Specific Policies To Enhance Economic Growth Economics Essay

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The Oxford English Dictionary defines principle as "a general scientific theorem or law that has numerous special applications across a wide field". Policy is "a course or principle of action adopted or proposed by a government, party, business, or individual". It is obvious, then, that the principles serve as theoretical guides to the formation of policies, but do the principles imply a set of unique good policies? Is it possible for countries around the world to implement different polices to enhance economic growth?

John Williamson described a set of ten specific economic policies, which is called Washington Consensus, as the standard reform package promoted for developing countries, Latin American countries for example, in 1989. The Washington Consensus seems to be the set of unique good policies to promote economic growth. However, China and India, which are the two most famous fast growing countries, both have some economic policies opposite to Washington Consensus' recommendations. Joshua Cooper Ramo pointed out that there is no perfect solution and different strategies are appropriate for different situations. There are some economists sharing the similar point of view with Ramo. Dani Rodrik argued in his paper that policy makers have substantial room for creatively packaging the core economic principles into institutional designs that are sensitive to local constraints and take advantage of local opportunities.

The plan for the essay is as follows. The first section analyses the link between principles, policies, and performance. Section 2 illustrates the importance of policy based on sound principle and growth theory. The third section explores the difference of policies for initiating growth and good policies for sustaining growth. Section 4 develops the viewpoint that the core economic principles do not necessarily imply a set of unique good policies. The conclusion is the last sector.

Link between principles, policies, and performance

The core economic principles include market-based competition, appropriate incentives, stable macroeconomics environment, role of high savings, positive technological progress, and so on. These principles act as the basis for the growth strategies and policies made by government, and are similar independent of specifics.

A policy is typically described as a deliberate plan of action to guide decisions and achieve rational outcome. Once the policy is set, institutional arrangement must be consistent with it, and the authority has to make their decision according to the plan. In other words, policies serve as the practical guides.

Performance refers to how successfully the policies perform, and it involves the evaluation of the plan when the policy is carried out.

The link between principle, policies, and performance can be summarized as follows: the principle acts as theoretical guide, the policies serve as practical guide, and the performance is the evaluation of the policies.

Policies, economic principles and growth theories

There are several important growth theories in develop economics. Every model has its different assumptions from others. It is not surprising, then, that models based on different hypothesis will lead to varied conclusions and policy suggestions. Therefore, there is no general growth theory for all the policy makers to apply, and reflect every country's specific characteristics and historical experiences. The theories presented here are the exogenous growth models and endogenous growth models.

The key assumption of the exogenous growth models is that capital is subject to diminishing returns, which means that the marginal production of capital is smaller with the capital accumulation. Exogenous growth models make policy makers have more guides in developing their economic plans: saving rate can't influence the rate of growth in the long run; capital accumulation for a firm, industry, sector, is constrained by diminishing returns and this stops growth rate rising indefinitely; however, there is convergence in the long-run and the level of GDP per capita can be raised by good policies.

These models state that government should implement policy measures like tax cuts or investment subsidies to increase saving rate and affect the short-run growth and the steady state level of output positively. It seems like that the higher the saving rate is, the faster the economy will grow. There is no doubt increasing saving rate is a good policy for some countries, such as some developing countries in Sub-Saharan Africa. However, for a country like China, who already has really high saving rate, a better policy now may be promoting domestic consumption, expanding the consumption demand and saving less. Needless to say, China's high saving rate and low consumption from income have freed up resources for economic growth. However, it is generally acknowledged in China that the saving rate should come down in order to diversify the economy and provide greater stability. Since China's over export dependence has transmitted instability to the economy, and higher personal consumption and lower saving rate would help China lessen economic instability which is harmful to sustainable growth.

Endogenous growth theories act as a response to criticism of the neo-classical growth model, and hold that policies can affect the long-run growth rate of an economy. The key assumption is constant marginal product of capital, or at least that the marginal product of capital does not tend towards zero. This is the most important difference between the exogenous and endogenous growth models. Scientist like Romer and Lucas argue that savings, government policy, and technology fostered by efficient markets do have a influence on the growth rate. These conclusions show some suggestions to the government that policy makers should increase education investment and give bigger subsidies directly or indirectly to the technology research and development department in order to promote technology progresses.

