Economic Growth versus Economic Development - Term Paper Example

Introduction Economic growth and economic development are terms often used interchangeably although they have clear distinctions. Economic growth refers to the increase in production of goods and services in a country within a given period while economic development refers to concerns with the overall policymaking actions that safeguard the well-being of various social, political and economic welfare. Economic growth leads to growth of a country’s GDP while economic development concerns with the qualitative aspects of the growth process. Some of the most common areas of economic development include; health rates in a country, people life expectancy rates, unemployment and rates of poverty that are characteristic of a particular country. Economic growth versus economic development In actual practice, economic growth is narrow in its scope as compared to economic development. Economic growth solely takes into account the total increase in a country’s real level of national output that is often because of a boost in the quality of resources applied, for instance, education, an increase in the number of resources and the quality improvements that have been done in technology. In another words, to measure economic growth, economists make use of the GDP statistics, which shows the contributions of each country’s sector towards the overall national output. On the other hand, economic development can be said to be a normative concept, which only exists in the citizen’s sense of morality, i.e, the knowledge of something good and bad. In a general sense, economic development of a country can be explained though an increase in peoples standards of living and general way of life. Economic development ensures that people make proper decisions about their wealth creation and improves their way of life. This is done only when people realize the value of involvement in different economic activities. The best approach in the measurement of economic development is the use of human development index that gives due consideration to a country’s levels of literacy, people’s expectancy rates and how they affect overall productivity in a country. Economic development is an important concept since it often leads to creation and establishment of important institutions that determine the quality of human life like education and health care. In addition, it also contributes to establishment of important employment and environment policies. Economic development in a country means the increase in per capita income out of a single individual. When computing the levels of economic growth in a country, economists do not consider the size and extent of the informal economy, rather it only puts into account statistics of recorded economic activities. The informal economy refers to those economic activities that take place in a country and are usually not officially documented. There is usually no evidence about their happening and the people responsible, in a general term; this is referred to as black economy. black economy is highly discouraged in every country since it reduces the rate of economic growth, as a matter of fact it an illegal practice where suspects found are prosecuted in a court of law. Economic development aims at giving people better and modern standards of living, reducing the levels of poverty. In other words, development looks at the qualitative aspects of life and how they positively affect people’s lifestyle in a country. Economic growth does not concern with depletion of important natural resources that can contribute to pollution activities, resulting in diseases that can harm human life. On the hand, economic development is conscious of all activities happening in the environment at present and in the future as well. Environmental effects have become problematic to all governments of the world, with a lot of pressure arising from efforts to control global warming. All countries are supposed to check on the amount of carbon emissions being released in the environment to reduce global warming and its effects. Differences between economic growth and development It is important to understand that economic growth is important and necessary but is not a sufficient element in the determination of economic development. There are clear distinctions between these two concepts. For instance, in terms of implications, economic development implies variations in people’s revenue, saving patterns as well as their investment behavior, which accompanies progressive variations in the social and economic structures of the country (this is mostly changes in the institution and technological aspects). Economic growth on the other hands deals with increase in the amount of goods and services in a country within a certain period, usually one year. The other striking difference between the two terms relates to the factors influencing them. Economic development is influenced by human capital indexes, reduction in inequality statistics and changes in various structures, which improve the quality of life of all people in the country. Alternatively, economic growth is determined by a steady rise in either of the components of GDP, these components could be consumption is private and public sectors, government expenditure, overall investments or net exports. The scope of the two factors has economic development dealing with the overall structural changes and patterns in the country while economic growth is mostly about general improvement in the total output in a country. Measuring economic development may not follow a set framework like the case of economic growth. There exists diverging vies about the mode of approach in getting better statistic about economic development concepts in a country. Basic Concepts in Economic Development Development is considered in the paper as a gradual rise in the general well-being of members of a society between any periods. Well-being is term that is often used interchangeably with welfare, although the tow terminologies have their separate formal meanings especially with regard to economics. Welfare refers to the kind of utility that a society member gets from using products over a given period. Welfare is equivalent to the discounted present value of future satisfaction that individuals are bound to get. When consumption is taken for all the members of a given society, the prevailing discounted value is usually referred to as