Economic Growth as an Objective for Macroeconomic Policy in Developing Countries


Growth has occupied a prime position in macroeconomic literature because every economy is evaluated in terms of output growth or GDP growth over time. Growth refers to a positive change in the size often over a period of time. Growth can occur as a stage of maturation or a process toward economic growth. On the other hand growth with emphasizes the increase in the value of goods and services produced by an economy over a period of time. Macroeconomics has trapped economic growth as one of its objectives, most especially in developing countries in order to bring about stable and sustainable growth, through the use of its policies.

Introduction

Over the last two decades, determinates of economic growth have attracted increasing attention in both in theoretical and applied research. Yet the process underlying economic performance is inadequately conceptualized and poorly understood. Sometimes these can be partly attributed to the lack of a capital accumulation, labour, technology, institutions, legal and political system, socio – cultural factors, demography, and geography.

Economic growth may be defined as the rate of expansion of national income or total volume of production of goods and services of a country. It can also be defined as a quantitative increase in a country’s per capita income. Whenever the per capita income of particular country increases, one can easily conclude that the country is experiencing an economic growth. Economic growth and economic development are two different things. The fundamental difference between economic growth and economic development is that: an economic growth is taken as a qualitative increase in a country’s per capita income while economic development implies a complete transformation of a society, resulting in a general and complete improvement in the standard of living. The importance of economic growth in developing and developed nations are given below

  • Economic growth ensures the very survival of a country as a free and independent nation
  • It determines the capability of a nation to defend its borders.
  • Economic growth in an economy determines the respect and honour a country receives in the world community.
  • It helps to maintain peace and preventing a possible disintegration of the nation.
  • It determines the level of fulfillment of social and economic aspirations of the people

Importance of economic growth as an objective of macroeconomic policy in developing countries

Economic growth simply means increasing the aggregate capacity to produce that which can transform the standard of living of the people. Therefore, economic growth and economic stability as desirable national goals are often achieved when there is full employment, increase in output and income, stable price etc. fiscal and monetary policies are two types of macro economic tools government normally use to attain this objective.

A fiscal policy such as taxation and government expenditure and monetary policy such as Open Market Operation (OMO), a discount rate of interest, reserve requirement ratio, moral suasion etc. all are used as macro economic tools in achieving economic growth and stability.

Process of economic growth as an objective of macroeconomic policy in developing countries

Economic growth can take place if we consume less of what e produce today and save more as a basis of capital formation to be invested in capital assets or good. In other words, economic growths require saving and then investing in the productive capital because the more you grow, the more output you can produce. A nation that desires economic growth must, therefore, be ready to invest in and produce more and better factors of production (i.e labour and capital goods). A better labour force or human capital comes about via better utilization, education, attitudes, skills, etc. similarly, more and better capitals means building more power plants, refineries, factories, machines, equipment, etc. as economic growth is attained, people can have more or better things. The population, however, must be held in check.

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To save is generally difficult; it is even more so for the poor (both individuals and nations). This requires forcing people to save or consume less (via social process, political process or price mechanism). This can be done via a policy of unequal distribution of income so as to direct resources towards production of more capital goods or fewer consumer goods. This means that policy directed at enforcing distributive justice in a poor country is evidently one that encourages more consumption. Against the background of low productivity, when what is available is a shared equally so as promote social justice, the level of saving will be zero and no growth would take place. In this context, it can appreciate that income distribution policy does effect does affect indirectly the growth rate while production choice between consumer capital goods directly affects the growth rate. So the government has to apply the appropriate macroeconomic policy in order to have sustainable economic growth.

The growth problem in a developing economy like Nigeria is especially difficult because the level of income generally is so low that it is difficult to generate any savings which can be turned into investment. in such an economic, the rich would rather take out their capital to foreign lands for investment to avoid insecurity. This is the more reason for the government to see it as a point of duty to come out in full force in its budgets to champion the course of economic growth without relying too heavily on foreign investment and domestic savings as said earlier, because of the generally harsh environment, effective demand is generally low while the cost of production is high due to a lack of capital assets and infrastructure deficit for industrial development. The government is therefore expected to come up with pro – poor policies and programmes aimed stimulating demand.

Determinant of growth in developing countries

A wide range of studies has investigated the factors underlying economic performance. Using differing conceptual and methodological frameworks, these studies have placed emphasis on a different set of explanatory parameters and offered various insights to the sources of economic growth.

Investment: investment is the most fundamental determinant of economic growth identified by both neoclassical and endogenous growth theories. However, in the neoclassical model investment has an impact on the transitional period, while the endogenous growth models argue for more permanent effects. The importance attached to investment has led to an enormous amount of empirical studies examining the relationship between investment and economic growth (see, for instance, Kormendi and Meguire 1985; Foreign Direct Investment [FDI]) has recently played a crucial role of internationalizing economic activity and it is a primary source of technology transfer and economic growth. This major role is stress in several models of endogenous growth theories. The empirical literature examining the impact of FDI on growth has provided more – or – less consistent findings affirming a significant positive link between the two (e.g. Borensztein et al. 1998; Hermes and Lensink 2000; Lensink and Morrissey 2006).

