Quiz 17: Institutions, Policies, and Cross-Country Differences in Income and Growth

Business

Five countries with a high income per capita are as follows - 1. Norway 2. United States 3. Switzerland 4. Canada 5. United Kingdom The income is so high in these countries because these countries have high degree of economic freedom in terms of excellent voluntary exchange policies, open markets, strongly enforced laws protecting the private property rights coupled with sound legal and monetary system. Legal system in these countries is free and enforces contracts in evenhanded manner. All these aspects strengthen the productive activities in these countries and create an environment which enables the market to bring savers and investors together and channel fund into wealth - creating projects. Therefore, on account of high economic freedom, above mentioned countries have high income. Neither of the above mentioned countries has ranked among the fastest growing countries in the world since 1990. However, these countries have clocked an average growth rate of around 2 percent between the 1990 and the 2007.

Five fastest-growing economies in the world since 1990 are as follows - 1. China 2. South Korea 3. Taiwan 4. India 5. Chile These economies have grown rapidly because they have increased the magnitude of their economic freedom. This has been done in terms of strengthening the institutional structure, creation of stable monetary environment, creation of sound legal structure that is not only independent but strong enough to protect the private property rights and can enforce the contracts in evenhanded manner. Apart from this, each of the above mentioned countries have open up themselves by undertaking multitude of economic reforms. Role of state has been reduced and market sector has been given the prominence. These economies have also made themselves more open to foreign competition and investment thus attracting capital which is always a scarce commodity in these countries. To their comparative advantage that is low cost and large labor force these countries have added the increased competitiveness, free flow of capital and technology. All these ingredients have enabled them to achieve high growth rates since 1990. For example, India had undertaken the economic reforms in 1991 by dismantling the licensing system and other barriers and opened itself to the work and created institution encouraging foreign trade. These steps have enabled the India to achieve the rapid fast growth rates.

The given statement is both true as well as false. It is true in the sense that many poor countries in Africa, Asia, and Latin America have remained poor or in other words level of income in these countries has declined. Some of these countries like Haiti, Moldova, and Congo have even recorded the negative economic growth between 1990 and 2007. On the other hand, living standards in developed countries like United States, Norway, Germany, U.K. has been increasing because of increase in per capita income, technological innovation, and moderate economic growth. So, in a way, gap between rich and poor countries have indeed increased. The sentence is false in the sense that many countries that were classified as poor in 1960s and 1970s like South Korea, China, and India etc. have shown tremendous economic growth in recent decades. In fact, rate of increase in per capita income in these countries is twice as that of rate of increase in per capita income in developed countries in recent decades. Some countries like South Korea have achieved the per capita income which is more than the per capita income of many developed European countries. So, in a way, gap between poor and rich countries have declined. As above discussion clearly state that on one hand gap between rich and poor countries have increased in some cases but in other cases this gap has decreased as well. Widening or narrowing of gap depends on the policies followed by the respective countries.

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