Economic growth - Wikipedia

Economic growth can be defined as the increase or improvement in the inflation-adjusted market value of the goods and services produced by an economy over ... Economicgrowth FromWikipedia,thefreeencyclopedia Jumptonavigation Jumptosearch Increaseintheinflation-adjustedmarketvalueofthegoodsandservicesproducedbyaneconomyoveracertainamountoftime Grossdomesticproductrealgrowthrates,1990–1998and1990–2006,inselectedcountriesRateofchangeofgrossdomesticproduct,worldandOrganisationforEconomicCo-operationandDevelopment,since1961 PartofaseriesonMacroeconomics Basicconcepts Aggregatedemand Aggregatesupply Businesscycle Deflation Demandshock Disinflation Effectivedemand Expectations Adaptive Rational Financialcrisis Growth Inflation Demand-pull Cost-push Interestrate Investment Liquiditytrap Measuresofnationalincomeandoutput GDP GNI NNI Microfoundations Money Endogenous Moneycreation Demandformoney Liquiditypreference Moneysupply Nationalaccounts SNA Nominalrigidity Pricelevel Recession Shrinkflation Stagflation Supplyshock Saving Unemployment Policies Fiscal Monetary Commercial Centralbank Models IS–LM AD–AS Keynesiancross Multiplier Accelerator Phillipscurve Arrow–Debreu Harrod–Domar Solow–Swan Ramsey–Cass–Koopmans Overlappinggenerations Generalequilibrium DSGE Endogenousgrowth Matchingtheory Mundell–Fleming Overshooting NAIRU Relatedfields Econometrics Economicstatistics Monetaryeconomics Developmenteconomics Internationaleconomics SchoolsMainstream Keynesian Neo- New Monetarism Newclassical Realbusiness-cycletheory Stockholm Supply-side Newneoclassicalsynthesis Saltwaterandfreshwater Heterodox Austrian Chartalism ModernMonetaryTheory Ecological Post-Keynesian Circuitism Disequilibrium Marxian Marketmonetarism People FrançoisQuesnay AdamSmith ThomasRobertMalthus KarlMarx LéonWalras KnutWicksell IrvingFisher WesleyClairMitchell JohnMaynardKeynes AlvinHansen MichałKalecki GunnarMyrdal SimonKuznets JoanRobinson FriedrichHayek JohnHicks RichardStone HymanMinsky MiltonFriedman PaulSamuelson LawrenceKlein EdmundPhelps RobertLucasJr. EdwardC.Prescott PeterDiamond WilliamNordhaus JosephStiglitz ThomasJ.Sargent PaulKrugman N.GregoryMankiw Seealso Macroeconomicmodel Publicationsinmacroeconomics Economics Applied Microeconomics Politicaleconomy Mathematicaleconomics  Moneyportal  Businessportalvte Economicgrowthcanbedefinedastheincreaseorimprovementintheinflation-adjustedmarketvalueofthegoodsandservicesproducedbyaneconomyovertime.Statisticiansconventionallymeasuresuchgrowthasthepercentrateofincreaseintherealgrossdomesticproduct,orrealGDP.[1] Growthisusuallycalculatedinrealterms–i.e.,inflation-adjustedterms–toeliminatethedistortingeffectofinflationonthepricesofgoodsproduced.Measurementofeconomicgrowthusesnationalincomeaccounting.[2]Sinceeconomicgrowthismeasuredastheannualpercentchangeofgrossdomesticproduct(GDP),ithasalltheadvantagesanddrawbacksofthatmeasure.Theeconomicgrowth-ratesofcountriesarecommonlycomparedusingtheratiooftheGDPtopopulation(per-capitaincome).[3] The"rateofeconomicgrowth"referstothegeometricannualrateofgrowthinGDPbetweenthefirstandthelastyearoveraperiodoftime.ThisgrowthraterepresentsthetrendintheaveragelevelofGDPovertheperiod,andignoresanyfluctuationsintheGDParoundthistrend. Economistsrefertoanincreaseineconomicgrowthcausedbymoreefficientuseofinputs(increasedproductivityoflabor,ofphysicalcapital,ofenergyorofmaterials)asintensivegrowth.Incontrast,GDPgrowthcausedonlybyincreasesintheamountofinputsavailableforuse(increasedpopulation,forexample,ornewterritory)countsasextensivegrowth.[4] Developmentofnewgoodsandservicesalsogenerateseconomicgrowth.[citationneeded]Asitsohappens,intheU.S.about60%ofconsumerspendingin2013wentongoodsandservicesthatdidnotexistin1869.[5] Contents 1Measurement 2Long-termgrowth 2.1Growthandinnovation 3DeterminantsofpercapitaGDPgrowth 3.1Productivity 3.2Factoraccumulation 4Otherfactorsaffectinggrowth 4.1Humancapital 4.2Politicalinstitutions 4.3Entrepreneursandnewproducts 4.4Structuralchange 5Growththeories 5.1AdamSmith 5.2TheMalthusiantheory 5.3Classicalgrowththeory 5.4Solow–Swanmodel 5.5Endogenousgrowththeory 5.6Unifiedgrowththeory 6Inequalityandgrowth 6.1Theories 6.2Evidence:reducedform 6.3Evidence:mechanisms 7Importanceoflong-rungrowth 7.1Qualityoflife 7.2Equitablegrowth 8Environmentalimpact 8.1Globalwarming 8.2Resourceconstraint 8.3Energy 9Possibilityofinfiniteeconomicgrowth 10EconomicGrowthonanExample:Armenia 11Seealso 12References 13Furtherreading 14Externallinks 14.1Articlesandlectures 14.2Data Measurement[edit] Mainarticle:GrossdomesticproductTheeconomicgrowthrateiscalculatedfromdataonGDPestimatedbycountries'statisticalagencies.TherateofgrowthofGDPpercapitaiscalculatedfromdataonGDPandpeoplefortheinitialandfinalperiodsincludedintheanalysisoftheanalyst. Long-termgrowth[edit] Livingstandardsvarywidelyfromcountrytocountry,andfurthermore,thechangeinlivingstandardsovertimevarieswidelyfromcountrytocountry.BelowisatablewhichshowsGDPperpersonandannualizedperpersonGDPgrowthforaselectionofcountriesoveraperiodofabout100years.TheGDPperpersondataareadjustedforinflation,hencetheyare"real".GDPperperson(morecommonlycalled"percapita"GDP)istheGDPoftheentirecountrydividedbythenumberofpeopleinthecountry;GDPperpersonisconceptuallyanalogousto"averageincome". Economicgrowthbycountry[6] Country Period RealGDPperpersonatbeginningofperiod RealGDPperpersonatendofperiod Annualizedgrowthrate Japan 1890–2008 $1,504 $35,220 2.71% Brazil 1900–2008 $779 $10,070 2.40% Mexico 1900–2008 $1,159 $14,270 2.35% Germany 1870–2008 $2,184 $35,940 2.05% Canada 1870–2008 $2,375 $36,220 1.99% China 1900–2008 $716 $6,020 1.99% UnitedStatesofAmerica 1870–2008 $4,007 $46,970 1.80% Argentina 1900–2008 $2,293 $14,020 1.69% UnitedKingdom 1870–2008 $4,808 $36,130 1.47% India 1900–2008 $675 $2,960 1.38% Indonesia 1900–2008 $891 $3,830 1.36% Bangladesh 1900–2008 $623 $1,440 0.78% SeeminglysmalldifferencesinyearlyGDPgrowthleadtolargechangesinGDPwhencompoundedovertime.Forinstance,intheabovetable,GDPperpersonintheUnitedKingdomintheyear1870was$4,808.AtthesametimeintheUnitedStates,GDPperpersonwas$4,007,lowerthantheUKbyabout20%.However,in2008thepositionswerereversed:GDPperpersonwas$36,130intheUnitedKingdomand$46,970intheUnitedStates,i.e.GDPperpersonintheUSwas30%morethanitwasintheUK.Astheabovetableshows,thismeansthatGDPperpersongrew,onaverage,by1.80%peryearintheUSandby1.47%intheUK.Thus,adifferenceinGDPgrowthbyonlyafewtenthsofapercentperyearresultsinlargedifferencesinoutcomeswhenthegrowthispersistentoverageneration.ThisandotherobservationshaveledsomeeconomiststoviewGDPgrowthasthemostimportantpartofthefieldofmacroeconomics: ...ifwecanlearnaboutgovernmentpolicyoptionsthathaveevensmalleffectsonlong-termgrowthrates,wecancontributemuchmoretoimprovementsinstandardsoflivingthanhasbeenprovidedbytheentirehistoryofmacroeconomicanalysisofcountercyclicalpolicyandfine-tuning.Economicgrowth[is]thepartofmacroeconomicsthatreallymatters.[7] Growthandinnovation[edit] CreativeEconomicsThesystemofeconomicgrowthindevelopedregions IthasbeenobservedthatGDPgrowthisinfluencedbythesizeoftheeconomy.TherelationbetweenGDPgrowthandGDPacrossthecountriesataparticularpointoftimeisconvex.GrowthincreaseswithGDPreachesitsmaximumandthenbeginstodecline.Thereexistssomeextremumvalue.Thisisnotexactlymiddle-incometrap.Itisobservedforbothdevelopedanddevelopingeconomies.Actually,countrieshavingthispropertybelongtoconventionalgrowthdomain.However,theextremumcouldbeextendedbytechnologicalandpolicyinnovationsandsomecountriesmoveintoinnovativegrowthdomainwithhigherlimitingvalues.