Why is economic growth important?

Throughout the 1th century, most countries showed annual economic growth rates of between 3% and 5%, with some cases of accelerated growth around 10%, and towards the end of the 100th century some spectacular exceptions such as China, growing about 1% annually. But what makes this data so relevant? Let's illustrate it with an example. Suppose we have three countries, A, B and C, all starting from the same point, say a GDP of 3 monetary units. With growth rates of 5%, 30% and 130% respectively, after 250 years the GDP of these countries will be 430, 50 and 160 monetary units respectively, after 450 years they will be 1.100, 300 and 2.000 monetary units respectively, and after a century the GDP of these countries will be 13.000, XNUMX and XNUMX monetary units respectively.

Another way of looking at the effects of economic growth is by measuring how long it takes a country to double its GDP given its growth rate. Growing at a rate of 1%, a country doubles its GDP in 70 years, but if it grew to 3,5% it would take only 20 years.

Given the example we can see that in all cases, having economic growth, the average income of the country improves. In general terms, economic growth is necessary but not sufficient to improve the well-being of the population. Equity in the distribution of wealth is an additional element necessary for growth to translate into an improvement in social welfare and later in economic development.

In economics, we usually speak of a growth path when at least 20 years of sustained growth are achieved, this is consistent growth in the long term. It is possible to affirm that in those countries that manage to maintain a growth path, the entire population improves their quality of life.

However. There are three main sources of economic growth, they are the growth of work, the accumulation of capital, and technological progress. These three sources have in common their ability to expand the production capacities of the economy. From the point of view of international trade, growth has two effects, the wealth effect and the terms of trade effect. When there is growth, the wealth effect is positive to the extent that the well-being of the average citizen improves; the effect of terms of trade can be positive or negative depending on the country's trade relationship with the rest of the world.

Following the example, after 100 years country A achieves a GDP three times higher than the initial one, which is nominally positive, however country B achieves a GDP twenty times higher than the initial one and country C achieves a GDP 130 times higher than the initial one. Given this scenario and if all the other variables are kept constant, the terms of trade of country A deteriorate substantially with respect to those of the rest of the world, which in general terms represents a deterioration in the social welfare of country A.

Amid the current scenario of pandemic and international financial blockade, the international bank Credit Suisse projected a growth of 4% for the Venezuelan economy in 2021. As shown in the first lines, 4% growth is a really considerable rate for the contemporary standards and is especially interesting given the negative expectations in most of the Latin American region. So, regardless of the geopolitical situation, expectations for the Venezuelan economy are turning positive.

True economic development implies growth with equity. But equity is useless when there is no wealth to distribute, to achieve economic development you must first necessarily achieve a growth path, that is why economic growth is so important.

The author is president of the Foreign Trade Bank of Venezuela, Bancoex.

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