ECONOMIC GROWTH

the process by which a nation's wealth increases over time. Although the term is often used in discussions of short-term economic performance, in the context of economic theory it generally refers to an increase in wealth over an extended period. The term is also generally applied to developed economies. Increases in wealth in underdeveloped economies are discussed in the article economic development (q.v.). There are two main difficulties in discussing economic growth. The first is that, although there is considerable agreement on the main ingredients and conditions of growth, there are major differences among economists as to how these ingredients interact. The second problem is that there is no consensus on what precisely constitutes economic growth. Although the real rate of growth in a country's total output of goods and services (measured by gross national product, adjusted for inflation) is the most widely used yardstick, there are those who argue that national income per capita, consumption per capita, or some other measure is the most appropriate. Economists and economic historians have long attempted to understand the process of economic growth and the reasons for marked differences in the growth rates of different countries. The aim has been to develop economic models to indicate the best ways of maximizing economic growth. As early as the 18th century Adam Smith attempted to define how and why the economy works, placing considerable emphasis on the role of labour and the operation of unrestricted market forces. More recently economists have developed different theories. W.W. Rostow argued that the process can be divided into stagesthe traditional (largely agricultural) stage; a transitional stage, in which the human and technological conditions for a rapid advance are established; the take-off stage of rapid growth; and a mature stage marked by large-scale production and mass consumption. Other analysts have attempted to explain growth in terms of a nation's development from primary (agricultural) through secondary (manufacturing) to tertiary (service) production. A number of theories concentrate on the effects of changes in one or another of the major inputs of productive economies: labour, capital, technological change, and entrepreneurship. There is nevertheless a large degree of consensus on the principal conditions of economic growth. These can conveniently be divided into internal and external conditions. The fundamental internal condition is the quality and extent of natural resources. These include mineral resources, sources of fuel, the fertility of land, waterways, etc. It is generally agreed that, especially in the early stages of development, natural resources exert a major influence on the rate of economic growth. Even more important are human resources: the size of the labour force as a proportion of total population; the quality of the labour force, which is dependent on the level of education as well as inherent qualities of the people (health, energy, inventiveness, etc.); and the intensity of labour, which is determined by the number of hours worked, the way in which work is organized, and the pressures and incentives exerted by the particular political and economic system. Closely related to the value of natural and human resources is the extent of capital resources and technological development. A labour force that is equipped with modern, highly productive machinery will produce more per unit of raw materials and time than one that operates with inefficient machinery. Similarly, a labour force that is engaged in the production of high-technology products will produce more added value (the amount by which the cost of raw materials is exceeded by the final selling price) than one engaged in simple processing industries. For this reason, most economists agree that the higher the rate of capital and technological investment, the higher the rate of economic growth. There is considerable empirical evidence that suggests that countries that devote a comparatively high proportion of their resources to investment, as opposed to consumption, tend to have relatively high long-term economic growth rates. Finally, another important internal condition of economic progress is stability of the government. Everything else being equal, a country with political stability will tend to grow faster, as it will attract more investment from both internal and external sources. There are also a number of key external conditions of national economic progress. The most important of these is the level of world economic activity. This determines the level of world trade, and, since most countries export a substantial proportion of their output, the strength of world trade is a key determinant of the strength of demand for domestic production activities. Closely allied to this are the terms of trade, which measure the value and therefore the price of one country's export goods in terms of the value of its imported products. Thus, if the price of a country's export products exhibits a long-term decline in terms of the cost of its imported goods, its capacity to import is reduced. This can have an adverse effect on the supply of investment goods or raw materials, which will tend to inhibit economic growth. Historically, commodity-producing countries have faced weakening terms of trade, the effect of which is to retard their economic progress and technological development. The effects of a weakening in the terms of trade, however, can be overcome by an inflow of foreign loans and investment that can enable a country to acquire import goods for domestic development that could not be acquired otherwise. The import of foreign investment is also beneficial in that it can make up for the lack of domestic technological expertise. the process by which a nation's wealth increases over time. Although the term is often used in discussions of short-term economic performance, in the context of economic theory it generally refers to an increase in wealth over an extended period. Growth can best be described as a process of transformation. Whether one examines an economy that is already modern and industrialized or an economy at an earlier stage of development, one finds that the process of growth is uneven and unbalanced. Economic historians have attempted to develop a theory of stages through which each economy must pass as it grows. Early writers, given to metaphor, often stressed the resemblance between the evolutionary character of economic development and human lifee.g., growth, maturity, and decadence. Later writers, such as the Australian economist Colin Clark, have stressed the dominance of different sectors of an economy at different stages of its development and modernization. For Clark, development is a process of successive domination by primary (agriculture), secondary (manufacturing), and tertiary (trade and service) production. For the American economist W.W. Rostow, growth proceeds from a traditional society to a transitional one (in which the foundations for growth are developed), to the take-off society (in which development accelerates), to the mature society. Various theories have been advanced to explain the movement from one stage to the next. Entrepreneurship and investment are the two factors most often singled out as critical. Economic growth is usually distinguished from economic development, the latter