Growth Population Essay

Economic Growth is the increase per capita gross domestic product (GDP). There is a distinction between nominal and real economic growth, where the first is the growth rate including inflation, while the second is the nominal rate adjusted for inflation. Moreover economic theorists distinguish short-term economic stabilization and long-term economic growth. The topic of economic growth is mainly related to the long run. Short-run variation of economic growth is termed the business cycle. The long-run path of economic growth is one of the central questions of economics.

In 1377, the Arabian economic thinker Ibn Khaldun provided one of the earliest descriptions of economic growth in his Muqaddimah (known as Prolegomena in the Western world) (cited in Weiss, 1995): When civilization [population] increases, the available labor again increases. In turn, luxury again increases in correspondence with the increasing profit, and the customs and needs of luxury increase. Crafts are created to obtain luxury products. The value realized from them increases, and, as a result, profits are again multiplied in the town. Production there is thriving even more than before.

And so it goes with the second and third increase. All the additional labor serves luxury and wealth, in contrast to the original labor that served the necessity of life. Economic growth is an important part of economic theory and one of the most significant problems economists tried to explain is the differences of growth rates of countries. Economic growth has been discussed since the time of physiocrats and Adam Smith. In his book “Wealth of Nations” (1776), Adam Smith mentioned economic growth as the improving and increasing of capital.

David Ricardo in “The Theory of Comparative Advantage” (1817) emphasized on the benefits of trade and its role in the expansion of economies. Modern economic growth theory was developed more than a century later during the mid-20th century. Based on Harrod and Domar model (1946), Solow and Swan (1956) introduced a model that included the term productivity growth. Assuming technological progress exogenous the neo-classical growth model shows that in case of no technological progress, economic growth will at some point ceases due to the effect of diminishing returns.

Solow’s model also includes a parameter that measures productivity, which describes the knowledge in the economy. The model implications where that in the short run policies are able to affect the steady state of the total production, but not the long run growth rate since growth is determined exogenous by the growth of labor force and technological progress. Neo-Classical Growth Model: Y=AK^? L^(1-?) Where Y represents the total production in an economy, A represents the productivity factor (often generalized as technology), K is he capital and L is the labor.

Despite its simplicity and the model gave the first insights in the importance of technological progress in the process of economic growth through the productivity factor, since a technological improvement which would increase A would eventually lead the economy to a higher level of output. Due to the disadvantages of Solow’s model and the need for a more {{{{effective}}}} theory explaining growth in the long run and technological progress, the endogenous growth theory were developed in the 1980s.

Romer (1986) based on microeconomic assumptions, households maximizing utility and firms maximizing profits, built macroeconomic models introducing technological progress and human capital – the skills and knowledge that make the labor force productive – which contrary to physical capital has increased rates of return. This model gave to policy makers for the first time the theoretical framework in order to influence long run growth rates depending on the type of capital they wanted to invest in.

Lucas (1988), Grossman and Helpman and Aghion and Howitt (1992) developed this idea further by including innovation and focusing mostly on research and development. The first wave of traditional neoclassical growth models are efforts to explain differences in income per capita through different paths of factor accumulation, focusing on the benefits caused by capital accumulation, physical and human, and on the way that these benefits may encourage long run growth.

The second wave of models – Romer (1990), Grossman and Helpman (1991) and Aghion and Howitt (1992) – endogenized technical progress, but they are not providing satisfactory explanation for income differences, in the contrary is similar to that of older models. North and Thomas (1973), cited in Acemoglu et al. (2005), mentioned that innovation, economies of scale, education and capital accumulation are not causes of growth; they are growth. All these factors are “proximate causes of growth”; the fundamental causes of growth differences are institutions, geography and culture. (Acemoglu et al. 2005) One definition for institutions is given by North (1990, pg. 3): Institutions are the rules of the game in a society or, more formally, are the humanly devised constraints that shape human interaction. In consequence they structure incentives in human exchange, whether political, social, or economic. Institutional change shapes the way societies evolve through time and hence is the key to understanding historical change. Institutions are the way that societies are organized and this is what it makes them vital for the behavior of economies and can be distinguished in two types, political and economic institutions.

