Nebulous Economies

Abstract

In our paper we investigate the underlying factors responsible for a country’s economic growth and prosperity. We go beyond the traditional definition of growth as defined by the year on year GDP growth to a more representative development factor which combines the key elements of GDP growth, human development index, Gini coefficient and trade ratio. We make use of factor analysis to pick out the key factors for development and this would be representative of the vibrancy of the economy. It would measure not just how fast an economy is growing but how it is redistributing the wealth so created and the productivity gains that is being brought about as a result of this growth. Gini coefficient and human development index would be measures for income redistribution while trade vibrancy would depict productivity gains as theorized from the Ricardian Competitive advantage theory which speaks about the benefits of trade. We make 6 key hypothesis about the stability of the growth engine of a country based on a combination of institutional, cultural, technological and ecological factors. The six hypothesis elucidated are as follows: 1) Role of women in society and their access to employment, education and politics is an important factor influencing economic growth and development parameters 2) The diversification of the economy of a country helps in promoting economic growth 3) The government efficacy in budget and fiscal responsibility plays an important role in promoting economic growth 4) Ecologically sustainable practices help in ensuring economic growth 5) Trade imports influence trade exports 6) Trade intermediate imports and labor indexed affect exports.

We do not find any significant relationship between gender equality and economic growth, however a strong link exists between gender equality and important human development parameters. We find a clear relationship between the diversification of an economy and the country’s economic growth. A diversified economic base is essential to absorb internal and external shocks and therefore has a key role to play in long term economic growth of a country. Government fiscal responsibility and prudency is also an important factor for a country’s growth and development. Fiscal responsibility sends a strong message of stability and encourages foreign capital. It also helps prevent inflation from taking the spoils of the economic growth.

We also did not find any significant relationship between import from regional countries and the export led growth. This was logical as the relative position of the country rarely determines its growth potential via export. However when we looked at the import of intermediates from regional countries and coupled it with the labour productivity of the country we could see that it has shown significant relationship.

The factor analysis shows that the development of a country follows 2 trajectories, one with respect to external export led growth and other with respect to redistributed growth. Factor analysis also shows that the export led growth is affected by the resource availability and resource productivity the most.

We finally try and identify those countries which have the potential to become emerging markets in the near future i.e within a decade or two. These countries would be particularly important for designing India’s strategic missions and objectives.