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Chapter 22: Problem 10

(Related to Solved Problem 22.2 on page 747) Shortly before the fall of the Soviet Union, the economist Gur Ofer of Hebrew University of Jerusalem wrote, "The most outstanding characteristic of Soviet growth strategy is its consistent policy of very high rates of investment, leading to a rapid growth rate of [the] capital stock." Explain why this strategy turned out to be a very poor way to sustain economic growth in the long run.

Short Answer

Expert verified
The Soviet Union's strategy of high investment rates leading to rapid growth in capital stock turned out to be a poor way to sustain economic growth in the long run due to several reasons: - possible overinvestment in low-return industries, - neglect of other growth drivers like technological progress and human capital enhancement, - potential resource misallocation and wastage due to lack of market forces.

Step by step solution

01

Breaking down the Soviet Union's economic strategy

The Soviet Union employed a strategy of high investment rates, which led to a rapid increase in their capital stock. This means they focused a large portion of their national income on creating new physical capital (machinery, buildings, infrastructure, etc.).
02

Understanding the implications of this strategy

The implications of such a strategy are significant. In the short run, this strategy could stimulate economic growth as the increased capital would boost productivity. However, over time, the diminishing returns to capital would set in, meaning that each additional unit of capital invested would produce less output than the previous unit.
03

Identifying the flaws of the strategy

In the long run, this strategy turned out to be a poor method to sustain economic growth for several reasons. Firstly, the policy of consistent and intense investing might have led to overinvestment in industries with little returns and neglect of key sectors like consumer goods and services. Secondly, the overemphasis on physical capital and neglect of other growth drivers like technological progress and human capital enhancement (education, skills, health) might have stunted the potential for more balanced, sustainable growth. Thirdly, there could also be an inefficiency in resource allocation due to a lack of market forces leading to wastages and inefficiencies.

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Most popular questions from this chapter

Some economists argue that the apparent slowdown in productivity growth in the United States in recent years is a measurement problem resulting from the failure of GDP to capture the effects of many recent innovations, such as cloud computing. James Manyika, head of technology at McKinsey \& Company, has argued that for many of these innovations, "we have all these benefits but we're not paying for them." a. Before the arrival of the Internet, people looking for facts, such as the population of France or the salary of the president of the United States, had to go to the library to look them up. Now people can find that information in a few seconds with a Google search. Are the benefits to you of being able to do a Google search included in GDP? Briefly explain. b. Does your answer to part (a) indicate that the slowdown in U.S. productivity growth in recent years is just a measurement problem? What other information would you need to arrive at a definite answer?

Why does a country's economic growth rate matter?

What are the consequences for growth of diminishing returns to capital? How are some economies able to maintain high growth rates despite diminishing returns to capital?

An article in the Economist on the Mexican economy noted, "A huge, unproductive informal sector and general lawlessness also drag the economy down." If these factors were the main barriers to more rapid economic growth in Mexico, would that be good news or bad news for the Mexican government's attempts to increase its economy's growth rate? Briefly explain.

A columnist in the New York Times observed that "many analysts agree that economic reform, of which integration into the global economy was a key element, has lifted millions of people out of poverty in India." What does "integration into the global economy" mean? How might integration into the global economy reduce poverty in India?
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