If we base the description of each type on North’s definition for institutions, political institutions are the “rules of the political game” and are those that determine in a society the distribution of political power and the way that political power changes hands. Examples of political institutions are electoral rules, accountability, political stability, rule of law, number of veto players, presidential or parliamentary system, years in office etc. Similarly economic institutions can be defined as the “economic rules of the game” and are those that determine economic opportunities in societies.

Examples of economic institutions are property rights, the type of credit arrangements, commercial law etc. In addition economic institutions influence economic activities as they shape incentives and have significant impact on investments and production. Acemoglu et al. (2005, pg. 392) provides a figure of how political institutions interact with economic institutions and affect economic performance. The relationship is described in Figure 1 below: Figure 1 Source: Acemoglu et al. (2005, pg. 392) “Economic institutions are endogenous” as they are the result of the choices that social groups make.

However in most cases there will be a “conflict of interest’ among social groups. The equilibrium that determines the economic institutions depends on the involved groups and in spite of the fact that the efficiency of the economic institutions may influence the decision made, the key player in the conflict will be the group that has more political power. Political power takes two forms regarding its origin: “de jure political power (institutional) and de facto political power”. De jure political power derives from political institutions, such as the form of government, while “de facto political power … [originates from] the economic esources [of a social group]. Those who hold political power at period t are able to influence the political institutions of the future. Economic institutions shaped at period t determine the economic performance at current period and through this the distribution of resources at the period t+1. (t refers to current period and t+1 to the future) Regarding the creation of institutions Acemoglu (2005) based on Coase theorem (Coase, 1960) describes that institutions are the results of conflicts and negotiations between groups of people in societies in order to escape from inefficient conditions.

In other words institutions are shaped by the active forces within societies. In the field of the origins of institutions, there are various views. First is the “efficient institutions view”, following from the above, according to this view social groups or individuals that maximize their surplus are influencing the existing institutions. One institution (e. g. property rights, rule of law etc. ) is established when the costs are less than the benefits that the groups are facing.

So if the current conditions in societies are beneficial for a certain group, while are negative for another, these two groups can negotiate and through this to change the institutions, increasing in this way the total surplus. According to this view the differences in institutions between countries arise from the different characteristics that each country has, meaning that no right or wrong institutions exist, but only efficient or not, because while an institution may create significant benefits for a country or a society, it might have the opposite effect on another.

The second view is “the social conflict view”. Following this view the institutions may appear as choices of groups, but the major difference with the first view is that instituions are not necessarily efficient. This view, origins from the idea that institutions are shaped mostly from the social groups that hold political power and these groups are making choices in order to increase their own benefits, so in some cases the emerging institutions may not maximize the total surplus. Avner Greif (2008) offers an example with the analysis of the origin of constitutionalism.

Greif (2008) emphasized on the fact that constitutionalism evolved from the need of the ruler for administration, in other words for a group of people to implement policies and monitor the society. This group of people acquired administrative power – political power – and so was able to negotiate with the ruler, disregarding the non-elite. Furthermore all the institutions that evolved afterwards were protecting and improving the benefits of the elite. Third one is “the ideology/beliefs view”, which focuses on the role of beliefs that societies have in the procedure of influencing the institutions.

This view is based on the impact that beliefs may have in the incentives of a society. The last of the views regarding the origins of institutions is “the incidental institutions view”, which indicates that institutions are a result of the interaction within societies, rather than choices of social groups. (Nelson and Winter (1982), Young (1998), Acemoglu (2003a) and Acemoglu, Johnson and Robinson (2005)) Geography is the second fundamental cause, as was stated earlier, and it refers to the role that nature has on the economic development of countries.

Differences in geography, climate and every other aspect of the environment in which individuals, social groups or countries take decisions or act, are able to shape incentives and influence productivity in various ways. Montesquieu (1748) cited in Acemoglu et al. (2005), might be one of the first that discussed this issue, in his book The Spirit of Laws he mentions: The heat of the climate can be so excessive that the body there will be absolutely without strength.

