A Brief History of Human Progress* Taken from Gary M. Walton President, Foundation for Teaching Economics "Poverty is but the worst form of violence."

A Brief History of Human Progress*A Brief History of Human Progress*Taken from Taken from

Gary M. WaltonGary M. WaltonPresident, Foundation for Teaching President, Foundation for Teaching

EconomicsEconomics

"Poverty is but the worst form "Poverty is but the worst form of violence."of violence."

-- Mahatma Gandhi-- Mahatma Gandhi

What is What is poverty?poverty?

Poverty is hunger. Poverty is hunger. Poverty is lack of shelter. Poverty is lack of shelter. Poverty is being sick and not Poverty is being sick and not

being able to see a doctor. being able to see a doctor. Poverty is not having access Poverty is not having access

to school and not knowing to school and not knowing how to read. how to read.

Poverty is not having a job, is Poverty is not having a job, is fear for the future, living one fear for the future, living one day at a time. day at a time.

Poverty is losing a child to Poverty is losing a child to illness brought about by illness brought about by unclean water. unclean water.

Poverty is powerlessness, Poverty is powerlessness, lack of representation and lack of representation and freedom. freedom.

Every 3.6 seconds Every 3.6 seconds someone dies of someone dies of hungerhunger

Cyclical PovertyCyclical Poverty Cyclical poverty refers Cyclical poverty refers

to poverty that may be to poverty that may be widespread throughout widespread throughout a population, but the a population, but the occurrence itself is of occurrence itself is of limited duration. limited duration.

Absolute PovertyAbsolute Poverty Poverty as defined in terms of the minimal requirements necessary to afford Poverty as defined in terms of the minimal requirements necessary to afford

minimal standards of food, clothing, health care and shelter. minimal standards of food, clothing, health care and shelter.

In the Asian, African and Latin American countries, well over 500 million people are In the Asian, African and Latin American countries, well over 500 million people are living in what the World Bank has called "absolute poverty“living in what the World Bank has called "absolute poverty“

Every year 15 million children die of hungerEvery year 15 million children die of hunger

For the price of one missile, a school full of hungry children could eat lunch every day For the price of one missile, a school full of hungry children could eat lunch every day for 5 yearsfor 5 years

Throughout the 1990's more than 100 million children will die from illness and Throughout the 1990's more than 100 million children will die from illness and starvation. Those 100 million deaths could be prevented for the price of ten Stealth starvation. Those 100 million deaths could be prevented for the price of ten Stealth bombers, or what the world spends on its military in two days!bombers, or what the world spends on its military in two days!

The World Health Organization estimates that one-third of the world is well-fed, one-The World Health Organization estimates that one-third of the world is well-fed, one-third is under-fed one-third is starving- Since you've started this power point at least third is under-fed one-third is starving- Since you've started this power point at least 200 people have died of starvation. Over 4 million will die this year.200 people have died of starvation. Over 4 million will die this year.

Relative PovertyRelative Poverty(Compared to others in a designated region)(Compared to others in a designated region)

In the U.S. hunger and race are related. In 1991 46% of In the U.S. hunger and race are related. In 1991 46% of African-American children were chronically hungry, and African-American children were chronically hungry, and 40% of Latino children were chronically hungry compared 40% of Latino children were chronically hungry compared to 16% of white children. to 16% of white children.

The infant mortality rate is closely linked to inadequate The infant mortality rate is closely linked to inadequate nutrition among pregnant women. The U.S. ranks 23rd nutrition among pregnant women. The U.S. ranks 23rd among industrial nations in infant mortality. African-among industrial nations in infant mortality. African-American infants die at nearly twice the rate of white American infants die at nearly twice the rate of white infants.infants.

One out of every eight children under the age of twelve in One out of every eight children under the age of twelve in the U.S. goes to bed hungry every night.the U.S. goes to bed hungry every night.

Half of all children under five years of age in South Asia and Half of all children under five years of age in South Asia and one third of those in sub-Saharan Africa are malnourished. one third of those in sub-Saharan Africa are malnourished.

““Absolute” (v. “Relative”) Absolute” (v. “Relative”) PovertyPoverty

Absolute poverty is measured with reference to a standard

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The middle family is relatively poorer than the famous model and relatively richer than the

struggling artist.

All 3 are above the poverty line, so none is absolutely poor.

Gross Domestic ProductGross Domestic Product It is difficult It is difficult for those of for those of

us in the United States, us in the United States, where per capita GDP in where per capita GDP in 2002 was about $36,000, 2002 was about $36,000, to grasp the fact that to grasp the fact that about 2.8 billion people, or about 2.8 billion people, or nearly half the world nearly half the world population, live on $2 or population, live on $2 or less a day.less a day.

And about 1.2 billion live And about 1.2 billion live on less than $1 a day. on less than $1 a day.

