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ECONOMIC GROWTH
INTRODUCTION
Economic growth and development is often used interchangeably but there is a
difference. Economic growth is an increase in the amount of the goods and services
produced over a specific period of time. Generally, economic development refers to
policymakers' actions which promotes the health, political, and social well-being of a
specific area. Common areas of development includes literacy rates, life expectancy,
unemployment, and poverty rates. Economic development leads to the economic growth
of a country.Economic Growth is a narrower concept than economic development.It
Economic Growth does not take into account the size of the informal economy. The
informal economy is also known as the black economy which is unrecorded
economic activity. Development alleviates people from low standards of living into
proper employment with suitable shelter. Economic Growth does not take into
account the depletion of natural resources which might lead to pollution,
congestion & disease. Development however is concerned with sustainability
which means meeting the needs of the present without compromising future
needs. These environmental effects are becoming more of a problem for
Governments now that the pressure has increased on them due to Global
warming.
Economic growth is a necessary but not sufficient condition of economic
development.
Economic development is the sustained, concerted actions of policy makers and
communities that promote the standard of living and economic health of a specific area.
Economic development can also be referred to as the quantitative and qualitative
changes in the economy. Such actions can involve multiple areas including development
of human capital, critical infrastructure, regional competitiveness, environmental
sustainability, social inclusion, health, safety, literacy, and other initiatives. Economic
development differs from economic growth. Whereas economic development is a policy
intervention endeavor with aims of economic and social well-being of people, economic
growth is a phenomenon of market productivity and rise in GDP. Consequently, as
economist Amartya Sen points out: economic growth is one aspect of the process of
economic development.[1]
History
Economic development originated in the post war period of reconstruction initiated by the
US. In 1949, during his inaugural speech, President Harry Truman identified the
development of undeveloped areas as a priority for the west:
More than half the people of the world are living in conditions approaching misery. Their
food is inadequate, they are victims of disease. Their economic life is primitive and
stagnant. Their poverty is a handicap and a threat both to them and to more prosperous
areas. For the first time in history humanity possesses the knowledge and the skill to
relieve the suffering of these people ... I believe that we should make available to peaceloving peoples the benefits of our store of technical knowledge in order to help them
realize their aspirations for a better life What we envisage is a program of development
based on the concepts of democratic fair dealing ... Greater production is the key to
prosperity and peace. And the key to greater production is a wider and more vigorous
application of modem scientific and technical knowledge."
There have been several major phases of development theory since 1945. From the
1940s to the 1960s the state played a large role in promoting industrialization in
developing countries, following the idea of modernization theory. This period was followed
by a brief period of basic needs development focusing on human capital development
and redistribution in the 1970s. Neo-liberalism emerged in the 1980s pushing an agenda
of free trade and Import Substitution Industrialization.
In economics, the study of economic development was borne out of an extension to
traditional economics that focused entirely on national product, or the aggregate output
of goods and services. Economic development was concerned in the expansion of
peoples entitlements and their corresponding capabilities, morbidity, nourishment,
literacy, education, and other socio-economic indicators.[7] Borne out of the backdrop of
Keynesian, advocating government intervention, and neoclassical economics, stressing
reduced intervention, with rise of high-growth countries (Singapore, South Korea, Hong
Kong) and planned governments (Argentina, Chile, Sudan, Uganda), economic
development, more generally development economics, emerged amidst these mid-20th
century theoretical interpretations of how economies prosper.[1] Also, economist Albert O.
Hirschman, a major contributor to development economics, asserted that economic
development grew to concentrate on the poor regions of the world, primarily in Africa,
Asia and Latin America yet on the outpouring of fundamental ideas and models.[8]
It has also been argued, notably by Asian and European proponents of infrastructurebased development, that systematic, long-term government investments in
transportation, housing, education, and healthcare are necessary to ensure sustainable
economic growth in emerging countries.
Economic Development
Economic Growth
country.
technological changes).
Development relates to growth of
human capital indexes, a decrease in
Factors
Qualitative.HDI (Human
Measureme
nt
Effect
Scope
We have started our discussion of development by addressing very broad issues relating to the concept
of development. However, much of the literature and thinking about 'development' focuses on
economics. Indeed 'development' and 'economic development' have often been treated as synonymous
concepts.
The economic development of a country or society is usually associated with (amongst other things)
rising incomes and related increases in consumption, savings, and investment. Of course, there is far
more to economic development than income growth; for if income distribution is highly skewed,
growth may not be accompanied by much progress towards the goals that are usually associated with
economic development.
