Economic Growth and Causes of Its Variability

Introduction

Economic growth is defined as an increase in the market-adjusted value of goods and services produced by an economy over a particular period of time. For the sake of convenience, it is measured as the percent rate of the positive change in GDP, gross domestic product. In the modern world, there is great diversity and variability when it comes to economic growth.

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A question arises as to why some countries seem to know how to trigger and harness rapid economic development whereas others struggle with introducing and reinforcing viable and policies and, hence, lag behind. The presence of several concurrent influences and the integration of each national market into the global marketplace are what make it impossible to make a development plan that would fit any country. This paper will discuss how countries are classified in terms of their economic trajectories and study the main factors influencing economic growth.

The World Population and Country Classifications

As of 2018, the total world population had reached 7.7 billion people. This number is projected to have grown by 29% and amounted to 9.9 billion by 2050 (Population Reference Bureau, 2018). Asia is by far the most populous continent housing more than 4 billion people. With its 1.4 inhabitants, China has been the most populous country in the world for decades on end. India comes close second with its 1.3 billion people and is projected to break China’s record by 2050. The population of Africa will double by 2050 – out of 26 countries with the fastest projected growth, the majority are located on this continent.

West Africa will see a particular increase in population as it is expected to triple in the next thirty years. Home to approximately 750 million people, Europe comes third among the most populous continents. Only one European country, Russia, has made it to the top twenty most populous countries in the world. However, Russia is also on the list of the regions that will see the most dramatic decline in population by 2050. North America and South America come fourth and fifth with populations of 460 and 390 million respectively. Lastly, Australia remains the most sparsely populated continent out of all and only houses 36 million people.

The World Bank (2019) and other international institutions use GNI (Gross National Income) per capita for measuring economic development and classifying countries accordingly. The World Bank (2019) defines low-income countries as those with GNI per capita less than $1,035. To qualify as middle-income, the citizens of a country need to have more than $1,035 but less than $12,616 at their disposable.

The middle-income countries are split into two categories: lower-middle and upper-middle. Lastly, high-income countries are characterized by GNI per capita that surpasses $12,616. As of now, not a single European or North American country belongs to the low-income category. The overall tendency is that African and Asian countries are behind on economic development as compared to the rest of the world.

GNI per capita is not a perfect or unquestionable tool for evaluating economic development, let alone the quality of life. The economic growth rate might be more useful when making predictions or analyzing a particular country’s trajectory.

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As per the most recent data, the five countries with the fastest economic growth all belong to the low-income and lower-middle-income categories. As of 2018, the economies with the quickest development rate are Ethiopia, followed by Rwanda, Bangladesh, India, and Cote d’Ivoire (Focus Economics, 2018). The new statistics make it even more interesting to analyze the discrepancies between countries in terms of economy.

Economic Growth: Main Factors

Governance

Economic growth has everything to do with the way a country is governed. The World Bank defines governance as both the policies and institutions that facilitate the decision-making process and the exertion of authority (n.d.). Governance ensures the provision of necessary infrastructure and social environment to foster the economic development of the entire nation. According to the World Bank’s reports, there are six aggregate indicators used for assessing the quality of the governance in a given country (n.d.). These are accountability, political stability and lack of violence, regulatory framework, government effectiveness, the rule of law, and control of corruption.

Today, in the majority of both developing and developed countries, the main objective of governance is stimulating economic development. Accountability means taking responsibility for one’s actions: the government of a country is held responsible by both its citizens, especially if they have the discretionary power, and the international community. Regulatory frameworks and their adequate enforcement limit the government’s powers and set the course of action. Political stability and lack of violence are also crucial for economic growth because major conflicts disrupt normal economic processes.

Moreover, in the case of any event that compromises the political stability of a country, its government has to shift its focus to solving the conflict instead of fostering the business environment. Lastly, apart from ensuring peace and the rule of law, an effective government takes control of corruption and undertakes measures to eliminate it. Corruption is detrimental to economic growth as it leads to the disproportional distribution of a country’s capital that benefits those in power. Good governance insists on transparency and facilitating consultative processes between the authorities and private interests.

A prime example of how good or bad governance can affect economic development is a vast difference between North and South Korea. Shortly after their division in 1945, both newly formed states suffered from extreme poverty. Even though in the 1950s, North and South Korea were equally wrecked by political chaos and instability, over the next few decades, their economic development took completely different directions.

North Korea chose communism and turned into a dictatorship or what French (2015) calls a state of paranoia. The new national ideology, Juche, glorified independence, which in the case of North Korea, proved to mean hostility toward anything foreign and total seclusion from the outside world. Today’s North Korean government barely meets the standards for good governance outlined by the World Bank. The authorities are violent toward the country’s citizens, and despite the proclaimed communist values, the gap between the richest and the poorest is wide. The country has one of the lowest GNI per capita in the world, and its industries can barely sustain the needs of its inhabitants.

