CHAPTER

8
Characteristics Meaning and Characteristics of Growth Modern Economic Growth
MEANING
Modern economic growth refers to the development of the developed countries of Western Europe, the United States, Canada, Australia and Japan. Prof. Simon Kuznets in his Nobel Memorial Lecture defined economic growth as a long-term rise in capacity to supply increasingly diverse economic goods to its population, this growing capacity is based on advancing technology and the institutional and ideological adjustments that it demands.1 This definition has three components: First, the economic growth of a nation is identified by the sustained increase in the supply of goods. Second, advancing technology is the permissive factor in economic growth which determines the growth of capacity in supplying diverse goods to the population. Third, for an efficient and wide use of technology and its development, institutional and ideological adjustments must be made to effect the proper use of innovations generated by
1. In his earlier book Modern Economic Growth, 1966, Kuznets defined economic growth as a sustained increase in per capita or per worker product, most often accompanied by an increase in the population and usually by sweeping structural changes.

advancing stock of human knowledge. For example, modern technology is incompatible with the rural mode of life, the large and extended family pattern, family enterprise and illiteracy.

CHARACTERISTICS OF MODERN ECONOMIC GROWTH

Modern economic growth marks a distinct economic epoch. Prof. Simon Kuznets has pointed out six characteristics of modern economic growth that have emerged in the analysis based on national product and its components, population, labour force, and the like. Of the six, two characteristics are quantitative that relate to national product and population growth, two relate to structural transformation, and two to international spread. We will discuss them one by one here: 1. HIGH RATES OF GROWTH OF PER CAPITA PRODUCT AND POPULATION Modern economic growth, as revealed by the experience of the developed countries since the late eighteenth or early nineteenth century, is characterised by the high rates of increase in per capita product accompanied by substantial rates of population growth. The extremely high rates of increase are at least five times as high for population and at least ten times as high for production as observable in the past. Prof. Kuznets has shown that the rates of population growth of thirteen countries, excluding France, have been high in modern times than in pre-modern times. Leaving France with a population increase of 2.5 per cent per decade, the rates of population growth range from 6-7 per cent for UK, Sweden, Italy, and the USSR, to 8 per cent for Switzerland and Norway, to 1014 per cent for Denmark; West Germany, Japan and the Netherlands, and to 19-24 per cent for Canada, the United States and Australia. The decade rates of growth in per capita product of all these developed countries, except Australia with 8 per cent decade rate, are above 13 per cent. They range from 13.5 -14.1 per cent for the Netherlands and the UK, to 16-19 per cent for Switzerland, the United States, France, West Germany, Canada, Italy, Norway and Denmark, and to above 26 per cent for Japan, 28.3 per cent for Sweden and 43.9 per cent for the USSR.2 That modern economic growth meant a striking accelerated rise not only in product per capita but also in population does not imply that the latter was a necessary condition for the former. In some countries high rates of growth in per capita product were accompanied by high rates of population increase, and in others by low rates 3 For instance, rate of growth of population per decade in the USSR was low (6.9 per cent) but the rate of increase in per capita product was the highest, 43.9 per cent. Similar was the case with the UK, Sweden and Italy with low per decade population growth rates of 6.1, 6.7 and 6.8 per cent while their per capita product growth rates per decade were 14.1, 28.3 and 18.7 per cent respectively. If we were to take France, its per capita growth rate was 14.1 per cent against the population increase rate of 2.5 per cent. On the other hand, high population growth rates of 21.6 per cent and 19.1 per cent for the United States and Canada were associated with high per capita product growth rates of 17.2 per cent and 18.1 per cent respectively. Apparently, other factorsrelative availability of natural resources, timing of the inception of the modern growth process, or institutional conditions
2. S. Kuznets, Post-War Economic Growth, Four Lectures, 1964, Table 4. 3. S. Kuznets, Population and Economic Growth, Proceedings of the American Philosophical Society, Vol. Ill, No. 3, June 1967.

