A Country’s Standard of Living, Essay Example

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Essay

Introduction

If the President of Lisavia (a small country) wants to increase productivity in his country, thereby leading to higher living standards over the long-term, there are a number of policies that he/she can undertake.  First, the president should adopt a policy of promoting investment in the country.  Policies of promoting investment can include subsidies or tax breaks for investments in certain industry or infrastructure.  Second, the president should invest in educational and training opportunities in the country.  The investment should not only be limited to providing robust primary, secondary, and tertiary educational opportunities for citizens, but should also focus on retraining programs that would allow workers to use existing skills in different ways.  Lastly, the President should focus on policies to decrease the tax rate; not only does this tend to lead to higher levels of productivity, but it also leads to sound macroeconomic policy that can also ensure high living standards over time.

Investment is typically cited as a key factor to boost productivity and growth in the economy.  According to the neoclassical model, investment plays a key role in expanding productivity in economies.  Indeed, according to the neoclassical model, greater capital accumulation in the economy (via investment) leads to greater technical progress that in turn drives growth in the economy.  The economist Solow improved upon the original assumptions of the neoclassical growth model by illustrating that investment can play a critical factor in the growth of a country through the total factor productivity growth model.  Solow’s work had a salutary effect on understanding the role of capital accumulation and productivity growth on the economy.

Looking at the growth of individual countries, one can also see the importance of  investment- whether it be a developed or developing country.  China is one key example.   The Chinese government announced dramatic reform initiatives in 1979: Deng Xiaoping declared that China would “open its doors” through a series of economic policies that would encourage the inflow of foreign direct investment in the country, particularly in the building of factories and other production capacity.  China’s level of investment increased from nearly 8% of GDP in 1979 to roughly 40% by 1995; the country’s level of investment had stayed constant since that time and has played a substantive role in the country’s double-digit economic growth rate.  The United States has also benefited from investment; one can point to the increasing domestic level of investment in the country’s IT industries as a key driver of growth in the US’s economic story.

While investment levels usually have a positive correlation with productivity, that does not necessarily mean that all investments carry the same weight.  Indeed, while investment in roads and basic infrastructure are useful, too much investment, particularly in countries without a robust market economy, can lead to wasteful spending.  The President would be wise to avoid this trap and promote investment in human capital for the country.  Investment in human capital can happen along two different lines: 1) investment in the basic primary, secondary, and tertiary schooling of the country; 2) investment in the training and human capital of the existing workers for the country.  Numerous economic studies have been conducted that show a positive relationship between a country’s investment in education and productivity; these results are particularly striking for developing countries where  robust primary and secondary educational systems have not been established yet.  Indeed, the President would be wise to develop a long-term plan for educational investment to also convince the country’s commericial sector that workers will arrive with needed skills, thus allowing firms to make further investments in human capital once workers are hired.

The third main policy is to promote productivity through tax policy.  The promotion of investment, particularly in the area of education, has shown to increase productivity. Usually, however, firms need incentives in order to invest and to hire workers.  This is where tax policy comes in.  The President should consider a number of tax policies that would increase investment in the economy through reduction of the existing tax rate on capital machinery and other investment goods.  At the same time, the President should give tax credits to firms  that hire and train employees, as well as give tax credits to employees who directly seek work in areas where there are shortages.  This tax policy, coupled together, would have the effect of increasing productivity in the country.

Overall, the President is looking to increase productivity in the country that will lead to higher living standards over the long-term.  With that goal in mind, the President should focus on increasing the level of investment in the economy.  This level of investment not only refers to capital goods, but also refers to the government’s and industry’s investment in human capital.  Finally, the government should also implement an activist tax policy that focuses on providing incentives for firms and individuals that seek to increase their productivity in the economy.  Although not mentioned, the government could also consider increasing existing levels of immigration as a way to boost productivity if it lags.

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