What South Korea did after the division is often called “the miracle of the Han River.” SK embraced capitalism, transparency, and accountability early on, and by 1996, it had joined the Organization for Economic Cooperation and Development (OECD), which marked its transition to a developed country. Eight years later, South Korea entered the “trillion GDP club” and ranked 11th among the world’s largest economies (McCune, 2019).

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As of now, in terms of GNI per capita, South Korea has gotten far ahead of its closest neighbor, North Korea, and left China and Vietnam behind, however, losing the competition to Japan and Singapore. Overall, the example of South and North Korea shows how different countries can handle human resources, natural resources, corruption, and population growth.

Human Resource

On a national scale, human resources mean the total size of a country’s population with regards to their capabilities, education, professional skills, productivity, and work ethics. Another term used interchangeably with the human resource is human capital. Human beings are an essential part of the production and other business activities and need to be carefully studied to ensure proper economic development.

A ranking that provides the most precise data on the global human resource at hand is the Human Development Index or HDI. What makes HDI unique is that it examines human capital from the angles of both an asset and a liability of the government. The first of three aspects regarded by HDI, knowledge, is what a person can offer at the job marketplace and what he or she can contribute to their country’s development.

The remaining two aspects, however, describe the responsibilities that the state must take: ensuring that its citizens have long and healthy lives and decent standards of living. All three aspects are interconnected: a person can be hardly productive if he or she struggles to cover the most basic expenses or has poor health. A person who no longer struggles to make a living, on the contrary, can think on a higher plane: be proactive, entrepreneurial, and plan his or her future without hesitation.

As of 2018, the top ten positions of the HDI ranking are occupied by the countries belonging to the high-income group: Norway, Switzerland, Australia, Ireland, Germany, Iceland, Hong Kong (China), and others (Human Development Reports, 2018). While doing further research on these leading countries, it turns out that what unites them is high life expectancies – some of the highest in the whole world (more than 80 years).

The top of the HDI list overlaps with the highest-ranking positions of the OECD Better Life index available at http://www.oecdbetterlifeindex.org/. For instance, Norway, Switzerland, Australia, and Iceland rank high according to the data provided by both HDI and OECD.

Another common characteristic that is true for the majority of these countries is free or accessible education and high literacy rates. Now that human resource development is covered, it would be compelling to take a look at how the examined countries are doing economically. As it turns out, Norway, Switzerland, Iceland, Ireland, and Australia have some of the highest GNI per capita in the world (Human Development Reports, 2018). They also make part of the world’s largest economies and are recognized as stable and safe countries.

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It makes sense also to take a look at some of the bad examples of how some countries handle their human resource. In the modern world, men and women take equal parts in academia and the workforce, and none of the genders should be discriminated against or denied opportunities. The World Bank (2018b) reports that not educating girls costs countries trillions of dollars as they miss out on opportunities to engage more young specialists in business activities.

Countries that rank very low on the HDI are also the countries with the poorest female literacy rates in the world, for instance, Chad and the Central African Republic (India Today Web Desk, 2016). To ramp up the economy, both boys and girls should be obliged to receive at least secondary education, which is a pathway to tertiary education and future professional achievements.

Human Resource Management

It is also important to study human resources development on a smaller scale, namely, in the corporate world. In developed countries, entrepreneurship and small and medium business are the backbones of the economy. The business environment is ever-changing and needs to keep up with global tendencies. The criteria for measuring organizational success are evaluated by leadership in the market share, revenue, and competitive advantages supported by customer loyalty and satisfaction.

Another factor speeding up economic growth is innovation: developing new products or services on par with market contenders or earlier than them, thus, disrupting industries. This requires responding promptly to market needs and operating more efficiently, namely, eliminating business processes and activities that do not add any value. A company’s capacity for innovation and development is the total sum of each manager’s and employee’s capabilities and ambitions, which makes human resource management a vital part of economic growth.

Effective human resource management relies mostly on building a healthy organizational culture. Alvesson (2002) emphasizes that in the modern world, a strictly pragmatic approach to creating a work environment is no longer adequate. The author claims that there is an inevitable confusion around what constitutes organizational culture, and many contemporary notions and concepts lack depth and consistency. Some people see corporate culture as a set of rules that employees must follow.

While this utterly functionalist interpretation might make sense, it ignores human motivation and engagement, simply put, why people do or do not do what they are told. To other people, organizational culture as a concept is interchangeable with managerial ideology. This approach pays attention to such aspects as leadership styles but is also deficient due to its dismissal of the interconnectivity between managers and employees.

