You are on page 1of 13

Acknowledgement

Being the student of MBA, it is our great opportunity to prepare report on the The sources of
economic growth and polices . It had not been possible without the help from many people.

Firstly, I would like to thank our course instructor Khim S. Dhami for his valuable guidance
and timely advice. He inspired us greatly to work in this report. I would also like to thank
Uniglobe College for assisting for the completion of the report.

Lastly, I would like to thanks my friends who have helped me a lot for the completion of the
report and to all the other people who have directly or indirectly help me throughout the term
paper writing. Thank you all.

Bikash Gajurel

1.1 Introduction
Economic growth is the increase in the amount of the goods and services produced by
an economy over time. It is conventionally measured as the percent rate of increase in real gross
domestic product, or real GDP. Growth is usually calculated in real terms, i.e. inflationadjusted terms, in order to net out the effect of inflation on the price of the goods and services
produced. In economics, "economic growth" or "economic growth theory" typically refers to
growth of potential output, i.e., production at "full employment," which is caused by growth
in aggregate demand or observed output.
As an area of study, economic growth is generally distinguished from development economics.
The former is primarily the study of how countries can advance their economies. The latter is the
study of the economic aspects of the development process in low-income countries.
As economic growth is measured as the annual percent change of gross domestic product (GDP),
it has all the advantages and drawbacks of that measure.
Thus economic growth is a long-term expansion of the productive potential of the economy.
Sustained economic growth should lead higher real living standards and rising employment.
Short term growth is measured by the annual % change in real GDP.

1.2 Objective of the Study


The main objective of this study is to know about the sources of economic growth and policies.

1.3 Methodology
The data had been collected from secondary sources through Journals, Newspaper and different
websites like Nepal Rastra Bank , Ministry of Finance etc.

1.4 Sources of Economic Growth and Policies

Different countries have different economic growth rate. Since growth rates vary, the country
rankings can change over time:
Poor countries are not necessarily doomed to poverty forever, e.g. Singapore incomes were low
in 1960 and are quite high now. Rich countries cant take their status for granted: They may be
overtaken by poorer but faster-growing countries.

Productivity
More productivity of the country means more in growth rate of the countries economy.
Productivity also affects competitive position of the economy over the global market. In short,
productivity is the source of the high standard of living enjoyed by the developed economies
relative to the third world or to the same economies fifty or one hundred years ago. A countrys
standard of living depends on its ability to produce goods & services. This ability depends on
productivity, the average quantity of goods and services produced per unit of labor input. The
fundamental relation in productivity measurement is, again, the production function:

Y = F(X) or Y=P/L

A production function is a rule which gives the quantity of output, Y , for agiven quantity
of input, X , denoted

The production function can change over time so,

Y = F(X, t)

Physical Capital
The stock of equipment and structures used to produce goods and services is called physical
capital, denoted by K. More physical capital means the economy has potential to produce or
have more productivity. It is capable of exploit more resources. Productivity is higher when the
average worker has more capital (machines, equipment, etc.) More capital generally means more
production, and more production means more growth. To get capital, countries have to invest and
so the level of investment may be a big determinant of future growth. The quality of the capital is
important as well Y=K/L

Human Capital

The knowledge and skills workers acquire through education, training, and experience is called
human capital. Ability of the economic system to absorb and productively employ these added
workers ability largely associated with the rate and kind of capital accumulation and the
availability of related factors, such as managerial and administrative skills. Lack of capital
formation results in widespread unemployment in the urban areas and under employment in rural
areas. Productivity is higher when the average worker has more human capital (education, skills,
etc.) Y=H/L

Natural Resources
Other things equal, more N allows a country to produce more Y..Some countries are rich because
they have abundant natural resources (e.g., Saudi Arabia has lots of oil). But countries need not
have much N to be rich (e.g., Japan imports the N it needs. If an economy has a plentiful supply
of natural resources (oil, natural gas, hydro and so on) it may help the growth to expand.
However, availability of natural resources alone is not enough to sustain high growth. There also
have to be the skilled people and capital to exploit the opportunities. Y=R/L

Technological knowledge
Technological progress is another widely accepted source of economic growth. This is because
technology makes it possible to produce more from the same quantity of resources. This boosts
the potential level of output of the economy. The pace of technological change will depend on
the scientific skills of the country, the quality of education, and peace, political stability and
efficient management of the economy.
Society understands of the best ways to produce goods and services. Technological progress
does not only mean a faster computer, a higher-definition TV, or a smaller cell phone. It means
any advance in knowledge that boosts productivity (allows society to get more output from its
resources).
Y=T/L

Several countries are matched by numerous differences in growth rates. Some


countries are discussed below.

