Economic growth

According to the traditional definition of François Perroux, the economic growth corresponds to “the increase supported for one or more long periods of an indicator of dimension, for a nation, the total product Net in real terms”. In practice, the indicator used to measure it is Gross domestic product or GDP, and the growth rate is the rate of variation of the GDP. In the same way, one uses the growth of the GDP per capita to measure the growth of the standard of living , even if the concept of GNP (or GDP) ordered holding account of the foreign trade is often retained like more significant of this standard of living. This GNP ordered with the advantage of taking account of the price differences between the interior products and the imports, however it does not hold account owing to the fact that, to know what was actually consumed, it is necessary to withdraw from the GDP exports, and to add the imports to him. A country in structural deficit thus has an effective standard of living higher than that which the GDP indicates, or even ordered GDP.

Introduction

The term of growth is thus conventionally used by the economists to describe an increase in the production on the long run. In the short run, it is of use to use the term of “expansion” (which is opposed to the “recession” or the “depression”).

In a strict sense, the growth describes a process of increase in the only economic production. It thus does not return directly to the whole of the economic transfers and social suitable for an expanding economy. These transformations in the broad sense, conventionally, are indicated by the term of Economic development.

The growth is a fundamental process of the contemporary economies. It transforms the life of the individuals into their getting more goods and services (attention one should not confuse growth and development. The growth term is employed when one speaks more particularly about the economy of the country while the development is a social change which can for example modify the level and the lifestyle of the individuals. It is possible that in certain countries, one observes the growth without the development or reciprocally). In the long run, the Standard of living (which one should not confuse with quality of life) individuals depends thus only on this growth. In the same way, the enrichment which results from the economic growth only makes it possible (but not necessarily) to remove material misery.

The growth of the Gross domestic product per capita comes from an increase in the productivity - i.e. of an increase in quantity in production obtained with a volume given in work and capital.

However, the increase in the productivity itself results basically from the technological advancement , i.e. of the appearance of more productive means of production, as well as invention of new goods and marketable services. The contents of the economic growth are thus not a simple increase in the volumes produced, but more especially the effect of the innovation bringing of the goods and more sophisticated services, varied, powerful or adapted to new needs.

Since about thirty years, in particular following the Meadows report/ratio, and more still in the recent years, the possibility of an infinite growth of the worldwide economy was questioned - because in particular of the epuisability of the natural resources (oil, etc) on which it is based, as well as negative externalities (pollution, destruction of the environment) which it generates.

History

The historians generally agree on the fact that the standard of living of the human beings on the whole of the sphere evolved only little /moved since Antiquity until the XVIIIe century, put aside a clearing in Europe Western between Xe and XIIIe centuries, cancelled by the epidemics and the famines of XIVe and XVe centuries. The economic growth is thus a recent phenomenon and geographically limited.

The phase of economic development since the emergence of the market economy at the 19th century does not have any preceding history. After the 16th century, when various parts of the world start very slowly and with touch commercial relations, one notes periods of growth economic, but transitory and marginal. The living conditions at the 18th century were practically similar everywhere, or at least they seem to us similar insofar as they were much lower than than we know. It is estimated that the global growth of the economy between 1500 and 1820 is only of one thirtieth of what it was since. The incomes in Europe more than multiplied by ten. Asia accelerates also its growth rate since a half century: the standard of living in China was multiplied by six and that of the Japan by eight.

However, at the 19th century economic development was apparently in the facts rather paradoxical. In France, in spite of a considerable growth, the country undergoes a significant development of a pauperism never known hitherto in the peasants come to work in the factories, and mainly at the least qualified of them. In difficulty to find employment regular, they underwent it all the more hard as their departure of their community of origin had creates a rupture of traditional solidarity.

It is necessary to say here that the standard of living and the development started to be observed only at the 19th century, so that it is difficult, for lack of data, to make a comparison between the {{XVIIIe}} and the 19th century. What one knows, it is that in France, the French revolution took place in a context of quasi-famine in the campaigns, whereas everyone had to eat at the 19th century. Little before the French revolution, of the observers had for example considering close to Chartres of many men brouter of grass like the horses, not having any other means of subsistence. The Rural migration of the 19th century made poverty obviously more visible, but certainly not larger.

