HK & Singapore a Country's Economic Growth Essay

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HK & Singapore

A country's economic growth "may be defined as a long-term rise in capacity to supply increasingly diverse economic goods to its population…" (Kuznets, 1973). There are a number of methods by which economic growth can be encouraged. These include reducing barriers to business expansion (such as interest rates, tax rates and bureaucracy), increasing transparency in government, increasing population, trade policy, technological innovation and increased exploitation of resources. Singapore and Hong Kong are first-world city states with large populations and limited natural resources. Although both have experienced population increases, density is very high and there is limited room for domestic consumption growth. Likewise, there is limited room for growth in resource exploitation, as neither has excess natural resource capacity. Transparency International ranks Singapore as first in the world for least corruption, and Hong Kong is a strong 13th, so there is little room for improvement (Transparency International, 2010).

Tax rates are therefore a key strategy that can help firms in Hong Kong and Singapore achieve growth, according to endogenous growth theories. These theories propose that higher tax rates discourage productivity, as workers and companies see declining marginal returns on their investments of time, energy and capital.

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Thus, lowering tax rates is theoretically correlated with increasing economic growth, by increasing the economic incentive to invest and innovate. There is dissenting literature with respect to this theory, for example Padovano and Galli (2001). However, reducing taxation rates remains a popular theory for increasing economic output.

Modern trade theory, which is based on the Ricardian model, suggests that the level of economic activity can be increased as a result of reducing barriers to trade. This is certainly critical for nations like Hong Kong and Singapore that are constrained with respect to internal growth by their first-world status and limited natural resources. A key test of this can be found in Hong Kong, which first saw the transfer back to China in 1997 that brought reduced barriers between the SAR and rapidly growing Guangdong Province and then saw China's accession to the World Trade Organization a few years later, further reducing regional and global trade barriers. A World Bank chart of nominal GDP for Hong Kong shows a relatively poor correlation between these trade barrier reductions and economic growth. The SAR grew rapidly prior to….....

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