[8] DeterminantsofpercapitaGDPgrowth[edit] HistoricworldGDPpercapita Innationalincomeaccounting,percapitaoutputcanbecalculatedusingthefollowingfactors:outputperunitoflaborinput(laborproductivity),hoursworked(intensity),thepercentageoftheworking-agepopulationactuallyworking(participationrate)andtheproportionoftheworking-agepopulationtothetotalpopulation(demographics)."TherateofchangeofGDP/populationisthesumoftheratesofchangeofthesefourvariablesplustheircrossproducts."[9] Economistsdistinguishbetweenlong-runeconomicgrowthandshort-runeconomicchangesinproduction.Short-runvariationineconomicgrowthistermedthebusinesscycle.Generally,economistsattributetheupsanddownsinthebusinesscycletofluctuationsinaggregatedemand.Incontrast,economicgrowthisconcernedwiththelong-runtrendinproductionduetostructuralcausessuchastechnologicalgrowthandfactoraccumulation. Productivity[edit] Mainarticle:Productivity-improvingtechnologies Increasesinlaborproductivity(theratioofthevalueofoutputtolaborinput)havehistoricallybeenthemostimportantsourceofrealpercapitaeconomicgrowth.[10][11][12][13][14]"Inafamousestimate,MITProfessorRobertSolowconcludedthattechnologicalprogresshasaccountedfor80percentofthelong-termriseinU.S.percapitaincome,withincreasedinvestmentincapitalexplainingonlytheremaining20percent."[15] Increasesinproductivitylowertherealcostofgoods.Overthe20thcenturytherealpriceofmanygoodsfellbyover90%.[16] Economicgrowthhastraditionallybeenattributedtotheaccumulationofhumanandphysicalcapitalandtheincreaseinproductivityandcreationofnewgoodsarisingfromtechnologicalinnovation.[17]Furtherdivisionoflabour(specialization)isalsofundamentaltorisingproductivity.[18] Beforeindustrializationtechnologicalprogressresultedinanincreaseinthepopulation,whichwaskeptincheckbyfoodsupplyandotherresources,whichactedtolimitpercapitaincome,aconditionknownastheMalthusiantrap.[19][20]TherapideconomicgrowththatoccurredduringtheIndustrialRevolutionwasremarkablebecauseitwasinexcessofpopulationgrowth,providinganescapefromtheMalthusiantrap.[21]Countriesthatindustrializedeventuallysawtheirpopulationgrowthslowdown,aphenomenonknownasthedemographictransition. Increasesinproductivityarethemajorfactorresponsibleforpercapitaeconomicgrowth—thishasbeenespeciallyevidentsincethemid-19thcentury.Mostoftheeconomicgrowthinthe20thcenturywasduetoincreasedoutputperunitoflabor,materials,energy,andland(lessinputperwidget).Thebalanceofthegrowthinoutputhascomefromusingmoreinputs.Bothofthesechangesincreaseoutput.Theincreasedoutputincludedmoreofthesamegoodsproducedpreviouslyandnewgoodsandservices.[22] DuringtheIndustrialRevolution,mechanizationbegantoreplacehandmethodsinmanufacturing,andnewprocessesstreamlinedproductionofchemicals,iron,steel,andotherproducts.[23]Machinetoolsmadetheeconomicalproductionofmetalpartspossible,sothatpartscouldbeinterchangeable.[24](See:Interchangeableparts.) DuringtheSecondIndustrialRevolution,amajorfactorofproductivitygrowthwasthesubstitutionofinanimatepowerforhumanandanimallabor.Alsotherewasagreatincreaseinpowerassteam-poweredelectricitygenerationandinternalcombustionsupplantedlimitedwindandwaterpower.[23]Sincethatreplacement,thegreatexpansionoftotalpowerwasdrivenbycontinuousimprovementsinenergyconversionefficiency.[25]Othermajorhistoricalsourcesofproductivitywereautomation,transportationinfrastructures(canals,railroads,andhighways),[26][27]newmaterials(steel)andpower,whichincludessteamandinternalcombustionenginesandelectricity.Otherproductivityimprovementsincludedmechanizedagricultureandscientificagricultureincludingchemicalfertilizersandlivestockandpoultrymanagement,andtheGreenRevolution.Interchangeablepartsmadewithmachinetoolspoweredbyelectricmotorsevolvedintomassproduction,whichisuniversallyusedtoday.[24] Productivityloweredthecostofmostitemsintermsofworktimerequiredtopurchase.Realfoodpricesfellduetoimprovementsintransportationandtrade,mechanizedagriculture,fertilizers,scientificfarmingandtheGreenRevolution. Greatsourcesofproductivityimprovementinthelate19thcenturywererailroads,steamships,horse-pulledreapersandcombineharvesters,andsteam-poweredfactories.[28][29]Theinventionofprocessesformakingcheapsteelwereimportantformanyformsofmechanizationandtransportation.Bythelate19thcenturybothpricesandweeklyworkhoursfellbecauselesslabor,materials,andenergywererequiredtoproduceandtransportgoods.However,realwagesrose,allowingworkerstoimprovetheirdiet,buyconsumergoodsandaffordbetterhousing.[28] Massproductionofthe1920screatedoverproduction,whichwasarguablyoneofseveralcausesoftheGreatDepressionofthe1930s.[30]FollowingtheGreatDepression,economicgrowthresumed,aidedinpartbyincreaseddemandforexistinggoodsandservices,suchasautomobiles,telephones,radios,electricityandhouseholdappliances.Newgoodsandservicesincludedtelevision,airconditioningandcommercialaviation(after1950),creatingenoughnewdemandtostabilizetheworkweek.[31]ThebuildingofhighwayinfrastructuresalsocontributedtopostWorldWarIIgrowth,asdidcapitalinvestmentsinmanufacturingandchemicalindustries.[32]ThepostWorldWarIIeconomyalsobenefitedfromthediscoveryofvastamountsofoilaroundtheworld,particularlyintheMiddleEast.ByJohnW.Kendrick'sestimate,three-quartersofincreaseinU.S.percapitaGDPfrom1889to1957wasduetoincreasedproductivity.[14] EconomicgrowthintheUnitedStatessloweddownafter1973.[33]IncontrastgrowthinAsiahasbeenstrongsincethen,startingwithJapanandspreadingtoFourAsianTigers,China,SoutheastAsia,theIndiansubcontinentandAsiaPacific.[34]In1957SouthKoreahadalowerpercapitaGDPthanGhana,[35]andby2008itwas17timesashighasGhana's.[36]TheJapaneseeconomicgrowthhasslackenedconsiderablysincethelate1980s. ProductivityintheUnitedStatesgrewatanincreasingratethroughoutthe19thcenturyandwasmostrapidintheearlytomiddledecadesofthe20thcentury.[37][38][39][40][41]U.S.productivitygrowthspikedtowardstheendofthecenturyin1996–2004,duetoanaccelerationintherateoftechnologicalinnovationknownasMoore'slaw.[42][43][44][45]After2004U.S.productivitygrowthreturnedtothelowlevelsof1972–96.[42] Factoraccumulation[edit] Capitalineconomicsordinarilyreferstophysicalcapital,whichconsistsofstructures(largestcomponentofphysicalcapital)andequipmentusedinbusiness(machinery,factoryequipment,computersandofficeequipment,constructionequipment,businessvehicles,medicalequipment,etc.).[2]Uptoapointincreasesintheamountofcapitalperworkerareanimportantcauseofeconomicoutputgrowth.Capitalissubjecttodiminishingreturnsbecauseoftheamountthatcanbeeffectivelyinvestedandbecauseofthegrowingburdenofdepreciation.Inthedevelopmentofeconomictheory,thedistributionofincomewasconsideredtobebetweenlaborandtheownersoflandandcapital.[46]InrecentdecadestherehavebeenseveralAsiancountrieswithhighratesofeconomicgrowthdrivenbycapitalinvestment.[47] Theworkweekdeclinedconsiderablyoverthe19thcentury.[48][49]Bythe1920stheaverageworkweekintheU.S.was49hours,buttheworkweekwasreducedto40hours(afterwhichovertimepremiumwasapplied)aspartoftheNationalIndustrialRecoveryActof1933. Demographicfactorsmayinfluencegrowthbychangingtheemploymenttopopulationratioandthelaborforceparticipationrate.[10]Industrializationcreatesademographictransitioninwhichbirthratesdeclineandtheaverageageofthepopulationincreases. Womenwithfewerchildrenandbetteraccesstomarketemploymenttendtojointhelaborforceinhigherpercentages.Thereisareduceddemandforchildlaborandchildrenspendmoreyearsinschool.TheincreaseinthepercentageofwomeninthelaborforceintheU.S.contributedtoeconomicgrowth,asdidtheentranceofthebabyboomersintotheworkforce.[10] See:Spendingwave Otherfactorsaffectinggrowth[edit] Humancapital[edit] Manytheoreticalandempiricalanalysesofeconomicgrowthattributeamajorroletoacountry'slevelofhumancapital,definedastheskillsofthepopulationortheworkforce.Humancapitalhasbeenincludedinbothneoclassicalandendogenousgrowthmodels.