Basics of economic growth 2

Human capital growth Human capital is made up of accumulated skills and knowledge. Most economists consider human capital as the fundamental source of both increased labour productivity and technological advance.

The earliest revolutionary human skill is the art of writing. The ability to keep records enhanced productivity and preservation of knowledge. Later, the invention of mathematics laid the foundation for the extension of knowledge about physical forces, chemical and biological knowledge.

Technological advance

By technology, we mean the use of advanced equipment or machinery. Today, we have engines and transportation equipment which were unknown a 100 years ago.

Technological change contributes a good deal to an economy’s productivity. It arises from formal research and development programmes as well as from trial and error. Economic growth results from productivity growth.

Preconditions for economic growth

Three institutions are crucial to the creation of incentives that lead to economic growth. These are markets, property rights and monetary exchange.

Markets

Markets stimulate economic activity when set up in rural or urban areas which can be easily reached by farmers. Markets for commodities in other countries stimulate production for exports.

It is in markets that buyers and sellers meet. There is a market wherever sellers and buyers can be in touch by post or electronic media.

Property rights

Property rights are indispensable for the functioning of a market economy. Individuals and institutions are exclusive owners of factors of production, goods and services.

When a man cultivates his garden to plant maize and cotton, he does so with the belief that he will be the only person entitled to harvest the crop and dispose it as he wills.

In situations where there is no law and order, gangs or robbers raid farms and take away the produce. In such a situation, hardly anybody would think it is worthwhile doing farming. So, in countries where law has broken down, industries collapse and people starve.

Before foreign investors go into a country, they find out about property rights. They will not go into a country where government is unwilling or incapable of guaranteeing the sanctity of their property rights.

Monetary exchange

The existence of money facilitates the development of the economy. In days when money was not in use, people conducted business by means of barter. Exchange was slow, specialisation was limited and economic activity was at a low level because each family tried to be self-sufficient.

The use of money facilitates the orderly transfer of private property from one person to another. Property rights and monetary exchange create incentives for people to specialise and trade, to save and invest, and to discover new technologies.

Achieving faster growth

To achieve faster economic growth, we must first increase the growth rate of physical capital (roads, bridges, equipment) and the pace of technological advance or the growth rate of human capital.

The main suggestions for achieving these objectives are:

(a) Stimulate saving

(b) Stimulate research and development

(c) Target high technology industries

(d) Encourage international trade

(e) Improve the quality of education

Stimulate saving

The deposits people make with banks constitute the savings that provide the capital for investment. The propensity to save among Africans is much lower than among the Asians, especially of the Four Tigers. The latter save either 20 or 25 percent of their earnings.

In Singapore, there was an element of compulsory saving initiated by the State. The savings that people made helped them in old age.

I look with nostalgia the time Admarc was a monopoly, the sole buyer of smallholder produce. It made a lot of profits and invested them in several enterprises which were bought or launched by the Malawi Development Corporation (MDC).

This arrangement was discontinued under the liberalisation programme. Compulsory saving is a virtue not a vice. We should think of reviving it in another form.

Research and development

There is no item that we can make or produce for the international market which is not already being sold. The only possibility of penetrating the global market is either to introduce a product which no one else is selling or to make a better quality product and sell it at a competitive price. This requires research and development. What percentage of budget does the Ministry of Finance allocate to research and development? Come forward you ladies and gentlemen who have earned PhDs through research. Earn second PhDs through research and development that leads to invention and innovations. This will give you lasting fame if the invention or innovation boosts the economy.