(a)Singapore
(b)When the level of productivity in a country is high, the rates of returned obtained by investments will be correspondingly high. This will attract investment to the economy, improving economic growth leading to higher real national income, which increases people's purchasing power and ability to afford more and better goods and services. Furthermore, some investment may improve the infrastructure of the country or entails retraining of workers. Both improve the living standards of the people, quantitatively and qualitatively respectively.
(c)A cut in interest rates will help countries such as India who is facing low investment and exports (Extract 4) achieve economic growth.
This is because a decrease in interest rates will lead to some marginal projects becoming profitable due to lower cost of borrowing. As a result, investment (I) will increase. Furthermore, the lower cost of borrowing will also reduce the opportunity cost of consumption. This leads to consumers spending more, increasing consumption expenditure (C). Furthermore, a fall in interest rate may cause capital flight leading to depreciation of the currency as people move their finances to other countries to earn higher interest rates. This causes the price of exports to be relatively cheaper in terms of foreign currency and the price of imports to be more expensive in terms of local currency. Assuming that Marshall-Lerner condition holds, net export (X-M) will increase. Hence, aggregate demand (AD) increases as C, I, and (X-M) increases. This shifts the AD curve from AD1 to AD2 as shown in the diagram below. Real national income will thus increase from Y1 to Y2 via the multiplier effect, leading to economic growth. (d)Infrastructure, level of education and training, and technological innovation will affect the productivity of an economy.
An economy with well-developed infrastructures will likely have higher productivity due to improved efficiency. This is because well-connected transport network will allow goods and services and labour to move timely and efficiently. Also, low level of power outage will also minimise disruptions to production and operation. This allows more goods and services to be produced with the same amount of time. Also, a higher educated workforce that is constantly undergoing retraining and skills upgrading will also be more productive. This is because the economy will be able to move towards a knowledge-based economy from labour-intensive economy, through improvement in their quality in terms of knowledge, skills, and efficiency. More or better quality goods and services will be able to be produced with the same amount of resources. Furthermore, an economy with high level of investment into research and development will also correspondingly see higher productivity. This is because technological innovation can lead to a improved capital efficiency or better methods of production. It also enables higher quality products to be developed. (e)India and China has been achieving high growth rate in real GDP averaging 7.68% and 10.54% from 2007 to 2011 respectively (Table 1) despite low standing in the GCI at 29 and 59 in year 2012/2013 respectively (Table 2). A high growth rate is achieved through a combination of increasing actual growth and potential growth.
A low standing in the GCI indicates low productivity possibly due to poorly educated workforce, low quality infrastructure and unstable political climate. This will decrease investment as it creates an unfavourable investment climate and lowers investor confidence as resources vital to investors are unavailable and government policies are not encouraging for investment. This is especially so as China and India’s GCI ranking both decreases from 2011/2012 to 2012/2013. Furthermore, in the case of India, the lack of key reforms and corruption scandals has decreased investment in India by 78% in 2012. Ceteris paribus, a fall in investment level should decrease AD, leading to a multiple fall in national income and decreased economic growth. However, investors may not only rely on GCI ranking when deciding on which country to invest in. A poor GCI ranking may only indicate deficiencies in certain areas of productivity. China and India may still be productive in other areas that have appeal to investors. Also, the GCI of India and China, while low, may be comparatively better than many other countries. Furthermore, investors may still invest in China and India due to the size of their market (Extract 5) which allows them to exploit economies of scale and lower their cost of production, thereby increasing their profits. They may also benefit from the low cost of labour which is essential for labour-intensive industry. This is unlikely to be found in countries with high GCI since most countries with high GCI have developed a knowledge-based economy with high cost of labour. Moreover, cuts in interest rates in India (Extract 4) will also lead to an increase in investment, as explained in part (c). Hence, considering all factors affecting investment, investment may still ultimately rise in China and India. Moreover, there are other factors affecting the growth of the economy. This includes both aggregate demand (AD) and aggregate supply factors (AS). Investment (I) is only one of the AD factors, others include consumption (C), government expenditure (G), and net exports (X-M). China and India can be curbing inflation to increase growth. According to Extract 4, India has lowered inflation rate gradually. A decrease in inflation rate will lead to China and India’s exports becoming less expensive. Assuming that the demand for China and India’s exports to be price elastic due to availability of substitutes, a decrease in price will lead to a more than proportionate increase in the quantity demanded. This will increase the export revenue. On the other hand, imports from overseas will be relatively more expensive than local goods. This will lead to a fall in demand of imports as consumers will choose to purchase the relatively cheaper local goods instead, reducing import expenditure. With an increase in export revenue and decrease in import expenditure, net export (X-M) increases. The cuts in interest rates described previously will also lead to an increase in consumption as explained in part (C). Furthermore, if the government is increasing its spending on infrastructure development projects or in areas such as education and healthcare in order to advance the economy and improve people’s quality of life, government expenditure will increase. The increase in C, G, (X-M), and potential increase in I will lead to an overall increase in AD. Furthermore, if the government of China and India is actively engaged in supply side policy by increasing education level, improving infrastructure, and encouraging R&D, AS will increase as the economy becomes more efficient and productive. (f)As highlighted in Extract 5, competitiveness is crucial to sustainable economic growth. The level of competitiveness can be identified through the twelve pillars of competitiveness. The effectiveness of adopting free market policies or government intervention to improve competitiveness can be assessed by the impact and extent of impact.