So, prostration will pass even to the spirit; no curiosity, no noble enterprise, no generous sentiment; inclinations will all be passive there; laziness there will be happiness … People are . . . more vigorous in cold climates. The inhabitants of warm countries are, like old men, timorous; the people in cold countries are, like young men, brave. ” One of the founders of modern economics Marshall is another prominent figure who emphasized the importance of climate, arguing: “vigor depends partly on race qualities but these, so far as they can be explained at all, seem to be chiefly due to climate. Furthermore geography may influence as well technology and innovation, mostly in agriculture and also may have major impacts on the mortality rates, usually mentioned as “disease burden”, of certain regions of the world affecting in this way the labor force. Bloom and Sachs (1998) discuss that malaria, which kills millions of children every year in Africa, reduces the annual growth rate of African countries by approximately 1. 3 percent a year, implying that if malaria had been cured 50 years ago the income of these countries would be double than it is today. Culture is the final fundamental cause of economic growth.

Culture, related to different beliefs, religion and experiences, can play an important role in shaping incentives in different societies. Joel Mokyr (2008) for instance in his research about the origins of industrial revolution argues that British institutions were more efficient for the changed needs of the economy and the society, and specifically the commercial environment. Also emphasizes on the fact that British culture and the gentlemanly codes enhanced the trust and the cooperative behavior and allowed market exchange and the creation of new technologies. Regarding the importance of institutions Acemoglu et al. 2005) discuss the case of the separation of Korea as a “natural experiment”. Korea was under Japanese rule from the beginning of the 20th century till the end of World War II, upon the Japanese defeat in 1945. Separation of Korea was the result of a political game between Soviet Union and United States of America. After Korean independence Soviet forces took over control of a part of Korean peninsula and the United States afraid of the prospect of the complete control of the Korean peninsula by communists, supported a nationalist ruler, Syngman Ree, who preferred the separation than a communist leader for Korea.

After the elections of May 1948 Korea was separated and two states were established, the Republic of Korea to the south, that followed a more capitalistic type of government, protecting private property and allowed markets to be driven by private incentives, and the Democratic People’s Republic of Korea to the north, following a Soviet socialist type of government, eliminating private property and market decisions instructed by the state.

Before separation as Acemoglu et al. (2005) state: Koreans shared the same history and experiences … Korea exhibited an unparalleled degree of ethnic, linguistic, cultural, geographic and economic homogeneity … [with] few geographic distinctions between South and North, and both shared the same disease environment. North Korea was has more natural resources and was more industrialized, since the Japanese occupation, however both had the same GDP per capita in 1945.

Therefore the separation may serve the research for the effects of institutions, since the only differences that could affect the economic performances were the different institutional paths each Korea followed. Figure 2 Source: CIA World Factbook As you can see in Figure 2 the two Koreas till early ‘70s had the same income per capita level but from mid-‘70s and after the paths of their economic performance separated as well. South Korea grew rappidly achieving vast growth rates, while North Korea remained at almost the same level of income. By 2000 South Korea had income level 15 times greater than North Korea’s.

However as Acemoglu et al. (2005) continue to the commenting, despite that the large difference in income level of the Koreas can be directly related to the different institutional paths each one followed, this “natural experiiment is not enough to support and establish a theory for the role of institutions in the process of economic growth, a larger sample is needed. Tebaldi et al. (2008) analyze the role of institutions and innovation in economic growth. The model examines how institutional constraints affect growth rates and sets a framework to study the interactions between institutions and human capital.

Their work emphasizes on the effects of the quality of institutions on the allocation of human capital to the research and development and in case of economies with poor institutions how human capital influences growth. Through their analysis, they were able to find that long run growth rate is influenced by the growth rate of innovation which is also determined by the growth of institutions. On the other hand, in the short run, if institutions are not able to follow innovation in the path of change, putting therefore barriers in growth, the growth rate of the economy will decrease and so innovation will slow down as well.