Strategies to Achieve Growth

Harrod-Domar growth model

- The model suggests that the economy’s rate of growth depends on: the level of saving and the productivity of investment.

- Economic growth depends on the amount of labour and capital. More physical capital generates economic growth.

- Higher income allows higher levels of saving. Increasing the savings ratio, or the amount of investment or the rate of technological progress are significant for the growth process.

- The key to economic growth is toe expand the level of investment both in terms of fied capital and human capital. Policies that encourage saving and/or generate technological advances are needed.

- Problems: 1. it is difficult to stimulate the level of domestic savings on a practical level, particularly in the case of developing countries where incomes are low. 2. Borrowing from foreign countries to fill the gap caused by insufficient savings causes debt repayment problems later.

Structural change / dual sector model

- Three stages of production: primary production (concerned with the extraction of raw materials), secondary production (concerned with industrial production), and tertiary production (concerned with the provision of services).

- Problems of the Lewis model: 1. An increasing rural-urban migration causes a more unequal distribution of income. 2. A constant demand for labour from the industrial sector is questionable. 3. Higher incomes do not necessarily mean higher savings. 4. The model ignores the cost of training and educating the surplus labour from the rural sector.

Types of aid

- Three main aids are humanitarian, bilateral, and multilateral. It may be official (by government agencies) or unofficial (by a non-government body, or charity.)

- Tied aid is tied to particular contracts, so the receiving country needs to agree to buy goods or services from the donor nation.

- Successful aid should be an attempt to overcome the low savings ratios, help reduce foreign exchange outflows, and reduce the dependency on private investment. It also should improve the living standards of the poorest people, move with the times, not simply provide cheap food, but allow choice to be exercised by the receiving country.

Export-led growth / outward-oriented strategies

- Benefits: More closely to comparative advantage (resources used more efficiently), Increased investment (it will increase domestic productivity), Increased employment (due to increased production), Greater equality of income distribution (Increased demand for labour will raise wages)

Import substitution / inward-oriented growth strategies / protectionism

- Advantages: protects jobs, culture and curbs power of MNC

- Disadvantages: LR lose of job creation, no benefits of comparative advantage, inefficient domestic industries, inflation due to supply constraints, retaliatory protectionism

Commercial loans

- loans frombanks and other financial organizations, usually in the developed world

Fair trade organizations

- FairTrade organizations allow farmers and small manufacturers use a FairTrade Logo which international consumers recognize as meeting certain standards

- Guarantee farmers and producers a fair price for the goods they produce. A price that covers their production costs and allows a surplus that they can reinvest in their business and that can sustain a reasonable standard of living.

- Creates a degree of stability of prices and allows development to take place at a consistent pace.

Micro-credit schemes

- Schemes that lend small amounts to the poor in a developing country. They are usually offered by Non-Governmental Organizations (NGO’s).

Foreign direct investment

- Mainly through multinational corporations (MNCs)

- Benefits of MNCs: proponents of outward (help raise enough finance to fund the necessary investment), Leading to a more efficient allocation of the world’s resources, Boosting the rate of economic growth (shifting the LRAS to the right, or productive potential), Injecting money into the local economy (provide jobs directly, multiplier effects),

Sustainable development

- Not having a detrimental effect on future generations and involving measures to limit the use of non-renewable resources

- Targeting aid (improve the environment), Research, Programmes to help reduce population growth

Barriers to Growth

Poverty can be shown by Human Poverty Index (HPI: a long and healthy life, knowledge and a decent standard of living)

Poverty Cycle

• Low income ® Low savings ® Low investment ® Low incomes

Nepal is having this poverty cycle in the economy  due to low income. 69% of population is living on less than $2 a day. This will cause people save less, invest less, and earn less eventually.

Institutional and Political Factors

1. Ineffective taxation structures: physical problems or simply data information problems (ex: poor records of the population)
2. Lack of property rights: property allocated on traditional or tribal grounds or ownership. This prevents trade of FOP between ownerships.
3. Political instability: There will be an unwillingness to engage in capital investment.
4. Corruption: a barrier for overseas firms investing in an economy
5. Unequal distribution of income
6. Formal and informal markets: In informal markets, no money is exchanged and economic activity goes unrecorded.
7. Lack of infrastructure: Can be known from the data of electricity use, roads, access to sanitation, fixed lines and mobile telephones, illiteracy total, mortality rates, and child malnutrition.

International Trade Barriers

Over-dependence on primary products

After the prices of primary goods fall, the developing countries have to export ever greater quantities of primary products to be able to import the same quantity of imported goods.

Low income elasticity of demand for primary products.