Admittedly, a phenomenon as complex as organizational culture requires more in-depth understanding. Alvesson (2002) views culture broadly: to him, it consists of learned and exchanged values, opinions, experiences, and meanings. People use culture as a source of information and a means to self-expression; culture is both communicated and reproduced. The author argues, however, that while the mentioned attributes are true for all cultures, there is no such thing as organizational culture in general as this phenomenon is unique to each enterprise, country, or even region.

Alvesson (2002) sees a distinction between good and bad cultures as arbitrary due to certain relativism: what works for some people might not be found useful by others. However, the author singles out such types as the culture of excellence and the culture of inferiority. They are distinguished by how they treat human capital and what kind of climate they create, friendly and supportive or toxic and abusive.

Today many countries in the Northern hemisphere, especially Northern European countries, employ the so-called democratic model of organizational culture which Alvesson would probably categorize as a culture of excellence. Markopoulos and Vanharanta (2014) argue that the employment of the said model is only possible if the overall social and political climate predisposes it, and society has enough knowledge and democratic institutions. According to the authors, the democratic business model gives rise to democratic project management which can otherwise be characterized as responsive. Employees’ voices are heard and amplified, and their needs are considered and met.

The next step as described by Markopoulos and Vanharanta (2014) is innovation development enabled by the democratic culture within a corporation. When employees have enough space to create and are supported by the management, they are able to come up with innovative ideas or at least, understand the need for innovation and prioritize it in their work (Sutton, 2014). The last step that crowns the preceding development of the democratic culture is innovation-based competitive operations.

As seen from the described mechanism, a vision precedes action in a way that organizational culture precedes a decision and its realization. Thus, organizational culture cannot be equated with the sum of managers’ and employees’ roles and responsibilities and should be understood as philosophy reflective of the social climate in which it exists.

Corruption

Both on a national and local level, organizational culture should disapprove of corruption. It is one of the ways in which a person can abuse his or her power and leverage by pursuing interests that contradict the law. From a moral standpoint, corruption is a breach of trust, especially when committed by an individual who assumed their current position through an election. Different studies conducted over the span of the last two decades have shown that bribery is pandemic in developing and transition countries. However, corruption rates may vary significantly within the same country or region.

Nowadays, corruption is seen as a severe constraint on economic growth and development. Bribery usually leads to an increase in transaction costs and insecurity in the economy. Power abuse in the form of bribery deters international and domestic investments. A corrupted state puts a heavy burden on its citizens and the commercial and service activities of small and medium businesses. It is easy to see how bribery can affect human resource development and lead to a so-called brain drain, or talent relocation.

Since corruption is a complex phenomenon, its causes vary from region to region. However, when analyzing the most corrupt countries in the world, it is possible to point out a few commonalities. According to the most recent data provided by Transparency International (2018), Somalia, Syria, South Sudan, North Korea, and Yemen are the states that are most affected by bribery. All of them are located in Africa and the Middle East and qualify as low-income according to the World Bank’s classification. Among other things that these countries have in common are closed economies, low level of education, and lack of media freedom. The GDPs and GNI per capita of the mentioned countries have also been staying on the low for years and do not show signs of improvement.

Šumah (2018) argues that these common characteristics are interrelated. The rigidity of closed economies and their overreliance on tradition prevent them from accepting new policies. Bribery and embezzlement take place behind closed doors, and constrained and controlled media institutions cannot shed light on financial crimes. At the same time, a low level of education does not allow for building an organizational culture around meritocracy. The worth of a person on the marketplace and in the government structures is based on his or her closeness to those in power and not on their actual skills. Accumulating evidence shows time after time again that corruption stifles economic growth and is associated with adverse economic outcomes in both short and long perspectives.

Natural Resources

The abundance of natural resources is closely related to economic growth and development. One of the prime examples of a country that reached wealth and prosperity through proper utilization of its rich natural resources in Saudi Arabia. As of now the economy of Saudi Arabia is part of the top twenty economies of the world (G20) and belongs to the high-income country category (Wynbrandt 2014).

The Middle Eastern state has come a long way to achieve such outstanding results. Up until the early 1930s, Saudi Arabia was a subsistence economy characterized by self-reliance and self-provision by the community. The decade has proven to be a game-changer for the entire nation: after an unsuccessful attempt at a concession to a British oil company in 1923, in 1933, the country signed an agreement with a California-based Standard Oil.

A close, fruitful collaboration between Saudi Arabia and the United States led to the discovery of the first offshore field in the Middle East. Thanks to the efforts of the Arabian-American Oil Company (Aramco), Saudi oil production rose exponentially and allowed for exporting the product to the other countries in the Persian Gulf and the Mediterranean. All in all, the growth of the petroleum industry shaped the future outlook of the country’s economy for the decades to come.

