Archive

Posts Tagged ‘HSBC’

Conditions for the perfect economy

January 12, 2012 1 comment

In a report published by HSBC on predictions for the global economy in 2050, there were listed conditions for which create strong and sustained growth. The variables and models are based on the work of Robert Barro: Determinants of Economic Growth: a cross-country empirical study.

The variables are as follows:

  • degree of monetary stability
  • level of democracy
  • the rule of law
  • the size of government
  • level of education
  • health of population
  • fertility of population

The perfect conditions for the perfect economic model is: a very stable inflation rate, averaging less than 2%; weak democracy; strong rule of law; a high education level where the average years of schooling is 10; a healthy population and a relatively low fertility rate, but high enough to maintain population levels.

Now, most of these are glaringly obvious apart from, perhaps, the bit about weak democracy.

Barro’s work actually showed that too much democracy wasn’t necessarily a good thing for economic growth (of course it may be the best model for social development). He found that at very high levels of democracy, income redistribution becomes a dominant force, which serves to restrain entrepreneurial endeavours. And democracy places a disproportionate weight on winning current votes, potentially at the expense of future votes, and therefore can hinder the investment required for long-term development.
Overall, authoritarian regimes can deliver economic success if the system manages to set in place the incentives that a market-based system naturally delivers, namely competition and a motivation to drive efficiency.

In short, democracy is good but, like most things, you can have too much of it before it becomes detrimental to your economic health.

Advertisements