Growth of Nations in the Global Economy

This article will focus on the growth of nations in the global economy. The article will provide an overview of the two main national growth theories, including the neoclassical growth theory and new growth theory, and the concept of the global economy. The relationship between global governance and the growth of nations will be discussed. The issues related to human capital and technology as engines for growth of nations in the global economy will be introduced.

Keywords Global Economy; Global Governance; Human Capital; Nations; Neoclassical Growth Theory; New Growth Theory

International Business > Growth of Nations in the Global Economy

Overview

The growth of nations varies between regions, nations, and historical eras. Economic and political changes promote or depress the growth of nations depending on variables such as national leadership, political and economic stability, natural resources, international relations, and infrastructure. The current era of the global economy, a product of economic globalization, is creating strong, though variable, national economic growth and development worldwide (Jones, 2005).

The global economy is characterized by growth of nations, both in populations and in output and consumption per capita, interdependence of nations, and international management efforts. Indicators of global growth and interdependence include the huge increases in communication links, world output, international trade, and international investment since the 1970s. The global economy is built on global interdependence of economic flows linking the economies of the world. The global economy is characterized by economic sensitivity. National economic events in one region often have profound results for other regions and national economies. National economies exist not in isolation but in relationship and tension with other economies worldwide. The global economy includes numerous economic phenomena and financial tools shared between all countries. Examples include the price of gold, the price of oil, and the related worldwide movement of interest rates (Preston, 1996).

According to the World Bank, economic growth of nations refers to the quantitative change or expansion in a country's economy. The economic growth of a nation is measured as the percentage increase in its gross domestic product during one year. Economic growth occurs in two distinct ways. Economic growth of a nation occurs when a nation grows extensively by using more physical, natural, or human resources or intensively by using resources more efficiently or productively. According to the World Bank's approach to economic growth of nations, intensive economic growth of nations requires economic development (Glossary, 2007).

The new global economy is characterized and controlled through global management or governance efforts. International organizations, both public and private, work to establish norms, standards, and requirements for international financial governance. These international organizations, including the United Nations, the World Bank, the G-20, the Financial Stability Forum, the International Organization of Securities Commissions, the Organization for Economic Co-operation and Development (OECD), and the Basle Committee on Banking Supervision, develop and encourage implementation of standards, principles, best practices, and economic architecture for worldwide use (Preston, 1996).

The following sections provide an overview of the main national growth theories and the global economy. These sections serve as foundation for later discussion of the relationship between global governance and the growth of nations. Issues related to the use of human capital and technology as engines for growth of nations in the global economy will be introduced.

Theories of Economic Growth of Nations

The economic growth of nations has been a topic of study by economists and political scientists since the nineteenth century. Economic growth of nations is considered by economists to be a natural result of market activity. Economists have long been interested in the relationship between income inequality and the economic growth of nations. Growth theories refer to the theories that explain the factors and relationships that promote the economic growth of nations. Economic growth theories incorporate variables representing the effects of production factors, public expenditure, and income distribution. The following factors influence the effect that income distribution has on growth: investment indivisibilities, incentives, credit market imperfections, macroeconomic imperfections, macroeconomic volatility, political economy aspects, and social effects (Alfranca & Galindo, 2003).

There are two main theories of the economic growth of nations: neoclassical growth theory and new growth theory.

• Neoclassical growth theory: Neoclassical growth theory, also referred to as the exogenous growth model, focuses on productivity growth. The neoclassical growth theory was the predominant economic growth theory from the nineteenth to mid-twentieth centuries. Exogenous growth refers to a change or variable that comes from outside the system. Technological progress and enhancement of a nation's human capital are the main factors influencing economic growth. Technology, increased human capital, savings, and capital accumulation are believed to promote technological development, more effective means of production, and economic growth. The neoclassical growth theory prioritizes the same factors and variables as neoclassical economics. The field of neoclassical economics emphasizes the belief that the market system will ensure a fair allocation of resources and income distribution. In addition, the market is believed to regulate demand and supply, allocation of production, and the optimization of social organization. Neoclassical economics, along with the neoclassical growth model, began in the nineteenth century in response to perceived weaknesses in classical economics (Brinkman, 2001).
• New growth theory: New growth theory, also referred to as the endogenous growth theory, began in the 1980s as a response to criticism of the neoclassical growth theory. Endogenous growth refers to a change or variable that comes from inside and is based on the idea that economic growth is created and sustained from within a country rather than through trade or other contact from outside the system. The new growth theory identifies the main endogenous factors leading to sustained growth of output per capita including research and design, education, and human capital (Park, 2006).

