Government policies vital to economic development

Providing an international and interdisciplinary platform for creative cultures of learning, the second part of the program called “Bridges: Dialogues Towards a Culture of Peace” organized by the International Peace Foundation brought in to Cebu another 2004 Nobel Laureate Professor Finn Erling Kydland who discussed about underlying concepts and theories in macroeconomics.

In his lecture at the University of San Carlos recently, Kydland discussed the importance of government policies in one’s nation emphasizing on its impact to either make or break the economy.

“With a good policy there is potential in poor nations for not only one to two percent but around 1000 to 2000% income increase,” Kydland quoted the conclusion of Prente and Prescott’s book Barriers to Riches.

Kydland also raised the need for governments to avoid policies that protect only vested interests of some parties and that which prevents influx of new technology from entering the commercial marketplace which protects a monopoly of industries thus far enabling corruption.

“We should think of eliminating corruption and think about enabling and making it easier to import new technologies to gain increases of wealth. This will be worthwhile even if it will take decades,” he pointed out.

As lessons for policy, Kydland pointed out that governments should focus on incentives for productivity and growth through encouraging innovations that can generate capital accumulation that will drive economic growth.

“Government needs capacity to take advantage of these innovations and produce these products so there will also be a need for incentives to encourage investors to put up new capital for putting up infrastructure,” added Kydland.

The problem in economic development in many nations according to Kydland is the creation of policies that prevents the adoption of a set of technologies and discourages implementation of these technologies, which in effect results to low income.

He emphasized that innovative activity such as research and development and technological change which produces more valuable goods are basically the primary driving forces of economic growth.

Kydland stressed that the government may deal with so many decisions but optimal government policy should take into account current and future private decisions which will depend on current and anticipated economic circumstances.

So to produce far-reaching effects on a nation’s economic growth Kydland stressed that, “government policies have to be credible and forward looking and should be optimal to society and account business and household’s reactions because a commitment mechanism has to be implemented in a monetary and fiscal policy.”Kydland cited two nations Ireland and Argentina to illustrate how economic policy has created spectacular performance for a nation’s economy; the former of which experienced significant growth of economy due to implementation of sound government policies while the latter experienced depression and recovery over the past 20 years.

Kydland together with Dr. Edward C. Prescott received the 2004 Nobel Prize in economics for their research that has contributed to understanding what drives business cycles and macroeconomics policy, specifically time consistency of economic policy. – Rhia de Pablo