Costs and Benefits of Economic Growth For 9D & 9F

Costs and Benefits of Economic Growth

The advantages and disadvantages of economic growth are fiercely debated by economists, environmentalists and other commentators. In this note we consider some of the economic and social costs and benefits from expanding levels of production and consumption. In particular we focus on the idea of sustainable growth.

The Benefits of Economic Growth

Improvements in living standards: Growth is an important avenue through which better living standards and lower rates of poverty can be achieved. This is particularly true for countries who regard growth as a key route for poverty reduction among their population. According to a report published in August 2004 by the Asian Development Bank (ADB), rapid growth in many of the countries in the Asian region has reduced the number of people living on less than $1 a day fell to 22% of the region's population in 2002. That compares with 34% in 1990 and shows "considerable progress in the fight against poverty."

Rising Employment: Growth stimulates higher employment. As we can see from the chart below, the sustained growth in the British economy since 1993 has helped to bring about a large rise in total employment, the number of people in work has risen from 2.53 million at the start of 1993 to nearly 29 million thirteen years later. This is a very impressive employment creation record, much better than most other countries in the European Union.

The accelerator effect of growth on capital investment: Rising AD and output encourages investment in capital machinery – this helps to sustain growth by increasing LRAS.

Greater business confidence: Growth has a positive impact on company profits & business confidence – good news for the stock market and for the growth of small and large businesses.

The “fiscal dividend” to the government: Government finances are cyclical in nature because a growing economy boosts the tax revenues flowing into the Treasury and it also provides the government with more money to finance spending projects.

Potential environmental benefits – richer countries have more resources available to invest in cleaner technologies. And, as nations move to later stages of development, energy intensity levels start to fall. Much depends on how many resources an economy is willing to devote to environmental improvement and protection. Over the last thirty years, the ratio of energy consumption per unit of GDP has fallen quite significantly. The reduction in energy intensity is a reflection of improvements in production technologies and also a gradual switch towards a low carbon economy. Much more progress needs to be made. Organisations such as the Carbon Trust sponsor research into low carbon technologies and many

The Disadvantages of Economic Growth

Economic growth does not come risk-free. Although our material progress can be measured in part by the growth of national output, income and spending, if the economy grows too quickly, it can bring about short and long-term problems.

Inflation risks: There is the danger of demand-pull and cost-push inflation if demand grows faster than long run productive potential High and rising inflation can be destabilizing for an economy because it puts pressure on interest rates to rise and can cause a loss of competitiveness for domestic businesses in international markets

The environment: Economic growth cannot be separated from its environmental impact. Fast growth of production and consumption can create negative externalities such as increased noise and air pollution and road congestion. Environmental damage can have a negative effect on our quality of life and limits our sustainable rate of growth. For example, road transport is responsible for 25% of UK CO2 emissions once emissions from fuel processing and vehicle manufacturing are taken into account.

Inequalities of income and wealth: Not all of the benefits of growth are evenly distributed. We can see a rise in real GDP but also growing income and wealth inequality in society which is reflected in an increase in relative poverty. The Gini coefficient is one way to measure the inequalities in the distribution of income and wealth in different countries. The higher the value for the Gini co-efficient (the maximum value is 1), then greater the inequality.  Countries such as Japan, Denmark and Sweden typically have very low values for the Gini coefficients; whereas African and South American countries have an enormous gulf between the incomes of the richest and the poorest elements of the population.

Regional disparities: Although average living standards may be rising, the gap between rich and poor can widen leading to an increase in relative poverty and a widening of the gap between different regions.

Sustainability of Economic Growth

Many of the world’s most valuable finite resources are being extracted at such a rapid rate that it questions the long-term sustainability of growth. Renewable resources are also being depleted because of over-consumption. Examples include the destruction of rain forests, the over-exploitation of fish stocks and loss of natural habitat created through the construction of new roads, hotels, retail malls and industrial estates. Some of the main environmental threats include:

• The depletion of global resource base and the impact of global warming. There are plenty of examples around of the “tragedy of the commons”, the permanent loss of what should be renewable resources that result from over-extraction of some of our environmental resources.
• A huge expansion of waste and pollution of the environment
• Over-population (particularly in urban areas) putting pressure on scarce land and other resources
• Species extinction leading to a loss of bio-diversity

The current Government supports the concept of sustainable development and focuses on four main objectives set out below:

• Social progress which recognises the needs of everyone: Everyone should share in the benefits of increased prosperity and a clean and safe environment. Needs must not be met by treating others, including future generations and people elsewhere in the world, unfairly.
• Effective protection of the environment: We must limit global environmental threats, such as climate change to protect human health and safety from hazards such as poor air quality and toxic chemicals and to protect things which people need or value, such as wildlife, landscapes and historic buildings.
• Prudent use of natural resources: We need to make sure that non-renewable resources are used efficiently and that alternatives are developed to replace them in due course. Renewable resources, such as water, should be used in ways that do not endanger the resource or cause serious damage or pollution.
• Maintenance of high and stable levels of economic growth and employment, so that everyone can share in high living standards and greater job opportunities.

Key points

• Economic growth provides important long-term benefits for the population of a country. It can be a route out of poverty and it creates jobs and wealth.
• Inequalities in income and wealth mean that, in many countries, the benefits from growth are not distributed evenly. This raises questions of equity (fairness) and impacts on our interpretations of how to measure standards of living.
• The environmental consequences of growth cannot be ignored.
• Sustainable growth meets the needs of the present without compromising the ability of future generations to meet their own needs.
• There are environmental benefits from countries becoming richer
• However, there are major concerns about the impact of fast growth on the world’s environmental resources.
  Economic growth is just one indicator of a country’s economic performance. Alternative measures, such as the United Nation’s Human Development Index & the Index of Sustainable Economic Welfare, take account of other indicators.