In 1913, French PIB/h was of 3485 $ (international dollars 1990). In 1998, it was of 19558 $. The average growth rate of PIB/h was thus of 2,0% over this period. If it had been of 1,0%, the standard of living would have been of 8199 $ in 1998, that is to say a little less than the real standard of living of Uruguay (8314 $).

Figures of the growth

Growth in the industrialized countries

Growth of the euro area

Some determinants of the growth

Xavier Salt-I-Martin points out the principal lesson drawn from a multitude of Régression S between country:

It does not have there only one simple determinant of the growth.
the initial level is the most important variable and most robust. (I.e., in the majority of the cases, plus a country is rich, less it grows quickly. This assumption is known under the name of conditional Convergence.)
the size of the government (administration, public sector) has only little importance. On the other hand the quality of the government has much importance: the governments which cause hyperinflation, the distortion of foreign exchange rates, the excessive deficits or an ineffective bureaucracy have very bad results.
the institutions (gone, private property, rule of law) are important.
the more open economies tend to grow more quickly.

The history, in particular that of the XVIIIe century, seems nevertheless to show that the extension of freedoms (freedom to undertake, freedom of circulation of the ideas, the people and the goods) is a condition of the growth. For example, there exists a certain number of cases where a population sharing the same historical antecedents, the same language and the same cultural standards was divided between two systems, one being an market economy and the other a directed and centralized economy (both Germany, both Korea, China and Taiwan). In each case, the zones having practiced the market economy showed a much better performance. The collapse of the USSR also testifies to the best results of the liberal economic models by reports/ratios with the savings in collectivist type.

To create the short-term growth

See Economic revival

Theories of growth

The explanatory theories of the growth are relatively recent in the history of the economic thinking. These theories resulted in proposing the central role of technological advance in the growth. On the long run, only technological advance is able to make more productive one economy (and thus to allow him to produce more, i.e. to have growth). However, these theories explain badly from which this progress comes, and in particular in what it is related to the operation of the economy.

The traditional school

The economists of the traditional school, writing however at the beginning Industrial revolution, thought that no growth could be durable, because any production had, according to them, unrelentingly to converge towards a stationary state. It is thus the case of David Ricardo for which the stationary state was the product of the decreasing outputs of the cultivable grounds, or for Thomas Malthus which bound it to its " principle of population". However, Adam Smith, through his study of the effects of productivity induced by the development of the division of the labor, let foresee the possibility of an uninterrupted growth.

The innovation at the origin of the growth: Schumpeter

From work on the business cycles of Kondratieff, Joseph Schumpeter developed the first theory of growth over one long period. He thought that the Innovation carried by the Entrepreneur S constituted the driving force of the growth, and introduced the concept of “creative Destruction” to describe the process by which an economy sees replacing an old productive model a new model based on innovations.

Growth “on the wire of the razor”: Harrod and Domar

After the second world war, the economists Harrod and Domar, influenced by Keynes, will seek to include/understand the conditions under which a phase of expansion can be durable. Thus, if he strictly speaking does not propose a theory of growth (explaining its origin over one long period), the model of Harrod-Domar makes it possible, nevertheless, to emphasize the strongly unstable character of any process of expansion. In particular, it shows that so that growth is balanced (i.e. the offer of production increases neither less (sousproduction) nor more (overproduction) that the request), it is necessary that it respects a precise rate, function of the saving and capital coefficient (quantity of capital used to produce a unit) economy. However, there is no reason but the growth, which depends on individual decisions (in particular of the investment plans of the contractors), respects this rate. Moreover, if the growth is lower thanthis rate, it will tend not to join it, but to move away some more, decreasing gradually (because of the multiplying of investment). The growth is thus, according to an expression of Harrod, always “on the wire of the razor”. This model, built after war and marked by the pessimism generated by the crisis of 1929, however was strongly criticized. It supposes, indeed, that neither rate of saving, nor the capital coefficient are variable short-term, which is not proven.

Technological advance like residue: model of Solow

Endogénéiser technological advance: new theories of growth

The recent theories precisely seek to make this factor endogenous - it be-with-to say to build models which explain its appearance. These models were developed starting from the end of the year 1970 in particular by Paul Romer and Robert Barro. They are based on the assumption that the growth generates by itself technological advance. Thus, there is no more fate of the decreasing outputs: the growth generates an technological advance which allows that these outputs remain constant. The growth, if it generates technological advance, thus does not have any more limit. Through technological advance, the growth constitutes a process which car-discusses.

