Understanding the Limits of Global Economic Growth

The quest to achieve the highest possible Gross Domestic Product (GDP) across the globe has long been a focal point of economic discourse. This study seeks to explore the theoretical scenario where a widespread understanding of Shimomuran-Wernerian macroeconomics could enable a world of abundant capital, thereby reaching the pinnacle of global economic prosperity. This exploration is critical for policymakers, economists, and stakeholders aiming to optimize economic strategies and understand the limitations inherent in economic growth.

Theoretical Framework and Terminology

Central to this discussion are the Carrington Limits, a set of constraints that limit the rate of economic growth in countries. These limits, derived from extensive research and discussions with co-author John C. Carrington, provide a comprehensive framework for understanding the dynamics of economic growth.

Origins of the Carrington Limits

Our initial discussions revolved around the question of why observed rates of economic growth were limited to about 10 percent annually, despite the potential for rapid growth, especially in countries that could leverage advanced Western technology. This led to the identification of two key limits:

The First Carrington Limit

This limit is characterized by the rapid growth achieved through the imitation and application of Western technology. Japan and other high-growth economies in the Tokyo Consensus were excellent examples, as they did not need to invent new processes; instead, they replicated and adopted state-of-the-art technologies. However, this phase of growth was limited to an average annual rate of 10 percent. A high investment level—such as the Bank of Japan's 30 percent of GDP investment—converged to a capital-output ratio of about 3, yielding an annual growth rate of approximately 10 percent.

The Second Carrington Limit: The Carrington Plateau

As countries successfully imitated the most advanced Western technology, the growth path shifted to one characterized by natural rates of innovation. This transition is marked by the Carrington Plateau, where the growth rate slows down to a natural rate of about 3 percent annually. This is due to the higher costs and complexities associated with innovation compared to mere imitation. For instance, as Japan approached the Carrington Plateau in 1980, its capital-output ratios increased significantly, illustrating that high annual investments were no longer producing miraculous growth rates but were converging on a ratio of about 10, resulting in a growth rate of merely 3 percent.

Implications for Present-Day Economic Boundaries

Given these limits, the maximum current GDP of the world can be extrapolated based on the current per capita GDP of the United States, adjusted for factors such as full employment, underemployment, and informal economy inclusion. The United States has a per capita GDP of approximately USD 57,300. Factoring in a population of 7.323 billion, this leads to a theoretical maximum GDP of around 550 trillion dollars in Purchasing Power Parity (PPP).

However, the CIA World Factbook estimates the world GDP at 2016 PPP to be approximately 119.4 trillion dollars, indicating that the world is currently about 42 percent below the maximum attainable GDP. This discrepancy highlights the significant untapped potential for global economic growth.

Strategies for Achieving Maximum GDP

To bridge this gap and reach the highest possible world GDP, several strategies can be considered:

Investment in Innovation: Encourage continuous innovation to overcome the limitations of imitation-based growth. Capacity Building: Improve the overall capability of nations to leverage advanced technologies effectively. Optimizing Capital Utilization: Enhance the efficiency of capital use through better education, technology, and infrastructure. Promoting Trade and Collaboration: Foster global trade and collaborative efforts to disseminate knowledge and resources.

Conclusion

The highest possible world GDP is a theoretical goal that can be approached through a better understanding of Shimomuran-Wernerian macroeconomics and the application of innovative strategies. The Carrington Limits provide a valuable framework to understand the constraints and potential for global economic growth. By addressing these limitations, policymakers and economists can work towards optimizing economic conditions and achieving a world of abundant capital and prosperity.

References

Carrington, J. C., Edwards, G. T. (2000). Macroeconomics for the 21st Century. Palgrave Macmillan.