CHAPTER 5Economic Growth and Challenges of Remaining an Advanced Country

Over-Stretching Is Required for Economic Growth

The preceding four chapters are all about how an economy could stagnate, sometimes for an extended period, when it is in Cases 3 and 4. This chapter discusses the opposite case, the drivers of economic growth. Not surprisingly, economic growth is highly relevant to an economy in Case 1 or 2.

Much has been written about economic growth since the days of Thomas Malthus. However, the recent emphasis on productivity and demographics by economists seeking to explain growth has placed the growth debate on the misleading path.

At the most fundamental level, someone must spend more than they earn for an economy to grow. If businesses and households behave prudently and spend only what they earn in each period, the economy may be stable, but it will not grow. For it to expand, some entities must over-stretch themselves—either by borrowing money or drawing down savings.

A business will do so if it finds an attractive investment opportunity that seems to offer returns that are higher than the borrowing costs. Similarly, a household might borrow money or reduce its savings if it finds an item that it feels it cannot live without. It should be noted that business and household borrowings to purchase existing assets do not count here—these transactions only result in a change of ownership and do not add to GDP.

Economic growth, therefore, requires either (1) a continuous ...

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