The Main Factors For An Economic Growth - Term Paper Example

? The main factors for an economic growth The evaluation of the progress of economies can be a challenging task mostly because of the continuous changes in the political, social and financial conditions in countries worldwide. Moreover, the impact of factors, which used to be critical in economic growth, can be differentiated due to unexpected social or financial events. The case of Lehman Brothers in 2008 proved that economic growth is not guaranteed. The factors that can influence economic growth in the context of the international community are presented and analyzed in this paper. Emphasis is given on the role of macroeconomic and microeconomic factors in the performance of economies globally. The review of the literature published in this field showed that economic growth is likely to be influenced by a series of factors. Of particular importance seem to be factors related to the microeconomic and the microeconomic conditions of each region. It is also proved that despite their intervention in economic development, these factors are not likely to act similarly in each market, meaning that their power to influence the economic performance of each country is differentiated. Different approaches have been developed in the literature in order to explain the level of development of each economy. In accordance with Nijkamp (2010) investment should be regarded as a key factor in regard to the economic growth. It is noted that as investment grows, the performance of economy is also likely to be increased; however, their interaction is not simple. It is explained that the level of intervention of investment in economic growth can be differentiated. Reference is made specifically to the time period required for the benefits of investment to appear in regard to a country’s economic life (Nijkamp 43). There are cases where the benefits of investment on local economy appear quite early; but, most commonly, it is possible for these benefits to appear with delay, a view that is aligned with the endogenous growth models (Nijkamp 43). At this point, the following problem appears: how can investment benefit quickly the local economy if bureaucracy sets obstacles in the completion of the relevant processes? From this point of view, it could be stated that the effects of investment on economic growth are not standardized. Investment, in any case, contributes in economic growth but the terms of success of the relevant plans are depended on a series of factors, such as the local regulations, meaning especially the laws on investment, the availability of sources, the political and social stability and so on. Another factor which can also affects economic growth is the human capital. Nijkamp (2010) notes that the term ‘human capital’ can be used for describing the workforce, i.e. those involving in the production processes (products and services) of the local economy. There is no differentiation between locals and foreigners, meaning that human capital would also include expatriates who are asked to participate in the business projects developed within a particular country. However, when referring to ‘human capital’ as influencing economic growth, it would be preferable to consider a particular team of persons: the locals who are able and willing to be engaged in the business activities developed across their country. From this point of view, the value of ‘human capital’ within a specific country can be influenced by the education and training available to people of different age and gender (Nijkamp 43). Human capital, as a term used in the explanation of economic growth, is not directly related to the macroeconomic conditions of each country; however, its existence and its quality is reflected in these conditions. For example, a high GDP level would indicate that people across the country are appropriately educated and trained, supporting the growth of their organization, as this growth result also in the growth of the economy. From a similar point of view, it is noted that the promotion of research and innovation within a particular country is likely to lead to the increase of the performance of the local economy (Nijkamp 43). This view can be considered as justified, because of the following reason: in the context of globalization, competition in all industries has been increased. Firms are able to improve their performance only at the level that they can support long-term programs focusing on research and innovation. Moreover, the development of organizations within a country is expected to lead to the growth of the economy, either in the short or the long term. In this context, research and innovation contributes in economic growth even if relevant schemes are not developed by governmental organizations but they are promoted only in the private sector. However, it is necessary for these schemes to be supported by the state in terms of existing legislation and bureaucracy. Otherwise, the successful completion of these schemes would become quite difficult. Apart from the private sector, the efforts for economic growth need to be developed in the context of the state also, meaning not just that the relevant schemes have to be initiated by the government but also that they have to be actively supported by the relevant authorities. In the study of Barro (1999) emphasis is given on the power of the state to support the development of the economy. It is noted that a government can ensure the economic growth in case that it promotes a series of plans focusing on particular aspects of social and economic life. For example, the economy of a country could be developed under the influence of these factors: ‘high levels of schooling, good health, low government welfare expenditures and favorable terms of trade’ (Barro 8). The above view sets the following questions: since the above practices could result to the development of economies, why they are not used worldwide? Or else, why efforts are not made for introducing effective policies in regard to education, health and trade, which can highly