Conditions for economic growth

The conditions for economic growth are a series of economic, social, demographic and political factors that are necessary for a country, union of countries or region to grow economically in a sustainable way.

Although there are many other measures, in the words of Adam Smith “the wealth of a nation” is usually measured through gross domestic product (GDP). In order for this phenomenon of economic growth to occur, a number of conditions must be met. These could be considered as the necessary foundations for this economic growth to settle.

Conditions for economic growth

Among the main conditions for economic growth that must occur in an economy are the following:

Investment and savings

Both variables have a positive correlation with the GDP of a country. For a country to grow, it must allocate its investments efficiently. Therefore, both public and private, these investments must generate a level of productivity per adequate and sustainable worker.

In addition, if a country’s savings levels are insufficient, it will have to attract foreign investment in order to grow.

Markets and financial intermediaries

These have a vital role in growth, allowing economic agents with a surplus of resources to lend to economic agents with their deficit . The financial markets determine which resource providers offer the most attractive risk – adjusted returns.

In the same way, they create and transform financial assets to provide liquidity to the market and to transfer risk from some agents to others. Finally, being able to accumulate small amounts of the savings surplus of many agents means that financial intermediaries can finance larger projects that would never otherwise succeed.

Political stability, laws and property rights

Political stability together with an appropriate legislative framework and the right to property, both physical and intellectual, are essential to foster and attract investor confidence. Investors, both public and private.

The economic uncertainty caused by political instability, wars or corruption cases, supposes a panorama of uncertainty that breaks with the confidence of both domestic and foreign investors. This means a clear reduction in the potential for economic growth.

Investment in human capital

Investment in skills and highly qualified workers has proven to be an undeniable complement to investment in capital goods . Countries with high rates of investment in education and health tend to have higher rates of economic growth.

Taxes and regulation

Keeping the other variables constant, countries with lower tax rates and regulatory barriers have proven to be countries with higher growth rates. A favorable regulatory framework for the creation of new companies and startups encourages entrepreneurial activity and contributes positively to the productivity of the economy as a whole.

Free trade and free movement of capital

Free trade encourages economic growth by increasing competition between companies. This competition promotes the productive efficiency of the entire economy via cost reduction.

On the other hand, the free movement of capital reduces the problem mentioned above about the insufficient saving of a country. If capital can circulate freely, a country with low levels of savings can attract foreign investment. The objective is to continue undertaking investment projects that allow them to continue growing.

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