Long run economic growth and development - Essay Example

Long-term Economic Growth and Development Introduction The long term economic growth and developmentfor any country or region in the world is an important subject for all students of sociology, economics and even history since economic development affects all systems that can be found in a political entity. Even in recent years, countries such as Japan that had been destroyed by the ravages of the Second World War and had little to go on in terms of natural resources were able to become economic giants and global economic players. However, such developments could not be emulated by other countries in Latin America and Africa for a multitude of reasons. To understand why some countries are able to develop and grow in economic terms better than others, we need to understand the theoretical background of economic development and then see what the main drivers of growth can be for different nations. Of these various drivers, one can be analysed in detail to give us a conclusion of how that particular aspect of economic development can aid the long term growth of a country. However, putting first things first, it is important to understand the theoretical foundations that are concerned with the development of an economic system. In Theory The economic theories that deal with the growth and development of an economic system primarily utilise three variables to show how the economy can grow. These are the production output of the economy, the savings made by the people in the economy and the supply of labour to the economy. In this regard, the Harrod-Domar Model is particularly useful since it gives the growth rate of the gross domestic product as a direct relation to national savings and as inversely proportional to the national capital to output ratio. However, as a practical issue, long term economic growth rate is also affected by the growth of population and the rate of technological development. The exogenous growth model takes this into account since technology is an important factor in this model. The rate of savings in this model determines the level of income but does not directly affect the level of growth in the economy. However, as shown by the model, technological growth accounts for the majority of growth and development that was shown by the United States in the 19th century. Innovations and technological development therefore, have a more direct impact in this growth model than other factors that could help an economy see improvements. Of course the role of labour in the development of an economic system can not be denied and the Model of Surplus Labour is a theory where the presence of unemployment and underemployment as well as the economic system in the political arena becomes very important. The theory suggests that economic development will take place rapidly when labour is shifted from traditional sectors to modern ones which will have a beneficial affect for the economy in the long term as labour prices will rise and eventually level off for all sectors. Additionally, there is the Harris-Todaro model which looks at economic development in more socially relevant terms such as the migration of labour between urban and rural centres of population. While this model takes its cues from sociology, the applicability of the model seems to be truer for developing countries than the countries which have already seen stable economic growth for a long period of time. In terms of practical examples, the progress made by China by developing both rural areas and the establishment of industries in rural areas to handle unemployment serves as a good example of the Harris-Todaro model of economic development. The Main Drivers It seems that labour, economic production output as well as national saving levels are all drivers of economic growth but the overall factor which produces these variables in different quantities is government policy and the economic system that is in place in a given country. For example, a country may follow the practice of becoming more liberal in financial terms and having less stringent controls on the way in which entrepreneurs acquire capital but this does not necessarily mean that economic growth will happen the way the government wants it to happen. Financial liberalization has several advantages and disadvantages which are directly connected with the needs of developing countries. While there may be examples of how some countries have seen economic booms with a liberal approach to the financial markets e.g. China (University of Pennsylvania, 2007), others have experienced inflation, erosion of wealth and a dire need for assistance and loans (Craig, 2000). Developing countries in Asia, Africa and Latin America serve as good examples of what pros and cons financial liberalization brings to a country and why capital controls are necessary for the healthy development of an economy. Asia has long been home to world’s most dynamic economies. The last decade has shown us a broad flowering of entrepreneurship throughout Asia in the face of different challenges. Factors attributed to this trend include a huge wave of private equity and venture capital funding, but more importantly, regulatory laws for financing and capital acquisition were eased and the less stringent rules governing the listing of young companies at the various stock markets helped in many companies getting the money they need for business (Robinson, 2005). The ease of getting loans and the financial liberalization process helped the growth of Pacific Rim for countries such as China, India, Hong Kong, Taiwan and even Japan. In particular, after the Second World War, Japan came to represent a model of economic development. Of course the massive gains made by the economy were based on the manufacturing of electronics and automobiles but the financial liberation process certainly helped the country gain its footings after the destruction it experienced (Herring, 2006). Similarly, Hong Kong has always been rated as one of the more free economies and even though it went through a change of government i.e. from Britain to China, it has retained the financially liberal attitude of the British economy rather than the controlled system of the Chinese. Taiwan can also