[50][51][52] Acountry'slevelofhumancapitalisdifficulttomeasuresinceitiscreatedathome,atschool,andonthejob.Economistshaveattemptedtomeasurehumancapitalusingnumerousproxies,includingthepopulation'slevelofliteracy,itslevelofnumeracy,itslevelofbookproduction/capita,itsaveragelevelofformalschooling,itsaveragetestscoreoninternationaltests,anditscumulativedepreciatedinvestmentinformalschooling.Themostcommonly-usedmeasureofhumancapitalisthelevel(averageyears)ofschoolattainmentinacountry,buildinguponthedatadevelopmentofRobertBarroandJong-WhaLee.[53]ThismeasureiswidelyusedbecauseBarroandLeeprovidedatafornumerouscountriesinfive-yearintervalsforalongperiodoftime. Oneproblemwiththeschoolingattainmentmeasureisthattheamountofhumancapitalacquiredinayearofschoolingisnotthesameatalllevelsofschoolingandisnotthesameinallcountries.Thismeasurealsopresumesthathumancapitalisonlydevelopedinformalschooling,contrarytotheextensiveevidencethatfamilies,neighborhoods,peers,andhealthalsocontributetothedevelopmentofhumancapital.Despitethesepotentiallimitations,TheodoreBretonhasshownthatthismeasurecanrepresenthumancapitalinlog-lineargrowthmodelsbecauseacrosscountriesGDP/adulthasalog-linearrelationshiptoaverageyearsofschooling,whichisconsistentwiththelog-linearrelationshipbetweenworkers'personalincomesandyearsofschoolingintheMincermodel.[54] Economicgrowthrates(percent,vertical)v.standardizedtestsofstudentachievementindifferentregions,bothadjustedforGDPpercapitain1960 EricHanushekandDennisKimkointroducedmeasuresofstudents'mathematicsandscienceskillsfrominternationalassessmentsintogrowthanalysis.[55]Theyfoundthatthismeasureofhumancapitalwasverysignificantlyrelatedtoeconomicgrowth.EricHanushekandLudgerWößmannhaveextendedthisanalysis.[56][57]TheodoreBretonshowsthatthecorrelationbetweeneconomicgrowthandstudents'averagetestscoresinHanushekandWößmann'sanalysesisactuallyduetotherelationshipincountrieswithlessthaneightyearsofschooling.Heshowsthateconomicgrowthisnotcorrelatedwithaveragescoresinmoreeducatedcountries.[54]HanushekandWößmannfurtherinvestigatewhethertherelationshipofknowledgecapitaltoeconomicgrowthiscausal.Theyshowthatthelevelofstudents'cognitiveskillscanexplaintheslowgrowthinLatinAmericaandtherapidgrowthinEastAsia.[58] JoergBatenandJanLuitenvanZandenemploybookproductionpercapitaasaproxyforsophisticatedliteracycapabilitiesandfindthat"Countrieswithhighlevelsofhumancapitalformationinthe18thcenturyinitiatedorparticipatedintheindustrializationprocessofthe19thcentury,whereascountrieswithlowlevelsofhumancapitalformationwereunabletodoso,amongthemmanyoftoday'sLessDevelopedCountriessuchasIndia,Indonesia,andChina."[59] Politicalinstitutions[edit] Seealso:GreatDivergence§ Propertyrights,GreatDivergence§ Efficiencyofmarketsandstateintervention,andGreatDivergence§ Stateprohibitionofnewtechnology “Asinstitutionsinfluencebehaviorandincentivesinreallife,theyforgethesuccessorfailureofnations.”[60] Ineconomicsandeconomichistory,thetransitiontocapitalismfromearliereconomicsystemswasenabledbytheadoptionofgovernmentpoliciesthatfacilitatedcommerceandgaveindividualsmorepersonalandeconomicfreedom.Theseincludednewlawsfavorabletotheestablishmentofbusiness,includingcontractlawandlawsprovidingfortheprotectionofprivateproperty,andtheabolishmentofanti-usurylaws.[61][62] MuchofthisliteraturewasbuiltonthesuccessstoryoftheBritishstateaftertheGloriousRevolutionof1688,inwhichhighfiscalcapacitycombinedwithconstraintsonthepowerofthekinggeneratedsomerespectfortheruleoflaw.[63][64][65][60]However,othershavequestionedthatthisinstitutionalformulaisnotsoeasilyreplicableelsewhereasachangeintheConstitution—andthetypeofinstitutionscreatedbythatchange—doesnotnecessarilycreateachangeinpoliticalpoweriftheeconomicpowersofthatsocietyarenotalignedwiththenewsetofruleoflawinstitutions.[66]InEngland,adramaticincreaseinthestate'sfiscalcapacityfollowedthecreationofconstraintsonthecrown,butelsewhereinEuropeincreasesinstatecapacityhappenedbeforemajorruleoflawreforms.[67] Therearemanydifferentwaysthroughwhichstatesachievedstate(fiscal)capacityandthisdifferentcapacityacceleratedorhinderedtheireconomicdevelopment.Thankstotheunderlyinghomogeneityofitslandandpeople,EnglandwasabletoachieveaunifiedlegalandfiscalsystemsincetheMiddleAgesthatenabledittosubstantiallyincreasethetaxesitraisedafter1689.[67]Ontheotherhand,theFrenchexperienceofstatebuildingfacedmuchstrongerresistancefromlocalfeudalpowerskeepingitlegallyandfiscallyfragmenteduntiltheFrenchRevolutiondespitesignificantincreasesinstatecapacityduringtheseventeenthcentury.[68][69]Furthermore,PrussiaandtheHabsburgempire—muchmoreheterogeneousstatesthanEngland—wereabletoincreasestatecapacityduringtheeighteenthcenturywithoutconstrainingthepowersoftheexecutive.[67]Nevertheless,itisunlikelythatacountrywillgenerateinstitutionsthatrespectpropertyrightsandtheruleoflawwithouthavinghadfirstintermediatefiscalandpoliticalinstitutionsthatcreateincentivesforelitestosupportthem.Manyoftheseintermediatelevelinstitutionsreliedoninformalprivate-orderarrangementsthatcombinedwithpublic-orderinstitutionsassociatedwithstates,tolaythefoundationsofmodernruleoflawstates.[67] Inmanypooranddevelopingcountriesmuchlandandhousingareheldoutsidetheformalorlegalpropertyownershipregistrationsystem.Inmanyurbanareasthepoor"invade"privateorgovernmentlandtobuildtheirhouses,sotheydonotholdtitletotheseproperties.Muchunregisteredpropertyisheldininformalformthroughvariouspropertyassociationsandotherarrangements.Reasonsforextra-legalownershipincludeexcessivebureaucraticredtapeinbuyingpropertyandbuilding.Insomecountries,itcantakeover200stepsandupto14yearstobuildongovernmentland.Othercausesofextra-legalpropertyarefailurestonotarizetransactiondocumentsorhavingdocumentsnotarizedbutfailingtohavethemrecordedwiththeofficialagency.[70] Nothavingclearlegaltitletopropertylimitsitspotentialtobeusedascollateraltosecureloans,deprivingmanypoorcountriesofoneoftheirmostimportantpotentialsourcesofcapital.Unregisteredbusinessesandlackofacceptedaccountingmethodsareotherfactorsthatlimitpotentialcapital.[70] Businessesandindividualsparticipatinginunreportedbusinessactivityandownersofunregisteredpropertyfacecostssuchasbribesandpay-offsthatoffsetmuchofanytaxesavoided.[70] "DemocracyDoesCauseGrowth",accordingtoAcemogluetal.Specifically,"democracyincreasesfutureGDPbyencouraginginvestment,increasingschooling,inducingeconomicreforms,improvingpublicgoodsprovision,andreducingsocialunrest."[71]UNESCOandtheUnitedNationsalsoconsiderthatculturalpropertyprotection,high-qualityeducation,culturaldiversityandsocialcohesioninarmedconflictsareparticularlynecessaryforqualitativegrowth.[72] AccordingtoDaronAcemoglu,SimonJohnsonandJamesRobinson,thepositivecorrelationbetweenhighincomeandcoldclimateisaby-productofhistory.Europeansadoptedverydifferentcolonizationpoliciesindifferentcolonies,withdifferentassociatedinstitutions.Inplaceswherethesecolonizersfacedhighmortalityrates(e.g.,duetothepresenceoftropicaldiseases),theycouldnotsettlepermanently,andtheywerethusmorelikelytoestablishextractiveinstitutions,whichpersistedafterindependence;inplaceswheretheycouldsettlepermanently(e.g.thosewithtemperateclimates),theyestablishedinstitutionswiththisobjectiveinmindandmodeledthemafterthoseintheirEuropeanhomelands.Inthese'neo-Europes'betterinstitutionsinturnproducedbetterdevelopmentoutcomes.Thus,althoughothereconomistsfocusontheidentityortypeoflegalsystemofthecolonizerstoexplaininstitutions,theseauthorslookattheenvironmentalconditionsinthecoloniestoexplaininstitutions.Forinstance,formercolonieshaveinheritedcorruptgovernmentsandgeopoliticalboundaries(setbythecolonizers)thatarenotproperlyplacedregardingthegeographicallocationsofdifferentethnicgroups,creatinginternaldisputesandconflictsthathinderdevelopment.Inanotherexample,societiesthatemergedincolonieswithoutsolidnativepopulationsestablishedbetterpropertyrightsandincentivesforlong-terminvestmentthanthosewherenativepopulationswerelarge.