inflation currently contained and with few signs that upward pressures are likely to develop any time soon, we have chosen to maintain that stance pending evidence that the forces inhibiting economic growth are dissipating enough to allow the strong fundamentals to show through more fully. as has often been the case in the past, the behavior of inventories provided substantial impetus for the initial strengthening of the economy. manufacturers, wholesalers, and retailers took vigorous steps throughout 2001 to eliminate an unwanted buildup of stocks that emerged when final demand slowed late in 2000. by early this year, with inventory levels having apparently come into better alignment with expected sales, the pace of inventory reduction began to ebb, and efforts to limit further drawdowns provided a considerable boost to production. the available evidence suggests that, in some sectors, liquidation may be giving way to a rebuilding of inventories. however, as inventories start to grow more in line with sales in coming quarters, the contribution of inventory investment to real gdp growth should lessen. as a result, the strength of final demand will play its usual central role in determining the vigor of the expansion. while final demand has been increasing, the pace of forward momentum remains uncertain. household spending held up quite well during the downturn and through recent months, and thus served as an important stabilizing force for the overall economy. real consumer outlays and spending on residential construction each rose about 3 percent over the course of 2001, even as the growth of real gdp fell off to only ½ percent. household spending was boosted by ongoing increases in incomes, which in turn were spurred by strong advances in productivity as well as by legislated tax reductions and, in recent months, by extended unemployment insurance benefits. monetary policy also played a role by cutting short - term interest rates, which helped lower household borrowing costs. particularly important in buoying spending were the very low levels of mortgage interest rates, which encouraged households to purchase homes, refinance debt and lower debt service burdens, and extract equity from homes to finance expenditures. fixed mortgage rates remain at historically low levels and thus should continue to fuel reasonably strong housing demand and, through equity extraction, to support consumer spending as well. indeed, recent sizable increases in home prices, which reflect the effects on demand of low mortgage rates, immigration, and shortages of buildable land in some areas, have significantly increased the equity in houses that homeowners can readily tap through home equity loans and mortgage refinancing.

s domestic economy and the associated policy reforms. sala - i - martin ( 2002 ). world bank ( 2002 ) - - gdp per capita ( constant 1995 dollars ) for the per capita income data and sala - i - martin ( 2002 ) for the poverty data. world bank ( 2002 ) - - gdp per capita ( constant 1995 dollars ). sala - i - martin ( 2002 ). sala - i - martin ( 2002 ) and world bank ( 2002 ) - - gdp per capita ( constant 1995 dollars ). smith ( 1776 ), vol i, book iv, chapter ii, p 422. sachs and warner ( 1995 ). sachs and warner ( 1995 ). a second characteristic that economists have identified as influencing a country's ability to grow is termed its " institutional infrastructure. " by this we mean the institutions that help make an economy work, such as a functioning legal system, which ensures the rule of law and protects property rights. these institutions are responsible for setting the " rules of the game " and ensuring that those rules are observed. sound institutions provide the backdrop against which markets operate. they foster confidence that contracts will be honored, that debts will be paid, and that the gains from sound investments will not be stolen or expropriated. researchers in recent years have found that the rule of law - - defined as a system that emphasizes creditor rights and rigorously enforces contracts - - facilitates the development of an efficient banking system and financial markets more generally ; this development, in turn, supports growth. the quality of the institutions in a country - - such as a sound regulatory environment, political stability, and the control of corruption - - have important effects on growth. economies with a high quality of governance, relative to other economies in their regions, including hong kong and singapore in asia, chile in south america, and botswana in africa, have had some of the fastest growth rates in their respective regions in recent decades. the quality of a country's educational system is clearly a significant part of its broader institutional infrastructure. policies that foster the human resources of a country improve growth. many studies exhibit a link between education and growth, with some showing that even a small increase in average education can lead to a sustained rise in the rate of economic expansion. finally, an undeniable determinant of economic growth is macroeconomic stability - - having fiscal, monetary, and exchange rate policies that are sound and predictable. a prudent government sets, among other