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One question has troubled economists since the creation of their field of study: how can we maximize our returns despite a finite amount of resources?
That question has only become more important as environmental degradation threatens ecosystems around the world and rapidly migrating populations fight for resources.
It’s an interesting dynamic in this world of ours – when times are good, economic growth seems easy. Economies and financial markets flourish comfortably.
On the downside, recessions and shocks to important commodities like oil send economies spiraling into downturns. That’s not to mention the economic impact of COVID-19 that countries around the world battle in 2020.
Next in our series about global megatrends, we’re taking a look at how economic growth impacts countries around the world.
Growth occurs at different rates and for very different reasons. We’ll look at these as well as the impact that innovation has on the steady growth of global economies.
Causes of economic growth
Policymakers and politicians often scramble to seek new ways of encouraging economic output. More jobs, better living standards, and bigger industries often lead to greater economic growth. But finding the best way of achieving those things can be like trying to push a tractor up a hill.
The simplest way to break down how economic growth is to look at some common inputs: people and productivity. The two are similar, but not the same.
If all it took to achieve sustained growth was an increase in population, then the world wouldn’t be doing too bad. We covered population growth in an earlier post in our series on global megatrends [link to #1].
If population growth was all it took, politicians would need to make far fewer promises and people would likely be quite happy going on and making babies to fuel the world’s economic potential.
Unfortunately, the matter is entirely more complicated. The other half of the equation is productivity. This can be defined as how much output can be made on a per-person basis. The tricky part of the whole economic dilemma is how to affect productivity without creating too many downsides.
Productivity is further impacted by another four important factors, known as capital:
- Human elements such as knowledge, skills, and health;
- Social aspects, like norms and institutions;
- Manufacturing and infrastructure; and,
- Natural resources and ecosystems.
These four things interact with each other to impact productivity in all sorts of ways. Advancements in one factor, like adopting new manufacturing technologies, often incurs a cost to other forms of capital such as the destruction of natural resources.
How do we increase productivity? Here’s the interesting part. Virtually all sources of innovation, at regional or global scales, are the biggest drivers of productivity.
For instance, innovations in technology lead to new manufacturing methods and improvements to infrastructure.
New social programs that incorporate the latest understanding of education can also boost human capital and create a more educated and highly-skilled workforce.
Innovation, then, is one of the biggest drivers of long-term growth. Think about all the advancements that humanity has made over the centuries – even the most basic ones.
When humans created tools and machines, they increased productivity. When communities began aggregating and settling into urban settings, they increased productivity through proximity and by sharing knowledge.
Innovative advancements, no matter how small, play a huge role in allowing us to maximise resources and achieve greater returns on otherwise finite resources.
Physical resources are scarce, meaning they’ll run out eventually. The same is true for labour resources since not everyone can work indefinitely (no one can, actually) and not everyone works at the same level of productivity.
The world has experienced marked increases in investments and improvements to capital stocks over the centuries. For instance, investments in manufacturing capital in developed countries have doubled between 1970 and 2010.
How much growth is good?
Increases to productivity really took off after the 18th century. Data availability is difficult, but before then, economic output was suspected to rise by only 0.1 percent annually. But after the industrial and agricultural revolutions in Europe and elsewhere, economic activity and efficiency skyrocketed.
Advancements in transportation allowed once-distant civilizations to meet and share knowledge. Resource and knowledge sharing bypassed the traditionally slow route of making advancements on one’s own, which only further accelerated economic growth.
By the 21st century, the global average of growth of gross domestic product (GDP), a measure of economic activity, steadied between 2 and 4 percent. However, there are outliers. China, for instance, grew 9.8 percent on average every year between 1980 and 2013. That means its economy was doubling in size every seven years in that period.
The 2008 financial crisis curtailed much of the economic growth that was happening around the world. The global economies took another major hit in 2020 with the spread of the COVID-19 disease and the subsequent shutdown of many national economies in efforts to prevent its spread.
On average, however, global economic growth is steady and measured and will continue that trend thanks to innovation. The OECD predicts that global GDP will triple between 2010 and 2050.
Not all of that economic growth will be spread evenly across every nation. Different levels of investment in innovations, as well as cultural and institutional factors, play a part in how growth is distributed. Different countries are further expected to invest in different levels in human, social, and manufactured capital.
That said, global averages are expected to decelerate from a typical 4.3 percent growth to around 2 percent by 2050. Other nations, like those in the EU, might expect to reach a steady state of around 1.3 percent. Some nations will do better than others, as India and other countries like Brazil, Russia, and Indonesia are expected to see around 5 percent growth in the same time period.
Economic growth shouldn’t be considered a race, however. If history is any example, the secret to a steady rise in economic growth is innovation. Gains in efficiencies in all forms of capital – human, social, manufacturing and natural – is the proven way for countries to advance toward sustained economic growth.
For more in our series on global megatrends, check out our next post on how the dynamics of power, both political and economic, are changing around the world. [link to 6]