both because capital increases the productive power of labor 4. El crecimiento
and because capital embodies the technical progress that has económico
contributed so greatly to the process of economic growth. depende de la
acumulación
de capital
 Once over lightly 5. Abrirse a la economía
globalizada facilita el
crecimiento económico
permitiendo
aprovecharse de las
• Openness to the global economy facilitates economic growth. ventajas comparativas.
Asimismo, la inversión
In addition to permitting a fuller exploitation of comparative advantages, it
extranjera puede
enables primitive economies to benefit from the technological
ayudar enormemente a
achievements of already developed economies. If a nation establishes la acumulación de
favorable conditions, foreign investment can also make a large contribution capital que necesitan
to the accumulation of initial capital in a developing economy. las economías en
• The willingness of the population to save a large part of its income desarrollo.
can make a significant contribution to capital accumulation and economic 6. El ahorro es importante
growth. ya que permite la
acumulación de capital
• Human capital is an important part of a society's capital stock. Economic 7. El desarrollo
growth proceeds more rapidly in a society of educated people. económico es más
A growing amount of evidence suggests that knowledge is the single most rápido en una sociedad
important factor in promoting economic growth. de gente educada.
Estudios recientes
señalan que el
conocimiento es el
factor individual más
importante en
promover el
crecimiento económico.
 Once over lightly
8. Si un país
crece por
• The knowledge essential to economic growth encima (o
includes knowledge about the effective por abajo)
organization of political life. Whether a nation del
experiences rapid economic growth or an crecimiento
economic growth rate below its rate of poblacional
population growth will depend largely on dependerá
whether it develops appropriate principalmen
institutions of governance. te de las
• The reliability of aggregate GDP analysis is further instituciones
aggravated when trying to compare per capita de
GDP across different countries with differing gobernanza
currencies. que logre
desarrollar.