Hunger, squalor, and Hunger, squalor, and disease are the norm in disease are the norm in many nations of the worldmany nations of the world

The Rich and the PoorThe Rich and the Poor According to the United According to the United

Nations, the richest 20 Nations, the richest 20 percent of the world’s percent of the world’s population receives more population receives more than 80 percent of the than 80 percent of the world’s income;world’s income;

The poorest 20 percent The poorest 20 percent receives less than 2 receives less than 2 percent.percent.

The poorest 60 percent The poorest 60 percent receives less than 6 receives less than 6 percent of the world’s percent of the world’s income.income.

History of the MassesHistory of the Masses The year 1750 does not The year 1750 does not

usually evoke images of usually evoke images of great prosperity or of great prosperity or of revolutionary progress, but revolutionary progress, but in fact the mid-eighteenth in fact the mid-eighteenth century was an historical century was an historical turning point of economic turning point of economic advance. advance.

Technological changes in Technological changes in that period allowed that period allowed growing numbers of people growing numbers of people to move from mere to move from mere subsistence activities to subsistence activities to thoughts and actions that thoughts and actions that furthered economic, furthered economic, political and social political and social progress. progress.

Almost All of our Ancestors were Almost All of our Ancestors were Utterly WretchedUtterly Wretched

Taking a long, broad Taking a long, broad view, the lives of view, the lives of almost all of our almost all of our distant ancestors were distant ancestors were utterly wretched. utterly wretched.

Consider this time Consider this time capsule summary of capsule summary of humanity from humanity from Douglass C. North’s Douglass C. North’s 1993 Nobel address: 1993 Nobel address:

Only for the Last 3 or 4 Minutes on Only for the Last 3 or 4 Minutes on History’s ClockHistory’s Clock

Let us represent the human experience Let us represent the human experience to date as a 24-hour clock in which the to date as a 24-hour clock in which the beginning consists of the time beginning consists of the time (apparently in Africa between 4 and 5 (apparently in Africa between 4 and 5 million years ago) when humans became million years ago) when humans became separate from other primates.separate from other primates.

Then the beginning of so-called Then the beginning of so-called civilization occurs with the development civilization occurs with the development of agriculture and permanent settlement of agriculture and permanent settlement in about 8000 B.C. in the Fertile Crescent in about 8000 B.C. in the Fertile Crescent – in the last three or four minutes of the – in the last three or four minutes of the clock clock

For the other 23 hours and 56 or 57 For the other 23 hours and 56 or 57 minutes, humans remained hunters and minutes, humans remained hunters and gatherers, and while population grew, it gatherers, and while population grew, it did so at a very slow pace.did so at a very slow pace.

Just 35 Minutes Just 35 Minutes on our New 24-Hour Clockon our New 24-Hour Clock

Now if we make a new 24-Now if we make a new 24-hour clock for the time of hour clock for the time of civilization – the 10,000 civilization – the 10,000 years from development of years from development of agriculture to the present – agriculture to the present – the pace of change appears the pace of change appears to be very slow for the first to be very slow for the first 12 hours.…12 hours.…

The pace of change The pace of change accelerates in the past accelerates in the past 5,000 years with the rise 5,000 years with the rise and then decline of and then decline of economies and civilization. economies and civilization.

Last 250 YearsLast 250 Years Population may have Population may have

grown from about 300 grown from about 300 million at the time of million at the time of Christ to about 800 Christ to about 800 million by 1750 – a million by 1750 – a substantial acceleration substantial acceleration as compared to earlier as compared to earlier rates of growth. rates of growth.

The last 250 years – just The last 250 years – just 35 minutes on our new 35 minutes on our new 24-hour clock are the 24-hour clock are the era of modern economic era of modern economic growth, accompanied by growth, accompanied by a population explosion a population explosion that now puts world that now puts world population in excess of population in excess of 5 billion (1993).5 billion (1993).

Restricted to Western Europe and Restricted to Western Europe and Extensions of BritainExtensions of Britain

If we focus on the last If we focus on the last 250 years, we see that 250 years, we see that growth was largely growth was largely restricted to Western restricted to Western Europe and the Europe and the overseas extensions of overseas extensions of Britain for 200 of Britain for 200 of those 250 years those 250 years (North, 1993). (North, 1993).

The Decline of Poverty: The Decline of Poverty: Where and WhenWhere and When

Figure 1 shows world Figure 1 shows world population over the population over the past ten thousand past ten thousand years, along with years, along with noteworthy noteworthy inventions, inventions, discoveries, and discoveries, and events. events.

Shortly before the Shortly before the United States won United States won its independence its independence from Britain, the from Britain, the geographical line geographical line bolts upward like a bolts upward like a rocket, recently rocket, recently powering past six powering past six billion humans alive billion humans alive on Earth. on Earth.

