I.

Introduction
Economic growth defined as a percentage output increase in economy.
Economic growth is one of most important indicators of a healthy economy within
one country. A long-term growth of a country gives positive impact on national
income and level of employment which improving the standard of living. Higher
economic growth also leads to extra tax income for government spending that can
be used to develop economy. Furthermore, as the country’s population grows, the
growth of economy is needed to keep up the standard living and wealth within the
country. Generally, there are two components that can be used to measure the
growth economy of one country which are Gross National Product (GNP) and
Gross National product (GDP). The growth of economy can be calculated by
comparing the amount of the current GDP/GNP with GDP/GNP a period before.
In the last couple of years, countries in world face slower growth of economy
especially in developed country. Some developed countries even suffer a decreased
economic growth. The slower growth of economy from two developed countries
( Japan, US ) in the last two years.
Figure 1. 3 developed countries Annual Growth Rate

Japan Annual Growth US annual growth

Based on the figure, we were informed that these two developed countries
particularly seem hard to maintain their economic growth. It was seen in the
economy growth of these developed countries are under 5 %. Although some
measures have been done by the government, yet they still suffer the economic
 growth. Therefore, in this paper, we aim to analyse the factors that might influence
the economic growth of these countries.

2. Review of Literatures

2.1 Basic Indicator of Development

1. Real income

This indicator is in term of real income per capita adjusted for purchasing power
or known as Purchasing power parity. Purchasing power parity is calculated using
a common set of international prices for all goods and services. In a simple way we
can say that PPP is how foreign currency can buy the identical quantity of goods
and services in the local developing country market as $1 would buy in the US.

For example the price of a Big Mac in Indonesia is equal to $2,26 while in the US
the price of a Big Mac is $5.74.

For many developing countries, the PPP is estimated using a multiple of the official
exchange rate (OER) measure. For developed countries, the OER and PPP
measures are more similar, because the standards of living in developed countries
are closer to those of the US. (Amadeo, 2019)

If domestic prices are lower, PPP measures of GNI per capita will be higher than
estimates using foreign exchange rates as the conversion factor. The table below
will show the comparison of exchange rate and PPP GNI per capita.
2. Health

1) Life expectancy

Life expectancy is the average number of years newborn children would live if
subjected to the mortality risks prevailing for their cohort at the time of their birth.

Increase in life expectancy is often associated with higher economic growth. A 1998
World Bank study showed that life expectancy displays a strong tendency to improve
with per capita income. (Raouf Boucekkine, 2007)

Here are the example of life expectancy and several indicators for developed and
developing countries as proposed by Euromonitor (Biciunaite, 2014)
 2) Undernourishment (problem of hunger)

It means consuming too little food to maintain normal levels of activity.

A research conduct by FAO in 2001, result shows that the goals of a world free of
poverty or a world free of hunger are complementary and may not only improve
human welfare in the static sense, but contribute to raising the rate of economic
growth (Arcand, 2001)

3) Child mortality

It used indicator of Under-5 mortality

4) Crude birth rate

This is the amount of birth of 1000 people per year.

3. Education
1) Literacy

Basic abilities to read and write for adult males and females whether it is reported or
estimated.

2) Schooling

Comparing between mean years of schooling and expected years of schooling

A research conduct by A.Z Nowak and Gangadhar Dahal who investigate the
relationship between education and economic growth in Nepal between 1995 and
2013 result that secondary and higher education contributes significantly to the Real
GDP Per Capita in Nepal. The elementary education also positively influences
economic growth but the results are statistically less significant. Therefore the
researcher suggested to keep education on top priority in public policies to achieve
sustained economic growth.