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Human capital: Human capital is the main source of growth in several endogenous growth models as well as one of the key extensions of the neoclassical model. Since the term ‘human capital’ refers principally to workers’ acquisition of skills and know – how through education and training the majority of studies have measured the quality of human capital using proxies related to education (such as school – enrollment rates). A large number of studies has found evidence suggesting that educated population is a key determinant of economic growth innovation can play a major role in economic progress increasing productivity and growth. This is due to increasing use of technology that enables the introduction of new and superior processes and products. This role has been stressed by various endogenous growth models, and the strong relationship between innovation and economic growth has been empirically affirmed by many studies.

Openness: openness to trade is another potentially significant determinant of growth performance. There are sound theoretical grounds for arguing that there is a strong and positive link between openness and economic growth. Openness enables the exploitation of comparative advantage, technology transfer and diffusion of knowledge, increasing scale economic and exposure to competition.

In the developing economies of Africa, there are different determinants of economic growth which varies from one country to the other due to different macroeconomic policies in different periods. In this context, four countries were selected to take a look at the different determinants of growth in these selected countries. They are; Nigeria, Ghana, Côte d’Ivoire and Togo.

NIGERIA

Nigeria rebased its GDP from 1990 to 2010, resulting in an 89% increase in the estimated size of the economy. As a result, the country now boasts of having the largest economy in Africa with an estimated nominal GDP of USD 510 billion, surpassing South Africa’s USD 352 billion. The exercise also reveals a more diversified economy than previously thought. Nigeria has maintained its impressive growth over the past decade with a record estimated 7.4% growth of real gross domestic product (GDP) in 2013, up from 6.7% in 2012. This growth rate is higher than the West African sub regional level and far higher than the sub-Saharan Africa level. The performance of the economy continues to be underpinned by favorable improvements in the non-oil sector, with real GDP growth of 5.4%, 8.3% and 7.8% in 2011, 2012 and 2013, respectively. Agriculture – particularly crop production – trade and services continue to be the main drivers of non-oil sector growth. The oil sector growth performance was not as impressive with 3.4%, -2.3% and 5.3% estimated growth rates in 2011, 2012 and 2013, correspondingly. The growth of the oil sector was hampered throughout 2013 by supply disruptions arising from oil theft and pipeline vandalism, and by weak investment in upstream activities with no new oil finds.

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Going forward, there are prospects of strong economic growth although downside risks remain entrenched. Such prospects are expected to hinge on continued recovery of the global economy, favourable agricultural harvests and a possible boost in energy supply arising from the power-sector reform, as well as on expected positive outcomes from the Agricultural Transformation Agenda. Comprehensive economic and structural reforms are also expected to improve economic growth. Nevertheless, the country’s ongoing GDP rebasing may influence the growth figures, possibly making them lower going forward since the expected result is a larger economy.

Risks to Nigeria’s economic growth are the sluggish recovery of the global economy, security challenges in the northeastern part of the country, continued agitation for resource control in the Niger Delta and possible distraction from the ongoing reforms as a result of the upcoming 2015 general elections. Negative growth of the oil sector may also continue to drag down overall growth until a lasting solution is found to the challenge of oil theft and weak investment in exploration due to the uncertain state of play in the sector as a result of non-passage of the Petroleum Industry Bill.

Nigeria faces an ongoing challenge of making its decade-long sustained growth more inclusive. Poverty and unemployment remain prominent among the major challenges facing the economy. One reason for this is that the benefits of economic growth have not sufficiently trickled down to the poor. The national authorities are not oblivious to this reality. Thus, poverty reduction, mass job creation, and protection of the most vulnerable and those in the large informal sector are the focus of current policy dialogue and initiatives. In fact, the 2014 national budget that has just been passed into law by the national assembly focuses mainly on creating more jobs and making growth more inclusive.

Increased integration of the poor into global value chains is essential for poverty reduction. Agriculture, which is largely informal, employs about 70% of the labour force, a large portion of which is poor. Adding value to agriculture tradable will create more jobs through its upstream and downstream integration with other sectors of the economy, increase export revenues, boost the income of the poor and reduce poverty incidence.

Table 1: Nigeria’s Macroeconomic indicators

 20122013(e)2014(p)2015(p)
Real GDP growth6.77.47.27.1
Real GDP per capita growth3.93.64.44.7
CPI inflation12.28.58.18.2
Budget balance % GDP-1.4-1.8-1.2-2
Current account balance % GDP2.84.45.85.1

Source: Data from domestic authorities.

Reference

  • Barbara Barungi: Nigeria’s Economy Rebased: An      Article for African         Economic Outlook: June 2014
  • Okudzeto, W. A. Mariki, G. De Paepe, K. Sedegah: Ghana’s Economy: An Article for African Economic Outlook: April 2014
  • Pascal Yembiline, Bakary Traoré, Luis Padilla: Cote d’Ivoire after Crisis: An Article for African Economic Outlook: March 2014
  • Africa Economic Outlook
  • Wikipedia
  • The Role of Women in Economic Development
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