Question

Economists argue that some environments are more conducive to economic growth than others. One of the ways economists differentiate one environment from another is in terms of its institutions. An institution is “the rules of the game in a society or, more formally, the humanly devised constraints that shape human interaction: the rules and regulations, laws, customs, and business practices of a country.” Do you agree that institutions are conducive to economic growth? If so, how? Briefly discuss.

Answer 1

I think institutions are conducting to economic growth.

Institutions regulate human behavior in such a way that it helps in achieving certain goals of the society. Economic growth can not be achieved without having enabling institutions. For example, firms need credit in order to expand output which is crucial for economic growth. Financial institutions help in mobilizing savings from savers to borrowers. So, financial institutions make it possible for firms to get access to credits. Similarly, businesses need to protect their intellectual property rights or other business interests from competition. There are designated institutions by the government to set rules regarding intellectual properties and resolving issues. Moreover, institutions are required to keep a check on anti-competitive practices or unethical practices which harm others. Therefore, institutions act as facilitators of economic activities. This way, institutions are conducive to economic growth.