Question

What impact do you think the following events will have on long run economic growth? Why?

a) The dictator of Turan has recently begun to arbitrarily seize farms belonging to his political opponents, and he has given the farms to his friends. His friends don't know much about farming. The courts in Turan have ruled that the seizures are illegal, but the dictator has ignored the rulings.

b) The dictator of a certain country requires that companies planning to open or expand must pay a large fee to file an application one year prior to plans to build new factories or expand existing ones.

c) Suppose that a new government is elected in Tempestia. The new government takes steps toward improving the court system and reducing government corruption. The citizens of Tempestia find these efforts credible and outsiders believe these changes will be effective and long lasting.

d) The President of a developing country proposes that his country needs to help domestic firms by imposing trade restrictions.

Answer 1

a) Seizing the farms from his political rivals, and giving them to his friends, even when they do not know about farming, will result in less economic growth, because the human capital employed in farming is now of less quality. If things turn sour, a famine could even result (there have been many examples of this kind of situation throughout history).

b) This kind of red-tape will result in less economic growth, because investments that could have been made during the current year, will be postponed at least one year due to the bureaucracy.

c) The government of Tempestia is improving the judiciary, granting it independence and credibility. This will result in more economic growth because now both citizens, and international investors have more confidence in the country, since they feel that their property rights will be enforced, giving them an incentive to invest and take risks.

d) This kind of protectionist policies will likely result in less economic growth because the lack of international trade makes things more expensive for consumers, keeping their incomes from growing, and also because protectionism leads to the misallocation of resources by keeping afloat inefficient economic sectors that under a free trade system would otherwise collapse to give way to more efficient sectors.