dissertation help service economics

dissertation help service economics

The Impact of Government Policies on Economic Growth

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1. Introduction

Because of this, there has in many countries been a substantial divergence between what development economists would regard as appropriate policies and actual policies followed. In many underdeveloped and developing countries this has led to considerable disappointment with the results achieved, and for this reason policy recommendations have often been marked by an element of exhortation rather than dispassionate analysis of the costs and benefits of alternative courses of action. It is beginning only fairly recently that growth and development have come to be widely viewed a policy problems like other in economics, and that an attempt is being made to rationalize the choice of objectives and instruments in these fields. Theoretical analysis here is much complicated by the paucity of reliable statistical data, the absence of clearly specified objectives, and the impossibility of controlled experiments; but its becoming increasingly recognized that the formulation of policies by which objectives may be attained is an exercise in applied social science where there is large margin for error. This being so, it is to be hoped that the tools of economic analysis will gradually be brought to bear on the elucidation of the nature of policy problems in a way that will command the attention of those responsible for their solution.

Government is the major actor in the running of the country. Government policies are key to the success or failure of the ambitious task of developing countries because they provide the framework within which decisions affecting economic growth and the efficient use of resources are taken. This is equally true of policies that are explicitly concerned with growth and those that impinge on it only indirectly. The view of the role of government in a free enterprise economy has fluctuated widely, but both the theoretical literature and practical experience suggest that government has a great deal of scope both to encourage and to retard economic development. But government has in many cases been relatively unresponsive to the advice of specialists in economic development and economic growth, and it has often pursued policies for reasons other than their likely impact on the rate of growth of national income.

2. Literature Review

Empirical studies have been conducted which indicate that at higher levels of income, the income elasticity of demand for imports is significantly negative. These studies seem to support the belief that as countries become richer, they tend to begin phasing out domestic production of certain goods in favor of imported substitutes. This phenomenon seems to coincide with different stages of growth predicted by the theory of the product cycle. If a country is importing goods that it could just as easily produce at home, it is likely that there will be a detrimental effect on the domestic economy. This is because the production of those goods has already reached its potential and begun to decline in terms of comparative advantage. If domestic production of those declining goods is showing a decrease in output and employment, it can hinder the overall growth process. This is highlighted as a possibility in some of the earlier endogenous growth models. It is at this point that government policy aimed specifically at increasing growth becomes important. The consideration and determination of the effects better or worse economic policy will have on overall growth is a complex topic. It is not purely an issue of microeconomic theory, nor is it a simple extension from the theory of competitive growth. But the principles of creating more public-sector employment in order to soak up unemployed resources can be contrasted against the basic Harrod-Domar growth model where growth is a result of the level of saving and investment. In that simple model, government employment is at first not seen as an engine for growth but is simply a means where the government can put idle resources to work without affecting the rate of growth. But improvements to the Harrod-Domar model and the understanding that government and private sectors often produce the same goods brings to light a different story.

3. Analysis of Government Policies

Several different sets of government policies in the OECD have been used for analysis. In this section, a number of econometric models are used to investigate what impact, if any, the policies under review have on economic growth. The models used are simple, consisting of OLS regressions where the annual growth rate in GDP (taken from the IMF’s World Economic Outlook database) is regressed against the policy indicators. This data is presented on an annual basis; variables and mean values for the period under consideration 1960-85 can be seen in the appendix. The first of the policies to be considered is that of the relative price of non-traded to traded goods. This is calculated as the price indices of these respective goods and weights them using private consumption and private investment. The idea is that countries with relatively high non-traded good prices will have less growth as resources are drawn into non-traded goods production. This brings about linkages with the theory of the Dutch disease where an increase in natural resource revenue causes an appreciation of the real exchange rate causing a decline in a tradable goods industry. The effects of this have been shown both theoretically and empirically. High resource prices, perhaps as a result of government policy, will cause a disallocation of resources away from the tradable goods sector to the non-traded, and there is evidence that an appreciation of the real exchange rate due to capital inflows reduces the growth rate so long as it is expected to continue.

4. Case Studies on Economic Growth

Other differing views on South Korea’s economic success suggest that it was a success on the basis that the military government were soon educated in the benefits of elite consumption and that they were mainly to increase the standard of living of the ROK citizens. However, it cannot be argued that they were also trying to fast track Korea to a stage where they could be seen as “one of the big boys”, preparing itself for the 1988 Olympics and the 2002 World Cup, while mainly deliberately fostering the growth of the chaebols into multinational corporations and earning South Korea a position in the NIC category where it has stayed even during contemporary times with ROK now being named on the threshold from first to second. This policy of success, however, is not widely regarded as a model for economic development.

The end of the Second World War, and the subsequent division of the Korean Peninsula, and later the Korean War, had a long-term impact on the country’s economic development. Prior to the Korean War, South Korea was a largely agricultural nation, and had a relatively high standard of living for a third world country. By the end of the Korean War, the South Korean economy was in ruins with over a million dead and the country had little to export, which lasted until 1979. Under Park Chung Hee, South Korea’s economy grew and the government invested 25% of the nation’s budget into state-owned companies, and there was much effort put into modernizing businesses and increasing the production of consumer goods. This growth was achieved in a non-conventionalist manner by today’s standards. It has been described as a type of “benevolent dictatorship” and there was a limited amount of democracy and civil rights. However, this policy has been termed as a great success, as with the later stages of Ha-Joon Chang’s “kicking away the ladder”. From this stage, South Korea’s economy began to pick up with some massive success, including the Hyundai motor company and Samsung. South Korea has gone through the four stages of the crucial turning points in policy third world development. This effort to create international industries led to the creation of an export-oriented strategy, involving large-scale production running with the economies of scale, increasing returns and learning effects, and also comparative advantage.

South Korea

5. Conclusion and Recommendations

The world is in the best of times and in the worst of times, in a state of change that is more rapid and intense than ever before. Never before have the dynamic market and the globalization process discovered such dynamics. The last fifteen years in particular has witnessed unprecedented attempts to correct the ills of the private sector and bring about accelerated development. It is the main argument of this essay that an expose of the limitations to government though are exceeded by the misconceptions of its critics serves to enhance the understanding of the process of a successful development strategy, it is a critique that applies as much to small interventionist economies as it does to those in transition. The study is a search for balance between an economic liberalism that it argues has been productive but often detrimental and government intervention that has been suggested to avoid failures and resolve economic disparities, but has generally proved counterproductive, in short the false choices and forced choices of the title. The essay has focused mainly on the practical policy decisions that have to be made by transitional economies but the general aims of such debates are common to economies at all levels of development. So from the case studies and experiences used, it claims that its insights have universal relevance and applications.

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