Why Some Economies Grow Faster Than Others

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Why Some Economies Grow Faster Than Others
A Comparison of Cuba and Israel
Harry M. Geedey
Professor Evelyn Bolden
Economics 250
March 1, 2011

Abstract
The governments of Cuba and Israel are relatively young. The two countries are of similar size, population, and possess similar natural resources. They each have port cities with easy access to the world. Their governments were founded on socialist principles. Despite the similarities, the economic performance of Israel has far outpaced Cuba’s. This paper will examine the reasons behind the disparate economic performance of countries, and then specifically examine the economies of Israel and Cuba.

Why Some Economies Grow Faster Than Others
There are many reasons why some economies grow faster than others. Let’s begin with the things that aren’t in the control of individuals or governments. Geography plays an important role in economic growth. It is more difficult to ship and receive goods in landlocked countries. Extremely hot or extremely cold climates limit the amount of human exertion possible and require more inputs in the form of heating and air conditioning. Economies that have an abundance of water, valuable minerals, arable land, and oil also have a significant advantage over those that lack natural resources. Ceteris paribus, most economists would agree that the next most important element of economic growth is a market oriented economy. The things that are necessary to facilitate a smooth transition to a market economy follow. People must have the freedom to seek utility and produce goods and services. Individuals must also have the right to own property, and the opportunity to succeed or fail. Economic growth will be diminished if individuals do not have the right to own property and the opportunity to succeed. Individuals must also be educated to the extent that they can assess the utility of various goods and services and choose the ones that best satisfy their needs. Individuals must also be educated to the extent that they are able to compute “the utility generated from alternative forms of self employment for their own account” Rosefield. Actions that replace, inhibit, or restrict these activities in any way will result in market failure.  Implementing a market economy without rules will result in excessive rent seeking, activities in restraint of trade, restricted alternatives, and excessive inequality.  Government must ensure there are rules (laws) to make sure competition is healthy.   This should include laws to prohibit: practices in restraint of trade, price fixing, false advertising, barriers to entry, and others.   To insure some level of equity, governments should also put measures in place to capture and redistribute wealth.  This should include progressive income and inheritance taxes and various social welfare programs.  Using taxes to build infrastructure and education programs will accomplish income redistribution and position the economy for further growth. Determining the extent to which equity should be pursued is a balancing act.  If governments pursue equity too fervently, individual investment and effort will be stymied.  If equality is not pursued, the resulting inequality will result in class strife and market failure. The ability to raise money and finance new businesses is critical to economic growth. Investors will not invest in economies that lack a stable currency or where governments are likely to confiscate the capital that was purchased through investment. Governments can play an important role in helping businesses raise capital by establishing contract laws, maintaining a stable currency, and promoting foreign investment. To avoid inflation, fiscal policy should be established with the express intention of not over stimulating the economy. Governments may also create central banks to implement a monetary policy designed to maintain a stable...
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