UNDERSTANDING ECONOMIC GROWTH • Why are we so rich

							    UNDERSTANDING ECONOMIC GROWTH



• Why are we so rich and they so poor?



  Output per worker in steady state is determined by the

  rate of investment in private inputs such as physical

  capital and skills, by the growth rate of the labour force,

  and by the productivity of these inputs. Rich countries are

  those that invest a large fraction of their GDP and time in

  accumulating capital and skills. However, countries such

  as the United States are rich not only because they have

  large quantities of capital and education per worker, but

  also because these inputs are used very productively.

  However, the above raise additional questions. Why is it

  that some countries invest much less than others? A very

  important role is played by an economy’s laws,

  government policies, and institutions.

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• What is the engine of economic growth?



  The engine of economic growth is invention. At a

  mathematical level, this is suggested by the Solow model:

  growth ceases in that model unless the technology of

  production improves exponentially.



• How do we understand growth miracles?



  We understand growth miracles as reflecting the

  movement of an economy within the world income

  distribution. Something happened in the economies of

  Hong Kong and Japan to shift their steady-state relative

  incomes from values that were very low relative to the

  United States to values that are relatively high. To make

  the transition from the low steady state to the high steady

  state, these economies must grow more rapidly than the

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United States. Eventually, we expect the transition to the

new steady state to be complete, and economic growth in

Hong Kong and Japan to return to the growth rate given

by the rate at which the world technological frontier

expands. The fact that all growth miracles must come to

an end doesn’t make them any less miraculous.

How does this transformation take place? If differences in

social infrastructure are a key determinant of differences

in income across countries, then changes in social

infrastructure within an economy can lead to changes in

income. Fundamental reforms that shift the incentives in

an economy away from diversion and toward productive

activities can stimulate investment, the accumulation of

skills, the transfer of technologies, and the efficient use of

these investments.




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