As one might expect, economies with rapid growth tend to be economies that add physical capital, increase their human capital, or experience rapid technological progress. Striking economic success stories, like Japan in the 1950s and 1960s or China today, tend to be countries that do all three: rapidly add to their physical capital through high savings and investment spending, upgrade their educational level, and make fast technological progress. Evidence also points to the importance of government policies, property rights, political stability, and good governance in fostering the sources of growth.

Savings and Investment Spending One reason for differences in growth rates between countries is that some countries are increasing their stock of physical capital much more rapidly than others, through high rates of investment spending. In the 1960s, Japan was the fastest-growing major economy; it also spent a much higher share of its GDP on investment goods than did other major economies. Today, China is the fastest-growing major economy, and it similarly spends a very large share of its GDP on investment goods. In 2014, investment spending was 48% of China’s GDP, compared with only 20% in the United States.

Where does the money for high investment spending come from? From savings. In the next chapter we’ll analyze how financial markets channel savings into investment spending. For now, however, the key point is that investment spending must be paid for either out of savings from domestic households or by savings from foreign households—that is, an inflow of foreign capital.

Foreign capital has played an important role in the long-run economic growth of some countries, including the United States, which relied heavily on foreign funds during its early industrialization. For the most part, however, countries that invest a large share of their GDP are able to do so because they have high domestic savings. In fact, China in 2014 saved an even higher percentage of its GDP than it invested at home. The extra savings were invested abroad, largely in the United States.

One reason for differences in growth rates, then, is that countries add different amounts to their stocks of physical capital because they have different rates of savings and investment spending.

Education Just as countries differ substantially in the rate at which they add to their physical capital, there have been large differences in the rate at which countries add to their human capital through education.

A case in point is the comparison between Argentina and China. In both countries the average educational level has risen steadily over time, but it has risen much faster in China. Figure 9-7 shows the average years of education of adults in China, which we have highlighted as a spectacular example of long-run growth, and in Argentina, a country whose growth has been disappointing. Compared to China, sixty years ago, Argentina had a much more educated population, while many Chinese were still illiterate. Today, the average educational level in China is still slightly below that in Argentina—but that’s mainly because there are still many elderly adults who never received basic education. In terms of secondary and tertiary education, China has outstripped once-rich Argentina.

Research and Development The advance of technology is a key force behind economic growth. What drives technological progress?

Scientific advances make new technologies possible. To take the most spectacular example in today’s world, the semiconductor chip—which is the basis for all modern information technology—could not have been developed without the theory of quantum mechanics in physics.

But science alone is not enough: scientific knowledge must be translated into useful products and processes. And that often requires devoting a lot of resources to research and development, or R&D, spending to create new technologies and apply them to practical use.

Although some research and development is conducted by governments, much R&D is paid for by the private sector, as discussed below. The United States became the world’s leading economy in large part because American businesses were among the first to make systematic research and development a part of their operations. The upcoming For Inquiring Minds describes how Thomas Edison created the first modern industrial research laboratory.

Developing new technology is one thing; applying it is another. There have often been notable differences in the pace at which different countries take advantage of new technologies. For example, as the following Global Comparison shows, since 2000, Italy has suffered a significant decline in its total factor productivity, while the United States and Germany have powered ahead. The sources of these national differences are the subject of a great deal of economic research.