Not counted: Nigeria’s GDP model is based on the year 1990. (Photo: Wayan Vota)
In 2014, one small policy tweak will grow Nigeria’s economy by 40 percent, causing it to overtake South Africa as the largest in the region. A similar change in Ghana caused that country’s economy to grow 60 percent, while in Guinea-Bissau and Gambia the economy doubled in size. Even the United States increased its output by 3.6 percent using the same technique. What happened?
GDP rebasing. Simply put, these countries are all changing the way they measure their Gross Domestic Product — the sum total of all economic activity in a country in a given year — to better reflect what’s really happening the economy.
When Nigeria’s rebasing is complete, it won’t mean the country is actually producing 40 percent more goods and services. Living standards won’t jump by 40 percent — the government will just be counting more accurately. But it’s still hugely important.
Democratic Switzerland is the world’s most competitive economy. China doesn’t make the top 10. (Photo: Wikimedia Commons)
The World Economic Forum has just released its latest Global Competitiveness Report, which assesses the competitiveness of 148 economies around the world. This year’s top ten includes few surprises, but does illustrate an important fact: eight of them are democracies and rated “Free” by Freedom House’s Freedom in the World index. (Singapore, which ranks second, and Hong Kong, which is under Chinese sovereignty and ranks seventh, are both rated “Partly Free.”)
Why is this important? At CIPE, we believe that democratic and economic development go hand in hand: strong democratic institutions support strong market institutions, and vice versa. But this belief is not shared everywhere. There is a growing contingent who feel that “strong” leaders in charge of highly directed economies can lead poor countries to prosperity, and that elections and debate simply get in the way.
Economist Dani Rodrik argues that democracy as we know it is a product of industrialization.
Most rich countries followed the same historical path to economic development: a period of industrialization, followed by rising productivity and a shift away from manufacturing to a service economy. But economist Dani Rodrik argues that today’s developing countries seem to be de-industrializing at an earlier, and poorer, stage — a process which could threaten the development of democracy.
In the United States, employment in manufacturing peaked at about 27 percent of the workforce, followed by a transition to a service-oriented economy which today employs less than 10 percent of its workforce in industry. Other Western countries followed similar trajectories: Germany, for example, peaked at about 40 percent before steadily declining.
But, Rodrik points out, today’s emerging economies seem to be shifting away from manufacturing at a much earlier stage. Even industrial powerhouse China seems to have never employed more than about 15 percent of its population in manufacturing — and that share is already declining, even as China’s economy continues to grow.
Wamda’s Mix n’ Mentor event in Riyadh brought together CEOs and entrepreneurs.
At a recent conference in Saudi Arabia, I overheard a conversation between two business leaders about their daughters’ marriage prospects. As the father of three daughters, I was curious to hear what they had to say. “Definitely not,” one of the businessmen said, “I am not going to let my daughter marry an entrepreneur. If he doesn’t have a stable job or predictable income, I ask you, how will he be able to support my daughter?” The other, in his traditional white thobe, nodded in agreement.
In 2011, a group of researchers conducted a survey on entrepreneurship in the MENA region and cited “non-acceptance from family members, lack of prestige, high level of competition, and fear of failure” as the top four barriers to starting a business (see Figure 1). In a region where schools and parents prioritize rote memorization over creativity, job security over entrepreneurship, and stability over risk-taking, young people naturally refrain from treading off the beaten path and launching new companies. Furthermore, other social factors, such as the lack of marriage prospects, explain why young Arabs aspire to be government employees and dream of job security.
A participant in the EmprendeAhora youth entrepreneurship program in Peru shows off some of his products.
In today’s world, enterprising youth who attempt to expand their businesses have exciting opportunities and also face serious challenges. Unsurprisingly, these young people around the world are coming together and finding innovative ways to meet these challenges and seize the opportunities.
In this week’s Economic Reform Feature Service article, three winners from CIPE’s 2012 International Youth Essay Competition in the Inclusive Growth category discuss what opportunities young entrepreneurs have in expanding their businesses and the challenges they face. Each author describes how youth in their country are meeting this challenges and the tools that they are using to do so.
Botswana, which has been democratically governed since independent, has also been one of the most stable and fastest-growing economies in Africa. (Photo: Wikimedia Commons)
The relationship between government and commerce can seem fractious at times. Companies eager to please their shareholders and regimes eager for popular support each vilify the other. Socialists place too little value on the role of the private sector while laissez-faire advocates place too much. Ultimately, however, the two are not nearly so divergent. In fact, democracy turns out to be the form of government that inspires the most economic growth. It is at the intersection where the most fertile ground is discovered.
Dr. Boris Begović, a longtime CIPE partner, understands this better than most. As a chief economic adviser to the federal government of the Federal Republic of Yugoslavia for 15 months during 2000-2002, he helped guide the country through an economic liberalization process and to fast growth. He believes that democracy has certain advantages for the private sector; namely, it is a stable form of government that creates predictability in the institutions necessary for growth. Democracies allow more individuals to enter the market, ultimately helping to mitigate individual risk, increase creativity, and inspire competition.
Article at a glance
• Democracy results in higher rates of economic growth over the long term because democracies have more stable and predictable institutions and tend to implement policies that are conducive to private enterprise.
• Since they are accountable to the public rather than to elites, democracies produce more public goods, invest more in human capital, maintain the rule of law, and protect private property rights.
• Though democracies are more likely to engage in large-scale redistribution than autocracies are, the dampening effect of redistribution is offset by the fact that democracies have lower barriers to entry, promoting competition, and innovation.
Read the full article.
Fast-growing economies have institutions that allow entrepreneurs to take risks. (Photo: Businessweek)
Why is it that some economies adapt to change and produce long-run growth, while others stall? We observe that in the adaptive economies, entrepreneurs drive change and innovation. So why then do talented entrepreneurs play a leading role in a few societies and yet hit the wall in others? What causes entrepreneurs to make the leap from dealing in guilds and bazaars to participating in global markets?
Mary Shirley, President of the Ronald Coase Institute, digs deeply to explain how fundamental institutions make all the difference. In “Why Institutions Are Essential to Entrepreneurship,” new from CIPE’s Economic Reform Feature Service, Dr. Shirley offers clear insights into the mechanisms that facilitate exchange and reduce the risks of being an entrepreneur. Societies that lack these institutions — the limited access societies — fail to unleash the entrepreneurial drive. However, those that nourish creative business endeavors improve their long-run economic performance.
This article is part of a forthcoming CIPE report on Creating the Environment for Entrepreneurial Success.