How Financial Sector and Social Overhead Capital Determine GDP Growth

How Financial Sector and Social Overhead Capital Determine GDP Growth

Cicih Ratnasih

http://doi.org/10.35808/ersj/736

Retrieved from: Europen Research Studies Journal

Economic growth is determined by the interplay between the financial sector and social overhead capital (SOC), where institutional variables like education and public health dictate how effectively the real sector responds to monetary stimuli. While social capital (social overhead capital) acts as a public good that enables coordination through trust and networks, its absence leads to institutional inaction and inefficiency. Consequently, sustainable increases in gross domestic product (GDP) require both financial stability and high-quality social infrastructure to transform national income into broad prosperity and reduced unemployment.

The relationship between the financial sector and SOC acts as a primary determinant of domestic product growth. While the financial sector encompasses variables like interest rates, exchange rates, and credit, social overhead capital represents the institutional infrastructure, specifically education and public health. Research utilizing probit analysis indicates that these variables exert both partial and simultaneous influences on gross domestic product. Significant correlations exist between social overhead capital indices and regional investment, suggesting that institutional quality is a critical factor in how the real sector responds to monetary stimuli.

Social capital (SOC) functions as the social and political infrastructure necessary to drive economic growth. It is characterized as a public good inherent in social structures, consisting of norms, trust, and networks that enable collective action and coordination. Within the Indonesian context, this capital is measured through education participation indices and nutritional status. Weaknesses in social capital often manifest as institutional rigidities, such as corruption or bureaucratic inefficiency, which disrupt economic efficiency and hinder the transition of financial stability into real sector productivity.

GDP represents the total output growth across all economic sectors and serves as a fundamental requirement for sustainable development and increased national prosperity. Calculation methods include the income approach, which sums the gross value added of various sectors, and the expenditure approach, which aggregates household consumption, government spending, investments, and net exports. Economic growth is fundamentally the addition to this product, reflecting a rise in national income. However, improvements in financial indicators do not always result in immediate real sector growth if underlying factors like unemployment or stagnant agricultural productivity remain unaddressed.

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