Economic Growth Theory

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Economic growth has been a preoccupation of many countries for many years. The main puzzle has been what it is exactly that makes some countries better off. Different prepositions have been advanced to make long term economic growth possible; from capital accumulation, that is, both human and physical capital to technological progress, whether endogenously or exogenously driven. Relatively new to the growth debate is the argument of institutions as a prime determinant of economic growth. Proponents of this argument stress that it is the ‘good ‘or ‘right’ institutions that are a channel of growth. Critiques argue that there is an endogeneity problem, that is, which one comes first between the institutions and growth. To add to the debate are…show more content…
Although the two basic models may differ in their theory, they both basically stress the importance labour capital and technology. However, this essay presents a new argument altogether; one which stresses the importance of institutions in driving long term growth.. Dollar and Kraay (2002:133) argue that countries with better institutions tend to achieve growth much quicker than those with poor ones. Acemoglu et al (2005:389) identifies two sets of institutions which are political and economic. They state that economic institutions such as free market as well as property rights system are the most significant because they induce individual investments as well as create an environment for efficient allocation of resources. Acemoglu et al (2005:389) resonate the neoliberal argument of a laissez faire economic system where the state does not infringe on individual private property ownership but is preoccupied with creating an enabling environment in which economic activity can flourish. Furthermore, they argue that because economic institutions are endogenous, their functioning will depend on the different interest groups in a society and their preferences. It holds therefore that the groups that has the most power will have their interests represented more (Acemoglu et al…show more content…
Gallup (1999) et al argues that a country’s location as well as climate can have negative effects on its ability to generate adequate income that leads to economic growth. A country’s geographical location can inhibit income levels through among others transport costs. A case in point is that of Zambia which is landlocked. The fact that the country does not have a sea port means that it uses huge sums of income to pay transportation cost for goods reaching its borders through other countries such as South Africa and Tanzania. This therefore means that money which would otherwise be spent on national projects leading to economic growth is channelled towards expenditure on movement of goods through external means. The table below is an illustration of huge amounts of transport costs that landlocked countries incur. It indicates that trading time across borders can last even up to forty (40) days in Sub Saharan Africa $ 7600 per container. This therefore means that countries in particular geographic locations do not only have to deal with high costs but time constraint as international trade is faced with long hours of clearing at the
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