What are the major determinants of economic growth and how far the costs of economic growth outweigh the benefits

The promise of impressive economic growth has been a staple of electoral promises ever since the inception of parliamentary democracy in the UK.  In recent years, this phenomenon has only gathered pace with both the Tories and the New Labour leadership claiming the ‘economic growth’ mantle as their own.  Here, the implicit assumption is that economic growth per se is a good thing for the country and its citizens.  But there are economists and intellectuals who would argue that other parameters of human development should also measured alongside economic prosperity.  The rest of this essay will delve into some of their arguments and also attempt to ascertain the major determinants of economic growth and how far their benefits outweigh their costs.

Various economic theories differ in their emphasis on key determinants of economic growth.  But some of the determinants appear more frequently than others, helping them gain recognition as factors contributing to economic growth.  Foremost among these determinants is the governmental institutions that overlook economic activity in a country.  The broad policy framework adopted by the government and its impact on microeconomic and macroeconomic conditions is an important determinant.  Some commonly used measures of the quality of institutions include “government repudiation of contracts, risk of expropriation, corruption, property rights, the rule of law and bureaucratic quality” (Allen, et. al., 2005).  The development of infrastructure and human capital as a way of facilitating business is also a crucial determinant. In other words,

“Economic policies can influence several aspects of an economy through investment in human capital and infrastructure, improvement of political and legal institutions and so on (although there is disagreement in terms of which policies are more conductive to growth). Macroeconomic conditions are regarded as necessary but not sufficient conditions for economic growth. In general, a stable macroeconomic environment may favour growth, especially, through reduction of uncertainty, whereas macroeconomic instability may have a negative impact on growth through its effects on productivity and investment (e.g. higher risk).” (Weissman, 2003)

The role of central banking institutions and their reputation for stability and control cannot be overstated.  Some theories emphasize the importance of ‘human capital’ as an indicator of robust economic growth in the future.  The rapid rise of India and China in recent decades is a testament to the value of ‘human capital’ for economic growth.  Public and private sector investments are also considered important.  Innovation and R&D activities also have the potential to promote economic growth.  This claim has been empirically tested and proven as well.  Further,

“Openness to trade has been used extensively in the economic growth literature as a major determinant of growth performance. There are sound theoretical reasons for believing that there is a strong and positive link between openness and growth. Openness affects economic growth through several channels such as exploitation of comparative advantage, technology transfer and diffusion of knowledge, increasing scale economies and exposure to competition. Openness is usually measured by the ratio of exports to GDP.” (Allen et. Al., 2005)

Since the phenomenon of globalization has become ubiquitous in the new neo-liberal world order of the last few decades, it would be instructive to study aforementioned determinants within the framework of international capitalism.  This particular form of capitalism has steadily replaced socialistic and communistic forms of economic arrangement in many countries in the world.  While proponents of this global economic model argue that this is the best possible system, there are also those who strongly oppose various aspects of this system.  Taking a historical perspective, we see that the events of the two centuries are shaped and defined by the practice of capitalism.  While conceding that concentrations of power and finance in and of themselves do not lead to oppression and injustice, empirical evidence of the workings of the capitalist model suggests such an outcome.  Similarly, while neo-liberal economic paradigm might have improved the Gross National Products (including that of the UK) of individual nations and improved the general standards of living, there are other aspects to human wellbeing that is not easily measured and fulfilled (Dixon, 1998, p.125).

1 2