Economic Growth, the Case of Developed and Developing economies

Volume 8, Issue 2, February – 2023 International Journal of Innovative Science and Research Technology ISSN No:-2456-2165 IJISRT23FEB1323 www.ijisrt.com 2141 HOLY SPIRIT UNIVERSITY OF KASLIK (USEK) Economic Growth, the Case of Developed and Developing Economies by Richard Hanna Beainy Supervised by Dr. Charbel Salloum Submitted to the Department of Doctoral Studies at the USEK Business School In partial fulfillment of the requirement For the degree of Ph.D. of Business Administration - Finance at the Holy Spirit University of Kaslik (USEK) Kaslik, Lebanon March,2023 Copyright © 2023 Richard Hanna beainy All Rights Reserved Volume 8, Issue 2, February – 2023 International Journal of Innovative Science and Research Technology ISSN No:-2456-2165 IJISRT23FEB1323 www.ijisrt.com 2142 ABSTRACT The goal of this study is to analyze what can enhance Gross Domestic Product, one of the most important indicators of economic growth, the study analyzes what are the effects of education, technology, innovation and political stability on economic growth. Keywords:- Gross Domestic Product, Economic growth, Education, Technology, Innovation, Political stability Volume 8, Issue 2, February – 2023 International Journal of Innovative Science and Research Technology ISSN No:-2456-2165 IJISRT23FEB1323 www.ijisrt.com 2143 TABLE OF CONTENTS Abstract.......................................................................................................................................... 2141 Introduction .................................................................................................................................. 2145 Literature Review......................................................................................................................... 2147 Research Methodology ................................................................................................................ 2152 Results and Discussion................................................................................................................. 2154 Conclusion ..................................................................................................................................... 2160 REFERENCES ............................................................................................................................. 2161 Volume 8, Issue 2, February – 2023 International Journal of Innovative Science and Research Technology ISSN No:-2456-2165 IJISRT23FEB1323 www.ijisrt.com 2144 LIST OF TABLES Table 1: Sampling Method summarized ...................................................................................... 2152 Table 2: Research Methodology Summary ................................................................................. 2153 Table 3: Argentina, Developing economy ................................................................................... 2154 Table 4: Greece, developed economy lower bounds .................................................................. 2155 Table 5: United states, Developed economy upper bound ......................................................... 2155 Table 6: United kingdoms, developed economy upper bound ................................................... 2156 Table 7: Germany, Developed economy upper bound ............................................................... 2157 Table 8: China, Developed economy upper bound ..................................................................... 2158 Table 9: Results Summary ............................................................................................................ 2158 LIST OF FIGURES Figure 1: Technological advances in terms of computational capacity of computers .............. 2149 Figure 2: GDP increase in the United States of America ........................................................... 2150 Volume 8, Issue 2, February – 2023 International Journal of Innovative Science and Research Technology ISSN No:-2456-2165 IJISRT23FEB1323 www.ijisrt.com 2145 CHAPTER ONE INTRODUCTION A. Background and Statement of the Problem Covid-19 ended, new economic challenges began. Painful but fast, was the economy’s respond towards Covid-19, but as soon as international economies were recovering, with Covid-19 tamed not yet solved, a new crisis erupted caused by the Ukraine War (Prohorovs, A., 2022) with controllable negative impact on developed economies and uncontrollable impact on economies already in crisis, Gross Domestic Product “GDP” in many countries decreased but in some countries GDP kept increasing and from such countries we learn how to develop a better economy. B. Purpose of the Study Some argue that taking a passive approach; economies do fix themselves in the long run. However, the quick adaptation to Covid-19 in the past proved that people, firms and countries do adapt quickly in the short run and it is the adaptation of individuals and entire economies to challenges, which encouraged us to hasten this study with the purpose of addressing the current risks on economies, more particularly taking into consideration what can be done to developing economies to increase their GDP. Our analysis will contribute to a better comprehension of the current economic challenges that were, are and may continue in the future in the purpose of building an efficient and effective economy, with policies and solutions that may help policymakers to provide for individuals, not only the infrastructure necessary for the survivability of firms but the ability to meet and use global emerging challenges, that are to be seen as opportunities instead of threats to