“Capitalism” is identified by its characteristic institutions

Institutions: the formal and informal “rules of the game” that shape incentives and outline expected and acceptable forms of behavior in social interaction.

• Private Property Rights• Rule of law• Open, competitive markets• Entrepreneurship and innovation

Present ? Evidence?

markets

private property

rule of law

entrepreneurship

ECONOMIC ANALYSISclearly present – the component is present in the economy with few exceptionsgenerally present – the component is present in the economy, but with many or significant exceptionsgenerally absent – the component is only present in the economy in some limited formsclearly absent – the component is almost entirely excluded from the economynot enough information

United States

•The judiciary functions independently and predictably although serious constitutional questions have arisen regarding the government mandated health insurance decision. •Corruption and cronyism is on the increase and is undermining the institutional integrity of the rule of law, resulting in an 86th percentile ranking in control of corruption and a corruption perception index of 7.1 (out of 10) by Transparency International and a decrease of 4 points in the heritage Foundation score to 71 from a previous 75 in 2010. •Property rights are guaranteed, although affected by increasing regulations, ranking the US 19th in the world, with a score of 85 out of 100 by the Heritage Fndn.

Specific Situation: Apple Patent Victory

Aug. 25, 2012 SAN JOSE, Calif.—Nine jurors delivered a sweeping victory to Apple Inc. in a high-stakes court battle against Samsung Electronics Co., awarding the Silicon Valley company $1.05 billion in damages and providing ammunition for more legal attacks on its mobile-device rivals.

Jurors Friday found that Samsung infringed all but one of the seven patents at issue in the case—a patent covering the physical design of the iPad. They found all seven of Apple's patents valid—despite Samsung's attempts to have them thrown out. They also decided Apple didn't violate any of the five patents Samsung asserted in the case.

Present ? Evidence?

markets

private property

rule of law

entrepreneurship

clearly present

clearly present

clearly present

clearly present

Prices and products determined in markets

Patents upheld

Courts act and decisions are enforced

Millions of companies operate in every sector

ECONOMIC ANALYSISclearly present – the component is present in the economy with few exceptionsgenerally present – the component is present in the economy, but with many or significant exceptionsgenerally absent – the component is only present in the economy in some limited formsclearly absent – the component is almost entirely excluded from the economynot enough information

2012 Country Scenario Updates

Capitalism is best thought of not as “a system,” but as a

continuum of institutional combinations . . . .

Less

capitalist

More

capitalist

Capitalism is best thought of not as “a system,” but as a

continuum of institutional combinations . . . .

Some institutional forms confer benefits on the poor . . . and others do NOT.

Less

capitalist

More

capitalist

Heritage:www.heritage.org/index/

Ranking Criteria:• Size of government• Legal system & Property rts• Sound money• Freedom to trade internationally• Regulation

1. Size of GovernmentA. Government consumptionB. Transfers and subsidiesC. Government enterprises and investmentD. Top marginal tax rate

(i) Top marginal income tax rate(ii) Top marginal income and payroll tax rate

Process: Identify quantifiable data that can be used to rank countries.

Consider how these measures connect to the institutions we ranked in the “Will the Real Capitalism?” activity:

markets, entrepreneurship

2. Legal System and Property RightsA. Judicial independenceB. Impartial courtsC. Protection of property rightsD. Military interference in rule of law and politicsE. Integrity of the legal systemF. Legal enforcement of contractsG. Regulatory restrictions on the sale of real propertyH. Reliability of policeI. Business costs of crime

rule of law, entrepreneurship, property rights

3. Sound MoneyA. Money growthB. Standard deviation of inflationC. Inflation: most recent yearD. Freedom to own foreign currency bank accounts

entrepreneurship

4. Freedom to Trade InternationallyA. Tariffs

(i) Revenue from trade taxes (% of trade sector)(ii) Mean tariff rate(iii) Standard deviation of tariff rates

B. Regulatory trade barriers(i) Non-tariff trade barriers(ii) Compliance costs of importing and exporting

C. Black-market exchange ratesD. Controls of the movement of capital and people

(i) Foreign ownership/investment restrictions(ii) Capital controls(iii) Freedom of foreigners to visit

markets

5. RegulationA. Credit market regulations

(i) Ownership of banks(ii) Private sector credit(iii) Interest rate controls/ negative real interest rates

B. Labor market regulations(i) Hiring regulations and minimum wage(ii) Hiring and firing regulations(iii) Centralized collective bargaining(iv) Hours regulations(v) Mandated cost of worker dismissal(vi) Conscription

C. Business regulations(i) Administrative requirements(ii) Bureaucracy costs(iii) Starting a business(iv) Extra payments/ bribes/favoritism(v) Licensing restrictions(vi) Cost of tax compliance

Markets, entrepreneurship

10 9 8 7 6 5

Fraser Institute Index of Economic Freedom 2013

(Released Sept. 2013)