[73] InWhyNationsFail,AcemogluandRobinsonsaidthattheEnglishinNorthAmericastartedbytryingtorepeatthesuccessoftheSpanishConquistadorsinextractingwealth(especiallygoldandsilver)fromthecountriestheyhadconquered.ThissystemrepeatedlyfailedfortheEnglish.Theirsuccessesrestedongivinglandandavoiceinthegovernmenttoeverymalesettlertoincentivizeproductivelabor.InVirginiaittooktwelveyearsandmanydeathsfromstarvationbeforethegovernordecidedtotrydemocracy.[74] Entrepreneursandnewproducts[edit] Policymakersandscholarsfrequentlyemphasizetheimportanceofentrepreneurshipforeconomicgrowth.However,surprisinglyfewresearchempiricallyexamineandquantifyentrepreneurship'simpactongrowth.Thisisduetoendogeneity—forcesthatdriveeconomicgrowthalsodriveentrepreneurship.Inotherwords,theempiricalanalysisoftheimpactofentrepreneurshipongrowthisdifficultbecauseofthejointdeterminationofentrepreneurshipandeconomicgrowth.Afewpapersusequasi-experimentaldesigns,andhavefoundthatentrepreneurshipandthedensityofsmallbusinessesindeedhaveacausalimpactonregionalgrowth.[75][76] Anothermajorcauseofeconomicgrowthistheintroductionofnewproductsandservicesandtheimprovementofexistingproducts.Newproductscreatedemand,whichisnecessarytooffsetthedeclineinemploymentthatoccursthroughlabor-savingtechnology(andtoalesserextentemploymentdeclinesduetosavingsinenergyandmaterials).[43][77]IntheU.S.by2013about60%ofconsumerspendingwasforgoodsandservicesthatdidnotexistin1869.Also,thecreationofnewserviceshasbeenmoreimportantthaninventionofnewgoods.[78] Structuralchange[edit] Mainarticle:Rostow'sstagesofgrowth EconomicgrowthintheU.S.andotherdevelopedcountrieswentthroughphasesthataffectedgrowththroughchangesinthelaborforceparticipationrateandtherelativesizesofeconomicsectors.Thetransitionfromanagriculturaleconomytomanufacturingincreasedthesizeofthesectorwithhighoutputperhour(thehigh-productivitymanufacturingsector),whilereducingthesizeofthesectorwithloweroutputperhour(thelowerproductivityagriculturalsector).Eventuallyhighproductivitygrowthinmanufacturingreducedthesectorsize,aspricesfellandemploymentshrankrelativetoothersectors.[79][80]Theserviceandgovernmentsectors,whereoutputperhourandproductivitygrowthislow,sawincreasesintheirsharesoftheeconomyandemploymentduringthe1990s.[10]Thepublicsectorhassincecontracted,whiletheserviceeconomyexpandedinthe2000s. Thestructuralchangecouldalsobeviewedfromanotherangle.Itispossibletodividerealeconomicgrowthintotwocomponents:anindicatorofextensiveeconomicgrowth—the‘quantitative’GDP—andanindicatoroftheimprovementofthequalityofgoodsandservices—the‘qualitative’GDP.[81] Growththeories[edit] AdamSmith[edit] AdamSmithpioneeredmoderneconomicgrowthandperformancetheoryinhisbookTheWealthofNationsfirstpublishedin1776.Thebookexaminedthecontributionstoproductionoflabor,landandcapital.Itdemonstratedtheeconomicimportanceoflargebuoyantmarketsandindustrialspecialization.Italsodocumentedtheinfluenceofnon-economicfactorssuchasthepolitical-legalenvironmentonnationalprosperity.Smith'sstudycombinedbasiceconomictheorywithpersonalobservationandhistoricaldocumentaryreferences.[82] TheMalthusiantheory[edit] Mainarticle:Malthusianism TheMalthusiantheoryproposesthatovermostofhumanhistorytechnologicalprogresscausedlargerpopulationgrowthbuthadnoimpactonincomepercapitainthelongrun.Accordingtothetheory,whiletechnologicallyadvancedeconomiesoverthisepochwerecharacterizedbyhigherpopulationdensity,theirlevelofincomepercapitawasnotdifferentfromthoseamongtechnologicallyregressedsociety. TheconceptualfoundationsoftheMalthusiantheorywereformedbyThomasMalthus,[83]andamodernrepresentationoftheseapproachisprovidedbyAshrafandGalor.[84]InlinewiththepredictionsoftheMalthusiantheory,across-countryanalysisfindsasignificantpositiveeffectofthetechnologicallevelonpopulationdensityandaninsignificanteffectonincomepercapitasignificantlyovertheyears1–1500.[84] Classicalgrowththeory[edit] Inclassical(Ricardian)economics,thetheoryofproductionandthetheoryofgrowtharebasedonthetheoryorlawofvariableproportions,wherebyincreasingeitherofthefactorsofproduction(labororcapital),whileholdingtheotherconstantandassumingnotechnologicalchange,willincreaseoutput,butatadiminishingratethateventuallywillapproachzero.TheseconceptshavetheiroriginsinThomasMalthus’stheorizingaboutagriculture.Malthus'sexamplesincludedthenumberofseedsharvestedrelativetothenumberofseedsplanted(capital)onaplotoflandandthesizeoftheharvestfromaplotoflandversusthenumberofworkersemployed.[85]SeealsoDiminishingreturns. Criticismsofclassicalgrowththeoryarethattechnology,animportantfactorineconomicgrowth,isheldconstantandthateconomiesofscaleareignored.[86] Onepopulartheoryinthe1940swasthebigpushmodel,whichsuggestedthatcountriesneededtojumpfromonestageofdevelopmenttoanotherthroughavirtuouscycle,inwhichlargeinvestmentsininfrastructureandeducationcoupledwithprivateinvestmentswouldmovetheeconomytoamoreproductivestage,breakingfreefromeconomicparadigmsappropriatetoalowerproductivitystage.[87]Theideawasrevivedandformulatedrigorously,inthelate1980sbyKevinMurphy,AndreiShleiferandRobertVishny.[88] Solow–Swanmodel[edit] Mainarticle:Solow–Swanmodel RobertSolowandTrevorSwandevelopedwhateventuallybecamethemainmodelusedingrowtheconomicsinthe1950s.[89][90]Thismodelassumesthattherearediminishingreturnstocapitalandlabor.Capitalaccumulatesthroughinvestment,butitslevelorstockcontinuallydecreasesduetodepreciation.Duetothediminishingreturnstocapital,withincreasesincapital/workerandabsenttechnologicalprogress,economicoutput/workereventuallyreachesapointwherecapitalperworkerandeconomicoutput/workerremainconstantbecauseannualinvestmentincapitalequalsannualdepreciation.Thisconditioniscalledthe'steadystate'. IntheSolow–Swanmodelifproductivityincreasesthroughtechnologicalprogress,thenoutput/workerincreasesevenwhentheeconomyisinthesteadystate.Ifproductivityincreasesataconstantrate,output/workeralsoincreasesatarelatedsteady-staterate.Asaconsequence,growthinthemodelcanoccureitherbyincreasingtheshareofGDPinvestedorthroughtechnologicalprogress.ButatwhatevershareofGDPinvested,capital/workereventuallyconvergesonthesteadystate,leavingthegrowthrateofoutput/workerdeterminedonlybytherateoftechnologicalprogress.Asaconsequence,withworldtechnologyavailabletoallandprogressingataconstantrate,allcountrieshavethesamesteadystaterateofgrowth.EachcountryhasadifferentlevelofGDP/workerdeterminedbytheshareofGDPitinvests,butallcountrieshavethesamerateofeconomicgrowth.ImplicitlyinthismodelrichcountriesarethosethathaveinvestedahighshareofGDPforalongtime.PoorcountriescanbecomerichbyincreasingtheshareofGDPtheyinvest.Oneimportantpredictionofthemodel,mostlyborneoutbythedata,isthatofconditionalconvergence;theideathatpoorcountrieswillgrowfasterandcatchupwithrichcountriesaslongastheyhavesimilarinvestment(andsaving)ratesandaccesstothesametechnology. TheSolow–Swanmodelisconsideredan"exogenous"growthmodelbecauseitdoesnotexplainwhycountriesinvestdifferentsharesofGDPincapitalnorwhytechnologyimprovesovertime.Instead,therateofinvestmentandtherateoftechnologicalprogressareexogenous.Thevalueofthemodelisthatitpredictsthepatternofeconomicgrowthoncethesetworatesarespecified.Itsfailuretoexplainthedeterminantsoftheseratesisoneofitslimitations. Althoughtherateofinvestmentinthemodelisexogenous,undercertainconditionsthemodelimplicitlypredictsconvergenceintheratesofinvestmentacrosscountries.Inaglobaleconomywithaglobalfinancialcapitalmarket,financialcapitalflowstothecountrieswiththehighestreturnoninvestment.IntheSolow-Swanmodelcountrieswithlesscapital/worker(poorcountries)haveahigherreturnoninvestmentduetothediminishingreturnstocapital.Asaconsequence,capital/workerandoutput/workerinaglobalfinancialcapitalmarketshouldconvergetothesamelevelinallcountries.