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From affecting the savings of every family to budgets of the largest charities, workers keeping the jobs they have to the unemployed and economically backward having an easier time finding work, and even retirement savings and insurance — a strong economy can make all the difference.
One of the most common flaws in understanding the economy of a state is looking at it as one static whole, which can be divided into parts of various sizes, where in the differences in size creates the economic hierarchy. Firstly, the whole is a not a static constant, instead, it can be made to increase by us creating wealth, and shrink in size if there erroneous decisions made.
While the size of the part each individual gets depends on the wealth they create, it is possible to assure a larger part for each citizen as compared to what they would have gotten before. The importance of a growing economy is most easily proven when we look back at the crisis in , marked by the fact that the consumption rate in the United States of America in and was much larger than its GDP — the Gross Domestic Product. When the tables turned in , prices dropped but the money had already been invested, pushing the banks into a state of economic emergency.
While the cause of this crisis has been attributed to various flaws in government and housing policies, financial institutions, regulations, consumers and credit agencies, the primary concern did arise when subprime mortgages and loans allowed for fervent investment in homes without a worry of repayment in the near future. Though the stock market got back up in approximately five years, the widespread unemployment and low housing prices remained.
Keeping the economy at its best and constantly growing for years to come is essential for our lives and that of the future generations. While there is much debate about how that can truly be achieved, here are 5 ways which illustrate steps towards economic growth. From cheap labor abroad to the lack of tax incentives within the US, manufacturers have relocated to other parts of the world in startling numbers.
This outsourcing of production and manufacturing is a game changer when it comes to the lack of good employment opportunities for residents. According to the Index, governments should simply make sure that the money supply expands with the growth of output—any inflationary spending undermines the efforts of private enterprise.
As a result, its exports became even more attractive and its imports all the more beyond the reach of its citizens. The Index argues that Great Britain gained economic supremacy in the nineteenth century when it established its free-trade regime. But its rise took place mainly in the previous century, when, in competition with France and the Netherlands, it relied on a protectionist policy of trade promotion and on forced mobilization of resources.
Great Britain dismantled its trade regime after it became the undisputed economic, financial, and industrial leader of the world, not before. Under its new, freer policies, it began its relative economic decline and was slow to take advantage of the newer industries based on chemical and electrical engineering. For all its freedoms, it has performed below average for industrial countries for more than a century—and especially since World War II—as its incomes have fallen below those in most of the rest of Western Europe.
It is true that Great Britain began its initial rise to supremacy by freeing up its internal market, a step it took while other sizable countries were divided into regions with their own trade barriers. The United States followed the same pattern during its ascendance: it combined a free domestic market with sizable tariff barriers until after World War II.
Indeed, all the leading industrial powers developed as protectionist regimes in the nineteenth century, whereas countries such as India and Portugal, following free trade regimes, found themselves stripped of industry.
As these examples show, different economic freedoms have different weight in promoting growth, and depending on the context, some may well hinder it. For managers seeking opportunities in foreign markets, it would be advisable to rely on a more sophisticated analysis of growth potential than the framework presented in the Index.
The theory accepts the need for countries to accumulate capital. For new theorists as well as old, that requirement means people need to save and invest. Does more freedom promote more saving? It turns out that countries with high savings rates have all relied on one or more forms of forced saving. China allows no private ownership of land, home mortgages do not exist, and there is little consumer credit, so citizens with modest incomes must save in order to accumulate the bricks and timbers to build a home—they have no alternative.
Much the same has been true for Japan, South Korea, Singapore, and Taiwan, all of which have been among the top savers relative to their incomes. Countries such as Singapore, Malaysia, and, more recently, Chile have supplemented such broad controls with out-and-out forced saving schemes through payroll deduction.
Australia, the United Kingdom, and the United States, with their free-credit markets, have among the lowest rates of capital accumulation in the world. Freedom may certainly promote saving if citizens believe they will prosper from investing in enterprises, but credit controls can promote growth in appropriate circumstances. Australia has just begun to remedy its low savings rate with a phased-in program of forced saving.
That is not to say that we should rely on any government to move a country along to prosperity—the boondoggles of foreign aid surely make that clear. One reason China is growing so fast now is that it started from a very low base of economic production. Eight centuries ago, China probably had the wealthiest and most advanced economy in the world.
Power-hungry emperors and bureaucrats, however, suppressed freedoms and failed to protect property rights, pushing the economy into a long period of stagnation. If individual companies can use their internal powers of coercion to invest in products with potential for large future returns, why should we be so quick to dismiss similar efforts at the national level? In addition to the blind spots in its economic-growth analysis, the Index of Economic Freedom takes a narrow view of prosperity—one that seems inconsistent with democratic government beyond the short term.
The growth that results from increases in capital and labor represents growth due to increases in inputs. There are limits to how much accumulating capital helps, and increasing labor also often means more mouths to feed and so by itself may not increase the standard of living real GDP per capita.
Sustainable long-run growth is the result of better use of existing resources, increasing economic output per input and thereby increasing productivity. For example, think of the productivity gains that resulted from the use of personal computers and the Internet to complete tax forms.
Rather than using pen, paper, and a calculator to complete the forms, tax filers can use sophisticated software programs to retrieve financial data from personal accounts using the Internet, insert the information correctly on complicated tax forms, and complete the complex calculations.
The forms can then be filed electronically to expedite the process. This is just one example of recent gains in productivity resulting from increases in physical capital. Now multiply those relatively small gains by the millions of workers who use increasingly powerful computers and better software.
Increasing investment in physical capital allows for continued increases in productivity and economic growth. This is an example of changes in productivity resulting from changes in inputs; in this case, the input is physical capital.
Similarly, human capital —the knowledge and skills that people obtain through education, experience, and training—is important, and strong educational institutions are vital. A well-educated workforce is generally more productive, providing higher output per worker. Well-educated workers can make the most efficient use of existing technologies. They are also more likely to develop new technologies. Further, a persistent growth in the level of educational attainment will likely lead to growing productive capacity, the key to future economic growth.
While both physical and human capital are important to economic growth, both have their limits and their benefits tend to diminish over time. Knowledge and ideas that lead to better use of existing resources increasing output per input are driving forces behind continuing long-run economic growth.
The innovation resulting from new ideas is key to continued technological progress. Consider the computerized tax-filing example.
When a new computer is produced, the inputs required to build it are not much different from a computer built 10 years ago, but today's computer has much larger implications for labor productivity than earlier versions. The computer has improved over time as the result of new knowledge, ideas, and innovations incorporated into the design of its hardware and software. Of course, all of this happens within the institutional structures of an economy, our next topic. In addition to productivity-boosting factors such as physical and human capital, economies with high rates of economic growth often share characteristics related to economic institutions that support or reward productive activity.
Notice that "institutions" is used differently in this context than you may have seen before. When discussing economic growth, we can think of institutions as the foundational rules of the game noted by Douglass North in the opening quote; they include not only laws and regulations, but also customs and practices.
Institutions work through the incentive structure in an economy and are important in explaining why some countries experience faster growth than others.
Both institutions and the incentives they offer affect improvements in long-term growth. Some of these institutions might not seem directly related to economics, but institutions clearly have an impact on the potential output of the economy. For example, patent protections are examples of laws that ensure that firms developing new technologies are able to profit from them. The firm's profit motive provides the incentive to produce new goods and services, as well as the technologies that benefit society and result in economic growth.
Traditionally, people have reasoned that patent protection enables firms to profit from their costly research and development efforts; as a result, they are willing to invest in the first place.
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