Advances in Food ProductionAdvances in Food Production Advances in food Advances in food

production from new production from new technologies, commonly technologies, commonly labeled the second labeled the second Agricultural Revolution, Agricultural Revolution, coincide with this coincide with this population explosion. population explosion.

Improvements and Improvements and spread of use of the spread of use of the plow, for example, first plow, for example, first introduced in the introduced in the Mesopotamian Valley Mesopotamian Valley around 4000 B.C., around 4000 B.C., changed very little over changed very little over the next 5000 years.the next 5000 years.

Competition for Needed ResourcesCompetition for Needed Resources

Contrast this with Contrast this with air travel. The air travel. The first successful first successful motor-driven motor-driven flight occurred in flight occurred in 1903 by the 1903 by the Wright Brothers. Wright Brothers.

In 1969, a mere In 1969, a mere sixty-six years sixty-six years later, Neil later, Neil Armstrong Armstrong became the first became the first man to step foot man to step foot on the moon.on the moon.

Poor Diet is Not a Matter of Bad Poor Diet is Not a Matter of Bad Choices!Choices!

For most people, poor diet was not a For most people, poor diet was not a matter of bad choices, it was the matter of bad choices, it was the absence of choices, the fact of absence of choices, the fact of scarcity. scarcity.

Exceedingly poor diets and chronic Exceedingly poor diets and chronic malnutrition were the norm because malnutrition were the norm because food production seldom rose above food production seldom rose above basic life-sustaining levels. basic life-sustaining levels.

Most people were caught in a food-Most people were caught in a food-energy trap, and low food supplies energy trap, and low food supplies and inadequate diets were and inadequate diets were accompanied by high rates of disease accompanied by high rates of disease and low rates of resistance. and low rates of resistance.

Maladies of Malnourishment Maladies of Malnourishment Reflected in Historic HeightReflected in Historic Height

The consequences of malnourishment The consequences of malnourishment and widespread disease are revealed and widespread disease are revealed in evidence on height and weight. in evidence on height and weight.

In 1750, the average height of adult In 1750, the average height of adult males in England, the world’s most males in England, the world’s most economically advanced nation, was 4 economically advanced nation, was 4 feet, seven inches, and even that feet, seven inches, and even that exceeded averages in France and exceeded averages in France and Norway (Fogel, 1994). Norway (Fogel, 1994).

Today, the average American man Today, the average American man stands 15 inches taller.stands 15 inches taller.

A typical Englishman in 1750 weighed A typical Englishman in 1750 weighed around 130 pounds, an average around 130 pounds, an average Frenchman about 110, compared to Frenchman about 110, compared to the mid-170s for U.S. males today. the mid-170s for U.S. males today.

It is startling to see the suits of armor It is startling to see the suits of armor in the Tower of London that were in the Tower of London that were worn for ancient wars; they vividly worn for ancient wars; they vividly remind us of how small people of long remind us of how small people of long ago really were. ago really were.

Second Agricultural RevolutionSecond Agricultural Revolution The second Agricultural The second Agricultural

Revolution beginning in the mid-Revolution beginning in the mid-eighteenth century, soon followed eighteenth century, soon followed by the Industrial Revolution, by the Industrial Revolution, initiated and sustained the initiated and sustained the population explosion, lifting birth population explosion, lifting birth rates and lowering death rates. rates and lowering death rates.

Evidence (Preston, 1995) reveals Evidence (Preston, 1995) reveals that for the world as a whole, it that for the world as a whole, it took thousands of years for life took thousands of years for life expectancy at birth to rise from expectancy at birth to rise from the low 20s to around 30 years in the low 20s to around 30 years in the mid-18th century. the mid-18th century.

Table 1:Table 1:Years of Life Expectancy at BirthYears of Life Expectancy at Birth

PlacePlace Middle Middle AgesAges

Select Select yearsyears

1950-1950-19551955

1975-1975-19801980

20022002

FranceFrance 3030 6666 7474 7979

United United KingdoKingdomm

20-3020-30 3636 6969 7373 7878

IndiaIndia 2525 3939 5353 6464

ChinaChina 25-3525-35 4141 6565 7171

AfricaAfrica 3838 4848 5050

WorldWorld 20-3020-30 4646 6060 6767

Life ExpectancyLife Expectancy From Table 1 we see From Table 1 we see

that by 1800, life that by 1800, life expectancy in France expectancy in France was just under 30 was just under 30 years, and in Great years, and in Great Britain about 36, levels Britain about 36, levels that China and India that China and India had not reached 100 had not reached 100 years later. years later.

By 1950, life By 1950, life expectancy in England expectancy in England and France was in the and France was in the high 60s, while in India high 60s, while in India and China it was only and China it was only about 40.about 40.

Europe and England’s Colonies Europe and England’s Colonies Advanced While the World SleptAdvanced While the World Slept

While the rest of the While the rest of the world slept, and changed world slept, and changed little economically, little economically, Europe and England’s Europe and England’s colonies in America colonies in America advanced. advanced.

