Economic growth
defines the volume of natural resources flowing through a community
related to its demand for goods and services. This is determined by
the size of the purchasing population and its relative
wealth.
The economy's need
for workers originates in the demand for the goods and services
they provide. So, as a first step in projecting employment, there
has to be an estimate of the final demand for goods and services
produced. In the United States this measure is called gross
domestic product (GDP). The five major categories that make up
demand are the following:
-
Personal consumption
expenditures. These include purchases by individuals of goods
(such as automobiles, clothes, and food) and services (such as
education, healthcare, and rent).
-
Gross private domestic
investment. This includes business investment in equipment and
software, the construction of factories and office buildings, the
construction of residential structures, and changes in business
inventories.
-
Government purchases.
Government purchases include goods and services bought by Federal,
State, and local governments. These are goods and services produced
in the United States and purchased in foreign
countries.
-
Imports. Imports are goods and
services produced abroad and purchased in the United States.
Because GDP measures production in the United States, the value of
imports is subtracted from the other four categories of
GDP.
Finally, these
categories are broken down into more detailed ones, such as
the demand for clothing.
Most charts based on
this kind of data show changes in the level and composition of
demand. These changes affect industry employment levels. For
example, an increased level of business investment in
microcomputers will increase employment in the computer industry
and in all those industries, such as electronic components, that
provide inputs to the computer industry. In turn, occupations that
those industries employ will also grow.
Thus under certain
conditions home consumption demand can boost economic
growth. There are the following four main reasons for this:
First, residents' daily necessities and durable consumer goods need
to be constantly updated. Doing so can help upgrade consumer goods
and increase total consumption demand; second, increase in demand
for consumer goods can help promote the re- employment of urban
workers, while increase in the employed population will bring about
purchasing power and proceed to bring about more consumption and
will need more consumer goods, that is to say, employment boosts
consumption; third, at present, it is highly necessary to expand
the rural market, if demand for food produced by farmers for urban
consumption expands, it can increase farmers' income which, in
turn, will promote the production of industrial goods. Such being
the case, expanding demand for consumer goods can bring about the
development of the rural market and the industrial goods market;
and fourth, the aim of production is to improve people's living
standards and the quality of life, increase in quality demand for
clothing, food, housing and transportation and for better consumer
goods has led to the constant emergence of new consumer goods and
new consumption methods.
Almost two-thirds of
the world's population lives on less than $2 per day. Families are
hard-pressed, at this level of income, to meet their daily needs
for food and shelter. They find it difficult to provide education
for their children, build up savings for a rainy day, or improve
their standard of living by making more investments in a business
that can generate larger income flows.
Rural markets
provide income to family operated micro-enterprises. These families
live in low income countries with an average per capita gross
national income (GNI) of less than $745 per year or lower middle
income countries with a per capita income of less than $2,975 per
year. USAID partners with these countries to support their efforts
to improve the levels of income their citizens enjoy. Governments
are responsible for adopting policies that provide a good
environment for business that creates jobs and establish needed
organizations and institutions of governance, such as courts, banks
and telecommunications regulators. Governments also make specific
investments in public services such as education, health, and
transport systems using taxes collected on trade and incomes.
Private entrepreneurs and investors, if provided appropriate
incentives, security and access to markets, use their ideas,
knowledge, and capital to establish companies that produce a wide
variety of goods and services. In developing countries, many of the
businesses are very small microenterprises that employ fewer than
ten people.
Trading
opportunities permit business enterprises to specialize in various
products and services. The process of exchanging products and
services through market operations, or trade, generates more wealth
than would be otherwise created if companies were less specialized.
Companies generally seek to build their businesses on the basis of
some local advantage - oil, gold, land that can be used to produce
crops, factories that make use of the labour that large urban
populations provide, and so forth. USAID experience has shown that
countries can boost the ability of the companies located in their
territory to compete more effectively in trade if they pay
attention to their policies and organizations of governance, the
health and education of the workers, and the establishment of
infrastructure such as modern energy systems, roads, airports, and
seaports that enable goods to be produced and moved quickly and
efficiently. Information about markets is increasingly understood
to be an important element of efficient trade.
