Q: 4) “Economic growth is important?

”
Discuss this statement and assess the potential for a government to
increase the rate of economic growth in an economy. Use examples to
support statements.

Introduction
The world faces many problems such as starvation and poverty which are not
astonishing, even in countries like the UK and the US where average living
standards are high. For that reason, growth is essential as much as it is needed if
people in less developed countries are to escape material poverty. However, rising
population and consumption have put pressure on the earth’s natural ecosystem
especially through the many forms of pollution. Therefore, although growth is
absolutely necessary and attainable, it must be also sustainable which in turn must
be based on the idea that technological change is part of the solution since
innovation in production processes uses less of all inputs per unit output.
Government’s pricing and policy incentives is vital to facilitate direct technological
change in a more environmentally friendly way. Essentially, there is no guarantee
that the world can solve the problems of sustainable growth because there will never
be full protection from the cycle of nature, but at the same time there is nothing that
the modern growth theory and existing evidence to suggest that this achievement is
impossible.

Nature of economic growth:

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 Economic growth is primarily concerned with the long run study of how countries
can advance their economies through a process of continuous replacement and
reorganization of human activities simply by investment to take full advantage of
income.1 In comparison, the short run variation of economic growth referred to as
the business cycle proves that almost all economies experience periodical
recessions2 and it is only through long run growth that an economy can raise living
standard through the removal of a recessionary gap because growth can go on
indefinitely.

Causes of economic growth:

Four of the most important determinants of growth relies heavily on growth in the
labour force, investment in both human and physical capital and finally, but not the
least, technological change.

Growth in the labour force occur when population growth increases resulting in
more labour being used which essentially leads to more output and an increase in
Gross Domestic Product (GDP)3 while human capital involves improvements in the
health and the prolonged existence of the population.

When the health of a worker is better, it tends to leads to increased productivity by

cutting down on illness, absenteeism and accidents. In addition, investment in
human capital can prove to contribute to economic growth since the longer a person
has been educated, the more adaptable and productive the worker will become;
technical training is therefore clearly required if a person has to operate complex
machinery or face new challenges in the work force. Furthermore, training potential
innovators can lead to advances in knowledge and also contribute to growth.

1
Actual income and growth represents what the country does in fact produce while
potential income and growth measures what the economy could have produced if all
resources were employed at full levels of utilization.
2
Oil shocks, war and harvest failure are causes of recessions.
3
A measure of national income.
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 Physical capital on the other hand, affects GDP similarly to that of population
growth. Where labour growth concerns output per person that determines living
standards, physical capital concerns output per unit of capital showing that living
standards can increase as physical capital increases because output is rising while
population remains constant.

Technological change states that the same amount of labour and capital can
produce more GDP if the production function is altered since new inventions can
significantly contribute to growth.

Governments can also play an important role in the cause of the growth process
because they need to provide the framework for the market economy by enforcing
contracts, law and order and the basic right of the individual to locate, invest and sell
where and how the individual decides. Governments also need to provide the
infrastructure such as transportation and communication networks which is critical to
growth in a modern and globalized economy. Government regulations and
competition policy are needed to prevent growth inhibiting monopolies in areas such
as roads, bridges, rail and harbour which can be provided by private firms.
Education and health are also essential concerns of government expenditure,
especially for the disadvantaged, because creating the appropriate factors of
production is critical to creating comparative advantages in products that may be
exported. It is fundamentally significant for governments to place emphasis on
poverty reduction because poverty can exert anti-growth effects as employers will
not be able to develop the skills needed to provide a productive labour force and
may not respond to incentives.