increase competitiveness. C. Significance of the Study Theoretically, developed and developing economies tend to converge on the long run. Practically, the gap between developed and developing economies in most cases is being widened and differences have been increasing. The first significance is simple, examining an economic theory’s implication on a developed country would render the study purely theoretical as we will fall into the misleading assumption of “Ceteris paribus” as many variables would, in addition to the strategy, affect the county’s already well developed economy, but as we compare successful countries to less successful ones, we would be able to, using statistics, understand the differences that are prohibiting developing economies from converging with others and maybe, be able to draw an equation that would help developing economies to get out of the hole and finally have their Gross Domestic Product GDP and more importantly the quality of living of their population increased. The second significance is the possible use of the theory for developed countries as well, as they also need of the security and immunity provided by the arguments discussed to maketheir economiesimmune to national and international crises, natural challenges like Covid-19 and human caused challenges due to excessive risk‐taking and insufficient regulations like the 2007 global financial crisis (Hjertaker, I., &Tranøy, B. S.,2022). Volume 8, Issue 2, February – 2023 International Journal of Innovative Science and Research Technology ISSN No:-2456-2165 IJISRT23FEB1323 www.ijisrt.com 2146 D. Nature of the Study and Research Question This study taking a fundamental approach does not aim to recreate alphabet for alphabet is already created, instead it aims to increase understanding on how existing theories combined may enhance economies in distress and renders successful economies resistant to adverse events through the use of reliable secondary data mainly from the world bank and the international monetary fund “IMF” while focusing on amplification and contraction effect of multiple variables together. This effect is well known in the economy as correlation, synergy and compound system (Hu et al., 2022) to answer a research question: how can countries realize a sustainable growth of GDP while considering the scarcity of resources? Volume 8, Issue 2, February – 2023 International Journal of Innovative Science and Research Technology ISSN No:-2456-2165 IJISRT23FEB1323 www.ijisrt.com 2147 CHAPTER TWO LITERATURE REVIEW A. Mainstream Literature Review Many argue that gross domestic product or GDP that is defined as the sum of the total value of all goods and services produced in an economyis one of best indicators for national economic well-being (Aitken, 2019) But increasing GDP is still as general as an objective as enhancing an economy, so to render the theory more tangible and scientific we examine how GDP is calculated GDP = C + I + G + (X-M) (Stewart and Budnikova, 2022) With C as consumer and household spending on goods and services, I as investment spending on productive physical capital, G represents government spending on infrastructure, goods and services, X as export and selling to other countries and M as imports and purchases of goods and services from other countries. Taking into consideration the paradox that increasing salaries increase consumer spending and investments and thus increases GDP while simultaneously the increase in salaries increases the cost of goods produced, decreases exports and increases imports thus decreases GDP we realize that even though the objective of increasing GDP is clear and simple, the practical implementation is as not as simple as the study’s objective. Another road leading to the same destination is economic growth which modern economists argue that can be caused by two specific possibilities, an increase in factors of production and better technology, the former includes land, labor, physical and human capital and the latter includes proper use of technology to produce more outputs using less inputs (Ray and Anderson, 2015) A third approach is the unemployment rate approach, which measures the health of an economy by the percentage of people that can and want to work but could not find jobs (Hall and Kudlyak, 2022) and although this definition is accurate but analyzing this definition from a macro economical point of view the definition of an unemployed becomes someone who wants to increase Consumer spending, who wants to pay additional taxes for the government and thus enabling the government to spend more and who wants to participate in the economic growth by being productive yet due to an unknown inefficiency he could not find a job. The direct cost of unemployment even though seems negligible or as little as the government unemployment compensation is, as economists we have learned to always look unto the opportunity cost as well, which is immense on both the individual, the society, the government and the economy. B. Theoretical Framework In this section, we present prior theories related to methods of calculating and increasing Gross domestic product and economic growth while decreasing unemployment rate. Robert Solow, Nobel prize winner 1987 provided the Solow growth model, which is one of the most significant theories every written to calculate economic growth According to the Solow growth model simplified: Economic growth or output or Y = A ×√(E×L+K) A represents productivity, ideas and innovation, it’s about combining Human capital and physical capital to produce an output Volume 8, Issue 2, February – 2023 International Journal of Innovative Science and Research