October 19, 2017

What factors increase economic growth?

  • By Kyaw Win Tin

Economic growth is the increase in the inflation-adjusted market value of the goods and services produced by an economy overtimes. It is conventionally measured as the percent rate of increase in real gross domestic product (GDP) usually in per capita terms. Growth is usually calculated in the inflation-adjusted term-to eliminate the distorting effect of inflation on the price of goods produced. Long term growth of a country has a positive impact on national income and the level of employment which increases the standard of living. It also leads extra tax income for government spending which can also develop the economy. Economic growth also helps reduce poverty, but this cannot occur without economic development.
The six main causes of economic growth are key components in an economy. Improving or increasing their quantity can lead to a growth in the economy. They are natural resources, physical capital, population, human capital technology and law (efficient and effective financial regulation).
Natural Resources: The discovery of more natural resources like oil or mineral deposits may boost economic growth as this increases the country’s production possibility curve. It is difficult, if not possible, to increase the amount of natural resources in a country. Many countries take care to balance the supply and demand of scarce natural resources to avoid depleting them. Improve land management may improve the quality of land and contribute to economic growth.
Physical capital: An increased investment in physical capital such as factories, machinery and roads will lower the cost of economic activity. Better factories and machinery are more productive than physical labor. This can increase output.
Population: A growth in the labor force means there is a larger population and more manpower. However this could lead to high unemployment if not to enable people to embrace and not use their power effectively.
Human capital: An increase in investment in human capital can improve the quality of the labour force. A skilled labour force has a significant effect on growth.
Technology: Another influential factor is the improvement of technology. This could increase productivity with the same levels of labour, thus accelerating growth and development.
The last factor is law: An institutional framework which regulates economic activity such as rules and laws. There is no specific set of institutions that promote growth. The relationship between law and economic development has been a central concern of modern social theory. Maintenance of financial regulations of a country can play an integral part in the growth of its economy. An economy’s strength is measured by the amount of finance it possesses. Hence a country with adequate finances is considered strong enough to deal with the changing global economic patterns whereas a country with inadequate finances is dependent upon the boon and recession of the markets for its profits and losses. The regulations form guidelines and policies set by the government as part of the law.
Laws regarding financial transactions and other like issues are enforced to make sure that no institution goes out of its way. These regulations ensure the flow of cash within a country and save its institutions from being bankrupt by too much outflow of funds. Therefore the policy framework for effective and efficient financial regulation is important to improve economic sector.
The researcher Mark Taylor an academic financial economist practitioner and member of Warwick Commission suggested four key issues; first the designing appropriate regulation is no easy task. Regulation of any kind tends to have distorting effects on incentives. Financial markets are also remarkably adept at circumventing regulation. Second there are important questions to be answered about the design of monetary policy, especially interest rate policy should be directed: solely at controlling price inflation not asset price inflation. Additionally it was understood that monetary policy could be used as the single main instrument of government macroeconomic policy. Inflation targeting, however, needs to be supplemented by some form of regulation specifically aimed at calming asset markets when they become overheated. Third if the world is unpredictable, there will need to learn to expect the unexpected, and if it is not, the early warning system will be needed for the financial institutions. Fourth the international financial structure is built within a political, sociological and geographical frame work that governs its behavior and it is clear time for a unified social science approach to the problems of the financial system. Therefore financial regulation and supervision can help increase the effective functioning the financial system and growth economy through financial stability. The above mention describes that law especially financial regulation is one of the main factors that affect economic growth.
In conclusion, I would like to mention according to literature reviews that to be good policy framework for effective and efficient financial regulation, the roles of financial landscape (well-functioning system) policy objectives (identifications of problem and case for intervention) policy instruments (identification, matching policy instruments and principles of financial regulation), system design and implementation and reviewed and evaluated on a regular basis should be widely considered and formulated.

Reference
1. How to create better financial regulation & institutions: Stephany Griffith-Jones
2. Draft OECD High-level Checklist (paris 2008)
3. Financial Regulation & Procedure: the University of Warwick.
4. Review Essay Does law Matter for economic development? Evidence from East Asia. Tom Ginsburg.

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