Economic growth

Economic growth from 1 to 2003 by geographical and global areas.

Economic growth is the increase in income or value of final goods and services produced by an economy (generally from a country or region) in a certain period (generally in a year).

Broadly speaking, economic growth refers to the increase in certain indicators, such as the production of goods and services, increased energy consumption, savings, investment, a favorable trade balance, increased per capita consumption, etc The improvement of these indicators should theoretically lead to an increase in the living standards of the population.

Measure of economic growth

Economic growth is usually measured as a percentage increase in real Gross Domestic Product ("real" means "adjusted for inflation") and can be divided into five components: growth in

• population
• production per unit of insumption of work (productivity of employment),
• working hours (intensity),
• percentage of the working-age population that actually works (participation rate) and
• proportion of the population of working age with respect to the total population (demography).

Arithmetic of partial growths

The total growth in a period made up of several partial periods is slightly higher than the sum of the growth of the partial periods. Examples:

• If an economy has a growth of 2.0 % each of the four quarters of a year, the annual growth of that economy will be approximately 8.24 % (note 1.02*1.02*1.02*1.02=1.08243216).
• If the respective quarterly growths are 1.0 %, 2.0 %, 3.0 % and 4.0 %, the annual growth of that economy will be approximately 10.36 % (note that 1.01*1.02*1.03*1.04=1.10355024)

Main factors of economic growth

Economic growth is caused by various changes in the economy. Over a period of time, some of the factors may be more important than others. The main factors of economic growth are: natural resources, human resources, capital accumulation, technological change, innovation and socio-political stability.

Although natural resources strongly affected past economic growth, their impact on output variation is currently limited. In current economies, the most important factor is human capital focused on innovation that produces (or adopts) new advances and makes a technological change that increases productivity.

Growth and well-being

The economic growth of a country is considered important because it is related to GDP per capita, and this indicator is statistically correlated with the socioeconomic well-being of a country due to the relative abundance of material economic goods available to its citizens. a country for consumption.

However, the value of goods produced or consumed is not necessarily directly related to well-being, for example, we can imagine a society in which tobacco or other drugs with negative effects on health are produced and contribute to GDP with an amount N, and that simultaneously medical treatments are produced that offset the effects by an amount P. Comparing with an economy identical to the previous one but in which the products with adverse effects or the compensatory medical treatment are not produced and with GDP Y₀, the second would have a GDP higher Y₀ + N + P, however, in both societies the general welfare would be the same, already in the second that the adverse effects have been compensated by the medical treatments.

For a better understanding of economic development as a component of well-being, it is recommended to review the Human Development Index and the Social Progress Index.

Short and long-term growth

The short-term variation in economic growth is known as the business cycle, and nearly all economies experience periodic recessions. The cycle can be confused since the fluctuations are not always regular. The explanation of these fluctuations is one of the main tasks of macroeconomics. There are different schools of thought that study the causes of recessions and the policies necessary to get out of them (see Keynesianism, monetarism, neoclassical and neoKeynesian economics). The short-term variation in economic growth has been minimized in higher-income countries since the early 1990s, partly attributable to better macroeconomic management.

The study of long-term economic growth is a fundamental issue in the study of economics. Despite the caveats listed above, an increase in a country's GDP is often seen as an increase in the standard of living of its inhabitants. Over long periods, even small annual growth rates can have a significant effect due to their combination with other factors. A growth rate of 2.5% per year would lead GDP to double in a period of 30 years, while a growth rate of 8% per year (experienced by some countries such as the four Asian dragons) would lead to the same phenomenon in a period of only 10 years old. When a population increases, to see improvements in the standard of living, GDP has to grow faster than that population. This analysis seeks to understand why there are very different rates of economic growth in some regions of the world.

Historical growth since the 19th century

Until the end of the 19th century there were no sufficiently detailed statistics to calculate economic growth. For the past, A. Maddison (2001) presented estimates which, consistent with other sources, show that economic growth during the Middle Ages and up to the XIX was slow. From 1870 until the First World War, growth was very rapid. ^{[citation needed]}During World War I, the interwar Great Depression, and World War II growth slowed somewhat, although it remained high relative to observed rates before the 19th century. After the end of the last World War came the golden age of economic growth between 1945 and 1970, with an expansion without historical comparison. From 1970 to the present to 2007 it was slower, but still high; This does present an increase in the difference in growth between rich countries, which grew somewhat faster, and poor countries. Historically, growth before the 19th century between rich and poor countries had been more balanced.

Sustained economic growth

It is a relatively new concept in human history. GDP growth for years was very low, so it was not taken into consideration by the thinkers of the time. It was not until after 1800 that GDP per capita could change the standard of living in just one or two generations. Growth rates differ between nations and a variation in it in a period of one year has a great impact on the level of per capita income in a prolonged period.

