Jul 23, 2020 in Literature

Creating an Environment for Growth and Prosperity

The article “Economics: Private and Public Choice” by Gwartney, Stroup, Sobel, & Macpherson summarizes the importance of economic growth to a country. The authors illustrate how GDP and per capita income can be measured and their significance to the growth of income and improvement of standards of living. Chapter 16 of the book Creating an Environment for Growth and Prosperity highlights the key elements required to maintain a sound environment for economic growth and individual prosperity. Some of the factors listed include having a legal system that protects property rights, enforcement of contracts, providing a competitive market, access of stable money value, minimal regulatory procedures, openness of trade and avoidance of high marginal tax rates. However, the analysis of modern economic growth stresses on the importance of sound institutions and policies. In the current paper, some factors contributing to the creation of sound economic environment will be analyzed and discussed.

Gwartney et al. wrote the article in an attempt to bring into perspective the concept of economic growth and its trend during last 1000 years. The researchers succeeded in providing a rough estimate of the history of economic growth, citing how the world per capita income had increased by over 2000 folds in 1000 years. However, the authors state a different growth model in developed countries that grew twice the world’s average rate. At the same time, the researchers highlight how the world’s life expectancy at birth grew from 24 and 26 years to average 64 years as at 2003 over a period of 1000 years. There was no significant difference in the life expectancy at birth between the highly developed countries in the West and the rest of the world. The article further explains the importance of economic growth with emphasis placed on its contribution to higher incomes and higher living standards in terms of health, life expectancy and educational opportunities. The authors further illustrate how countries can estimate the number of years required for the income level of an economy to double following “The Rule of 70.”


The authors’ main idea is to provide a detailed explanation for the sources of economic growth and income levels citing three major areas. These fields include gains from trade, entrepreneurial discovery, and investment in physical and human capital. The article also substantiates the manner in which institutions and policies influence economic growth, citing appropriate legal systems, minimal regulations, competitive markets, access to credit, trade openness and high marginal tax rates as the most essential elements of a sound institutional environment and growth. Other factors that impact on growth and prosperity including population, climate and location, natural resources, foreign aid as well as existing policies and institutions of a country are also explored. Overall, the article explains the concept of economic growth while exploring the essential factors that foster growth and prosperity in a typical economy.

The article explores nine central concepts related to economic growth and prosperity, including a brief history of economic growth, life expectancy, the importance of economic growth, and the rule of 70. Other themes pertinent in the text are sources of economic growth, essential components of sound institutional environment, significant elements of growth, other factors that influence rise in an economy, and the implication of institutions and policies on the prosperity of an economy. The authors began their article with a brief history of the economic growth over a period of 1000 years. They noted that the economy of the entire world had increased by nearly 2000 folds as at 2003. The life expectancy at birth over the last 1000 years averaged at 64 years as at 2003. Whereas the economic growth of high-income nations grew twice the average rate of the entire worlds, the average life expectancy at birth in these nations conformed to the world’s average.

The importance of economic growth provides the basis for any economy to strive towards its realization. The authors had to articulate the benefits of economic growth in an economy as the basis for institutional and policy changes. I conquer with the authors’ assertion that indeed economic growth is an essential element for higher income and better living standards in terms of health, life expectancy, and education. According to Acemoglu and Robinson, economic growth provides a competitive edge for its products, thereby fostering economic prosperity.

The main concern of the authors is the process of implementation of the aspects that can lead to a stable operating environment for economic growth. The following are some of the issues raised as major detriments to stable economic development.

Legal drawbacks. The legal system should be used to protect the property rights of firms and individuals as well as enforcing contractual agreements. This makes it necessary for smooth operations in the free market. Private ownership of property and rights allows people to have incentives to develop and use resources wisely, discover and innovate better ways of production, invest and conserve resources for the future. However, insecure property rights lead to weak incentives for investment and reduce the rate at which people engage in entrepreneurial and economic activities. In addition, if contracts are not enforced or enforced with bias, the transaction cost can increase making it riskier for investment leading to a fall in trade volumes. Undermining the security of property rights causes political instability, civil unrest and war. In contemporary economic world, political instability in countries like DRC, Nicaragua, Iraq, Haiti, Russia and Zimbabwe has contributed to dismal economic performance.

