by Carrie Barnett

Why are some parts of the world rich and getting richer? Why are some nations mired in poverty? The questions are among the most fundamental in economics.

Arthur Blakemore and Berthold Herrendorf examined these questions—with an eye toward policy. If economists can discover how economies improve their living standards, then the logical next step is to craft policies to make it happen. Blakemore and Herrendorf are professors of economics at ASU’s W.P. Carey School of Business. They outlined their findings in a white paper issued in January 2007.

The first step in figuring out why growth occurs is to define the term. Policymakers often overlook step one. Gross Domestic Product (GDP) growth alone does not accurately reflect the standard of living in an economy. The ASU economists say that real GDP per capita—economic output on a per person basis and adjusted for inflation— is a better gauge.

The professors synthesized decades of research by world renowned economists, from Joseph Schumpeter to Nobel Laureate Edward C. Prescott. Blakemore and Herrendorf conclude that success at adopting or developing new technology is the key to growth. A backward economy can vault ahead by copying techniques used by more advanced societies.

Growth rates can be extraordinary once this process begins. China is the best current example. China’s economy grew very little in the first half of the 20th century. But during the last 25 years, its per capita income grew by a factor of nine—zooming from $614 to $5,530.

Countries or regions playing technological catch-up tend to experience extraordinary growth rates. Once they close the gap, growth slows dramatically.

The ASU researchers write that maintaining even modest levels of growth requires substantial investment in research and development. It also needs a constant upgrading of the skills of the labor force. Schumpeter's term “Creative destruction” refers to the replacement of old industries with new ones. It is an essential part of growth in advanced societies. The consequences are painful for firms that go out of business and individuals who lose their jobs. But the economy as a whole will benefit with higher growth rates and improved standard of living.

Blakemore and Herrendorf say that economic growth is primarily a result of market dynamics. However, growth trajectories can be altered (either positively or negatively) by government policy.