Violently fluctuating prices of primary goods. (Elastic)

Increased trade between developed countries

Consequences of adverse terms of trade

People need to sell more just to earn the same amount as they did in previous years, ignoring any decline in the value of their domestic currency.

Consequences of a narrow range of exports

Overproduction, failure to get all producers to join, storage of some commodities is difficult, and floor prices are too high and encourage overproduction.

Protectionism in international trade

• Strict protection policies in the developed economies in order to stop cheaper imports coming in from developing economies.

International Financial barriers

1. Indebtedness: After the first oil-crisis in 1973-74, developing countries’ debts suddenly rose. In the 1980s, those countries borrowed from US government and immediately interest rates moved upwards. The developing countries found their debt risen in real value. (Increased interest rates, increased value of the dollar, and the recession in the developed world)

To solve debt crisis. 1. Attempt to expand GDP faster than debt ratio. 2. Structural adjustment programmes can be accepted. 3. The richer nations could write-off debts and import more so that they can boost developed world trade.

1. Non-convertible currencies: mainly apply to developing countries whose exchange rates are fixed, rather than floating. As the fixed rate is usually greater than the free market equilibrium rate, the exchange rates tend to be overvalued. Therefore it makes exports more expensive.
2. Capital flight: Borrowed money used not to repay debts, but to put into stocks and shares and property. This occur due to fear of devaluation, highrates of inflation, a low real rate of interest, and a poor domestic investment prospect.

Social and Cultural Factors

1. Religion
2. Culture
3. Tradition
4. Gender issues

There exist a lot of barriers to economic growth in Nepal. Unequal distribution of income is one of them. Country’s 10% of the population takes 50% of the wealth, and the bottom 40% takes 10%. Also, due to lack of property rights, land ownership in Nepal has been extremely limited. Limited access to new farming technologies, inputs and extension services causes productivity levels remain low. It eventually prevents trade of land and agricultural goods. According to the data from 2003, 86%  of 24.7 million population in Nepal resided in the rural areas. It suggests their dependence on agriculture. 80.2% of the labour force is employed in this sector, but the industrial sector is still on its progress. Besides, lack of infrastructure can be seen from the following data: access to improves sanitation (35%) and literacy rate (49% all adults). Most households have little or no access to basic social services such as primary health care, education, clean drinking water and sanitation services. 85 % of Nepalese don’t have health access. The barriers include political instability; poverty and lack of economic growth contributed to political unrest and violence. A Moist rebellion that began in 1996 killed more than 14,000 Nepalese and about 600,000 have been internally displaces or made homeless. Fighting occurred largely in rural areas, affecting agriculture. Though a peace accord was signed between the Government and the Maoists, it still remains a fragile issue. This instability may cause an unwillingness to engage in capital investment.

Listed above, several barriers have been slowing down the economic growth in Nepal. Since the country is already in poverty cycle, it would be difficult to raise the productivity level. Considering influence from each barrier, the biggest barrier would be over-dependence on agriculture. It is unlikely for peasants to attempt getting education or to invest on FOP. Also, due to lack of property rights, people barely have no incentive to be productive.

Sources of Growth

Economic Growth is an increase in a country’s total output of goods and services. It is measured by changes in real GDP. Economic Growth is caused by improvements in the quantity and quality of the FOP. The following is the four elements of Economic Growth:

• Natural Resources

Ex) land, minerals, fuels, climate

• Human Resources

The supply of labour and the quality of labour

Increase in the supply of labour and market demand thus stimulating production

• Physical Capital and Technological Factors

Ex) machines, factories, roads

• Institutional Factors

Ex) the banking system (a purpose of providing liquidity on the capital and goods markets), legal system, education system, health care system, political stability, infrastructure (ex: roads, ports, telecommunications networks)
Population growth

In the short run, population growth put pressure on education and employment but eventually social provision for the elderly will have to be financed. It also impacts on the supply of food (starvation and malnutrition cause infant mortality) and environment (food pressure takes valuable resources away.)

Increase in the quality of human resources, or social investment, would have both economic and social benefits. Economic benefits would be higher productivity in the economy, increased labour mobility, and better use of finite resources. Social benefits would be better health and longer lives, greater participation and democratization, and better opportunities for women in choosing their own lives.

Education

In developing countries, children do not receive an appropriate education due to the following:

1. Inadequate education systems
2. Children need to work on the land instead of to study at school
3. A lack of jobs may lead to crime and increasing drug abuse, and an unwillingness to attend school

Nepal is the 48th poorest country in the world. One of the problems is its population that will be 48 million by 2030. 16.5% of the country’s total land area is cultivated, and due to population pressure, the percentage of Nepal’s cultivated area has increased from only 10% in the 1960s.

