7 D Y N A M I C P O W E R P O I N T ™ S L I D E S B Y S O L I N A L I N D A H L

CHAPTER OUTLINE
Key Facts about the Wealth of Nations and
Economic Growth
Understanding the Wealth of Nations
Incentives and Institutions
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SEE THE
HAND
Economic growth is a matter of life and death to the 1.8 million children who die of diarrhea each year globally.

Key Facts about the Wealth of Nations and
Economic Growth
Fact One: GDP per Capita Today Varies Enormously among Nations
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Key Facts about the Wealth of Nations and
Economic Growth
Wealth and Health go Together.
Source: Penn World Tables and World Bank Group, World Development Indicators, 2005 B A C K T O

Key Facts about the Wealth of Nations and
Economic Growth
Fact Two: Everyone Used to be Poor
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Key Facts about the Wealth of Nations and
Economic Growth
A Primer on Growth Rates
How is economic growth measured?
g t
 y t
 y t  1 y t  1
 100
Where y t is per capita real GDP in year t
Example:
Year real GDP per capita
2008
2009
$15,000
$15,500 g
2009

15 , 500  15 , 000
 100
15 , 000
 3 .
33 %
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The Rule of 70 (The Magic of Compounding)
The rule of 70:
Doubling time 
70 growth rate in %
Example: If real GDP per capita is growing at an annual growth rate of 3.5%, it will double in:
70
3 .
5
 20 years.
The moral? Small improvements in growth add up fast (the power of compounding).
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A Little Growth Goes a Long Way
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Key Facts about the Wealth of Nations and
Economic Growth
Fact Three: There are Growth Miracles and Growth Disasters
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Understanding the Wealth of Nations
The Factors of Production are important
Physical capital: the stock of tools including machines, structures, and equipment.
Human capital: is the productive knowledge and skills that workers acquire through education, training and experience.
Technological knowledge: knowledge about how the world works that is used to produce goods and services.
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What Causes Economic Growth?
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Understanding the Wealth of Nations
Why do some nations have faster growth than others?
Besides factors of production, incentives and institutions matter.
Institutions = “rules of the game” that structure economic incentives.
Institutions of Economic Growth
1. Property rights
2. Honest government
3. Political stability
4. A dependable legal system
5. Competitive and open markets
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Korea’s Experiment
Before division after WWII: similar
Culture, physical capital, technology.
North Korea became a communist state with a centrally planned economy.
South Korea adopted the capitalist free market model.
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SEE THE
HAND
North and
South
Korea at night

Institutions
1. Property rights:
Provide incentives to work hard.
Encourage investment and innovation.
Without property rights:
Effort is divorced from payment, reducing incentives.
Free riders become a problem.
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Institutions
Free Rider = someone who consumes a resources without working or contributing to the resource’s upkeep.
China’s “Great Leap Forward”- which introduced farming collectives- reduced incentives. 20-40 million starved.
1978, farmers in Xiaogang met in secret to devise a plan to keep some of their produce.
(background photo)
Productivity improved so quickly the government allowed the experiment to proceed.
Food production increased 50% in 5 years 1978-1983.
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Institutions
2. Honest Government
Property rights are meaningless unless government guarantees property rights.
Corruption bleeds resources away from productive entrepreneurs.
Corruption takes resources away from more productive government activity.
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Corruption and Growth
Don’t go Together
Source: Penn World Tables and World Bank Group, World Development Indicators, 2005
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Corruption Who’s Who List
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Institutions
3. Political Stability
Changing governments without the rule of law creates uncertainty which leads to less investment in physical and human capital.
In many nations civil war, military dictatorship, and anarchy have destroyed the institutions necessary for economic growth.
Bullet casings from Liberia’s Civil War: Bad soil for anything to grow.
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Institutions
4. Dependable Legal System
A good legal system facilitates contracts and protects property from others (including government).
Poorly protected property rights can result from too much government or too little government.
In India, residents who purchase land have to do so more than once because of lack of proper record keeping.
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Institutions
5. Competitive and Open Markets
Encourage the efficient organization of resources.
One study found: if India used its physical and human capital as efficiently as the U.S., India would be 4x richer than it is today.
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Institutions
Why do poor countries use their capital inefficiently?
Whether inadvertently or not, inefficient and unnecessary regulations:
Create monopolies and impede markets
Example: until recently in India, it was illegal to produce shirts using large-scale production
Economies of scale = the advantages of large-scale production that reduce average cost as quantity increases
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Institutions and Growth Miracles
Revisited
Why did England’s Industrial Revolution bring us:
 large scale factories
 mass production
 the steam engine
 the railroad
 the beginnings of a consumer society
 the first sustained rise in human living standards above subsistence?
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Institutions and Growth Miracles
Revisited
Property rights?
England’s geography and Navy helped protect property rights
Honest government
Growth of Parliament (and religious changes) reduced royal tyranny
Political stability
Middle class developed from growth
A dependable legal system
Less corruption as royal and Catholic power is reduced
Competitive and open markets
England opened itself more to trade
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