Technology ISSN No:-2456-2165 IJISRT23FEB1323 www.ijisrt.com 2148 E for education or efficiency L for labor power Together E and L represent human capital K represents physical capital, K is all our factories and tools The reason why Solow growth model is so important and is good news for stressed economies as in our study, is the simple law of diminishing returns according to which adding more and more capital eventually adds less and less output, which means that countries with already small amount of physical capital can very quickly increase their output even by adding a small amount of physical capital. But if this is the case, then why some economies like china grew fast to catch up while other economies like Nigeria did not grow this fast and in fact, in some years their economies actually shrank. Here another theory coexists with the Solow growth model that includes proper institutions like political stability, property rights, honest government, competitive and open markets and a dependable legal system (Zalle, 2019) In theory this has been proven as countries in Africa have had almost no growth due to political instability, but the translation of the theory into a quantifiable formula is necessary for a scientific study. Assuming political stability, property rights, honest government, competitive and open markets and a proper legal system are designed by a letter P, P as stability cannot influence directly the level of output and therefore cannot be higher than one, yet it can eliminate growth and due to the logical arguments above P is measured between 0 and 1. Combining political stability with the Solow growth simplified equation and the below formula which will be called: Richard of Mary’s Model for economic growth: Y= [A × √(E×L+K)] P C. Research Context A theoretical framework without a practical actual context of our times is either history or prophecy but not a scientific research in anyway, therefore we have to consider our current times to properly analyze the theoretical framework. A co-founder of Intel in 1965 Gordon E. Moore scientifically presented a law related to technology that was in the best scenario thought of as it would last a decade, today after more than half a century Moore’s law, according to which the number of transistors on integrated circuits will double every two years enabling massive technological advances, still holds (Edward, 2023) Therefore, technology is growing exponentially, economically speaking this means that economic growth can grow exponentially if the latter efficiently uses the former. Volume 8, Issue 2, February – 2023 International Journal of Innovative Science and Research Technology ISSN No:-2456-2165 IJISRT23FEB1323 www.ijisrt.com 2149 Fig. 1: Technological advances in terms of computational capacity of computers Note. According to the above, computer speed multiplier from 1993 to 2021 was one hundred thousand (University of Oxford, 2022) Volume 8, Issue 2, February – 2023 International Journal of Innovative Science and Research Technology ISSN No:-2456-2165 IJISRT23FEB1323 www.ijisrt.com 2156 Note. With a significance level and p-value of below 0.05 we successfully reject the null hypothesis H0, according to which the independent variables of education, technology, political stability and Capital investments have no significant impact on GDP in the case of the united states, the most important variables according to P-value are R&D and technology, as well as investments in Capital and manufacturing assets. Regression Statistics Multiple R 0.626119475 R Square 0.392025597 Adjusted R Square 0.044611653 Standard Error 0.093862095 Significance F Observations 12 0.415651756 ANOVA df SS MS F Regression 4 0.039765611 0.009941403 1.128410656 Residual 7 0.06167065 0.008810093 Total 11 0.101436261 Coefficients Standard Error t Stat P-value Intercept 1.914 4.052 0.472 0.651 Education Exp % GDP 0.035 0.090 0.382 0.714 R&D Innovation exp % GDP -1.273 1.049 -1.214 0.264 Government Effectiveness/world bank -0.004 0.032 -0.128 0.902 Capital Assets and manufacturing output 0.000 0.000 1.096 0.309 Table 6: United kingdoms, developed economy upper bound Note.With a significance level and p-value of above 0.05 we fail to reject the null hypothesis H0, according to which the independent variables of education, technology, political stability and Capital investments have no significant impact on GDP in the case of the United Kingdoms. Volume 8, Issue 2, February – 2023 International Journal of Innovative Science and Research Technology ISSN No:-2456-2165 IJISRT23FEB1323 www.ijisrt.com 2157 Regression Statistics Multiple R 0.941854773 R Square 0.887090413 Adjusted R Square 0.774180825 Standard Error 0.036211658 Significance F Observations 9 0.035366852 ANOVA df SS MS F Regression 4 0.041209172 0.010302293 7.856643824 Residual 4 0.005245137 0.001311284 Total 8 0.046454309 Coefficients Standard Error t Stat P-value Intercept 0.486 0.936 0.519 0.631 Education Exp % GDP 0.077 0.162 0.476 0.659 R&D Innovation exp % GDP -0.531 0.303 -1.755 0.154 Government Effectiveness/world bank -0.002 0.010 -0.200 0.851 Capital Assets and manufacturing output 0.000 0.000 3.796 0.019 Table 7: Germany, Developed economy upper bound Note. With a significance level and p-value of below 0.05 we successfully reject the null hypothesis H0, according to which the independent variables of education, technology, political stability and Capital investments have no significant impact on GDP in the case of Germany, the most important variables according to P-value are investments in Capital and manufacturing assets, followed insignificantly by R&D and technological advances. Volume 8, Issue 