The Key to Economic Growth
Economics is not a hard science like physics or chemistry; it differs from society to society. Our culture, history, politics, geography, and climate influence our daily economic decisions, thus, the whole economy, when combined. But there are universal values that every society in the world yearns for, such as justice, peace, and trust. We can extend these values to the national scale as the power of the judiciary, the national stability, and the competence and morality of the government. These three factors form the foundation for long-run, sustainable, and high-quality economic growth. Therefore, a government must achieve these three goals to create economic growth, and the best way to attain economic growth is by building strong institutions.
There are two kinds of institutions: political and economic institutions. Political institutions are the most critical because they control the distribution of political power in society and create the legal basis for monetary institutions. The government must ensure those institutions are well established and will not easily lose their functionality in social distress.
However, there is one more important thing about institutions. Based on how they are designed, they can become inclusive or extractive. While inclusive institutions distribute power and resources equally among society, extractive institutions gather them into the hand of the few elites who use these resources and power for their benefit. Therefore, it becomes harder for new firms to enter the market and compete against monopolies usually created by the elites using their power. Even with a new idea that could innovate a particular industry, monopolies may use their political power to stop the innovation if that idea could harm their businesses. This situation is highly harmful to innovation, and without innovation, there is no creative destruction which is the heart of high-quality, long-run economic growth. Thus, the government must also be wary of any weak points in institutions that the elites could exploit.
After establishing the political institutions, the government’s next step is to maintain
economic growth with economic institutions. As we stated at the beginning of this essay, the country’s economy is molded by environmental and cultural factors. The government must accurately analyze those factors and use its resources efficiently. Different situations need various solutions; hence the government should expand its tools to manage the economy. This achievement can be achieved by central banks, ministries, or planning institutes such as the State Planning Organization (DPT) in Turkey. With these institutions, the government should support innovation and industrialization to boost the country’s self-sufficiency. A great example would be South Korea. With extensive planning, this war-scarred, emerging nation became an economic powerhouse by substituting imported goods with domestic goods to increase the autarchy and supporting the establishment of companies with R&D operations, such as Samsung, LG, and Hyundai, to export high-tech products. South Korea not only exported high-tech goods but also its culture with K-Pop and TV shows helped boost the economy.
Such successful governing could not be made without powerful institutions and careful planning.
In general, we can safely interpret from this information that the key to economic growth is powerful institutions, competent government, and extensive planning in a country.
