What Causes High Economic Growth?

Peter Hann

High economic growth is associated especially with certain developing economies. Economic history suggests that developed economies normally have lower growth rates, even during times of economic boom. Double-digit or high single-digit growth rates are often associated with countries in the process of industrialization, those that are raising productivity and making more use of their natural and human resources. High economic growth may be made possible by the greater availability of capital, often sparked by attracting foreign direct investment. Improvements in the health and education of the population of a country also may spur fast economic growth by increasing productivity.

High economic growth is associated especially with certain developing economies.
High economic growth is associated especially with certain developing economies.

The high economic growth rates achieved by China in the decades following the reforms passed in 1978 are closely linked to the productivity levels of the population. Legal reforms increased the chances for starting private enterprises, while regulatory and tax incentives enabled rural collectives and private enterprises to retain more of their profits. Reforms allowed many foreign firms to form equity or contractual joint ventures with Chinese companies, while some could trade through wholly owned enterprises in China. This brought advantages to China in terms of technology transfer, development of infrastructure and job creation, while Chinese companies raised their productivity to international standards. Export-led growth was stimulated by the establishment of special economic zones with particular incentives for high technology companies and those manufacturing goods for export.

Distribution of resources to areas like the military often occurs in the final stage of economic growth.
Distribution of resources to areas like the military often occurs in the final stage of economic growth.

High economic growth is, therefore, spurred by high capital investment and the introduction of reforms to encourage the development of private companies that are incentivized by the ability to retain most of their profits rather than pay them over to the government. In developing countries with high levels of rural unemployment, the creation of jobs in urban areas and movement of workers from the countryside to towns may raise employment and productivity levels. Investment in new businesses in both urban and rural areas may draw in excess labor from the agricultural sector, increasing employment and productivity.

High growth rates historically have been achieved by innovation in products, processes, transport and communications. The inventions that spurred the industrial revolution in England led to greater productivity, and the introduction of railways in the 19th century with possibilities for fast transportation of raw materials and goods gave an additional boost to economic growth. In the latter part of the 20th century, the world economy was spurred by the computer revolution and development was given more speed after the spread of the Internet. While this type of innovation does not abolish the business cycle or prevent recessions resulting from failure of the financial system, the longer-term effects of such wide-ranging innovations are to spur greater growth of the world economy.

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Discussion Comments


@serenesurface-- I don't feel as confident as you about the US economy. I believe that for long-term economic growth, a country has to invest in education and innovation. But our education system is not very conducive to innovation anymore. In fact, I suspect that less and less people will go to college in the future because education has become so expensive. The US government just uses 3% of its budget for education (in 2014). I think it's too little.


@serenesurface-- Well, yes. The economy can't grow rapidly indefinitely. But it's also about the living standards and work standards found in developed nations.

Just think about foreign investment for a minute. Why do many Western companies relocate their production facilities and staff to developing countries like India, China, Africa and Brazil? It's because people are paid less in those countries. So companies save money by having the same work done for less. This gives a disadvantage to American workers who cannot be paid less than a minimum page for their work.

Developing countries have more unused resources and their resources are also cheaper which makes them very attractive to investors. This in turn fosters high economic growth. It's simple, really.


I had no idea that developed economies have lower economic growth rates than developing economies. This explains why the US, for example, has lower growth rates than China or Brazil as of 2014. I actually thought that this mean our economy is doing very badly. But I guess economic growth can't be uphill all the time. There is a point and after a country reaches that, the growth levels out. I do feel more confident about the US economy after knowing this.

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