Rule the Pool: How To Increase Economic Growth
White Bear Lake High School—South Campus
White Bear Lake, Minnesota
A swimmer's potential is established by heredity and realized
through proper training. Good nutrition is the element that can make that
realization possible or prevent it from happening.
— Ernest W. Maglischo (Maglischo 663)
We are entering a world where the old rules no longer apply.
— Phillip Sanders (qtd. in Crichton ix)
Like the competitive swimmer whose goal is to achieve faster times, the
ultimate goal of nations is to achieve higher standards of living through
fast and sustained economic growth. Yet, why some economies grow faster
than others and what can be done to influence economic growth are subjects
of ongoing debate. As with heredity and the competitive swimmer, there is
an inherent economic growth determinant, land resources, the potential of
which can only be realized through proper "training" or economic
Contrary to the earlier belief that the economic growth gap between
developed and less-developed countries was an object gap (amount of capital),
there is a more important factor, the knowledge gap. The knowledge gap
refers to the country's use of technology which contributes to the overall
quality of the human capital (Stiglitz 1-2). Another crucial aspect of
economic growth is the means by which the central bank maintains price
stability in the country so as to encourage savings or investment as well
as consumption. While, by itself, the central bank cannot increase the
rate of economic growth, like good nutrition for the competitive swimmer,
it is an element that can facilitate economic growth by steadily increasing
the money supply so as to keep the money supply proportional to the growing
economy (Boyes 419).
Economic growth is described as occurring whenever a nation rearranges
its resources in such a way that is more productive (Romer 2). The four
main determinants of economic growth are labor, capital, land and technology
(Boyes 464-67). While the land determinant is essentially a fixed input
for economic growth, increases in the productivity of labor and capital
are directly related to increases in technological progress which can
also increase the quality of the land resources (Boyes 469; Miller 1).
Internal resources aside, the biggest differences between developed and
less-developed countries are labor quality and government policies on
the use of world knowledge (Miller 3-4; "Neoclassical" 1).
It has been proven that growth of labor productivity and the growth
of labor intensity go hand in hand with economic growth. While an already
developed country cannot go much further as far as labor intensity, increasing
labor productivity becomes all the more crucial for economic growth (Miller
2-3). Among the factors influencing or affecting labor quality are education
level, quality of education, demographic change and attitudes toward work
(Boyes 470-73). One factor that can greatly increase the productivity
of labor is technological innovation which increases efficient productivity
of the available inputs (Boyes 474; Sabillon 8; Miller 3).
This is where another significant factor in economic growth, government,
comes into play. Through its policies, government can either hinder, through
export specialization policies which inhibit use of new technologies from
around the world, or encourage, through large investments in manufacturing
which is responsible for a large portion of new technologies, use of new
technology available from world knowledge (Sabillon 6; Stiglitz 2). Japan
and Taiwan, countries that have made huge gains in economic growth, use
tax incentives and subsidies to encourage technology (Kotler 4, 288).
Generally, restrictions on use of world knowledge can be traced to groups
who help create them because they might lose if the new knowledge is utilized
(Miller 4). Says Joseph E. Stiglitz, senior vice president and chief economist
at the World Bank in Washington, D.C., in an interview with Arthur Rolnick,
Minneapolis Federal Reserve Bank senior vice president, "Innovations
that make our society more productive have mostly winners but some losers."
Stiglitz thinks there should be job transition programs to accommodate
the "losers" because "[p]eople are training for where the
economy goes" (Stiglitz 4).
The central bank, like the Federal Reserve Bank in the United States,
is in control of the amount of the money supply and its overall goal should
be to maintain stable prices (Krugman 119; Boyes 365). The central bank
has the ability to increase the money supply through monetary policy by
buying government bonds, decreasing fractional reserve requirements and
lowering discount rates, or decrease the money supply by doing the opposite
(Boyes 368-371). While monetary policy can greatly stimulate the economy
in the short run, it can eventually result in an increase in overall prices.
As it turns out, monetary policy is able to increase gross domestic
product in the short run because of public misinformation about current
overall prices. In the long run, however, poorly executed usage of monetary
policy in cases like this will only cause an overall increase in prices
(Humpage 5). The central bank is still able to assist economic growth,
though, through a steady increase of the money supply to match increasing
rates of economic growth.
The equation of exchange states that the quantity of money (M) multiplied
by the velocity of money (V) is equal to the price level (P) multiplied
by real income or real GNP (Y), or MV = PY (Boyes 365). In order to keep
prices steady while, if the government is doing a good job, GNP is increasing,
the central bank would need to increase the money supply proportionally,
depending on whether the velocity is growing at a steady rate or not,
which would help promote low inflation (Boyes 366-67). As Gary H. Stem,
president of the Federal Reserve Bank in Minneapolis, says, in a low-inflation
economy, "resource allocation moves closer to optimal, with attendant
benefits for growth and living standards" (Stem 2).
What determines a nation's growth rate potential is not its hereditary
benefits or impediments but, rather, the way in which a nation uses its
resources. As shown by Japan and other East Asian countries, the degree
to which the government encourages or provides incentive for use of developing
technologies directly affects the rate at which the economy will grow.
In this era of globalization, "where the old rules no longer apply,"
technology is essential. At the same time, an economy can't improve on
technology alone. It requires a balanced nutritional diet or steady increase
of the money supply to match economic growth rates in order to keep overall
prices down. Through hard work and determination, a nation, just like
the competitive swimmer, is capable of making a big splash and possibly
setting a few world records.
Canadian Department of Foreign Affairs and International Trade: "Beyond
the Neoclassical Growth Model: Other Factors Behind Economic Growth."
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Mifflin Company, 1991.
Crichton, Michael. Rising Sun. New York: Ballantine Books,
Humpage, Owen F. "Monetary Policy and Real Economic Growth,"
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Kotler, Philip, Somkid Jatusripitak, and Suvit Maesincee. The
Marketing of Nations. New York: The Free Press, 1997.
Krugman, Paul. Peddling Prosperity. New York: W. W. Norton
and Company, 1994.
Maglischo, Ernest W. Swimming Even Faster. Mountain View,
California: Mayfield Publishing Company, 1993.
Miller, Preston J., and James A, Schmitz Jr. "Breaking Down the Barriers to Technological Progress." Federal Reserve
Bank of Minneapolis 1996 Annual Report. March 1997.
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Sabillon, Carlos. "Policy Making for the Attainment of Fast and
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Analysts Society. Milwaukee, June 4, 1997.
Stiglitz, Joseph E. and Arthur Rolnick. "Interview with Joseph E. Stiglitz."The Region. September 1997.