Economic growth, quarterly by country: the latest data

What is economic growth and development

Economic growth is defined as the rate of increase of the Gross Domestic Product (GDP) of a country. An increase in GDP means that the country produces more goods and services this year than it did last year.

Why do we equate production and income? All the goods and services produced in a country are sold to households, firms, government entities, and foreigners. The revenue from these sales end up in the pockets of people who are either employees (getting salaries) or capital owners (getting dividends and rents). In other words, all of the income comes from the sale of goods and services. More production means more income, less production means less income. The country cannot consume more than it produces. Respectively, GDP measures income.

Of course, an increase in GDP or GDP per capita does not mean that everyone is getting richer. Most of the additional income may go to relatively few capital owners and less goes to employees. For that, we need to look at income inequality. Also, even if everyone’s income is growing, that does not mean they live better. There could be crime, environmental pollution and other problems. The Human Development Index published by the United Nations broadens the notion of development by incorporating health and education outcomes along with income.

The importance of long-run economic growth

Over time, the expansion of the economy is due to rapid annual growth and "compounding." Compounding means that each year the increase in GDP comes on top of the increase during the preceding year. In other words, the increases are cumulative.

The question then is not only how to achieve rapid economic growth but how to sustain it over time. In other words, we should care about long-term economic growth. When we look across many countries and many years, economic growth is on average 2.5 to 3 percent per year. If an economy grows by 7-8 percent per year for several years, as the Chinese economy, that is extraordinary. With 8 percent economic growth, GDP doubles in size every nine years.

How economies grow

Broadly speaking, there are three ingredients to economic growth:

- Physical capital. These are the machines, equipment, buildings, land, and other tangible inputs into the production process. When companies invest in more equipment, this allows them to expand production over time and to contribute to economic growth.

- Labor. These are all the people employed in the economy. The economy can expand by simply increasing the number of people who work. This could be the result of population growth or greater labor force participation rate. For example, the entry of female workers into the labor force has been a great boost to economic development in many countries. Those additional workers produced goods and services and helped expand the economy.

- Productivity. Productivity is the amount of output produced with given labor and physical capital. The question here is not how many people are working and what machines they use but how well the labor and machines are put to use. Is the work organized well? Are resources wasted on inefficient company practices or in dealings with a corrupt public administration?

To sum, the economy can expand if there are more people working, if they use more machines and equipment, and if the people and machines are put to better use.

Historically, most of the advancements in economic growth have been associated with increased productivity. That, however, is not true for all counties at all times. Less developed countries grow primarily through investment in capital and incorporating more people into their labor force. The rapid rates of industrialization in Asia can be largely attributed to investment in new equipment and expanding the work force. As countries develop, their pattern of economic growth begins to shift. Innovation, rather than imitation, becomes more important. Hence, economic growth requires new technology and improvements in productivity.

Whether or not a country is able to make the transition to high productivity growth depends on many factors. Innovation requires a well-educated population, strong protection of patents and copyrights, institutions that support the growth of new ideas, and well-functioning financial markets that can finance these ideas. Without those factors, development reaches a ceiling and further improvements are tough to generate.

What factors determine if an economy grows rapidly

A vast number of economic analyses have identified the following factors for economic development: rule of law, education, international trade, and financial development.

Rule of law

In countries with strong rule of law:

- Property rights over land, equipment, and personal items are clear.

- The property rights are protected by law.

- Contracts between people, businesses, and the government can be enforced legally.

- Business regulations are clear and enforced in a transparent manner.

In such environments people make long-term investments and build large organizations. In contrast, if the property rights and contracts are not enforced and the business regulations are not clear, most of the economy consists of small family owned firms with little modern equipment. A high-tech, prosperous economy would not develop.

Recognizing the importance of the rule of law does not mean that we know how to improve it. Countries with weak legal systems and inefficient administration seem to be like that for decades, if not centuries. Although improvements are possible, they are painfully slow.

Education

Education contributes to economic development in many ways. An educated labor force can use new technologies raising the productivity and competitiveness of firms. Education is also essential for the creation of new technologies. A better educated labor force is more flexible and mobile. Economic studies across many countries and periods show that the greatest benefit for development comes from primary education. At that level, students become literate and develop basic math skills that allow them to participate in the economy. This raises their incomes and lowers income inequality. Increased access to higher levels of education is also important but the benefits are smaller. The benefits from strong higher education become important as countries approach the technological frontier and their development depends on producing new technologies. Better education also improves health outcomes and girl’s education in particular strengthens reproductive health. More broadly, better education helps strengthen the democratic processes and improve governance.

Various measures for education, such as the percent of teenagers who are enrolled in secondary schooling, are routinely included in statistical models that explain economic growth across countries and over time. The education variable is almost always “statistically significant”, i.e. there is substantial empirical evidence that education contributes to economic growth.

International trade

International trade fosters economic development in several key ways:

1. It allows firms to expand their markets and to increase sales. The greater scale of production lowers their cost and makes them more competitive.

2. International trade exposes firms to international competition and forces them to adopt new technologies and practices to stay competitive.

3. Foreign investment increases as foreign companies can open production facilities in one country and sell their products in other countries.

4. The economy can concentrate on the types of products it is good at and import the rest. In that way its resources are used optimally.

5. Firms can take advantage of cheaper imported goods for their production processes that make them more cost-effective.

Financial development

The "financial system" includes banks, stock markets, insurance companies, and other financial institutions. "Financial development" means that the financial system is fairly large and performs the important functions described below:

- It provides financing for large firms so they can expand their scale and implement complex technologies. That is possible as the financial system pools together the savings of various individuals and small firms and can finance large projects.

- It evaluates the prospects of different investments and allocates financing to the most promising ones. In that way, the available funds in the economy are put to good use.

- It monitors whether the funds are used prudently and as intended.

- It helps savers diversify risk. Banks and stock markets pool together the savings of thousands of individuals and invest them in many projects. That lowers the risk to individuals because the funds are spread out across many different investments.

Of course, the financial system may or may not perform well the functions described above. Sometimes, it channels too much money to poor investments and the result is a banking crisis.

Virtuous and vicious cycles

The factors that drive economic development depend, to a large extent, on the level of economic development of a country. Richer countries can invest resources in strong legal, educational, and financial institutions that further promote economic development. In contrast, poor countries lack the resources to develop such institutions. We call these “virtuous” and “vicious” cycles of economic development.

Based on that logic, countries could be “jump-started” by an external entity, such as the World Bank or the European Union that provides funds to build institutions and improve education. One notable success story is the Marshall Plan that provided development assistance from the U.S. to Germany after World War II. It helped Germany rebuild its economy and get on a high economic growth track. Unfortunately, it is hard to come up with other equally successful cases. In most cased, external assistance has no effect on long-term economic growth as the money is not used effectively or its volume is not sufficient to make a radical change. Therefore, countries have to come up with internal ways to promote economic development and switch from a vicious to a virtuous cycle.

Additional resources

World Development Report from the World Bank with information about every country and the world economy as a whole. Available from: World Bank.

The United Nations Development Program with analyses and data on poverty and economic development issues. Available from: Available from: United Nations.