~~Barriers and Strategies to growth~~

The title was my final exam question and below is my answer!

         In the era of increased international economic integration the country which has an export led strategy, attracts foreign direct investment and has a favorable business climate has the advantage of creating employment opportunities within the country, which would ultimately result in achieving sustainable growth. 
      
        In the end of 20th century many countries started liberalizing their economies so that they are not left behind in getting a pie of world’s GDP. Countries have tried reducing the tariffs, reformed their banking system, invested in technology, opened their trade and even allowed foreign companies to set up and run business in their domestic market. These are the basic structural framework to attract investment but investors look beyond that. No investors would be interested to invest in a country when the country has stringent labor laws, high government interference, very bad infrastructure, inefficient judiciary, unfavorable regulations and lack of available skilled labor force. So only when a country implements right policies and at the same time gets it fundamentals right it could sustain growth and achieve development.


Barriers to growth
Tariffs:
High tariffs may fill the government coffers but it hinders the growth of the country. Countries put high tariffs on foreign goods so that the local manufactures are saved, this policy in fact makes the local manufactures inefficient and unfit to compete in the global market. The domestic consumers bear the brunt by paying high cost for the local goods which are also low in quality. So the government should remove the high tariffs gradually make the local companies capable enough to compete in the global market.


Regulations
The World Bank’s doing business report  gives a detailed overview on the regulations the companies have to face, the number of days it needs to start and exit a business in a country. It has found that the countries with heavier regulation of entry have higher corruption and larger unofficial economies, but no better quality of public or private goods. So the regulations are more of a hindrance than a favorable factor for growth. The countries should remove inefficient regulations and try to implement policies which encourage investors to invest in the country.


Infrastructure:
The lack of infrastructure in many developing countries limits the economic growth of a country. In many countries the road network remains dreadful, the railways overloaded, seaports clogged, airports struggling to cope with the huge increase in flights and electricity and water supplies in many places shockingly unreliable. Countries should learn from China which invested a huge portion of GDP in infrastructure and it proved to be one of the major factors in attracting foreign investors. Improving infrastructure should be the important priority of the government. 


Labor laws:
Many countries have restrictive and complex labor laws which are highly protective of labor force and make the labor market inflexible. These laws prevent the companies to scale up the business and even stop investing in the country. Better designed labor regulations can attract more labor- intensive investment and create jobs in the country. Reforming labor is the first step countries should implement if at all they want to attract investors.


Corruption:
Corruption not only reduces the efficiency of the government system but affects the investment the country can attract. When public resources are diverted to benefit private individuals the first thing which gets compromised is the country’s growth. Removing corruption from the system should be the top most priority for the government.


Strategies for growth
Export led strategy:
     The ten countries observed in Durlauf, Johnson & Temple (2005)  which had consistent growth over the last years are mostly the countries which implemented an export led strategy. In the late 60’s East Asian countries started encouraging their manufacturers to export their products in the world market. This ensured the companies had to compete in global market, increase their production and thereby reducing their variable cost. They concentrated on labor intensive manufacturing which boosted the employment opportunities. Governments allowed easy access to credit, implemented sound macroeconomic policies and encouraged foreign direct investment. So countries should identify which products manufactured in the domestic market would have high demand in the global market are target those industries.


Privatization:
In many countries the government owns and controls most of the enterprises. Many of those enterprises are mismanaged, underutilized, running in huge losses and unfit to compete in global market. Studies have shown private run companies are proven to perform more effectively than government owned companies. The government should disinvest from these enterprises and allow private players to compete in the market. This would encourage competition and enterprises would be run efficiently.


Education:
Human capital is the stock of competences, knowledge and personality attributes embodied in the ability to perform labor so as to produce economic value . Investors always look at the available human capital before investing in a country. Higher rates of education are essential for countries to achieve high levels of economic growth. So the countries should invest in qualitative and quantitative education which helps in build a high human capital which helps in attracting investors into the country. 


Technology: 
Investing in education alone won’t foster growth as the country should adapt itself to the latest technology. Initially countries need not be innovative but can borrow from existing technology. Education allows countries to absorb foreign technology productively. In early stage of rapid industrial growth countries such as Japan, Korea, Taiwan have relied on foreign technology, developing their own only after considerable growth had occurred. So countries should be open to accept new technologies and make sure they have good intellectual property right which would attract investors to transfer the use of technology in the country. The faster the technological transfer the quicker the country’s growth.


Free Trade Agreements (FTA):
Any two or more countries can engage in FTA by eliminating tariffs, quotas and preferences on most goods and services traded between them. Countries would get more benefits out of FTA if their exports and imports are complementary. Trade can grow as a result of specialization, division of labor, and most importantly via comparative advantage. FTAs are the basic integrations before the countries get into international economic integration.


Foreign Direct Investment (FDI):
 FDI can be used as the measure of economic globalization of a country. FDI gives the countries the access to capital and technology, spurs up employment and boosts the country’s growth. China has been attracting huge amounts of FDI every year and it is one of the main reasons it could post sustainable growth over the last two decades. The countries could attract FDI by creating a favorable business environment as FDIs are vital for the countries which don’t have capital to develop on their own.


Thus countries needs to improve its infrastructure, reform the labor laws, eliminate the tariffs, have favorable business climate, give quality education, deregulate company laws, encourage private participation and have an export led strategy. If a country gets these things right the growth of the country can be sustainable and would help in achieving country’s economic development.