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complicate the effects of population growth and prevent a simple association betweenit and growth in per capita product, and population growth itself may have both expansive and depression effects on the increase in per capita product that differ in their weight in conjunction with other factors.4 High rates of growth of per capita product and population imply high rates of increase in total product. During the periods of modern economic growth, the rate of growth per decade in total product was the highest (53.8 per cent) for the USSR followed by the USA (42.5 per cent), Japan (42 per cent) and Canada (40.7 per cent). It was the lowest for France (20.8 per cent) and the UK (21.1 per cent). The growth rates of total product of other countries ranged between 21 and 40 per cent. The divergencies between these growth rates result in enormous multiplication of the total magnitude of performance, a decadal rate of growth of 20 per cent means a multiplication in a century to over 6 times the initial level; a rate of 50 per cent means a rise to about 58 times the initial level.5 Taking the non-communist developed countries as a whole, the rates of growth per year over the period of modern economic growth, were almost 2 per cent for per capita product, 1 per cent for population and 3 per cent for total product. These rates roughly mean a multiplication over a century by five for per capita product, by three for population, and by more than fifteen for total product.6 2. THE RISE IN PRODUCTIVITY Modern economic growth is characterised by a rise in the rate of per capita product due primarily to improvements in the quality of inputs which led to greater efficiency or rise in productivity per unit of input. This is traceable either to an increase in input of resources of labour and capital or to an increase in efficiency, or to both. Increase in efficiency implies greater output per unit of input. According to Kuznets, we find that the rate of increase in productivity is large enough to account for almost the entire growth of product per capita in the developed countries. Even with adjustments to allow for hidden costs and inputs, growth in productivity accounts for over half of the growth in product per capita. The growth of national product has been due to the enormous addition to population which led to a large increase in labour force. The increase in national product in turn led to a considerable increase in capital accumulation and hence in reproducible capital. The proportion of labour force to total popualtion showed an upward trend for all developed countries except Switzerland, Italy and Australia. It was the highest for Denmark (29.4%), followed by the United States (25.2%), Canada (18.3%), Belgium and Germany (15.8%), Sweden (14.6%) and Great Britain (13.1%). This rise may have been due to a shift in the age structure of the population in favour of working age, associated with decline in birth rate and in the proportions of population below working age; or to increasing participation of women in gainful occupations.. .and of lowering of the age of retirement. Whatever the reason, the proportion of gainfully occupied to total population, increased. But economic growth of developed nations has been accompanied by the long-term decline in the number of man-hours per capita. This tendency reflects increase in efficiency or productivity. Leaving the exceptional case of Italy where man-hours per capita declined by 7.5 per cent per
4. S. Kuznets, Modern Economic. Growth, l966. Data in this chapter are mostly based on this study. 5. lbid. 6. S. Kuznets, Economic Growth of Nations : Total Output and Production Structure. 1971.

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decade, the overall decline in man-hours per capita per decade for all other developed countries ranged between 1.1 per cent for Great Britain, 2 to 2.4 per cent for Belgium, Germany, Denmark, Sweden, Norway and the United States, 2.8 to 3.5 per cent for Canada, France and Australia, 4.1 per cent for Switzerland and 4.5 per cent for Netherlands. The contribution of capital input to rise in product per capita can be assessed by the trends in the capital-product ratios. The ratio of reproducible capital to national product rose by 11 per cent in the United States (between 1850-1950), 9 per cent in Great Britain (between 1865-1933) and by 7 per cent in Japan (between 1905-35). On the whole, the incremental capital-product ratio rose from 1.6 per cent in the late 19th century and early 20th century to 3.1 per cent in the 20th century for all developed countries. Further, the net domestic incremental capital-output ratio rose from 2.6 to 3.6 for Sweden, from 4 to 5.1 for Norway, from 2.4 to 2.8 for Denmark and from 2.9 to 5 for Australia between the second half of the 19th century and the first half of the 20th century. 3. HIGH RATE OF STRUCTURAL TRANSFORMATION Structural transformations in modern economic growth include the shift away from agriculture to non-agricultural activities and from industry to services a change in the scale of productive units, and a related shift from personal enterprises to impersonal organization of economic firms, with a corresponding change in the occupational status of labour: The share of the agricultural sector in total product declined in all developed countries except Australia. In the case of Great Britain, it declined from 22 per cent in 1841 to 5 per cent in 1955; from 42 per cent between 1872-82 to 9 per cent in 1962 for France; from 49 per cent in 1879 to 9 per cent between 1939-48 for United States; and from 63 per cent between 1878-82 to 14 per cent in 1962 for Japan. Thus by the end of the long periods the share of this sector in total product was less than 10 per cent in the case of UK, France, Germany, Netherlands and the USA, while it ranged between 10 to 26 per cent in Denmark, Norway, Sweden, Italy, Canada, Australia, Japan and the USSR. On the other hand, the share of the industrial sector rose to more than 50 per cent by the end of the long periods for Great Britain (56%), France (52%), Germany (52%), Netherlands (51%), Norway (53%), Sweden (55%), and the USSR (58%), while it ranged between 22 to 49 per cent for Italy (22%), Australia (30%), United States (42%), Denmark (48%), Canada (48%), and Japan (49%). So far as the movements in the share of the services sector are concerned, they are neither marked nor consistent among countries. The share of the services sector declined in Sweden and Australia while it rose in Canada and Japan. In other countries, the trend on balance was too small to be significant.7 The rapidity of structural transformations in modern economic growth can also be illustrated by the changes in the distribution of labour force among the three major sectors. By the end of the long periods of growth, the share of labour force attached to agricultural sector was 5 per cent in Great Britain, 12 per cent in the USA, 17 per cent in Australia, 19 per cent in Denmark, Sweden and Canada, 20 per cent in Switzerland and France, and 25 per cent in Norway. But it was high in Japan (33 per cent), and the USSR (40 per cent). Consequently, the share of labour force attached to the industrial sector ranged between 40 to 58 per cent for all countries, except Japan and the USSR, the latecomers in the field of industrialisation. But the share of the services
7. S. Kuznets, Modern Economic Growth, 1966.