What characteristics are typically associated with economic development? Write down a list of features
that in your view might distinguish an economically developed country from one that is not.
Clearly not all developed countries exhibit all these characteristics in equal measure. And, some of you
might even question the presence of certain items in the above list, pointing perhaps to countries (or
regions within them) in which, for example, crime and employment levels appear to be quite high, or
highlighting the fact that not everyone has access to good public services, housing and so on. Some of
these points are clearly open to debate. For instance crime levels in the rural areas of many developing
countries where most people live are often much lower than in some of the urban population centres of
developed countries. Nonetheless, the above list is probably fairly indicative of the characteristics that
distinguish countries that are economically developed from those that are not.
Economic growth
From the answer to the previous question you will have noticed that the listed characteristics once again
say more about goals than the processes or mechanisms for achieving them. So what drives a country
towards achieving these goals? The orthodox view, espoused by most governments, most major
international organisations, and the economists that advise them, is that a big part of the answer lies in
economic growth.
However, economic growth can follow many different paths, and not all of them are sustainable.
Indeed, there are many who argue that given the finite nature of the planet and its resources, any form
of economic growth is ultimately unsustainable. We shall leave these debates for later. For now let us
look at what exactly economic growth is and how it is measured.
Economists usually measure economic growth in terms of gross domestic product (GDP) or related
indicators, such as gross national product (GNP) or gross national income (GNI) which are derived
from the GDP calculation. GDP is calculated from a country's national accounts which report annual
data on incomes, expenditure and investment for each sector of the economy. Using these data it is
possible to estimate the total income earned in the country in any given year (GDP) or the total income
earned by a country's citizens (GNP or GNI).
GNP is derived by adjusting GDP to include repatriated income that was earned abroad, and exclude
expatriated income that was earned domestically by foreigners. In countries where inflows and
outflows of this sort are significant, GNP may be a more appropriate indicator of a nation's income than
GDP.
There are three different ways of measuring GDP
The income approach, as the name suggests measures people's incomes, the output approach measures
the value of the goods and services used to generate these incomes, and the expenditure approach
measures the expenditure on goods and services. In theory, each of these approaches should lead to the
same result, so if the output of the economy increases, incomes and expenditures should increase by
the same amount.
Figures for economic growth are usually presented as the annual percentage increase in real GDP. Real
GDP is calculated by adjusting nominal GDP to take account of inflation which would otherwise
make growth rates appear much higher than they really are, especially during periods of high inflation.
Short-term versus long-term growth
A distinction needs to be made between short-term growth rates and longer term ones. It is quite normal
for short-term growth rates to fluctuate in line with the business cycle. This can be seen in the two
figures in 1.2.1 representing GDP growth in the US between 1930 and 2003.
1.2.1 US GDP (1930 to 2003) in billions of $US (at year 2000 prices)
Source: Unit author, based on statistics from US Department of Commerce, Bureau of Economic
Analysis
According to the measures of GDP and growth shown here, growth in recent decades has fluctuated
between zero and 5% per annum. Clearly, based on long-term trends, growth rates exceeding 5% (as
measured here) would seem to be unsustainable. When politicians are talking about sustainable growth
they are often referring to macroeconomic concerns relating to the cycle of boom and bust. An
economic boom involves high growth rates and is often accompanied by rising inflation. It is often
followed by a period of lower growth rates and recession ('bust'). Sustainable growth in this context
relates to stable growth rates that even out the fluctuations in the business cycle, thus avoiding high
peaks and the large troughs associated with recessions. Note that this is different from the issues that
environmentalists typically focus upon when they discuss the sustainability of economic growth. We
shall say more on this later.
Relationship between growth and development
Now take a moment to think about what GDP and GDP growth tell us about a country's
level of economic and social development.
Do high levels of GDP necessarily correspond with high levels of development? Not necessarily. It is
not aggregate GDP that is important, but GDP per capita. Countries like China and India have much
higher levels of GDP than, say, Singapore, New Zealand or Belgium, but few would suggest that the
latter are economically less developed than the former.
If GDP growth is to translate into higher GDP per capita, it has to outpace population growth.
Assuming that it does, is it reasonable to say that development is taking place?