However, the increasing volatility of the oil and petrol market has shown that exporting natural resources cannot be the only impetus to economic growth. For instance, in 2014, another country whose economy relies on oil export, Russia, went into a massive crisis that only came to an end in 2017 (Clayton, 2015). This was when it became apparent that the market for natural resources had become a political battleground. On top of the plummeting oil prices, Russia had to face repercussions due to its military interventions. These events emphasize the importance of economic diversification to avoid dependency on one single factor.

A brief look at the list of the world’s largest economies makes it evident that in the modern world, technology and innovation are what stimulates growth. The United States is known for its Silicon Valley, a global center for high technology that gave rise to hundreds of startups and businesses. In recent years, China has appeared at the forefront of innovation and is on its way to building a knowledge-based economy (Gallagher, 2014). Rapid technological progress allows for the creation of new jobs, finding a balance between meeting financial and environmental objectives and making the government more efficient.

Population Growth

The first part of this paper provided statistics on global population trends. The world’s growing population has been raising concerns among economists. The past president of the World Bank embarked on the topic with caution. Tom McNamara, population growth was an ambiguous factor that could affect an economy both positively and negatively (The World Bank, 2018a). McNamara called for being delicate when approaching the issue of overpopulation and considering nuances.

Population growth presents advantages such as an increase in the working population. Human capital is one of the most valuable assets a country might have, and a steady rise in the number of people means that retired workers are replaced by new specialists. Population growth also means market stimulation and expansion: producers seek to meet changing needs by offering more goods and services.

Lastly, an increase in population can push people to cultivate previously unsettled territories, thus, realizing their economic potential. On the downside booming population growth is associated with an increased demand that is not always met by supply. The needs of citizens might surpass the industries’ productive capacities. It also burdens the environment and increases pollution, thus, reducing the quality of life. This disadvantage, however, can be overcome by implementing green technology and introducing innovative methods to agriculture.

Conclusion

Economic growth can be operationalized as an increase in gross domestic product or gross national income in capita with the latter more reflective of the quality of life than the financial capacity. Admittedly, economic growth is a complex phenomenon, and explaining its underlying mechanisms takes researchers to outline numerous contributing factors. Rapid population growth, especially in Asia and Africa, is an observable phenomenon whose effects are not devoid of certain ambiguity. A rise in population can both enrich the workforce and put a strain on the industries and welfare system.

Population growth means more human capital, which gives a country a competitive advantage if this resource is utilized adequately. High life expectancy, excellent quality of life, and education on par with organization culture that promotes excellence can ramp up economic growth. Abundant natural resources can give a country a leg up in competition, but over-reliance on this one factor jeopardizes its economic stability. Overall, economic growth is closely related to the governance of a country that considers all types of resources, knows how to handle population growth, and fights corruption.

References

Alvesson, M. (2002). Understanding organizational culture. Newcastle upon Tyne, UK: Sage.

Clayton, B. C. (2015). Market madness: A century of oil panics, crises, and crashes. New York, NY: Oxford University Press.

Focus Economics. (2018). The world’s fastest-growing economies. Web.

French, P. (2015). North Korea: State of paranoia. London, UK: Zed Books Ltd..

Gallagher, K. S. (2014). The globalization of clean energy technology: Lessons from China. Cambridge, MA: MIT press.

Human Development Reports. (2018). Latest Human Development Index (HDI) ranking. Web.

India Today Web Desk. (2016). Countries with lowest literacy rate: Let us shed some light on literacy in the world. India Today. Web.

Markopoulos, E., & Vanharanta, H. (2014). Democratic culture paradigm for organizational management and leadership strategies – the company democracy model. In 5th International Conference on Applied Human Factors and Ergonomics (pp. 1-12). Kraków, Poland.

McCune, G. M. (2019). Korea today. Abingdon-on-Thames, UK: Routledge.

Population Reference Bureau. (2018). 2018 world population data sheet with focus on changing age structures. Web.

Šumah, Š. (2018). Corruption, causes and consequences. Web.

Sutton, A. (2014). Work psychology in action. New York, NY: Macmillan International Higher Education.

The World Bank. (2018a). A changing world population. Web.

The World Bank. (2018b). Not educating girls costs countries trillions of dollars, says new World Bank report. Web.

The World Bank. (2019). Country classification. Web.

The World Bank. (n.d.). The Worldwide Governance Indicators (WGI) project. Web.

Transparency International. (2018). Corruption Perceptions Index 2018. Web.

Wynbrandt, J. (2014). A brief history of Saudi Arabia. New York, NY: Infobase Publishing.

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