Country
Argentina
China
Germany
Japan
India
Korea
Mexico
United States

Per capita
1960
3091
716
5217
2239
533
690
2157
7380

GDP
1985
3486
2444
10708
9447
750
3056
3985
12532

USSR (RIP)

2951

6266

Average Growth Rate


0.5
4.9
2.9
5.8
1.4
6.0
2.5
2.1
3.0

The growth rates are for per capita GDP, expressed as an annual percentage. Data is as close as
we can get to data that are comparable across countries. This data applies the same "world"
prices to output quantities in all countries.
The differences in per capita GDP across countries are enormous, and the differences in growth
rates suggest that rankings of levels can change dramatically. Note, for example, that Korea and
India had comparable levels of income in 1960, while in 1985 Korea's per capita GDP exceeded
India's by a factor of 4. At this rate of growth, per capita GDP doubles every 12 years. Clearly
there is something going on in Korea that India hasn't figured out yet.

Determinants of Economic Growth

A large variety of economic and social variables can be proposed as determinants of economic
growth. We focus on the variables that have received the most attention in the academic literature
and in policy circles. These variables can be divided into five groups: transitional convergence,
cyclical reversion, structural policies and institutions, stabilization policies, and external
conditions
Transitional convergence
According to the transitional convergence the growth rate depends on the initial position of the
economy. The conditional convergence hypothesis maintains that, ceteris paribus, poor
countries should grow faster than rich ones because of decreasing returns to scale in production.
Cyclical reversion
Although our main objective is to account for long-run trends in economic growth, in practice,
we work with relatively short time periods (five- or ten-year averages) for both econometric
estimation and forecasts. At these frequencies, cyclical effects are bound to play a role. Major
cyclical factors are included under the category of stabilization policies of government, output
gap at the start of each period as a growth determinant. The output gap is obtained as the
difference between potential and actual GDP around the start of the period.
Structural policies and institutions
The underlying theme of the endogenous growth literature is that the rate of economic growth
can be affected by public policies and institutions. Although there may be disagreement on which
policies are most conducive to growth or on the sequence in which policy changes must be
undertaken, there is no doubt that governments can and do influence long-run growth in their
countries. Theoretical work usually concentrates on one policy in particular or the combination
of a few policies, whereas empirical work tends to be comprehensive in the sense of considering
a wide array of policy and institutional determinants of growth. While considering the major
explanatory variables representing all major categories of public policies first one is structural
policies and institutions; the next considers stabilization policies. The first area of structural
policies is education, and human capital formation in general. Human capital can counteract the
forces of diminishing returns in other factors of productionsuch as physical capitalto render

long-run growth. Apart from its direct role as a factor of production, education and human capital
can serve as a complement to other factors such as physical capital and natural resources,
determine the rate of technological innovations in countries that produce technology, and
facilitate technological absorption in countries that imitate it.
The second policy area is related to financial depth. Well-functioning financial systems promote
long-run growth. They influence economic efficiency and economic growth through different
channels. Financial markets facilitate risk diversification by trading, pooling, and hedging
financial instruments. They can help identify profitable investment projects and mobilize savings
to them. Moreover, financial systems can help monitor firm managers and exert corporate
controls, thereby reducing the principal-agent problems that lead to inefficient investment. Firmlevel, industry-level, and cross-country studies provide ample evidence that financial
development leads to higher growth.

The third area of economic policy is international trade openness. The literature points out five
channels through which trade affects economic growth. First, trade leads to higher specialization
and, thus to gains in total factor productivity (TFP), by allowing countries to exploit their areas
of comparative advantage. Second, it expands potential markets, which allows domestic firms to
take advantage of economies of scale, thus increasing their TFP. Third, trade diffuses both
technological innovations and improved managerial practices through stronger interactions with
foreign firms and markets. Fourth, freer trade tends to lessen anticompetitive practices of
domestic firms. Finally, trade liberalization reduces the incentives for firms to conduct rentseeking activities that are mostly unproductive.

The fifth important area of policy involves the availability of public services and infrastructure
which affect economic growth. Whether they are treated as classic public goods or as subject to
congestion, public services and infrastructure can affect growth by entering directly as inputs of
the production function, by serving to improve total factor productivity, and by encouraging
private investment as they help protect property rights.

Stabilization policies
Including stabilization policies as determinants of economic growth is important because the
stabilization policies affect not only cyclical fluctuations, but also long-run growth. In fact an
argument can be made that cyclical and trend growth are interrelated processes, which implies
that macroeconomic stabilization and crisis-related variables have an impact both over short
horizons and on the long-run performance of the economy. Fiscal, monetary, and financial
policies that contribute to a stable macroeconomic environment and avoid financial and balanceof-payments crises are thus important for long run growth. By reducing uncertainty, they
encourage firm investment, reduce societal disputes for the distribution of ex post rents (for
instance between owners and employees in the face of unexpected high inflation), and allow
economic agents to concentrate on productive activities (rather than trying to manage high risk).

External conditions
A countrys economic activity and growth are shaped not only by internal factors, but also by
external conditions. These have an influence on the domestic economy in both the short and long
runs. There is ample evidence of transmission of cycles across countries via international trade,
external financial flows, and investors perceptions of the expected profitability of the global
economy. Changes in long-run trends can also be spread across countries. This is achieved
through, for example, the demonstration effect of economic reforms and the diffusion of
technological progress.

