Written by Mohammed Abdalla Anter ( Economist)
Government spending or expenditure includes all government consumption, investment, and transfer payments. In national income accounting the acquisition by governments of goods and services for current use, to directly satisfy the individual or collective needs of the community, is classed as government final consumption expenditure. Government acquisition of goods and services intended to create future benefits, such as infrastructure investment or research spending, is classed as government investment (government gross capital formation). These two types of government spending, on final consumption and on gross capital formation, together constitute one of the major components of gross domestic product.
Government spending can be financed by government borrowing, or taxes. Changes in government spending is a major component of fiscal policy used to stabilize the macroeconomic business cycle.
Reforming public expenditures has come to the forefront of the policy agenda in many countries. Advanced economies face the challenge of containing or consolidating overall spending to meet fiscal targets while responding to pressures that raise expenditures related to aging. Emerging markets and developing countries with limited resource mobilization capacity in the short term strive to improve spending efficiency to create the needed fiscal space to finance the expansion of priority spending on education, health and infrastructure.
The evaluation of government spending can help identify areas where there may be room to increase spending efficiency or rationalize spending. Country experience shows that streamlining expenditures is politically difficult to implement. This is in part because of concerns about the social impact of spending cuts. As a result, many countries have adopted across-the-board containment measures rather than pursuing deeper efficiency-oriented reforms. But across-the board measures offer only short-term relief and risk undermining the desired social objectives. For this reason, providing information that helps identify areas where there may be room to improve spending efficiency or reduce or contain spending, without affecting the quality of the services delivered, is a key component of a well-designed spending reform.
The role of public expenditure in economic growth:
Economic growth is caused by government expenditures. Generally, most governments all over the world embark on public expenditure to stimulate the economy. They believe the economy cannot grow unless with government intervention and government expenditures are instrument for controlling the economy. Scholars have argued that public expenditures on socio-economic and physical infrastructure enhance economic growth.
The argument on whether government capital expenditure has positive or negative impact on economic growth has, for years, continued to provoke series of economic controversies and debates among economic scholars in the public finance literature.
Some authors submitted that government capital expenditure has negative and insignificant influence on economic growth, while other authors found that government capital spending significantly and positively influence economic growth. Another view maintained neutral ground on this issue and conclude that government capital expenditure does not exert any impact on economic growth.
The objective of this paper therefore, is to examine the opportunity of capital expenditure reform and its role in promoting inclusive and sustainable growth in Iraq through exploiting of available economic resources, public private partnership, bilateral agreements and examining experiences of some Asian tigers’ countries such as South Korea, Singapore and Malaysia.
Iraq’s economic indicators as year 2018:
The Republic of Iraq is a country emerging from conflict and facing the challenge of reconstructing core physical infrastructure and delivering public services to 34 million people. Its gross domestic product (GDP) per capita was roughly 5,882 US dollar (real GDP in percent – 0.6) in 2018. The total revenue to GDP was about 39.8, its economy dominated by oil, it considers as world’s fourth largest oil reserves, the bulk of Iraq’s fiscal revenue comes from oil receipts. The contribution of non-oil sectors to GDP was about 0.8 % is relatively small both in GDP and in exports, growth domestic investment close to 12.9 % of which: public investment was 5.3 %, growth national saving amounted to almost 13.6 % of which public saving was 6.5%. Total expenditure about 32 of which capital expenditure only 5.3 percent, overall balance about 7.9 percent. The Consumer price inflation (percentage change; average) 0.4, Real effective exchange rate 4.9, Growth in broad money 2.7, current account balance (CAB) roughly 6.9, trade balance 13.4, international reserves about $ 64.7 billion, Reserves in months of imports of goods and services (8 months) unemployment to GDP ……
The decline in GDP by (- 0.6) in year 2018 was due to shock to oil price, this mean that, under current policies alongside with rely on oil production to be as anchor to drive growth may result in significant economic spillover in future due to oil price volatility which will lead to lowering exports, declining budgetary revenue, in turn will aggravate fiscal and external positions with international reserve falling below adequate levels. Hence, the country will have being faced daunting challenges to meet social, security basic needs, to keep public debt sustainable and reduce the pressures on the exchange rate and inflation.
Main challenges need to be addressed.
