Economic Growth

ECONOMIC GROWTH REFERS to the rate of increase in a state's prosperity over the course of time. It is more commonly used to consider long-term growth. The single percentage annual measure of economic growth has come to be considered perhaps the most important test of national and governmental economic progress and, especially in the developing world, carries with it a measure of prestige. Growth rates in east Asian states in particular have reached levels that are unprecedented, since modern growth is hugely more rapid than it has ever been.

Three aspects of the economy can cause growth: capital accumulation, which includes investment in all factors of production (such as land, people, and machinery); labor market growth; and technological progress. Total factor productivity (TFP) is a combination measure, which summarizes changes in each of these three areas. However, there is considerable and continued controversy concerning exactly what sorts of changes are most effective in promoting overall growth and how they can be managed. The Austrian economist Joseph Schumpeter added to the debate by pointing out the importance of entrepreneurs in stimulating growth.

The economist W.W. Rostow argued that the action of economic growth was to cause societies to move from a traditional stage to a transitional one in which the conditions are secured for the change to a mature society capable of much higher levels of growth. Colin Clark subsequently described this process as moving from agriculture to manufacturing to services. Subsequently, much discussion has centered on the move to a fourth stage, which is that of the information or knowledge economy.

In any case, it is clear that economic growth leads to and is caused by transformation of the existing nature of the economy. Nobel Prize winner Simon Kuznets wrote that six factors characterize growth in modern economies: high rates of growth in population and per capita output, high rates of change of TFP, rapid structural economic transformation, rapid social and ideological transformation, market and resource-seeking activity by developed country firms, and limited spread of growth internationally. The desire for greater equity in global economic development has led many to try to change the last of these factors.

Greater attention to the reasons for economic growth has further stimulated the concept of endogenous growth theory—the idea that economic growth can arise from within a nation and need not be caused solely by inputs from external sources. Causes of growth according to this theory include new and more efficient uses of machinery and technology, greater levels of education and productivity in the local workforce, and government policies.

There are many ideological and political implications to this approach since it contradicts to some extent the structural adjustment approach of the International Monetary Fund, which has paid no heed to local conditions or to the ability of domestic markets to transform them. The examples of South Korea, Taiwan, Singapore, and China, among others, demonstrate the extent to which economic growth can be stimulated through government policies, particularly with respect to encouraging education and discouraging imports.