term being restricted to economies that are close to the subsistence level. The term economic growth is applied to economies already experiencing rising per capita incomes. In Rostow's phraseology economic growth begins somewhere between the stage of take-off and the stage of maturity; or in Clark's terms, between the stage dominated by primary and the stage dominated by secondary production. The most striking aspect in such development is generally the enormous decrease in the proportion of the labour force employed in agriculture. There are other aspects of growth. The decline in agriculture and the rise of industry and services has led to concentration of the population in cities, first in what has come to be described as the core city and later in the suburbs. In earlier years public utility investment (including investment in transportation) was more important than manufacturing investment, but in the course of growth this relationship was reversed. There has also been a rise in the importance of durable consumer goods in total output. In the U.S. experience, the rate of growth of capital goods production at first exceeded the rate of growth of total output, but later this too was reversed. Likewise, business construction or plant expenditures loomed large in the earlier period as an object of business investment compared to the recent era. Whether other countries will go through the same experience at similar stages in their growth remains to be seen. Comparative growth rates for a group of developed countries show how uneven the process of growth can be. Partly this unevenness reflects the extraordinary nature of the 191350 period, which included two major wars and a severe and prolonged depression. There are sizable differences, however, in the growth rates of the various countries as between the 18701913 and 195073 periods and the period since 1973. For the most part, these differences indicate an acceleration in rates of growth from the first to the second period and a marked slowdown in growth rates from the second to the current period. Many writers have attributed this to the more rapid growth of business investment during the middle of the three periods. The relatively high rates of growth for West Germany, Japan, and Italy in the post-World War II period have stimulated a good deal of discussion. It is often argued that late starters can grow faster because they can borrow advanced technology from the early starters. In this way they leapfrog some of the stages of development that the early starters were forced to move through. This argument is nothing more than the assertion that late starters will grow rapidly during the period when they are modernizing. Italy did not succeed in growing rapidly and thereby modernizing until after World War II. Together with Japan and Germany it also experienced a large amount of war damage. This has an effect similar to starting late, since recovery from war entails building a stock of capital that will, other things being equal, embody the most advanced technology and therefore be more productive and allow faster growth. The other part of this argument is the assertion that early starters are actually deterred from introducing on a broad front the new technology they themselves have developed. For example, firms in a country that industrialized early may be inhibited from introducing a more modern and efficient means of transportation on a broad scale because there is no guarantee that other firms handling the ancillary loading and unloading tasks will also modernize to make the change profitable. Related to this is the problem of whether or not per capita income levels and their rates of growth in developed economies will eventually converge or diverge. For example, as per capita incomes of fast growers like the Italians and Japanese approach those of economies that developed earlier, such as the American and British, will the growth rates of the former slow down? Economists who answer in the affirmative stress the similarities in the changing patterns of demand as per capita income rises. This emphasis in turn implies that there is less and less chance to borrow technology from the industrial leaders as the income levels of the late starters approach those of the more affluent. Moreover, rising per capita incomes in an affluent society usually are accompanied by a shift in demand toward services. Therefore, so this argument goes, differences in income levels and growth rates between countries should eventually narrow because of the low growth in productivity in the service sector. The evidence is inconclusive. On the one hand, growth is a function of something more than the ability to borrow the latest technology; on the other hand, it is not clear that productivity must always grow at a slower rate in the service industries. A rapidly increasing population is not clearly either an advantage or a disadvantage to economic growth. The American Simon Kuznets and other investigators have found little association between rates of population growth and rates of growth of GNP per capita. Some of the fastest growing economies have been those with stable populations. And in the United States, where the rate of growth of population has shown a downward historical trend, the rate of growth of GNP per capita has increased over the last century and a half. Another finding by Kuznets is that while GNP per capita in 1960 was substantially higher in the United States than in any European country, there was no significant difference in the per capita growth rates of all these countries over the period 1840 to 1960 as a whole. The conclusion is that the United States started from a higher per capita base; this may have been the result of its superior natural resources, especially its fertile agricultural land. Additional reading Simon Kuznets, Capital in the American Economy: Its Formation and Financing (1961), a description of trends in capital formation in different sectors of the American economy from the mid-19th to the mid-20th century; W.W. Rostow, The Stages of Economic Growth, 2nd ed. (1971); Ezra J. Mishan, The Cost of Economic Growth (1967), a critique of rapid economic growth as a policy goal; John Kenneth Galbraith, The Affluent Society, 4th ed. (1984), a critique of modern capitalism written for the layman; Joseph A. Schumpeter, Business Cycles: A Theoretical, Historical, and Statistical Analysis of the Capitalist Process, 2 vol. (1939, reprinted 1982), a pioneering work in the field of growth and cycles that stresses the importance of entrepreneurship; and James S. Duesenberry, Business Cycles and Economic Growth (1958, reprinted 1977), a theoretical study of a developed economy of the American type, with emphasis on the importance of demand in growth. Later studies include Dan Usher, The Measurement of Economic Growth (1980), an explanation of the difficulties inherent in such measurement; John Cornwall, The Conditions for Economic Recovery: A Post-Keynesian Analysis (1983), an analysis of the causes and consequences of economic stagnation; Martin Ricketts, The New Industrial Economics: An Introduction to Modern Theories of the Firm (1987), stressing the role of entrepreneurship in modern economics; and on government intervention, Stephen Wilks and Maurice Wright (eds.), Comparative Government-Industry Relations: Western Europe, the United States, and Japan (1987). John L. Cornwall