The Growth Development And Industrial Policy Economics Essay

1. Economic growth is the increase of per capita gross domestic product (GDP) or other measure of aggregate income, typically reported as the annual rate of change in real GDP. Economic growth is primarily driven by improvements in productivity, which involves producing more goods and services with the same inputs of labor, capital, energy and materials. Economists draw a distinction between short-term economic stabilization and long-term economic growth. The topic of economic growth is primarily concerned with the long run. The short-run variation of economic growth is termed the business cycle. The rate of economic growth is measured by the percentage increase in output over a 12 month period.

Governments aim to achieve high levels of stable economic growth over the long term – avoiding occurances such as recessions and periods of excessive short term growth which cannot be sustained. The situation in Britain, and throughout a large portion of the world at the moment, is a good example of how stable growth was not maintained. By not maintaing a constant level of aggregate demand, fluctuations will occur, moving the circular flow of income from a state of equilibirum to a state of disequilibrium – this is a natural occurance within an economy, as a rise in aggregate demand demonstrates Economic Growth and vice versa. Unemployment will also fall in relation to growth, inflation rates are likely to rise, with the gap between exports and imports narrowing as consumer demand for less expensive forgein produced products increases and demand for domestically produced goods decreases.

Benefits of Growth:

Increased levels of consumption

Avoidance of macroeconomic problems

Redistribution of income to the poor

Greater societal care for the environment

In theory Growth should make people happier as income will be more evenly distributed, meaning everyone has more money to spend, improving quality of life – the down side is that this may not actually happen, and none of the above improvements may actually occur.

Costs of Growth

Opportunity cost of growth

Growth may simply generate extra demand

Social effects and Enviornmental costs

Shortage of Non-Renewable resources – fossil fuels and minerals e.g.

Distribution of Income – rich get richer, poor get poorer?

Changes in production – people with basic skills may find they are no longer required, so without further education of training my no longer be employable.

Should countries pursue their goals of economic growth? This is a decision to be made in relation to the benefits and costs involved, i.e. each countries situation will be different and their can be no difinitive yes or no answer.

“Economic development in its simplest form is the creation of economic wealth for all citizens within the diverse layers of society so that all people have access to potential increased quality of life. Job creation, economic output and increase in taxable basis are the most common measurement tools”.

Structural transformation, improving the quality and productivity of resources and improving the standard of living of a nation’s population, through sustained growth from a simple, low-income economy to a modern, high-income economy, are desireable goals for any government to try and achieve. Improving quality of life in turn relates to improving economic development would be enhanced, including the process and policies by which a nation enhances the economic, political, and social well-being of its people.

2.

“Public policy generally aims at continuous and sustained economic growth and expansion of national economies so that ‘developing countries’ become ‘developed countries’. The economic development process supposes that legal and institutional adjustments are made to give incentives for innovation and for investments so as to develop an efficient production and distribution system for goods and services”.

http://schumpeter2006.org/blog/2006/12/20/definition-of-economic-development/

In relation to developing countries, Economic Development can be interpreted in both a positive and negative manner. For example, the government of Sri Lanka has been consistant in their attempts to push the country towards economic development since the 1970’s. Many different approaches have been taken, but a common theme of free market principles and structutal reform have been successful in keeping the plans for growth and development on track. Of course, there have been fluctuations – these are fundamental for any country, let alone those in the developing world, pursuing such goals. Set backs such as political pressures, involving civil war and forgein investment, as well as a massive drought, have been hugely influential in the path of the countries progress. However, as a result of perseverance and a setting realistic short term goals, the successive governments have been fortunate to see positive developments, especially since 2002 when a ceasefire was signed between the government and insurgent groups and the drought which has hampered development ended, allowing reliable power sources to be restored and the agricultural industry to lower their prices. Working in conjunction with the International Monetary Fund (IMF) more targets were set for the 2003-2006 time period. Along with the new laws which were introduced, concerning areas such as tax and welfare reform, as well as investment deregulation, the country hope is to “establish lasting peace through relief, rehabilitation and reconstruction”.

The fluctuations observed over this time period show clear examples of the negative and positive sides of growth and development, for example, the social effects displayed through the cival unrest and the environmental costs created by the droughts. On a more positive note, it can be seen the the distribution of wealth is becoming more even as a result of the reforms instigated in 2003. A level of health care is provided for free – midwifey care is one such service now available, although many others such as blood transfusions are still very expensive. The government hope to influence and change this with their continued action through a number of key policies:

“1) restoring fiscal sustainability, including raising revenues by 21/2% of GDP; 2) implementing structural reforms mainly involving deregulation and privatization; 3) creating opportunities for the poor to share more fully in the benefits of economic growth through improvements in infrastructure and education; and 4) garnering resources for reconstruction, including though donor assistance and government investments.”

“Like many other industrialized nations of the West, the United Kingdom has sought to combine steady economic growth with a high level of employment, increased productivity, and continuing improvement in living standards. Attainment of these basic objectives, however, has been hindered since World War II by recurrent deficits in the balance of payments and by severe inflationary pressures. As a result, economic policy has chiefly had to be directed toward correcting these two underlying weaknesses in the economy”

“The Conservative government elected in 1979 sought to reduce the role of government in the economy by improving incentives, removing controls, reducing taxes, moderating the money supply, and privatizing several large state-owned companies. This policy was continued by succeeding Conservative governments into the 1990s. The election of a Labour government in 1997 did not reverse this trend. Indeed, privatization is now widely accepted by most of the Labour Party (with the exception of the dwindling numbers of the wing of the party with strong ties to trade unions).”

