Connect Extend Challenge March 12th: An increase in the rule of law an increase in the GDP per capita or it could

ould be the other way round as well (because it is a correlation)

Barriers to Development: Political Instability Corruption

Political Stability Political stability means there are rules which apply to everyone and institutions that ensure rights.

Political Instability: Results from a Lack of One of the following: 1. 2. 3. Rule of Law: Ideally, the rule of law prohibits the oppression of the weak by the strong. A good rule of law will have rules that apply to everyone. Likewise, it will ensure property rights and fair competition. Legal Institutions: A society must have functioning police, judicial and penal systems to enforce laws. Courts must be open and accessible. Intellectual property must be protected. Democratic Institutions: People who have say in their leaders are better citizens. A free and fair electoral process is common in virtually all developed countries. There has never been a famine in a democratic country

The Results of Political Instability: Without stability, a society is a place of insecurity and fear. In general, economic activity will be very low in both domestic and foreign investment. This leads to yet another vicious cycle:

Political instability Low investment Poverty Political instability Political instability is one of the principal reasons for the plight of Africa in the past 30 years. 1/3 of all countries on the continent were involved in armed conflicts. All of these nations are on the bottom 1/3 of the HDI Investment in Africa (both foreign and domestic) is the lowest in the world. It is the only continent to grow poorer between the 1980s and 2000s

Corruption: - What is corruption? Abuse of power by authority figures at all levels of governmental power. This is closely linked to the rule of law. Examples: Skimming off the top Bribes Other examples?

The Causes of Corruption: - Complicated and extensive regulations: When there are many licenses, permits, etc. necessary, authorities have the power to hinder. This creates incentives for authorities to lose papers and applicants to pay to speed up the process. - Discretionary power: When officials in office have unlimited power to grant rights or approval. Ex: Land rights.

- Bureaucracy: Large bureaucracies with poor and unclear decision making systems will lead to politically motivated hiring. Ex: Nepotism, cronyism, favoritism, etc.

What is Transparency?

The Effects of Corruption: Corruption discourages investment. - Ex: Price Waterhouse Coopers estimates that Russia loses close to $10 billion per year due to corruption - Other estimates connect a reduction in corruption with up to .5% increase in GDP. Tax evasion will be much more common. Crony capitalism will be rampant. Bribes serve as another tax on doing business. - Ultimately a regressive tax. High corruption usually correlates with less spending on merit goods. - Ex: A parliamentary committee in the Philippines estimated that corruption cost close to $2 billion annually. This amounts to almost twice the money spend on education. Therefore, it is clear why development doesnt happen faster. Corruption leads to distrust and skepticism towards the government. Misuse of funds and capital flight can lead to an increased burden of debt.

Ultimately, it becomes Another Loop: Corruption Poor Governance Corruption

Quick Write: What are some of the major barriers to development that we have discussed thus far?

Some of the Barriers of Development: Unequal Distribution of Income International Trade Barriers

Unequal Distribution of Income: Despite the fact that economic growth doesnt necessarily seem to influence income distribution, the opposite does seem to be true. Low levels of income inequality can have beneficial effects on growth. Highly unequal distribution of income can have adverse effects on human development.

Unequal Distribution of Income: Effects of Inequality High income inequality is associated: With high poverty levels Increased crime levels Sub-optimal economic performance: savings and investment will be low. Enabling the rich to control and exploit the political and economic system.

Why Informal Markets Arise? The unofficial economy is generally made up of two parts: 1. Subsistence agriculture 2. Parallel markets

Informal Markets: Can make up a significant chunk of economic activity. Some estimates put informal activity at 25-40% in developing countries. Less tax revenues for the government as a result. They are losing out on a significant chunk of money No accurate measure of how much the economy is growing

Causes of Informal Markets: Overly-formalized regulation Hazy properties rights

Results of Informal Markets: The informal market ultimately allows economic activity to take place that would not otherwise. It can in fact, increase allocative efficiency. What other impact would you imagine? Loss of income and output in the economy Create a poor tax base Little or no social welfare benefits. Little protection from the law. They are wide open to corruption.

How to Eliminate an Informal Market? Ultimately, the benefits of legal business must outweigh the costs. What could be some possible solutions to this?

Lack of Infrastructure: Good infrastructure is vital for transportation, production, attracting investment, and improving Standard of Living for citizens.