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The Concentration Of Economic Power In The Public Sector Undermines The Foundations Of Economic Growth

2300 words - 9 pages

The Concentration of Economic Power in the Public Sector Undermines the Foundations of Economic Growth

In this essay, the concentration of economic growth in the public
sector will be taken to mean the proportion of the economy that is
governed by public ownership in the production of goods and services.
Foundations of economic growth refer to the potential for the economy
to expand, and hence this would be represented by an outward shift of
the Production Possibility Curve. Therefore we shall discuss how a
higher proportion of the economy that the government is directly
involved in leads to a diminishing potential for future progress of
the economy.

How can the public sector hinder economic growth? Economic growth is
determined by the potential of the country to produce additional
outputs of goods and services. This is in turn dependent on two
factors- availability of resources and productivity. Therefore if the
public sector influences these two factors negatively, then it would
undermine the foundations of economic growth

The government can affect the capital aspect of resources. Assuming
ceteris paribus (other factors like land, natural resources- oil,
timber, etc are also rigid), it is commonly recognized that heavy
involvement of the public sector could hinder capital generation. This
is since with majority of the workforce employed by the public sector,
there are few entrepreneurs and the extent of free enterprise is
limited. Hence with the lack of entrepreneurship and business
ventures, there is also the lack of profits and hence the inflow of
capital into the country. The lack of capital results in inadequate
funds for investment. Investment is the key to sustained future
economic growth because capital is needed to fund the economy. The
economy cannot solely rely on the profits of the government and
subsequent government injection. This has been illustrated in
previously communist regimes like China that suffered from numerous
deficits and a deteriorating economy by solely depending on the state
initiative.

Since investments and capital generation through entrepreneurship and
enterprise is restricted with the concentration of economic power in
the public sector, then the only other major source of investments to
fuel economic growth is foreign direct investment. While this source
of investment could singly sustain economic growth, the prospects of a
public sector dominated economy may not be appealing. The labour force
available for Multi-National Companies contemplating investing in a
country would be small and not very skilled. This is since the public
sector would very likely have the first pick and recruit the ‘cream of
the crop’. In addition, foreign direct investments may be severely
leaked out of the country with the lack of proper regulations, and
...

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