The outlook for the country depends on whether the government is able to reduce social unrest, resolve its dispute with the Kurds, and prevent the return of Islamic State influence alongside with Economic policy priorities include eradicating corruption, improving fiscal management, and strengthening the financial sector, boosting the economy activities through small/medium enterprises, diversity economic growth alongside with oil production, the economic resources diversification stand as key factor to Iraq’s medium/long-terms economic development, will require to strengthened investment climate to bolster private-sector engagement, which in turn will require improving the security environment and restoring the rule of law and combatting corruption.
The main idea should be focus on providing friendly fiscal policy to scale up capital spending and boost non-oil revenue to promote export sector and mobilize revenue through tax-broad base over short/medium/long terms, accompanied with the experience of some Asian tiger countries such as South Korea.
Hence, the economic activity will be rebounded, and growth will be sustained.
The key factors of success: (preconditions of success)
– Quality of education.
– Scientific Research (think tank).
– Comprehensive planning to export sector
– Macroeconomic model (for export sector).
– Good governance and transparency.
– Efficient financial management system.
– Efficient financial sector.
– Government digitalization.
– Stronger open trade policies.
1. Quality of education:
The quality of education can be a strong predictor of a country’s economic prosperity but, more than this, skill gaps can impact on everything from a nation’s health to social unrest.
Education is expected to contribute to addressing sustainable human development, peace and security, universal values, informed decision-making, and the quality of life and individual, family, societal, and global levels.
One way to address quality is to consider the inputs, processes, environments and outputs that surround and foster, or hamper, learning.
2. Research institutes (think tanks):
A research institute is a facility or building dedicated to research, commonly with the focus on a specific area.
In few words. Research gives the premise to almost all administration approaches in economic framework. Research has significant role in taking care of different operational and arranging issues of business and industry, activities investigate, statistical surveying and motivational research are essential, and their outcomes help with taking business choices. Therefore, Interdisciplinary centers and institutes are key to developing innovative programs. And address specific issues or problems. and how research can effect on workforce, capital stock, and opportunity for economic growth, how scientific papers on countercyclical policies can help support the economy during downturns, and how institutional research can play significant role by providing research, policy advice to support export sector for sustainable economic growth.
3. Comprehensive planning:
A comprehensive planning is the primary and most important function of management and occupies a very high position in the management process. It is the starting point of the whole management process and involves the determination of future course of action. Why an action is required, how to take an action, and when to act are main subjects of planning for the management. Planning is a determined course of action for achieving a specific objective
comprehensive planning can be divided into three subsets:
– Program planning- planning that deals with the content, quality, and scope of planners and experts.
– Resource planning – planning that deals with the extent, nature, and capacity of resources required to sustain and improve government endeavor.
– Strategic planning- the design and implementation of action needed to secure the resources for improvement of programs.
4. Macroeconomic model.
A macroeconomic model is an analytical tool designed to describe the operation of the economy of a country or a region. These models are usually designed to examine the comparative statics and dynamics of aggregate quantities such as the total amount of goods and services produced, total income earned, the level of employment of productive resources, and the level of prices.
Macroeconomic models may be logical, mathematical, and/or computational; the different types of macroeconomic models serve different purposes and have different advantages and disadvantages. Macroeconomic models may be used to clarify and illustrate basic theoretical principles; they may be used to test, compare, and quantify different macroeconomic theories; they may be used to produce “what if” scenarios (usually to predict the effects of changes in monetary, fiscal, or other macroeconomic policies); and they may be used to generate economic forecasts. Thus, macroeconomic models are widely used in academia in teaching and research, and are also widely used by international organizations, national governments and larger corporations, as well as by economic consultants and think tanks.
To achieve sustainable economic growth, the main idea will be focus on Expansionary policy by expanding the money supply faster than usual, through open market operations, accumulate adequate international reserve and setting appropriate interest rates to encourage private sector investment (monetary side).
From fiscal side, encourage economic growth through increased government spending on projects such as infrastructure improvements and determine specific export sectors to drive growth in short/medium term.
5. Good governance and transparency
Good governance, defined as the quality management and orientation of development policies has a positive influence on economic performance. The question is what content the literature gives to the concept of governance? According to the World Bank, good governance is evaluated by the implementation capacity of governance principles of a country, providing a framework for market development and economic growth.
Transparency and accountability are central to the concept of good governance. Disclosure of information and transparent decision-making processes enable citizens and other stakeholders to scrutinize actions and hold governments or companies to account.
