SOME OBSERVATIONS ABOUT THE ECONOMIC GROWTH – BY Dr. BOBBY SRINIVASAN AND Dr. SUDHAKAR BALACHANDRAN

September 19, 2014 | Posted by bobbysrinivasan << back to blog

Here is a list of observations that are relevant to the understanding of the economy of a country. By observing, one learns that any country is in its current state because of the policies they are currently pursuing or the outcome of the policies pursued before. It will be clear to the reader that policies have a big role to play in developing macro-economic activities for a country. We are currently presenting some 16 observations as a first part of this assignment. Read on.

Observation 1:

It is generally true that when the economic growth of a country maintains a high momentum (namely higher growth rate), we can conclude that the citizens of the country will become materially well off. The ‘well off’, for example, means more ownership of cars, houses, computers, fridge, etc.

This observation is not necessarily true. It depends upon how the wealth is distributed. If the society is divided into, say 3 categories, wealthy, middle-class and poor. Recent studies in the US show that in the year 2011, 93% of all the wealth created went to the top 1%.

Observation 2:

Some countries had a head start in their economic growth for a host of reasons including a more open door policy with regard to the foreign direct investment.

True. Take the case of China. Since the days of Deng Xioping in 1976, it never looked back. FDI poured in huge amounts which created infrastructure, jobs and growth.

Observation 3:

War destroys the wealth of a country.

True. Look at Gaza today. The Israeli army is pounding them with missiles that it is knocking off all offices and buildings. It may take many decades to rebuild it.

Observation 4:

The countries in the world could be classified as belonging to any one of the 3 categories:

Poor economies with a lower GDP, very high unemployment and aspiring to become an emerging economy.
Emerging economy with GDP improving continuously and aspiring to achieve a status of a well-developed economy.
Well-developed economy, which aspires to maintain its good growth. This is what the entire world is aspiring for.

Observation 5:

Consumption is mostly the biggest driver of economic growth. In the US, for example, 72% of the GDP comes from consumption. However, a country like China, where consumption is only 46% of the GDP and achieves its growth by investing in their infrastructure.

Observation 6:

Some countries’ economic growth is stalled due to lack of heavy investment in the infrastructure.

Indian budget expenditure is mostly interest payment on debt, subsidies and non-planned expenditure. Literally, very little is available for infrastructure building. We are always looking for public-private sector partnership to help us out.

Observation 7:

Social costs take away significant chunk of money which otherwise could have been used for development purposes.

For example, for the FY 2013-14, our government plans to spend Rs.2.5-3 lakh crore to fund the social costs like subsidizing the costs of food, energy, fertilizers, etc.

Observation 8:

These subsidies, strictly speaking, do not contribute to economic growth.

For example, in the MGREGA scheme, Indian government gives salaries to people who do not work or work in odd jobs that have no economic value.

Observation 9:

For some countries, labour and its productivity contributes to their economic growth. The per capita GDP of Singapore is more than US $60000 and the growth in GDP is maintained due to increased labour productivity.

Observation 10:

Even though enormous number of people are available to join the labour force, they do not have any skill to offer and hence, they can only be a burden to the economy.

In India, most of the labour forces are involved in menial and low value added jobs, such as in agriculture. Currently, efforts are being made to upgrade their skill set and productivity but it is still a long way off.

Observation 11:

When the banking and financial services are available to every citizen in a country, it is easy to track as to where the funds have gone and put to use.

In India, more than 50% of the 680000 villages have never heard of a bank and so all the economic activities among themselves are done in cash and so, it is not easy to track as to where the money went.

Observation 12:

To achieve a higher growth rate, a significant part of the money should be employed into sectors which have a high velocity and the turnover time is short. For example, when funds get struck in real estate, it takes a much longer time to realize cash and so the slow velocity from the activity prevents quicker recycling. This in itself stunts the growth. In the extreme case, it created the sub-prime crisis of 2008.

Observation 13:

Investments, generally speaking, in high technology give us the best returns. For example, the contribution made by the Silicon Valley to the US GDP is mind-boggling.

Observation 14:

Deficit financing is a major killer to the economy. The government spends, in this case, for its various activities from borrowed money. The deficit over time gets added on with interest for the future generation to pay. Some countries like Japan has an accumulated debt exceeding 200% of GDP.

Observation 15:

For a citizen born in a highly indebted country, he or she should be prepared to pay higher taxes in the future.

Observation 16:

When the debt level reaches a high level, it will destroy the economic freedom of the country. As a significant portion of the budget money will go towards interest payments.

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