Economic growth: Key to high living standards

On the Business News page of The Nation of Wednesday, April 25 2012 we read that tobacco earnings for the first three weeks since the market opened have dropped by 17 percent this year compared to the same period last year.

Repeated drops in tobacco sales give rise to a business cycle. This means the economy will decline in production and employment.

A fall in tobacco sales also means a fall in foreign exchange earnings.

A fall in forex means a fall in the amount of goods we can import with our own resources. With the forex shortage, we may not be able to import enough petroleum, machinery, equipment, fertiliser and other items.

This will mean companies operating at half capacity and dismissing some of their employees.

Those who lose jobs may not have enough money in their pockets to keep on visiting bars and supermarkets. As such, the bars and supermarkets experience a fall in their sales.

We see in this that a decline in one key industry may indirectly create problems for other institutions or industries.

So, what is the remedy?

It is reviving economic growth.

Rapid economic growth provides goods and services that people need such as schools, hospitals, better food, homes, pay rise for civil servants, pollution control and others.

Economic growth is so important for people’s living standards and this is why governments include it in their macro-economic policies.

What is economic growth?

It is a process by which economies accumulate large quantities of capital equipment which pushes out the frontiers of technological knowledge.

In this way, the quality of goods and services that household and institutions access improve.

Economists have identified four engines or factors of economic growth:

(a) Human resource

Briefly, these are labour, education, skills and motivation.

Many economists believe that human element is the most important factor of economic growth, especially if workers are educated, skilled, disciplined and highly motivated.

You may have tractors and computers, but if the workers are neither skilled nor interested in their jobs, the other factors do not work.

High quality of the human factor has made economic growth possible even in countries with scanty natural resources.        Countries with uneducated and unskilled workers experience little growth in wealth though well endowed in natural resources.

(b)   Natural resources

The most important of these are arable land, oil, gas, forests, water and minerals.

Some of the wealthiest countries in the world have built their riches mainly on natural resources. These include Botswana with its diamond mine, North African and Middle East countries with their oil, but Canada and Norway have a variety of natural resources.

The Economist of April 7 to 13 2012 introduces to us what on its front cover it calls ‘East Africa’s Energy Bonanza’ and inside it calls ‘Eastern El Dorado’. We read of a big oil strike in the Turkana region of Kenya.

It is claimed that more wells will be drilled across Kenya while more oil is expected off Kenya’s shores. This will ensure that Kenya remains East and Central Africa’s largest economy for many years to come.

But wait a minute, Tanzania which had rich diamond mines in Shinyanga District has also seen the discovery of enormous gas fields in its offshore water. This comes after earning £2.1 billion out of gold.

In Uganda, oil was struck in 2006. We sometimes read in magazines that oil has been a curse to certain countries. This need not be so in East Africa.

(c)   Capital

In definition of capital, we include tangible capital goods such as power plants and equipment like trucks and computers as well as intangible items such as patents, trademarks, copyrights and others.

(d)   Technological advance

This is the fourth factor in the creation of wealth. It is embedded in inventions which increase productions, methods of organising businesses which improve efficiency and enhance production. Inventions improve existing products and inventions introduce new ones.

Economists have often debated how to encourage technological progress because it is a major factor in raising the standards of living of people. Teaching science subjects in schools is only the first step. The next one is how to motivate people to introduce new technologies. Apart from the natural resources that Malawi has and which we know, there may be others which wait for advances in technology to be discovered and exploited.