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sector in total labour force either remained constant or changed relatively little in Great Britain, Belgium, the Netherlands, Sweden and Australia. But, there was marked absolute and relative rise in Switzerland, Denmark, Norway, Italy, the United States, Canada, Japan and the USSR. The inter-sectoral shifts were accompanied by growth in the scale of firms and changes in the type of organisation within sectors such as manufacturing or trade, from small incorporated firms to the large corporate units with the rapid shift in industrial structure and rapid change in technology. There were also rapid shift in allocation of product among types and sizes of producing norms, and consequently in the allocation of labour force. There was high inter industry, interstatus and inter-occupational mobility of the labour force among employees from blue-to white-collar jobs, from less to more skilled occupations and from small to large enterprises.8 4. URBANISATION Modern economic growth has been characterised by the movement of an increasing proportion of population in developed countries from rural areas to urban areas. This is urbanisation. Urbanisation is largely a product of industrialisation. The economies of scale arising from nonagricultural pursuits as a result of technological changes led to the movement of a large proportion of labour and population from the rural to the urban areas. As the technical means of transportation, communication and organisation grew more effective, there was the spread of increasing optimum scale units. All these processes affected the grouping of population by social and economic status and transformed the basic pattern of life. The effects of urbanisation on modern economic growth of developed nations led to the decline in birth-rate and the shift toward the small family. It brought people together from different rural areas who initiated and learnt from each other and from those already living in towns. It facilitated the development of impersonal relations of modern life and also taught cooperation. Above all, it created conditions for the intense intellectual activity associated with modern civilisation, and thereby created favourable conditions for the increase in knowledge.9 Besides, urbanisation affected the level and structure of consumer expenditure in developed countries in three ways, according to Prof. Kuznets. First, urbanisation led to an increasing division of labour, growing specialisation, and the shift of many activities from non-market oriented pursuits within the family or the village to specialised market-oriented firms. Much food processing, tailoring, dress-making, and even building and repairing of houses, was one time done within the household or by communal efforts within the village; and today a large part is performed by business firms within the urbanised modern society. Second, urbanisation made the satisfaction of an increasing number of wants more costly. Urban life became costiler because of congestion and overcrowding. This created difficulties of housing, sanitation, water, intracity and city transportation and similar basic amenities in the cities. These are the extra costs of urban life which increased consumer expenditure on different types of consumer goods. Third, the demonstration effect of the city life led to imitation of consumption patterns by the large immigrants, which led to increased consumer expenditure.10
8. Ibid. 9. S. Kuznets, Economic Growth and Structure, 1965. 10. S. Kuznets, Modern Economic Growth, 1966.