Bottom of Form
Certainly, statistics reveal that the most developed countries are those with the highest GDP per capita
(see Easterly 2002). Clearly, though, GDP per capita doesn't tell the whole story. GDP per capita is
calculated by dividing GDP by the population. It says nothing about how incomes are distributed or
spent. Growth in GDP per capita could result from growth in the incomes of richer groups in society,
with incomes of poorer groups remaining largely unchanged. It coincides with spending patterns that
are skewed towards the rich and which exclude the needs of the poor. It doesn't necessarily follow that
growth in per capita GDP will lead to a reduction in poverty or to broader social and economic
development. Indeed, there are those who argue, rightly or wrongly, that in many countries economic
growth is associated with increasing levels of poverty, rather than the reverse.
The relationship between economic growth and poverty is a hotly debated topic, about which people
are very divided. Some people highlight the negative effect of growth on low income groups, stressing
the need for new approaches to economic development that will allow the poor to benefit more from
economic growth than they do at present. Others are more sanguine, believing that the benefits of
current models for growth will eventually 'trickle down' to poorer groups in society, if they are not
already doing so.
Much of the debate in this area revolves around the values and ideals of those engaged in it, as well as
the different theories on the subject. It also hinges upon interpretations of the empirical evidence.
Poverty and income distribution are hard to measure, especially in developing countries where the
capacity to gather and analyse data is often very weak. Consequently, the strength of the statistical
relationship between growth and poverty remains the subject of debate. There is also controversy about
the mechanisms by which economic growth may reduce poverty, the timing of these and the policy
implications.
GDP and purchasing power parity
An additional problem with GDP as a measure of development occurs when one compares per capita
GDP across countries. This problem arises because one US dollar in the United States or Europe, for
example, does not buy the same amount of goods and services as it would do in, say, Africa or Asia. For
many goods and services one dollar will purchase significantly more in a developing country than it
will in a developed one. To overcome this difficulty, economists often use purchasing power parity
(PPP) dollars when making cross-country comparisons of GDP. These are dollars that are adjusted to
account for the differences in purchasing power between different countries.
Human development index
The weaknesses inherent in the use of GDP as a measure of development has led to the creation of
other measures. The most well known of these is the human development index (HDI) published on a
regular basis by The United Nations Development Programme (UNDP) in its Human Development
Report. The HDI is a composite index that rates countries according to their overall performance in
relation to three criteria
life expectancy
education
As noted earlier, these are related to fundamental freedoms to live and to participate in society.
UNDP publishes a number of different human development indicators, many of which are composites
of other weighted indexes. The main indexes are
Economic development
'Economic development' is a term that economists, politicians, and others have used
frequently in the 20th century. The concept, however, has been in existence in the West
for centuries. Modernization, Westernisation, and especially Industrialisation are other
terms people have used while discussing economic development. Economic development
has a direct relationship with the environment.
Although nobody is certain when the concept originated, most people agree that
development is closely bound up with the evolution of capitalism and the demise of
feudalism.[3]
Mansell and When also state that economic development has been understood since the
World War II to involve economic growth, namely the increases in per capita income, and
(if currently absent) the attainment of a standard of living equivalent to that of
industrialized countries.[4][5] Economic development can also be considered as a static
theory that documents the state of an economy at a certain time. According to
Schumpeter (2003), the changes in this equilibrium state to document in economic theory
can only be caused by intervening factors coming from the outside.[6]
Growth and development
Dependency theorists argue that poor countries have sometimes experienced economic
growth with little or no economic development initiatives; for instance, in cases where
they have functioned mainly as resource-providers to wealthy industrialized countries.
There is an opposing argument, however, that growth causes development because some
of the increase in income gets spent on human development such as education and
health.
According to Ranis et al., economic growth and development is a two-way relationship.
