Economic Growth and Economic Development - Essay Example

The terms economic growth and economic development are often used synonymously, although they are not identical concepts. Discuss the differencesbetween the two concepts. Explain the preconditions for economic growth. Discuss the sources of economic growth and how can they be translated into improvements in the quality of life It is important to differentiate between economic growth and economic development we must first analyze their individual definitions and then look at what their main differences are. Economic development is more of a vague measure usually incorporating social measures such as literacy rates or life expectancy as a means of measuring a country's level of development. Economic development implies more, particularly improvements in health, education and other aspects of human welfare (Aase, 2004). Countries that increase their Income but do not also raise life expectancy, reduce infant mortality, and increase literacy rates are missing out of some important aspects of development. The economic development of a country is defined as the development of the economic wealth of the country. Economic development is a maintainable boost in the standards of living of the people of a country. It implies an increase in the per capita income of every citizen. In the long run, economic development implies that there has been creation of more opportunities in the sectors of education, healthcare, employment and the conservation of the environment. Economic development is aimed at the overall well-being of the citizens of a country, as they are the ultimate beneficiaries of the development of the economy of their country. Michael P. Todaro in his book has outlined that in order for economic development to be achieved at least the following three objectives must be reached upon: “To increase the availability and widen the distribution if basic life-sustaining goods such as food, shelter, health and protection To raise levels of living, including, in addition to higher incomes, the provision of more jobs, better education, and greater attention to cultural and human values, all of which will serve not only to enhance material well-being but also to generate greater individual and national self-esteem To expand the range of economic and social choices available to individuals and nations by freeing them from servitude and dependence not only in relation to other people and nation-states but also to the forces of ignorance and human misery” Economic growth, usually expressed in terms of the gross domestic product or GDP of the country, refers to a rise in national or per capita income and product. If a production of goods and services in a country rises, ultimately means an increase in the overall income and the overall consumption of goods and services in the economy (Wolf, 2005). Economic growth can be either positive or negative. Negative growth can be referred to by saying that the economy is shrinking. Negative growth is associated with economic recession and economic depression. Economic growth is a narrower concept than economic development. It is defined as the increase in the value of goods and services produced by every sector of the economy. Experts have analyzed economic growth in various ways but the main difference lies in the fact that economic growth is generally measured with the mean of percentage. For example, GDP of a country is an example of economic growth (Parkin, 2008). The example of economic development can be social and/or financial development of the country, which is difficult to measure quantitatively. This is why economic growth is part of economic development; it helps to measure some of the whole system. Another difference between these two concepts is the type of changes. In economic growth, it takes only quantitative changes under considerations to determine the growth of an economy. For example the annual income of a country is a quantitative change and can indicate an economic growth if it has increased over time. Economic development, however, takes both quantitative and qualitative changes under consideration to determine the development of an economy. Pre-conditions of Economic Growth According to various economists there are 3 main pre-conditions that are necessary for economic growth. These are: 1. Economic Freedom: This is probably the most important because people in every economy must have the freedom to make purchasing decisions on their own. The state must however continue to provide basic services but the individual consumer must make the final consumption decision. The same basic principle applies to selling of goods and services. The prices are set according to availability of goods and the needs of the society. Once again they too cannot be forced into selling, rather it is their own decision whether they wish to sell or not (Krugman, Wells & Graddy, 2008). The common principle in both cases is that their private property remains protected in both cases. A very important aspect in economic freedom is the monetary exchange of goods between the two parties. Exchange is facilitated by money which allows proper evaluation of the good or service being traded. Without properly assigning monetary value it is very difficult to have a fair exchange of goods of equal value. Using a local of international currency does not make a difference, however using an international currency has its own affects (which are beyond the scope of this paper). 2. Property Rights: A property right is the exclusive authority to determine how a resource is used, whether that resource is owned by government or by individuals. Property rights are societal arrangements which govern how any commodity is to be safeguarded against all those who are not part of the transaction, i.e. parties other than the buyer or the seller. All economic goods have a property rights attribute. This attribute has four broad components: The right to use the good: The owner has the right to keep the good or to consume it. If the owner does not wish to use it, and in the process the good is destroyed, only the owner will have to bear the financial cost of losing the good. When the buyer has purchased the good, he has the right to use the good in any way he wants and cannot be pressurized into using it someone else’s way. The right to earn income from the good: The owner is capable of selling the good/service to anyone he seems fit at a certain monetary price. This price can be set at whatever the seller seems fit; it is up to the buyer to negotiate a lower price or walk away from the deal. Multiple transactions can take place i.e. the buyer can become the seller and this cycle can repeat until the good is no longer usable. The right to transfer the good to others: The seller also has the right to transfer the goods to anyone he/she seems fit. The seller is entitled to gift any part of his good to another person. The right to enforcement of property rights: Both the owner and seller have the right to enforce the property rights. The state is only responsible for making sure no violations are made, and not intervening in any way. Both parties have the right to appeal to the state if they feel that their rights are being violated. 