“The most important issue facing Britain in the early 2000s was membership in the European Monetary Union (EMU). Labour Prime Minister Tony Blair decided to opt out of EMU at its inception in 1998 and has promised a referendum on British membership. The opposition Conservatives oppose abandoning the pound and have the support of a majority of the British population on the issue. In June 2003, the chancellor of the exchequer stated that Britain was not yet ready to enter the euro zone, which made a referendum in the current parliament unlikely, at least until a new government would be seated in 2005. The government in 2003 devoted its attention on the domestic front to improving such public services as health, education, and transportation.”

http://www.nationsencyclopedia.com/Europe/United-Kingdom-ECONOMIC-DEVELOPMENT.html

Industrial Policy

Industrial policy is a government funded program that encourages the public and private sector to create new technology which in time leads to economic growth. This new technology can be used to create new industries within the given country which in time can lead to greater levels of employment. It can also be used to save an industry that may be outdated or failing.

The government run these programs in many ways. One way they can do it is by funding a private organisation to carry out the research. This funding can be through tax breaks or the organisation could be a direct subsidiary to the government. The programs could also be government run; this has less of an advantage as private organisations are usually in a better position to carry out this research.

Does it work?

It’s not just established economic countries that have industrial policy either and it can be just as if not more important for newly formed industrial countries as well. This is due to the resources needed for economic growth, which at the start can be easy for a country to do. As it gets bigger it requires more and more resources in order to maintain this growth and without appropriate investment this would not be possible. The Korean government did this by offering financial incentives and reduced tax to organisations setting up in the country, whilst this has worked well for them as a developing country, the practises are now banned by the WTO for developing countries and as such wouldn’t help smaller countries in the same situation Korean was in some 40 years ago.

Over the last few years with the recession damaging world economies it has been quite hard to define between industrial policy and government bail outs. In the UK the government bailed out RBS as it knew that it would be fundamental in the progression in the country’s economy. But just because a government invests money into an organisation doesn’t necessarily mean that the company is fundamental in the development of that country’s economy. Take France for example in 2008 at the beginning of the recession a British born French toy company began to slowly slip, the country bailed the toy company, these actions would normally be associated with an organisation that in fundamental to the growth of the country, but they chose this to safe guard the jobs of some of their citizens. With this in mind we are going to look at examples where industrial policy is more obvious and whether opposed to some educated beliefs industrial policy does exist in the UK.

A good example of industrial policy in many countries just now is energy. All across the world the focus is slowly shifting towards renewable energy. Government s are paying incredible sums of money to develop new ways of harnessing renewable energy as they know in the long run it will be essential to maintain their economic growth. A country that is investing massively in renewable energy is China, (The Economist, 2010) stated that over the next 10 China would invest nearly a trillion yen which equate to about £80 billion on nuclear power. This is done using a variety of state owned organisations i.e. banks and also through private organisations which are then government subsidised. The energy companies are paid massive amounts of money to work creating this new technology. As well as this the Chinese government also made it a rule that any foreign companies wishing to trade in that market must give in technological secrets to the local electricity companies. This economic policy is what has allowed the Chinese electricity market to grown so quickly and will allow the energy market to continue to grow at its current rate.

With all this success in industrial policy in the Far East and in Europe some would presume that Industrial Policy is a good thing but there are also arguments against Industrial policy, the main one looks closely at the length of time it takes for the country to get any real benefit out of their investment. This point is summarised by Mr E GLAESER of (THE NEW YORK TIMES, 2011), who says “New industries don’t grow on trees. They require years of investment and development, an educated workforce and an international market for those services. That’s why the administration is pushing green energy in the stimulus, offering tax credits for renewable energy and solar power, pushing for expanded community college enrolment, and talking about an export-driven recovery. This sounds smart. But it is the sort of public policy labour whose fruits won’t be apparent for years”. This is all quite fitting however as America have a track record in not having a very good Industrial Policy and one that is also heavily focused in out dated dirty energy.

How does industrial policy effect the UK?

Industrial Policy has slowly disappeared over the last couple of decades in the UK, as privatisation crept in under the Conservative Government in the 1980’s the companies that were state owned and that Industrial policies has originally protected became privately owned. Since 1995 the shift has been from Industrial Policy towards more Rural and Urban policy. This is where the government breaks the country down into its constituencies to try and target its investment towards areas that require it most. It encourages organisations to open up and begin trading in these areas creating jobs and training opportunities for people living in these areas often suffering from multiple levels of deprivation. Each area is looked at differently as no area is ever the same and where different forms of investment is required then that local council receives the money to try and combat this problem.

Examples of how Rural or Regional Policy has improved the UK in the last 5 years can be seen in Glasgow with the Commonwealth Games. The Scottish Government has given a lot of to regenerate the east end of Glasgow, this regional policy has boosted employment in the area and will make the area a more viable business location with improvements to transport links and a facelift for the surroundings. (Community Care, 2010) emphasises that as well as a£20 million direct financial investment, the games will also created 1000 new jobs and also 1000 affordable homes in Glasgow’s east end.