be put on the list of countries benefiting from financial freedom. Although it has had a share of political instability and outright threats of invasion from China, it has led the way in semiconductor and IC manufacturing (Bremmer & Zakaria, 2006). Of course the methods and means for such production entail the transfer of technology from one country to another and it is one of the very important ways in which developing or less developed nations can learn from developed countries of the world (BEA, 1999). Developing nations like China, Brazil, India and Russia are all heavily involved in the technology transfer process which is not limited to the physical technological goods but also extended to managerial processes and enterprise management techniques which can be transferred along with the technology involved (Niosi & Rivard, 1990). In a perfect world, companies and governments of these nations can collaborate with organizations and governments of countries like America, France, Germany, the UK and other advanced states through formal agreements. The agreements outline how much technology in what timeframe would be transferred from one country to another. Theoretically, it would allow the developing country to improve its systems and infrastructure and let them catch up with the developed nations much faster than what it would take them in a normalised development schedule (BEA, 1999). However, in the real world, the transfer of technology comes with several implications, barriers and problems that are faced by both partners involved in the transfer. From some of the studies conducted on the topic, it seems that the companies in developing countries are rather quick and efficient about gathering the knowledge given to them (Marcotte & Niosi, 2000). Others seem to suggest that the transfer of technology is not an easy task and the results are often more negative than they are positive (Freeman & Hagedoorn, 1994). Perhaps the biggest surprises resulting from the process of financial liberation and technology transfer are the giants that started emerging in early 1990s, i.e., China and India (Hubbard, 2005). China changed from socialist economy to a mixed market and still faces a big challenge of balancing a controlled economy with a capitalistic economy while turning into the manufacturing unit of the world (Herring, 2006). India has developed into the back office of the world due to its human resource skilled in information technology and still faces the challenge of reducing its dependency on services (Hubbard, 2005). Therefore, it can be said that the capitalist world in particular and the western world at large have certainly gained benefits from the liberalization of financial markets and technology transfer but the same have produced their own set of problems. For example, many developing countries (particularly the poor nations in sub-Saharan Africa) are faced with massive economic problems like inflation, currency crises and international debt (Craig, 2000). While some economists think that bodies like the World Bank and the IMF serve the cause of global harmony by bringing development and growth for developing countries (IMF, 2006), others suggest that the situation is quite the opposite (Stiglitz, 2002). To better understand the situation, one of these drivers, i.e. financial liberalisation and analyse it in detail. Financial Liberalisation Quite surprisingly, some developing countries blame their present economic problems directly on the policies of the World Bank and IMF as well as the policies resulting from the Washington Consensus which often recommend a financial liberation process. In come cases, the rise of terrorism in recent years has also been linked with the situations created by global entities that are supposed to work for the benefit of the developing world (Akbar, 2005). In economic literature, ‘Washington Consensus’ is a name given to the various policies of creating a liberalized financial market and these policies were initially suggested by Washington based institutes such as the World Bank and IMF to several Latin American countries in order to bring up and improve their economies. The defenders of the liberalisation policies of the Washington Consensus call it a boon and a path to economic independence. Those who oppose it call it a Darwinian implementation of neo-liberalism and a method for the global domination of the United States (Williamson, 2000). Economists like Williamson are well aware of the detractions and say that many people can misunderstand the need to enforce the policies of the World Bank/IMF. Williamson (2000) says that analysts around the world think that the policies are somewhat forced upon various weaker countries. This line of thought further suggests that it is the policies alone which have taken those countries towards a state of economic crisis and have created immense misery for their people (Harvard University, 2003). In fact, financial liberation is only a small set of the recommendations made by Williamson (2000) as the implementation of regulations that are supposed to help the country. The complete set of policies include a lot more than financial liberation since other things such as fair trade practices, redirection of government spending towards development expenditure, alleviation of poverty, investments in things such as healthcare, education etc., and creating a wider tax base are all part of the process. Additionally, the countries are told to have a free floating interest rate, liberalize their trade related policies, create positive foreign investment prospects, privatise the national companies, deregulate their economy as well as the establish correct currency exchange rates. With that in mind, simply taking financial liberalization to be the panacea for all that ails a country is unjustified and may even be economically impossible if the other problems are not handled first. Expanding on the concept of financial liberation and creating a more real definition for the policies shows us that the policies of a government should support free trade, liberal market system, stable property rights, and deregulation of controlled industry. In present times, a country must first qualify for certain criteria before financial liberalisation