By the early 1800’s, the By the early 1800’s, the United States had pushed United States had pushed ahead of Europe, and by ahead of Europe, and by the mid 1900’s, citizens the mid 1900’s, citizens of the U.S. enjoyed of the U.S. enjoyed incomes well above those incomes well above those of Europeans and many of Europeans and many multiples above people multiples above people living elsewhere.living elsewhere.

Impact of Regional Differences Impact of Regional Differences Apparent in Nations TodayApparent in Nations Today

The real impact of regional The real impact of regional differences in economic differences in economic growth is apparent when we growth is apparent when we realize that the poor nations realize that the poor nations of today—Zaire, Ethiopia, of today—Zaire, Ethiopia, Tanzania, Burma, and Tanzania, Burma, and Bangladesh—have per capita Bangladesh—have per capita income levels surpassed in income levels surpassed in Europe 500 to 1000 years ago.Europe 500 to 1000 years ago.

Even now, they have not Even now, they have not attained levels of well-being attained levels of well-being experienced by western experienced by western peoples at the time of the peoples at the time of the American Revolution (see American Revolution (see Table 3).Table 3).

ClassificationsClassifications The World Bank classifies countries into high-income, The World Bank classifies countries into high-income,

medium-income, and low-income countries on the basis of medium-income, and low-income countries on the basis of national income per capitanational income per capita

The The high-income nations, high-income nations, are known as the are known as the industrially industrially advanced countries (IACs); advanced countries (IACs); they include the United they include the United States, Japan, Canada, Australia, New Zealand, and most of States, Japan, Canada, Australia, New Zealand, and most of the nations of western Europe. the nations of western Europe.

Conditions of IACsConditions of IACs In general, these In general, these

nations have nations have • well-developed well-developed

market market economies economies

• based on large based on large stocks of capital stocks of capital goods, goods,

• advanced advanced production production technologies, technologies,

• and well-and well-educated educated workers. workers.

In 2001 these In 2001 these economies had a economies had a per capita income per capita income of $26,710.of $26,710.

DVC DVC Developing CountriesDeveloping Countries

The remaining nations of the world The remaining nations of the world are called are called developing countries developing countries (DVCs). (DVCs).

They have wide variations of income They have wide variations of income per capita and are mainly located in per capita and are mainly located in Africa, Asia, and Latin America. Africa, Asia, and Latin America.

Middle Income NationsMiddle Income Nations The DVCs are a The DVCs are a

diverse group that diverse group that can be subdivided can be subdivided into two groups:into two groups:• The The middle-income middle-income

nations,nations,, include , include such countries as such countries as Brazil, Iran, Brazil, Iran, Poland, Russia, Poland, Russia, South Africa, and South Africa, and Thailand.Thailand.

• Per capita output Per capita output of these middle-of these middle-income nations income nations ranged from $745 ranged from $745 to $9206 in 2001 to $9206 in 2001 and averaged and averaged $1850.$1850.

Low Income NationsLow Income Nations• The The low-income low-income

nations, nations, had a per had a per capita income of capita income of $745 or less in $745 or less in 2001 and average 2001 and average only $430 of only $430 of income per income per person. India, person. India, Indonesia, and Indonesia, and the sub-Saharan the sub-Saharan nations of Africa nations of Africa dominate this dominate this group. group.

EconomiesEconomiesLow (tan) – Medium (green) - high (brown)Low (tan) – Medium (green) - high (brown)

Table 2Table 2Real Gross Domestic Product Per Capita (1990 $)Real Gross Domestic Product Per Capita (1990 $)

AreaArea 10001000 15001500 17001700 18201820 19521952 19951995 20012001

EuropeEurope $400$400 $640$640 $870$870 $1,130$1,130 $4,370$4,370 $13,950$13,950 $19,256$19,256

USAUSA 600600 1,2601,260 10,65010,650 23,38023,380 27,94827,948

IndiaIndia 530530 530530 610610 15701570 19571957

ChinaChina 450450 600600 600600 600600 540540 32003200 35833583

AfricaAfrica 400400 400400 400400 400400 12001200 14891489

WorldWorld 420420 550550 600600 670670 22702270 51905190 60496049

Sources: Maddison (1998, 1999).Development Centre Studies The World Economy: Historical Statistics, Maddison, 2003.