The table below shows the comparison of those basic indicators for the countries
classification, region and illustrative countries.
2. Analysis Holistic Indicator of Development

In the past, economic development generally only measured by basic indicators as

explained above. However, within years later people's conscious that the pursuit of happiness
was a fundamental human goal then recognized that the basic indicators of economic such as
the Gross Domestic Product (GDP) was not designed to -and did not reflect adequately- the
happiness and well-being of people. Consequently, it needs indicators broader that captured the
importance of the pursuit of happiness and well-being in development better.
As explained by Todaro and Smith (2011), The Human Development Index (HDI)
provided by the United Nations Development Program (UNDP) was created in an attempt to
move away from the simple reliance on GDP as a measure of welfare, and included adjusted
real income, lifespan and educational attainment. Some discrepancies have been found between
the HDI and life satisfaction rankings of countries. HDI itself defined as an index measuring
 national socioeconomic development, based on combining measures of education, health, and
adjusted real income per capita. This indicator has recently been considered as the most
representative of the success of economic development. Compared to GDP, the HDI has a
greater emphasis on human development. It takes the quality of life into account, not just
production capacity of a country. Education and health are considered as important to a country
as economic power. GDP is considered a means to human development, but not an end. GNI
per capita, which is essentially the average person’s purchasing power, is an important factor
in calculating the HDI, but just one of several. That is why the HDI paints a more holistic picture
of a country than GDP.
Todaro and Smith (2011) further divided the Human Development Index indicator into
the Traditional and the New one. In the Traditional one, the index attempts to rank all countries
on a scale from 0 to 1 based on three goals: (1) longevity as measured by life expectancy at
birth; (2) knowledge as measured by weighted average of adult literacy and gross school
enrolment ratio; (3) standard of living as measured by real per capita GNP. Using these
measures, the traditional HDI groups countries into four: (1) low human development (0,0 to
0,499); (2) medium human development (0,50 to 0,799); high human development (0,80 to
0,90); (4) very high human development (0,90 to 1,0).

Interesting fact can be seen from the table that countries with similar GDPs can have vastly
different HDIs or as more drastic example, Senegal and Rwanda have essentially the same
 average HDI though real income is 92% higher in Senegal. And Costa Rica has a higher HDI
than Saudi Arabia, even though Saudi Arabia has more than double the real per capita income of
Costa Rica. Many countries have an HDI significantly different from that predicted by their
income. Todaro and Smith explained it because of the HDI has a strong tendency to rise with per
capita income, as wealthier countries can invest more in health and education, and this added
human capital raises productivity. It should be stressed that the HDI has a strong tendency to rise
with per capita income, as wealthier countries can invest more in health and education, and this
added human capital raises productivity. Furthermore, it so striking is that there is still such great
variation between income and broader measures of well-being.
The HDI itself faces criticisms. First, it implicitly assumes trade-offs between its
components. For example, the HDI measures health using life expectancy at birth and measures
economic conditions using GDP per capita. So the same HDI score can be achieved with different
combinations of the two. As a result, the HDI implies a value of an additional year of life in terms
of economic output. This value differs according to a country’s level of GDP per capita. Second,
the HDI also struggles with the accuracy and meaningfulness of the underlying data. The HDI
does not distinguish between countries with the same GDP per capita, but different levels of
income inequality or between countries based on the quality of education.

Answering those critics, in 2010, the UNDP presented the New Human Development Index
(NHDI). The new points of this NHDI mentioned by Todaro and Smith (2011) as follows:

1. Gross national income (GNI) per capita replaces gross domestic products (GDP) per capita
2. The education index has been completely revamped
3. Expected educational attainment, the other new component, is somewhat more ambiguous: it
is not an achievement but a UN forecast? History shows that much can go wrong to derail
development plans
4. The two previous components of the education index, literacy, and enrolment, have been
correspondingly dropped
5. The upper goalposts in each dimension have been increased to the observed maximum rather
than given a predefined cut-off
6. The lower goalpost for income has been reduced
7. Another minor difference is that rather than using the common logarithm
8. Possibly the most consequential change is that the NHDI is computed tih a geometric mean, as
we examine next.

