Question

Deirdre McCloskey, an economist at the University of Illinois at Chicago, argued, "A poor country that adopts thoroughgoing innovation ... can get within hailing distance of the West \(\ldots\) in about two generations." a. What does McCloskey mean by a country adopting "thoroughgoing innovation"? What does she mean by a country getting within "hailing distance of the West"? b. A generation is usually considered to be about 25 years. In 2016, real GDP per capita in Italy was about \(\$ 33,500\) (measured in 2010 U.S. dollars), and real GDP per capita in Haiti was about \(\$ 1,500 .\) If Haiti adopted thoroughgoing innovation and as a result its average annual growth rate over the next 50 years increased to 6.5 percent, would Haiti end up with the level of real GDP per capita that Italy enjoyed in \(2016 ?\) [Hint: Use the following equation: Real GDP per capita \(_{2016} \times(1+g)^{50}=\) Real GDP per capita \(_{2066}\), where \(g\) is the average annual growth rate expressed as a decimal.] c. McCloskey also noted that her previous observation "does not mean that catch-up is inevitable." Briefly explain why low-income countries catching up with high-income countries isn't inevitable.

Short answer

A. 'Thoroughgoing innovation' refers to widespread changes to stimulate economic growth, and 'hailing distance of the West' implies becoming fairly close to Western economic statuses. B. To know if Haiti could reach Italy's 2016 GDP per capita level, we substitute the given values into the equation to compute Haiti's future real GDP per capita. Then we compare this with Italy's 2016 level. C. Though innovation can stimulate growth, catch-up to high-income countries isn't guaranteed due to potential hurdles like institutional weaknesses, resources, conflicts, lack of human capital, and technological constraints.

Step-by-step solution

Answering what's meant by 'thoroughgoing innovation' and 'hailing distance of the West'

A. 'Thoroughgoing innovation' refers to a country embracing comprehensive changes in terms of technology, policy, and institutions to foster economic growth and development. 'Hailing distance of the West' implies that the country's economic statuses become fairly close to, or more aligned with, those of developed Western countries. It signifies relative economic convergence - catching up to or narrowing the gap with wealthier nations.

Computing Future Real GDP Per Capita for Haiti

B. Given that Real GDP per capita in 2016 = $1,500, the average annual growth rate (g) = 6.5% = 0.065 (expressed as a decimal), and the number of years (n) = 50, we can substitute these values into the given equation. Therefore, Real GDP per capita in 2066 \(= \$1,500 \times (1 + 0.065)^{50}\).

Discussing why catch-up isn't inevitable

C. Although growth is a potential outcome of thoroughgoing innovation, whether a country catches up to high-income countries is not guaranteed. Many factors can hinder this process, such as institutional weaknesses, lack of resources, geopolitical conflicts, lack of human capital, and technological constraints among others. Thus, while innovation could stimulate growth, catch-up is not always the inevitable outcome.

Comparing Haiti's Future Real GDP Per Capita to Italy's 2016 Level

B. After computing Haiti's future real GDP per capita, we compare it with Italy's real GDP per capita in 2016, which is $33,500. If Haiti's future real GDP per capita is less than, equal to, or more than $33,500, we would know if Haiti catches up to, equals, or surpasses Italy's 2016 level respectively.

Key concepts

Real GDP Per Capita Growth

Real Gross Domestic Product (GDP) per capita growth is an economic measure that reflects the average economic output per person adjusted for inflation over a specific time period. It's a metric that helps us understand how an economy is developing in terms of the average person's living standard. When we hear about a country experiencing real GDP per capita growth, it implies that the average income per person is rising, assuming the population remains constant.

For example, if Haiti adopted widespread innovation leading to robust economic reform, and its real GDP per capita grew at an average annual rate of 6.5% over 50 years, we could use the equation McCloskey mentioned to calculate its economic status in 2066. The formula \( \text{Real GDP per capita}_{2016} \times(1+g)^{n} = \text{Real GDP per capita}_{future} \) with \( g \text{ as growth rate and } n \text{ as number of years} \text{,} \) enables us to project future economic outcomes.

To track such growth, economists use data like real GDP per capita because it considers inflation and population changes, providing a clearer picture of whether people's well-being is genuinely improving or if apparent growth is just a mirage caused by rising prices or population growth.

Innovation and Economic Growth

Innovation is the engine driving economic growth and transformation. Thoroughgoing innovation, as alluded to by McCloskey, is the comprehensive integration of new technologies, policies, and institutional changes that significantly enhance productivity and economic outcomes.

For countries looking to leapfrog development stages, embracing innovation is key. This means investing in education to foster a skilled workforce, supporting research and development (R&D) for new technologies, and establishing legal and economic frameworks that encourage entrepreneurship and investments.

For instance, if Haiti were to adopt such innovations, it would influence its economic growth by improving efficiency and productivity, creating new industries, and opening up new markets. This would feed into the real GDP per capita growth, leading to prosperity that can ripple through various socioeconomic layers. The premise here is that innovation isn't just about having the latest technology; it's about reshaping the entire economic landscape to harness the power of new ideas and tools for sustained economic development.

Economic Convergence

Economic convergence refers to the theory that poorer economies will eventually catch up to the income levels of richer countries, provided they achieve comparable capital and technological conditions. This notion is based on the idea that there are diminishing returns to capital in high-income countries and thus investments in lower-income countries can yield a relatively higher rate of return.

This process is not automatic, and as McCloskey warns, it's not inevitable. Barriers to economic convergence can include inadequate infrastructure, insufficient investment in human capital, political instability, cultural factors, and resistance to change. The idea of 'within hailing distance of the West' suggests that through effective innovation and liberalizing economic policies, a country like Haiti could significantly narrow the economic gap with a country like Italy.

Putting this into the context of solving the real GDP per capita problem for Haiti, achieving a consistent growth rate of 6.5% might mathematically signal potential convergence with Italy's economic status. However, the creation and maintenance of the growth rate depend on countless variables, including the widespread implementation of effective and sustained innovative strategies and the overcoming of systemic challenges.