GDP Per CapitaGDP Per CapitaThen and Now (1990$)Then and Now (1990$)

18201820 18701870 19001900 19131913 19501950 19731973 19921992 20012001

United United KingdomKingdom

17061706 31903190 44924492 49214921 69396939 1202512025 1608816088 2012720127

SwitzerlandSwitzerland 10901090 21022102 38333833 42664266 90649064 1820418204 2078820788 2226422264

USAUSA 12571257 24452445 40914091 53015301 95619561 1668916689 2317023170 2794827948

ChinaChina 600600 530530 545545 552552 439439 839839 20982098 35833583

BurmaBurma 504504 504504 685685 396396 928928 860860 14091409

EgyptEgypt 475475 649649 902902 902902 910910 12941294 24072407 29922992

GhanaGhana 439439 781781 781781 11221122 13971397 11001100 13111311

EthiopiaEthiopia 390390 626626 485485 660660

ComparisonsComparisons In 2001 U.S. GDP was nearly $10 trillion; In 2001 U.S. GDP was nearly $10 trillion; the combined GDPs of the DVCs in that year came to only the combined GDPs of the DVCs in that year came to only

$6 trillion.$6 trillion.

The United States, with only 5 percent of the world’s The United States, with only 5 percent of the world’s population, produces 31 percent of the world’s output.population, produces 31 percent of the world’s output.

Per capita GDP of the United States is 249 times greater Per capita GDP of the United States is 249 times greater than per capita GDP in Sierra Leone, one of the world’s than per capita GDP in Sierra Leone, one of the world’s poorest nations.poorest nations.

The annual sales of the world’s largest corporations exceed The annual sales of the world’s largest corporations exceed the GDPs of many of the DVCs.the GDPs of many of the DVCs.

General Motors’ annual world revenues are greater than the General Motors’ annual world revenues are greater than the GDPs of all but 21 nations.GDPs of all but 21 nations.

An An Institutional Institutional

Road-Map to Road-Map to PlentyPlenty

It is clear that the It is clear that the road out of poverty is road out of poverty is new.new.

It has been traveled It has been traveled by few societies: by few societies: Western Europe; the Western Europe; the United States, United States, Canada, Australia; Canada, Australia; and New Zealand and New Zealand (Britain’s offshoots); (Britain’s offshoots); Japan, Hong Kong, Japan, Hong Kong, Singapore; and few Singapore; and few others. others.

What steps did What steps did Western Europe and Western Europe and its “offshoots” take its “offshoots” take to lead humanity to lead humanity along the road to along the road to plenty? plenty?

CharacteristicsCharacteristics In generalIn general• literacy rates are low,literacy rates are low,• Unemployment is high, Unemployment is high, • population growth is rapid, andpopulation growth is rapid, and• exports consist largely of agricultural produce (such as cocoa, bananas, sugar, raw cotton)exports consist largely of agricultural produce (such as cocoa, bananas, sugar, raw cotton)• and raw materials (such as copper, iron ore, natural rubber).and raw materials (such as copper, iron ore, natural rubber).

Capital equipment is minimal, Capital equipment is minimal, • production technologies are simple, production technologies are simple, • and labor productivity is very low.and labor productivity is very low.

About 41 percent of the world’s population lives in these low-income DVCs, all of About 41 percent of the world’s population lives in these low-income DVCs, all of which suffer widespread poverty.which suffer widespread poverty.

Roadmap to a Roadmap to a Life of Plenty?Life of Plenty?

Why is China, the world’s Why is China, the world’s most populous country most populous country (almost 1.3 billion), now (almost 1.3 billion), now far ahead of India (second far ahead of India (second with 1 billion), when with 1 billion), when merely fifty years ago both merely fifty years ago both nations were about equal nations were about equal in per capita income and in per capita income and more impoverished than more impoverished than most poor African nations most poor African nations today? today?

Is there a roadmap leading Is there a roadmap leading to a life of plenty, a set of to a life of plenty, a set of policies and institutional policies and institutional arrangements that arrangements that developing nations can developing nations can adopt to replicate the adopt to replicate the success of advanced success of advanced modern economies? modern economies?

The heartening news is The heartening news is that while we cannot map that while we cannot map out a clear highway to out a clear highway to wealth, there are clearly wealth, there are clearly road signs to point us in road signs to point us in the right direction and the right direction and away from cliffs.away from cliffs.

Nation’s Output determined by Nation’s Output determined by Input of Factors of ProductionInput of Factors of Production

Well known is the fact that a Well known is the fact that a nation’s total output is nation’s total output is determined by its total inputs, determined by its total inputs, measured in terms of measured in terms of • natural resources, natural resources, • labor force, labor force, • stock of capital, stock of capital, • and entrepreneurial talentsand entrepreneurial talents

Two hundred and fifty years ago, Two hundred and fifty years ago, and for many centuries preceding and for many centuries preceding that, most people (80-90 percent that, most people (80-90 percent of the labor force) everywhere of the labor force) everywhere were engaged in agriculture, with were engaged in agriculture, with much of it being subsistence, much of it being subsistence, self-sufficient, noncommercial self-sufficient, noncommercial farming. farming.

