To achieve faster economic growth, investing in health and education v

17Jun 2016
Muharram Macatta
The Guardian
To achieve faster economic growth, investing in health and education v

Many developing countries face particular challenges that make it difficult for them to stimulate and sustain economic growth. These challenges include weak institutions, high unemployment, and poor infrastructure,

Increased government spending on health and education tends to boost growth in the future, and households reap the benefits from increased investments in health and education through higher future incomes. This generates a virtuous circle of development.

a lack of access to financial services and unsuitable laws and regulations.

Is there some action a government could take that would lead the Tanzanian economy to grow like Indonesia's or Egypt's? If so, what exactly, if not, what is it about? “The nature of Tanzania” that makes it so?

The consequences for human welfare involved in questions like these are simply staggering. Once one starts to think about them, it is hard to think about anything else.

However, the response to some failures to limit the role of government in the economy and, in the late 1980s and early 1990s, to try to focus on the ‘right policies’; these were those policies associated with ’: lower fiscal deficits; lower taxes; lower import tariffs; fewer restrictions on international trade and capital flows; privatisation; deregulation; secure property rights; and a greater role for markets in allocating resources more generally.

Unfortunately, as 1990s unfolded, countries around the world implemented policies consistent with that consensus: In Africa, countries such as Ghana, Tanzania and Uganda embarked on privatisation, retrenched the public sector and liberalized trade.

In Asia, India abandoned central planning, embracing a wide range of reforms, and China continued market-oriented reforms.

What is common among these countries has been their persistent ability to grow over time. The challenge of development is therefore to transform growth episodes into sustained growth. Albeit with different degrees of success, these few countries have been able to meet this challenge.

Millions of people do not own or have formal rights to the land they live and work on. This makes it difficult to plan or save for the future. The risk of losing land and property can deter people from investing, for example in irrigation for their land. It can also make it difficult for people to borrow to fund investments.

The Government needs to create the right incentives for firms to invest. Private investment by both foreign and domestic firms contributes to the economic growth that is needed to reduce poverty in our developing country.

Firms’ willingness to invest depends on the business environment - the extent to which the laws, regulations and infrastructure within a country support or limit enterprising activities.

Businesses need a degree of certainty and an acceptable level of risk. To achieve this, a country needs: - A strong rule of law, enforceable property and land rights, better regulations, reduced trade barriers, proper infrastructure, a functioning tax system, increased transparency.

To encourage investment, partner countries must create a regulatory frame-work that is proportionate, effective, transparent and balanced. We may even streamline the business registration process from 2 weeks to 1 day and the process can now probably be completed online.

This and other work will result in over 1000 new businesses being registered in two years. Further simplifications are expected to generate 30 million shillings in savings for business.

Certain countries and regions have relatively large informal sectors. For example, in our country, it was the primary generator of jobs in the 2000s with 30 per cent of new jobs created by micro-enterprises, own-account workers and domestic services. In the United Republic of Tanzania, if rural and agricultural sectors are included, the figure is closer to 75 – 80 per cent.

The combination of excessively regulated labour markets and low levels of development is the principal driver of the informal sector. Careful deregulation of labour markets will reduce the cost of employment for firms in the formal sector and increase the share of formal employment.

Of course, this may come at a cost to those already employed in the formal sector. There is thus a trade-off between the amount of formal employment and the benefits it provides, and individual countries will need to consider reform in this area carefully.

Economic growth is not just associated with reducing poverty. There is also clear evidence for a positive link between economic growth and broader measures of human development.

It is also not fundamentally about materialism. We may describe economic growth as a crucial means for expanding the substantive freedoms that people value.

These freedoms are strongly associated with improvements in general living standards, such as greater opportunities for people to become healthier, eat better and live longer.

Growth generates virtuous circles of prosperity and opportunity. Strong growth and employment opportunities improve incentives for families to invest in education by sending their children to school.

This may lead to the emergence of a strong and growing group of entrepreneurs, which will generate pressure for improved governance. Strong economic growth therefore advances human development, which, in turn, promotes economic growth.

Equally, weak economic growth implies vicious circles in which poor human development contributes to economic decline, leading to further deterioration in human development. For many countries, achieving the Millennium Development Goals will require breaking out of vicious circles to enter virtuous circles.

The link between economic growth and human development operates through two channels. First, there is the ‘macro’ link whereby growth increases a country’s tax base and therefore makes it possible for the government to spend more on the key public services of health and education.

Growth is essential if the government is going to be able to continue to provide public services, which directly benefit the poor. Although aid may provide initial support, increasing public expenditure in developing countries must ultimately be financed by collecting greater tax revenues as President Dr. Magufuli has initiated this exercise in the first two weeks of his presidency; and the tempo should now continue systematically.

Given the generally low levels of tax revenue collection (often still below 20 per cent of GDP in most African countries), this can only be achieved in the long-run by strong and sustained growth.

In general, a growing economy tends to provide greater job opportunities. These lead in turn to increased demand for education as people expect higher returns for them and their children from the investment of time and money in acquiring skills.

The link works equally in the opposite direction. Increased government spending on health and education tends to boost growth in the future, and households reap the benefits from increased investments in health and education through higher future incomes. This generates a virtuous circle of development.

The strong links between growth and human development are often mediated by policy choices and structural factors, such as the priority given to investing in health and education vis-à-vis other potential policy interventions to achieve faster growth.

It is impossible for the government to fix everything at once. Long lists of reforms can have the effect of impeding action and leading to inappropriate sequencing of the reforms that are implemented.

Prioritisation is key to formulating a credible growth strategy. This requires analysis that identifies both the key constraints on growth, and the obstacles to removing these constraints, including political obstacles. So not only is it essential to have sound economic analysis; it also requires an appreciation of the political context within a country.

Growth diagnostics is the process of identifying binding constraints on growth. The process is a dynamic one: one constraint successfully removed will lead to another one binding.

MUHARRAM MACATTA is a retired civil servant, a graduate in liberal arts, majoring in economics and political science. He served as a director of internal and international trade, import and export section, with the then ministry of commerce and industries, which later became to be the ministry of commerce and cooperative; and served as principal marketing officer assigned to several marketing boards.

He established state motors corporation and also founder regional offices; and first director of the Saba Saba International trade Fairs.

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