Effects of economic growth

Economic growth has bilateral effects on the living conditions of people.
Benefits Costs
1) There is a positive transformation in the 1) Growth requires heavy investment of
lifestyles of ordinary workers when there is a resources in capital goods and activities such as

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higher GDP per capita.
2) Redistribution on income to the poor through
increased taxes as income rises allows
government to use this opportunity as a powerful
weapon against poverty.
3) It is easier for a fast growing economy to give
more towards unfortunate citizens through
redistribution incomes than with a static
economy.
4) Economies are driven by new technology and
improvements in efficiency.
5) Pollution regulation policies are strictly
enforces throughout developed countries in an
attempt for citizens to help care for the
.environment.
6) Human welfare is increased through higher
consumption of goods and services resultant of
higher income levels.
7) Inflation can result in the absence of economic
growth putting strain on the individual consumer.
education and health which does not yield
immediate returns for consumption.
2) Innovation of technology in a changing
economy requires rapid adjustments which can
cause misery and upset to the people affected by
it.
3) Things that affect the quality of life such as
pollution and congestion are not measured when
considering economic growth.
4) Growth encourages the creation of greed and
artificial needs as the industry causes consumers
to desire new tastes and can also lead to crime
and violence.
5) Humanity’s environmental demand puts a
strain on Earth natural capacity thereby depleting
resources and creating shortages for the future.
6) Although distribution of income globally has
increased average wealth, it has added to the
inequality of wealth.
7) The natural balance of the earth is being upset
because of human activity due to the
manufacture of CFCs. In addition, the deposition
of acid rain on farmland reduces crop yields.

Brief history of the United Kingdom’s economy

The UK’s economy is a modern, market based, mixed economy where much of what
society produces depends on population and productivity level. The long period of
sustained productivity growth in the twentieth century, especially after World War II,
had caused British citizens to expect a substantially better off life than parents and
grandparents because the trend in employment had been positive which was
stimulated when more women had been encouraged to enter the labour force at that

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time. This growth in labour productivity was a key determinant of economic growth
in the UK living standards where productivity had doubled between 1920 and 1970
and an even further 70% by 1993. As each worker produced more in total, there was
more for each person to consume on average. There had also been an 80%
increase in productivity in the manufacturing sector between 1980 and 1993.
Continual technological change which made labour more productive in market
economies have also contributed to economic growth in the UK. Job structure and
the pattern of work had also changed in the UK as Great Britain was the first
industrial nation to show a sharp decline in manufacturing industries, especially in
the agriculture field, to service industries. This was because services that used to be
provided within manufacturing firms had been contracted out to specialist firms. In
addition, the rapid growth rate of international trade caused production and sales for
increasing quantities of service inputs such as transportation, banking and
marketing. Also, one of the most important aspects of change that saturate market
economies is the continual introduction of new products: as more products became
high-tech more money was spent on product design and customer feedback which
could be termed as service activities.

Government’s role in the economy

The Government’s central economic objective is to raise the economy’s sustainable

rate of growth, and achieve rising prosperity, through creating economic and
employment opportunities for all. In order to improve the productivity of the UK
economy the Government made changes to promote macroeconomic stability,
reform the labor market and improve the efficiency and equity of the microeconomic
environment. In the UK, innovation and growth drives market economies to

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continually change and in order to ensure continued success, government policy
must be adapted to keep it relevant in this ever changing global environment.

It is because of economic growth that have banished the misery and poverty that
occurred in England more than 150 years ago owing to increases in the total output
of goods and services that the economy is capable of producing. Nationalization
have emerged from the belief UK government control over natural resources and key
industries are a prerequisite to growth which can be best handled through public
ownership.

In addition, policies that reduce structural employment can increase the employed
labour force and therefore increase potential income. Although this increase might
not be large, social benefits will result from the reduction in unemployment.

Reducing inefficiencies can be valuable to an economy as it serves to increase

national income which will be welcomed where many wants go unsatisfied.
Governments continue to have policies to redistribute income and to make basic
services such as education and hospital health care available to everyone since
many people care about the relative differences among themselves. Economic
growth, inefficiencies and redistribution are all interrelated since policies that create a
distribution of income that is unrelated to the market value of work, can negatively
affect the growth rate. As a result, policies that are designed to reduce inefficiencies
need to be examined carefully for any effects that it may have on growth. Similarly,
policies that are designed to affect growth need to be examined for their effect on
economic efficiency and income distribution for example, policies that raise the
health and educational standards or ordinary workers, may raise growth rate.
A major goal of the UK’s government policy therefore, is in essence, economic
growth.