Transparency consider as key to curbing corruption and Corruption is defined as the abuse of public office for private gain.
The question: why resource-rich countries perform badly in terms of socio-economic development?
6. Efficient financial management system
A financial management system is the methodology and software that an organization uses to oversee and govern its income, expenses, and assets with the objectives of maximizing profits and ensuring sustainability.
An effective financial management system improves short- and long-term business performance by streamlining invoicing and bill collection, eliminating accounting errors, minimizing record-keeping redundancy, ensuring compliance with tax and accounting regulations, helping personnel to quantify budget planning, and offering flexibility and expandability to accommodate change and growth.
Other significant features of a good financial management system include:
• Keeping all payments and receivables transparent.
• Amortizing prepaid expenses.
• Depreciating assets according to accepted schedules.
• Keeping track of liabilities.
• Coordinating income statements, expense statements, and balance sheets.
• Balancing multiple bank accounts.
• Ensuring data integrity and security.
• Keeping all records up to date.
• Maintaining a complete and accurate audit trail.
• Minimizing overall paperwork.
7. Efficient financial sector
The efficiency of financial sector is particularly important because of the unique circumstances in accelerated economic growth in transition economies. or decline savings.
Financial sector attracts deposits and provide loans from surplus to deficit side. The overall impact of financial sector in economy is to ensure sustainable growth. It helps to mobilize savings and direct funds into production sectors. As results, it facilitates efficient allocation of resources and increases overall productivity. It also facilitates delivery of products and services, management of risks, easier payments. In addition, it ensures the availability of different instruments, such as insurance packages, and information that facilitates trade activities. Financial development promotes growth via increasing capital accumulation efficiency together and improving marginal productivity consequential from it.
By digitalizing processes and making organizational changes, governments can enhance services, save money, and improve citizens’ quality of life, Governments need to be in line with businesses when it comes to using technology. They can use it to streamline their processes and improve interactions in short time with their clients inside and outside of the country.
Digital solutions, including a digital core, can create better integrated, more efficient systems—the kind of systems that help governments transform and deliver better outcomes for their clients.
8. Stronger open trade policies.
The national economic growth is one of the most important development indicators that are affected by a variety of factors including the international relations. International relations consist of a series of actions and interactions of the government and non-government an institutions and political processes of the nations. However, international politics refers to the governmental behaviors or their reactions. On the other hand, and foreign policy includes a set of governmental decisions concerning the foreign relations, … all the countries in the world are interdependent and if this kind of interdependence is efficiently managed using a comprehensive framework it may lead to the economic development.
Therefore, integrating with the world economy through trade and global value chains helps drive economic growth and reduce poverty—locally and globally, and help country to make economic transfer. Thus, build strong relation with international community and engagement with donor will be the key factor of the future economic shift.
What is an appropriate approach for Iraq’s current situation?
Iraq need to Sustain the growth episode in the near term while laying the groundwork for broader private sector-led growth and structural transformation over the medium and long term. Tailoring of growth strategies is critically important, and important dimensions of the Iraqi context must be considered. First address the root cause of conflict and tension in the country, the greatest priority should not be just to achieve rapid growth, but also to ensure that it is broad-based and inclusive. Second, domestic political uncertainty and tensions needed to be addressed, whose resolution is critical for sustaining trade and investment. Third, oil is a non-renewable resource and not a solid basis for sustainable growth for the future. The current global crisis is a strong reminder of the need to diversify, as well as the macroeconomic policy, corruption, good governance, institutional capacity, these challenges need to be addressed in the near and medium terms.
Iraq’s near and medium terms strategy should focus on:
– Rebuilding public institutions will be essential for success, including by reducing vulnerabilities to corruption, and could deliver a significant impetus to long-term growth
– On the fiscal front, improving tax and custom administration has large potential to generate non-oil revenue, while strengthening public financial management would help ensure that public money is appropriately spent, including for capital expenditure projects.
– Financial sector stability would be enhanced by restructuring public banks and strengthening bank supervision and frameworks for AML/CFT.
– steps to strengthen the rule of law will be essential to encourage private-sector investment.
– The authorities have intensified efforts to modernize the business environment in the context of their application for WTO membership.
– Developing and maintaining the necessary enabling environment for growth, specifically effective capital expenditure management.
– Implementing policies aimed at improving the investment climate and broadening private sector led growth.