3. Markets: The third pre-condition is the availability of free markets where the buyer and seller can interact and make sure that each individual’s right is fulfilled. The markets are only there to facilitate the transactions, however many communist economists believe that state intervention in the market is important because it allows a fair distribution within the economy. The proponents of the free market economy state that the markets operate better if they are left on their own and they will always distribute the goods in the most economical way. The biggest premise for the markets to be competitive is that there should be more than one buyer and one seller and only in this way can prices be competitive. Lastly, the availability of information is important. If the players in the market are to have the optimal transaction all the parties must have all the information available to them. Sometimes there is a need for government policy interventions, such as taxes, subsidies, bailouts, wage and price controls, and regulations, including attempts to correct any kind of market failure (Hayami, 2001). But this may also lead to an inefficient allocation of resources, (sometimes called government failures). Thus, there is sometimes a choice between imperfect outcomes, i.e. imperfect market outcomes with or without government interventions. Sources of Economic Growth The main determinants of economic growth since the mid-1990s have been a relatively stable macroeconomic environment, including favorable external conditions and markets, generally prudent domestic financial policies, and the creation of critical market economy institutions. However, in terms of physical output, economic growth has derived from a very narrow base comprising the garment, tourism, and construction sectors, and to a much more limited extent, the agricultural sector. In developing countries one of the most prominent sources of growth has been seen because of the agriculture sector. Agriculture has seen a lot of improvements which has meant an increase in the productivity of the land as well as increased yield of the crops. More land is being converted from forest to agriculture use. In addition, the number of workers working on a particular piece of land has also increased. Because of the use of newer fertilizers, the productivity of the land is also increasing. Agriculture based business is on the increase, i.e. the garment an apparel industry is an important variable. Newer techniques mean that the producer can make a higher quality product with the same kind of raw materials. The effects of improvements in technical and allocated efficiency over time, e.g. learning-by-doing are now being experienced more rapidly than ever before. The construction sector has also seen a lot improvement which has translated into economic growth of the country. Experts say that the construction sector is a direct link towards the growth of the economy. With construction, all of the other resources of the country are also used and hence there is increased consumption which in most cases means increased growth (Perkins, Radelet & Lindauer, 2006). The trickle-down effect simply states that a small increase at the top of the consumption chain will have a dramatic increase on the economy. The increases in construction projects mean an inflow of capital into the economy which is definitely increase the living conditions of the people. Over the past 20 years or so, tourism worldwide has become an important sector in the economy. This is a means to earn foreign exchange. Even countries which may not be the most developed may be abundant in natural scenery and historical sites. In many cases, tourism is tackle by the small and medium enterprises of the country, i.e. people opening up bed and breakfast and small hotels for tourists visiting the neighboring locations (Stiglitz, 2002). Other important determinants of economic growth can be categorized as improvements in Structural Policies and Institutions. Although there may be disagreement on which policies are most conducive to growth or on the sequence in which policy changes must be undertaken, there is no doubt that governments can and do influence long-run growth in their countries. The first area of structural policies is education and human capital formation in general. Education is important towards the long term sustainable growth of the economy. The educated individuals think of new ways to improve the production and distribution of good and services while keeping costs to a minimal. The educated generally are more aware of the things around them and hence they are more capable of tackling difficult situations. The second policy area is related to financial depth. Well-functioning financial systems promote long-run growth. They influence economic efficiency and economic growth through different channels. Financial markets facilitate risk diversification by trading, pooling, and hedging financial instruments. They can help identify profitable investment projects and mobilize savings to them. The availability of finance is an important driver of economic growth. Investors like to invest money only if they feel that the economy is likely to grow and they are receiving a reasonable return on investment. If an international economy is offering a better rate, then there is more likely to be a flight of capital abroad, however if the investment stays localized, then the country can benefit from this. Strong regulations against fraud and mal-practices ensure that there is an abundance of dependable and reliable capital. The third area of economic policy is international trade openness. The basic reasons for