Global social and economic problems are forever increasing. Governments are always challenged to do more for growing populations – better healthcare, education, employment etc. Development, including infrastructure (schools, hospitals, roads, bridges etc) need to be resilient and sustainable. Prudent policies for sound balance of payments are important.
Decisions about government spending and taxation can be made easier depending on the amount of revenue a country is able to generate and a government has at its disposal.
Economic growth is one means by which revenue may be obtained to achieve many objectives.
Some studies have shown that over 80% of the reduction in poverty has come through increased growth in Gross Domestic Product (GDP). This requires growth in employment, changes in capital (including technology), productivity growth, training and skills development and a spirit of entrepreneurship). However, the studies show less that 20% of poverty reduction has come through changes in inequality.
Productivity growth has been negatively affected by the Covid-19 pandemic, the Ukraine war and extreme weather events. The negative effects of these generally linger on. The United States, Germany and France are doing better than most. The United States’ GDP growth has been the most robust among developed economies in a generally sluggish environment. Economic growth is also expected to be slow in emerging markets and developing economies in the coming years. The USA is also forecasted to be top recipient of Foreign Direct Investment followed by the Netherlands and Brazil in a few years.
Often, investment is seen as the main determinant of economic growth- Productivity and investment are seen as the issues which we face at present.
In examining how investors intend to invest their money (and allocate their assets) some suggest that the important factors are: The investors’ time horizon and risk tolerance.
In what follows, we discuss:
Strategies for increasing investment for economic growth and suggest that there ought to be greater focus on identifying potential investors, bringing them viable benefits and reducing weaknesses and investor risks associated with possible investment opportunities.
The role played by the private sector in the development process and the importance of various economic sectors and industries have been much discussed, The Organisation of Eastern Caribbean States (OECS) Business Council would like to see a vibrant and productive private sector taking responsibility for its own development with an ability to invest in productive economic activities and not over reliant on distributive sectors. However, it has been observed that many countries and communities have exemplary development experiences as a result of engaging in international trade and distributive sector trading.
When thinking of starting a business, one is inevitably concerned about its future viability and likely profitability. The project’s objectives have to be clearly defined and a strategy developed to tackle any problems identified. An appraisal needs to be made of the project which involved an evaluation to determine the soundness of the economic, financial, technical, management etc considerations. Some of the more common appraisal methods which may be necessary include:
Cash Flow forecast which calculates the amount of money coming into and going out of the business.
A profit and loss forecast which calculates the balance of money left after expenses have been paid.
A Sensitivity analysis- which analyses how change in certain hypothetical situations (eg costs and prices of particular products, interest rates, duration of certain activities etc) may impact on certain outcomes.
Net Present Value – which analyses the project’s profitability over a time period. A positive NPV is good, and a negative NPV over the period is not good and the project should not go ahead.
Internal Rate of Return- which indicates the profitability of a future investment. The IRR is a discount rate which makes the Net Present Value of cash flow equal to Zero.
Break-Even-Point analysis- the point at which total cost equals total revenue. That is, no loss, no gain.,
The above essentially analyses the financial aspects of a project. However, it may be necessary to have a comprehensive plan for the enterprise – A business plan. This would not be complete without proper attention being paid to potential project weaknesses which may include:
- An assessment of market/marketing/promotion/help with export requirement
- Assessment of business space/ premises needs
- Research and Development incentives
- Assistance with regulatory regimes
- Assistance with technology requirements
- Training and skills development
- Capital availability etc
These and other forms of support (as necessary and appropriate) may be identified and brought to the investor to enhance the attractiveness of a project proposal and so potentially modify the investor’s attitude to risk ( ie lower its perceived riskiness particularly at the early/start-up stage of an enterprise and improve expectations of the project(s) viability and profitability.
In addition, a project’s Strengths, Weaknesses, Opportunities and Threats (SWOT) may be undertaken to identify the internal and external strengths and weaknesses of the business and included in the business plan for the enterprise. Such comprehensive analysis are particularly important in times of market instability and uncertainty as may be the case when high government borrowing could cause interest rates to rise thereby crowding out the private sector and discouraging borrowing for investment and economic growth. In many small states (the Caribbean included) with limited economic bases, sometimes poor growth rates, vulnerability to severe weather events and some countries may even experience political uncertainties. These situations are able to heighten risk averseness in the investor community.
“Venture Capitalist are sitting on top of a 300 billion-dollar pile of cash and massive reserves as start-ups struggle to raise funding. With more capital at their disposal VC’S are often favouring established companies with lower risk and higher potential for immediate returns. VC’S are increasingly focusing on late- stage investment which offer potentially quicker returns compared to early-stage ventures”. Source: Daniel Levi, Tech Startups, January 31, 2024
Particularly with early-stage ventures, the initial investment can be the most difficult to secure and is likely to be the riskiest for investors therefore, a form of Blended finance (ie Public finance to attract private investment).is a means of overcoming the problem. A range of viable benefits may be brought to the table as catalyst to attract private investors to, as it were, crowd-in (rather the negative crowding-out of investors) and where risk levels have been clearly reduced for the private investors, have returns to them adjusted accordingly.
National/Global macroeconomic difficulties can manifest themselves in various forms of project weaknesses and risks to investors. This may be compensated for by public involvement and support mechanisms thus catalysing investors as they may feel incentivised by the viable benefits which may be on offer. The positive crowding-in effect may also occur if entrepreneurs are assisted in starting enterprises through various institutional support mechanisms (eg incubator systems) partnerships, co-operative arrangements through which funding may be available. Public sector involvement may also be helpful, indeed essential if, for a variety of reasons, financial institutions may be reluctant/unable to lend- there may be questions about project viability etc why potential lenders are unable or unwilling to lend. If, however, the project(s) have significant national impact. funding options may be more diverse.
Next: “Cultural and creative activities enabling investment and economic growth”.