Chapter 18: Q. b- For Critical Thinking (page 401)
Why do you suppose that many observers regard India's agricultural productivity issues related to land use as analogous to the problems arising from dead capital?
Agricultural productivity is calculated by dividing agricultural outputs by agricultural inputs.
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Assume that each billion in net capital investment generates percentage point of the average percentage rate of growth of per capita real GDP, given the nation's labor resources. Firms have been investing exactly billion in capital goods each year, so the annual average rate of growth of per capita real GDP has been percent. Now a government that fails to consistently adhere to the rule of law has come to power, and firms must pay million in bribes to gain official approval for every billion in investment in capital goods. In response, companies cut back their total investment spending to billion per year. If other things are equal and companies maintain this rate of investment, what will be the nation's new average annual rate of growth of per capita real GDP?
Answer the following questions concerning proposals to reform long-term development lending programs currently offered by the IMF and World Bank.
a. Why might the World Bank face moral hazard problems if it were to offer to provide funds to governments that promise to allocate the funds to major institutional reforms aimed at enhancing economic growth?
b. How does the IMF face an adverse selection problem if it is considering making loans to governments in which the ruling parties have already shown predispositions to try to "buy" votes by creating expensive public programs in advance of elections? How might following an announced rule in which the IMF cuts off future loans to governments that engage in such activities reduce this problem and promote increased economic growth in nations that do receive IMF loans?
Consider Table 18-1. Based on the basic arithmetic of economic growth, what were the average annual rates of real GDP growth since 1990 for those nations experiencing positive rates of annual growth of per capita real GDP?
What does this tell us about a comparison of the average rate of growth of real GDP since 2000 in emerging and developing nations compared with advanced nations?
What types of asymmetric information problems might have existed as a consequence of the control that Myanmar's protected natural monopolies exercised over allocation of investors' funds?
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