Economic Growth of Asian Countries - Essay Example

CONTENTS Topics page no. I. Concept of economic growth'''''''''''''''..2 II. Economic growth and welfare'''''''''''''''3 III. Economic Growth and Development theory'''''''''..5 IV. The role that Government can play'''''''''''''7 V. Performance of Turkey and Iran''''''''''''''11 a. Economic Indicators''''''''''''''''''..11 b. Social Indicators''''''''''''''''''''.12 VI. Concluding remarks'''''''''''''''''''12 Importance of Economic Growth Concept of economic growth Before discussing the importance of economic growth first we need to make conceptual clarification of economic growth. In general economic growth refers to the increase in the production of goods and services over a period of time. Economic growth is measured in terms of Gross Domestic Product (GDP) of a country. GDP refers to the value of goods and services produced within the domestic boundary of a country within a given time period. Whenever the GDP rises over time we can say that the concerned country has experienced economic growth. (Branson 1989) In this context, one thing should be remembered that the GDP is a money value of the goods and services. That's why it may rise simply by the rise in the price level without any change in the volume of goods and services produced. In order to solve this problem we consider the concept of real GDP. To calculate real GDP we have to assume a base year. A base year is normally selected from the previous years in which the functioning of the economy was normal. Once we select the base year then we measure the value of goods and services produced in the current year at the price of the base year. This is known as real GDP. A rise in real GDP definitely implies economic growth. Another measurement of the economic growth is the Per Capita Income i.e. the average of the national income of the country. If the per capita income of a country grows over time it would also imply economic growth. (Donbusch and Fischer, 1989) Here we are to discuss the importance of economic growth for a country. Economic growth is an important factor in promoting the economic development. Hence economic growth is a mean and economic development is an end by itself. From the definition of economic growth it is vivid that economic growth implies increase in production of goods and services within the economy. The creation of goods and services means the creation of wealth within the economy. It is quite likely that economic growth would generate higher income level of the country and thereby it would be effective for removal of poverty. It has been found that economic growth can play the role of the major driver in reduction of poverty. In the East Asian countries the decline in poverty is strongly correlated to the rate of growth of the countries. (AusAiD, n.d.) . Economic growth and welfare Theoretically economic growth can increase the welfare level of a country. This can be shown with the help of the following diagram. In the following diagram the horizontal and vertical axes measure the quantity of X and Y respectively, B1B1 is the initial production possibilities frontier that represents the locus of different combinations of two commodities that can be produced by the optimum utilization of the factors given the condition that the factor endowment is limited and full employment exists. The country would seek to maximize welfare. That is possible while given the feasible condition the maximum level of satisfaction is attained while the maximum possible community indifference curve can be reached. (The community indifference curve refers to the locus of various combinations of two commodities that yield equal level of social welfare for the country. Hence, in the following figure E is the initial equilibrium condition determined by the tangency of the community indifference curve I0 I0) I1 A1 I0 F B1 E 0 B1 A X Now we consider that the economy has experienced economic growth and hence out of the same endowment the country would be able to produce more. That would be reflected by a rightward shift of the production possibility frontier and the new production possibility frontier would be A1A1. E is no longer the optimum point. Here the country would reach the higher community indifference curve I1I1. The new equilibrium point would be point F (tangency of new production possibility frontier and the new higher community indifference curve). As the property of indifference curve states that higher IC means higher level of satisfaction hence we can say that economic growth would maximize the social welfare level of the country (Chacholiades, 1990) Economic Growth and Development theory The ultimate objective of each economy is to move in the path of development. No doubt, for economic development, economic growth is a necessary condition. But economic growth is not enough to accelerate the tempo of development. In the classical and neoclassical theories of economics economic development was not considered to be a separate concern. They believed in the free operation of market forces and free trade as the major policies. They