– Increasing returns to the specific sector such as agriculture… as the highest potential engine of growth and poverty reduction over the medium-term.
– Developing a comprehensive reconstruction plan through the government budget (loan, securities, Letter of Guarantee, …, furthermore participation of private sector (BOT), or grants from international community (Donor)…etc.
– To effectively manage oil revenue, authorities should allocate specific amount of oil revenue to capital expenditure decoupled of the budget such as special Fund to promote export sector. Breaking this link leads to smoother and more efficient capital expenditure and investments and helps mitigate the significant costs of future short-term fiscal adjustments. Toward this end, fiscal planners need to take short and medium-term approach to managing oil revenue.
– Reducing the cost structure for manufacturing and agri-business through continuing progress on infrastructure development, particularly electricity and transport such as rural roads and connectivity with areas that were historically developed but have lagged because of conflicts with ISIS and focusing on urban development, which can be a source of growth in secondary cities throughout the country.
– For efficiency improvement, more direct participation of the private sector in infrastructure services through public private partnership (PPP) in construction and operation should be encouraged through stronger institutional and legal frameworks, moreover the government should take steps to liberalize services to encourage private sector participation, which have led to some improvements in the capacity and the efficiency of service delivery.
– The Iraqi government strategy should focus on restructuring the Iraqi economy with a major emphasis on agriculture and industry with special attention to small- and medium-scale industries with reduction of trade costs, including modernizing customs, the development of a trade logistics service, the need to build capacity in food and plant safety regulations…etc.
– Fiscal planners need to consider a medium-term outlook on oil revenues to effectively manage volatility and promote a more reliable expenditure basis for priorities. Further need to use oil revenues to develop the economy away from oil dependence and to develop the non-oil tradable sectors (export sector) that are the ultimate source of sustainable growth.
– Government and civil society should have increased the transparency of business information. New regulations should have adopted to improve transparency, particularly regarding the dissemination of company data.
The budget cycle framework:
Stage 1: Strategy and Planning
o Lack of evidence based on solid research; goals are often unrealistic and driven primarily by political process
o Capital expenditure is often viewed as non-performing compared to other sectors and thus receives a low budget allocation
o Coordination with key capital sectors (e.g., rural infrastructure, education) is often crucial for sectoral performance but missing in reality
o Data gaps are especially serious in countries with decentralized budgets
Stage 2: Budgeting
1. On budget formulation
o Formulated budget does not adequately reflect the outcomes of the strategy and planning stage.
o 7. In some countries, off-budget funds account for a large part of the export sector budget but are poorly documented.
2. On budget composition
o Underinvestment in public goods.
o Lack of coordination results in programs that contradict or duplicate each other’s objectives.
o Insufficient budgeting of operational and maintenance costs for existing infrastructure or programs.
Stage 3: Execution
1. On budget system
o Fund disbursements are insensitive to the production sector calendar.
o Large discrepancies exist between planned and actual expenditures.
o High levels of waste and leakage of program funds.
2. On program design
o Actual program design is unsuitable for reaching its intended objectives.
o Some infrastructure programs are irrelevant design and not priority.
Stage 4: Monitoring and Evaluation
o Each program has too many irrelevant and non-uniform indicators, and too-frequent evaluations
o Insufficient resources to carry out high-quality M&E
Foreword to economic recovery and sustainable growth in Iraq:
For the arduous task of reconstructing and achieving sustainable growth in Iraq after the ISIS ignited destruction, Iraq’s Reconstruction and Development Framework is the government’s strategy that looks back to what has been lost and destroyed and presents a structured framework how to build it back better. Global experience has identified five key steps to successfully recover from a disaster: understand the needs, develop a comprehensive recovery plan, build inclusive and resilient institutions, finance the recovery, and implement recovery programs in a coordinated manner with high levels of accountability and transparency.
To improve economic situation and promote economic growth in Iraq through public expenditure there are challenges need to be addressed, particularly human and physical capital, as well as the weakness of governance, corruption, furthermore the capability of workers skill, poor security conditions, inefficient budget cycle frame work moreover, large infrastructure gaps, poor basic services, subpar health, education outcomes, widespread of poverty alongside with the specific economic measures to be implemented in Financial sector, export and import sector, monetary sector.
Authorities have generally saved little during oil price booms and economic threats come from Iraq’s over-reliance on a single commodity as its main source of growth, therefore they require to scale up saving and allocated it to capital expenditure to diversifying their economies non-oil resources, on the other hand authorities need to rise government banks credit and oriented it as required by strategic development plans to achieve sustaining rapid growth.
