The Causes of Economic Growth
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Economic Growth is caused by improvements in the quantity and quality of the factors of production that a country has available i.e. land, labour, capital and enterprise. Conversely economic decline may occur if the quantity and quality of any of the factors of production falls.
Improving the Quantity and Quality of Land Resources
Increases in the quantity of land available for agriculture will increase economic growth. However, the extent to which this happens is limited to the extent to which bush land can be converted to agricultural land. All economic resources are scarce and have an opportunity cost. As bush land is increasingly used for agricultural purposes it is no longer a habitat for wildlife. The relative scarcity of land in the face of a growing population means that the law of diminishing returns might also become relevant. The law predicts that an increasing amount of labour applied to a fixed quantity of land the marginal productivity of the labour will fall. This was the basis of the argument put forward by the Reverend Thomas Malthus. To prevent this loss in productivity the quality of the land must be improved. This can be done through the application of better technology through improved irrigation, fertilisers and pest control
Improving the Quantity and Quality of Human Resources
Increases in the supply of labour can increase economic growth. Increases in the population can increase the number of young people entering the labour force. Increases in the population can also lead to an increase in market demand thus stimulating production. However, if the population grows at a faster rate than the level of GDP the GDP per capita will fall.
It is not simply the amount of labour that will lead to economic growth. It is often the quality of that labour. This will depend on the educational provision in countries. Improving the skills of the work force is seen as being an important key to economic growth. Many LDCs have made enormous efforts to provide universal primary education. As more and more capital is used, labour has to be better trained in the skills to use them, such as servicing tractors and water pumps, running hotels and installing electricity. It should always be remembered that education spending involves an opportunity cost in terms of current consumption and thus it is often referred to as investment spending on human capital.
Improving the Quantity and Quality of Capital Resources
One can distinguish between:
- Directly productive capital - plant and equipment e.g. factories
- Indirectly productive capital - infrastructure or facilitating capital e.g. roads and railways.
The process of acquiring capital is called investment. The opportunity cost of capital investment is the current consumption foregone. The level of investment and the quality of investment will directly affect the level of economic growth. The efficiency of the labour force and the other factors of production will depend upon the amount and quality of capital they have. In LDCs some investment comes from abroad in the form of foreign direct investment. This is usually through multinational enterprises locating in a country. There has been criticism of some investment in LDCs as to whether it is appropriate. If production moves from being labour intensive to capital intensive, unemployment and poverty increases.
The Quantity and Quality of Enterprise resources
The level of economic growth may be slowed down if there is a lack of entrepreneurial and risk taking managers. For growth to take place inventions and innovations must be encouraged. Again the role of education is seen as being essential here. Multinational enterprises also can provide training in management skills.
In countries like Zambia where for many years the government has taken a considerable role in production through parastatals there might be a lack of enterprise culture. In addition, where traditional agriculture has been communally organised then the move towards a private sector profit making culture is likely to be slow.
Thus there are many potential economic, cultural and social barriers to economic growth.
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Related Glossary Items:
Factors of Production
Privatisation of State Owned Enterprises
Low productivity of Traditional Farming Methods
Supply Side Approaches
Fisher Clark's Theory of Structural Change
The Harrod-Domar Model
The Lewis Model of Development
Rostow's Model - The Stages of Economic Development
Models of Demographic Transition
Economic Growth and the Production Possibility Frontier