III. Discussion
 Based on the World Bank, the classification of countries is determined by two factors:

1. A country’s GNI per capita, which can include economic growth, inflation, exchanges rates,
and population to mention the countries as the developed ones, we can assume by their level of
development measured by capita gross national income (GNI).
2. Classification threshold: the threshold is adjusted for inflation annually using the SDR deflator.

Basically, developed countries can be indicated by countries which have high income and high
per capita income. World Bank divided the income based on the level of GNI per capita, in which
countries with less than $1,035 GNI per capita are classified as low-income countries, those with
between $1,036 and $4,085 as lower middle income countries, those with between $4,086 and
$12,615 as upper middle income countries, and those with incomes of more than $12,615 as high-
income countries. Thus, the figure below can be represented as the developed economies by (World
Economic Situation and Prospects (WESP)).

Figure 2. List of Development Country

Problems Underlying Developed Countries: Hard To Maintain the growth Economic

Although developed countries show a monetary development in terms of high income, it does
not mean that they also experience a stable economic growth. Moreover, Patterson asserted that
 developed countries are faced with the problems of stagflation, that is high rates of both inflation and
unemployment combined with slow growth and productivity. For this reason, firstly we need to look

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Japan 2.8 0.4 0.1 1.5 2.2 1.7 1.4 1.7 -1.1 -5.4 4.2 -0.1 1.5 2.0 0.4 1.2

United States 4.1 1.0 1.7 2.9 3.8 3.5 2.9 1.9 -0.1 -2.5 2.6 1.6 2.2 1.8 2.5 2.9

Created from: World Development Indicators

Series : GDP growth (annual %)

Table 1: annual growth of US and Japan Over a decade

We can see that in the table 1 both developed countries suffered from secular stagnation”
describes an economic situation in which a country’s economic growth is very low or non-
existent over a longer period. From the data above, the thwo countries experience a slow growth
of annual GDP accounted only between 0% and almost 3%, even for Japan reached the slowest
rate of GDP Growth by -0,1% in 2011. The problem of stagnation can be identified because
of some reasons, he problem of stagnation can be identified because of some reasons, explained
by several perspectives, as follows:

1. Shrinking population weakens economic growth

When a country’s population stops growing or even declines, it has an impact
on both supply and demand for goods. A shrinking population means fewer consumers
so that demand for material goods and services goes down. If a company responds to
this trend by limiting production, the country’s GDP declines. At the same time, a
shrinking population also implies a reduction in people of employment age. This
reduces society’s production possibilities, which weakens economic growth. This case
happened in Japan it suffered population growth over a decade.

2. Rising income inequality hampers demand for goods

Rising income inequality results in an increasing percentage of society’s
aggregate income flowing into high-income households. These are generally
characterized by an above-average saving rate. As such, society’s savings grow, which
means that demand for goods declines. If this decline in demand is not compensated for
 with appropriately high investment expenditures, society’s aggregate demand shrinks.
If companies adapt by reducing production, the GDP goes down. Therefore, income
inequality puts the brakes on growth.

3. Saturation points lead to declining demand

In highly developed national economies, people enjoy a high material standard

of living. Sooner or later, it reaches a saturation point. This initially impacts food
products and later consumer goods as well. As incomes grow, the percentage of total
economic saving in the GDP increases, which is accompanied by a decline in the
consumption rate. Investments are no longer worthwhile because the products a
business could produce with them would not find any buyers. Therefore, saturation
points induce a demand-side stagnation trend

3.
4. Tax
5. Expenditures
6. According to an article by Lucas Kawa, the reason of the slow growth are because a
stalling of progress on the Euro Area crisis, debt and fiscal issues in the United States,
the possibility of a sharp showing of investment in China and disruption in global oil
supplies.
7. According to the World Economic Situation and Prospects (WESP, 2017), the
weakness in economic growth is in line with a slowdown in private and public
investment in developed economies. Weak investment not only weighs on aggregate
demand in the short run, but also reduces growth in productivity and potential output
in the medium to long run