Let us spot a light among some resource rich countries, Same Resources, but Different Outcomes: What Explains It? what separates the successful ones from the ones plagued by the resource curse? Countries like Botswana, Chile, Indonesia and Norway were resource rich and succeeded in either managing their resource-driven wealth wisely or diversifying their economies away from natural resources to modern, competitive economies. The average per capita income in these countries has increased five-fold over a two-decade period. In contrast, countries like Angola, Gabon, Nigeria, Kuwait and Saudi Arabia have seen wide swings in their per capita income coinciding with the global commodity cycles, and the average citizen in these countries have hardly seen any change in their per capita income over a two-decade period. The successful countries had put in place the necessary policy and institutions early enough to enable them to diversify their economy and share their prosperity more inclusively and thereby buffeting their economy from economic and political risks. The resource curse countries, on the other hand, squandered their opportunity and remained stuck in weak policy and institutional environments.
Iraq needs a new, more balanced growth vision that is less reliant on oil, while using the oil wealth to create an economic foundation for a diversified, inclusive and sustainable growth path.
The first task is to decouple the economy away from oil and adopt policies that can stimulate private sector-led growth in the non-oil sector of the economy, at the same time, it is imperative that the gains from growth be shared more broadly to raise the living standard of the vast majority of Iraqi people…,additionally the government need to attractive the private finance through intelligent participation with the private sector (PPPs) to rebuilding the infrastructure for projects,
Second, to accelerate the process of reconstructing such as (roads, electricity power, water supply, sanitation, …etc.) the government need to establish specific Fund to be financed from oil gain and it should be managed efficiently along with grants and aides provided by the donors or development partners.
Third, delivering credits and financial services through financial sectors (Small/Medium Enterprises) for low income people in capital city and remote areas to enhance their living standards and reduce the poverty and on the other hand to support growth opportunities and achieve economic and financial stability.
Fourth, the government should build close relationship at the level of neighboring countries, indeed at the regional and global levels in the context of mutual economic benefits, which will help to attractive Foreign Direct Investment (capital spending) and further it will facilitate the terms of international trade (export sector).
Fifth, stablish well-organized budget cycle framework including macro model to enable the government links the levels of sub plans with national strategy, further to ease the coordination with other sectors and executed the quality of budget project on time without delay.
The above measures are essential to enable Iraq to diversify the economy resource, to this end, contribution of government expenditure particularly capital expenditure is crucial for more balanced growth vision and less reliant on oil.
For more elaboration of the important of government spending to promote sustainable economic growth let us to highlight some points on South Korea and Indonesia experience in this matter.
Highlight some points on South Korea experience
South Korea up to well into the 1960s truly represented a backward, desolate economy based on subsistence agriculture with all the difficulties facing a typical developing country today… South Korea is poor in natural resources. Only about 30% of the land area is cultivable and the arable land per farm household ranks among the lowest in the world (currently less than a hectare). Korean society was traditional, feudalistic, agrarian, and isolated from the West until the late nineteenth century. Japanese colonial rule during the period 1910 to1945 brought both exploitation and modernization, influencing the country’s future course of development. The small infrastructural base built during Japanese rule was mostly destroyed during the Korean War of 1950-53. The country’s per capita income in the early 1960s was lower than those of Haiti, Ethiopia, and Yemen and about 40% below India’s. With such a low-level income, domestic savings were negligible. underemployment and poverty were widespread with over 40% of the nation’s population suffering from absolute poverty. THE KOREAN
The country today, with some 51.3 million as of Thursday, August 1, 2019, based on the latest United Nations estimates population and per capita income of nearly $31,000 in 2019, is the world’s fifteenth largest trading nation, and is on the threshold of joining the ranks of industrialized, developed nations. The government-led, outward-oriented economic strategy worked satisfactorily until recently, resulting not only in rapid growth but also in gradual eradication of absolute poverty the nation’s unemployment rate is currently around 4% in 2019 and the incidence of absolute poverty is below 5% of the nation’s population.
