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What Is the Relationship between Government and Economic Growth?

By Peter Hann
Updated May 16, 2024
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Government and economic growth are linked because a government may spur growth by creating an economic, legal and regulatory environment in which businesses can thrive. A government also may foster growth through its education and training policy, increasing opportunities for workers to improve their skills. Direct government spending on infrastructure projects such as road and rail links, seaports and airports can ensure that domestic and foreign trade operates efficiently. Technology provides a major boost to economic growth, and a government can pursue policies that are favorable for research and development or technology transfer. The link between government and economic growth also may be seen in government's creation of better conditions for international trade through lowering tariffs, tax and duties and concluding free-trade agreements with potential trading partners.

Economic growth normally is one of the main objectives of government policy, pursued by attempting to achieve stability in currency inflation, interest rates and exchange rates. A government may particularly help business by reducing laws and regulations to the minimum necessary. The government also may help economic growth through its education and training policy, ensuring that the workforce is in a position to acquire and maintain relevant skills. Government spending also may ensure that higher education institutions link up with business through knowledge sharing to ensure that pure and applied research may lead the development of innovative products by commercial enterprises. A government may stimulate networking by creating an environment for high-technology clusters of business and academic bodies, leading to knowledge sharing and collaborative development of new technologies.

Government and economic growth are related where government improves the infrastructure to enable traders to move their goods at a lower cost and with greater efficiency. Well-planned and maintained road and rail links between cities and with seaports and airports may enable businesses to flourish as they gain easier access to domestic and foreign markets. Overcrowded seaports may be supplemented by access to inland dry ports with direct road and rail links to sea and air terminals and onward links to consumer markets. In some cases, the economy of outlying regions may be transformed by opening up transport links via bridges and tunnels to overcome natural barriers. Movement of workers from home to workplace may be facilitated by the development of metropolitan and underground railway networks and motorway links.

A favorable tax and regulatory environment for business may reduce the temptation for some businesses to migrate to jurisdictions with low taxes and minimal regulation. The relationship between government and economic growth is seen where foreign trade is encouraged through lower tariff barriers for imports and negotiation of better access to foreign markets for exports. The government may negotiate free-trade agreements or membership in free-trade areas, and can conclude treaties for protection of investments and elimination of double taxation for companies operating in foreign jurisdictions.

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Discussion Comments
By burcinc — On Nov 16, 2014

I get upset when I hear about how much of the federal budget the government spends on education and innovation. Both of these are very important for sustainable economic growth. I think we need to invest more in both.

By stoneMason — On Nov 16, 2014

@discographer-- That's an interesting question. Just to let you know, there is no national economy in the world in which there are absolutely no government controls. Some control is necessary you see. There have to be rules and boundaries in the market so that the businesses play fairly. Government policies aren't to create barriers for economic growth, but rather to encourage it while making sure that the market truly remains free and fair. For example, without government regulation, most markets would become monopolies. One or two companies would dominate over all others and push them out of the market. It's government policies that prevent this from happening.

By discographer — On Nov 15, 2014

Isn't one of the requirements of free market capitalism, lack of government intervention? Doesn't that make free market capitalism the economic system most conducive to growth? Then why do governments always intervene with their economic policies and regulations?

It's great for a government to try to remove barriers for business and trade. But there are also times when the government creates barriers or when it disrupts the market with its policies. I don't understand this. I don't think we have a true free market.

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