How can the government affect economic growth?

This time, the text was about how India, the world’s fourth-largest economy in the world is growing rapidly despite the Great Recession.

The change and evolution has started since India elected Modi as prime minister and rejected the leadership of Gandhi’s party. Modi is a businessman and it’s changing the way India works. Which type of economy is he applying? Which types of economy exists? and which one is the best?

What are the different types of economies?

Each country in the world has a different economy, with different features and it’s own identity, but looking at the big picture we can distinguish four economic systems.

-Traditional Economic System

This is the most traditional and ancient type of economy in the world. There’s still a big part of the world that functions under a traditional economic system. Mainly third-world countries. In this economy everyone has it’s own role and surpluses are rare. What does this mean? A member of this economy doesn’t think about creating, working, or growing more than what is needed for self-consume. There isn’t a big market and everyone works for selfsurvival.

This kind of economies will eventually evolve to form a different type of economy.

First, the economy relies on the families or tribes, but the need for trades and starting to produce more than needed will make the economy evolve to a more developed way of economical system. (Amadeo, 2019)

-Command Economic System

Almost all the economic system of a commanded system is controlled by the government and centralized. One example of this was the URSS when the owner of all industries was mainly the government. This type of government is supposed to supply and redistribute all needed resources around all citizens. Creating a healthy supply of its resources at affordable prices for all citizens. The point that the government owns the industries can provide jobs for all citizens making the unemployment rates be almost inexistent. If there is a lack of some resource there is the need to ration since every citizen has the “same right” to get it.

-Market Economic System

Also known as capitalist system, is a free market economy. Industries and companies are mainly private sector. Every individual works in self interest, price and quantity is settled by the supply and demand of the product. If there is lack of something, not everyone will afford buying it. It’s the total oposite of the Commanded Economic system.

The point that companies are private sector and their main goal is to have as much benefits as posible, there’s a lot of competence, this competence leads into “competitive” races, leading into more innovation and growth.

The government in this economic system has not the power to control the market at all.

-Mixed Economic System

A mixed economic system is a combination of a market economy and command economy. The market is more or less free of government ownership except for some fields like sensitive industries.

The market is regulated by itself but if there is the need of the government acting, the government is able to act to control business, industries and the market in general. For example, if large companies are abusing monopoly powers, government can enter the market and breake it up, or taxating harmful products like alcohol or other drugs. (Agarwal, 2019)

What actions are taken by a government to develop an economy?

There are a lot of actions that a government can take to develop an economy, but it depends on the system it’s following. For example, in a commanded country. Government theoretically eliminates poverty, it provides equal access to health care and education because noone is discriminated.

The unemployment rates are low because government can create jobs thanks that they own all industries. For example, if there is high unemployment in one province. The government can settle the construction of roads there giving employment to the unemployed people from that province.

While working on strengthening domestic taxation and raising more revenues to finance public goods, the priority needs to be on improving the business enviroment to attract private capital. (Izvorski, 2019)

Some governments since 1960 have increased significantly their spendings in things like education, health care or public industries and all kinds of industries but however, creating a large redistribution may create substancial disincentives to work and invest.

One important way of promoting economic growth is through innovation. Start-ups are the ultimate job creatos who start with ingenious ideas, take risk and create value.

Inmigration policies that aggressively reach out to skilled immigrants will give more competitiviness to the country employees leading into more innovation and growth.

Unemployment programs, unemployed people has to be offered a job by governments, even in capitalist countries, governments give help to unemployed people constantly educating them to new scenarios and make them able to swap from old industries to new industries.

Also one of the easiest ways of a country developing economic growth is using it’s own natural resources.

Pros of Economic Growth

-Higher Income Per Capita, economic growth always will mean higher income per capita.

-Lower Unemployment.

-Reduction of government borrowing, deficit is likely to be reduced making more money available in the economy.

-Encourages investment, power of acquisition is higher, bigger change of major investments.

-Higher living standards, thanks to the increase of power of acquisiton.

-Employment effects. Higher wages and profits for both employees and employers.

-Increase of the productivity.

Cons of Economic Growth

-Depletion of non-renewable resources, such as lands or non renewable energies.

-Does not guarantee happiness, more money in the pocket does not bring happiness.

-Higher interest rates, higher purchasing power leads into inflation and inflation of interest rates.

-Higher inflation.

-Higher inequalities of income and wealth.

-Increased consumption may cause shortage.

-Huge industrial waste, due to the increase of productivity.

-High likelihood of recession after inflation, the aftermath of an increase of inflation is sometimes a recession.

-Corruption cases may increase, there is more money floating in the economy.

-Excessive government expenditure.

(ProsAndConds.com)

Conclussion

In conclussion, all economies start with a traditional economic system, after some time it starts developing new features that leads into evolving into one of the 3 other systems. Is there one better than others? In theory all three have their good things and bad things compared to others but in the reality, a commanded economy usually leads into a dictatorship, it doesn’t matter the type.

Economic growth it’s a good thing for a country in general, but in a mixed or capitalist economy, it will lead into more inequality between citizens.

References

Agarwal P., 2019. The Four Types Of Economies. Available at: https://www.intelligenteconomist.com/types-of-economies/ [Accesed September 26, 2019]

Amadeo K., 2019. Traditional Economy With Its Characteristics, Pros, Cons, and examples. Available at: https://www.thebalance.com/traditional-economy-definition-examples-pros-cons-3305587 [Accesed September 26, 2019]

Amadeo K., 2019. Capitalism, Its Characteristics, with Pros and Cons. Available at: https://www.thebalance.com/capitalism-characteristics-examples-pros-cons-3305588 [Accesed September 26, 2019]

Amadeo K. 2019. Socialism and Its Characteristics, Pros, Cons, Examples and Types. Available at: https://www.thebalance.com/socialism-types-pros-cons-examples-3305592 [Accesed September 26, 2019]

Izvorski I., 2019. 4 lessons for developing countries from advanced economies’ past. Available at: https://www.brookings.edu/blog/future-development/2019/02/20/4-lessons-for-developing-countries-from-advanced-economies-past/ [Accesed September 26, 2019]

Shapiro G., 2013. Six ways to Create Economic Growth. Available at: https://www.forbes.com/sites/garyshapiro/2013/01/23/six-ways-to-create-economic-growth/ [Accesed September 26, 2019]

Amadeo K., 2019. Economic Growth, Its measurements, Causes, and Effects. Available at: https://www.thebalance.com/what-is-economic-growth-3306014 [Accesed September 26, 2019]

EDUCBA.COM 2019. Economic Growth vs Economic Development. Available at: https://www.educba.com/economic-growth-vs-economic-development/ [Accesed September 26, 2019]

PROSANDCONS, 2018. Pros and Cons of economic growth. Available at: https://www.prosancons.com/business/pros-cons-economic-growth/ [Accesed September 26, 2019]