2, February – 2023 International Journal of Innovative Science and Research Technology ISSN No:-2456-2165 IJISRT23FEB1323 www.ijisrt.com 2158 Regression Statistics Multiple R 0.891053353 R Square 0.793976077 Adjusted R Square 0.629156939 Standard Error 0.044226305 Significance F Observations 10 0.057508199 ANOVA df SS MS F Regression 4 0.037689561 0.00942239 4.817256579 Residual 5 0.00977983 0.001955966 Total 9 0.047469391 Coefficients Standard Error t Stat P-value Intercept 1.363 0.441 3.093 0.027 Education Exp % GDP 0.053 0.042 1.264 0.262 R&D Innovation exp % GDP -1.065 0.307 -3.469 0.018 Government Effectiveness/world bank -0.001 0.004 -0.301 0.775 Capital Assets and manufacturing output 0.000 0.000 2.684 0.044 Table 8: China, Developed economy upper bound Note: With a significance level of 0.057 just above 0.05 we fail to reject the Null hypothesis H0 even though the p-valueis below 0.05 in both technological advances and innovation as well as Capital assets investments, if we had been using a confidence level of 94% we would have successfully rejected the Null hypothesis. B. Discussions H1 – Significant impact of Education H2 – Significant impact of Capital investments H3 – Significant impact of Political stability H4 – Significant impact of technology and innovation Argentina, Developing economy ○ ○ ○ ○ Greece, Developed economy lower bound ○ ○ ○ ○ United States, Developed economy upper bound ○ YES ○ YES United Kingdom, Developed economy upper bound ○ ○ ○ ○ Germany, Developed economy upper bound ○ YES ○ ○ China, Developed economy upper bound ○ YES ○ YES Table 9: Results Summary Volume 8, Issue 2, February – 2023 International Journal of Innovative Science and Research Technology ISSN No:-2456-2165 IJISRT23FEB1323 www.ijisrt.com 2159 Note. In the developing economy of Argentina, no single variable had a Power of below 0.05 to be able to solely and significantly impact GDP, yet the sum of variables together had a significance of below 0.05 which means that in developing economies, many conditions need to be achieved simultaneously to impact GDP. Technology and innovation was the most important factor influencing GDP of China and the United states in terms of power of significance, followed by the degree of Capital investments in the latter, also the GDP of Germany, a developed country was significantly influenced. C. Limitation and Further Research How rare is it that the economy of Argentina, was significantly influenced by the sum of independent variables, yet influenced to a lesser extent by each of the variables alone, three times was the analysis repeated and providing the same results which implied that further research is needed to understand the paradox of GDP in developing economies. In the case of developed economies, results were much more straightforward and obvious as research and development are the major important variables in the two largest economies in the world, the United States and China. Volume 8, Issue 2, February – 2023 International Journal of Innovative Science and Research Technology ISSN No:-2456-2165 IJISRT23FEB1323 www.ijisrt.com 2160 CHAPTER FIVE CONCLUSION In terms of major findings, it became apparent that for economies to increase their GDP, the first and shortest method is to increase investment in Capital assets and manufacturing equipment, only after due to the law of diminishing value the impact of the latter becomes low, a country ought to increase investments in innovation and research and development. Theoretically speaking, the Solow growth Model to measure economic performance proved to be useful and important even though incomplete, as it does need to weight the variables according to their importance and to add some more variables as political stability. In terms of practical implementations, developing economies ought to launch a carefully weighted campaign to increase simultaneously, the quality of education, political stability, investments in capital assets and innovation, it is to conclude that the collective impact of the variables mentioned together would be enough to increase GDP and thus the quality of living in developing economies. Volume 8, Issue 2, February – 2023 International Journal of Innovative Science and Research Technology ISSN No:-2456-2165 IJISRT23FEB1323 www.ijisrt.com 2161 REFERENCES [1.] Prohorovs, A. (2022). Russia’s War in Ukraine: Consequences for European Countries’ Businesses and Economies. Journal of Risk and Financial Management, 15(7), 295. [2.] Hjertaker, I., &Tranøy, B. S. (2022). The dollar as a mutual problem: New transatlantic interdependence in finance. Politics and Governance, 10(2), 198-207. [3.] Mu, X., Kong, L., Tu, C., Chen, J., & Hu, G. (2022). Correlation and synergy analysis of urban economy–energy–environment system—A case study of Beijing. Natural Resource Modeling, 35(1), e12329. [4.] Aitken, A. (2019). Measuring Welfare Beyond GDP. National Institute Economic Review, 249, R3R16. doi:10.1177/002795011924900110 [5.] STEWART, E. T., & BUDNIKOVA, A. S. (2022). Methods of calculating GDP. In ПРОБЛЕМЫ РАЗВИТИЯ СОВРЕМЕННОГО ОБЩЕСТВА (pp. 20-22). [6.] Ray, M., & Anderson, D. (2015). Krugman’s economics for AP®, (adapted from Economics, by Paul Krugman and Robin Wells). Worth Publisher. [7.] Hall, R. E., &Kudlyak, M. (2022). The unemployed with jobs and without jobs. Labour Economics, 79, 102244. [8.] Zallé, O. (2019). Natural resources and economic growth in Africa: The role of institutional quality and human capital. Resources Policy, 62, 616-624. [9.] Edwards, C. (2023). Scaling at 3nm and Beyond. [10.] Connie O. C. (2022). GDP by country, metro and other areas. 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