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Why Some Countries Grow Faster than Others

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Why Some Countries Grow Faster than Others

Economic growth is the constant rise in a country’s creation of goods and services over a certain

period. It is characterized by a general improvement in the living standards of the citizens.

Rahman et al. (2018, p. 564) view economic growth as “the most powerful tool for creating jobs,

reducing poverty, and improving the standard of living through improved health status and

educational attainment.” A nation’s social and economic development is usually estimated by

changes in its real Gross Domestic Product (GDP) (Broughel & Thierer, 2019; Rahman et al.,

2018). The U.S. Bureau of Economic Analysis (BEA) defines the real GDP as the value of goods

and services less by production cost (Bureau of Economic Analysis, 2020). BEA (2020) states

that a change in a country’s real GDP indicates the overall economic situation. For example,

BEA reported a general decrease in the real GDP across the fifty states in the second quarter of

2020, causing a 31.4 percent decrease in the nation’s overall real GDP (see Figure 1). The bureau

attributed this decline to the COVID-19 pandemic:

The decline in second quarter GDP reflected the response to COVID-19, as “stay-

at-home” orders issued in March and April were partially lifted in some areas of

the country in May and June, and government pandemic assistance payments

were distributed to households and businesses. This led to rapid shifts in activity,

as businesses and schools continued remote work and consumers and businesses

canceled, restricted, or redirected their spending. The full economic effects of the

COVID19 pandemic cannot be quantified in the GDP estimate for the second

quarter of 2020 because the impacts are generally embedded in source data and

cannot be separately identified. (BEA, 2020)

Figure 1. Percent Change in U.S. Real GDP (Bureau of Economic Analysis, 2020)

Since economic growth has been a critical determinant of a country’s social and economic

development, economists have sought to research its causes. In so doing, they can establish why

some countries are far ahead in development than others. This paper will explore the factors

contributing to the high growth rate among countries and then offer possible solutions to nations

that still lag in development.

Why do some countries grow faster than others?

While there may be no definitive answer to why countries experience varying growth rates,

economists have revealed several factors contributing to the growth. According to Rahman et al.

(2018, p. 567), “there is a clear lack of consensus among the researchers about the contributory

factors that accelerate growth.” However, this study identified some of the outstanding factors

that influence growth. They are discussed below.

International trade

Depending on the availability of raw materials, skilled workforce and technology, some

countries engage in trade with other countries for mutual benefits. Each country gets an

opportunity to gain from the exchange since they acquire goods and services, which they either

lack or need more (Wolla, 2017). Wolla (2017) asserts that when underdeveloped countries can

venture into bilateral trade, they are inclined to acquire capital goods that they can use in

supplementing their factors of production. The availability and productivity of these factors of

production results in a higher rate of economic advancement. Furthermore, international trade

provides a broader market for locally produced goods and services (Wolla, 2017). However,

Mutreja et al. (2018) reveal that some countries cannot participate in international trade because

of trade barriers. The rationale for using trade barriers such as quotas and tariffs, according to

Yabs (2018, p. 2), is “to protect their domestic economies or restrict consumption of certain

goods or services.” The same article states that minimizing or lifting these barriers could result in

a rise in economic growth.

Government

In most countries, the government has a significant contribution to its economic growth.

For example, several studies exist to explain the impact of government expenditure on the
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countries growth. Research by Rahman et al. (2018) and Dudzevičiūtė et al. (2018) state that

government expenditure affects the economy positively and negatively. Rahman et al. (2018, p.

572) opine that:

High government expenditure might come from greater taxing on the people

reducing their disposable income; and in the presence of corruption and

inefficiency in public spending, specifically in the low-income and lower-middle

countries, high government expenditure may be financed by substantial

borrowing. This may lead to crowding-out effect if government expenditure

exceeds the threshold level.

Research by Dudzevičiūtė et al. (2018) also reports that government spending has significant and

adverse effects on a nation’s growth. Dudzevičiūtė et al. (2018, p. 375) state that “The results

have revealed that in the short run, spending on national security, health, transportation, and

communication have been positively related to economic growth.” Other ways in which the

government can impact a nation’s economy include regulations and taxes. These strategies can

either vitalize or destroy the economy. Therefore, countries with inefficient government and poor

institutions are bound to lag in economic development.

Technological innovation

Technological innovation is the advancement in know-how and its application in various

production processes. Although technological innovation has been condemned as

‘dehumanizing’ and a cause of unemployment for every nation’s labor force, it is a significant

driver of economic growth (Broughel & Thierer, 2019, p. 3). Bart Verspagen notes that “it seems

beyond dispute that a change of technology in the pure sense, coupled with organization changes
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at various levels of aggregation, are the main driving factors behind the continuous increase of

living standards (As cited in Broughel & Thierer, 2019, p. 13.” Although Broughel and Thierer

(2019) say, “it is not always clear what cultural, political, or market systems affect the pace of

innovation,” technological change is hard to achieve. Some of the factors that hinder new

technology include the high cost of implementation, political factors, and unfavorable market

conditions and policies (Broughel and Thierer, 2019). However, countries that invest in market

research and can access better technology are bound to register increased productivity, and as

productivity increases, the economy also grows. Countries that invest in the acquisition and use

of new technology are more likely to experience a higher growth rate than countries with no

institutions to initiate these changes.

In conclusion, governments can take some measures to enhance economic growth. One of

the measures is encouraging spending among the citizens by reducing taxes levied on products.

However, the government should be keen not to collect meagre taxes as this is likely to result in

external borrowing to supplement its budget. Furthermore, the government should uphold

political and economic stability to provide an enabling environment for investment. Another way

that the government can enhance economic development is by developing infrastructure in terms

of better transport systems such as roads, railway lines, and airlines. If any government,

especially those from underdeveloped countries, can implement some of the initiatives

mentioned above, sooner or later they may be at par with or even surpass the already developed

countries.
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References

Broughel, J., & Thierer, A. D. (2019). Technological innovation and economic growth: A brief

report on the evidence. Mercatus Research Paper.

https://dx.doi.org/10.2139/ssrn.3346495

Bureau of Economic Analysis. (2020, November 25). U.S. Economy at a Glance.

https://www.bea.gov/news/glance

Dudzevičiūtė, G., Šimelytė, A., & Liučvaitienė, A. (2018). Government expenditure and

economic growth in the European Union countries. International Journal of Social

Economics, 45(2), 372-386. https://doi.org/10.1108/IJSE-12-2016-0365

Mutreja, P., Ravikumar, B., & Sposi, M. (2018). Capital goods trade, relative prices, and

economic development. Review of Economic Dynamics, 27, 101-122.

https://research.stlouisfed.org/wp/2014/2014-012.pdf
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Rahman, M. M., Rana, R. H., & Barua, S. (2019). The drivers of economic growth in South

Asia: Evidence from a dynamic system GMM approach. Journal of Economic Studies,

46(3), 564-567. https://doi.org/ 10.1108/JES-01-2018-0013

Wolla, S. A. (2017). Why are some countries rich and others poor?. Page One Economics.

https://research.stlouisfed.org/publications/page1-econ/2017/09/01/why-are-some-

countries-rich-and-others-poor

Yabs, J. (2018). Trade barriers between European Union and East African

Countries. International Journal of Economics, 3(1), 1-6.