The Role of Government in Promoting
Economic Growth
Governments can play an important role in promoting—or blocking—all three sources of
long -term economic growth: physical capital, human capital, and technological progress.
Governments and Physical Capital Governments play an important direct role in
buildinginfrastructure:roads, power lines, ports, information networks, and other
parts of an economy’s physical capital that provide an underpinning, or foundation, for
economic activity. Although some infrastructure is provided by private companies, much
of it is either provided by the government or requires a great deal of government regula-
tion and support. Ireland, whose economy really took off in the 1990s, is often cited as an
example of the importance of government -provided infrastructure: the government in-
vested in an excellent telecommunications infrastructure in the 1980s, and this helped
make Ireland a favored location for high -technology companies.
Poor infrastructure—for example, a power grid that often fails,
cutting off electricity to homes and businesses—is a major obstacle
to economic growth in some countries. To provide good infrastruc-
ture, an economy must be able to afford it, but it must also have
the political discipline to maintain it and provide for the future.
Perhaps the most crucial infrastructure is something we rarely
think about: basic public health measures in the form of a clean
water supply and disease control. As we’ll see in the next section,
poor health infrastructure is a major obstacle to economic growth
in poor countries, especially those in Africa.
Governments also play an important indirect role in making
high rates of private investment spending possible. Both the
amount of savings and the ability of an economy to direct savings
into productive investment spending depend on the economy’s in-
stitutions, notably its financial system. In particular, a well -
functioning banking system is very important for economic growth because in most
countries it is the principal way in which savings are channeled into business investment
spending. If a country’s citizens trust their banks, they will place their savings in bank
deposits, which the banks will then lend to their business customers. But if people don’t
module 39 Growth Policy: Why Economic Growth Rates Differ 389
Inventing R&D
Thomas Edison is best known as the inventor of
the light bulb and the phonograph. But his
biggest invention may surprise you: he invented
research and development.
Before Edison’s time, there had, of course,
been many inventors. Some of them worked in
teams. But in 1875 Edison created something
new: his Menlo Park, New Jersey, laboratory. It
employed 25 men full - time to generate new
products and processes for business. In other
words, he did not set out to pursue a particular
idea and then cash in. He created an organiza-
tion whose purpose was to create new ideas
year after year.Edison’s Menlo Park lab is now a museum.
“To name a few of the products that were devel-
oped in Menlo Park,” says the museum’s web-
site, “we can list the following: the carbon button
mouthpiece for the telephone, the phonograph,
the incandescent light bulb and the electrical
distribution system, the electric train, ore sepa-
ration, the Edison effect bulb, early experiments
in wireless, the grasshopper telegraph, and im-
provements in telegraphic transmission.”
You could say that before Edison’s lab, tech-
nology just sort of happened: people came up
with ideas, but businesses didn’t plan to make
continuous technological progress. Now R&Dfyi
Thomas Alva Edison in his laboratory in East
Orange, New Jersey, in 1901.operations, often much bigger than Edison’s
original team, are standard practice throughout
the business world.© Bettmann/CORBISGovernments play a vital role in health
maintenance. A child is vaccinated
against the influenza A (H1N1) virus dur-
ing a mass vaccination in Schiedam,
Netherlands, in late 2009.ED OUDENAARDEN/AFP/Getty ImagesRoads, power lines, ports, information
networks, and other underpinnings for
economic activity are known as
infrastructure.