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5. THE OUTWARD EXPANSION OF DEVELOPED COUNTRIES The growth of developed countries has been most unequal. Modern economic growth occurred in some nations earlier than it did in others. This was due largely to differences in historical background and antecedents. Thus when modern science and knowledge developed, Industrial Revolution occurred first in England in the second half of the 18th century and later on, it spread to other countries of Europe. Modern economic growth was concentrated in European countries and their offshoots overseas until the entry of Japan, in the late 19th century and of the USSR in the 1930s. The outward expansion of developed countries with their European origin has been primarily due to the technological revolution in transportation and communication. This led to more direct political dominance over the colonies, the opening up of previously closed areas like Japan and the partition of undivided areas like sub-Saharan Africa. It was the threat of force on the part of the developed countries that led to the spread of growth in Japan and the USSR. On the other hand, the partition of Africa and greater political dominance over the colonies were due to the revival of imperialism which was responsible for the outward expansion of developed countries like Germany and the United States in the last quarter of the 19th century. Thus political or power element in international relations is an important factor in the spread of modern economic growth. This meant ever-increasing interdependence among nations because of the potential of closer contact and because of the sharing of an increasing number of nations of one and the same transnational stock of knowledge. Such dependence led to the spread in developed nations of modern education that increased their capacity to exploit and contribute to the available stock of tested and useful knowledge. An important element in this was the use of a common language for increasingly large groups in the developed countries, which led to the sharing of a common body of knowledge and techniques. But the selection of knowledge and techniques made by any one nation depended upon its time of entry into the process of modern economic growth and upon the characteristics specific to that nation with respect to size, natural resources and historical heritage. For instance, the development of shipping in the economic growth of Norway, of paper and iron in Sweden, and of agricultural products in New Zealand and Australia highlight the importance of these factors in modern economic growth. But modern economic growth failed to spread to LDCs due to two factors. First, such countries do not possess a stable and flexible political and social framework which may accommodate rapid structural changes and encourage growth-promoting groups in society. Second, the colonial policies followed by the developed countries limit political and economic freedom in LDCs. As a result, the LDCs have failed to take advantage of the spread of modern economic growth and have continued to remain backward with the exception of Japan. 6. INTERNATIONAL FLOW OF MEN, GOODS AND CAPITAL The international flow of men, goods and capital increased from the second quarter of the 19th century to First World War but decline began with First World War and continued till the end of Second World War. There has been, however, rise in some of these flows since the early 1950s. We discuss these flow one by one. (a) Migration. The cumulative and increasing volume of international migration since the late 1840s and continuing to First World War has an important bearing-upon the patterns of modern economic growth. International migrations were at an annual level of over a quarter of a million

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in 1846-50 and rose to a peak of about 1.5 million in 1906-15. The addition of intercontinental migration would have raised the annual volume of international migration in the decade before First World War to close to 2 million, according to Kuznets estimates. For the period 1846-1932, 95 per cent of the total inter-continental emigration was from Europe and almost 58 per cent of the total intercontinental immigration between 1821-1932 was to the United States. It is highly significant that the population of Asia and Africa barely participated in this flow during the 19th and 20th centuries and that 67 per cent of emigrants from Europe went to North America, 6 per cent to Australia and New Zealand, 11 per cent to Argentina and 7 per cent to Brazil. Thus the intercontinental migration was from the older countries of Europe to the younger and emptier countries of North and South America and Oceania. The factors which led to these international migration were the easing of intercontinental transportation by steamships and of intracontinental migration in Europe by railways. But migration flows to the United States was due to the pull of better economic conditions. However, in the long-run the push had been an important factor due to the progressive impact of the dislocation produced by the modernisation of agriculture and industry in Europe. This push factor was primarily responsible for intercontinental migrations from Europe to North and South America, to European colonies in Africa and offshoots in Oceania. During and after First World War, international migration almost stopped. First, due to the War, and second, due to the imposition of legal restrictions especially during the depression decade of the 1930s. This phenomenon continued to persist during and after the Second World War and even in the 1950s. (b) Flow of Goods. Foreign commodity trade has been by far the most dominant component of outward expansion of the developed countries. Two trends are observed in this regard: First, there is the high rate of growth of world trade between 1820s and 1913. Between 1820-30 and 1850-60 and between 1850-60 and 1880-89, the rate of growth was 50 per cent per decade, and about 37 per cent per decade between 1881-85 and 1911-13. Second, the share of the few developed countries in the world foreign trade has been high between 1820s and 1913. North-west Europe and the United States accounted for six-tenths in 1820-30 and two-thirds in 1880-89. The share of the same countries with Canada and Australia added was roughly two-thirds between 1881-85 and 1913, but their share declined significantly after the First World War. Between the 1850s and First World War, the proportion of commodity foreign trade to total output rose significantly but by the low rates for the few larger countries. They were Canada, Australia and the United States. But the volume of foreign commodity trade grew more rapidly than the volume of world output. The quantum of world commodity trade tripled between 1850 and 1880 and then tripled again between 1880 and 1913, thus rising to nine times its original level. According to Kuznets, on the assumption that world per capita income doubled over the period, the ratio of world commodity trade to total output would have almost tripled from 1850 to 1913, and the increase was probably greater than that. Prof. Kuznets traces out four factors that led to greater increase in growth of foreign trade than of domestic output over the decades before First World War in the old developed countries: The first, was the revolution in trasportation of commodities with the development of steam railroads and ocean transportation. The second, was the decision by the United Kingdom to develop free trade and international division of labour.

