Economic Growth
is the most important factor in the success of
nations, and should be the central objective of
every developing country’s governmental
policy. Countries succeeding in the race to prosperity
serve as models for other developing nations seeking
to emulate them, and increase their affluence
and role in the comity of nations. Economic growth
is all about increasing the productivity of a
nation through natural or man made means and letting
the effects trickle down to the common man. Its
common measures are the Gross Domestic Product
(GDP) or the Per Capita Income of a nation’s
inhabitants. In other words, it is a symbol of
wealth and purchasing power of a country in the
international arena.
Economists researching into the factors underlying
economic growth have identified various common
factors contributing to the growth and development
of nations. These are a country’s (a) Natural
Resources (b) Human Resources (c) Propensity towards
Capital Formation and (d) Technological Change
and Innovation. Lastly, the development of infrastructure,
organizations and systems to perpetuate the economic
growth also plays a very important role. Looking
at the economic growth of Hong Kong and Singapore,
we can see how the above factors came into play
to make these nations Asian Tigers and models
of economic prosperity.
Hong Kong’s economic strengths include accumulated
public and private wealth from decades of economic
growth, a sound banking system, little public
debt, a strong legal system, and a rigorously
enforced anti-corruption regime. Hong Kong’s
GDP was US$ 98 Billion in 1999, with a Real Growth
Rate of 5.5%. Per capita Income was an impressive
$24,011. Its main industries comprise of textiles,
clothing, electronic, plastics, toys, watches
and clocks. Exports in 2002 totaled $193 Billion,
compared to Imports of $201 Billion. The USA and
China are two of its major trading partners.
Source: U.S. Department of State: Bureau of East
Asian and Pacific Affairs (http://www.state.gov/r/pa/ei/bgn/2747.htm)
Similarly, Singapore is blessed with a highly
developed and successful Free Market Economy,
and open and corruption-free business environment,
stable prices, and the fifth highest per capita
GDP in the world. Exports, particularly in electronics
and chemicals, and services are the main drivers
of the economy. Singapore’s GDP was US$
163 Billion in 1999, with a Real Growth Rate of
2.3%. Per capita Income was an impressive $27,800.
Its main industries comprise of electronics, financial
services, oil drilling equipment, petroleum refining,
rubber processing and rubber products, processed
food and beverages, ship repair, entrepot trade,
biotechnology. Exports in 1999 totaled $114 Billion,
compared to Imports of $111 Billion. The USA and
Japan are two of its major trading partners.
Source: (http://en.wikipedia.org/wiki/ Economy
of Singapore)
In summary, Hong Kong and Singapore have:
• Pursued a model of economic development
that was export driven (goods for export to highly-industrialized
nations).
• Used education as a means of improving
productivity (improving the education system at
all levels)
• Used an abundance of cheap labor (were
able to leverage this into a cheap, productive
workforce)
• Had non-democratic and relatively authoritarian
political systems during the early years
• Developed trade surpluses and sustained
economic growth for a number of years
• Maintained a high savings rate and a high
level of International currency holdings
I would advise theWorld Bank to ask the newly
industrialized natons to use similar strategies
to boost their producitvity and economic growth.
At present, China and India are 2 countries who
have boosted their growth and productivity using
the development model of these East Asian tigers.
Source: (http://en.wikipedia.org/wiki/East Asian
Tigers:Characteristics of the Tiger Economies)
Scenario 2: Tax Refund
The Tax Refunds of 2003 made by the IRS have been
based on the simple principle of Equity i.e. the
tax rates on married couples must be the same
as on two separate individuals living together.
The change in tax law enacted in May 2003 also
dropped tax rates across the board and people
in the lower income brackets benefited from it.
Marginal tax rates were reduced and companies
were advised to apply the new rates in calculating
tax liability effective July 2003.
The combination of new tax rates and tax cuts
targeted at married couples moved many of those
households from the 27 percent bracket down to
the 15 percent bracket. Because the tax law changes
took effect midyear, many households found they
have been over-withheld, and tax refunds will
be much higher than expected. IRS officials say
tax refunds have been steadily rising, on average,
for about 20 years. This year's jump may be higher
due to lower tax rates, an increased child tax
credit and other tax cuts.
According to a CNN report, since the drop in tax
rates in January 2003, taxpayers received only
half of the refunds due to them. Therefore many
taxpayers can expect either a smaller tax bill
or a further tax refund in Year 2003. Tax rate
slabs were changed in July 2003, reducing the
tax payable for people falling in the lowest three
tax brackets.
Source: CNN.com: Taxpayers may see bigger refunds
(Friday, January 16, 2004)
http://www.cnn.com/2004/US/01/16/2003.taxes.ap/
There is a general thinking among economists that
such tax refunds will contribute to increased
consumption and a rise in the GDP level. This
hypothesis supports the presumption that what
is not saved or invested must be consumed. Therefore
according to conventional wisdom, a tax refund
will contribute to more consumption in the household.
Let us however remember that Economics is an imperfect
science. The assumption that a tax refund will
lead to more consumption presupposes that (1)
the average household will prefer consumption
to saving or investment (2) the incentive to save
and invest i.e. the interest rates are not very
appealing (3) there is also a possibility that
there is a inflationary trend in the economy i.e.
purchasing power is bound to reduce in the future,
therefore consumers will spend now and get more
value for their money. The fact of the matter
is that Tax Refunds have been welcomed by all
and sundry in the USA. America has not really
recovered from the recessionary trend of the economy
after 9/11. The unflattering economic numbers
and the state of the US deficit has only increased
due to additional Governmental spending on the
War on Terrorism i.e. Afghanistan, Iraq and internal
measures like Homeland Security. The ebbs and
flows in world oil supplies and prices vis a vis
the US Dollar have aggravated the situation.
Moreover there is a possibility that the refunds
may also be reclaimed. According to the IRS, “If
you itemized tax deductions on your tax return
for 2002 or a prior tax year and previously deducted
state tax or local tax paid, and received a tax
refund of some or all of the state tax or local
tax in 2003, you should include the tax refund
as taxable income on your 2003 tax return.”
Source: Tax Refund, IRS & Tax
http://www.wwwebtax.com/income/state_tax_refunds.htm
The USA is still in the throes of a recession,
with security concerns being the uppermost and
affecting the lifestyles and freedom of the average
citizen. With the possibility of terrorist acts
around the corner, appetite for investment, credit
and consumerism has steadily diminished. The average
citizen is loathe to spend his/ her hard earned
income frivolously.
Other ways of refunding the payment to the taxpayer
would be for example (1) giving it back to the
employer with an instruction to invest the amount
in a Retirement Plan that would benefit the employees
and be good for the company’s image as well
or (2) adjusting the refund amount as a loan subsidy
should the taxpayer apply for credit through the
banking system.
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