[Dec 2007, Volume 4 Quarterly Issue] Pdf File size - The IIPM Think ...

MORE MARKETS, LESS GOVERNMENT
The answer to the question what impedes
the investment is government spending
and consequently budget deficit, but not
only the budget deficit. Claiming that
‘catch-up’ effects, when a country with
low GDP per capita is catching-up countries
with higher GDP per capita, allow an
expansionary fiscal policy cannot be justified
on empirical grounds and experience
nevertheless. Empirically, high government
spending reduces the operating capacity
of the economic growth due to high
tax burden and expanded public sector
activities. It is crucial for a high-growing
‘catch-up’ economy to reduce government
spending and thus lay a solid foundation
of growth. On the other side, contemporary
growth theory emphasizes the quality
of growth engines such as the quality
of institutions and means of productivity
as determinants of economic growth.
Neoclassical growth theory supports low
government spending, low taxation of
productive behavior, emphasis on price
stability and solid free market institutions,
the enforcement of private property rights
and the rule of law. The latter is essential
to macroeconomic stability. For decades,
economists have questioned the impact of
government spending on economic
growth. The Keynesian controversy began
in 1930s when John Maynard Keynes
wrote a voluminous book on the theory of
employment, interest and money. Keynes
argued that economy’s growth capacity
can be boosted by injecting more purchasing
power into the economy. Keynesians
argued that government could reverse the
economic downturn by borrowing more
money from the private sector to help end
the recession or depression and then return
the money in all sorts of public incentive
programs such as tax rebates. Keynesians
supported high government
spending because they believed that inflation
was resulted from too much economic
growth. The Keynesian economic analysis
and doctrine became a corner-stone
between 1930 and 1970. The overall impact
of Keynesian economics bluntly diminished
when the reality has shown that
there is no long-run trade-off between
inflation and unemployment; an assertion
which was postulated into the famous
Phillips curve. The economies which were
operating under staunch Keynesian economic
policy have faced significant economic
downturns such as multi-year recessions
and even economic depression.
In 1991, Sweden slid into economic recession,
facing high unemployment and rampant
inflation. In Finland, where Keynesian
economic policy dominated the
public policy course from 1945 onwards,
at the beginning of 1990s, economic
growth turned into a decline in GDP,
while inflation and unemployment grew
severely. Numerous other countries faced
the same experience of mistaken Keynesian
economic policy.
One of the fundamental questions
which transition economies, such as India,
face is what the optimal goals of economic
policy are. In addition, what are
important and empirically relevant areas
demanding competitive economic reforms
as a guarantee of sustainable long-term
growth of real GDP and standards of living.
In this article, I entail empirical studies
into economic policy and attempt to
suggest the reform agenda that would
boost India’s competitiveness in terms of
sound market economy with sustainable
economic growth, price stability and freemarket
institutions.
The Empirics Of Growth
Government spending and consumption
is inversely related to the economic
growth. 4 Higher government spending
correlates with higher tax burden while
higher taxes on productive behavior such
as entrepreneurship, saving and investment,
labor supply and innovation impede
growth performance. On the other hand,
the share of government spending positively
relates to the share of public investment
in the GDP. The quality and productivity
of investment highly differs whether
Public investment is directed via political decisions and its
time preference rates of politicians on the electoral basis is
subject to the realization of promises which is oftenly
negatively related to growth prospects
it is conducted in the private sector or on
behalf of public sector. The reason why
resources invested by private investors are
normally more efficient than investment
in the public sector is the fact that risktaking
plays more powerful role in the
private sector. Private investors bear the
information and investment resources efficiently
because of the motives such as
higher productivity perspective and competitive
pressures in the market economy.
The investment conducted by the managers
in public sector is subject to political
pressures while politicians do not pursue
the same goals as private investors. Public
investment is directed via political decisions
and its time preference rates of
politicians on the electoral basis is subject
THE INDIA ECONOMY REVIEW
147