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The third was the relaxation of trade barriers by all the developed countries. The last, was the opening of the West in the United States, in Canada, Australia and Argentina leading to European specialisation in industry. But beginning with First World War the rate of growth in the absolute volume of foreign trade declined. In 1913, the index of foreign trade was about 300 and by 1947-51 it was about 400. Thus between 1913 and 1947-51 world trade increased about a third. On the other hand, in the three decades before First World War it tripled. Since First World War, world population grew by 40 per cent and world per capita income also grew somewhat, therefore, the ratio of world trade to world population declined significantly since 1914. (c) Flow of Capital. International flow of foreign capital investments grew rapidly from the second quarter of the 19th century to First World War. For the three major exporters of capital (Great Britain, France and Germany), capital outflow for the period 1874-1914 averaged between $0.5 and $1.1 billion per year at 1913 prices. The increase in the cumulative total of foreign capital invested by these three countries rose from $4.9 to $35.3 billion over the period at 1913 prices which comes to a rate of growth per decade of 64 per cent. A substantial portion of these capital flows went to developed countries and was based on political rather than economic considerations. Of the total foreign investments of Great Britain, almost half were within the empire; of French foreign investments close to half were in Russia, Turkey, the Balkan states, Austria-Hungry, and her colonies; and of Germanys investments, about one-third went to Austria-Hungary, Turkey, Russia and the Balkan states. Although in some cases economic and political considerations may have coincided, in others the line of distinction cannot be drawn sharply, a sizable portion of foreign capital investments was probably motivated by political considerations. The flow of international capital during the inter-war period were of the order of $ 110-170 million per year at 1913 prices. While Germany became a net debtor, the United States emerged as a major international lender. Foreign capital investments and flow from the United States increased from $ 43 million in 1921-29 to $ 78.1 million in 1930-38 at current prices. But the decade of the 1950s witnessed important changes in international capital flow. The average volume of capital flow was about $ 2 billion per year between 1951-55 and $ 3.3 billion between 1956-61 at 1913 prices. But private capital flow were only 45 per cent of the total during the 1950s, the major being in the form of official donations, loans by governments and international agencies. Another important feature of this decade was the emergence of the United States as the principal lender of the world. Between 1951-55, and 1956-61, the international flow of capital from the United States was $ 78.4 million and $ 67.4 million per year at current prices. But these figures do not present a real picture because these international capital flow constituted small proportions of GNP of the creditor countries especially after the First World War. For instance, capital exports as a share of GNP of the United Kingdom were 5.3 per cent in 1900-14 which fell to 2.3 per cent in 1921-29 and further to 0.7 per cent in 1950-58. Similarly, for the United States, it fell from 2.0 per cent in 1909-28 to 0.4 per cent in 1929-38, rose to 0.9 per cent in 1946-50 and again fell to 0.5 per cent in 1950-59. Thus according to Kuznets, there was marked retardation in the expansion of international capital flow in the five-decade period after 1913 as compared with the century that preceded First World War.

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CONCLUSION These six characteristics of modern economic growth are inter-related. They are inter-woven in a cause and effect sequence. Given a stable ratio of labour force to total population, there is a high rate of increase in per capita product which implies higher labour productivity. This in turn, leads to the great rise in per capita product and per capita consumption. The latter, in turn, is the result of advanced technology, and changes in the scale of production of plants, as a result the very character of enterprises changes. These, in turn, produce not only for the domestic market but also for the foreign markets. This is the sequence of modern economic growth that led to its outward spread and expansion in the developed countries before the First World War, between the two World Wars and in the 1950s.