Six Lessons on Inclusive Growth
First and foremost, the Korean experience shows how the shift from an agrarian economy to a manufacturing-led economy went together with large-scale productivity gains, the efficient use of factor endowments, namely basically educated and motivated labor, led to large gains in employment, output and incomes. …the shift to urban settings involved huge gains in productivity per worker, and the accumulation of capital and use of technology further magnified these gains. The results were spectacular, namely, a drop in the rate of absolute poverty from close to 30 percent of the population in 1970 to one-third that level a decade later. So, lesson one was that to increase the earnings of workers, one needs to employ them in higher value-added endeavors, empower them with capital, and enhance their productivity with newer technologies.
South Korea, like both Hong Kong and Singapore, decided that government-supported housing was an essential ingredient of urban development. Inclusive development cannot proceed when the poor and the working poor lack assets, and one of the key assets in a dynamically growing economy is housing. Countries lacking the fiscal resources to provide adequate housing will in the end be creating urban sprawl, degradation and slums. The inability to provide basic public services, such as water and electricity, not only reduces living standards, but also creates health problems and fewer opportunities for upward mobility. Lesson two, therefore, is for governments to invest in public services and to deal with urban housing demands in a proactive manner. South Korea did this and other East Asian economies ranging from Thailand, Malaysia Vietnam and China have done so as well, with recognized successes in distributional measures of income.
Education provides the great equalizing element for societies that are concerned with issues of economic opportunity. To promote inclusive or more equitable growth, lesson three is to provide high-quality public education, with accountability by the school system and the strong involvement of parents….
This latter point is critical since a rapidly growing economy such as Korea in the 1970-1990 period witnessed rapid changes in industrial composition, a phenomenon requiring a malleable work force.
South Korea did engage in some redistributive policies. the basic sense was that the poorer groups should not be left “too far behind.”. This is the sense of inclusive growth and it provides lesson four, namely, excluded or disadvantaged groups may need extra effort, more resources, and special programs to be able to benefit from the general societal gains.
The fifth basic lesson that has important ramifications for the future pattern of economic growth revolves around planning, monitoring and evaluation.
The role of the government in economic planning, including Five Year Plans and the coordinating role of the Economic Planning Board; the extensive monitoring of export production versus national targets and the use of subsidized credit to generate export revenue; and the importance placed on evaluating the efficacy of policy interventions all led to a culture of accountability. Knowing how economic progress is occurring, who was left behind, how Korea was stacking up versus its competitors, these were all part of the accountability culture that enabled policymakers at first and politicians later to track economic progress and the distribution of gains. This is not to say that equitable distribution of income was a national objective, since it clearly wasn’t, or that Korean elites didn’t gain enormous economic power, which they did; but rather to argue that the data was always available to show how national income was being generated and captured and outlandish gains were usually frowned upon and often punished, especially in the high growth decades.
greater efforts are needed both on the side of redistribution of income as well as in ways to discourage the perpetuation of wealth and the lack of opportunity of the average citizen to succeed. This process has preoccupied South Korea during the last decade and a half. Some efforts have been exerted to show that the elites should not dominate; however, these efforts have been weak and largely ineffective
The sixth and final lesson is that complacency is not advisable when dealing with rapidly enriching countries, since the accumulation of wealth goes together with the exercise of economic power.
The Framework of Strategy Implementation
Broad goals in a development strategy remain political window-dressing unless they are carried over into specific policies. Specific policies for industrial development in Korea during the period of export expansion can be grouped into two broad categories: the first was the set of macroeconomic policies aimed at influencing the general environment for industrial activities, and the second, the set of policies more directly targeted on the development of specific sectors or industries.
The Setting of the Macroeconomic Environment
One important objective of Korea’s earlier industrial policy was to create an economic environment conducive to efficient resource utilization. There were two aspects of economic policy implemented for this purpose.
One aspect of this was government investment in infrastructural development. During the 1960s the lion’s share of public funds went to funds in infrastructural projects (highways, port facilities, electricity, irrigation, transportation, communication, etc.). The government and public enterprises accounted for close to 40% of the total domestic investment in the period between1963 and 1979. Moreover, the industrial composition of government investment reveals that the share of infrastructure projects investment has been steadily rising, reaching as high as 76% of the total public-sector investment in the years between 1977-1980. It was these infrastructure and intermediate production support activities that constituted the foundation for strengthening the vertical linkage of production, paving the way for the process of rapid economic growth.
