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How growth is obliterated by political decision-making

For improving economy and to maintain healthy growth rate,1 the countries usually make good efforts but there are a number of impediments to economic growth. Among others, these hurdles include economic inefficiency, excess capacity and blocks to private enterprises. Economic inefficiency results in the production of goods at a higher cost than efficiency requires. Economic efficiency occurs when the cost of production of a given output is as low as possible.2 Excess capacity tells the health of industry and the demand of its products among the consumers. A business with sizeable excess capacity can often lose a considerable amount of money if it is not able to meet the fixed costs that are associated with the production.

The impediments to private enterprises are created through illogical controls, regulatory regimes, prohibitory regulations and unwanted interventions in the market. These controls and interventions in the markets lower the people’s income and retard overall rates of income growth. The more a government intervenes in the economy, the likely result is the sharp decline in income growth and where the state goes too far, it may bring economic expansion to a halt.3

In order to maintain the rhythm of growth, governments are required to encourage a robust private sector to create jobs and foster innovation. The state has to move the economy away from its dependence on government-led infrastructure investments,4 heavy industries and low exports. Because spending on infrastructure and building heavy industries under the state control leads to corruption, mismanagement and waste of resources. State controls in sectors like railways, aviation, water, power and energy are a good example to support this argument. The public sector building and maintaining control over it brings real challenges to the economic growth, it would thus be advisable if governments rely more on free market forces, consumer demand and private investments.5

Since growth and progress require change, any policy that slows change probably reduces progress. Thus to avoid frequent government interventions, it would be appropriate for states to stabilise the government spending and to minimise the regulatory regimes.

In fact, the frequent government interventions lead to systematic, institutional and structural problems,6 making it difficult for sustaining steady and sound development, as at times this factor squeezes out innovation and hurts the small businesses. It also creates uncertainty and chaos in the markets thus decreasing investments and consumption leading to excess capacity of the business enterprises which results in higher costs and makes the enterprises inefficient thereby causing hardships to their survival.

It may be added that the increased private consumption can become a good source to channel the available resources into a powerful force for driving the growth. This market driven momentum brings impact on different variables of the economy, say for example, increase in the GDP, increases in future savings, increase in the government revenues, increase in the consumption, and increase in the production capacity leading to positive effects on profits which may attract new investments. Along with it increased market demand may induce firms to make more investments leading to more job creation. The evidence supports the fact that growth in private enterprises leads to more jobs, more specialisation, incentive for improving the qualification, and healthy competition.

At the same time government spending may lead to a negative economic impact, as it may decrease the rate of job growth, may decrease the productivity growth rate, may decrease the rate of economic growth and may lead to unemployment. The fact is that government spending does not support innovation and creativity as generally corruption diverts competitive requirements to personal gains.

The experience has also shown that too much government controls slowdown economic growth and limit the businesses to bring in major changes in their decision making for investment and job creation. The government should also restrict changes in sectors relating to the land policy, banking and credit, and other drivers of growth.

Governments generally rely on limited options and fail to introduce required reforms in those sectors of economy that can generate growth. Failure to do so brings in decline in the economic growth making the governments nervous and accordingly they try to stimulate economy rather than to introduce the reforms to make the markets perfect in order to bring the economy on track.

All these arguments make the government intervention an unwanted step though, yet the governments are required to lay down regulations in areas where economic externalities exist like environment pollution.7

There is another dimension which requires attention and that is that by controlling the large industries and sectors like energy, petroleum and gas, the state creates monopoly which by its intrinsic nature is an inefficient step. That is why structural reforms become necessary to reduce the state controls to make the regulated industries more efficient.

It may also be added that corruption in the public sector is a direct result of state controls and interventions, if we lower the controls, corruption would automatically fall.

There are lessons for making improvements in the economies which are either slowing down or are stagnant. Making the markets more perfect would provide incentives for investments and economic growth leading to more jobs. The perfect markets also provide stabilising impact for the citizens and society.

1 In fact economic growth is the increase in a country’s productive capacity, as measured by comparing gross national product (GNP) in a year with the GNP in the previous year. Increase in the capital stock, advances in technology, and improvement in the quality and level of literacy are considered to be the principal causes of economic growth. In recent years, the idea of sustainable development has brought in additional factors such as environmentally sound processes that must be taken into account in growing an economy.

2 It depends on the prices of the factors of production. The concept of economic efficiency is only relevant when the quality of goods being produced is unchanged.

3 The communist countries in the past exceeded the limits of government intervention, and by doing so these countries severely eroded their economic performance.

4 Many economists consider the state investment in infrastructure construction as inefficient and unprofitable as generally through such investments local government accrue heavy debt.

5 These steps would bring in a more balanced and realistic approach to economic decision making.

6 The case in hand is that of china, the country has not been able to maintain its hyper growth rate and the economy is slowing due to inefficiency, excess capacity and frequent government interventions.

7 In European Union, the major area of government intervention relates to environmental pollution.

The writer is an advocate and is currently working as an associate with Azim-ud-Din Law Associates Karachi

Zafar Azeem, "How growth is obliterated by political decision-making," Business recorder. 2015-03-12.
Keywords: Economics , Economic issues , Economic system , Environmental pollution , Economic policy , Economic growth , Economic activities , Growth rate , Economy-Pakistan , Corruption , Pakistan , GDP