this are the fact that trade openness forces the companies toward better utilization of resources. It forces the domestic companies to expand their operations beyond the local market and use economies of scale to take advantage of the opportunity. Free trade tends to lessen anticompetitive practices of domestic firms (Nordhaus & Samuelson, 2004). However, may advocates of free trade suggest that free trade means allowing foreign competition, which may have an abundance of capital and have the ability to destroy the local producers. They also stated that if foreign products do enter the market, in essence all the money earned will be growing abroad; hence this strategy is not good for long term growth. The counter argument is that in the long run, large multinationals will re-invest in the economy which will ensure long-term growth of the host nation. The fourth area is related to the government burden; it focuses on the drain that government may represent for private activity. Although government can play a beneficial role for the economy, it can be a heavy burden if it imposes high taxes, uses this revenue to maintain ineffective public programs and a bloated bureaucracy, distorts markets incentives, and interferes negatively in the economy by assuming roles most appropriate for the private sector. Corruption at government levels is what stops few countries from effectively breaking the barrier of moving from developing to developed. Most government spending is not done where it is needed and that hampers the productivity and efficiency of the country. One area where governments do not pay attention is the roads and transportation system. Governments do not invest in them when required, red tapes and mismanagement means that the roads may not be re-built when needed, and hence they become congested. This congestion causes delays in transportation which results in a lower bottom line, all boiling down to lower productivity and lower economic growth. Lastly, the health system is an area where improvement must be made if the overall economic growth is to be seen. Although many experts do not include this in their analysis, this too is important because it directly reflects the living conditions of the people in the country. Outbreaks of disease can only be kept to a minimum of the people are not exposed to high levels of waste and pollution. Economic growth generally means an improvement in the health care system. More public hospitals mean that the population in general is healthier. Availability of safe drinking water is important. Developed countries with high economic growth rates invest heavily in proper waste management systems. The theory underlying this is that a healthier population means more productivity and in general a better economy. Improvements in Quality of Life The term quality of life is used to evaluate the general well-being of individuals and societies. The term is used in a wide range of contexts, including the fields of international development, healthcare, and politics. Quality of life should not be confused with the concept of standard of living, which is based primarily on income. Instead, standard indicators of the quality of life include not only wealth and employment, but also the built environment, physical and mental health, education, recreation and leisure time, and social belonging (Sen, 1999). Now the question arises when you try to relate economic growth with improvements in the quality of life. The easiest way to look at this is through understanding the effect of increased growth on the life of a factory worker. If the economy is experiencing double-digit growth, it is likely that his salary will be increasing (the assumption here is that the growth rate is greater than the inflation rate). This increased salary means that the spending patterns will change. Now the factory worker may not just spend on the basic necessities, but also spend on his children’s education and health. He may also indulge in a few luxury items if he has some left over spending power. This increase spending means that the company will have greater sales and therefore will need to increase its production. This increase in production can only be matched if the factory worker works overtime and gets more pay. The cycle repeats itself and therefore we have continued economic growth. Since the incomes have increased, there will be increased taxes. This means that there will be lesser government borrowing and more emphasis will be put on spending money in the public sectors such as transportation, healthcare and education sectors. Economic growth will generally benefit all the players in the economy. 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 (Ingham, 1995). 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." Conclusion From our discussion, we have narrowed down the fact that economic development and economic growth are two separate concepts. They both have a different effect on the economy and both have different pre-conditions. The pre-conditions for economic growth have to be satisfied in order for the country to experience long term sustainable economic growth. Additionally, the government has to intervene and help with enforcing of rules and policies to make sure that there is economic growth. In most underdeveloped countries, the government does not carry out its function properly and this results in large income disparities. This phenomenon overlooks the benefits of economic growth and only a few people benefit from it. We can only say that the country is experiencing long term economic growth if all the players are benefiting from an improved quality of life. Bibliography Aase, S., 2004. Is Globalization a Powerful Force for Good or a Means of Exploitation? New World Order, UMN News Hayami, F., 2001. Development Economics - From the Poverty to the Wealth of Nations. Oxford University Press Ingham, B., 1995. Economics and Development. McGraw-Hill Krugman, P., Wells, R. & Graddy, K., 2008. Economics. Worth Publishers Nordhaus, W., & Samuelson, P., 2004. Economics. McGraw Hill Parkin, M., 2008 Economics 8th Edition, Pearson Perkins, D, Radelet, S. & Lindauer, D., 2006. Economics of Development. 6th edition, New York: W.W. Norton Sen, A., 1999. Development as Freedom. Oxford University Press Stiglitz, J., 2002. Globalization and its Discontents. Penguin Books Wolf, M., 2005 Why Globalization Works - The Case for the Global Market Economy. Yale University Press Read More