Welcome to this video. I will present the social and institutional perspectives on economic growth. This indicates that economic growth depends on much more than capital and labour. In particular, these theories pay attention to the social conditions of growth ranging from trust to a healthy workforce. And the mysterious X factor of growth that I presented in the previous video will have a social character in these two theories, as you will see. We'll start with the social economics of growth. The keyword here is inclusion. Inclusive growth is economic growth of which the benefits extend to all social groups in society. This is a type of a growth that is economically sound, because when there's conflict between social groups, this undermines social cohesion. So inclusive growth prevents social conflict. Moreover, equal access to all resources in the economy improves competitor utilization in the economy. For example, of buildings, machines, infrastructure, and skills, which all supports growth. The more people join, the more output that will be produced. So we can state that inclusion crowds-in production and productivity in the economy. This means that more resources will be used. And also, people from marginalized groups will have jobs, or will be able to access credit, and grow and sell crops. The social economic growth equation therefore emphasizes that both capital K and labour L should not be very unequal. Because the higher inequality in excess to credit and jobs, the more conflict and a lower capacity utilization in economy. And this slows down growth. So social economics, the only effective growth strategy is inclusive growth, not just for social reasons but also for economic reasons. The X factor in this growth equation refers to social cohesion, which is an important way to assure inclusion of all social groups, both in terms or accessing and benefiting from capital and labour markets. The diagram on this slide shows you that declining labour share of income in China between the years 1992 and 2008, a period of enormous economic growth in China. The labour share of income is the share of total national income that is earned by workers for their labour. The other share is called the capital share of income and is earned by owners of capital. The diagram has percentages on the vertical axis and years on the horizontal axis. The line shows a clear decline of the labour share of income over time. More precisely, the diagram shows that there is widening inequality in the distribution of income over owners of capital and workers. Whereas labour earned 64% of income in 1992, this year came down to 48%, 16 years later. This shows that during the period of enormous economic growth in China, owners of capital got more and more of the benefits of growth, and workers got less and less of it. This is clearly not pointing at more social cohesion. As a consequence, there is labour unrest in the country, even strikes and protests by underpaid rural migrants in the factories, in the cities on the East Coast. The diagram shows increasing unfairness, you might say, but it's also not good for growth. Why not? Let me show you. China's economic growth has come down from 10% per year to 7% per year, as social conflict between labour and capital increases. As people from regions outside the factory zones in the East protest against the migration laws that prevent them from finding jobs and living in the East. Perhaps redistribution of the gains from growth towards the disadvantaged and excluded may help to get growth back on track. This slide shows how redistribution over resource may indeed stimulate output rather than keep it the same or reduce it. The two pie diagrams illustrate the efficiency of redistribution with an example of agricultural land. It shows that when they have not get a higher share in resources, they become more productive and contribute to growth, even more than the rich did with that same resource. Now first, look at the pie diagram on the left, which shows us agricultural production and how it is divided between big land owners and small farmers. We see that the few big land owners own 75% of the land. Many small farmers own only 25% together. Now, look at the pie diagram on the right is clearly bigger than the first one, do you see? This indicates economic growth. Total agricultural production is bigger in the second diagram. There is more output. The pie of the economy has grown. But how did it happen? The answer is land redistribution. Not fertilizer, tractors, or more schooling for farmers, but simply the redistribution of some land from the rich to the poor. Now, the big land owners own 67% of the land and the large group of small farmers have now more land to use. They now own one-third of all agricultural land. The more equal distribution of land between the big and small farmers in the second diagram has increased total production in the economy, because the land taken away from the rich was not worked intensively anyway. Many big land owners have lent to show off their status rather than to use it to grow crops. But small farmers have lots of labour and did not have enough land to make use of it. Now, they have more land, and we're getting tentatively in order to get the most out of it. They used the output to feed the families and to sell the rest on the market to earn an income. So total output increases, because the output that is lost by the big farmers is more than compensated by the output gained by the small farmers. Yes, this is a typical win-win situation, at least for the small farmers and the economy as a whole. Not of course for the big land owners who feel that they have lost status. In conclusion, a solution in conflict about land through land redistribution has helped to give access to land to many small farmers who work the land intensively with their labour, so the total output increases. And that is inclusive growth. Now, we move on to Institutional economics. This theory makes clear what kind of institutions an economy need in order to make a shift from low levels of output and high inequality to low inequality and high levels of output. Institutional economics explains economic growth from a set of key institutions. On this slide, I'll show you the ten most important formal institutions of growth. They're also referred to as developmental institutions. The other following. State-owned firms in key sectors, national development banks, land reform and income redistribution, free and accessible education, good and accessible healthcare and sanitation, industrial policy to stimulate competitiveness of key sectors. Labour-intensive production to create jobs, and later to catch up higher levels of technology, capital controls, and selective foreign direct investment to prevent financial instability. Infant protection to help new industries to develop, and the rule of law through an effective state. Of course, growth does not require that all these developmental institutions should be in place all the time, but generally, the more of these, the higher growth. So in the institutional economics of growth, there are ten key formal institutions that matter. But as you will remember from institutional economics, economies also have informal institutions. And some of these matter as well for growth, according to institutional economics, particularly the institutions supporting pro social norms, such as trust and honesty. Without trust, people are reluctant to trade, because you'll never know whether the other party will sell you a bad product or run away with your money before the good has been delivered. And without trust, people also are reluctant to engage in new investments. Without honesty, an economy has lots of corruption and power abuse. This makes it less likely that people pay taxes and conform with government policies. This all hampers economic growth. Now, we are ready to plug in the formal and informal institutions that support growth into the economic growth equation. This still includes capital and labour and equality of capital as in the social economic perspective. But the institutional perspective adds human resources, HR, as a quality indicator of labour. And in particular, human resource is not only as education but also including capabilities such as social skills and adherence to pro-social norms. The X factor in the growth equation now stands for developmental institutions, which include both the formal institutions of growth and the informal ones. This concludes this video and leaves two more theories in economic growth to be discussed. In the next video, I will present post Keynesian growth theory in which growth depends more on the demand side of the economy than on the supply side. Check it out in the next video