Income growth can be divided into two main categories: growth from increases in income (eg capital, labor) and increases in productivity (eg new technologies). In the long run, technological progress is necessary in order to improve living standards, since it is not possible to increase incomes indefinitely through labor, and the attempt to constantly add capital to the production process will necessarily run into diminishing marginal depreciation (see foundations of production theory).

"Rule of 70": When a country has a growth rate in its annual X% GDP it takes 70/X years to double the rent.

In fact this is a rough rule of thumb, although numerically very exact, since the number of years it takes to double income is given by:

${displaystyle t={frac {1}{log _{2}(1+X/100}}approx {frac {69,31}{X}}} +0,3465-0,5776X+dots }$

Models to explain economic growth

Exogenous and endogenous models

In the theory of exogenous economic growth, the Solow (1956), Ramsey (1928), Harrod-Domar (1939) (1946) and Kaldor models stand out. They are called exogenous because the variable that explains the economic growth is taken as "exogenous" that is, as a variable that is not explained by the model.

In the theory of endogenous economic growth, the models of Romer (1986) (1990), Barro (1990), Learning-by-doing (1962), Uzawa-Lucas (1965) (1988) stand out., Shumpeter, among others. They are called endogenous because the variable that explains economic growth is explained by the model. And thus they offer clearer elements of public policy.

Acemoglu and Robinson

Acemoglu and Robinson (2012) Why do countries fail? say that first of all a country needs political stability to develop economically. Furthermore, Acemoglu and Robinson say that the industrial revolution began in Great Britain because it was the first country to allow the creative destruction necessary to grow economically at the frontiers of technology. ^{[citation needed]} This was guaranteed by their 1689 Bill of Rights, according to Acemoglu and Robinson.

For example, they note that Denis Papin built a steamboat in 1705. He sailed up the Fulda River to the city of Münden in Germany, where a guild of boatmen destroyed his boat and steam engine. They did not want competition. ^{[citation required]}

Pepin then went to England, where the Royal Society published several scientific papers he wrote describing his work. Unfortunately, he did not receive any compensation for those documents. He died destitute in London and was buried in an unmarked grave.

Thomas Newcomen built a steam engine using ideas from Pepin and others. Newcomen's machine became a commercial success, pumping water from coal mines that otherwise could not have been worked. Acemoglu and Robinson said that the 1689 Bill of Rights allowed creative destruction that had been blocked in Germany.

Neoclassical growth models

The Solow growth model (1956) was the first attempt to analytically guide long-run growth. This model, like other traditional growth models (Cass (1965), Koopmans (1965)), explains differences in per capita income in terms of (physical) capital accumulation. In these two models, the differences in the accumulated factor are due to the differences in the saving rates: for Solow they are determined exogenously, for Ramsey it is determined endogenously by maximizing intertemporal utility.

The Solow model predicts convergence towards a steady state; in that steady state, all per capita growth arises from technological progress. Starting from identical factors regarding institutions (government and central banks), added production functions and savings measures, all countries would tend to converge towards the same stationary state. Taking into account that not all countries have the same characteristics, it is possible that not all countries in the world converge when there are different levels of steady state. In fact, examining empirical data, convergence is only observable in a limited way.

Exogenous growth models do not explain the key variable that tells us why economies grow and why they do so at different rates. Endogenous growth theory tries to "endogenize" the variable of technical progress. And for this, it uses human capital (eg education), technological change (eg innovation), externalities, etc. North and Thomas (1973) argue that the fundamental explanation for economic growth is institutions.

The Washington consensus and its implications for theory

In the 1990s, John Williamson published the Washington Consensus, which was suggested to all developing countries to achieve growth.

The World Development Report (1991) argued that the growth functions -capital accumulation, efficient use of resources, technological progress, and a socially acceptable distribution of income- were best achieved in countries with macroeconomic stability, distribution of resources by the market, and opening to international trade. A sustained growth policy requires risk reduction, ensuring that serious financial crises do not occur. Finally, governments obviously need to support reforms that remove or at least reduce constraints to growth.

However, although in many countries (such as Latin America) structural reforms were carried out, the expected results were not obtained.

Other explanations

Jevons claimed in the 19th century that economic fluctuations were related to sunspots. Today the theories of economic growth are very diverse and those that seek an explanation in institutions stand out. The institutional differences would be explained due to cultural traits, geography, latitude, ideology and/or historical accidents, etc. Thus, for example, today there are those who point out that cold countries like Sweden are more economically successful than hot countries like Nigeria. In primitive stages of the history of Humanity, economic and cultural development was concentrated in the hot places on Earth, such as Egypt. Today, however, the cold northern states have higher GDP per capita rates than the hot tropical states. This aspect of economics (economic geography)--and its influence on human migrations and political structures--was extensively studied by Ellsworth Huntington, Professor of Economics at Yale University in the early 20th century.