Both the exogenous and endogenous growth models provide some useful guide to setting policies. However, there is not standard growth model which suits every country. Policy makers should develop economic plans reflecting their specific situations and conditions.

Policies for initiating growth and sustaining growth

Some countries struggle to start growth; others try to sustain it. As Dani Rodrik points out, when a country is so far below its potential steady-state level of income, even moderate movements in the right direction can produce a big growth payoff. However, sustained high growth is not easy. When a country is far behind the leading economies, says Philippe Aghion, it is very clear what this country has to do, but as the economy catch up with the leaders, what policies should be set becomes less obvious.

There are some countries grow quickly, but reach a plateau when they reach middle-income. No one could point out all the reasons for their losing momentum, but the common patterns may be suggestive. As the economy evolves from middle to high income, there are more capital-intensive and skill-intensive industries, and the domestic economy with its increased size and wealth becomes a more important engine of growth. The supply of labor in middle-income countries, which once seemed infinitely elastic, ceases to be so. As surplus labor disappears, the opportunity cost of employing a worker in one sector rather than another, rises. Firms compete for workers and wages increase. These higher wages slow the growth of labor-intensive sectors. Indeed, these export industries, which once drove growth, decline and eventually disappear. Shortages of high-skilled labor emerge. The growth strategies that served an economy well at lower income levels cease to apply. As a result, growth must spring from knowledge, innovation, and a deeper stock of physical and human capital. Instead of providing targeted support to labor-intensive sectors, governments must expand higher education to support the growing service sector of the economy. Skills must be upgraded across the spectrum of employment. What the policy makers should do is anticipating this transition and developing corresponding plans. Take China for example, the labor-intensive industries are still absorbing the rural millions of workforce, but the skill-intensive industries are emerging strongly at the same time. Thus, the policies to expand higher education and research, in response to the growing demand for human capital, should be implemented as soon as possible.

Bad policies are often good policies applied for too long. The growth strategy and policy must evolve with the economy. The plans for initiating growth that do not consist with the middle-income situation should be abolished. Resisting such policies will delay the economic structural change. The case of Singapore is a good example of letting go of earlier policies. Singapore allowed labor-intensive manufacturing to migrate elsewhere in respond to the evolving economic conditions at home and abroad. This let Singapore concentrate its resources on capital-intensive industries benefitting the economy.

In a word, policies should also differentiate between plans for initiating growth and plans for sustaining growth.

Growth strategies in specific country context

As Dani Rodrik points out, the higher-order principles of sound economic management do not map into unique institutional arrangements, and there may be multiple ways of packing the core economic principles into institutional arrangements. The growth theories can be reflected in different policies according to the context of a particular economic situation.

Washington Consensus

The term Washington Consensus has been controversial after being described by John Williamson. It is criticized by some Latin American politicians and economists. Some critics focus on claims that it led to destabilization, and some critics have also blamed the term for the Argentine economic crisis (1999-2002). Dani Rodrik is one of the famous economics against the consensus. He took the example of China and India and claimed it as a factual paradox: Both countries had extensive industrial policies planning, high levels of protectionism, and bad fiscal and financial policies through the 1990s. If China and India had failed in economy growth, then there would be strong evidence in support of the recommendations of Washington Consensus. However they turned out to be successes.

The Argentina economic crisis (1999-2002) is held out as an example of the economic devastation resulting from the application of the Washington Consensus. It is surprising that, in 1998 the IMF invited Carlos Menem, the president of Argentina, to talk about its successful economy experience, and then Argentina was considered as the best pupil of the World Bank and the USA government. However, in 2003 Argentina's then president and other Latin American leaders signed a manifesto in opposition to the Washington Consensus. Argentina's Deputy Foreign Minister Jorge Taiana attacked the Washington Consensus in 2005, and he said there never was a real consensus for the policies. Many economists challenge the view that Argentina's failure can be attributed to close adherence to the Washington Consensus. Some argues that what was wrong with the Washington Consensus had less to do with what was included than with what was missing.

Therefore, the Washington Consensus seems like a standard growth strategy, but it is not suitable for every country. Economies need to find their own paths to development .