There is one thing we need, all economists agree, to get us out of our financial and banking difficulties…..economic growth.The strange thing is that mainstream economists often have very little to say about what makes economies grow, at least before the growth happens. They frequently can explain growth after the event, but not before.
My sense is that growth occurs in an economy when seven factors are present
- Spare capacity and unused resources. It is easier to get an economy to grow after a period of stagnation than on the back of a boom, because there will be more spare unused resources around at moderate cost after a period of stagnation
- A market for what one produces. The EU provides a big potential market, but that potential will only be realised if consumers and businesses have the confidence to spend. Creating confidence is difficult, but one of the requirements for it is political stability, and a sense that the political leadership in Europe has a medium term plan. That is beginning to take shape, but far too slowly.
- A young population. Young people are more innovative that older people, and they have more unmet needs and both of these stimulate growth. Ireland has a comparatively young population, many other euro area countries do not.
- Available capital at moderate cost. It is very difficult to set up or operate a business if banks are afraid to lend because they themselves are unable to access funds at moderate interest rates. That is the situation we are in now, in places like Ireland but also in the southern European euro member states..
- Previously unexploited technical and scientific advances. During a downturn in an economy, scientists do not stop inventing, so when the upturn comes there is often a disproportionately large stock of readymade inventions waiting to be marketed.
- A competitive workforce. This means more than just moderate pay expectations and low rates of inflation. It also means good skill levels, adaptability, and willingness to work in new ways. But a competitive workforce, on its own, will not produce economic growth unless capital is available. The EU/IMF programmes for Ireland, Greece, Portugal will run into this difficulty.
- An efficient state. If a country has poor security, an inefficient legal system, a costly and ineffective health service, and an education service that emphasises the rights of education providers over the achievement of deeper understanding and higher competences by students, the country will not grow as quickly as it should.
Readers may has other items to add to this list.