Moreover, the first chain consists of economic growth benefiting human development
with the rise in economic growth, families and individuals will likely increase expenditures
with heightened incomes, which in turn leads to growth in human development. Further,
with the increased consumption, health and education grow, also contributing to
economic growth. In addition to increasing private incomes, economic growth also
generate additional resources that can be used to improve social services (such as
healthcare, safe drinking water, etc.). By generating additional resources for social
services, unequal income distribution will be mitigated as such social services are
distributed equally across each community, thereby benefiting each individual. Concisely,
the relationship between human development and economic development can be
explained in three ways. First, increase in average income leads to improvement in health
and nutrition (known as Capability Expansion through Economic Growth). Second, it is
believed that social outcomes can only be improved by reducing income poverty (known
as Capability Expansion through Poverty Reduction). Lastly, social outcomes can also be
improved with essential services such as education, healthcare, and clean drinking water
(known as Capability Expansion through Social Services). John Joseph Puthenkalam's
research aims at the process of economic growth theories that lead to economic
development. After analyzing the existing capitalistic growth-development theoretical
apparatus, he introduces the new model which integrates the variables of freedom,
democracy and human rights into the existing models and argue that any future
economic growth-development of any nation depends on this emerging model as we
witness the third wave of unfolding demand for democracy in the Middle East. He
develops the knowledge sector in growth theories with two new concepts of 'micro
knowledge' and 'macro knowledge'. Micro knowledge is what an individual learns from
school or from various existing knowledge and macro knowledge is the core philosophical
thinking of a nation that all individuals inherently receive. How to combine both these
knowledge would determine further growth that leads to economic development of
developing nations.Yet others believe that a number of basic building blocks need to be in
place for growth and development to take place. For instance, some economists believe
that a fundamental first step toward development and growth is to address property
rights issues, otherwise only a small part of the economic sector will be able to participate
in growth. That is, without inclusive property rights in the equation, the informal sector
will remain outside the mainstream economy, excluded and without the same
opportunities for study.
Goals
In the United States, Project Socrates outlined competitiveness as the driving factor for
successful economic development in government and industry. By addressing technology
directly, to meet customer needs, competitiveness was fostered in the surrounding
environment and resulted in greater economic performance and sustained growth.
Economic development typically involves improvements in a variety of indicators such as
literacy rates, life expectancy, and poverty rates. GDP does not take into account other
aspects such as leisure time, environmental quality, freedom, or social justice; alternative
measures of economic well-being have been proposed (more). Essentially, a country's
economic development is related to its human development, which encompasses, among
other things, health and education. These factors are, however, closely related to
economic growth so that development and growth often go together. Due to globalization
growth and development in those countries are interrelated to trends on international
trade and participation in Global Value Chains (GVCs) and international financial markets.
The last financial crisis had a huge effect on economies in developing countries.
Economist Jayati Ghosh states that it is necessary to make financial markets in
developing countries more resilient by providing a variety of financial institutions. This
could also add to financial security for small-scale producers.[9]
Regional policy
In its broadest sense, policies of economic development encompass three major areas:
Governments undertaking to meet broad economic objectives such as price stability, high
employment, and sustainable growth. Such efforts include monetary and fiscal policies,
regulation of financial institutions, trade, and tax policies.
Programs that provide infrastructure and services such as highways, parks, affordable
housing, crime prevention, and K12 education.
Job creation and retention through specific efforts in business finance, marketing,
neighborhood development, workforce development, small business development,
business retention and expansion, technology transfer, and real estate development. This
third category is a primary focus of economic development professionals.
One growing understanding in economic development is the promotion of regional
clusters and a thriving metropolitan economy. In todays global landscape, location is
vitally important and becomes a key in competitive advantage.
International trade and exchange rates are a key issue in economic development.
Currencies are often either under-valued or over-valued, resulting in trade surpluses or
deficits.
Organization
Economic development organization
Economic development has evolved into a professional industry of highly specialized
practitioners. The practitioners have two key roles: one is to provide leadership in policymaking, and the other is to administer policy, programs, and projects. Economic
Access to healthcare
Social security and pensions
Modern transportation
European development economists have argued that the existence of modern
transportation networks- notably high-speed rail infrastructure constitutes a significant
indicator of a countrys economic advancement: this perspective is illustrated notably
through the Basic Rail Transportation Infrastructure Index (known as BRTI Index) [10]
Community competition
One unintended consequence of economic development is the intense competition
between communities, states, and nations for new economic development projects in
today's globalized world. With the struggle to attract and retain business, competition is
further intensified by the use of many variations of economic incentives to the potential
business such as: tax incentives, investment capital, donated land, utility rate discounts,
and many others. IEDC places significant attention on the various activities undertaken by
economic development organizations to help them compete and sustain vibrant
communities.
Additionally, the use of community profiling tools and database templates to measure
community assets versus other communities is also an important aspect of economic
development. Job creation, economic output, and increase in taxable basis are the most
common measurement tools. When considering measurement, too much emphasis has
been placed on economic developers for "not creating jobs." However, the reality is that
economic developers do not typically create jobs, but facilitate the process for existing
businesses and start-ups to do so. Therefore, the economic developer must make sure
that there are sufficient economic development programs in place to assist the
businesses achieve their goals. Those types of programs are usually policy-created and
can be local, regional, statewide and national in nature.
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