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 kiind 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 programmemes provide support both to government and
private
sector partners. Economic growth and trade programmes are closely
integrated with other
programmemes 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.
