Economic growth, poverty traps and cycles: productive capacities versus inefficiencies

Abstract

PurposeThe authors analyse a growth model to explain how economic fluctuations are primarily driven by productive capacities (i.e. capacity utilization driven by innovations and know-how) and productive inefficiencies.Design/methodology/approachThis study’s methodology consists of the combination of the economic growth model, à la Solow–Swan, with a sigmoidal production function (in capital), which may explain growth, poverty traps or fluctuations depending on the relative levels of inefficiencies, productive capacities or lack of know-how.FindingsThe authors show that economies may experience economic growth, poverty traps and/or fluctuations (i.e. cycles). Economic growth is reached when an economy experiences both a low level of inefficiencies and a high level of productive capacities while an economy falls into a poverty trap when there is a high level of inefficiencies in production. Instead, the economy gets in cycles when there is a large level of the lack of know-how and low levels of productive capacity.Originality/valueThe authors conclude that more capital per capita (greater savings and investment) and greater productive capacity (with less lack of know-how) are the economic policy keys for an economy being on the path of sustained economic growth.