Basics of economic growth

The first prime minister of Singapore Lee Kuan Yew has been quoted in the media as saying he preferred to be surrounded by men and women of above average abilities because these are the ones who are capable of bringing about desired changes.

This is the point that has to be borne in mind by those calling for an indaba of political parties and civil society groups to discuss with President Joyce Banda the current economic problems.

There are meetings that need a big group of people, others just need a few people with the requisite knowledge to study the situation and make recommendations.

Many people may suffer from a health epidemic, but the solution of such a problem lies not with the multitude but few people who have specialised in the study and practice of medicine.

Since most people cannot resist the inclination to comment on current economic issues, it probably makes sense to remind ourselves of the basics of economic growth.

The better standards of living that people want only come where economic growth takes place.

What is economic growth?

It is a sustained expansion of production possibilities. We calculate growth by comparing the growth domestic product (GDP) in one year and that in the succeeding year.

If the GDP in the second year is greater than in the first year, then there has been economic growth. If the following year’s GDP is small, then the economy has shrunk.

This growth or expansion must continue over a period of years for people’s standards of living to change. It is those developing countries which persistently register higher growth rates that get transformed from middle income to higher income economies.

This is the story behind the Four Tigers of the Far East: Hong Kong, Singapore, Taiwan and South Korea. They have recently been joined by the Peoples Republic of China.

At the height of pseudo campaign to change our national flag, I used to advise those who were pro-change that they should find other justifications than that Malawi had now achieved development and food self-sufficiency.

I pointed out that the countries of the Far East and China experienced sustained high growth rates over a period of at least 20 years? Did those people take heed of what I was saying?

Malawi is no longer boasting of food sufficiency or high growth rates.

It is only sustained growth of the GDP per person that can transform a poor society into a wealthy one. Sustained growth has not occurred in Malawi.

For sustained growth to take place, certain conditions must be fulfilled. The GDP grows when quantities of the factors of production grow or when permanent improvements in technology make factors of production more and more productive. The factors of production are land, labour and capital.

Standards of living improve only if an average person produces more goods and services per hour. This is referred to as productivity per hour. The forces that enable labour to produce greater quantities are (a) aggregate hours and (b) labour productivity.

Aggregate hours

Aggregate hours are the total number of hours worked by all the people employed during a year. Production of goods and services in Malawi has traditionally been below the production potential, less than what can be achieved because people spend fewer aggregate hours working.

Generally, people are busy during the rainy season cultivating then harvest. This is followed by the dry season when people stop work on the land completely. They wait until the next rainy season. If only during the dry season they would be making compost manure, digging dams for irrigation, land would produce more crops.

While leisure hours are necessary for health reasons, some people waste time enjoying themselves or engaging in activities which do not contribute to wealth such as the pebble-and-hole game or communal drinking.

Labour productivity

This is the quantity of real GDP produced. It is calculated by dividing GDP by aggregate labour hours. When labour productivity grows, more goods and services are produced and this is how the wealth of the nation increases.

The growth of labour productivity is a function of (depends on) three thing:

(a) Physical capital growth

(b) Human capital growth

(c) Technological advances

Physical capital is made up of equipment and tools. A person who cultivates his land using a tractor will plough more land per hour than someone who uses ox-drawn ploughs. Capital is made up of man-made goods which are used in the further production of goods.

The accumulation of capital on farms, in banks, factories, laboratories and so on have resulted in higher labour productivity and more production of goods and services.