These two theories vary in their argument about what causes economic growth and what role technology plays in economic growth. There are three main criticisms of new growth theories: First, the new growth theory is criticized for lack of conceptual clarity in its underlying assumptions. Second, the new growth theory is criticized for lack of empirical relevancy. Third, the new growth theory is criticized for claiming to be a wholly new theory when it's closely tied to growth theories that came before. Economists debate the significance of this last criticism. The new growth theory claims to represent a total break from neoclassical theory but the continued focus on technology (whether exogenous to endogenous technology) and its relationship to economic growth, connects the two main growth theories in significant ways (Brinkman, 2001).

Criticism of the neoclassical growth theory focuses on the long-run productivity limitation created from exclusive focus on the addition of capital to a national economy. According to Mankiw (1995), the “neoclassical model predicts that different countries should have different levels of income per person, depending on the various parameters that determine” income levels (p. 282). The range of income levels between countries shows the magnitude of international differences is actually vast and variable. The neoclassical model also “predicts that each economy converges to its own steady state, which in turn is determined by its saving and population growth rates.” Comparisons of the growth rates of rich and poor countries shows that the neoclassical model does not successfully predict the rate of convergence of all countries. Convergence refers to the tendency of poor economies to grow more rapidly than rich economies (Mankiw, 1995, p. 284).

Ultimately, sustained economic growth of a nation, as represented by enhanced productivity and growth, may require structural transformation within the nation. Economic growth, as reported by Brinkman (2001), may require creative destruction of an old system of institutions, modes of production, and relationships.

The Global Economy

The global economy is a product of economic globalization. Global markets are characterized by an increasing mobility in capital, research and design processes, production facilities, customers, and regulators. Global markets, created through socio-economic changes, political revolutions, and new Internet and communication technology, have no national borders. The modern trend of globalization, and resulting shifts from centralized to market economies in much of the world, has created opportunities for increased trade, investment, business partnerships, and access to once closed global markets.

Economic environments around the world are changing due to the forces of globalization. Globalization creates a turbulent global socio-political environment characterized by competing political actors, shifting power relations, and politically-driven changes in national economies around the world. Business opportunities including international investments and joint ventures in the global economy are increasingly tied to trade pacts between nations such as the North American Free Trade Agreement (NAFTA) between the United States, Canada, and Mexico, the Mercosur trade pact between Argentina, Uruguay, Brazil, and Paraguay, and the Asia Pacific Economic Cooperation (APEC) trade zone. In addition, business opportunities are resulting from privatization worldwide. Nations are privatizing many state-owned industries and allowing foreign investors to purchase pieces of them through joint ventures or local operations in order to participate in these projects. Ultimately, the global economy is marked by change, innovation, and growth.

Applications

Global Governance & the Growth of Nations

The growth of nations in the global economy is heavily influenced by international governance organizations that develop international policies which effect business practices and profits and the distribution of development aid to developing countries. International governance organizations, also called policy regimes, are one of the main products of economic globalization. The increasing integration and interdependence created by international trade and product flows creates international markets and the need for international oversight and governance.

International governance, including political and economic governance, is one of the most significant trends of economic globalization. The global economy and the global environment are managed and coordinated by international organizations or policy regimes. Policy regimes refer to the arrangements and understandings that facilitate international harmonization and coordination of economic, environmental, and political affairs. Policy regimes tend to be cooperative, mutually-beneficial alliances. There are four main types of international policy regimes: Global and comprehensive regimes refer to regimes that can encompass the entire globe and any sphere of international activity (Preston, 1995). Regional and associative regimes refer to agreements and understandings of less than global scope with varying levels of comprehensiveness within their geographic limits. Functional economic regimes refer to “arrangements that might be global in geographic impact but with explicitly limited functional scope. Environmental regimes refer to agreements involving natural resources and the natural environment” (Preston, 1995).

Major international policy regimes that manage and control the global economy and global environment include the United Nations, International Monetary Fund, World Trade Organization, the World Bank, and the Organization for Economic Co-operation and Development. Regional policy regimes, such as NAFTA and the European Union, also have great control and influence over the global environment and global economy. Environmental regimes depend on compliance by all parties. The environment cannot be managed or tended to by one country and ignored by another. The responsibilities and effects of global environmental management are, by definition, global in nature.

Policy regimes are characterized by their scope, purpose, organizational form, decision and allocation modes, and strength. Scope refers to the sphere of international economic or business activity covered by the regime. Purpose refers to the specific objectives intended. Organizational form refers to the institutional structure and membership. Decision and allocation modes refer to the role of voting or other group decision-making processes and methods of distributing costs and benefits. Strength refers to the extent to which members conform to the norms and guidelines of the regime (Preston, 1996).