[91]Sincehistoricallyfinancialcapitalhasnotflowedtothecountrieswithlesscapital/worker,thebasicSolow–Swanmodelhasaconceptualflaw.Beginninginthe1990s,thisflawhasbeenaddressedbyaddingadditionalvariablestothemodelthatcanexplainwhysomecountriesarelessproductivethanothersand,therefore,donotattractflowsofglobalfinancialcapitaleventhoughtheyhaveless(physical)capital/worker. Inpractice,convergencewasrarelyachieved.In1957,SolowappliedhismodeltodatafromtheU.S.grossnationalproducttoestimatecontributions.Thisshowedthattheincreaseincapitalandlaborstockonlyaccountedforabouthalfoftheoutput,whilethepopulationincreaseadjustmentstocapitalexplainedeighth.ThisremainingunaccountedgrowthoutputisknownastheSolowResidual.HeretheAof(t)"technicalprogress"wasthereasonforincreasedoutput.Nevertheless,themodelstillhadflaws.Itgavenoroomforpolicytoinfluencethegrowthrate.FewattemptswerealsomadebytheRANDCorporationthenon-profitthinktankandfrequentlyvisitingeconomistKennethArrowtoworkoutthekinksinthemodel.Theysuggestedthatnewknowledgewasindivisibleandthatitisendogenouswithacertainfixedcost.Arrow'sfurtherexplainedthatnewknowledgeobtainedbyfirmscomesfrompracticeandbuiltamodelthat"knowledge"accumulatedthroughexperience.[92] AccordingtoHarrod,thenaturalgrowthrateisthemaximumrateofgrowthallowedbytheincreaseofvariableslikepopulationgrowth,technologicalimprovementandgrowthinnaturalresources. Infact,thenaturalgrowthrateisthehighestattainablegrowthratewhichwouldbringaboutthefullestpossibleemploymentoftheresourcesexistingintheeconomy. Endogenousgrowththeory[edit] Mainarticle:Endogenousgrowththeory UnsatisfiedwiththeassumptionofexogenoustechnologicalprogressintheSolow–Swanmodel,economistsworkedto"endogenize"(i.e.,explainit"fromwithin"themodels)productivitygrowthinthe1980s;theresultingendogenousgrowththeory,mostnotablyadvancedbyRobertLucas,Jr.andhisstudentPaulRomer,includesamathematicalexplanationoftechnologicaladvancement.[17][93]Thismodelalsoincorporatedanewconceptofhumancapital,theskillsandknowledgethatmakeworkersproductive.Unlikephysicalcapital,humancapitalhasincreasingratesofreturn.Researchdoneinthisareahasfocusedonwhatincreaseshumancapital(e.g.education)ortechnologicalchange(e.g.innovation).[94] OnMemorialDayweekendin1988,aconferenceinBuffalobroughttogetherthegreatmindsineconomicstheideawastoevaluatetheconflictingtheoriesofgrowth.Romer,Krugman,Barro,Beckerwereinattendancealongwithmanyotherrisingstarsandhighprofiledeconomistsofthetime.AmongstmanypapersthatdaytheonethatstoodoutwasRomer's"MicroFoundationsforAggregateTechnologicalChange."TheMicroFoundationclaimedthatendogenoustechnologicalchangehadtheconceptofIntellectualPropertyimbeddedandthatknowledgeisaninputandoutputofproduction.Romerarguedthatoutcomestothenationalgrowthratesweresignificantlyaffectedbypublicpolicy,tradeactivity,andintellectualproperty.Hestressedthatcumulativecapitalandspecializationwerekey,andthatnotonlypopulationgrowthcanincreasecapitalofknowledge,itwashumancapitalthatisspecificallytrainedinharvestingnewideas.[95] Whileintellectualpropertymaybeimportant,Baker(2016)citesmultiplesourcesclaimingthat"strongerpatentprotectionseemstobeassociatedwithslowergrowth".That'sparticularlytrueforpatentsintheethicalhealthcareindustry.Ineffecttaxpayerspaytwicefornewdrugsanddiagnosticprocedures:Firstintaxsubsidiesandsecondforthehighpricesofdiagnosticprocedurestreatments.Iftheresultsofresearchpaidbytaxpayerswereplacedinthepublicdomain,Bakerclaimsthatpeopleeverywherewouldbehealthier,becausebetterdiagnosesandtreatmentwouldbemoreaffordabletheworldover.[96] OnebranchofendogenousgrowththeorywasdevelopedonthefoundationsoftheSchumpeteriantheory,namedafterthe20th-centuryAustrianeconomistJosephSchumpeter.[97]Theapproachexplainsgrowthasaconsequenceofinnovationandaprocessofcreativedestructionthatcapturesthedualnatureoftechnologicalprogress:intermsofcreation,entrepreneursintroducenewproductsorprocessesinthehopethattheywillenjoytemporarymonopoly-likeprofitsastheycapturemarkets.Indoingso,theymakeoldtechnologiesorproductsobsolete.Thiscanbeseenasanannulmentofprevioustechnologies,whichmakesthemobsolete,and"destroystherentsgeneratedbypreviousinnovations".[98]: 855 [99]AmajormodelthatillustratesSchumpeteriangrowthistheAghion–Howittmodel [ru].[100][98] Unifiedgrowththeory[edit] Mainarticle:Unifiedgrowththeory UnifiedgrowththeorywasdevelopedbyOdedGalorandhisco-authorstoaddresstheinabilityofendogenousgrowththeorytoexplainkeyempiricalregularitiesinthegrowthprocessesofindividualeconomiesandtheworldeconomyasawhole.[101][102]Unlikeendogenousgrowththeorythatfocusesentirelyonthemoderngrowthregimeandisthereforeunabletoexplaintherootsofinequalityacrossnations,unifiedgrowththeorycapturesinasingleframeworkthefundamentalphasesoftheprocessofdevelopmentinthecourseofhumanhistory:(i)theMalthusianepochthatwasprevalentovermostofhumanhistory,(ii)theescapefromtheMalthusiantrap,(iii)theemergenceofhumancapitalasacentralelementinthegrowthprocess,(iv)theonsetofthefertilitydecline,(v)theoriginsofthemoderneraofsustainedeconomicgrowth,and(vi)therootsofdivergenceinincomepercapitaacrossnationsinthepasttwocenturies.Thetheorysuggeststhatduringmostofhumanexistence,technologicalprogresswasoffsetbypopulationgrowth,andlivingstandardswerenearsubsistenceacrosstimeandspace.However,thereinforcinginteractionbetweentherateoftechnologicalprogressandthesizeandcompositionofthepopulationhasgraduallyincreasedthepaceoftechnologicalprogress,enhancingtheimportanceofeducationintheabilityofindividualstoadapttothechangingtechnologicalenvironment.Theriseintheallocationofresourcestowardseducationtriggeredafertilitydeclineenablingeconomiestoallocatealargershareofthefruitsoftechnologicalprogresstoasteadyincreaseinincomepercapita,ratherthantowardsthegrowthofpopulation,pavingthewayfortheemergenceofsustainedeconomicgrowth.Thetheoryfurthersuggeststhatvariationsinbiogeographicalcharacteristics,aswellasculturalandinstitutionalcharacteristics,havegeneratedadifferentialpaceoftransitionfromstagnationtogrowthacrosscountriesandconsequentlydivergenceintheirincomepercapitaoverthepasttwocenturies.[101][102] Inequalityandgrowth[edit] Theories[edit] Furtherinformation:EconomicinequalityandEffectsofeconomicinequality Theprevailingviewsabouttheroleofinequalityinthegrowthprocesshasradicallyshiftedinthepastcentury.[103] Theclassicalperspective,asexpressedbyAdamSmith,andothers,suggeststhatinequalityfostersthegrowthprocess.[104][105]Specifically,sincetheaggregatesavingincreaseswithinequalityduetohigherpropertytosaveamongthewealthy,theclassicalviewpointsuggeststhatinequalitystimulatescapitalaccumulationandthereforeeconomicgrowth.[106] TheNeoclassicalperspectivethatisbasedonrepresentativeagentapproachdeniestheroleofinequalityinthegrowthprocess.Itsuggeststhatwhilethegrowthprocessmayaffectinequality,incomedistributionhasnoimpactonthegrowthprocess. Themodernperspectivewhichhasemergedinthelate1980ssuggests,incontrast,thatincomedistributionhasasignificantimpactonthegrowthprocess.Themodernperspective,originatedbyGalorandZeira,[107][108]highlightstheimportantroleofheterogeneityinthedeterminationofaggregateeconomicactivity,andeconomicgrowth.Inparticular,GalorandZeiraarguethatsincecreditmarketsareimperfect,inequalityhasanenduringimpactonhumancapitalformation,thelevelofincomepercapita,andthegrowthprocess.