These models explain why the growth generates technological advance by three large mechanisms. Firstly, the “learning by doing”: the more one produces, the more one learns how to produce efficiently. While producing, one acquires in particular experiment, which increases the productivity. Secondly, the growth supports the accumulation of the Human capital , i.e. the competences had by the labor and on which its productivity depends. Indeed, more the growth is strong, more it is possible to increase the educational level of the labor, while investing in particular in the education system. Generally, the rise of the level of education of the population - by public or private means - is beneficial. Thirdly, the growth makes it possible to finance infrastructures (public or private) which stimulate it. The creation of effective communication networks support, for example, the productive activity.

“Principal the conclusions these new theories is that while at the same time give an important weight to the mechanisms of market, they indicate the limits clearly of them. Thus it often required there to create arrangements apart from the market concurrenciel, which can imply an active intervention of the State in the economic sphere”. In particular this “return of the State” results in the fact that it is invested of triple role: to encourage the innovations by creating a framework ready to coordinate the externalities which rise from any innovation (for example thanks to protection that offers to the innovators the patents); to cause those while investing in research (in particular fundamental) and the infrastructures whose externalities exceed the profit that can expect the private actors; to improve the human capital while investing in the education system. Generally, it is the role of the structural policies of the State, in particular the investments in the public capital, which is thus underlined.

These models are however very frustrate in what they do not explain the precise mechanisms which make that the economic growth stimulates technological advance. In particular, each model of these theories sticks only to one flexible mechanism technological advance and growth. As Gallec and Ralle note it, “the general model recovering the whole of the forms of technological advance is undoubtedly too complex to be elaborate, which limits the range of the results obtained since the interactions between several existing forms are ignored”.

Controversies

Critics of the GDP

Can the growth be infinite?

There are several objections with the thesis of the infinite growth.

the first is an exogenic limit. The quantity of goods and services implemented in a company depends on the extension of the division of the labor. This one in its turn depends for its maintenance on material resources and their renewal. Even the economy known as “immaterial” depends on electrical energy (ex: the computer NEC Earth Simulator consumes 12 MW) and other infrastructures (the 130 million computers produced into 2002 will become waste before 2006).

the current Division of the labor rests on the massive use of resources épuisables. Nothing indicates that one can substitute other resources for these resources. Nothing states either that the renewable resources can render the same services. There is no proof making it possible to show that the current division of the labor could exist without oil, for example. Finally all indicates that the massive use of the reserves épuisables causes major disordered states of the Biosphère (climate changes, toxic etc), disordered states which more and more strongly reduce the free richness provided by nature and the services of the ecosystem S. the problem is that the monetary indicators do not take account of the abundance of the natural wealth. Certain estimates show that the services rendered by the ecosystems would have a money value exceeding several times world GNP. It is as far as we will have to pay if the free services are degraded.

For classical economists like John Locke, the extension of the economy could not be infinite, because the appropriation of the natural resources must know limits, so that others can profit from it: it was a preoccupation with a justice. But these concerns were marginalized at the 19th century, before returning at the end of the 20th century. In particular, Nicholas Georgescu-Roegen provided the foundations of the durable concept of Décroissance, which tries to show that an economy based on nonrenewable resources can only decrease one day.

These theories do not take however counts of it the speed of the technological changes, the regulation by the contract prices and the change of the productive contents (development of the immaterial services for example) which take shape in the current economy.

the second limit is endogenous. The division of the labor does not generate collective richness inevitably. For example the Intensive agriculture realizes fantastic savings of labor and it lowers the costs considerably, but at the price of an embrittlement of the ecosystems and an impoverishment of the soil which could be very expensive in the future. The generated income is actually composed of most of Endettement. The Organic farming uses the ecosystems in a durable and more productive way (ecologically speaking) that agricultural processing industry. It does not imply any debt. The organic farming implies a weak division of the labor in the field of the seeds, for example: it is the peasant who selects and who sows, because it is him which knows best the ecosystem. The industrial selection of the seeds would be for certain an aberration economic and ecological because the ecosystems are specific and in constant evolution. Some also affirm that if the people were in capacity to choose their food and to look after themselves mainly, they would need less to see their health taken of load by the medical system, which comes only in support.

international balance rests today on this promise of “Economic development for all”. The problem is that this promise does not rest on tangible proofs. It rests on an act of faith: the hope that we will always find coming of new resources to replace those that we exhausted, the hope which we will be able to adapt us to major degradations of the ecosystems. This hope can seem to weaken as we discover the complexity of the biosphere. Conversely, one can note that all the predictions of absolute terminals to the development since Malthus appeared false, because of the capacity of the man to find new uses with the resources.