The following sections describe the work that two of the main policy regimes, the Organization for Economic Co-operation and Development and the United Nations, do to promote the growth of nations in the global economy.

The Organization for Economic Co-operation & Development

The Organization for Economic Co-operation and Development (OECD), an international organization founded in 1961 including thirty member nations committed to democratic government and the market economy, promotes its Principles of Corporate Governance to nations around the world. The OECD principles, developed in 1999 and revised in 2003, serve as the international standard and reference for corporate governance practices. The OECD principles cover six main areas including ensuring the basis for an effective corporate governance framework, the rights of shareholders, the equitable treatment of shareholders, the role of stakeholders in corporate governance, disclosure, transparency, and the responsibilities of the board.

The Organization for Economic Co-operation and Development coordinates policy among industrialized countries and makes recommendations to less developed countries. OECD member nations, including Australia, Belgium, Canada, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Korea, Luxembourg, Mexico, Netherlands, New Zealand, Norway, Poland, Portugal, Slovak Republic, Spain, Sweden, Switzerland, Turkey, United Kingdom, and the United States, exchange economic data. The Organization for Economic Co-operation and Development create unified economic policies to maximize the economic growth of their member nations and help less developed nations develop more rapidly.

Organization for Economic Co-operation and Development monitors and analyzes the causes underlying differences in growth performance in OECD member nations. The Organization for Economic Co-operation and Development identifies factors, institutions, and policies in the following categories that could enhance the growth of member nations:

• Economic growth and development: The OECD works to reconcile the drive for the growth of nations with the need to achieve wider income.
• Economic Growth and Productivity: The OECD regularly monitors the patterns of economic growth in member nations. The OECD assesses the output and productivity growth trends.
• Human Capital: The OECD recognizes that human capital plays an important role in the process of economic growth. The OECD reviews policies that encourage investment in human capital.
• Investment in and Financing of Learning: The OECD recognizes that learning, which is expensive to implement, is linked to economic progress and social cohesion in the global economy. The need for lifelong learning opportunities raises new and complex resource-allocation issues.
• Micro Policies for Growth: The OECD, along with its Committee on Industry and Business Environment (CIBE), aims to identify effective micro-policies for stimulating growth through entrepreneurship and innovation.
• Science and Technology Policy: The OECD, along with its Committee for Scientific and Technological Policy, contributes to the policy debates about the relationship between science and technology and sustainable growth.
• Statistical Analysis of Science, Technology, and Industry: The OECD creates databases of statistics in the areas of science, technology, and industry. The databases are intended for international comparisons of member nation data.

The United Nations

The United Nations, a global association of governments facilitating cooperation in international law, security, economic development, and social equity founded in 1945, counts 192 nations as members. The United Nations has five regional commissions, in Africa, Asian and the Pacific, Europe, Latin America and the Caribbean, and Western Asia, which promote growth in nations around the world.

• Africa: The Economic Commission for Africa (ECA) was established in 1958 to assist African nations to develop self-reliant socio-economic systems. The ECA designs and implements economic and social policies to alleviate poverty; expands inter-regional trade and integrates Africa into the world economy; enhances the capacity of States for growth and development.
• Asia and the Pacific: The Economic and Social Commission for Asia and the Pacific (ESCAP) was established in 1947 to provide technical support to Member Governments for socio-economic development through direct advisory services, information and training, sharing regional experiences and inter-country networks.
• Europe: The Economic Commission for Europe (ECE) was established in 1947 to promote a policy, financial and regulatory environment conducive to economic growth, innovative development and higher competitiveness for member nations.
• Latin America and the Caribbean: The Economic Commission for Latin America was established in 1948 to coordinate policies promoting economic development in Latin America and to foster regional and international trade.
• Western Asia: The Economic and Social Commission for Western Asia was established in 1973 to improve the economic and social situation and integration into the global economy of its Member States.

The international governance organizations described above, the Organization for Economic Co-operation and Development and the United Nations, base their development and economic growth efforts on the principles of the new growth theory (also referred to as endogenous growth theory). International governance organizations, a product of the global economy, promote development and growth in nations through the adoption of principles, tools, technologies, and aid from outside the nation rather than from within the nation (United Nations Regional Commissions, 2006).

Issues

Human Capital v. Technology

International governance and aid organizations that give support for economic growth and development in industrialized and developing countries operate based on implicit or explicit theories of growth. Economists debate whether technology or human capital is most responsible for promoting the growth of nations in the global economy. In practice, most international development and governance organizations promote growth of nations through investment in both technological support and human capital growth. Human resources or capital refers to the total quantity and quality of human effort available to produce goods and services. Investment in human capital is made by international governance and development organizations through training and education programs. Paradoxically, focus on promoting technological innovation and human capital may greatly enhance the likelihood of economic growth of a nation or may dissipate energy and resources for growth. Nations and their international supporters must decide their approach based on understanding of the variables that affect the growth of nations in the global economy.

