By Dennis John, April 2020
Economic growth is the rate of growth of real gross domestic product over a given period in a region. Gross domestic product (GDP) is the value of all goods and services produced in a country in a single year. Achieving economic growth is one of the main macroeconomic objectives of an economy, which means it is one of the main goals that governments across the world try to achieve. Although economic growth is only considered in terms of change in GDP, the development of a country’s living standards is also looked at by using more indicators. One example of this is the Human Development Index (HDI), a measure introduced by the United Nations Development Program (UNDP). This looks at three main measures of economic development: a high life expectancy, a high GDP per capita, and a high standard of education. There are a few different reasons to why economic growth varies in different areas of the world. These can be categorized into four different groups: how developed the country is already, its geographical position/ access to water, its ease of doing business, and its availability of resources.
The most important factor when considering economic growth is the development stage of the country is in. Countries are often categorized into one of three development brackets: High Income Countries (HICs), Newly Emerging Economies (NEEs) and Low Income Countries (LICs). HICs consist of countries which are already of a highly developed standard, and include members of the G20, like Canada and the UK, amongst others. NEEs consist of countries which are developing now, like the BRICs countries (Brazil, Russia, India and China). LICs are those which are still not very developed at the moment and have not experienced any particular kickstart to achieving high levels of economic growth. But why is this important?
In fact, the category a country is in is deeply interlinked to their economic growth. For example, let’s look at the United States of America, one of the most developed economies in the world. Since its formation in 1776, the United States of America experienced considerable economic growth in its history, allowing it to become a very highly developed country. For example, after World War Two, it achieved positive economic growth rates of over 5% until 1955. It has one of the world’s highest GDP per capita values, as well as one of the greatest overall standards of living of its residents. But at the same time, recently, economic growth rates have been around 0 to 1%. The truth is, most of the HICs have already past their periods of high economic growth and are now in a period of persistently low rates. This sort of common pattern can be seen across the world in HICs: for example, in the UK, it experienced economic growth rates of 5.2% in 1972, but achieved rates near to 0% in the most recent quarter. The reason for this is because in these countries, their economies have almost reached their maximum productive potential. This means that economic growth is harder to attain, as it requires an increase in the productive potential of the economy first before attaining the economic growth. NEEs are currently experiencing that economic growth now. For example, Rwanda, which has been called “the next Singapore” by many, have achieved economic growth rates of 8.2% recently. Furthermore, India, considered by many to be the world’s next superpower, has had economic growth rates above 5% for the past 10 years. These economies have a lot of spare capacity and are finally beginning to use their spare capacity effectively to get closer to their productive potential. Meanwhile, LICs, often due to mismanagement by their government, have still not been able to achieve high economic growth rates yet, and the standard of living for their residents remains very poor.
The second most important factor is its geographical position. All the historic colonial powers of the time had one strength which helped them a lot in achieving economic growth: access to water. When the Roman empire was the biggest, they had access to the most important body of water at that time: the Mediterranean Sea. The British, French, Dutch and Spanish empires also had access to the Atlantic Ocean, which helped them to expand their empires further. A similar situation can be seen today. The two emerging superpowers, China and India, have long coastlines and easy access to the sea. In the past, it was important for colonialization, but now it is important for trade. Trade is a very important, but often understated, factor in achieving economic growth, as different countries have comparative advantages over others in producing different products. Unsurprisingly, most of the world’s megacities, like Rio de Janeiro and Shanghai, are in close proximity to a significant water body which has aided their economic growth.
The third most important factor is resource availability. In order to produce goods, an economy needs four factors: land, labour, capital and enterprise. Countries with rich natural resources can use these to achieve economic growth. For example, Saudi Arabia, has access to one of the largest oil reserves across the world. Considering that oil is a commodity which is also very necessary for consumers, Saudi Arabia have achieved a lot of money through extracting and selling the oil, and now have one of the highest GDP per capita figures across the world. However, this point does come with a major caveat. Resource availability can only aid economic growth of a country if the country is managed well. For example, Venezuela have the biggest oil reserves in the whole world. Along with this, they are the leading producer and exporter of many minerals like iron ore, oil and gold. However, mismanagement by the government, partly due to corruption and partly due to poor decisions on the macroeconomic level by the government, have cost the Venezuelan economy dearly. Hyperinflation occurred in 2016, and since then the Venezuelan economy has been in a deep recession. As a result, there was a fall in consumer and business confidence in the economy, as the purchasing power of the Venezuelan bolivar was falling minute by minute. Foreign direct investment into the economy ground to a halt. This led to a significant recession, as the economy shrank by 10% in 2016.
The fourth most important factor is ease of doing business. Simply put, the more business that happens in an economy, the more economic growth an economy can achieve. The richest countries are often the richest because it is very easy to do business there. The World Bank Group created the Ease of Doing Business Index to measure exactly that, and from 2007 to 2016, Singapore came out on top. From 2017 to 2020, New Zealand topped the rankings, and unsurprisingly, these two countries are HICs.
In conclusion, economic growth is not easy to attain. Some countries have already achieved considerable economic growth, while some are still yet to achieve any economic booms in their history. But there is no one true answer to the question of economic growth. While some countries may achieve it by taxing their consumers less, others may not be able to do that due to an already high debt-to-GDP ratio. There is no universal answer on what a government should do to ensure sustainable economic growth.
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