Engines of economic growth
Capital markets and financial institutions
In the modern world, economic growth relies very heavily on a financial sector that is very effective and efficient in pooling domestic savings and at the same time mobilizing capital from abroad for investments to be done locally in an effective manner. Without a well functioning financial sector in an economy, it is most likely that most of the productive projects will either be totally unexploited or under exploited. Financial institutions act as chief engines for economic growth since they usually have the productive investment taxing effect and hence decrease the scale for increasing the equipment stock that is required to compete effectively in the global arena. Should the financial sector engine be inefficient, it can significantly reduce the levels of growth that could have been suitable for the optimal market structures and appropriate policies and thus have a very negative impact on the economic growth (Bekaert, n. d.).
Capital markets are vital engines as far as economic growth is concerned, when they are either poorly functioning or they are underdeveloped, they usually have the effect of deterring foreign investments since such markets are both expensive to trade in and illiquid. This impacts very negatively on the direct investment since it becomes difficult to raise local capital as it is costly. Illiquidity coupled with high costs of transaction also inhibits the efforts of raising capital for the large local corporations and thus compelling them to shift to foreign markets where they shall not experience such difficulties (Ewah, Esang Bassey, 2004).
The financial sector in an economy concretely pools the financial resources from the households that are quite dispersed and efficiently allocates them to entrepreneurs who are also dispersed. Via the former activity, a financial sector that is efficient permits the households to not only diversify their risk but also maintain their investments in a liquid state such as bank deposits. The latter activity involves gathering of information and investment projects selection that is screening, as well as the monitoring of the activities of the entrepreneurs. The financial sectors as an engine to economic growth thus acts as an intermediary between the financial savers and the investors (Damar Ard1, 2006).
Capital markets are very closely related to economic growth, well elaborate and functioning capital markets enhances the opportunities of investment in an economy and thus result to better economic growth performance. In most of the emerging markets, the costs of transactions are usually higher for the foreign investors as compared to the local ones. Illiquidity coupled with government taxes as well as several restrictions in the capital markets usually make it difficult for corporations to participate in foreign markets. Such factors impair the ability of the capital markets as an engine for economic growth (Bekaert, n. d.).
Political stability and security as engines of economic development
Political stability is a very crucial engine of economic growth and prosperity. Without this crucial factor, it is very difficult for the economy to achieve any growth since all the other factors heavily rely on the performance of the political stability in a country. It is the political stability that gives room to the other economic growth engines to perform optimally. In situations where the investors anticipate that there is a likelihood of political instability in future, the most probable step they can take is withdrawing their investments from the country and shifts them to the countries that are enjoying political stability. Therefore, political stability as an engine of economic growth attracts capital inflows through direct investment, whereas political instability has a reverse effect. Political stability has a direct impact on the level of risk assumed by the investors, while political stability lowers this risk and thus attracts both foreign and local investments political instability increases the risk making most investors to shy from investing in such economies. Therefore, the state of political stability in a country has a direct and a significant impact on the gross domestic product of the country and thus affects the rate of economic growth (ZABLOTSKY, 1996).
Political instability in a country makes it almost impossible for any meaningful business to be carried out. Trade networks are disrupted and hence the various channels of distribution are done away with. It also adversely affects the countrys infrastructure especially those that facilitates transport and communication, which are vital for any significant business to be carried out. It also becomes quite difficult for a country experiencing political instability to participate actively in the international market. In the modern world where labour mobility among nations is very high, it gives the human capital an opportunity to move away from the nations that are experiencing political instability to those ones that are more politically stable. Human capital is very vital in economic growth and when it is lost to other nations as a result of political instability in a nation, economic growth is adversely affected (Schaefer, 2009).
Before any rational investor can make any substantial investment in a country, he or she must first assess the security status in such a country. If there is ample security in the country, it increases the probability of foreign investors making their investments in such a country, and thus takes a crucial role in exploiting the resources available in the country and also adds value to the products and services that are produced in the country. Insecurity on the other hand acts as an inhibitor to these all important engines of economic growth. As insecurity increases in a country, the existing investors transfer their capital assets to other nations, which are enjoying more security while the investors who had intended to invest in the country reverse their decisions. Hence, the state of political stability in a country is a very important engine of economic development as it can either lead to more or less exploitation of resources political instability leads to less value being added to the goods and services that are produced in a country thus resulting in a lower gross domestic product (Schaefer, 2009).
Just like in the case of political instability, the state of security in a country has a direct impact on the risk involved in investing in a country. Insecurity increases the risk involved and therefore, for an investor to accept to invest in such a country, the rate of return on the investments he or she has made must also be high so as to compensate for the high risk involved. This implies that only a few investors are willing to invest in such a country and they can only invest in a few segments of the economy they consider highly profitable (ZABLOTSKY, 1996).
