7 Factors That Contribute to a High National Economic Growth
Achieving high national economic growth is not just a priority for policymakers but also for entire societies worldwide. Strong economies not only create groundwork for successful businesses and startups but they also provide the surplus needed to build stable families, create art, and engage in leisurely pursuits. As such, economic growth is often intrinsically tied to a society’s ability to produce things that transcend mere economic value.
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While all prosperous economies have unique growth trajectories, most can attribute their stability to a few critical factors. Addressing these factors can guide policymakers, business leaders, and local communities alike in their efforts to promote economic development.
Seven Factors That Contribute to a High National Economic Growth
1) Stable Political Climate
For a national economy to grow sustainably (i.e. not be reliant on labor or resource extraction), a stable political environment must first be cultivated. Without political stability, the pace of investment and innovation is often severely limited, as investors will have to take on more risks and spend more merely to participate and protect their investments.
Developing and middle-income countries that fall into political instability can find it especially difficult to extricate themselves from the resulting development traps, often resulting in so-called “lost generations” that are unable to build value for their communities. Historically, widespread infrastructure development in the Philippines, Vietnam, and other rising middle-income economies only became possible after a measure of political stability was achieved in the late 20th century. While these economies are now often seen as exemplars of growth in their region, this has only been possible due to hard-fought struggles to move past previous political turmoil.
2) Business-Friendly Fiscal Policies
Apart from ensuring political stability, policymakers should prioritize prudent fiscal management, avoiding excessive debt accumulation, and maintaining budgetary restraint. Predictable fiscal policies that promote a favorable investment climate are crucial in attracting the domestic and foreign capital needed for economic expansion, as these help to ensure stable returns.
Unfortunately, constructing a fiscal policy that works for a specific economy can be a difficult task. Economic conditions, political realities, and external factors often complicate the policymaking process and it can be impossible to tell what works until it is tried. Nonetheless, effective planning and implementation of government spending remains a common thread that connects economically successful societies.
3) Investment in Productive Capital
In today’s technologically driven age, our concept of productive capital is now shifting away from traditional infrastructure like roads, power plants, and airports towards digital infrastructure like 5G towers, data centers, and modern manufacturing facilities. The presence of abundant productive capital reduces production costs, enhances productivity, and makes it possible for more kinds of investment to enter a community.
To sustain growth, both public and private sectors should allocate resources to modernize and expand the country’s productive capital base. In the Philippines, the national government is currently enlisting the services of private sector leaders to address present and future infrastructure needs. This collaborative approach offers better cost and efficiency compared to traditional infrastructure development frameworks, allowing smaller economies like the Philippines to do more with less.
4) Investment in Human Capital
Without a sufficiently educated and skilled workforce, modern levels of economic growth cannot be made sustainable. Investments in education are needed to create a workforce that is resilient to different economic conditions. Access to a labor force with diverse skills also ensures that investors can source more of the people they need within just one geographic area, reducing their overall labor costs. Whether investors are searching for talent for niches like web analytics, marketing, visual arts, or science and engineering, these needs can be met if a country invests in education and professional training. Most importantly, providing sufficient human capital investments ensures the presence of a large homegrown startup community—a necessary part of any modern economy.
5) Investment in Research and Development
Modern economies that are not solely reliant on providing labor or extracting natural resources need to continuously innovate to create new value-producing areas. With some notable exceptions, economies known for innovation such as Singapore, Japan, Taiwan, Hong Kong, and South Korea are lacking in domestically available natural resources, and it’s this disadvantage that ultimately led to their massive investments in research and development (R&D) and subsequent prosperity.
As these successful economies demonstrate, R&D investments promote innovation, which can lead to the development of new industries as well as increased efficiency in existing businesses. Policymakers should, therefore, create incentives for businesses and academic institutions to collaborate and invest in R&D.
6) An Open and Competitive Market Environment
An open and competitive market environment encourages innovation, efficiency, and economic growth. Policymakers should promote competition through antitrust regulations and ensure fair market access for all businesses. Avoiding monopolistic practices and reducing trade barriers create opportunities for domestic businesses to compete globally and attract foreign investment.
7) Financial Inclusion
Access to financial resources is essential for ensuring all citizens have the opportunity to lead prosperous lives, ultimately putting them in a better position to build businesses and create innovations that benefit their community.
To do this, everyone must participate in the formal finance sector so that any value they create is more easily integrated into the wider economy. Ensuring that all individuals and businesses are participating within the same financial system also reduces barriers to obtaining financing, reducing the risks of creating new ventures and enabling innovation to continue.
Achieving and sustaining high national economic growth requires a multifaceted, collaborative approach as well as a bit of luck. While there’s only so much that could be done to control the latter, policymakers and business leaders will still be well-placed to build robust, sustainable economies by looking at what has worked elsewhere. Though this approach is certainly not perfect—no approach is—it promises a tried and tested path for sustainable economic growth that benefits not just a nation’s elite but also its citizens.