USAID economic
growth and trade programmes provide support both to government and
private sector partners. Economic growth and trade
programmes are closely integrated with other programmes that
support democracy and governance, sound management of the
environment, increased agricultural output, and, of course,
education and health. Telecommunications and internet
facilities are critical to trade.
The average per captita income of the developing
countries in the Latin American and the Caribbean regions is about
$2.320; the average for 49 countries in Africa is only $670. Within
Africa, per capita income is projected to vary widely among
countries. In many of them it will be lower than in the mid-1980s.
The least developed countries had increased their average per
capita income from $240 in 1985 to only $270 in
2000.
Swift progress in raising labour productivity and
per capita income levels is an essential prerequisite for full
economic and social development. This is true although the process
of world development involves much more than economic growth and
structural transformation in the developing countries. The
alleviation of poverty, greater employment opportunities, good
nutrition and health, and better living conditions all contribute
to increasing the level of productivity of the labour force. There
are many aspects of the income distribution process: the allocation
of world income over countries, the proportion of income
received
Growth for the US economy in the third quarter of
2003-4 was the fastest quarterly rise recorded since 1984. Much of
the subsequent analysis has focused upon the surge in consumer
spending and its presumed role in the impressive numbers. For
example, spending on housing rose by 20 percent and spending on
consumer durables increased by 27 percent.
A debate has already begun over whether this good
news is sustainable. One reality check is the fact that few new
jobs are being created since continued increases in consumer
spending depend upon employment growth.
However, the primary focus on consumption is
misplaced. It turns out that both household spending and job growth
both depend upon increased business investment. If consumption and
demand are essential to economic growth, then government spending
on armaments and weaponry will boost the
economy.
But neither war nor terrorist acts are beneficial
to overall economic growth. Were it otherwise, the rebuilding after
natural disasters like hurricanes and floods would make them
welcome events.
And so it is that the appropriate direction of
causation is that production creates the basis of purchasing power
that allows consumption to take place. Evidence of this is seen in
that those countries with high levels of consumption are those with
the highest levels of production.
Non-economists might be forgiven for being misled
by commentators that note that consumption spending makes up about
65 percent of total demand. But consumer demand does not drive
economic growth.
It turns out that estimates of GDP greatly
understate business spending and grossly over- exaggerate consumer
spending as a proportion of total economic activity. When
calculations of total business expenditure take into account
spending between stages of production, it is considerably higher
than consumer spending. However, most business spending is left out
of GDP calculations because this supposedly would involve double
counting.
Growth is driven by capital accumulation, not
consumption. Increases in productivity that give rise to higher
living standards come from capital accumulation. These increases in
the material means of production require a stock of real savings.
As more capital is accumulated, more can be produced and more can
eventually be consumed.
Much of economic policy response is focused upon
manipulating the demand side of the economy. This is the aim of the
interest rate cuts by the Federal Bank and the expected stimulus
effects of eliminating the budget surpluses and replacing them with
public- sector deficit spending.
None of these steps can create a sustained rise in
the economy. For there to be persistent increases in growth, there
must be an increased level of real savings accompanied by
technological change and a group of entrepreneurs willing to take
risks.
Neither deficit spending nor interest rate cuts,
nor even temporary tax rebates, change fundamentals in the economy.
A politician might think that stimulating the economy is a good
idea since it may win votes. But economists should realize that
short-term economic stimulus is a misguided idea that leads to
long-term losses.
What then can be done to change economic
fundamentals in order to encourage a sustained recovery? Instead of
one-time tax rebates, permanent reductions in marginal tax rates to
reduce the disincentives caused by high taxes along with reduction
or elimination of capital gains taxes.
Capital gains taxes and the imposition of high
marginal tax rates do not punish the wealthy. In both instances,
those who seek to increase their wealth bear the burden. In so
doing, such a tax regime reduces the level of productive economic
activity and leads to slower job growth.
Moving forward toward a strong recovery will
require jettisoning much of the conventional wisdom that has become
deeply imbedded in economic analysis. In the end, this might prove
to be as difficult as rooting terrorists out of their lair in
faraway places.