Since the creation of their field of study, one question has troubled economists: how can we maximise our returns despite a finite amount of resources?
That question has only become more critical as environmental degradation threatens ecosystems worldwide and rapidly migrating populations fight for resources. It’s an interesting dynamic in our world - when times are good, economic growth seems easy. Economies and financial markets flourish comfortably. On the downside, recessions and shocks to essential commodities like oil send economies spiralling into downturns. That’s not to mention the economic impact of COVID-19 that countries worldwide battle in 2020.
Next in our series about global megatrends, we’re looking at how economic growth impacts countries around the world. Change occurs at different rates and for every other reason. We’ll look at these and 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 more significant industries often lead to more remarkable economic growth. But finding the best course of achieving those things can be like pushing a tractor up a hill. The simplest way to break down how economic growth is to look at some standard inputs: people and productivity. The two are similar but not the same. If all it took to achieve sustained growth were an increase in population, the world wouldn’t be doing too bad. We covered population growth in an earlier post in our series on global megatrends. If population growth were all it took, politicians would need to make fewer promises. People would likely be quite happy going on and making babies 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 per person. 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 critical 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 to impact productivity in all sorts of ways. For example, advancements in one factor, like adopting new manufacturing technologies, often incur costs to other forms of capital, such as destroying natural resources.
How do we increase productivity? Here’s the exciting 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 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 sharing knowledge.No matter how small. Innovative advancements 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 valid for labour resources since not everyone can work indefinitely (no one can, actually), and not everyone works at the same level of productivity. As a result, the world has experienced marked increases in investments and improvements to capital stocks over the centuries. For instance, assets in manufacturing capital in developed countries doubled between 1970 and 2010.
How much growth is good?
Productivity increases took off after the 18th century. Data availability is difficult, but economists suspected economic output to rise by only 0.1 per cent annually. But after the industrial and agricultural revolutions in Europe and elsewhere, economic activity and efficiency skyrocketed. In addition, advancements in transportation allowed once-distant civilisations 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 development of gross domestic product (GDP), a measure of economic activity, steadied between 2 and 4 per cent. However, there are outliers. China, for instance, grew 9.8 per cent on average every year between 1980 and 2013. That means its economy doubled in size every seven years in that period. Unfortunately, the 2008 financial crisis curtailed much of the economic growth 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 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 and cultural and institutional factors play a part in how development is distributed. Other countries are further expected to invest in different human, social, and manufactured capital levels. Global averages are expected to decelerate from a typical 4.3 per cent growth to around 2 per cent by 2050. Like those in the EU, other nations might wish to reach a steady state of about 1.3 per cent. Some nations will do better than others, as India and other countries like Brazil, Russia, and Indonesia are expected to see about 5 per cent growth in the same period. Economic growth shouldn’t be considered a race, however. If history is any example, the secret to a steady rise in economic development is innovation. Efficiency gains in all forms of capital - human, social, manufacturing and natural - are proven 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]