With the above as background, this chapter starts from the following assumptions (or stylized facts):

1. The United States is still the 'locomotive' of the world economy and will remain so for some time to come. There are two arguments to support this assumption. One is that the US is the main consumer of export goods from economies in East Asia that have kept their exchange rates artificially low precisely to maximize exports. The exporters, with large trade surpluses, have had to re-export capital to the US to prevent the financial markets from readjusting exchange rates and interest rates to compensate. This capital inflow is invested either in government bonds or other assets, such as existing firms. This, in turn, keeps US interest rates and inflation low. It also diverts much of the world savings away from the developing regions where it is most needed, to the US where it subsidizes excessive consumption. The second reason is that, since World War II, the US has been, and remains, the primary creator and generator of new advanced technologies. This is largely because of the existence of a number of autonomous elite universities that easily attract the world's top scientists and regularly spin off new business enterprises, subject to well-known and non-restrictive regulatory and labor market constraints and supported by plentiful venture capital, much of it created by previous successful spinoffs. The US model of university-generated high tech businesses exemplified by Silicon Valley is very difficult to imitate and has not, as yet, been imitated successfully elsewhere despite a number of attempts.

2. Economic growth and development in all countries is mainly driven by technological progress, reflected in increasing TFP. We assume that the best quantifiable measure of technological progress (based on prior research on the US and Japanese economies) is the efficiency with which energy inputs (actually exergy)3 are converted to 'useful work' (Ayres and Warr 2002; Ayres 2002; Ayres and Warr 2003; Ayres et al. 2003; Ayres and Warr 2005).

3. Technical progress in developing countries is almost entirely due to transfers from industrialized countries, either embodied in direct foreign investment (DFI) or in returning personnel who have studied or worked in an advanced country.

4. It is probably impossible to identify a set of necessary and sufficient conditions for economic growth. There are too many factors involved, many of which are interdependent. Certainly the extensive econometric work, mostly in the 1990s, seeking to identify the magic formula has utterly failed to do so. However, it is fairly easy to identify conditions that prevent or stunt growth, especially by inhibiting investment. Political instability, especially if accompanied by violence, is an absolute growth stopper. Monetary instability (as in Latin America for much of the past half century) is another. Rapid inflation essentially prevents planning and long-term investment. Central planning (as in the former Soviet Union) is a third. Excessive regulation and associated bureaucracy - also in Latin America - is a fourth. Excessive inequity between rich and poor is a fifth. Excessive corruption is a sixth. On the other hand, democracy or its lack seems to be largely irrelevant, or even negative for growth.4 Growth-friendly factors previously identified include primary education (literacy and numeracy), religious mix, and advanced education (especially engineering). 'Openness' seems to help, given other conditions. The most important factor, after education, is probably 'rule of law', with active and honest enforcement of commercial agreements and necessary, but not onerous, government regulation.

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