[109]Incontrasttotheclassicalparadigm,whichunderlinedthepositiveimplicationsofinequalityforcapitalformationandeconomicgrowth,GalorandZeiraarguethatinequalityhasanadverseeffectonhumancapitalformationandthedevelopmentprocess,inallbuttheverypooreconomies. Latertheoreticaldevelopmentshavereinforcedtheviewthatinequalityhasanadverseeffectonthegrowthprocess.Specifically,AlesinaandRodrikandPerssonandTabelliniadvanceapoliticaleconomymechanismandarguethatinequalityhasanegativeimpactoneconomicdevelopmentsinceitcreatesapressurefordistortionaryredistributivepoliciesthathaveanadverseeffectoninvestmentandeconomicgrowth.[110][111] Inaccordancewiththecreditmarketimperfectionapproach,astudybyRobertoPerottishowedthatinequalityisassociatedwithlowerlevelofhumancapitalformation(education,experience,apprenticeship)andhigherleveloffertility,whilelowerlevelofhumancapitalisassociatedwithlowergrowthandlowerlevelsofeconomicgrowth.Incontrast,hisexaminationofthepoliticaleconomychannelfoundnosupportforthepoliticaleconomymechanism.[112]Consequently,thepoliticaleconomyperspectiveontherelationshipbetweeninequalityandgrowthhavebeenrevisedandlaterstudieshaveestablishedthatinequalitymayprovideanincentivefortheelitetoblockredistributivepoliciesandinstitutionalchanges.Inparticular,inequalityinthedistributionoflandownershipprovidesthelandedelitewithanincentivetolimitthemobilityofruralworkersbydeprivingthemfromeducationandbyblockingthedevelopmentoftheindustrialsector.[113] Aunifiedtheoryofinequalityandgrowththatcapturesthatchangingroleofinequalityinthegrowthprocessoffersareconciliationbetweentheconflictingpredictionsofclassicalviewpointthatmaintainedthatinequalityisbeneficialforgrowthandthemodernviewpointthatsuggeststhatinthepresenceofcreditmarketimperfections,inequalitypredominantlyresultsinunderinvestmentinhumancapitalandlowereconomicgrowth.Thisunifiedtheoryofinequalityandgrowth,developedbyOdedGalorandOmerMoav,[114]suggeststhattheeffectofinequalityonthegrowthprocesshasbeenreversedashumancapitalhasreplacedphysicalcapitalasthemainengineofeconomicgrowth.Intheinitialphasesofindustrialization,whenphysicalcapitalaccumulationwasthedominatingsourceofeconomicgrowth,inequalityboostedthedevelopmentprocessbydirectingresourcestowardindividualswithhigherpropensitytosave.However,inlaterphases,ashumancapitalbecomethemainengineofeconomicgrowth,moreequaldistributionofincome,inthepresenceofcreditconstraints,stimulatedinvestmentinhumancapitalandeconomicgrowth. In2013,FrencheconomistThomasPikettypostulatedthatinperiodswhentheaverageannualrateonreturnoninvestmentincapital(r)exceedstheaverageannualgrowthineconomicoutput(g),therateofinequalitywillincrease.[115]AccordingtoPiketty,thisisthecasebecausewealththatisalreadyheldorinherited,whichisexpectedtogrowattherater,willgrowataratefasterthanwealthaccumulatedthroughlabor,whichismorecloselytiedtog.Anadvocateofreducinginequalitylevels,Pikettysuggestslevyingaglobalwealthtaxinordertoreducethedivergenceinwealthcausedbyinequality. Evidence:reducedform[edit] ThereducedformempiricalrelationshipbetweeninequalityandgrowthwasstudiedbyAlbertoAlesinaandDaniRodrik,andTorstenPerssonandGuidoTabellini.[110][111]Theyfindthatinequalityisnegativelyassociatedwitheconomicgrowthinacross-countryanalysis. RobertBarroreexaminedthereducedformrelationshipbetweeninequalityoneconomicgrowthinapanelofcountries.[116]Hearguesthatthereis"littleoverallrelationbetweenincomeinequalityandratesofgrowthandinvestment".However,hisempiricalstrategylimitsitsapplicabilitytotheunderstandingoftherelationshipbetweeninequalityandgrowthforseveralreasons.First,hisregressionanalysiscontrolforeducation,fertility,investment,anditthereforeexcludes,byconstruction,theimportanteffectofinequalityongrowthviaeducation,fertility,andinvestment.Hisfindingssimplyimplythatinequalityhasnodirecteffectongrowthbeyondtheimportantindirecteffectsthroughthemainchannelsproposedintheliterature.Second,hisstudyanalyzestheeffectofinequalityontheaveragegrowthrateinthefollowing10years.However,existingtheoriessuggestthattheeffectofinequalitywillbeobservedmuchlater,asisthecaseinhumancapitalformation,forinstance.Third,theempiricalanalysisdoesnotaccountforbiasesthataregeneratedbyreversecausalityandomittedvariables. Recentpapersbasedonsuperiordata,findnegativerelationshipbetweeninequalityandgrowth.AndrewBergandJonathanOstryoftheInternationalMonetaryFund,findthat"lowernetinequalityisrobustlycorrelatedwithfasterandmoredurablegrowth,controllingforthelevelofredistribution".[117]Likewise,DierkHerzerandSebastianVollmerfindthatincreasedincomeinequalityreduceseconomicgrowth.[118] Evidence:mechanisms[edit] TheGalorandZeira'smodelpredictsthattheeffectofrisinginequalityonGDPpercapitaisnegativeinrelativelyrichcountriesbutpositiveinpoorcountries.[107][108]Thesetestablepredictionshavebeenexaminedandconfirmedempiricallyinrecentstudies.[119][120]Inparticular,BrücknerandLedermantestthepredictionofthemodelbyinthepanelofcountriesduringtheperiod1970–2010,byconsideringtheimpactoftheinteractionbetweenthelevelofincomeinequalityandtheinitiallevelofGDPpercapita.Inlinewiththepredictionsofthemodel,theyfindthatatthe25thpercentileofinitialincomeintheworldsample,a1percentagepointincreaseintheGinicoefficientincreasesincomepercapitaby2.3%,whereasatthe75thpercentileofinitialincomea1percentagepointincreaseintheGinicoefficientdecreasesincomepercapitaby-5.3%.Moreover,theproposedhumancapitalmechanismthatmediatestheeffectofinequalityongrowthintheGalor-Zeiramodelisalsoconfirmed.Increasesinincomeinequalityincreasehumancapitalinpoorcountriesbutreduceitinhighandmiddle-incomecountries. ThisrecentsupportforthepredictionsoftheGalor-Zeiramodelisinlinewithearlierfindings.RobertoPerottishowedthatinaccordancewiththecreditmarketimperfectionapproach,developedbyGalorandZeira,inequalityisassociatedwithlowerlevelofhumancapitalformation(education,experience,apprenticeship)andhigherleveloffertility,whilelowerlevelofhumancapitalisassociatedwithlowerlevelsofeconomicgrowth.[112]PrincetoneconomistRolandBenabou'sfindsthatthegrowthprocessofKoreaandthePhilippines"arebroadlyconsistentwiththecredit-constrainedhuman-capitalaccumulationhypothesis".[121]Inaddition,AndrewBergandJonathanOstry[117]suggestthatinequalityseemstoaffectgrowththroughhumancapitalaccumulationandfertilitychannels. Incontrast,Perottiarguesthatthepoliticaleconomymechanismisnotsupportedempirically.Inequalityisassociatedwithlowerredistribution,andlowerredistribution(under-investmentineducationandinfrastructure)isassociatedwithlowereconomicgrowth.[112] Importanceoflong-rungrowth[edit] Overlongperiodsoftime,evensmallratesofgrowth,suchasa2%annualincrease,havelargeeffects.Forexample,theUnitedKingdomexperienceda1.97%averageannualincreaseinitsinflation-adjustedGDPbetween1830and2008.[122]In1830,theGDPwas41,373millionpounds.Itgrewto1,330,088millionpoundsby2008.Agrowthratethataveraged1.97%over178yearsresultedina32-foldincreaseinGDPby2008. Thelargeimpactofarelativelysmallgrowthrateoveralongperiodoftimeisduetothepowerofexponentialgrowth.Theruleof72,amathematicalresult,statesthatifsomethinggrowsattherateofx%peryear,thenitslevelwilldoubleevery72/xyears.Forexample,agrowthrateof2.5%perannumleadstoadoublingoftheGDPwithin28.8years,whilstagrowthrateof8%peryearleadstoadoublingofGDPwithinnineyears.Thus,asmalldifferenceineconomicgrowthratesbetweencountriescanresultinverydifferentstandardsoflivingfortheirpopulationsifthissmalldifferencecontinuesformanyyears. Qualityoflife[edit] Onetheorythatrelateseconomicgrowthwithqualityoflifeisthe"ThresholdHypothesis",whichstatesthateconomicgrowthuptoapointbringswithitanincreaseinqualityoflife.Butatthatpoint–calledthethresholdpoint–furthereconomicgrowthcanbringwithitadeteriorationinqualityoflife.[123]Thisresultsinanupside-down-U-shapedcurve,wherethevertexofthecurverepresentsthelevelofgrowththatshouldbetargeted.HappinesshasbeenshowntoincreasewithGDPpercapita,atleastuptoalevelof$15,000perperson.