Economic growth refers to a general increase in a country’s productive capacity over a particular period of time. Economic growth is manifested in business performance and population well-being (Hadad 205). As more goods and services are produced, businesses expand and experience a surge in profits. Stock prices also grow and shareholders can invest further and provide jobs to the community. Increased earnings result in higher disposable income and thus customers are inspired to buy more, creating a ripple effect in the process of economic growth. As economic growth is about a nation’s productivity, then, the factors of production are the foundation of economic growth. The primary factors of production include land, labor, and capital (Furtado 124). However, the factors of production cannot spur economic growth in isolation; they are dependent on social, political, and economic climate. Forces such as democracy, foreign trade, and market deregulation are important components of economic growth.
The impact of democracy on economic growth has been contentious. Some development theorists and researchers argue that democratization has positive effects on growth due to its tendency to increase a country’s GDP, as indicated in figure one. On the other hand, critics hold that democracy does not directly promote growth, its outcomes do, but then outputs are subject to other political forces. Democracy might be considered a key factor in economic growth in the US, but this is not the case. Krieckhaus suggest that the effects of democracy on economic performance depend on the regional context in which it is exercised. The author reveals that democracy only facilitates growth in countries with chronic patrimonism that politicians are grossly corrupt and need to be evicted (317). Victor and Povov add that democratization in absence of law and order undermines economic growth (101). Therefore, democracy is one of the factors of economic growth, but it is not the main one.
Political Stability and Economic Growth
The major driver of economic growth is political stability, which in turn promotes foreign policy and growth of companies. Contrary to democracy, political stability has direct impacts on growth. For example, economic development in the US is attributable to the country’s ability to maintain peace and order in its territories. Political instabilities have significant effects on the factors of production, which are the basis of economic growth. For example in absence of peace, labor becomes immobile, the land and its related natural resources are left unutilized, and capital hardly circulates. Conversely, stability provides a conducive environment for free movement of labor and utilization of other resources of production. Based on this premise, political stability is arguably the strongest factor of economic growth.
A stable political environment is characterized with a myriad of forces which attract investment. When the civil society is free from conflict, the people are inspired to invest for the future. One reason behind this trend is that individuals concentrate on innovation and have the propensity to work harder and save (Jeong 306). Consequently, it becomes easier for the society to open up businesses. Additionally, existing businesses are unlikely to suffer losses associated with loss of property in wars, unrealized credits, and reduced consumption by buyers that would result from instabilities. Increased profits with continued political stability encourage reinvestment, which results in long-term economic growth. Thus, political stability promotes economic growth by creating an enabling environment.
Besides local investment, political stability also promotes economic growth through foreign policy. The latter encompasses strategies such as free trade, foreign direct investment, joint ventures across nations, franchising, among other powerful commercial approaches. Free trade allows international commercial activities to take place without restrictions. For example, the US has established free trade agreements with numerous nations including Canada, Australia, and Israel, whereby trade between these countries has no barriers such as tariffs and quotas (Cooper 2). FTA enhances foreign direct investment and franchises, which are other powerful drivers of economic growth. Foreign policy and related concepts result in an upsurge in business growth. They essentially deregulate markets, foster innovation and competition, which are important forces of business growth. Foreign policy promotes growth across industries and nations, but countries cannot cooperate in policies such as free trade agreements with nations that lack political stability (Gilpin 209). The impact of democracy is evident with the comparison of the US and the China economies in the past decades. Although China is not fully democratic, the political effort to deregulate market and give human rights has seen the country economic grow at a rapid rate as indicated in figure two. Thus, economies cannot achieve growth in absence of political stability.
Although democracy is associated with liberty, economic freedom, and human capital accumulation which spur economic growth, it is seen as less powerful compared to political stability. The latter is indispensable in the pursuit of economic growth. For example, nations can engage foreign policies with non-democratic countries, but they cannot do so with politically unstable subjects. Nevertheless, both factors are important as democracy has the potential to create political stability. In addition, similar to democracy, political stability is associated with lesser or no instances of war, destruction, corruption, among other negative forces which are disincentive to work, saving, investment, and eventually deter economic progress. Overall, democracy, political stability, and economic growth are interconnected; thus, a democratic nation with a political stability would achieve greater economic growth.
EffectivePapers.com is a professional essay writing service committed to writing non-plagiarized custom essays, research papers, dissertations, and other assignments of top quality. All academic papers are written from scratch by highly qualified essay writers. Just proceed with your order, and we will find the best academic writer for you!
Cooper, William H. “Free trade agreements: Impact on US trade and implications for US trade policy.” (2014).
Furtado, Celso. “Economic Development of Latin America.” Promise of Development. Routledge, 2018. 124-148.
Gilpin, Robert. The political economy of international relations. Princeton University Press, 2016.
Hadad, Shahrazad. “Knowledge economy: Characteristics and dimensions.” Management dynamics in the Knowledge economy 5.2 (2017): 203-225.
Jeong, Ho-Won. Peace and conflict studies: An introduction. Routledge, 2017.
Krieckhaus, Jonathan. “Democracy and economic growth: how regional context influences regime effects.” British Journal of Political Science 36.2 (2006): 317-340.
Polterovich, Victor, and Vladimir Popov. “Democratization, quality of institutions and economic growth.” (2007).
Scott Malcolm and Sam Cedric. “Here’s How Fast China’s Economy
Is Catching Up to the U.S.” Bloomberg, 2016, www.bloomberg.com/graphics/2016-us-vs-china-economy/. Accessed on 5th April 2019.