Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure

“The malady of many underdeveloped economies can be diagnosed as a stable equilibrium level of per capita income at or close to subsistence requirements. Only a small percentage, if any, of the economy’s income is directed towards net investment. If the capital stock is accumulating, population is rising at a rate equally fast i.e. thus the amount of capital equipment per worker is not increasing. If economic growth is defined as rising per capita income, these economies are not growing. They are caught in a low-level equilibrium trap.”

Economic Development: Growth is associated with structural, social change and change in the important institutions of the economy.

First of all, economic growth is one of the macroeconomic objectives that the government wants to achieve as a primary goal and it happens when there is a rise in the enlarged product of population and per capita consumption. According to Hoover (2011), economic growth is the total material output of good values and service values in the market, measured by Gross Domestic Product (GDP) in a specific period of time. The growth of GDP is measured by excluding intermediate consumptions (production and resale), purely financial transactions and second-hand sales, which prevents double counting. To obtain an accurate value of economic growth, GDP needs to include the total output of expenditures and incomes.

Economic growth, put simply, is “an increase in the amount of goods and services produced per head of the population over a period of time”; development is inextricably linked with this economic growth. By utilising theories of economic growth and development we can see how the Chinese and Sub-Saharan African economies have emerged, but, more notably, we can use these to look at patterns from past and present to show their experience and the implications of this growth for the future.

However, this pattern was only observed in select countries, not in a broad sample. Romer and another economist Robert Lucas wrote papers defending models of growth that differ from the neoclassical model , which failed to properly explain convergence. Namely, the assumptions that technological change is exogenous and that the same technology is available in all countries were dropped. Growth was explained by endogenous factors, such as investment in human

So we see that on the other hard there are some situations where population growth can hamper economic development. This seems to focus more on the poorer countries of the world, which is probably due to more of a lack of resources. Also noted by Cincotta & Robert (1997), results of an elaborate study found that the correlation between stagnant economic growth and economic strength is the most prevalent among developing nations of the world. In other words, stagnate economic growth can be attributed to population growth as well, which as previously noted is an antithesis to this paper, but to point out, this heavily relates countries with a below average gross domestic

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Arrighi,G,. Silver,J,B,. and Brewer,D,B,. 2003. Industrial Convergence, Globalization, and the Persistence of the North-South Divide. Studies in Comparative International Development. p.3-31

Due to these views, some researchers argue that research looking at growth in terms of GDP per capita is not enough, as sustainable growth is also related to a country’s living standards and social welfare. (Aidt 2010, 4)

This research also shows that economic growth, on average, raises incomes for both the rich and the poor. It helps to lift the poorest in society out of absolute poverty and does not automatically increase inequality. More importantly, no country has managed to lift itself out of poverty without integrating into the global economy.

With economic growth, income poverty falls; with economic contraction, income poverty rises. Some countries in East Asia sustained per capita GDP growth rates of 5% over four decades, with massive improvements in living standards and in health and education for poor people and for everyone else. Other countries, most countries in Africa such as Somalia, registered negative growth or no growth at all over the same period, delivering no improvements even in average living standards. While economic growth is systematically associated with poverty reduction, the rate growth translates into lower poverty depends on the initial level of inequality in the distribution of income, and how that distribution changes over time. Growth and its effectiveness in reducing poverty also depend on sound, constant governance. So confronting socioeconomic inequalities and building sound institutions might be important for providing a socially sustainable basis for overall growth and for ensuring that poor people gain substantially from that growth (Lansley, 78).

Economic growth is a topic constantly discussed in Why Nations Fail by Daron Acemoglu and James A. Robinson and Saving Capitalism by Robert B. Reich .The authors in both books seem to believe that we live in a society in which economic growth is not at its finest, but there is still hope. More detailed, Daron Acemoglu and James A. Robinson blame extractive institutions for the slow growth because in this occasion the political and economic systems are structures in a way to benefit the elite by extracting resources from the rest of the society . Similarly Robert B. Reich states that those who control an increasing share of the wealth also have gained growing influence over the rules by which the market

Economist E.J. Mishan, well known for his skepticism towards economic growth, strongly believes that we are at the brink and the end of economic growth is near. In his book “The Economic Growth Debate,” he stated: “anyone having the slightest familiarity with the physics of heat, energy and matter will realize that, in terms of historical time, the end of economic growth, as we currently experience it, cannot be that far off” (Mishan, 1977). Mishan also noticed that pursuing economic growth in developed nations does more harm than good to the

February 10, 2009 The purpose of this note is to define the meaning of the term ‘inclusive’ growth. It is often used interchangeably with a suite of other terms, including ‘broad-based growth’, ‘shared growth’, and ‘pro-poor growth’. The paper clarifies the distinctions between these terms as well as highlights similarities.

He pointed out that different economic levels have their own requirements and they may not follow the same process of industrialization. Moreover, he raised the most influential theory related to late industrialization that the economically backward states may have rapider growth rate as they are late comers, and the national development process relied on the degree of economic backwardness. That is to say the more backward a country, the faster it will advance (ibid).