Explanation of the Balanced Path of Economic Growth on the Example of Ukraine

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Explanation of the Balanced Path of Economic Growth on the Example of Ukraine

In order to explain the balanced growth path using a general Solow economy, I have chosen Ukraine as a developing economy as it is a great example of a country in Europe that struggles economically and fits the Solows model of economic growth.

Solows model shows that the rate of savings in the economy determines the size of the capital stock, and accordingly the volume of production. The higher the rate of savings, the higher the capital adequacy and higher productivity. The growth of the savings rate determines the period of rapid growth to reach a new stable state. In the long run, the growth rate of savings does not affect the growth rate. Long-term productivity growth depends on technological progress. Economic policy makers often state that the rate of capital accumulation should be increased. Growth in public savings and tax incentives for private savings accelerate capital accumulation. Population growth also affects living standards. The higher the population growth rate, the lower the volume of production per worker. It followed from Solow’s model that the higher the rate of savings, the higher the capital adequacy of the worker in a state of balanced growth, and therefore, the higher the rate of balanced growth. However, growth is not an end in itself. Therefore, the next logical step was to determine the conditions for optimal economic growth for society.

According to economic theory, economic growth in a given country is possible in only three cases. The first is when investment flows: when capital accumulation outstrips the growth of the labor force, so the share of workers is more capital. This growth is named after the American economist Robert Solow – ‘Solovian’ growth. The second – economic growth can occur in connection with the expansion of the exchange of goods and services, it is commonly called Smithian growth, because of economist Adam Smith. The third is the growth caused by the accumulation of knowledge, the actual technical or technological progress of society, named after the Austrian economist Joseph Schumpeter, who defined capitalist expansion as continuous, leaps and bounds, technical change, and innovation.

However, there is another type of growth that is simply associated with population growth. Given that the population of Ukraine has been declining for the past 25 years and the demographic dynamics do not inspire optimism, we will not consider this type of growth as a likely factor in future economic growth in Ukraine.

Thus, there are three remaining types of likely economic growth in Ukraine. We will probably have to exclude Smithian growth for the near future. Since the great Chinese economic slowdown, there is a certain pause in development in developing countries, because many of them flourished precisely on trade with China. Over the past 25 years, China has been growing rapidly and therefore economies of countries that traded in raw materials and low-value products (including Ukraine) have grown with it.

There are remaining two types of growth – Solovian (investment) and Schumpeterian (technology). These are connected. By investments (capital investments) I mean the investments in the capital of enterprises which are long-term in nature. Investments are also possible in non-technological sectors, i.e. in agriculture or infrastructure, which will create a short time illusion of economic growth in Ukraine, but in the long term they cannot be effective, and thus after a while we will see a slowdown in the Ukrainian economy. China has shown the same in recent years that it may attempt to maintain high rates of economic growth by burying millions of tons of concrete in the ground, building countless highways and million-plus cities in many of which now no one lives. Yet it did not help and this component of artificial growth in the overall growth of China (which produces a lot of high-tech products) ended its effect. Thus, there is no need to repeat these mistakes of the planned Chinese economy on the Ukrainian economy as artificial growth is ineffective in this case.

We see that all types of growth are interconnected. Investment and technological growth are interconnected. The model of economic growth in Ukraine surrounds around investments in high-tech sectors that will provide production of high-margin products that are in demand on world markets. Only when in all these stages there will be a long-term growth, the Ukrainian economy will grow, selling more goods and services on world markets (Smithian growth). It will be possible to sell them because Ukraine will trade high-margin high-tech products that are in demand on world markets (Schumpeterian growth) and thus will be able to create these products due to previously accepting investments (both external and internal) in these high-tech sectors of the economy (Solowian growth), national science, and technical education.

All other models of attracting investments as factors of economic growth offered to Ukraine will only provide a short-term effect and will very quickly end their action.

We can further this by seeing whether growth-beneficial investments can be channeled into technology geological sectors. Modern capitalist development is characterized by an extreme degree of uncertainty therefore it is impossible to know for certain where the next technological breakthrough will take place.

In the United States, a four-tier system of attracting investment in the technology sector was created – a venture financial model (first, investments in a technology company come in the form of money from family and friends; then money from ‘business angels’ comes; then money from venture funds; then followed by an IPO). It is this model that helps to overcome the risks of uncertain technological development, but even there the number of successful investments is quite small. However, it was on this system that companies such as Apple, Microsoft, Google, Amazon, and Facebook were created.

The high level of openness of Ukraine’s economy determines the significance of the impact on national economic development by global economic trends.

Leading internationals think tanks are wary of optimism about the dynamics of the world economy in 2017, expecting a moderate acceleration growth in 2017 of 3.2% compared to 2.9% in 2016 to 3.4%. Expected multidirectional dynamics of developed economies. If for the US OECD experts forecast to accelerate GDP growth in 2017 by 0.7 % up to 2.1% in the Eurozone, on the contrary, growth is expected to slow down by 0.1 % up to 1.4%. In the UK – a decrease in the dynamics immediately by 0.8% up to 1%. So, there are reasons to be careful of optimism about the prospects for the development of export-oriented sectors in Ukraine. Maintaining and strengthening economic growth trends in 2017 critically depends on increase in fixed capital investment. There should be a return from investments made in 2016. Reconstruction of destroyed housing and infrastructure, restoration of business activity in the ‘front’ zone. Growth of construction activity and positive dynamics in clusters, related to the production of building materials, budget support programs housing construction; road construction, stimulated by the state budget and budgets of local communities. Development of mechanical engineering which is projected to cover agriculture mechanical engineering, production of machines for the food industry, for metallurgy, energy equipment related to investing in energy saving, production of railway rolling stock (taking into account the intention of Ukrzaliznytsia to mass purchase of freight cars), the defense industry. investment activity.

Economic growth is a key problem in macroeconomic politics in the world, yet alone- Ukraine. Developed countries and regions that managed to achieve a stable level of growth and revenue are focused on the social problems of development. When it comes to Ukraine, its economy is always described as the one that tries to catch up with the rest of the world, thus showing convergence. It suffers from a problem of keeping the stable development and growth on a consistent basis. Thus, the present model is unable to solve the problems of economic growth and thus in need of dramatic changes. Ukraine has not got a formed system of factors that could guarantee dynamic growth combined with structural transformation of the national economy.

Formulation an own model of economic growth is a very strategic prospect for Ukraine which shall secure macroeconomic stability, strong and positive influence of the economic surrounding onto restoring the quality of life and increasing the competition within the home businesses. It shall account all of the factors of growth inside of the economic system (demand, propositions and institutions) with a specialization of modern economic growth linked with processes of globalization, socializing, dynamics and ecology. The best suited model for economic growth in Ukraine is the Solow model which is furthered on the basis of the Ukrainian experience.

Positive indicators of economic growth in 2016 shows some success of achievement of the macroeconomic stability. It should be the foundation for the development and implementation of the concept of a new quality economic growth which should be based on intensification processes of economic development due to a system factors that will guarantee dynamic growth rates and taking into account structural priorities of economic transformation that will not only provide quantitative growth but also qualitative changes in the structure of consumption, accumulation and changes of in social parameters of development. New qualities of economic growth are not just aimed at development of production and welfare industry under consideration as a complex of branches of economy and economic activity but are directed on ensuring a high standard of living. The model offers and innovation and investment growth.

References

https://www.worldbank.orgencountryukraineoverview
https://www.case-research.eu/en/macroeconomic-model-for-ukraine
https://www.focus-economics.comcountriesukraine
https://www.imf.orgenCountriesUKR

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