Percent of Percent of Population Population Engaged in Engaged in Subsistence Subsistence AgricultureAgriculture

Today that Today that proportion is under proportion is under 5 percent in most 5 percent in most advanced economies advanced economies (3% in the U.S.). (3% in the U.S.).

During this two-and-During this two-and-one-half century one-half century transition, people transition, people grew bigger, ate grew bigger, ate more, and worked more, and worked fewer hours and fewer hours and days in greater days in greater safety and comfort. safety and comfort.

How Nations Apply Their How Nations Apply Their ResourcesResources

To explain why some To explain why some nations grow faster than nations grow faster than others, we need to look others, we need to look closely at the way nations closely at the way nations apply and adapt these apply and adapt these sources of productivity sources of productivity change. change.

To use this perspective, we To use this perspective, we need to assess the need to assess the complex relationships of complex relationships of the laws, rules, and the laws, rules, and customs of a society and customs of a society and its economic performance.its economic performance.

An ExampleAn Example

For example, in For example, in Afghanistan and Iraq, Afghanistan and Iraq, we are continually we are continually reminded of both the reminded of both the difficulty and the difficulty and the necessity of gaining necessity of gaining popular acceptance of popular acceptance of changes designed to changes designed to promote economic promote economic growth.growth.

The Human Realities of PovertyThe Human Realities of Poverty Let us examine a typical “extended” family in rural Asia.Let us examine a typical “extended” family in rural Asia.

The Asian household is likely to comprise ten or more people, including The Asian household is likely to comprise ten or more people, including parents, five to seven children, two grandparents,parents, five to seven children, two grandparents,

and some aunts and uncles. and some aunts and uncles.

They have a combined annual income, both in money and in “kind” (i.e., They have a combined annual income, both in money and in “kind” (i.e., they consume a share of the food they grow), of $250 to $300.they consume a share of the food they grow), of $250 to $300.

Together they live in a poorly constructed one-room house as tenant Together they live in a poorly constructed one-room house as tenant

farmers on a large agricultural estate owned by an absentee landlord who farmers on a large agricultural estate owned by an absentee landlord who lives in the nearby city.lives in the nearby city.

The father, mother, uncle, and the older children must work all day on the The father, mother, uncle, and the older children must work all day on the land. None of the adults can read or write; of the five school-age children, land. None of the adults can read or write; of the five school-age children, only one attends school regularly; and he cannot expect to proceed beyond only one attends school regularly; and he cannot expect to proceed beyond three or four years of primary education. three or four years of primary education.

Relief from the Daily StruggleRelief from the Daily Struggle There is only one meal a day; it There is only one meal a day; it

rarely changes and it is rarely rarely changes and it is rarely sufficient to alleviate the childrens’ sufficient to alleviate the childrens’ constant hunger pains. constant hunger pains.

The house has no electricity, The house has no electricity, sanitation, or fresh water supply. sanitation, or fresh water supply.

There is much sickness, but There is much sickness, but qualified doctors and medical qualified doctors and medical practitioners are far away in the practitioners are far away in the cities attending to the needs of cities attending to the needs of wealthier families. wealthier families.

The work is hard, the sun is hot and The work is hard, the sun is hot and aspirations for a better life are aspirations for a better life are constantly being snuffed out. In this constantly being snuffed out. In this part of the world the only relief from part of the world the only relief from the daily struggle for physical the daily struggle for physical survival lies in the spiritual survival lies in the spiritual traditions of the people.traditions of the people.

Sources of Sources of ProductivityProductivity

Consider just one of the Consider just one of the sources of productivity sources of productivity change – technological change – technological change—and how it is change—and how it is intimately tied to the intimately tied to the institutions, the laws, institutions, the laws, rules, and customs of a rules, and customs of a society. society.

A new technology can A new technology can introduce a whole new introduce a whole new product and service, such product and service, such as the airplane and faster as the airplane and faster travel, or it can upgrade travel, or it can upgrade and improve an existing and improve an existing one; one;

we have come a long way we have come a long way from the 1930’s Model A from the 1930’s Model A Fords to today’s luxury Fords to today’s luxury BMWs and state-of-the-BMWs and state-of-the-art hybrid fuel art hybrid fuel technologies. technologies.

New New TechnologyTechnology

A new technology can also affect the cost of A new technology can also affect the cost of production; the introduction of relatively light but production; the introduction of relatively light but strong aluminum changed the cost of producing a strong aluminum changed the cost of producing a whole range of goods and services, from soft-whole range of goods and services, from soft-drink cans to skyscrapersdrink cans to skyscrapers

Advances of Advances of KnowledgeKnowledge

In short, technological In short, technological changes can be thought of as changes can be thought of as advances of knowledge that advances of knowledge that raise or improve output or raise or improve output or lower costs. lower costs.

They often encompass both They often encompass both invention and/or invention and/or modifications of new modifications of new discoveries, called innovation.discoveries, called innovation.