Most Free: Hong Kong 8.97 Least Free: Venezuela 3.93

2011 data

10 9 8 7 6 5

Fraser Institute Index of Economic Freedom 2012

(Released Sept. 2012)

Most Free: Hong Kong 8.9 Least Free: Venezuela 4.07

2010 data

2013 Rankings* (Out of 151)

• Hong Kong 1• Singapore 2• NZ 3• Switzerland 4• UAE 5• Mauritius 6• Finland 7• Bahrain 8 Canada 8• Australia 10• Chile 11• United Kingdom 12• Jordan 13 (42 in 2010, 62

2012)• U.S. 17 (3 in 2006)• Israel 49 (44 in 2007, 83 in

2011)

• Poland 59 (88 in 1990, 44 in 2012)• Uganda 64 (67 in 2010, 51 in 2001,

113/113 in 1990)• Greece 85• Kenya 87• Mexico 94 (69 in 2010)• Russia 101• Egypt 108 (from high of 46, 80 in 2010)• India 111• China 123 (82 in 2010)• Iran 127• Ethiopia 142• Zimbabwe 149• Myanmar 151• Venezuela 152

*2010 Data* 2011 data

2012 Rankings* (Out of 144)

• Hong Kong 1• Singapore 2• NZ 3• Switzerland 4• Australia 5• Canada 6• Bahrain 7• Mauritius 8• Finland 9• Chile 10• United Kingdom 12• Ireland 12• U.S. 18 (down from 3 in 2006)• Japan 20• Poland 48 (88 in 1990)

• Uganda 50 (67 in 2010, 51 in 2001, 113/113 in 1990)

• Jordan 62 (42 in 2010)• Greece 81• Mexico 91 (69 in 2010)• Egypt 99 (from high of 46, 80 in 2010)• Israel 52 (44 in 2007, 83 in 2011)• Russia 95• China 107 (82 in 2010)• India 111• Iran 111• Zimbabwe 142• Myanmar 143• Venezuela 144

*2010 Data* 2010 data

Africa Continues to Lag Behind: 1/3 of the world’s “extremely poor”

What does recent research tell us about why Africa continues to lag behind – and what we can do about it?

Reduced Poverty Since 2000:Research on Growth vs. Safety Net ?

1. 75% growth / 25% redistribution (Dollar, Kraay, Kleineberg study)• context matters: averages hide wide range of variation

safety net (redistribution)

econ growth

demographic comp.

Reduced Poverty Since 2000:Research on Growth vs. Safety Net ?

1. 75% growth / 25% redistribution (Dollar, Kraay, Kleineberg study)• context matters: averages hide wide range of variation

2. economic growth is not generally associated with increased income inequality: •the (overall) share of income going to the poorest 2 quintiles (40%) does not change significantly with growth•poor governance often increases income inequality for specific populations in specific locations

3. 4/5 of the improvements in the lives of the poorest 40% of the population over the past decade are attributable to economic growth; 1/5 is attributable to redistribution

Talking about “Is Capitalism Good for the Poor?”•distinguish between “poverty” v. “poor people” •distinguish between treating symptoms v. underlying causes

Income Share of the Poorest 10% and Economic Freedom

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

Gro

wth

GD

P p

er

cap

ita

(avera

ge a

nn

ual

%),

1991-2

011

Least FreeQuartile

3rdQuartile

2ndQuartile

Most FreeQuartile

Sources: The Fraser Institute; The World Bank, World Development Indicators, Sources: The Fraser Institute; The World Bank, World Development Indicators, 2013.2013.

Most Free ……………. Least Free Most Free ……………. Least Free

Income of the Poorest 10% and Economic Freedom

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

Inco

me o

f th

e L

ow

est

10%

, 2011

Least FreeQuartile

3rdQuartile

2ndQuartile

Most FreeQuartile

Sources: The Fraser Institute; The World Bank, World Development Indicators, 2013.Sources: The Fraser Institute; The World Bank, World Development Indicators, 2013.

Most Free ……………. Least Free Most Free ……………. Least Free

Growth in Developing Nations Per Capita and Economic Freedom Quartile

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Gro

wth

GD

P p

er

ca

pit

a

(av

era

ge

an

nu

al

%),

19

91

-

20

11

Least FreeQuartile

3rd Quartile2nd QuartileMost FreeQuartile

Sources: The Fraser Institute; The World Bank, World Development Indicators, 2013.Sources: The Fraser Institute; The World Bank, World Development Indicators, 2013.

Most Free ……………. Least Free Most Free ……………. Least Free

%

Focus of lessons 2-5 in “Is Capitalism Good for the Poor?”

• Private Property Rights• Rule of law• Open, competitive markets• Entrepreneurship and innovation

Institutions Associated with Economic Growth