Perhaps more important was the second aspect of policy dealing with the price setting of such key resources as foreign exchange, investment funds (interest rate), transport, and staple grains. The Price Control Act revised in 1962 empowered the government to control the prices of most staple grains and the rates of public utilities. Given the important role of prices in the overall allocation of resources, extreme care has been exerted to reconcile the economic interests of various social classes.
The basic strategies for attaining the nation’s broad economic goals involved decisions over time on the shift in policy support from sector to sector. From a longer-term perspective on the growth process itself, however, a strategy gradually evolved for upgrading the economy by shifting from dependence on relatively labor-intensive light industry to a structure based on heavy and chemical industries. This made perfectly good sense. Korea’s original comparative advantage was cheap and diligent labor. It was therefore reasonable for Korea to engage in sectors like textiles, garments, footwear, and simple electronics. As the domestic wage rate rose and more capital was accumulated, it appeared more advantageous by the mid-1970s from the viewpoint of international comparative advantage for Korea to move into more capital-intensive sectors such as steel or petrochemicals.
Highlight some points on Indonesia experience
Effective Fiscal Management
Indonesia provides a good example of a resource-rich country that managed to avoid the economic difficulties experienced by most oil-exporting countries. Oil still constitutes a significant part of Indonesia’s exports (25 percent), however non-oil exports have also expanded significantly, and the country is no longer dependent exclusively on oil.
A key element of Indonesia’s success was the government’s commitment to macroeconomic performance and prudent fiscal and exchange rate policies. This has been particularly important as the government stance during oil booms plays a very important role in determining the extent to which the economic structure will be affected. Indonesia followed a conservative fiscal policy that entailed accumulating oil revenues and exercising fiscal discipline with respect to government accumulated budget surpluses and spent resource gains on strengthening the production base of non-oil tradable government spending. The sectors, through expansion of infrastructure and investment in social services and agriculture. The government has been particularly active with rural development programs aimed at driving agricultural growth.
Despite these successes, Indonesia has had to deal with an appreciation of the real exchange rate that seriously threatened the competitiveness of the manufacturing and food sectors. In addition to other policy reforms, Indonesia undertook timely devaluations and minimized Dutch disease effects and improved the profitability of the tradable sector.
Highlight some points on Singapore experience
Singapore’s key strategies have been to adopt a pro-business, pro-foreign investment, export-oriented economic policy framework combined with state-directed investments in strategic government-owned corporations. Without the presence of any natural resource, Singapore has long relied mostly on its human resources as well as its infrastructure. Contrary to the previous belief that Singapore’s growth had resulted from an increase in human productivity, it is now commonly agreed that Singapore’s early high growth has resulted from an extensive use of its resources.
At the very core, Singapore’s economic strategies can be summarized into three basic categories: (1) The government’s strategic role, (2) Mobilization of its human capital, and (3) Continuous development of infrastructure. Together, these three factors contributed to the high level of economic achievements that Singapore has enjoyed for the past four decades. Yet, a variation of these three factors was specifically used in the different periods from the 1960s onward. In the early period, Singapore used its sufficient physical infrastructure as well as the semi-skilled workforce to attract foreign investors to the island. From the 1980s, due to the increasing pressures on the labor market, Singapore could not maintain the low wages of its workforce. As a result, Singapore switched its strategies into establishing a modern ‘infrastructure’ as well as a dynamic high-skilled workforce to enable Singapore to become the financial and business hub of the region. In both periods, the role of the government institutions has been crucial. The government has adopted different policies to suit the different needs of the Singaporean economy, which would attract continuous foreign investment and thus, maintaining Singapore’s economic excellence.
What was the main economic challenge?
The main challenge for Singapore in its early years was to overcome its high unemployment problem. The Singapore government understood that the only way to increase employment was through extensive growth in its manufacturing industries… and other challenge faced Singapore is to upgrade its employment skill level to enable the country to move into the service industry and adopt high-technology. This was necessary for the economy to shift from having productions that need abundance in low-skilled labor to one that requires more skilled labor in high-technology industries.
What did the government do to improve the economy?
First initiatives of the government were to establish an institution called Economic Development Board (EDB) that would take overall care in establishing easy foreign investment on the island. The institution was to provide a one-stop general and procedural information to the foreign investors about investing in Singapore, …the main purpose to attract foreign capital to enter the Singapore market.
The EDB continued to review its tax incentives scheme to keep Singapore attractive in the eyes of foreign investors. the tax incentives scheme was extended to support Singapore-owned small manufacturing firms, as well as providing benefits for firms who provided services to the existing firms. The tax incentives and benefits significantly cut production costs by more than 33%.