[124] Economicgrowthhastheindirectpotentialtoalleviatepoverty,asaresultofasimultaneousincreaseinemploymentopportunitiesandincreasedlaborproductivity.[125]AstudybyresearchersattheOverseasDevelopmentInstitute(ODI)of24countriesthatexperiencedgrowthfoundthatin18cases,povertywasalleviated.[125] Insomeinstances,qualityoflifefactorssuchashealthcareoutcomesandeducationalattainment,aswellassocialandpoliticalliberties,donotimproveaseconomicgrowthoccurs.[126][dubious–discuss] Productivityincreasesdonotalwaysleadtoincreasedwages,ascanbeseenintheUnitedStates,wherethegapbetweenproductivityandwageshasbeenrisingsincethe1980s.[125] Equitablegrowth[edit] Mainarticle:Inclusivegrowth Whileacknowledgingthecentralroleeconomicgrowthcanpotentiallyplayinhumandevelopment,povertyreductionandtheachievementoftheMillenniumDevelopmentGoals,itisbecomingwidelyunderstoodamongstthedevelopmentcommunitythatspecialeffortsmustbemadetoensurepoorersectionsofsocietyareabletoparticipateineconomicgrowth.[127][128][129]Theeffectofeconomicgrowthonpovertyreduction–thegrowthelasticityofpoverty–candependontheexistinglevelofinequality.[130][131]Forinstance,withlowinequalityacountrywithagrowthrateof2%perheadand40%ofitspopulationlivinginpoverty,canhalvepovertyintenyears,butacountrywithhighinequalitywouldtakenearly60yearstoachievethesamereduction.[132][133]InthewordsoftheSecretaryGeneraloftheUnitedNationsBanKi-Moon:"Whileeconomicgrowthisnecessary,itisnotsufficientforprogressonreducingpoverty."[127] Environmentalimpact[edit] Seealso:TheLimitstoGrowthandOverconsumption CriticssuchastheClubofRomearguethatanarrowviewofeconomicgrowth,combinedwithglobalization,iscreatingascenariowherewecouldseeasystemiccollapseofourplanet'snaturalresources.[134][135] Themarginalcostsofagrowingeconomymaygraduallyexceedthemarginalbenefits,howevermeasured. Concernsaboutnegativeenvironmentaleffectsofgrowthhavepromptedsomepeopletoadvocatelowerlevelsofgrowth,ortheabandoningofgrowthaltogether.Inacademia,conceptslikeuneconomicgrowth,steady-stateeconomyanddegrowthhavebeendevelopedinordertoachievethisandtoovercomepossiblegrowthimperatives.Inpolitics,greenpartiesembracetheGlobalGreensCharter,recognisingthat"...thedogmaofeconomicgrowthatanycostandtheexcessiveandwastefuluseofnaturalresourceswithoutconsideringEarth'scarryingcapacity,arecausingextremedeteriorationintheenvironmentandamassiveextinctionofspecies."[136]: 2  The2019GlobalAssessmentReportonBiodiversityandEcosystemServicespublishedbytheUnitedNations'IntergovernmentalScience-PolicyPlatformonBiodiversityandEcosystemServiceswarnedthatgiventhesubstantiallossofbiodiversity,societyshouldnotfocussolelyoneconomicgrowth.[137][138]AnthropologistEduardoS.Brondizio,oneoftheco-chairsofthereport,said"Weneedtochangeournarratives.Bothourindividualnarrativesthatassociatewastefulconsumptionwithqualityoflifeandwithstatus,andthenarrativesoftheeconomicsystemsthatstillconsiderthatenvironmentaldegradationandsocialinequalityareinevitableoutcomesofeconomicgrowth.Economicgrowthisameansandnotanend.Weneedtolookforthequalityoflifeoftheplanet."[139] Thosemoreoptimisticabouttheenvironmentalimpactsofgrowthbelievethat,thoughlocalizedenvironmentaleffectsmayoccur,large-scaleecologicaleffectsareminor.Theargument,asstatedbycommentatorJulianLincolnSimon,statesthatiftheseglobal-scaleecologicaleffectsexist,humaningenuitywillfindwaystoadapttothem.[140]ConverselyParthaDasgupta,ina2021reportontheeconomicsofbiodiversitycommissionedbytheBritishTreasury,arguesthatbiodiversityiscollapsingfasterthanatanytimeinhumanhistoryasaresultofthedemandsofcontemporaryhumancivilization,which"farexceednature'scapacitytosupplyuswiththegoodsandservicesweallrelyon.Wewouldrequire1.6Earthstomaintaintheworld'scurrentlivingstandards."Hesaysthatmajortransformativechangeswillbeneeded"akinto,orevengreaterthan,thoseoftheMarshallPlan,"includingabandoningGDPasameasureofeconomicsuccessandsocietalprogress.[141] In2019,awarningonclimatechangesignedby11,000scientistsfromover150nationssaideconomicgrowthisthedrivingforcebehindthe"excessiveextractionofmaterialsandoverexploitationofecosystems"andthatthis"mustbequicklycurtailedtomaintainlong-termsustainabilityofthebiosphere."Theyaddthat"ourgoalsneedtoshiftfromGDPgrowthandthepursuitofaffluencetowardsustainingecosystemsandimprovinghumanwell-beingbyprioritizingbasicneedsandreducinginequality."[142][143]A2021paperauthoredbytopscientistsinFrontiersinConservationSciencepositedthatgiventheenvironmentalcrisesincludingbiodiversitylossandclimatechange,andpossible"ghastlyfuture"facinghumanity,theremustbe"fundamentalchangestoglobalcapitalism,"includingthe"abolitionofperpetualeconomicgrowth."[144][145][146] Globalwarming[edit] Seealso:Economicsofglobalwarming Uptothepresent,thereisaclosecorrelationbetweeneconomicgrowthandtherateofcarbondioxideemissionsacrossnations,althoughthereisalsoaconsiderabledivergenceincarbonintensity(carbonemissionsperGDP).[147]Uptothepresent,thereisalsoadirectrelationbetweenglobaleconomicwealthandtherateofglobalemissions.[148]TheSternReviewnotesthatthepredictionthat,"Underbusinessasusual,globalemissionswillbesufficienttopropelgreenhousegasconcentrationstoover550ppmCO2by2050andover650–700ppmbytheendofthiscenturyisrobusttoawiderangeofchangesinmodelassumptions."Thescientificconsensusisthatplanetaryecosystemfunctioningwithoutincurringdangerousrisksrequiresstabilizationat450–550ppm.[149] Asaconsequence,growth-orientedenvironmentaleconomistsproposegovernmentinterventionintoswitchingsourcesofenergyproduction,favouringwind,solar,hydroelectric,andnuclear.Thiswouldlargelyconfineuseoffossilfuelstoeitherdomesticcookingneeds(suchasforkeroseneburners)orwherecarboncaptureandstoragetechnologycanbecost-effectiveandreliable.[150]TheSternReview,publishedbytheUnitedKingdomGovernmentin2006,concludedthataninvestmentof1%ofGDP(laterchangedto2%)wouldbesufficienttoavoidtheworsteffectsofclimatechange,andthatfailuretodosocouldriskclimate-relatedcostsequalto20%ofGDP.Becausecarboncaptureandstorageareasyetwidelyunproven,anditslongtermeffectiveness(suchasincontainingcarbondioxide'leaks')unknown,andbecauseofcurrentcostsofalternativefuels,thesepolicyresponseslargelyrestonfaithoftechnologicalchange. BritishconservativepoliticianandjournalistNigelLawsonhasdeemedcarbonemissiontradingan'inefficientsystemofrationing'.Instead,hefavourscarbontaxestomakefulluseoftheefficiencyofthemarket.However,inordertoavoidthemigrationofenergy-intensiveindustries,thewholeworldshouldimposesuchatax,notjustBritain,Lawsonpointedout.Thereisnopointintakingtheleadifnobodyfollowssuit.[151] Resourceconstraint[edit] Seealso:Energyreturnedonenergyinvested,Substitutegood,Mining,Peakminerals,andSteady-stateeconomy§ Presentsituation:Exceedinggloballimitstogrowth Manyearlierpredictionsofresourcedepletion,suchasThomasMalthus'1798predictionsaboutapproachingfaminesinEurope,ThePopulationBomb,[152][153]andtheSimon–Ehrlichwager(1980)[154]havenotmaterialized.Diminishedproductionofmostresourceshasnotoccurredsofar,onereasonbeingthatadvancementsintechnologyandsciencehaveallowedsomepreviouslyunavailableresourcestobeproduced.[154]Insomecases,substitutionofmoreabundantmaterials,suchasplasticsforcastmetals,loweredgrowthofusageforsomemetals.Inthecaseofthelimitedresourceofland,faminewasrelievedfirstlybytherevolutionintransportationcausedbyrailroadsandsteamships,andlaterbytheGreenRevolutionandchemicalfertilizers,especiallytheHaberprocessforammoniasynthesis.[155][156] Resourcequalityiscomposedofavarietyoffactorsincludingoregrades,location,altitudeaboveorbelowsealevel,proximitytorailroads,highways,watersupplyandclimate.Thesefactorsaffectthecapitalandoperatingcostofextractingresources.Inthecaseofminerals,lowergradesofmineralresourcesarebeingextracted,requiringhigherinputsofcapitalandenergyforbothextractionandprocessing.Copperoregradeshavedeclinedsignificantlyoverthelastcentury.