What factors influence economic growth?

The concept of economic growth has changed in recent years. / C7

Technological change is the result of the interaction between human capital, innovation, research and development

Economic growth depends on several factors, among which savings and technological change stand out.

We currently live in a spiral of inflation generated by the global supply crisis, intense energy dependence and the invasion of Ukraine by Russia.

In addition, after nearly two years of confinement, consumption has accelerated. All these factors have overheated the economy and threaten its growth.

Growth and savings

American economists Robert Solow and Trevor Swan developed their theory of economic growth in 1956. In it, they establish that saving (which becomes investment) is the main engine of growth and that, although consumption is positive, it should not be excessive. This is the golden rule of the savings rate.

So, inflation, which is nothing more than the extreme manifestation of the pull of consumption, slows down the possibility of increasing savings and, therefore, limits growth.

Solow and Swan theory explains that the initial engine of growth is savings. That saving is reinvested and generates new capital. Capital accumulation produces higher income. That higher income is once again destined for consumption and savings, and the wheel turns again. Thus, a virtuous circle is created in which a moment arrives in which the accumulation of capital is such that it is no longer possible to continue growing. This is known as steady state.

Therefore, the economies of the countries would tend to grow to a steady state. Only events as relevant as crises, wars or natural disasters could separate the economy from its stationary state. When the economy recovers, thanks to savings, it would tend again to the stationary state.

Thus, in theory, all economies should tend towards a steady state. But practice shows that there are economies, especially Western ones, that tend towards permanent growth. So, in addition to saving, there must be other levers for economic growth.

Growth and innovation

Technology and human capital are also important in explaining economic growth. If neoclassical economists focused on the relationship between technical innovation and physical capital, Gregory Mankiw, David Romer, and David N. Weil studied the relationship between technical innovation, human capital, and institutions, including governments, face to face. to the growth of an economy.

Technological change is the result of the interaction between human capital, innovation, research and development. Romer himself has recommended that public money finance educational institutions and R&D.

For Hans-Jürgen Engelbrecht, the educational level plays a decisive role in some phases of economic development. This was clearly seen with the economic growth of the Asian tigers (Singapore, Hong Kong, Taiwan and South Korea) in the 1960s. Productivity growth is faster in countries with higher levels of average schooling.

The development of human capital has greater effects on growth when it is specific to technological diffusion. STEM subjects (science, technology, engineering and mathematics) fall into this category. Therefore, in order to predict economic growth, economists look at educational indicators (years of schooling, spending on education, teaching time...).

growth and education

After investigating the GDP per capita of the American economy (2001), Professor Robert J. Barro concluded that the increase in the quality of human capital has a positive impact on the growth rate of the economy. From his research, it was recognized that human capital is also an engine of growth.

Not only the amount of education matters (years of schooling), but also its quality, the results obtained. The educational policies of each country must be consistent with the strategic positioning of its economy.

Other less formal models of economic growth take into account factors such as financial policies, available natural resources, and even the level of corruption in an economy.

Likewise, other economists have identified the value system that marks a certain culture or religion as a source of economic growth. It is a difficult factor to quantify but it can have a decisive impact.

Last but not least, we find the participation of governments in economic growth through their fiscal policies and public spending. A greater investment in infrastructure positively affects economic growth to the extent that the increase in productivity due to public investment has its effects later on tax collection.

For Mankiw, investment in education and health favor economic growth (Principles of Economics, Part IX, chapter 25). Transfers (aid, subsidies, etc.) are also positive, to the extent that they are presented as redistributive policies that favor the most vulnerable segments. As for taxes, the optimal thing is to tax the physical capital and not the worker's income, since these generate positive externalities.

The results of a company's R&D are not only going to benefit the company or the industry in question, but also end up producing positive externalities for a large part of society.

For example, R&D in the area of ​​semiconductors generates profits for chip producers but also for battery manufacturers and the automotive sector.

Economies should not lose sight of these factors and how they contribute to their growth.

CARLOS ALBERTO LASTRAS RODRÍGUEZ, PROFESSOR OF ECONOMICS AND QUANTITATIVE METHODS, NEBRIJA UNIVERSITY

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