ECONOMIC GROWTH

 

Introduction

Economic growth refers to the persistent increase in a country’s gross domestic products over a given period of time usually one year. Economic growth is represented by an outward shift in the production possibly frontier which could be proportional or biased depending on the sectorial growth patterns.

Aggregate economic growth is measured in terms of gross national product (GNP) or gross domestic product (GDP)

Therefore the source of economic growth includes the following.

Natural resources

These include, land, forests, minerals, climate and water resources and they constitute a foundation for economic growth. However resource abundance is not a sufficient conditions for growth but rather r a necessary one because resources are optimally utilized at the least cost and waste. A good climate for example for agricultural economies can guarantee an increase in agricultural outputs and hence economic growth for example Kenya and Uganda they possess fertile soils which favor agriculture.

Capital accumulation

This refers to an increase in capital stock overtime. Capital accumulation reflects effective demand, creates production efficiency for future production, leads to increase in national out put and enables a nation to meet the requirements of an increasing population by providing employment opportunities and other survival alternatives. One method of growing capital is through the purchase of tangible goods that drive production. This can include physical asset such s machinery. This is witnessed more developed countries such as china.

Technological progresses

This refers to the improvement of the methods of production. It is when the quantity and combination of factors of production yield higher output. Technological progress arises from research and innovations which increase labour efficiency, capital productivity as well as efficiency of other factors of production due to technological progress there has been development of new production methods which improve on the quality of goods and also reduce with lower costs. Also informational technology such as access to free internet and access to satellite communication are responsible for the success of technological progress in countries such as India, china and Singapore.

 Populations

This has a dual effect on the economy as a source of economic growth.

a)      Increased productive labour force. This increases the country’s capacity to exploit idle resources. However labour force alone does not necessarily of labour force and the human capital. Human capital is the attributes of an individual that contribute productively to economic activities for example individual like entrepreneurs who provide business plans hence promoting economic growth in most developing countries such as Uganda.

b)      Market: population growth has got the potential to expand the domestic market. As such, the domestic produces would be induced to increase their output in response the increased demand.

Political stability

Basically growth is usually possible in a stable political environment Liberia, Burundi, and Nigeria are some examples where unstable political environment had prevented these economies from achieving desirable economic growth. Also a political stable environment encourages investors to invest in the economy for example there are many Chinese investors in Uganda.

Macro-Economic Environment

For an economy to thrive, macroeconomic stability is paramount for instance it doesn’t matter how much resources are available as long as there is inflation in an economy. A relatively stable macroeconomic environment for example stable price reduce the cost of doing business, increase demand for goods and services and therefore encourage investment hence promoting economic growth.

 Organisation

This refers to how the factors of production are put to use organisation compliments land, capital and labour and helps in increasing their productivity. Thus how much output produced in an economy depends on capital, labour, natural resources available on one hand but also on how well they are organized and put to use on the other hand. Therefore for an economy to attain rapid economic growth there has to emerge an entrepreneur class to organize other factors of production to make production of goods and services possible.

Neoclassical growth theory.

The theory was developed by Robert Solow and Trever Swan in 1956. Neoclassical growth theory is an economic theory that outlines how a steady economic growth rate results from a combination of three driving forces that is to say labour, capital and technology. The neoclassical growth theory is also referred to as the exogenous growth theory that assumes that economic prosperity is primarily determined by external factors rather than internal factors.

According to the neoclassical growth theory given a fixed amount of labour and a constant technology, leaving capital as variable, economic growth will cease at some point as ongoing production reaches a state of equilibrium based on internal demand factors. The equilibrium of the neoclassical growth theory is measured using the production function say

Y=AF(K,L), where Y represents an economies GDP (Gross Domestic Products).

                                 A represents a determinant level of technology.

                                 K represents its share of capital and  L describes the amount of unskilled labour in an economy.

However due to the relationship between labour and technology an economy’s production function is often written as  

Y=F(K,AL). Increasing any of the inputs shows the effect on GDP and therefore the equilibrium of an economy however if the three factors of neoclassical growth theory are not all equal the returns of both unskilled labour and capital on an economy diminish.

An example of the neoclassical growth theory is a 2016 study published in themes titled, technology changes in economic growth theory. Neoclassical, Endogenous and evolutionary institutional approach by Dragoslava Sredojevic Slobadan and Gorica BosKovic. The authers find a consensus among different economic perspectives all points to technology as a key generator to economic growth.

Endogenous growth theory

Endogenous growth theory is an economic theory which argues that economic growth is generated from within a system a s a result of internal processes. More especially the theory notes that the enhancement of a nation’s human capital will lead to economic growth by means of the development of new forms of technology, efficient and effective means of production.

Endogenous growth theory argues that improvement in productivity can be tied directly to faster innovations and more investments in human capital from governments and private sector institutions and markets which nature innovations and provide incentives for individuals to be innovative knowledge is the major determinant of economic growth under this theory.

The major tendencies of the endogenous growth theory include;

There are increasing returns to scale from capital investment especially infrastructure and investment in education, health and telecommunication.

Private sector investment in rural development is a crucial source of technology progress.

Government policy ability to raise a country’s growth may lead to more intense competition in market and help to stimulate product and pressing innovation of economic growth.

Government policy should encourage entrepreneurship as a means of creating new business and ultimately as an important source of new jobs, investment and further innovations.

One of the biggest criticisms aimed at the endogenous growth theory it that it is impossible to validate with empirical evidence. The theory is also criticized of being based on assumptions that cannot be accurately measured

Modern political economy theory

This is the most recent wage of growth theory that has been used to investigate the deeper or fundamental determinants of growth. This research focuses on the impact on growth of such factors as the quality of governance, legal origin, ethnic diversity, democracy, trust, corruption, role of law, human rights and institutions in general.

Major debate relating to the deeper determinant of growth also considers the relative importance of geographical constrains, the natural resource curse, and the links between international economic integration and growth.

Short run predictions

Growth is affected only in the short run as the economy converges to the new steady state output level.

The rate of growth is determined by the rate of capital accumulation as the economy coverage to the steady state.

In the augmented solow model growth is determined by both accumulation of physical capital and human capital. Capital accumulation is in turn determined by;

(i) The savings rate, the proportional output used to create more capital rather than being consumed.

(ii) The rate of capital depreciation. 

Long run predictions

The rate of return (on capital) is lower in countries with higher capital per worker therefore capital should flow from rich countries to poorer countries, thus driving convergence.

Diffusion of knowledge. Poorer countries can adopt modern technologies without having to develop them internally ant thus benefit from technological progress in more advance countries thus also driving convergence.

A common prediction of the Solow growth model is that an economy will always converge towards a steady rate of growth, According to this prediction countries are predicted to converge to their respective steady state of growth.

The steady state growth rate-depends only on the rate of technology progress and the rate of labour force growth.

Policy measures like tax cuts or investment subsides can the steady state level of output but not the long run growth rate.

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K.T NO.1