The government took over investments in areas lacking local private expertise. Nationalized companies emerged in the financial and transportation sectors, with the births of the Development Bank of Singapore (DBS), the Singapore Airlines (SIA) and the Sembawang Shipyard These institutions played supporting roles in establishing financial services as well
as continuing the progress of physical and non-physical infrastructure development in
To realize its aim of having a highly-skilled workforce, the Singapore government formed the National Computer Board (NCB) in 1981 to establish good knowledge and training of workers in the IT-related industries.
In 1990, Singapore government spent high in efforts to develop the high technology of the country. Through the NCB, Singapore had committed about S$ 2 billion from 1991 to 1995 and S$ 4 billion from 1996 to 2000, for the purposes of the development of high technology plans.
The wonders of the Singapore economic achievement since the 1960s have its roots in the hard work of the government and the people of Singapore. The government and the people of Singapore have realized that Singapore depends primarily on its human resources and secondarily on the resources of foreign investors. As such, both the government and the people have worked together throughout the years to ensure that Singapore’s economy remains competitive.
With relatively stable government from1960 onward, Singapore has been able to attract foreign investors, from which it gains the crucial financial capital for its economic progress. Other developing countries can learn from the experiences of Singapore, although there are certainly several underlying characteristics of a nation for it to succeed in implementing similar strategies as the Singapore economic strategies. Many skeptics have often cited that the small size of Singapore makes it easy for the government to implement state-planned economic strategies, something that is often tough to do in other bigger developing nations. And, as has been explained, the Singapore success story might well result from the good foundations of physical infrastructure that the British had built on the island.
Singapore has done well over the last forty years, turning its people into assets as the launching pad of its economic development.
Learning from other countries: the importance of policy diffusion. The object of looking abroad is not to copy but to learn under what circumstances and to what extent programs effective elsewhere may also work here. Moreover, the failures of other governments offer lessons about what not to do at far less political cost than making the same mistakes yourself
An important strength of the Iraq government is its willingness to learn from the experiences of other countries by not repeating the mistakes they have made in solving their problems. Thus, instead of “reinventing the wheel”, which is unnecessary and expensive, the Iraq’s leaders and senior civil servants would consider what has been done in other countries and the private sector to identify suitable solutions for resolving policy problems in Iraq. The policy solutions selected would usually be adapted and modified to suit Iraq’s context
Of all economists who discussed the relation between public expenditures and economic growth, Keynes was among the most noted with his apparently contrasting viewpoint on this relation. Keynes regards public expenditures as an exogenous factor which can be utilized as a policy instruments promote economic growth. From the Keynesian thought, public expenditure can contribute positively to economic growth. Hence, an increase in the government consumption is likely to lead to an increase in employment, profitability and investment through multiplier effects on aggregate demand. As a result, government expenditure augments the aggregate demand, which provokes an increased output depending on expenditure multipliers.
The recent development literature suggests that sustained economic growth generally involves a structural transformation in what countries produce and trade, from producing a relatively small number of simple products requiring few capabilities to more complicated products requiring many capabilities (policy expansion). According to the positive relationship among public expenditure and economic growth as Keynes cited and many successful experiences such as South Korea, Indonesia, Singapore they affirmed that therefore, necessary to attractive attention on the curtail role of expansionary public expenditure to achieve and promote sustainable economic growth so, Iraqi government need to consider:
First, take into consideration as priority step the preconditions which mentioned above, alongside with the priorities of development projects that which have vibrant contribution on socioeconomic growth such as high quality of education, health, infrastructure, road, airport, electricity power, access of clean water, sanitation and so on.
Second, well prepared integrated country strategic planning by identifying which Sector will led the economic growth, agriculture sector, industry sector, or tourism industry, which of them have comparative advantage and competition more than other to be as hub of growth.
Third, tied the production process with high technology to accelerate and increase the productivity and quality.
Fourth, raise income level of vulnerable people by providing them access to finance for small/medium enterprises.
Fifth, setting up efficient financial market and integrated with regional and international ones.
Six, the authorities may establish geopolitical projects and promote access of international trade.
Finally, not replicated but take the advantages of advanced and emerging countries experiences that have the same the nature of Iraq’s country and accordingly design strategic planning for export sector to drive the economic growth.
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