Criticism of economic growth

Economic growth affects all spheres: social, economic, political... The current system associates this growth with progress and well-being, a relationship that is often questioned by critics of capitalism. In the words of Carlos Taibo, a professor at the Autonomous University of Madrid:

In common perception, in our society, economic growth is, let us say so, a blessing. What we are told is that where there is economic growth, there is social cohesion, reasonably solvent public services, unemployment does not gain ground, and inequality is not great either. I think we're under an obligation to hypercritically discuss all of these. Why? First, economic growth does not generate - or does not necessarily generate - social cohesion. In the end, this is one of the central arguments made by the critics of capitalist globalization. Does anyone think that in China there is today more social cohesion than 15 years ago? [...] Economic growth generates, second, environmental aggressions that in many cases are literally irreversible. Economic growth, third, causes the exhaustion of resources that will not be available to future generations. In fourth and last place, economic growth facilitates the settlement of what more than one has called, the "slavery life mode"; which makes us think that we will be happier the more hours we work, the more money we earn, and above all, more goods we come to consume.
Behind all these aberrations, I think there are 3 rules of play that permeate almost everything in our societies. The first is the primacy of advertising, which forces us to buy what we do not need, and often even what objectively repugnates us. The second is credit, which allows us to obtain resources for what we do not need. And the third and last, the expiration of the products, which are programmed so that after an extremely short period of time, they cease to serve, so we see ourselves in the obligation to buy new ones.

The attempt to promote economic growth above all other measurable considerations is a symptom of what is known as productivism, a term that is often used in a derogatory tone.

Limits to growth

The limits to growth debate is about the ecological impact of growth and the creation of wealth and progress. Many of the activities necessary for economic growth make use of non-renewable energy sources. Many researchers believe that these ongoing environmental effects may in turn have an effect on global ecosystems.

Ecological footprint against IDH (2006).
The limit of Earth's biocapacity can be observed for that year: 2.1 ha global.

This impact on the environment is what the ecological footprint tries to quantify. Thus, for the year 2005 the number of global hectares (bioproductive hectares) per person was estimated at 2.1. However, for the whole world, consumption stood at 2.7. Therefore, at least for this year (and the trend is growing, since in 2003 the global ecological footprint was estimated at 2.23), we were over-consuming with respect to the planet's capacity; or what is the same, we are destroying resources at a rate greater than their natural regeneration rate.

They claim that the cumulative effects on ecosystems impose a theoretical limit to growth. Some turn to archeology to cite examples of cultures that seem to have disappeared because they grew beyond the capacity of their ecosystems to house them, as Duncan claims for example that our civilization will also happen (Olduvai Theory). His prediction is that limits to growth could end up making growth based on the consumption of energy sources impossible. The solution they propose is to apply the principles of Degrowth: that is, reduce consumption and production to levels where resources can be regenerated naturally, while the wealth of rich countries is distributed to the rest of the world.. This concept should not be confused with that of sustainable development, since the latter believes that it would be possible to continue increasing growth while protecting the environment. Others are more optimistic, believing that while local environmental effects may be detected, large-scale ecological effects are less. Optimists claim that if these global ecological changes exist, human ingenuity will find a way to adapt to them.

The rate or type of economic growth can have important consequences for the environment (the climate and the natural capital of ecosystems). Concern about the possible negative effects of growth on the environment and society has led certain scientific sectors to defend lower growth levels, from which comes the idea of economic decline and green parties, who think that national economies are part of a world society and a global ecological system, so they cannot exploit their capacity for natural growth without harming them.

Canadian scientist David Suzuki stated in the 1990s that ecosystems can only support annual growth of between 1.5 and 3% per year, and therefore any attempt to achieve higher yields by agriculture or forests will necessarily end up cannibalizing the natural capital of the soil or forests. Some people think that this argument can be applied even to the most developed economies. Mainstream economists believe that economies advance thanks to technological advances, for example: we now have faster computers than a year ago, but not necessarily a greater number of computers. Perhaps we have gotten rid of physical limitations by betting more on knowledge than on physical production.

On the other hand, it is a historical fact that in the last two centuries economic growth has presented fluctuations and cyclical crises in each and every one of the countries and internationally. Every economic boom eventually leads to recession and crisis, which ends up opening the conditions for recovery, which in turn clears the way for a new boom. The economic cycle studied by Clemente Juglar, Karl Marx, Wesley Mitchell, Joseph Schumpeter, Nikolai Kondratieff and other notable economists, is a reality to take into account without which any serious estimate of economic growth is impossible.