Both require basic scientific Both require basic scientific research, then further trial research, then further trial and error and study to adapt and error and study to adapt and modify the initial and modify the initial discoveries and put them to discoveries and put them to practical use. practical use.

Risk and CostRisk and Cost The inventor or The inventor or

company pursuing company pursuing research bears research bears substantial risk and substantial risk and cost---including the cost---including the possibility of failure and possibility of failure and no commercial gain. no commercial gain.

How are scientists, How are scientists, inventors, inventors, entrepreneurs, and entrepreneurs, and others encouraged to others encouraged to pursue high-cost, high-pursue high-cost, high-risk research ventures? risk research ventures?

Rule of LawRule of Law This is where laws and rules, This is where laws and rules,

or institutions as they are or institutions as they are called, help us better called, help us better understand the causes of understand the causes of technological change. technological change.

Patent laws, first introduced in Patent laws, first introduced in 1789 in the U.S. Constitution, 1789 in the U.S. Constitution, provided property rights and provided property rights and exclusive ownership to exclusive ownership to inventors for their patented inventors for their patented inventions. inventions.

These patents and copyrights These patents and copyrights extended exclusive ownership extended exclusive ownership rights to ideas including the rights to ideas including the right to sell, a market for new, right to sell, a market for new, patented ideas emerged, with patented ideas emerged, with inventors often selling their inventors often selling their patents to people specialized patents to people specialized in finding commercial uses of in finding commercial uses of new inventions. new inventions.

Importance of InstitutionsImportance of Institutions The keys here are The keys here are

the laws and rules – the laws and rules – the institutions the institutions

In advanced In advanced economies, laws economies, laws provide positive provide positive incentives to spur incentives to spur enterprise and help enterprise and help forge markets using forge markets using commercial legal and commercial legal and property right property right systems which allow systems which allow new scientific new scientific breakthroughs breakthroughs (technologies) to (technologies) to realize their full realize their full commercial-social commercial-social potential. potential.

What is an Institution?What is an Institution?

Established behavior practices and Established behavior practices and patternspatterns that form the foundation for that form the foundation for community life. community life.

Institutions evolve in market economies to Institutions evolve in market economies to help individuals and groups accomplish help individuals and groups accomplish their goalstheir goals

A different kind of institution, clearly A different kind of institution, clearly defined and well-enforced property rights, defined and well-enforced property rights, is essential to a market economy.is essential to a market economy.

Generate Productivity AdvancesGenerate Productivity Advances Properly constructed Properly constructed

institutions generate institutions generate productivity advances productivity advances through through • specialization and division specialization and division

of labor, of labor, • allowing universities, other allowing universities, other

scientific research scientific research institutions, corporations, institutions, corporations, to cooperate through to cooperate through interrelated markets interrelated markets (production and exchange) (production and exchange)

• hastening the growth and hastening the growth and spread of technological spread of technological advances advances

Create Incentives to WorkCreate Incentives to Work Getting the Getting the

institutions right and institutions right and sustaining sustaining institutional changes institutional changes that realize gains for that realize gains for society as a whole society as a whole are fundamental to are fundamental to the story of growth. the story of growth.

The rule of law:The rule of law:• protects and set limits protects and set limits

on the use of property,on the use of property,• and influences and influences

people’s incentives in people’s incentives in work, creativity, and work, creativity, and exchangeexchange. .

Population Population Growth in Growth in Developing Developing CountriesCountries

What do Successful Economies What do Successful Economies have?have?

Examining the successful Examining the successful economies suggests a partial list economies suggests a partial list of the institutional determinants of the institutional determinants that allow modern economies to that allow modern economies to flourish:flourish:

the rule of lawthe rule of law, coupled with , coupled with limited government, and open limited government, and open political participation;political participation;

rights to private propertyrights to private property that that are clearly defined and are clearly defined and consistently enforced;consistently enforced;

open, competitive marketsopen, competitive markets with with freedom of entry and exit, freedom of entry and exit, widespread access to capital and widespread access to capital and to information, low transaction to information, low transaction costs, mobile resource inputs, costs, mobile resource inputs, and reliable contract and reliable contract enforcement;enforcement;

*an atmosphere of *an atmosphere of individual individual freedomfreedom in which education and in which education and health are accessible and valuedhealth are accessible and valued

Poverty Level In USPoverty Level In US The 2003 poverty income The 2003 poverty income

level in the United States level in the United States (about $8,500), while poor (about $8,500), while poor relative to the U.S. average relative to the U.S. average ($34,000), is far higher ($34,000), is far higher than average per capita than average per capita incomes in most of the rest incomes in most of the rest of the worldof the world

Yet another way to show Yet another way to show how widespread the gains how widespread the gains have been from economic have been from economic growth is to show the growth is to show the availability of things we availability of things we take for granted today but take for granted today but that were special in 1950. that were special in 1950.