Trade and infrastructure as engines of economic growth
For any economy around the world to grow, trade must play a very crucial role in facilitating the chain of distribution of the various products and services that are produced in the economy. Openness, which is the aggregate of imports and exports to the gross domestic product of a country, is usually considered to be the main determinants as far as trade is viewed as an engine of economic growth. Economic growth that is led by exports acts as an indicator that the exports comprise the chief path via which the process of liberalisation can have an effect on the level of output and eventually have an effect on the economic growth rate. Expansion of exports increases the level of productivity by providing enhanced economies of scale. Increased exports usually have the effect of alleviating the constraints of foreign exchange and hence offer enhanced access to foreign markets. Furthermore, exports increase growth in the long run as it permits the growth of innovations especially in the development and research sectors that make it possible for trade to have a greater impact on the economic growth of a country (Parningotan, n.d.).
Without trade, goods and services could only be produced on small scale basis since they could only be used for subsistence purposes. However, due to trade, it is possible for people to produce what they can produce best and cheaply in large quantities. This leads to more economic growth since the producers are in a position of fully exploiting the available resources and also enjoy economies of scale. The networks involved in trade enables people to obtain goods and services that are not produced in their localities and at the same time to dispose off the products and services they have in excess to their needs (Chapman, 2007).
On its part, the infrastructure makes it possible for all the elements of economy to be integrated in a productive manner. Infrastructure eases the mobility of human and physical capital it also makes it easier for services and products to be transported from one region to another, through safe and fast means. In addition, infrastructure makes it possible for all the industries operating in a given economy to access most of the facilities they require for production purposes. A sound infrastructure is thus a vital engine of economic growth since it leads to lower costs of production making the produced goods and services to be cheaper and thus affordable to the consumers (OFallon, 2003).
The most important aspects of infrastructure include the transport and communication networks, power distribution networks, gas pipelines and systems of water and sewerage. These entire infrastructures have a direct impact on the performance of an economy. For those countries whose infrastructure networks are either underdeveloped or are poor, the rate of economic growth is also poor since it is not supported by a sound infrastructure network. This is due to the fact that they lead to a high cost of production that reduces the level of activity within the economy and thus impacting negatively on economic growth. In addition, poor infrastructure chases away foreign investors and also the large local investors, who opt to invest in countries with good infrastructure where they can be able to produce more cheaply and thus increase their profit margins (Pedroni, P. Canning, 2004).
Energy as an engine of economic development
Energy is also a very important engine as far as economic growth is concerned there is no particular economy in the world that can grow in the absence of energy. It is used in virtually all sectors of the economy and hence its availability and cost is very important for economic growth. Therefore, if energy is not easily available and hence expensive, it will have an impact on all goods and services that are produced within that particular economy as it will lead to increased cost of production and transport. When dealing with energy as an engine of economic growth, various issues surrounding the energy subject have to be considered. These include the energy sources, energy harnessing, use, direction and redirection of energy. This basically means that it has to be dealt with as a system that is intertwined (Stern, 2003).
The initial converting activities are the ones that set the economy into motion. These primary activities basically contribute net energy into the economy. It is these activities that are responsible for converting the energy from its natural form in which it normally occurs such as solar light and heat, running water, wind, tides, fossil fuels, minerals, chemicals and gravitation into final forms, which can eventually be utilised in the production of services and goods. Once the energy is used to produce services and goods, it can be said to have increased the gross domestic product since it makes it possible for value to be added at various levels. In most cases, these primary activities of converting the energy do not bring about energy into a form that can be directly used to produce various services and goods. Therefore, they have to be first converted into forms that are more usable or be delivered to locations where can be utilised by more advanced converting activities. These activities do not only add value to the energy as a factor of production, but they also make it possible for more refined goods and services to be produced (Boopen, 2006).
Energy is also used in the transport and communication segments of the economy, which are of great importance in economic growth. There is very little progress if any that can be achieved without transport and communication industries. Therefore, since it is the energy that drives these two sectors, it indirectly drives the economy of a country. Energy increases the rate at which raw materials and also goods and services are transferred to the areas they are required. Energy also makes it possible for many natural resources to be exploited which ultimately leads to economic growth. Industries manufacture goods worth billions every day. They however cannot be able to do so without the use of energy. However, in the current world, it has been observed that energy must be chosen and used in a sustainable manner otherwise it might end up having detrimental effects. One of the greatest hazards resulting from using non renewable energy to drive the economy is pollution and thus for energy to act as an engine of economic growth, such defects must be avoided as they will in the long run erode all the economic gains that have been achieved. Currently, the nations with more energy resources especially the oil producing countries have achieved more economic growth as compared to the ones that are not endowed with such resources (Alam, 2006).
Economic growth is affected by several factors in different ways, the engines of economic growth such as political stability and security, capital markets and financial institutions, trade and energy are the ones with more driving force on any given economy around the world. Without these factors, it is very difficult and in fact impossible for any meaningful economic growth to be achieved. Therefore, for a country to ensure that it prospers in terms of economic growth, it must ensure that these engines of economic growth are well taken care of and integrated in a beneficial manner that optimises each of them. By doing so, several segments of the economy will be integrated and the end result will be enhanced economic growth. It should however be noted that, the absence of any of these engines will most likely result to poor performance of the economy.