The Process of Growth

How we grow

The economic growth is defined by two distinctly different processes. As previously noted, we have used the following basic definition to define economic growth as “an increase in the capacity of an economy to produce goods and services, compared from one period of time to another” (Investopedia, N.D). However, the factors that drive these distinct processes are different and it depends on where your economy is in its development trajectory.

The first growth process is catch-up growth. Catch up growth occurs in developing nations when exogenous (outside) knowledge and technologies are applied to build better roads, schools, and hospitals etc. closing development gaps. As underdeveloped nations start with less capital, their productivity is substantially boosted, rapidly driving up productivity by replicating methods of production, technologies, and institutions used in developed economies. As a result catch-up growth can lead to growth rates as high as 5-10 per cent as seen by China and South Korea over the last few decades. (Sachs, 2015).

The second growth process is endogenous growth. Endogenous growth refers to the “economic advancement that emerges from the internal workings of the economy (Sachs, 2015).” Endogenous growth requires nations to have skilled workers, be technology leaders and their business need to have the capabilities to develop new and sustain competitive advantages. Endogenous growth therefore comes from innovation of new machinery, techniques and industries; and a must in order to belong to the developed world.

The process of endogenous growth is sometimes also referred to as “a process of increasing returns to scale or chain reaction economy” as allows for spill-overs that continue to stimulate further and combine innovations (Sachs, 2015). Acemouglu and Robinson (2012) go further in their definition to suggest endogenous growth also is about having the capabilities to transform and respond the “wide spread creative destruction” which is associated with innovation. As endogenous growth is not about adoption but creation, it is harder and slower process at around 1-2 per cent growth in GDP a year (Sachs, 2015).

Why it matters

Making the distinction between the two growth process matters because it requires different institutions[1] in that catch-up growth is about adoption and endogenous growth is about innovation (Acemouglu and Robinson, 2012; Sachs, 2015). And economic developers are not always conscious of this in their interventions.

Catch up-growth requires governments to have a stronger role in stimulating growth directly. Governments of developing nations need to quickly develop infrastructure, advance human capital outcomes and attract investment which are considered a prerequisite for endogenous growth.

While the role of government in stimulating endogenous growth more about enabling the private sector to innovate and be competitive. Government role is more about regulatory reform that enables structural change, advanced workforce development such as STEM programs and R&D.

[1] A  nations cultural, norms and regulative elements

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