Government can adopt free market policies by reducing labour legislation and income tax. The labour market can become more flexible by abolishing or lowering minimum wage and decreasing the power of labour union to encourage employers to hire. Government can also reduce income tax to increase disposable income and increases incentive for greater work effort. This will improve competitiveness through Pillar 7 – labour market efficiency (Extract 5). Government can also encourage greater private sector participation through deregulation and privatisation. Both introduce more competition to existing industry through the removal of monopoly rights and transfer of state firms to private hands respectively. The increased in competition will force firms to maximise utilisation of current technology to improve cost efficiency and invest in technological innovation in order to stay ahead of their rivals. This improves competitiveness through Pillar 9 and 12 – extent of technological readiness and technological innovation. Government can further adopt free market policies by reducing protectionist measures in place. This can be done by reducing trade barriers and signing of Free Trade Agreements. This increases size of market – Pillar 10 – for firms as they can tap into markets abroad easier and improves goods market efficiency – Pillar 6 – as goods can flow between countries easier. Global competition will also likely lead to an increase in efficiency and productivity. FDI will possibly increase due to less restrictive regulations. This is compounded by deregulation of financial markets by removing capital controls allowing financial transactions to be undertaken more efficiently. This improves efficiency of the financial sector, Pillar 8, and allows firms to operate globally easier. Under free market policies, producers themselves will also play a crucial role in strengthening the pillars of competitiveness in order to stay ahead in face of increased competition. They will invest in research and development in order to achieve lower cost of production or development higher quality or new products. They will also send employees for further education and retraining in order to meet the needs of the dynamic economy. They may also offer medical benefits to improve the health of their employees so that they can function to their maximum potential. These efforts strengthen Pillars 4, 5, and 11 respectively. However, free market policies may be most effective only for the increase in competitiveness for the production of private good. In the case of public good, such as defence, which is not possible to privatise, free market policies will have limited impact on the competitiveness of such an industry. Productivity in such industry will require government intervention to improve. Furthermore, producers will only consider their private cost and not the social cost when producing a good. If left to the free market entirely, competitiveness in the short term may come at the expense of labour rights and environmental degradation. This can have dire consequences in the long run and reduce competitiveness. In the case of education and retraining, producers may only have the incentive to improve their capabilities of their employees up to but not beyond the skill level required. This is again a short term improvement in competitiveness. Hence, government intervention is also necessary to improve the competitiveness of an economy. Government can invest in essential infrastructure developments such as developing new or better transportation system, commercial developments, and telecommunication services. The government should also implement appropriate economic policies in order to achieve stability of the macroeconomic environment. For instance, India should adopt suitable measures to address its high level of inflation (Extract 4) in order to allow firms to operate efficiently. These strengthen Pillars 1 to 3, offering the fundamental stability required to encourage productivity and increase competitiveness. The government can also increase spending on education and training (Pillar 5), with the foresight on important sectors that the economy wishes to advance into. For instance, if the economy has the intention to become a financial hub, government can invest in offering more schools, courses, and programmes to equip the population with financial knowledge. This increases competitiveness tremendously as the economy is already adequately prepared before entering the industry. This can only be achieved by government’s effort as firms are usually only capable to tap on and improve the current level of education but unable to steer a significant portion of the economy towards the direction of emerging industries significantly. Government is also better able to improve health of the workforce (Pillar 4) through construction and upgrading of hospitals with improved facilities and technology, improving accessibility to healthcare and increasing subsidies to people. Furthermore, for industries deemed important by the government but are not investing sufficiently into research and development, the government can intervene to encourage more R&D in those industries (Pillar 12). These will increase competitiveness of the economy. However, government intervention risks distorting market forces leading to inefficient allocation of resources and hence reduction in competitiveness. Government failure may occur leading to channelling of resources into inefficient sectors that do not yield much productivity gains and inhibits the proper function of the free market which could have achieved a more efficient allocation of resources. Furthermore, it generates dependency for the private sector to depend on government funds for research and development. This is not sustainable for long term competitiveness improvement. In conclusion, free market policies should be the main driving force for competitiveness improvement as it is able to address most of the twelve pillars of competitiveness effectively. Government’s intervention should take a more passive role in the pursuit of competitiveness, mainly by offering a stable environment for free market policies to thrive. |
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