Nepal’s mineral resources are very limited; they are small, scattered, and barely developed. There are known deposits of coal, iron ore, magnesite, copper, cobalt, pyrite, limestone, and mica. Indeed, Mineral extraction and transport is a major problem due to the country’s rugged terrain.
Nepal’s great river systems provide immense potential for hydroelectric development. If developed and utilized within the country and exported to India, the main market for power generated in Nepal, it could become a main resource of Nepal’s economy.

Two Benefits from International Trade

The reason for international trade is that each country has different resources. In order to use those resources efficiently, country intensively produces such product that is profitable to itself.

In international trade, Free Trade should be guaranteed for benefits to both countries. Through trade, a country is able to stabilize the price level by importing goods, that are expensive within the country, from foreign country. Also, Living standards can be raised by satisfying citizens’ demand, and domestic technology can be developed through import.

The Collapse of the Lehman Brothers

On September 15, 2008, a petition for bankruptcy of the fourth-largest US investment bank, Lehman Brothers, shocked the whole world and brought economic stagnation. Why did Lehman Brothers bankrupt and cause the heaviest fall in Dow Jones Industrial Average since 9.11 terror?

The bankruptcy arose from an aggressive investment in Mortgage and other derivatives. When the real estate prices and demand for houses rose, many people borrowed money through derivative. However, as bubble in house prices faded away, house prices fell gradually and people who borrowed money taking risks became unable to repay to the banks. They couldn’t even sell their houses due to low demand, and eventually absence of repayment caused a decline in liquidity of banks.

Due to the collapse of the Lehman Brothers, many stockbrokerage firms and banks who invested a lot in Lehman Brothers suffered financial damage. This provoked instability of the stock market. In order to restore companies with low liquidity, United States needed to invest enormously, which might lower the value of the dollar. It affected many companies of each country who export/import to the States in a negative way. As a result, global economy gradually slowdowned its growth.

1:1 Laptop Program

It is true that this is an innovative education method to use a laptop during class. Personally, however, I think that 1:1 laptop program does not helps students understanding economics. Besides all concerns about cost and possibility to drop/break the laptop, there are some limitations in learning with laptop. Even though interactive textbook, or online textbook, is available, it is quite time-taking and difficult to take additional notes ‘from’ online textbook. Handwritten or typed notes are definitely required since they are helpful when students review for quiz or exam.

Link: Econ

I usually find a news article and opinions of the economists at Bloomberg.com. It also contains market data, such as stock and currencies. When I need an article and clear analyze of it for my commentary, Bloomberg.com helps me a lot.

New fact about tax system

An effective tax rate, the percentage of your income you pay in taxes, is different from a nominal tax rate or legal tax rate. For example, if a rich spends $3000 in total taxes among his total income, $60000, his effective tax rate is 5%. In contrast, another person earns $30000 as total income and pays $3000 in taxes. This person’s effective tax rate is 10%, twice the rich pays. In this case, tax is regressive, and richer person pays less tax rate.

Over 10 years in the past, 1987-1997, people got richer in general and the income tax became more progressive. Increased rich people paid a larger share of taxes. Therefore, the statement “the rich are getting richer and the poor are getting poorer” is wrong. Not only the rich got richer, but also the poor got richer than before, according to the data table of Federal Individual Income-Tax Return Data both in 1987 and 1997.

Which tax system is the best?

Taxation is divided into two large categories: direct taxation (income/ labor/corporate tax) and indirect taxation (taxes on expenditure). It can be also divided into progressive taxation, proportional taxation, regressive taxation, and lump-sum.  Progressive taxation is that tax rate increases as taxable income increases, and proportional taxation is that tax rate is fixed regardless the amount of income. Regressive taxation means that tax rates decreases as taxable income increases, and lump-sum taxation is that tax rate is set.

1. Progressive taxation:

 - Lower incentive to work

 - Used most world-widely

 - Government can have high budget from taxation because of rich people’s high percentage taxes.

 - Poor people can benefit from social welfare done with tax. 

 

2. Proportional taxation

 - Higher incentive to work.

 - Unfair to poor people since they have to pay the same percentage as rich people.

 - Government gets smaller amount of taxes.

 

3. Regressive taxation

 - Higher incentive to work.

 - Poor people might not be able to pay. (higher percentage)

 

Even though progressive taxation seems to help poor people by using rich people’s high tax, it actually is helping the economy to be healthy. Poor people can survive and they can spend money (inject money into economy). Also, rich people are earning high amount of money, which causes them safe despite of high taxation.