considered growth as the entire part of economic development and pleaded for unbounded capitalism. In 1930s the study of Colin Clerk revealed the necessity of thinking at the separate dimension of economic development. (Clark 1957). His work stresses on the fact that most of the human beings of the globe do not belong to a capitalist system. In the early days of development economics stresses was given on the eastern European countries regarding their postwar reconstruction. The support of that was provided by famous development economist Rosenstein-Rodan (Rosenstein-Rodan 1943). After some days of the war economists shifted their focus towards Asia, Africa and Latin America. For these countries the basic common feature was decolonization after a long colonial exploitation. The standard of living of such countries was very different than that of the European nations. The economists like Bert Hoselitz, Simon Kuznets, and W. Arthur Lewis etc were among the first economists to start development economics as a separate part of economics. Though the early development theories were not much distinct from the conventional development theories in which the growth along with capital formation and industrialization were the major indicators of development. It was argued that the countries often pass some historical stage and underdevelopment was considered to be a stage in the path of development (Rostow, 1990). In the early development theories the process of development was equated to output growth and capital formation was argued to be the crucial component of economic development (Nurkse 1952). By considering the characteristics of the dual economy role of saving was stressed. Till this level of evolution of development economics the economic growth could be considered to be the best policy to articulate economic development. The problem of the migration due to dual economy has caused the inclusion of role of savings in economic development (Lewis 1954). The role of income distribution in the economic development is generated from the role of saving. The uneven distribution of income is a major cause of inequality and an obstacle to attain economic development (Kaldor, 1954). So in the development economics, as a separate discipline of economics, claims the government intervention in the underdeveloped economies, as there is no capitalist structure. Government intervention is sought to solve the problem of inequality in income distribution. Trade is sometimes considered to be an engine of growth (Viner, 1958). But the matter of fact is that the growth does not necessarily means economic development. That's why we have to shift our focus on different factors. In the growth economics capital formation has its unique role. In the terminology of development economics the weight has been transferred to the human capital and social capital. So economic development is no longer confined into economics and it has been synchronized with society also. In this context education and training has been emphasized. The economic development becomes a socioeconomic factor, which should emphasize on the social development and the quality of life. (Singer, 1984) There is also the need to take care of health and fertility rate and the level of education and skill. By proceeding some steps away development economics marks economic development as a social phenomenon in which the social upliftment of people is given more significance along with a fewer significance on economic growth. (Seers, 1977) The development programs should be more attentive towards the social issues like dualism, population explosion, inequality, urbanization, agricultural transformation, education, health, unemployment etc. Moreover, the problem that should be solved first is the problem of poverty and hunger. Mere growth is not the solution. The latest development-to-development economics is the introduction of human development index. The Human Development Index is the process of ranking of the countries by the level of the human development. According to this index a country can be marked as either developed or developing or underdeveloped. It includes a wide array of positive and negative variables. Those are literacy rate, employment rate, nutrition of the people, infant mortality rate, life expectancy rate etc. by the position of these variables the level of development of the country can be marked. (World Bank) The role that Government can play The classical and the neoclassical economists starting from Adam Smith have always opposed the positive role of government intervention. Mainly the classical economy is based on the 'Says Law of Market (Horwitz, 1997) and the quantity theory of money (Economy Professor, n.d.). The classical double defense of wage price flexibility and interest rate flexibility would ensure full employment equilibrium. (Ackley, 1962) The free flow of goods and services were supposed to ensure maximum income and welfare. The first step of the emergence of the interventionist theory was the emergence of Keynesianism in the period of the great depression. The great depression