Economic Growth

timer Asked: Nov 29th, 2018
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1. Chapters 23 and 24 investigate causes of economic growth. Sometimes the best way to identify the crucial ingredients of a high-growth economy is to see what happens when they’re missing. The Economist reported on the state of infrastructure investment in a number of Latin American countries. About Mexico, The Economistreported: “In Mexico, public spending on infrastructure—electricity generation, roads, railways, water plants and the like—was a third lower in 2004 than a decade earlier, according to a report by Merrill Lynch, an investment bank. The World Bank describes two-fifths of the country's motorways as ‘pre-modern’. Nevertheless, the government has found the money to spend 0.7 percent of GDP on subsidizing the electricity that is consumed—which does nothing for the poorest, who live in the dark in rural areas.” (“Slow! Government obstacles ahead,” The Economist, Jun. 15, 2006.) Thinking about the concepts in Chapters 23 and 24, the situation described represents a misallocation of resources that will inhibit economic growth in Mexico. What ingredients are missing from the “recipe” for growth in this case?

2. Read the contrasting quote below, and identify the crucial difference between Chile’s experience and that of Brazil and Peru. (To “privatize” infrastructure means that the government sells to private investors companies that had previously been owned and operated by the government.)

“According to the World Bank, 58 million Latin Americans lack access to potable water and 137 million lack sewerage. In Brazil and Peru, less than a quarter of the main highways are classified as good. In surveys by the bank, 55 percent of businessmen consulted in Latin America cite infrastructure as a serious problem compared with just 18 percent in East Asia. The bank says the region will have to double or triple its current spending to bring its infrastructure up to the level of that in East Asia's fast-growing economies. The exception, as so often, is Chile. Its military dictatorship began to privatize infrastructure in 1985, starting with telecoms and electricity. Democratic governments have since gone further. Now the roads that whisk the traveler into Santiago, the capital, from the airport are privately run, as are most other motorways and the airport itself. Nearly all Chile’s water is supplied by private companies. In Santiago treatment of sewage has increased from 3 percent in 1999 to 70 percent today, says Alfredo Noman, chairman of Aguas Andinas, the capital's Spanish-controlled water company. Only the most remote households in Chile lack running water or electricity.”

3. The article went on to identify some of the reasons why privatization was successful in Chile: “Chile has been able to mobilize so much private money because its governments have established legal and regulatory procedures that investors trust. “In case of a dispute we have to go to arbitration, which we've used and it works,” says Mr Noman..” Which of the determinants of growth discussed in the chapter are operative here?

4. Brazil’s economic growth is inhibited by inadequate infrastructure. Comment on the role of the following features of Brazil’s political environment in light of the conditions for growth:

“Regulators and the courts cannot be counted on to uphold contracts. In a recent survey of 21 regulatory agencies, 12 reported attempts by government to interfere in their decisions. The rules themselves are in flux. Take electricity. Lula (Brazil’s President) scrapped a system which used price signals to induce investment in generation. But the replacement—centralized auctions based on demand forecasts by distribution companies—has failed to attract investors, partly because of a government price cap. Investment in water and sewerage is stymied by a fight between lower levels of government over which should control it. In Brazil 36 percent of concession contracts have been renegotiated, usually at the instigation of the government. All but the most profitable investments have been deterred by the high—though now falling—cost of capital.”

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School: Carnegie Mellon University

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