can be recommended to them. By qualification, the economic need for the policy must be established first before World Bank or the IMF lends support for the given policies (Held, 2005). Analysts such as Rodrik (2001) are in complete agreement with Held (2005) and also add that the Washington policies for creating financial liberation in economically backward countries of the world should be expanded in their application. Financial liberation must come with the additional agenda to have things such as corporate accountability, social and personal responsibility of the governments, reduction in corruption, WTO partnerships, quality standards, welfare systems and a focus on social security for the people. It can be difficult if not impossible to suggest that these are bad policies in economic terms; however, the detractors show that just being financially liberal is a rather dangerous idea. For example, the financial liberalisation of the Russian breakaway states began when the countries were completely debt free and within a few years of their independence they became some of the most indebted nations of the world (IMF, 2006). It would seems that the policies recommended by the international bodies which recommend liberalisation as well as control are sometimes at odds with each other which leads Akbar (2005) to ask if a consensus can even exist. As per the dictates of Rodrigo de Rato, Managing Director of the IMF, the IMF has certainly come to a consensus with the World Bank to set the change of guidelines and social bodies of poor economies as a priority. This would enable these economies to come out of the cruel debt and the poverty cycle on their own rather than seek help from outside sources. The current focus of the IMF appears to be on creating trade relationships with other countries. However, the IMF does wish to take control of the areas where it has considerable expertise i.e. macroeconomic growth planning, debt control, government policy advisement and the creation of financial stability (IMF, 2006). In the real world, a large part of the policies has to do with economic debt relief and the IMF has already forgiven their loans to almost twenty of the poorest countries on the planet of which the majority were in sub-Saharan regions. Plans are being made to reduce or forgive the debts owned by many other poor nations around the world. The policy recommendations from the IMF are to prevent or restrict additional loans for certain countries until pre-set conditions are met so that the economy is given a fighting chance to grow on its own (IMF, 2006). Conclusions These policies would be in line with the suggestions made by Akbar (2005) who says that aid management can be problematic for countries who have no experience with a liberal financial approach. Aid can be given for specific causes or programs such as hunger elimination, poverty alleviation, education and for the control of diseases. Aid can also come with attached policy conditions since the goals of improving social conditions are also a part of the UN millennium goals (UN, 2005). The international monetary agencies certainly wish to show developing countries how money can be used in the country without causing a false appreciation in the currency or rising inflation (IMF, 2006). The IMF seems to appreciate the needs of the citizens of these countries so it creates programs to improve their situation with micro-lending programs and soft loans for entrepreneurs (IMF, 2006). This can be seen as a liberalisation of economic policy from an international perspective rather than local government working with large sums of money. It must be noted however, that such a plan can have negative influences since the financial control of the local currency and a certain level of political independence might have to be given up by the governments (Stiglitz, 2002). The process of giving up a certain amount of their sovereignty to outsiders from Washington may be a daunting task but the policies of the government might need to be changed anyways in order for an economic system to survive. If that must be done then it is possibly better to do that with the advice and support of the IMF and the World Bank rather than without it. In the final analysis, financial liberalization can certainly help a country and the business in the country to gain the capital they need for investment, creation of services and improving the economy of the country. However, financial liberalisation alone is nothing more than a disaster since it can lead to heavy inflation that can considerably weaken an economy. In effect, financial liberalisation must be coupled with stringent application of other policies which work towards the benefit of the people within the country and in the case of developing countries; it might be a good idea to have an established system which governs how these policies are to be enacted. For future research, it would be interesting to see how countries performed with regard to the process of financial liberalisation with as well as without the support of international monetary agencies. Finally, internal or external controls with regard to capital are also important because it is clear that whoever has the money can make the rules which are to be followed before that money can be shared with others. Word Count: 3,207 Works Cited Akbar, N. 2005, ‘Scoring the Millennium Goals: Economic Growth Versus the Washington Consensus’, Journal of International Affairs, vol. 58, no. 2, p233-244. 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Robinson, W. 2005, ‘Global Capitalism: The New Transnationalism and the Folly of Conventional Thinking.’ Science & Society, vol. 69, no. 3, pp. 316-328. Rodrik, D. 2001, The Global Governance of Trade as if Development Really Mattered, UNDP: New York. Stiglitz, J. 2002, Globalization and Its Discontents, Norton, New York. UN (United Nations). 2005, ‘What are the Millennium Development Goals?’ UN.org, [Online] Available at: http://www.un.org/millenniumgoals/ University of Pennsylvania. 2007, ‘Penn World Table’, upenn.edu, [Online] Available at: http://pwt.econ.upenn.edu/ Williamson, J. 2000, ‘What Should the World Bank Think About the Washington Consensus?’, World Bank Research Observer, vol. 15, no. 2, pp. 251-264. Read More