Government policies to increase economic growth

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The UK is committed to sustainable development through its international aid
programme, helping developing countries make improvements by balancing
economic, social and environmental factors. It reinforces the UK's central objectives
of poverty reduction and achieving the MDGs. In 2000, the UK expanded its national
investment in scientific activities, following the analysis and review in the DTI White
Paper ‘Excellence and Opportunity’. The additional investment in science
infrastructure and support of higher wage positions for top scientists offered, a
brilliant opportunity to analyse what government could do to enhance knowledge
creation and the economic consequences of it.

The use of fiscal policy is to influence total desired expenditure in order to influence
the level of national income. Because the UK government is placing more reliance
on markets to improve economic efficiency and prospects for growth, they have
introduced taxation policies such as VAT where income taxes are taxed as it is
earned, however, income that is saved would be untaxed which can prove to be an
incentive for person to save. This would in effect contribute to growth creating
investment. This tax would then be charged on interest earned on the savings only
when it is actually spent on consumption. On the other hand, tax rates that are
progressively steep penalize people with fluctuating incomes. This was a major
problem in the UK when the government in the 1980’s decided to cut the maximum
rate of tax from 70% to 40%, reducing the tax penalty.

Labour market policies attempt to boost growth through improved equity especially
when people lose jobs because of an economic change The UK government has
funded Training and Enterprise Councils (TECs) where training or work experience is
encouraged for young people who are out of work and not in higher education.
Government is also tempted to help industries that are declining which reduces
unemployment in the short run while aiming at efficiency, however, other industrial
policies aimed at long term growth maximize on competition while some hold that
monopoly and oligopoly profits is an incentive to growth creating innovations. This
led to a nationalisation of many British industries and heavy regulation of many
others in the private sector. Patent laws on the other hand, are designed to provide
incentives to the innovating firm to continue developing new ways of improving

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products under competition while creating a temporary property right over the
invention. In its absence, innovation can be easily copied by competitive firms
causing new firms to enter the market easily and quickly. Private firms are therefore
not motivated to produce since innovation is essentially a public good.

Monetary policy when compared to fiscal policy is used to suit the current change in
which it is operating since interest rates are determined by market forces in the
(international) markets for loans and deposits. Monetary control in the UK is
achieved through the Bank of England to determine the level of short term interest
rates in money markets. Monetary tightening involves forcing the interest rates up
which occurred in the competitive environment for the UK financial system in the
1980’s. This caused changes as competitive forces encouraged innovation in
financial products and services between banks and building societies. Building
society deposits were increasingly held as transactional balances and banks were
forced to pay increased interest rates on both current and savings accounts. As a
result, monetary tightening was abandoned in the UK in 1986 because of the
perceived instability of the money demand function of which financial innovation
contributed heavily towards. In the UK, nationwide building society said that house
prices increased by 0.9% in March, slowing the annual rate of decline to 15.7%
because of the recent G20 package to boost world economy. In an attempt to
quickly recover from global economic problems, this G20 package includes a
banking clean-up and a $1tn dollar injection into world financial system from the
International Monetary Fund and World Bank. This would help to stimulate growth
and expand loans to troubled nations, restore credit, growth and jobs, as well as
measure clamping down on tax havens and a commitment to build a green and
sustainable economy. Investing in human capital and the poor would bring about
land reforms and major investment in small scale agriculture, education and health
care while use of the IMF's reserve assets (Special Drawing Rights - its own
currency) will enable poorer countries to access much needed liquidity at low interest
rates without the hassle of the complexities of IMF loans.

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