was characterized by the declining price, employment, and rate of interest. That time the classical; theory of automatic adjustment mechanism failed and the Keynesian theory emerged that preached for the aggregate demand management policy by the state to secure the economy from the point of stagnation. Let us suppose the economy from the situation, which is characterized by the problem of unemployment. The rate of interest, during the time of great depression reached at the floor but people were not willing to invest. The shortage of aggregate demand would cause unemployment situation. In such a position Keynes threw light on the expansionary fiscal policy by changing the long celebrated convention of classical economics. The increase in government demand would create sufficient aggregate demand and the basic problem of unemployment could be solved by the state intervention. r LM0 LM! IS0 IS1 0 YA YB Y In the above figure horizontal and vertical axes measure the income level and rate of interest. IS0 is the initial IS curve: the locus of different combinations of Y and r that maintain product market equilibrium. On the other hand the LM curve represents the relationship between interest rate and income that maintain money market equilibrium. The horizontal part of the LM curve represents' the liquidity trap i.e. the smallest interest rate for which the money market becomes highly stable. That time the speculative demand for money becomes infinitely elastic and hence LM curve becomes horizontal. In such a situation it is only expansionary fiscal policy that would enable the country to reach towards full employment equilibrium. (Levacic 1982) This expansionary fiscal policy might be expenditure by the government on the public distribution system that could make an effort to provide the poor people the facility to have the food grains at lower price to maximize social welfare. The government might spend that money on the project for education of the poor children or by providing training for the unskilled workers. Such an expansionary policy would encourage the social upliftment as well as solution of the depression. It might be that in the developed world there is no need for public intervention but in the less developed countries like Sub Saharan African countries and the countries like Pakistan the government has to intervene in order to maintain the quality of life of the people. In that case the public expenditure becomes very fruitful as the private concerns are profit-making concerns and they are not willing to spend their money in such projects. That's why it is the duty of the state to fulfill the basic needs of the people. The classical and neoclassical theory of free trade and prescribing free trade as the best policy was criticized on the ground of terms of trade. It was found that the outward looking export led growth oriented policy by the classical theory came under an attack by the Singer-Prebisch Hypothesis. In this hypothesis in a long run trading relationship between a developed and an underdeveloped country it is quite likely that the terms of trade of the underdeveloped country vis-'-vis the developed country would show a secular decline. That's why the government intervention is required. (Krugman and Obstfeld, 2003) Similarly the trade pattern of Latin America and the America trade relationship a centre periphery pattern of trade would emerge. The economically backward country becomes dependent on the developed centre. This may be a technological dependence (Dos Santos) or a colonial pattern of trade The above two situations always prescribe the government should intervene in the trading pattern. That's why the government introduces the tariff or quota system for inward looking industrialization so that the domestic products can enjoy the domestic market. The major format is the policy of import substitution. There are much more policies that the government can adopt. For example the Mundell Flaming model in which it is prescribed that the government should use a tight monetary policy. The immediate effect would be an aggravated unemployment situation. But in long run the monetary policy would ensure better performance of the economy. According to many economists the government should adopt the tariff policy on the importable goods. That would encourage the Domestic producer. By protecting the dogmatic industry the government may promote growth and save the job-loss would be protected. The maximum of the potential policies that the government can adopt are the foreign trade policies. Sometimes the government can adopt efficient tax policy and hereby boost up the domestic 'production and thereby it can enable the domestic industries to be more competitive in the global market. That would enable the domestic producers to promote sale in the global market and hence there would be economic growth of the country. But if we consider the development policies the government has to be very selective and specific to choose the appropriate policy. (Rivera Batiz, 1985) Performance of Turkey and Iran: Economic Indicators The values of the core economic variables of Iran can be given as: The GDP measured at official exchange rate at the year 2008 was $382.3 billion, the GDP real growth rate in 2006 was 5.8%, in 2007 it was 7.8% and in 2008 it became 6.5%. In the year 2008 the per capita income in Iran was $ 12800. Agricultural sector constituted 25% of GDP the industrial sector consisted 44.3% of GDP and the service sector 44.9%. 