Market competition. When there are competitive markets in the economy, self-interest individuals receive a strong incentive to develop their resources and provide goods and services that are highly valued by clients and other stakeholders. Through competition, producers have to offer goods at a lower cost that serves the interest of consumers. This is due to the fact that if one firm fails to supply a product of a required quality, other companies in the industry will. The freedom to compete encourages entrepreneurs to provide quality products at a lower cost. However, the authors point out that the existence of a monopoly firm or individual hinders the free market experience of customers resulting in poor growth of the economy.

Monetary and price stability. When inflation is maintained at a lower level or is made highly predictable, the exchange risks across different tie periods are reduced. However, the authors point out that high and variable rates of inflation cause uncertainty and increase the cost of time dimension exchange thus reducing the level of investment. This makes the gain from trade, investment and entrepreneurship diminished. Therefore, the economic growth would be highly reduced.

The aforementioned institutional elements are not exhaustive. In fact, there are other factors that economists consider to influence economic growth. They include population, natural resources, foreign aid, climate and location. The authors succeed at referring to renowned economists including Thomas Malthus who noted that the increase of income above the subsistence level causes an increase in population which over time drives the level of income back down. In my opinion, the assertion is fallacious because other factors come into play to influence economic growth including technology, innovation and entrepreneurship. I disagree with the authors’ argument that resources positively impact on economic growth. In my opinion, as much as resources are advantageous to a country, there is no absolute correlation between natural resources and income. In fact, states such as Japan and Singapore have few natural resources but have high economic growth rates. Similarly, most African countries are rich in resources but remain to be low-income nations.

Over the years, foreign aid has been linked to economic growth. The grants are mostly given to developing countries to fund sustainable development projects, such as infrastructure. However, corrupt individual end up diverting the funds to private endeavors. In my opinion, growth-oriented policies can be utilized to foster positive results from foreign aids. Whereas the authors argue that climate and location hinder growth, it is worthwhile noting that the policies and established institutions considerably influence the growth levels. For example, countries along the tropics, such as Singapore, have been able to achieve growth with the existence of sound institutions and policies.

Although there are no absolute answers in economics, I believe that the article is right in as much as the sources of economic growth and essential elements of growth are concerned. However, the statistics related to historical economic growth and life expectancy lack reliability, because the authors could not, with utmost certainty, verify the validity of the information. In fact, it would be interesting to know how the researchers arrived at the level of economic growth of the entire world 1000 years ago. That notwithstanding, the estimates provide a better picture of how the world’s economy has grown over the last 1000 years. The authors must have expected a backlash with the evaluation. In effect, they provided more reasonable figures of 1820 which are readily available. These statistics provides a more reasonable edge for comparison, irrespective of the fact that some economies were non-existent or never preserved economic data at the time.

I also believe that the authors are right in pointing out that economic growth and prosperity narrow down to the idea of sound institutions and policies towards the realization of economic growth. They point out that these factors influence the willingness of individuals to engage in productive activities towards the achievement of economic growth. In fact, all the essential elements that contribute to economic growth are premised on sound institutional frameworks and favorable policies. For example, balanced judicial systems, monetary and fiscal harmonization, trade liberalization among other factors are all hedged on sound institutions and policies.

I believe that unless governments establish sound institutions and put in place supportive policies that enhance trade, entrepreneurial discoveries and investment, the possibility of achieving a sustainable and long-term growth will not be feasible. Government is the main actor in providing stable environment suitable for economic growth. The authorities can regulate the tax system to favor investment, ensure the existence of a stable currency and allow competition. With such a system in place, economic growth is inevitable and the quality of life can be improved.


Related essays