[157][158]Anotherexampleisnaturalgasfromshaleandotherlowpermeabilityrock,whoseextractionrequiresmuchhigherinputsofenergy,capital,andmaterialsthanconventionalgasinpreviousdecades.Offshoreoilandgashaveexponentiallyincreasedcostaswaterdepthincreases. SomephysicalscientistslikeSanyamMittalregardcontinuouseconomicgrowthasunsustainable.[159][160]Severalfactorsmayconstraineconomicgrowth–forexample:finite,peaked,ordepletedresources. In1972,TheLimitstoGrowthstudymodeledlimitationstoinfinitegrowth;originallyridiculed,[152][153][161]someofthepredictedtrendshavematerialized,raisingconcernsofanimpendingcollapseordeclineduetoresourceconstraints.[162][163][164] MalthusianssuchasWilliamR.Catton,Jr.areskepticaloftechnologicaladvancesthatimproveresourceavailability.Suchadvancesandincreasesinefficiency,theysuggest,merelyacceleratethedrawingdownoffiniteresources.Cattonclaimsthatincreasingratesofresourceextractionare"...stealingravenouslyfromthefuture".[165] Energy[edit] FurtherinformationonEnergyroleineconomy:Econodynamics FurtherinformationonEnergyefficiency:Productivityimprovingtechnologies(historical)§ Energyefficiency Energyeconomictheoriesholdthatratesofenergyconsumptionandenergyefficiencyarelinkedcausallytoeconomicgrowth.TheGarrettRelationholdsthattherehasbeenafixedrelationshipbetweencurrentratesofglobalenergyconsumptionandthehistoricalaccumulationofworldGDP,independentoftheyearconsidered.Itfollowsthateconomicgrowth,asrepresentedbyGDPgrowth,requireshigherratesofenergyconsumptiongrowth.Seeminglyparadoxically,thesearesustainedthroughincreasesinenergyefficiency.[166]IncreasesinenergyefficiencywereaportionoftheincreaseinTotalfactorproductivity.[14]Someofthemosttechnologicallyimportantinnovationsinhistoryinvolvedincreasesinenergyefficiency.Theseincludethegreatimprovementsinefficiencyofconversionofheattowork,thereuseofheat,thereductioninfrictionandthetransmissionofpower,especiallythroughelectrification.[167][168]Thereisastrongcorrelationbetweenpercapitaelectricityconsumptionandeconomicdevelopment.[169][170] Possibilityofinfiniteeconomicgrowth[edit] Theeconomicsystemasasubsystemoftheenvironment:naturalresourcesflowthroughtheeconomyandendupaswasteandpollution Ecologicaleconomicscriticizesthepossibilityofinfiniteeconomicgrowth.Currenteconomicmodelssuggesttheeconomycangrowcontinuouslyasaperpetualmotionmachine.However,accordingtotheLawsofThermodynamicsperpetualmotionmachinesdonotexist.[171]TheFirstLawssaysmatterandenergycannotbecreatedordestroyed,andtheSecondLawssaysthatmatterandenergymovefromalowentropy,useful,statetowardsalessusefulhigherentropystate.[172]Thus,nosystemcancontinuewithoutinputsofnewenergythatexitashighentropywaste.Justasnoanimalcanliveonitsownwaste,noeconomycanrecyclethewasteitproduceswithouttheinputofnewenergytoreproduceitself.[171] Matterandenergyentertheeconomyintheformoflowentropynaturalcapital,suchassolarenergy,oilwells,fisheries,andmines.Thesematerialsandenergyareusedbyhouseholdsandfirmsaliketocreateproductsandwealth.Afterthematerialareusedup,theenergyandmatterleavestheeconomyintheformofhighentropywastethatisnolongervaluabletotheeconomy.Thenaturalmaterialsthatpowerthemotionoftheeconomicsystemfromtheenvironment,andthewastemustbeabsorbedbythelargerecosysteminwhichtheeconomyexists.[173] Itcannotbeignoredthattheeconomyintrinsicallyrequiresnaturalresourcesandthecreationofwastethatmustbeabsorbedinsomemanner.Theeconomycanonlycontinuechurningifithasmatterandenergytopoweritandtheabilitytoabsorbthewasteitcreates.Thismatterandlowentropyenergyandtheabilitytoabsorbwasteexistsinafiniteamount,andthusthereisafiniteamountofinputstotheflowandoutputsoftheflowthattheenvironmentcanhandle,implyingthereisasustainablelimittomotion,andthereforegrowth,oftheeconomy.[171] EconomicGrowthonanExample:Armenia[edit] Let'sconsiderArmeniaasanexampletoexamineeconomicfluctuationsandgrowth.ArmeniagotitsindependencefromUSSRintheyear1991.TheGDPpercapitaofthecountrywasonly590$.[174]AsArmeniawasatwarwithneighbouringAzerbaijanuntil1994,theeconomicsituationinthecountrywasnotimproving.In1994,GDPpercapitawas400$.Thesituationgotmuchbetterafterwards.Abigrapideconomicgrowthoccurredinthecountryinthe2000sduetoaboominconstruction.GDPpercapitareached4010$in2008.Duetothegreatrecession,thevalueofGDPpercapitadeclinedintheyear2009butcontinuedrisingafterwards.ThefinaldeclineinGDPpercapitawasseenin2020whichwasresultedfromtheCOVID-19pandemicandthesecondArtsakhwar.Currently,theGDPpercapitaofthecountryis4267$. Seealso[edit] Americanexceptionalism Civilizingmission Climatechange Critiqueofpoliticaleconomy Degrowth Developmenttheory Economicdevelopment Export-orientedindustrialization Greed Greengrowth Greennewdeal Growthaccounting TheLimitstoGrowth ListofcountriesbyrealGDPgrowthrate Manifestdestiny OrthodoxDevelopment Post-growth Productivism Progress Propaganda ProsperityWithoutGrowth Statusquo Sufficiencyeconomy Sustainability Sustainabledevelopment Uneconomicgrowth Unifiedgrowththeory Universalbasicincome Wealthredistribution TheWhiteMan'sBurden Worldview References[edit] ^StatisticsontheGrowthoftheGlobalGrossDomesticProduct(GDP)from2003to2013,IMF,October2012.-"Grossdomesticproduct,alsocalledGDP,isthemarketvalueofgoodsandservicesproducedbyacountryinacertaintimeperiod." ^abBjork1999,p. 251 ^Bjork1999,p. 67 ^Bjork,GordonJ.(1999).TheWayItWorkedandWhyItWon't:StructuralChangeandtheSlowdownofU.S.EconomicGrowth.Westport,CT;London:Praeger.pp. 2,67.ISBN 978-0-275-96532-7. ^ 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Furtherreading[edit] Acemoglu,Daron;Robinson,JamesA.(2012).WhyNationsFail:TheOriginsofPower,Prosperity,andPoverty.CrownBusinessdivisionofRandomHouse.ISBN 978-0-307-71922-5. Argyrous,G.,Forstater,MandMongiovi,G.(eds.)(2004)Growth,Distribution,AndEffectiveDemand:EssaysinHonorofEdwardJ.Nell.NewYork:M.E.Sharpe. Barro,RobertJ.(1997)DeterminantsofEconomicGrowth:ACross-CountryEmpiricalStudy.MITPress:Cambridge,MA. Galor,O.(2005)FromStagnationtoGrowth:UnifiedGrowthTheory.HandbookofEconomicGrowth,Elsevier. Halevi,Joseph;Laibman,DavidandNell,EdwardJ.(eds.)(1992)BeyondtheSteadyState:EssaysintheRevivalofGrowthTheory,editedwith,London,UK: Hickel,Jason(2020).LessisMore:HowDegrowthWillSavetheWorld.PenguinRandomHouse.ISBN 9781785152498. Jones,CharlesI.(2002)IntroductiontoEconomicGrowth2nded.W.W.Norton&Company:NewYork,N.Y. Lucas,RobertE.,Jr.(2003)TheIndustrialRevolution:PastandFuture,FederalReserveBankofMinneapolis,AnnualReportonlineedition Schumpeter,JospephA.(1912)TheTheoryofEconomicDevelopment1982reprint,TransactionPublishers Weil,DavidN.(2008)EconomicGrowth2nded.AddisonWesley. Externallinks[edit] Wikiquotehasquotationsrelatedto:Economicgrowth Articlesandlectures[edit] "Economicgrowth."EncyclopædiaBritannic.2007.EncyclopædiaBritannicaOnline.17November2007. BeyondClassicalandKeynesianMacroeconomicPolicy.PaulRomer'splain-Englishexplanationofendogenousgrowththeory. CEPREconomicsSeminarSeriesTwoseminarsontheimportanceofgrowthwitheconomistsDeanBakerandMarkWeisbrot OnglobaleconomichistorybyJanLuitenvanZanden.ExplorestheideaoftheinevitabilityoftheIndustrialRevolution. TheEconomistHasNoClothes–essaybyRobertNadeauinScientificAmericanonthebasicassumptionsbehindcurrenteconomictheory WorldGrowthInstitute.Anorganizationdedicatedtohelpingthedevelopingworldrealizeitsfullpotentialviaeconomicgrowth. WhyDoesGrowthKeepSlowingDown?St.LouisFederalReserveBank Aretherelimitstoeconomicgrowth?It’stimetocalltimeona50-yearargument.Nature,16March2022. Data[edit] AngusMaddison'sHistoricalDataseries–seriesforalmostallcountriesonGDP,populationandGDPpercapitafromtheyear0upto2003. 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