[Dec 2007, Volume 4 Quarterly Issue] Pdf File size - The IIPM Think ...
[Dec 2007, Volume 4 Quarterly Issue] Pdf File size - The IIPM Think ...
[Dec 2007, Volume 4 Quarterly Issue] Pdf File size - The IIPM Think ...
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MORE MARKETS, LESS GOVERNMENT<br />
<strong>The</strong> answer to the question what impedes<br />
the investment is government spending<br />
and consequently budget deficit, but not<br />
only the budget deficit. Claiming that<br />
‘catch-up’ effects, when a country with<br />
low GDP per capita is catching-up countries<br />
with higher GDP per capita, allow an<br />
expansionary fiscal policy cannot be justified<br />
on empirical grounds and experience<br />
nevertheless. Empirically, high government<br />
spending reduces the operating capacity<br />
of the economic growth due to high<br />
tax burden and expanded public sector<br />
activities. It is crucial for a high-growing<br />
‘catch-up’ economy to reduce government<br />
spending and thus lay a solid foundation<br />
of growth. On the other side, contemporary<br />
growth theory empha<strong>size</strong>s the quality<br />
of growth engines such as the quality<br />
of institutions and means of productivity<br />
as determinants of economic growth.<br />
Neoclassical growth theory supports low<br />
government spending, low taxation of<br />
productive behavior, emphasis on price<br />
stability and solid free market institutions,<br />
the enforcement of private property rights<br />
and the rule of law. <strong>The</strong> latter is essential<br />
to macroeconomic stability. For decades,<br />
economists have questioned the impact of<br />
government spending on economic<br />
growth. <strong>The</strong> Keynesian controversy began<br />
in 1930s when John Maynard Keynes<br />
wrote a voluminous book on the theory of<br />
employment, interest and money. Keynes<br />
argued that economy’s growth capacity<br />
can be boosted by injecting more purchasing<br />
power into the economy. Keynesians<br />
argued that government could reverse the<br />
economic downturn by borrowing more<br />
money from the private sector to help end<br />
the recession or depression and then return<br />
the money in all sorts of public incentive<br />
programs such as tax rebates. Keynesians<br />
supported high government<br />
spending because they believed that inflation<br />
was resulted from too much economic<br />
growth. <strong>The</strong> Keynesian economic analysis<br />
and doctrine became a corner-stone<br />
between 1930 and 1970. <strong>The</strong> overall impact<br />
of Keynesian economics bluntly diminished<br />
when the reality has shown that<br />
there is no long-run trade-off between<br />
inflation and unemployment; an assertion<br />
which was postulated into the famous<br />
Phillips curve. <strong>The</strong> economies which were<br />
operating under staunch Keynesian economic<br />
policy have faced significant economic<br />
downturns such as multi-year recessions<br />
and even economic depression.<br />
In 1991, Sweden slid into economic recession,<br />
facing high unemployment and rampant<br />
inflation. In Finland, where Keynesian<br />
economic policy dominated the<br />
public policy course from 1945 onwards,<br />
at the beginning of 1990s, economic<br />
growth turned into a decline in GDP,<br />
while inflation and unemployment grew<br />
severely. Numerous other countries faced<br />
the same experience of mistaken Keynesian<br />
economic policy.<br />
One of the fundamental questions<br />
which transition economies, such as India,<br />
face is what the optimal goals of economic<br />
policy are. In addition, what are<br />
important and empirically relevant areas<br />
demanding competitive economic reforms<br />
as a guarantee of sustainable long-term<br />
growth of real GDP and standards of living.<br />
In this article, I entail empirical studies<br />
into economic policy and attempt to<br />
suggest the reform agenda that would<br />
boost India’s competitiveness in terms of<br />
sound market economy with sustainable<br />
economic growth, price stability and freemarket<br />
institutions.<br />
<strong>The</strong> Empirics Of Growth<br />
Government spending and consumption<br />
is inversely related to the economic<br />
growth. 4 Higher government spending<br />
correlates with higher tax burden while<br />
higher taxes on productive behavior such<br />
as entrepreneurship, saving and investment,<br />
labor supply and innovation impede<br />
growth performance. On the other hand,<br />
the share of government spending positively<br />
relates to the share of public investment<br />
in the GDP. <strong>The</strong> quality and productivity<br />
of investment highly differs whether<br />
Public investment is directed via political decisions and its<br />
time preference rates of politicians on the electoral basis is<br />
subject to the realization of promises which is oftenly<br />
negatively related to growth prospects<br />
it is conducted in the private sector or on<br />
behalf of public sector. <strong>The</strong> reason why<br />
resources invested by private investors are<br />
normally more efficient than investment<br />
in the public sector is the fact that risktaking<br />
plays more powerful role in the<br />
private sector. Private investors bear the<br />
information and investment resources efficiently<br />
because of the motives such as<br />
higher productivity perspective and competitive<br />
pressures in the market economy.<br />
<strong>The</strong> investment conducted by the managers<br />
in public sector is subject to political<br />
pressures while politicians do not pursue<br />
the same goals as private investors. Public<br />
investment is directed via political decisions<br />
and its time preference rates of<br />
politicians on the electoral basis is subject<br />
THE INDIA ECONOMY REVIEW<br />
147