Difficult times leads to new ideas…

Essentially, the same conundrum faces all of us in finance. Do you save to protect growth for the long term or do you spend to stimulate growth? Global economy is currently slowing down in all parts of the world even in China, which are the leaders of economic growth. Countries can address the situation by using fiscal policy in the near future with focus on openness of trade, human capital and infrastructure investment as drivers of long term growth and development.

Infrastructure development as a driver of economic growth and development provides immediate economic stimulus and it has great positive effects on output. US Governor Clinton used infrastructure spending as major part of his economic plan and he received the praises of Felix Rohatyn. The spending on infrastructure development and repairs helped to stimulate growth and production in the region. Investment in infrastructure is especially needed in developing countries to be internationally competitive. Infrastructure investment should however be done by local government due to the fact that the private sector prefers capital investment to infrastructure investments.

http://www.jstor.org/stable/10.2307/2138275

With regarding to infrastructure development that we have discussed above, it is irrelevant without the necessary social and human investment. Human sufficiency studies have proven that higher educational inputs increase productivity and so produce higher levels of national growth. Sianesi and Van Reenen (2000) concluded that an overall 1 % increase in school enrolment rates leads to an increase in GDP per capita growth of between 1 and 3 %. An additional year of secondary education which increases the stock of human capital, rather than just the flow into education, leads to more than a 1 % increase in economic growth each year. For this to be applicable there should be social infrastructure in place for human capital to be effective. http://www.cedefop.europa.eu/EN/Files/BgR3_Wilson.pdf.

With relevant to the European Union, infrastructure development and human capital investment will not be solution to their current problem.  The euro zone crisis is taking a toll on its citizens: low growth, soaring unemployment, and tough austerity measures with no relief in sight. The likely adjustment of Europe’s fiscal strategy offers a glimmer of hope, but it does not address the challenge of restoring long-term growth.

One solution that Europe’s leaders should pursue is to develop strategic partnerships with African governments aimed at increasing exports.  A developed Africa can open up new export markets for the West’s saturated and stagnant economies, and help to revive global growth. Indeed, Europe should be laying the groundwork for African countries to absorb its exports for the next 50 years.

For example, Nigeria requires 100,000 megawatts of electricity to support its population of 150 million, but generates less than 5,000 megawatts. With a stable power supply, Nigeria’s economy could grow 8-12% annually. At a rate of $1 million per megawatt, Europe could line up an export market worth about $100 billion annually, while creating thousands of jobs in Europe and Nigeria; this further improves infrastructure and human capital.

Africa’s output is projected to increase by more than 5% annually over the next 30 years, and the International Monetary Fund predicts that its growth will outpace that of Asia in the next five. European leaders seeking to escape austerity and stagnation should pursue new opportunities for recovery in this fast growing region. By forming mutually beneficial partnerships with its former colonies, Europe can increase its exports and put its industry back to work, while providing African countries, which are already looking to China and India, with the resources that they need. http://www.project-syndicate.org/online-commentary/europe-s-african-growth-engine.

Through these difficult times, it is the governments’ responsibility to take leadership and to provide support through policies as mentioned above, to establish a foundation from which growth and development can be a reality. It is important that fiscal and monetary policy is intertwining with each other, to achieve the long term goals that have been set.  One of these goals is to preserve cash reserves (savings) implement tight cost-control measures and make cuts.  This is one of the reasons why some develop countries has huge debt problems. Governments can not sit back anymore and rely on the market to rectify the current economic conditions.

Theavengers

JJ de Villiers

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One comment

  1. Nice post on the drivers of growth and I like the Eurpoe-Africa perspective. What is missing is an explanation of why European governments need to be involved. Wouldn’t European firms identify these opportunities and exploit them? What is the role of government in crowding in the growth?

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