Ch13-AK

1) Labor productivity is a measure of GDP per worker OR per hour worked in an economy. It captures the amount of “stuff” a country’s typical worker produces. GDP per capita divides GDP by the number of citizens in a country. It measures the average income paid to people within a country’s borders. Sometimes, economists (including yours truly) are lazy and use the terms interchangeably. You should be more diligent than that.

2) The “Productivity Slowdown” refers to a period between 1973 and the mid to late 1990s in which labor productivity GROWTH declined in many major economies. The cause for this remains mysterious. Declines in investment and the skill level of the workforce are poor explanations. Higher than average energy prices is a possible cause. Some have suggested that technological progress was limited to a few small sectors of the economy during this period, while others have argued that it took time for the workforce to truly understand how to use a computer at work (output per worker declines while people learn how to use a computer, but increases dramatically once understood).

The excerpt notes that a similar productivity slowdown occurred with the advent of the electric engine (a superior technology to the steam engine). Adoption of this technology required a massive change in the way that people worked. Gains from the new technology were slow to materialize because old processes had to be replaced first. In these ways, the electric engine and computers have much in common.

3A)Convergence theories argue that poor countries will “catch up” to rich ones over time IF the countries have similar savings and education rates. Austria and the US have similar rates, so we would expect the two to have similar GDP/capita figures over time. The same would not be true for Cameroon and the US.

Growth rates between 1960-2000:

USA	= (33293-12273)/12273 = 171%
Austria	= (23676-7337)/7337 = 223%
Cameroon	= (2042-1680)/1680 = 22%

Austria is catching up to the US, but Cameroon is not. This is what theory suggests. Converge.xls gives graphical illustrations about whether or not convergence has occurred. In general, countries that were poor in 1960 had lower subsequent growth rates, so convergence did not occur. However, countries do converge conditional upon having similar savings and education levels. The OECD is a group of countries that maintain these similar rates. Note that convergence did occur among OECD countries not because they belong to in the OECD, but because they have similar savings and education levels.

4A)This is a question about property rights.

Here are some relevant facts about Zimbabwe: Formerly Rhodesia, the country declared independence from the UK in 1965. Like South Africa, however, they formed a White-supremacist government built upon apartheid – clearly, an abhorrent institutional choice. The Black majority, led by Robert Mugabe revolted. By 1979, the Whites agreed to Black rule, the country was renamed Zimbabwe, and Mugabe became Prime Minister in 1980.

In 1992, Mugabe passed a Land Acquisition Bill that allowed the government to forcibly purchase half the land owned by White commercial farmers and redistribute it to Black peasants. One can see the motivation for such a policy: had Whites not forcibly removed Blacks from their land in prior centuries? Aren’t native Africans entitled to some compensation? However, you should also ask yourself: what are the consequences when a country lacks well-enforced property rights?

Mugabe’s land redistribution scheme was an extremely costly way of forcing White landowners to atone for their prior sins. The Guardian notes that productivity has decreased 40% in the last five years. The NY Times article gives some indication of the costs of land acquisition: “Agricultural exports were an economic mainstay. But in the last five years, Zimbabwe's parceling out of 5,000 commercial farms among squatters and peasants has caused the collapse of commercial farming. That has destroyed the businesses that supported it, from tractor sales - the nation needs 50,000, and has fewer than 400 working ones - to irrigation suppliers.” Also, “Business executives interviewed for this article almost uniformly refused to be named, fearing that criticism of economic policies would doom their scant chances of receiving government assistance.”

The Times also lists several consequences of bad policies: 70% unemployment, no available credit from abroad, food riots, gas-line protests, mobs, capital flight, hyperinflation, inability to find inputs for production, inability to ship goods, rent seeking activity (waiting in line for sugar), black market activity, etc.

The Guardian describes a solution Zimbabwe had been considering: Allow White workers to temporarily return to land they had previously owned. “Skilled whites and other new investors would be given special guarantees of uninterrupted tenure of five to 10 years, backed by government force to prevent any disruptions on the farms.”

Now, ask yourself how effective this policy would be, given past disregard for property rights. The article also remains skeptical, “John Worsley-Worswick of Justice for Agriculture said: ‘This is a puppet show and it's not going to solve things... But the reality is that the few farmers who have managed to stay on their land are being hammered by the military. This suggestion that white farmers could come back is an admission of their failure, but I don't know anyone who would take them up on their offer. The government's agriculture policy has failed abysmally. There is no maize, there is no wheat, people are hungry. It's a debacle.’"

5A) Problems: economic mismanagement, massive government debt, extravagant social welfare programs, high taxes, political instability, unemployment, emigration. When governments use a large amount of a nation’s resources, they drive up interest rates (we’ll see why later), which deters private investment. High taxes further reduce firms’ willingness to expand businesses. High taxes and generous welfare subsidies also reduce individuals’ incentives to genuinely look for work. Young, energetic, and able people desiring work will look for employment in other countries and emigrate, leaving the home country (Ireland) devoid of quality workers.

5B) The article states that the biggest contribution came from more people working (both from increased female participation rates and from immigration). The problem is, however, that the earlier articles had projected emigration to continue. This begs the question, why did Irish emigrants return? Why did women choose to work more? There must be some fundamental cause to the changing structure of the Irish workforce.

Note also that the article argues that much of Irish growth came from increased use of the factors of production (labor, capital, human capital), and not technological growth (the article uses “productivity growth” as a synonym for “technological growth”). Since there is a limit to how much growth can be achieved through factors alone, there is a concern that the Celtic Tiger will not roar forever. (Although, I’m not sure I agree with the article’s assessment).

6) Countries poorer than the US in 1965 will be to the left of the vertical line X=1. Countries Poorer than the US in 2000 will be under the horizontal line of Y=1. Countries that grew slower than the US will have lower relative GDP in 2000 than they did in 1965. This means they will be below the diagonal “45-degree” line from the origin, Y=X.

6A) Malaysia, Lower, Lower, Faster

6B) Venezuela, Lower, Lower, Slower

6C) United Kingdom, Lower, Lower, Slower

6D) Luxembourg, Lower, Higher, Faster

6E) Switzerland, Higher, Lower, Slower