25% of total work force was engaged in agriculture, 31% in industry, and 45% in the service sector. 12.5% was the share of unemployment in the work force. The inflation rate of the economy was high it accounted for 28% and 27% of GDP was spent in gross fixed investment. (CIA Fact Book, n.d.) The economic variables of Turkey are given as: GDP measured at official exchange rate at 2008 $ 798.9 billion. The real growth rate of GDP at the year 2006 was 6.9%, at 2007 it was 4.6% and at 2008 it was 1.5%. In the year 2008 the GDP per capita was $ 12000(PPP). Agricultural sector constituted 8.5% of GDP, the industrial sector constituted 28.6% of GDP and the service sector constituted 62.9% of GDP. The agricultural sector, industrial sector and the service sector provided employment of 29.5%, 24.7% and 45.8% of workforce respectively. In the year 2008 the unemployment rate was 7.9%. The inflation rate was 10.2%. The gross fixed investment constituted of 21% of GDP. (CIA Fact Book, n.d.) So we can find that the GDP was high in Turkey than Iran. But the GDP growth rate was higher in Iran and very low in turkey. The main cause is the US recession, which affected turkey more, and on the other hand at 2008 the oil price shock helped Iran to ensure a high growth rate. The GDP per capita in Iran is also higher than turkey. This is mainly due to higher level of population in Turkey. The agricultural sector in Turkey constitutes 8.5% of the total GDP whereas the agricultural sector in Iran constitutes 25% of GDP. It implies that the agricultural activity in Iran is better than Turkey. The service sector in Iran constitutes 44.9% of the GDP and the tertiary sector in Iran constitutes 62.9% of the GDP. This is because of the excessive dependence of Iran on its oil resource. The inflation rate is higher in Iran mainly due to the oil price hike and t'in Turkey it is 10% (less than half). The gross investment in Iran is higher than turkey. Social Indicators: Now we consider the indicators according to the millennium development goal. Here we will use some selected indicators, According to the World Bank Report of 2007 the literacy rate statistics of youth (15-24) was accounted as 87%. for girls and 91% for boys. The total primary completion rate was 86%. Percentage of total enrollment in primary stood for 89%. The progress of female can be represented as: females held 18% of national parliament seats. In 2007 the most surprising fact is that the ratio of female to male enrollments in tertiary education is 106%. While for primary and secondary it was 95%. Immunization of measles was 82% and the infant mortality rate was 47 per thousand. And the mortality rate under 5 was 68 per 1000. (World Bank Millennium Development Goal: Iran, n.d.) Concluding remarks In Turkey the literacy rate statistics of youth in 2007 was 94% for girls and 99% for boys. For that age group the total primary completion rate was 96% and the total percentage of enrollment was 91%. The proportion of female to male for enrollment in primary education was 75%. In parliament women held 9% of the total seats, the proportion of female to male in secondary education is 83% and 95% in primary. Immunization of measles of children is 96% and infant mortality rate (live birth) was 21 per 1000 and for fewer than 5 children it was 23 per thousand. (World Bank Millennium Development Goal: Turkey, n.d.) We find that in case of female empowerment and female education Iran is advanced than turkey and on the other hand for protection of children and child mortality rate Turkey is far advanced than Iran. May be rigid customs in Iran and their less health consciousness is the main cause. References: 1. Ackley, G 1962, Macroeconomics; Theory and Policy. Macmillan 2. Aus AID: n.d. available at: http://www.ausaid.gov.au/keyaid/growth.cfm (accessed on April 30, 2009) 3. Branson, Willam. H. 1989 Macroeconomic Theory and Policy (3rd Edition) Harper and Row 4. Chacholiades, M. 1990, International Economics, McGrawHill 5. CIA Fact Book: Turkey, n.d. available at: https://www.cia.gov/library/publications/the-world-factbook/geos/tu.html (accessed on April 30, 2009) 6. 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World Bank, n.d. available at: http://www.worldbank.org/html/prddr/trans/julaug99/pg20box.htm (Accessed on April 30, 2009) 24. World Bank Millennium Development Goal Iran, n.d. available at: http://ddp-ext.worldbank.org/ext/ddpreports/ViewSharedReport'&CF=&REPORT_ID=1336&REQUEST_TYPE=VIEWADVANCED (accessed on April 30, 2009) 25. World Bank Millennium Development Goal: Turkey: n.d. http://ddp-ext.worldbank.org/ext/ddpreports/ViewSharedReport'&CF=&REPORT_ID=1336&REQUEST_TYPE=VIEWADVANCEDm(accessed on April 30, 2009) Read More