Conclusion

In the final analysis, economic growth of nations in the global economy may be most important for the influence that growth of nations has on the standard of living and health for worldwide citizens. For example, the World Bank works to promote growth within nations that benefits people rather than simply creates corporate profit and opportunity. According to the World Bank, when economic growth is achieved by using more labor, it does not result in per capita income growth. In contrast, when economic growth is achieved through productive use of all resources, including labor, it results in higher per capita income. Ultimately, the approaches taken to promote economic growth and development profoundly influence the economic growth of nations and the quality of life for their citizens and residents.

Terms & Concepts

Convergence: The tendency of poor economies to grow more rapidly than rich economies.

Developing Countries: Countries characterized by an underdeveloped industrial base, low per capita income, and widespread poverty.

Global Economy: A model of economy characterized by growth of nations, both in populations and in output and consumption per capita, interdependence of nations, and international management efforts.

Global Markets: The economic markets of countries and regions open to foreign trade and investment.

Globalization: A process of economic and cultural integration around the world caused by changes in technology, commerce, and politics.

Human Capital: The utilization of human effort required to produce goods and services.

Markets: Social arrangements which allow buyers and sellers to carry out a voluntary exchange of goods and services.

Nations: Large aggregations of people sharing rules of law and an identity based on common racial, linguistic, historical, or cultural heritage; rarely act unilaterally.

Neoclassical Growth Theory: A growth model, also referred to as the exogenous growth model, which focuses on productivity growth.

New Growth Theory: A growth model, also referred to as the endogenous growth theory, which developed in the 1980s in response to criticism of the neoclassical growth theory.

Organization for Economic Co-operation and Development (OECD): An international organization founded in 1961 including thirty member nations committed to democratic government and the market economy.

Policy Regimes: The arrangements and understandings that facilitate international harmonization and coordination of economic, environmental, and political affairs (Preston, 1995).

The United Nations: A global association of governments founded in 1945 that facilitates cooperation in international law, security, economic development, and social equity.

The World Bank: An international economic development assistance organization that was founded in 1944.

Bibliography

Alfranca, O., & Galindo, M. (2003). Public expenditure, income distribution, and growth in OECD countries. International Advances in Economic Research, 9, 133-139. Retrieved May 17, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=10587268&site=ehost-live

Brinkman, R. (2001). The new growth theories: a cultural and social addendum. The International Journal of Social Economics, 28, 506-526.

Dougherty, C., & Jorgenson, D. (1996). International comparisons of the sources of economic growth. American Economic Review, 86, 25. Retrieved May 17, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=9605282425&site=ehost-live

Glossary. (2007). Retrieved May 17, 2007, from The World Bank. http://www.worldbank.org/depweb/beyond/global/glossary.html

Jones, B., Jones, B., Olken, B., & Olken, B. (2005). Do leaders matter? National leadership and growth since World War II. Quarterly Journal of Economics, 120, 835-864. Retrieved May 17, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=18333501&site=ehost-live

Mankiw, N. (1995). The growth of nations. Brookings Papers on Economic Activity, 6, 25-29. Retrieved May 17, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=9605282425&site=ehost-live

Park, C. (2006). The theory of economic growth: a "classical" perspective. Science and Society, 70, 558-562.

Preston, L. (1996). Global economy/global environment: relationships and regimes. EarthWorks. Retrieved May 14, 2007, from http://www.utexas.edu/depts/grg/eworks/proceedings/engeo/preston/preston.html

Skonhoft, A. (1997). Technological diffusion and growth among nations: the two stages of catching up. Metroeconomica, 48, 177. Retrieved May 17, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=10453246&site=ehost-live

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Suggested Reading

Hanushek, E., & Kimko, D. (2000). Schooling, labor-force quality, and the growth of nations. American Economic Review, 90, 1184-1208. Retrieved May 17, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=3885276&site=ehost-live

Nelson, R. (1997). How new is new growth theory? Challenge, 40, 29-58. Retrieved May 17, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=9710106884&site=ehost-live

Rima, I. (2004). Increasing returns, new growth theory, and the classicals. Journal of Post Keynesian Economics, 27, 171-184. Retrieved May 17, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=14636930&site=ehost-live

Wälde, K. (2005). Endogenous growth cycles. International Economic Review, 46, 867-894. Retrieved May 17, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=17511909&site=ehost-live