Page 433 - Krugmans Economics for AP Text Book_Neat

their economic growth suffers due to corruption among the government officials who
Long - run economic growth is
should be enforcing the law. For example, until 1991 the Indian government imposed
sustainable if it can continue in the
many bureaucratic restrictions on businesses, which often had to bribe government of-
face of the limited supply of natural
ficials to get approval for even routine activities—a tax on business, in effect. Econo- resources and the impact of growth
mists have argued that a reduction in this burden of corruption is one reason Indian on the environment.
growth has been much faster in recent years than it was in the first 40 years after India
gained independence in 1947.
Even when governments aren’t corrupt, excessive government intervention can be a
brake on economic growth. If large parts of the economy are supported by government Section 7 Economic Growth and Productivity
subsidies, protected from imports, or otherwise insulated from competition, productiv-
ity tends to suffer because of a lack of incentives. As we saw in Module 38, excessive gov-
ernment intervention is one often -cited explanation for slow growth in Latin America.

Is World Growth Sustainable?

Earlier we described the views of Thomas Malthus, the nineteenth-century economist
who warned that the pressure of population growth would tend to limit the standard of
living. Malthus was right—about the past: for around 58 centuries, from the origins of civ-
ilization until his own time, limited land supplies effectively prevented any large rise in
real incomes per capita. Since then, however, technological progress and rapid accumula-
tion of physical and human capital have allowed the world to defy Malthusian pessimism.
But will this always be the case? Some skeptics have expressed doubt about whether
long -run economic growth is sustainable—whether it can continue in the face of the
limited supply of natural resources and the impact of growth on the environment.
Natural Resources and Growth, Revisited

In 1972, a group of scientists called the Club of Rome made a big splash with a book ti-
tled The Limits to Growth, which argued that long -run economic growth wasn’t sustain-
able due to limited supplies of nonrenewable resources such as oil and natural gas.
These “neo - Malthusian” concerns at first seemed to be validated by a sharp rise in re-
source prices in the 1970s, then came to seem foolish when resource prices fell sharply
in the 1980s. After 2005, however, resource prices rose sharply again, leading to re-
newed concern about resource limitations to growth. Figure 39.1 shows the real price

figure 39.1

The Real Price of Oil, Real domestic
1949–2008 U.S. oil price
(2000 dollars,
The real price of natural resources, like per barrel)
oil, rose dramatically in the 1970s and $80
then fell just as dramatically in the
1980s. Since 2005, however, the real 70
prices of natural resources have soared. 60
Source: Energy Information Administration. 50
40
30
20
10

1949 1960 1970 1980 1990 2000 2008

Year

module 39 Growth Policy: Why Economic Growth Rates Differ 391