Policies for economic growth


Policies can affect the following, each of which has important effects on growth:
Saving and investment
International investment
Education, health & nutrition
Property rights and political stability
Research and development
Population growth
Free trade
Saving and investment
Reduction in consumption can lead to saving and saving is important for generating the fund for
investment. These investments can help towards contribution for economic growth and
development. Hence, saving and investment can be a tradeoff between each other.
International trade
International trade flexibility can attract more foreign investment, which in turn attracts more
capital, technology and human resources. International trade also facilitates foreign profitable.
These investment provide investment and there return flows back to the foreign investors. But
still these international funds are beneficial to poor and developing countries.
Education health and nutrition
Skilled and educated human resources to the economy can lead towards the development.
Government can promote its human resources by investing in education sector of the economy.
By investing in Human resources involves tradeoff between present and future required
resources.

Property Rights and Political Stability


Securing the property rights to the economy can boost up the economic activities. US is a
successful country that provides rights to its investors. This property right provides people with
rights to exercise authority over the resources they own. But in many poor and underdeveloped

countries this system doesnt performs well. Political instability (e.g., frequent coups) creates
uncertainty over whether property rights will be protected in the future. When people fear their
capital may be stolen by criminals or confiscated by a corrupt government, there is less
investment, including from abroad, and the economy functions less efficiently.
Result: lower living standards.

Research and development


Technological development is one of the most important factor for the economic development
over the long run of the economy. Technology can uplift the economic activities by limiting other
factors towards economic development. Government can invest in research by providing
subsidies to the research institutes and universities.
Free Trade
Free trade is a Free trade is a policy by which a government does not discriminate against imports
or interfere with exports by applying tariffs (to imports) or subsidies (to exports) or quotas.
According to the law of comparative advantage, the policy permits trading partners mutual gains
from trade of goods and services. Inward policies aim to raise living standards by avoiding
interaction with other countries. Outward oriented policies promote integration with the world
economy
This free trade can make everyone in the economy better off. Countries with inward-oriented
policies have generally failed to create growth. Countries with outward-oriented policies have
often succeeded.

The table below shows economic growth rate of some neighboring countries.

Nepalese economic growth rate has decreased in comparison to 2008 but increased with respect
to 2009. However the forecast seems to be down turn of the economy.

Above figure shows the ups and downs of the Nepalese GDP from 2001 to 2011.

Above figure represents the overall fluctuation in GDP in different sectors i.e. primary,
secondary and tertiary.

ANALYSIS OF ECONOMIC GROWTH AND POLICIES IN NEPAL

Country 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Nepal
3.4
3.7
2.6
-0.6 3
3
2.7
1.9
3.2
4.7
4.7
4.6

The history of economic growth in Nepal can be divided into three periods. The first period
consist of 1996 to 1980 when the economy was public sector-dominated with vigorous
development planning and expansion of public enterprises. Politically, the period was
characterized by an autocratic Panchayat system with absolute monarchy. The second period of
1981-1990 was the time of a liberal Panchayat system, followed by initiation of outward-oriented
economic policies. This was also a decade when liberal trade, industrial and financial policies
were initiated and the public sector bridled. The third period of 1991-2000 was the begtning of
multiparty democracy and adoption of economic liberalization, privatization and globalization of
the economy.

The Nepalese economy grew by a modest 2.3 percent during 1966-80. Such low economic
growth was accounted for by lack luster performance of the agriculture sector, which grew by a
mere 0.5 percent. The non-agriculture sector, however, grew by 7.4 percent during this period.
Such poor overall economic growth is attributable to low factor productivity, for the growth of
capital and labor was high during this period.
During 1981-90, the economic growth performance improved with 4.9 percent average growth
rate. The contributing factor for such improved growth was strong performance by the
agriculture sector, which grew by 4.6 percent during the decade. The non-agriculture sector grew
by 5.1 percent during the decade, contributing to improved growth performance. The major
source of growth for this period was capital, as it increased by more than 13 percent against the
less than 1 percent growth of labor force. Apparently, factor productivity also contributed to such
an improved growth rate. This is substantiated by the fact that, despite the decelerated growth of
both capital and labor, economic growth accelerated during this decade.
During 1991-2000, the overall economic growth improved further, despite poor performance of
the agriculture sector. The growth rate averaged 5.1 percent with 2.5 percent growth in the
agriculture and 7.1 percent growth in the non-agriculture sector. The economic liberalization
process, expedited since early 1990s, led to better performance of the manufacturing sector,
followed by improvement in exports. The financial sector also grew fast as a result of involving
the private sector in the financial industry and inviting foreign investment in this sector.
Liberalization of trade, industry and transport sectors led to faster expansion of these sectors with
high contribution to the economic growth. Despite a lot of policy changes, the economy could
not attain catch-up growth like in East Asia.

You might also like