Growth and distribution

Today, nearly all governments are concerned about their economic growth prospects because they are fully aware that economic performance may make or break them. They have all the policy instruments to build the infrastructure, and plan and implement all corrective measures to ensure that targets are following the path envisaged.

They have to deploy policy tools not only to stimulate economic growth but also to ensure an equitable income distribution, creating stability that ultimately helps to attract enough investment to ensure that the economy moves ahead.

It is generally accepted that when economies are able to provide a wide range of goods, it may be said that they have reached their economic maturity. At this stage their growth rates are normally not as high as those of developing countries.

The latter tend to have high economic growth rates because they have not yet fully exploited their resources in terms of human resource development, attraction of foreign direct investment, adequate infrastructural requirements, and channelling of financial resources to where they are actually needed.

India and China are still enjoying relatively high economic growth rates because they have not yet attained economic maturity; they are still increasing the supply of consumer and capital goods. Other developing economies should pass through the same process. It is too bad for countries that have not reached economic maturity and yet are experiencing low or negative economic growth rates.

Whether developed or developing, all countries concerned with their economic performance have to take into consideration the factors that contribute to growth. Three very important components of economic growth are the accumulation of capital, population growth and progress in applied technology.

Capital accumulation results when a proportion of the present income generated is saved and invested so that future output and income are increased. Machinery, equipment, materials and new factories enhance a country's capital stock and make it more possible to expand its productivity.

Reference may also be made to the accumulation of human capital. Investment in human resources development procures a better quality of labour force in terms of skills, efficiency and productivity, all of which should be conducive to high rates of social and cultural transformation.

Increase in population size is a two-pronged tool. On the one hand it enlarges labour supply - a means for wealth creation, and, on the other, it is a source of greater demand for goods. If economic activity is low or demand is high but it is satisfied through greater import levels, it is possible to conclude that a large population size will be considered an impediment to growth. A good yardstick is to ascertain that the rate of economic growth is always greater than population growth.

Many economists believe that the most important source of economic growth relates to technological progress as it provides the basis for consistent upward trends in GDP per capita. Applied technology is the result of new and improved ways of accomplishing traditional tasks, helping to achieve higher levels of output with the same quantum of labour and capital inputs.

Though it cannot be concluded that Malta has reached its economic maturity, for a number of years it has experienced very low economic growth rates, sometimes bordering on stagnation levels. This does not mean that Malta has not been concerned with the components for economic growth.

Over the years millions were spent on infrastructural works; the problem is that regular attention was not paid to ensure that the infrastructure was consistently in good shape; examples abound - power stations, roads, building of factories but not all rented.

The implication is that much investment was made for capital accumulation but then this investment was not followed up to ensure increased output and productivity.

The expenditure side of Government's balance sheet shows that a high level of investment was made to bring about human resources development. Many institutions were opened and many programmes were prepared, yet it is clear that this huge investment in education has not led to intensive research and development of innovative ideas. In fact Malta is at the bottom of the EU members' list for innovation.

The underlying problem may be that Government is solely concerned with attaining its financial targets on the budget deficit levels and subsequently to reduce the national debt substantially. It is clear that these aims may be reached according to plan. For these positive results in financial control, a price has to be paid. The cost has been increased taxation and lower investment potential, which certainly have contributed to reduce the economic growth possibilities.

In addition, another equally important and related area that contributes to economic growth is income distribution. It may be interpreted in two ways: functional income distribution that relates to the apportionment of national output among the factors of production; and the size of income distribution that attempts to gauge the financial rewards received by individual persons or families.

When a free market mechanism is allowed to play its role, functional income distribution tends to be fairly distributed among the factors of production; but government's involvement in the process may grossly affect the size income distribution to individuals.

Hendrik S. Houthakker, in his article 'The Ethics of Markets and Prices' in the book entitled Social and Ethical Aspects of Economics, writes: "More generally the price mechanism, if left to itself, will bring about a distribution of income that may not agree with the political preferences of the population. In a democracy those who consider their incomes to be unduly low are likely to outnumber those who are satisfied with their (usually high) incomes.

"The distribution can be modified by a system of progressive taxation and subsidies; the latter may take the form of children's allowances, old-age pensions, free health care and the like. Such a system can be arranged without seriously undermining the benefits of the market mechanism."

Malta is actually carrying out what Professor Houthakker had stated to improve the income prospects of low-income earners. Yet, whereas salaries and wages increase every year, income tax levels are not altered accordingly, pensioners have suffered relative decline when one considers that pensions have remained the same in the past 25 years. It is now being said that pension revision will only materialise in another 15 years' time.

A fair income distribution is a sine qua non for economic growth. In his book Deep Economy, Hans Dirk van Hoogstraten writes: "There is a tension between co-operation and exploitation. What I call exploitation, another person might call co-operation.

Adam Smith thinks that economics concerns right and fair co-operation. Smith is surely not outdated. Most economists, politicians and other reasonable people express a deep conviction that right co-operation among individuals, groups and nations underlies economics. Right co-operation includes fair distribution."

If we really want to achieve consistent growth we must ensure that there is a fair distribution of total income. Otherwise we end up with infighting among the different social groupings, bringing about uncertainty and an atmosphere that is not conducive to investment.

Dr Borda is an economist specialising in the economic development of small states.