merged

d. Free international trade. Free trade causes resources to be allocated to their most
productive uses. This allows for more production from the same amount of resources.
Chapter 16 provides more detail on how free international trade increases productivity.
A nation’s success in achieving economic growth depends on the quantity and quality of its
resources, and the development of its technology. But the quantity and quality of resources and
the development of technology depend greatly on the governmental policies within the nation.
Governmental Policies and Economic Growth
Historical evidence indicates that certain governmental policies are conducive to economic
growth. Nations that have followed these policies have been more successful in achieving
economic growth than nations that have not followed these policies. The growth-inducing policies
include:
1. Strong private property rights. The strength of private property rights determines the
amount of incentive that resource owners will have in the development and directing of their
resources. The stronger the private property rights of resource owners, the more incentive
they will have to develop and to direct their resources to their most valuable uses.
Governmental policies that strengthen private property rights include:
a. Enforcement of private property rights by both criminal and civil law. Resource
owners need to be confident that their property rights are secure against foreign invasion,
theft, fraud, and government expropriation. Private contracts, freely entered into, must be
legally enforceable. The court system needs to be reasonably efficient and free from
corruption.
b. Relatively low tax rates. The essential purpose of taxation is to provide funds for
government operations. But taxes weaken private property rights. Lower tax rates on
income increase the incentive to be highly productive now and to develop one’s resources
to be more productive in the long run. Lower tax rates on earnings from savings will
encourage increased saving, which makes more investment possible. More investment
now means more economic growth in the future. To maintain low tax rates, the tax base
needs to be broad (see Chapter 13) and the government needs to be relatively small.
c. A minimum of government regulation. Government regulation may be necessary to
control externalities or other sources of market failure. But government regulation weakens
private property rights, and should be limited. Government regulation is discussed in more
detail in Chapter 29.
d. A minimum of government corruption. Government corruption weakens private property
rights in a number of ways. Government corruption creates a sense of insecurity and
uncertainty for resource owners. Corrupt governments often impose extensive regulations
on economic activity. The extensive regulations can provide opportunities for corrupt
government officials to solicit bribes (e.g. to cut through government red tape) and illegal
campaign contributions (e.g. for favorable regulations). Government corruption leads to
extensive rent seeking (see Chapter 22), which is a socially wasteful use of limited
resources.
Countries with a minimum of government corruption typically achieve a high standard of
living. Countries with a high degree of government corruption typically suffer from a low
standard of living. A table in an appendix at the end of Chapter 15 illustrates the
relationship between corruption and standard of living for selected countries.
FOR REVIEW ONLY - NOT FOR DISTRIBUTION
2. Free and competitive markets. Free and competitive markets lead to economic efficiency in
the allocation of resources and goods (see Chapter 3). Governments may restrict free and
competitive markets by restricting entry into markets (e.g. licensing requirements), by
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