Economic Growth and Level of Savings - Essay Example

? Economics Assignment Economics Assignment Introduction Economic growth and its determinants has been a topic of considerable discussion for economists and policy makers for many years. In this essay, the relationship between low levels of savings and economic growth in developing nations is discussed. 2. Discussion According to the main growth models, the two major alternative two main alternative determinants of economic growth have been suggested as Total Factor Productivity (TFP) and factor accumulation (Solow, 1957). According to the dependency theories of growth, there are two groups of nations, one being the core group consisting of the developed nations and the other being the periphery, consisting of the less developed nations (Uche, 1994). The works by Prebisch (1947; 1949) and Singher (1950) attempted to explain economic growth based on the differences in products produced by different nations. The less developed nations according to these theories have to purchase the manufactured goods from the Northern nations at prices in excess of what of what they get for selling their primary goods (to the Northern nations). This ultimately adversely affects the economic growth of the less developed nations and thus they remain less developed (Todaro, 2003). These theories thus argue for promoting import-substituting policies for economic growth. Alternative theories by Harrod (1939) and advanced by Kregel (1980) capture the dynamics of economic growth by assuming that it is determined endogenously by the saving and investment decisions of firms. In this model, the growth rates put forward are actual, warranted and natural growth rates. Based on this approach, the long run growth rate is determined by the closed economy social saving rate rather than net exports. However, this model has been criticised for showing the possibility of unstable growth in a capitalist economy (Moudud, 2000). It has been shown that though there can be instability to some extent for the growth path, its extent is restricted by many endogenous factors in a capitalist economy (Moudud, 2000). 3. Conclusion In this essay, the discussion shows that low savings rate alone cannot explain the differences between developed and developing nations. By improving saving rates alone, developing nations cannot catch up with the West. Many other factors discussed above determine the differences between these nations. 1. Introduction The relationship between free trade and economic growth has been a topic of debate for the academicians and policy makers in the recent years. In this essay, the arguments for and against free trade are discussed. 2. Arguments for and Against Free Trade Greater availability of cheaper goods from abroad will lower the domestic price level, since the consumption bundle used to compute broad inflation measures includes imported goods. The magnitude of this effect depends on the share of imports in the consumption bundle of the representative household.Also as the economy opens up the shocks to the price level due to the domestic farm sector; output fluctuations are likely to ease which may diminish the price fluctuations (Jin, 2000 etc). As per the Dutch disease hypothesis (Collier and Gunning, 1999) and the political economy models (Alesina and Perotti, 1994), trade openness can affect fiscal deficits through the instability of government revenue. First, countries with an outward-looking strategy have higher levels of competition, are less corrupt (Ades and Di Tella, 1999) and have higher fiscal balances and lower fiscal deficit. Second, trade openness increases income inequalities which enhances the demand of public goods (Alesina and Perotti, 1994) and, simultaneously, reduces the ability of governments to collect taxes. Third, trade policy could reduce government revenue in the short run (Bean, 1999), which could occur when increases in openness result from a reduction in tariffs. However, for a given level of tariffs, government revenue from taxes is an increasing function of trade openness. Thus, in the long run, trade policy can increase government revenue. Finally, trade openness is expected to be positively correlated with budget balances as the leakage of demand abroad and resulting costs from external payment difficulties make high fiscal deficits less attractive than in less-trade oriented countries (Lindbeck, 1976). 3. Conclusion In this essay, the arguments for and against free trade are discussed. The discussion shows that free trade alone is not conducive for growth. It needs to be accompanied by several other institutional factors and other policy conditions for higher development in a country. 1. Introduction The big push theory has been one of the leading concepts in development economics. In this essay, big push theory is discussed in detail with the help of some examples. 2. Discussion The big push theory explains the difference between technologically less developed and developed nations using imitation (Amsden and Hikino, 1994).According to the big push theory, the technology which is imported in technologically less developed nation results in the rise in demand for many products. This in turn, results in more investment for meeting this additional demand which in turn results in up gradation of technology again. This process is called big push theory (Rosenstein-Rodan, 1961; Murphy, Shleifer and Vishny, 1989). Based on this theory, government has main role in helping the big push process especially in the technological up gradation process. For example, in nations like Japan and Korea, the many programmes have been initiated by the government to support the business groups for technological investment. In many other nations like Spain ,Taiwan, Singapore, Brazil etc the enterprises owned by the state act as facilitators for the big push process. Studies have shown the role of market power in the Big Push implementation based on the presence of strong and weak institutions. In the study by Fontenay(1999),this has been illustrated for two regions of Northern Honduras. The study shows the need for costly government actions in the case of weak institutions, which in turn results in the high costs for Big Push implementation. 3. Conclusion In this essay, the big push theory and the role of government as a facilitator in big push implementation has been discussed. The discussion shows the need for strong institutional environment for the successful implementation of big push as otherwise it becomes very expensive. References Alesina, Alberto and Perotti, Roberto (1994): “The political economy of budget deficits”, IMF Working Paper No.94/85. Amsden, A., & Hikino, T(1994) “. Project execution capability, organizational know-how and conglomerate corporate growth in late industrialization”. Industrial and Corporate Change, pp.111-148. Bean, David (1999): “Trade liberalization and the budget deficit”, Journal of Policy Modeling, Vol.21, No.6, pp653-94. Collier, Paul and Gunning, J, W (1999): “Trade shocks in developing countries, Vol 1 and 2, Oxford University Press, Oxford and New York Fontenay Cde(1999): “Market Power and the Failure of the Big Push:Evidence and Theory”, http://www.econometricsociety.org/meetings/wc00/pdf/1269.pdf,Accessed April 2 2011. Harrod, Roy(1939). "An Essay in Dynamic Theory." Economic Journal 49, 1939, pp. 14-33. Murphy. K.M., Shleifer, A., & Vishny, R.W(1989). “Industrialization and the Big Push”. Journal of Political Economy, 97(5): 1023-1026. Prebisch, R. (1950) “The Economic Development of Latin America and its Principle Problem”, UNECLA, Santiago. Rodriguez F. and Rodrik D. (1999), “Trade Policy and Economic Growth: a Skeptic’s Guide to the Cross-national Evidence” NBER Working Paper 7081, Cambridge MA: National Bureau of Economic Research Rosenstein-Rodan, P.N. 1961. Notes on the theory of the big push. In Ellis, H. & Wallich, H.C.(Eds.), Economic development for Latin America. New York : St. Martin’s Press. Singer, H(1950) “The Distribution of Gains Between Investing and Borrowing Countries,” American Economic Review (Papers and Proceedings), 40 (1950), 473 - 85. Thirlwall, A. P. "The Balance of Payments Constraint as an Explanation of International Growth Rate Differences." Banca Nazionale del Lavorro Quarterly Review, No. 128, March 1979: 45-53. Thirlwall, A.P. "The Balance of Payments and Growth: From Mercantilism to Keynes to Harrod and Beyond." In Rampa et al (eds), Economic Dynamics, Trade, and Growth: Essays on Harrodian Themes. New York, NY: St. Martin's Press, 1998. Thirlwall, A.P., and McCombie, J.S.L. "Economic Growth and the Balance of Payments Constraint Revisited." In P. Arestis, G. Palma, and M. Sawyer (eds.), Market, Unemployment, and Economic Policy. London and New York: Routledge, 1997. Read More

 

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