Economic Growth and Institutions Efficiency
Final Assignment SEM1 EGfD 7007D
Economic Growth and Institutions Efficiency
UB: 12024938 8th January 2013
1
Economic Growth and Institutions Efficiency
Introduction During the last few decades, economists throughout the world have tried to study and identify the macroeconomic determinants of economic growth. Among various models generated to explain the process of growth in an economy, one of the best-known is the Solow model of economic growth, created by Robert Solow in 1956. According to this model, output (production) is produced by the combination of capital and labour, assuming a constant return to scale. This means that doubling the inputs (i.e. the capital and labour) will double the output. Further, it is an endogenous growth model that distinguishes between human capital and physical capital, and determines the quantity of output, and growth in general, by the efficiency of investment as well as technological progress (Jones, 2002). Studies have found that the conventional elements of growth (like physical capital, human capital, technological progress, level of investment and international integration) have not been able to stimulate growth in some countries, especially in South Asia and the Sub-Saharan region (Aron, 2004; Sebastian, 2010). Historically, poor investment management and lack of institutions and accountability have caused insufficient return on public investment in low income countries; private investment has been affected as well (Dable et al., 2012). Moreover, differences in growth among countries around the world are much more pronounced than differences in their level of technological development. Therefore, variations in productivity and output can be better explained in terms of efficiency of investment (Wiel, 2013). This essay examines the importance and role of institutions in enhancing the efficiency of investment and furthering economic growth, and tries to find out the ideal set of institutions required for it.
Economic Growth and Institutions Efficiency
UB: 12024938 8th January 2013
1
Economic Growth and Institutions Efficiency
Introduction During the last few decades, economists throughout the world have tried to study and identify the macroeconomic determinants of economic growth. Among various models generated to explain the process of growth in an economy, one of the best-known is the Solow model of economic growth, created by Robert Solow in 1956. According to this model, output (production) is produced by the combination of capital and labour, assuming a constant return to scale. This means that doubling the inputs (i.e. the capital and labour) will double the output. Further, it is an endogenous growth model that distinguishes between human capital and physical capital, and determines the quantity of output, and growth in general, by the efficiency of investment as well as technological progress (Jones, 2002). Studies have found that the conventional elements of growth (like physical capital, human capital, technological progress, level of investment and international integration) have not been able to stimulate growth in some countries, especially in South Asia and the Sub-Saharan region (Aron, 2004; Sebastian, 2010). Historically, poor investment management and lack of institutions and accountability have caused insufficient return on public investment in low income countries; private investment has been affected as well (Dable et al., 2012). Moreover, differences in growth among countries around the world are much more pronounced than differences in their level of technological development. Therefore, variations in productivity and output can be better explained in terms of efficiency of investment (Wiel, 2013). This essay examines the importance and role of institutions in enhancing the efficiency of investment and furthering economic growth, and tries to find out the ideal set of institutions required for it.
References: Gani, A. (2011) Governance and Growth in Developing Countries. Journal of Economic Issues, 45(1), 19-39. [Online] Available from: http://search.proquest.com/docview/857719947?accountid=17193 [Accessed: 24th Oct. 2012] 10 Schepers, S. (2011) Governance: The New Challenge for the African Renaissance. The Journal of Management Development, 30(9), 927-934. [Online] Available from: http://dx.doi.org/10.1108/02621711111164385 [Accessed: 15th Oct. 2012] 11 Tebaldi, E. and Ramesh, M. (2008) Institutions – Augmented Solow Model and Club Convergence. MPRA Working paper No.1038. [Online] Available from: http://mpra.ub.unimuenchen.de/10386/ [Accessed: 18th Oct. 2012].