SourcesSources: U.S. Bureau of the Census, American : U.S. Bureau of the Census, American Housing SurveyHousing Survey

Figure 2 lists items owned or used by average households in the United States in 1950 Figure 2 lists items owned or used by average households in the United States in 1950 compared to those used by Americans below the poverty threshold today. compared to those used by Americans below the poverty threshold today.

Indeed, American households listed below the poverty level today are more likely to Indeed, American households listed below the poverty level today are more likely to own a color television set than an average household in Italy, France or Germany. own a color television set than an average household in Italy, France or Germany.

Air-conditioned homes with electricity, a refrigerator, a flush toilet, television and Air-conditioned homes with electricity, a refrigerator, a flush toilet, television and telephones are common even among poor Americans (as shown in Figure 2).telephones are common even among poor Americans (as shown in Figure 2).

Conclusions:Conclusions:

Recent declines in the Recent declines in the number of the world’s number of the world’s poor are primarily a poor are primarily a result of institutional result of institutional improvements in Asia, improvements in Asia, especially in China and especially in China and India. India.

Since 1980, more than Since 1980, more than 200 million people 200 million people have moved above the have moved above the poverty threshold poverty threshold measure. measure.

Will poorer nations “catch up”?Will poorer nations “catch up”? The faster growth rates The faster growth rates

of the those of the those successfully integrating successfully integrating into the world market into the world market system is positive system is positive news, holding out the news, holding out the very real possibility of very real possibility of poorer nations poorer nations “catching up” to the “catching up” to the material comforts material comforts enjoyed by the enjoyed by the advanced/rich nations, advanced/rich nations, even as the less even as the less globalized fall farther globalized fall farther behind. behind.

Political Systems Must ????Political Systems Must ???? Devising political Devising political

systems that divide systems that divide power, either by power, either by • (1) checks and balances (1) checks and balances

among branches or among branches or components of one components of one level of government; or level of government; or

• (2) by federalism (2) by federalism creating competition creating competition among layers of among layers of government, holds government, holds promise for the needed promise for the needed economic institutional economic institutional support of enterprise support of enterprise and markets. and markets.

The Corruption The Corruption IndexIndex

Presence of Corruption Sanctions Presence of Corruption Sanctions Criminality in the Economic SystemCriminality in the Economic System

Such criminality undermines the Such criminality undermines the growth of output by diverting growth of output by diverting scarce resources toward scarce resources toward activities that “transfer” income activities that “transfer” income away from activities that produce away from activities that produce goods and services. goods and services. SUCH ASSUCH AS::

Opening economies to Opening economies to international tradeinternational trade

Controlling population growth Controlling population growth Encouraging foreign direct Encouraging foreign direct

investment investment Building human capitalBuilding human capital Making peace with neighborsMaking peace with neighbors Establishing independent central Establishing independent central

banksbanks

Establish Realistic Exchange RatesEstablish Realistic Exchange Rates

Exchange rates that are fixed at unrealistic levels forces a Exchange rates that are fixed at unrealistic levels forces a nation into an abrupt reevaluation of its currency, sending nation into an abrupt reevaluation of its currency, sending shock waves throughout its economy. shock waves throughout its economy.

Privatize State IndustriesPrivatize State Industries Many DVCs would benefit Many DVCs would benefit

by converting state by converting state enterprises into private enterprises into private firms. firms. COMPETITION!COMPETITION!

State enterprises often are State enterprises often are inefficient, more concerned inefficient, more concerned with appeasing labor with appeasing labor unions than with unions than with introducing modern introducing modern technology and delivering technology and delivering goods and services at goods and services at minimum per-unit cost. minimum per-unit cost.

Challenge to Challenge to Poor NationsPoor Nations

The daunting The daunting challenge for poor challenge for poor nations is to craft nations is to craft better political better political institutions, to institutions, to promote the rule of promote the rule of law, rather than the law, rather than the more arbitrary rule of more arbitrary rule of men. men.

This challenging This challenging transition is vital transition is vital because “history because “history offers us no case of a offers us no case of a well-developed well-developed market system that market system that was not embedded in was not embedded in a well-developed a well-developed political systempolitical system

Optimism about the future of Optimism about the future of mankindmankind

Greater and greater numbers of Greater and greater numbers of humans are living longer, in humans are living longer, in greater ease and comfort, and greater ease and comfort, and with more dignity. with more dignity.

Although war, revolutions, and Although war, revolutions, and natural and man-made natural and man-made catastrophes can imperil regions, catastrophes can imperil regions, the economic evidence and the economic evidence and historical record provide ample historical record provide ample reason to expect that the global reason to expect that the global progress launched by open progress launched by open markets and individual freedoms markets and individual freedoms secured by rule of law around secured by rule of law around 1750 will continue indefinitely. 1750 will continue indefinitely.