Is the growth a good development model?

The economic growth is not unanimously allowed as being the ideal economic model. Its detractors, who are disappointed not to find there of political model, denounce the following disadvantages:

If each country wishes to gain more with its exports which it does not spend with its imports - what in all logic cannot arrive at all - the system is unbalanced. Some fear, in this kind of situations, that most powerful can only conceal with the least powerful and savagely compete with the ones the others. This competition can explain certain suppressions of employment in the powerful countries and the maintenance of low wages in the less powerful countries.

The liberal economists rétorquent that in the trade, any voluntarily agreed exchange involves an enrichment of each part, even if this exchange with the appearance of a play with null sum. Indeed, the parts would not be granting the exchange if they did not find there an advantage. Thus, always with the eyes of the liberal economists, the trade enriches all the parts with the exchange, that these parts are individuals or groups of individuals, like countries. Competition between country thus cannot with the dires of the liberal economists, to cause that a general enrichment. As for the existence of low wages, it is not due to an excess of competition but on the contrary to a defect of competition.

It creates frictions with nature. This one is exploited if there is search for immediate growth of the profit, because then one can not be satisfied to better manage the resources which one extracts already, but one increases also the extraction. However if the priority is not given to a better management (and thus also a better recycling), there are losses of potential of extractions, resources.

The liberal economists rétorquent that the problems involved in the exploitation of the resources can be easily solved for example by the privatization of these resources. Indeed, an owner will be able initially to evaluate his resource and then to manage it, simply while trying to maximize his richness.

Is the growth always source of satisfaction?

Each economic period of growth was the theater of sociological, political and ecological upheavals, in the sense that these upheavals did not always cause satisfaction.

1) Sociological upheavals

The rural migrations, as well as the great innovations like the car, the railroads or more recently the TIC, create great inequalities and great urban transformations that the population perceives initially and a long time like a sum of harmful effects. Moreover, these changes durably change the social report/ratio which is slower to be stabilized.

For as much, it is not certain that it is possible nor desirable to be opposed to the change. If the change takes place, it is certainly because it is necessary and inevitable caused dissatisfactions are never dominating vis-a-vis the advantages clearly perceived by the majority.

2) Political upheavals

The exponential growth of the Western economies at the 19th century, was based partly on a colonial model which produced a political scene of the 20th always source of instability and dissatisfaction.

In fact, colonialism hardly had advantageous economic effects very visible on the colonizing countries. Thus during the decolonization, one realized that the richest countries of Europe were Switzerland and Sweden, countries which had never had colony, and which Spain and Portugal, with their many colonies, had remained among the poorest countries of Europe. The only thing that gained the colonizing countries is to see their very widespread language and their culture in the world. As for the colonized countries, it is difficult to make for them an exact assessment of colonialism. They lost their languages, their cultures, their traditions, replaced by languages, cultures, European traditions. As for their developments economic and political, if it is clear that they have summers very strongly upset, which can say if they had been better or worse without colonialism?

3) Ecological upheavals

The passage of the industrial revolution and the formidable growth which results from this are without any doubt the source of the contemporary climatic upheavals, which nourish the distrust and the current dissatisfaction vis-a-vis technological advance.

Let us specify however that mistrust vis-a-vis progress and with its implications on the environment always existed and it is not obvious that they are stronger today than formerly.

4) Statistical upheavals

The growth is considered cause a drop in unemployment, even if exceptions exist. It is commonly admitted by the economists that the figure of 2% constitutes the threshold of influence on the rate of unemployment. Indeed, a growth higher than 2% results in a fall of this one. So that a policy to fight against unemployment must to be effective, to act indirectly on this one quite simply by causing the growth.

See too

References

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