Economic Growth- led by State or Markets?

Economic Growth- led by State or Markets?

by Chantelle de Villiers

2 August 2012

A Spanish proverb says: ‘The economy only grows at night, when the politicians are sleeping’.  Well that might be true in Europe but is it true for the rest of the world?  Each country has its own unique situation and thus each situation should be approached in light of the type of history and economic policies each country has.  Some countries find it in their best interest to very well leave the drivers of growth to the market, but isn’t that a bit of a problem after the global economic crisis?  Other countries mean the state has to take the lead to ensure economic growth and development in the country. Maybe the drivers of economic growth will lead each country to their decision.

Human Capital as a driver of economic growth and development

A big issue for both policy makers and practitioners at regional and national level over the centuries have been the development of human capital. Human Capital is said to be the principal mechanism of knowledge creation and management, which can both lead to economic growth.  Regional policy-makers who face competition both within and across nations view human capital development as a key to strengthen the positions of their economies in the global market.  The human capital theory views schooling and training as an investment in skills and competences (Schultz, 1960 and 1961) (Becker, 1964).

In order to facilitate economic growth, education and training needs to supply human capital at a faster pace than simply refilling it as it disappears from the labour market. Given the significant impact of high-order human capital as well as the increasingly fast pace of technological change that makes human capital obsolete. sami-mahroum-economic-growth-and-development-110111.cfm -here a well formed view on human capital is given by Sami Mahroum.

Infrastructure as a driver of economic growth and development

Many countries in the world are struggling to keep renovating their infrastructure to serve economic growth but not all succeed.  Looking at some of the Western countries.  The United States of America’s ranking  according to the World Economic Forum’s Global Competitiveness Report, over the last decade, has dropped from 7th to 23rd in quality of infrastructure, falling behind France, Germany, Canada and Spain, just to name a few.  Road congestion costs the United States more than $85 billion a year.   The U.S. also lags behind in broadband penetration, with 27 subscribers for every 100 people. Compare that to Sweden, where 41% of inhabitants have broadband subscriptions. CIBC World Markets expects Canadian GDP to expand 2.1% in both 2012 and 2013.

Now, looking at the Eastern countries, China has quietly increased its budget for railway investment this year by 16%, data from the Ministry of Railways showed, a fresh sign that Beijing is boosting the economy through infrastructure spending. In its latest bond prospectus published on China bond, an official website for debt issues, the railway ministry said it plans to spend 470 billion Yuan (US$73 billion) on infrastructure investment in 2012, up from the CNY406 billion stated in a prospectus issued earlier in 2012.

Spending on railway infrastructure has been viewed as a key tool to boost economic growth. Economic growth in the second quarter slipped to 7.6% year on year, down from 8.1% in the first quarter, for its slowest pace in more than three years. Data from the railway ministry showed that it spent CNY148.7 billion on infrastructure investment in the first half of 2012, down 39% from a year earlier

Now looking at South Africa, many of the competitor countries in Africa are growing rapidly on the back of a commodities boom and years of massive infrastructure investment. Whats_driving_Africas_growth_2601 gives an nice background on African economic growth. Six of the world’s 10 fastest-growing countries are in Africa. In eight of the past 10 years, sub-Saharan Africa has grown faster than East Asia.  But sadly, South Africa is not in this club, and is falling farther behind this growth curve.

Openness as a driver of economic growth and development

The third driver is the openness of a country.  The U.S. Secretary of State Hillary Clinton urged Asian countries, and Myanmar in particular, to embrace human rights and political openness as crucial components in attracting investment and driving economic growth a year ago and this week Obama authorized U.S. companies to invest in Myanmar for the first time in about 15 years, including with a state-run oil firm that opposition leader Aung San SuuKyi urged multinationals to avoid. This is a big step for an Asian country seeing as many Asian countries are partially or fully closed off to trade with the rest of the world.

“You can’t have economic liberalization without political liberalization,” said Clinton. Countries that want to be open for business but closed to free expression will find that this approach comes at a cost.

Asian economies need to dismantle trade barriers further. Various initiatives remain stalled among diplomatic bickering or domestic wavering. Japan, for example, would hugely benefit from joining negotiations for the Trans-Pacific Partnership, a free-trade area that would include the United States as well as markets such as Singapore, Malaysia and Australia. China, Korea and Japan have also discussed ways to reduce barriers, but those talks have yet to bear fruit.  In the Philippines, a whole range of professional services, including engineering, accounting and medicine, remain largely closed to foreign investors. In Indonesia, direct investment in mining is becoming more restricted.

Trade liberalization would have wide benefits by allowing regional trade to reach its full potential. Over the past 10 years, emerging Asia’s share of global output has risen to greater than 18% from around 10%, but the share of intra-Asian trade in world-wide exports has fallen to 59% from 63%.

Economies also need to increase further their openness to foreign investment. According to U.N. data, 2011 was another record high for foreign direct investment, or FDI, in Asia. However, flows have not kept pace with the region’s overall expansion. The contribution of FDI to total investment was a mere 7.4%, down from over 13% in 2000 and well below the 9.4% share in developed economies. The UN National Accounts Main Aggregate Database can be accessed at http://unstats.un.org/unsd/snaama/Introduction.asp

In conclusion, governments face a range of challenges as they emerge from the crisis. They need to put their economies back on the path to sustainable growth, find ways to handle complex and interrelated policy areas, anticipate and manage risks more effectively, and regain the trust of their citizens.   The markets cannot just be left to grow and develop on their own.  Effective regulation can provide strong support for meeting these challenges that governments may face.  Ineffective regulation, conversely, will slow recovery, inhibit growth, undermine efforts to address complex issues such as climate change, and reinforce citizen’s scepticism of government.

Just for a bit of extra info on economic growth in the U.S. see this following link:

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One comment

  1. Very nice post. You discuss the drivers of growth and I like the numbers that you add to the arguments. Evidence is the key. It is not clear, though, whether you think that government should drive the drivers of growth, or whether the private sector will ensure investment in education, infrastructure and exploit the opportunities of openness. Keep the question in mind for the future.

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