support the economy? The above questions are become more critical if referring to the views included in a report of the International Monetary Fund (2004); in accordance with this report, the potentials of a country to confront poverty are high even without setting in risk the local economy (IMF 37). It is explained that the increase of production across a country could support the increase of consumption also (IMF 37). Moreover, such initiative would not harm the local economy, since no additional investment would be required on the development of programs for supporting the poor people. In accordance with the above, the conditions for economic growth could be developed within each country. The management of a country’s resources and strategic advantages is therefore critical for the achievement of economic development; the latter may delay even all terms for economic growth are met, as described above. It is clear that the achievement of economic growth can be difficult if there is no willingness or ability for the appropriate management of a country’s existing resources, meaning not only the local products and the natural resources but also the ‘human capital’, as the term explained earlier. This view is in accordance with that of Sykes (2004) who supported that economic growth cannot be achieved unless effective macroeconomic polices are developed. Reference is made to practices, such as ‘the reduction and the stabilization of inflation level and the reduction of taxation’ (Sykes 11). The value of research and development (R&D) plans for economic growth is also highlighted. Also, reference is made to the level of development of foreign trade, meaning the activities of foreigners (individuals and enterprises) within a particular country and the level at which these activities are supported by the state (for example, law taxes in FDI (foreign direct investment) can result to the increase of the level of FDI within the particular country, either in the short or the long term (Sykes 11). Towards the same direction, Evans (2000) notes that the influence of macroeconomic factors on the economy’s growth can be significant. The interaction between these factors and the economy is explained as follows: the publication of figures related to certain macroeconomic factors influences the view of financial institutions in regard to the status and the perspectives of the local economy (Evans 10); at the next level, these institutions are likely to produce reports where there concerns are explained, a fact that negatively influences the potentials of the relevant country to seek for support by the local or the international banks. This is a phenomenon quite expanded today. In this context, governments worldwide should monitor closely the performance of macroeconomic indicators, such as: ‘the balance of payment, the inflation, the interest and exchange rates and the assets prices’ (Evans 10-11), as these indicators could significantly harm the economy. On the other hand, Dwivedi (2002) notes that microeconomic factors can also influence the economy, just like the macroeconomic factors; the difference between the two is that the former is likely to act in the long term while the latter can have immediate effects on the economic growth (Dwivedi 5). For example, the publication of a country’s macroeconomic indicators may be followed by the limitation of the level of financing provided to the relevant country for the development of its projects. However, the microeconomic factors, as for example the level of prices in regard to certain products/ services or the trends in the prices of rents across the country are also important for local economy since they can negatively affect the inflation, which, by each turn, harms the economy’s stability, as described above. A similar approach for explaining the terms of economic growth is included in the study of Sexton (2010). The above researcher notes that ‘economy can grow only with qualitative or quantitative changes in production, land, capital, labour and entrepreneurship’ (Sexton 78). It is clear that the terms of economic growth can be differentiated. In accordance with the issues discussed above, governments have the key role in the stabilization and the development of their country’s economy. However, the practices followed among individuals and firms in regard to the arrangement of prices of various products/ services can also influence the economy. For this reason, the issues that should mostly reviewed by legislators and governors when having to set the plans related to the growth of the economy should be the following ones: inequality is often likely to lead to social conflicts which can result to instability. At the next level, the development of business projects could be delayed while the promotion of governmental plans would be made quite difficult. In other words, economic growth should be achieved by reviewing all factors that would be expected to negatively influence the economy; the key challenge, when seeking for economic growth, is not the identification of the reasons for the delays in the completion of the relevant plans but the achievement of collaboration between the parties who are expected to support it. Works Cited Barro, Robert. Determinants of economic growth: a cross-country empirical study. Cambridge, MA: MIT Press, 1999. Cypher, James, Dietz, James. The process of economic development. Oxon: Taylor & Francis, 2008. Dwivedi, D. Microeconomics: Theory And Applications. Delhi: Pearson Education India, 2002. Evans, Owen. Macroprudential indicators of financial system soundness. Washington: International Monetary Fund, 2000. IMF. Serbia and Montenegro: Poverty Reduction Strategy Paper (EPub). Washington: International Monetary Fund, 2004. Nijkamp, Peter. Innovation, Growth and Competitiveness: Dynamic Regions in the Knowledge-Based World Economy. New York: Springer, 2010. Sexton, Robert. Exploring Microeconomics. Belmont: Cengage Learning, 2010 Sykes, Michael. Understanding economic growth: macro-level, industry-level, firm-level. New York: OECD Publishing, 2004 Read More