social welfare of people. From this insight of an economic point of view, it is evident that the manner in which access to important resources is distributed in a society, determines the expectations of how people benefit from them, this is the heart of welfare (Dasgupta, 2001, Samuelson, 1961). This is just a different way of talking about consumption opportunities in a given society. According to this reasoning, it is evident that welfare is usually closely associated to what is normally termed as wealth, because wealth refers to all the resources in a society, which people use in order to support themselves in various social and economic dimensions over time. According to this perspective, it is clear that welfare gives emphasis about the future whereby the most important aspects are not what we have now to make our life better, but our perspectives about how better off we want to be in future. This means that welfare is simply an intertemporal concept. People are always involved in various activities aimed at making the tomorrow better. They invest, engage in entrepreneurship activities as well as seek employment, all with the same motive. The actions and people’s behavior at present determines the success that they will have and enjoy in times to come. In contrast, well being is another economic term that does not have a single definition; this means that the concept of its determining factors is still largely debatable. As pointed out earlier, the term is sometimes used interchangeably with welfare. Other economists like Dasgupta (2001) have maintained that well being incorporates many aspects of welfare although it goes far ahead to include gains that are got from other things apart from consumption, for instance, the occurrence of basic human rights. Well-being is an essential concept that has the potential to measure the level of sustainable development in a society when it is widened to go beyond its traditional scope as far as economics is concerned. Economists seem to be interested in well-being consumption that is defined traditionally as the utility derived from the usage of goods and services produced in the market and sold in markets. if well-being is to be used in the measure of a society’s sustainable development, the it has to function of consumption in the widest sense. The definition of consumption has to be widened, it has to include the utility arising from usage of goods and services that play a role in enhancing general well-being, this definition has to take into account the contribution of things that are made available by nature such as forests, water, beautiful sunset sceneries as well as benefits from coastal features. According to this wide definition, it is good to consider the benefits that are attributed to human rights practices as well as different forms of psychic benefits as important contributors to consumption. This means that development of systems and mechanisms to measure economic development aspects have to be wide and involving many broad issues that are expanded in the widened scope of consumption. It looks reasonable to understand sustainable development as the kind of “development” that can run “forever” or can take a very long period. Sustainable development has to be beneficial to current as well as future generations. According to this perspective, sustainable development can thus be said to be increasing well-being, at the same time, it is also increasing consumption following the broad economic interpretation that it has. Indicators of Sustainable Economic Development The process of setting indicators for economic development has centered mainly on achieving the information needs that are essential for a country’s sustainable development approach. In many countries, it is practically rare to find these policies supported by an openly theoretical framework. On the contrary, they have been the result of thorough discussions happening within and without of government in order to ensure that different perspectives and approaches by important stakeholders and factored in and taken into account. for many governments and agencies, the opportunity to set up indicators for economic development have been wonderful chances for pushing up environmental and other critical issues up on the policy agenda together with economic and other social issues. at the same time, the indicators for sustainable development have been critical in supporting the concept in a manner that is more clear than the process in which it can be achieved using strategies for national development alone. In many instances, the association existing between development indicators and policy is well built, such that policy frameworks are crucial in determining the types and value of indicators. One of the strengths of indicators is the fact they are policies, giving the interpretation that they are biased. In as much as economic development indicators have been effective by having policy frameworks in the operation. There are some drawbacks linked to this concept, using policy frameworks simply means any changes in the policies have to be followed by changes in particular indicators. It is impossible that indicators can operate independently without policies. policy makers are supposed to have this awareness so that the changes made in the policies have to lead to effectiveness and efficiency in indicators. A good example of this scenario is the United Kingdom, where since 1996; there have been only three sustainable development policies and an equal number of associated indicators. It is general that setting indicators to exist freely without policies is practically impossible. Changes in indicators due to changes in policies are important especially where refinements would be instrumental with respect to coverage and comprehension of its effectiveness. it should be understood that changes on economic indicators are usually at the periphery while reasonable consistency prevails in efficient functioning of indicators. In the development and establishment of national economic development indicators, minor considerations are usually given to international comparability. This is something that is perhaps unavoidable with respect to the fact that we have dissimilar priorities and data availability in different countries. Different countries have policies that are divergent because of their different economic growth rates and patterns. Nonetheless, it should be known that for issues that are of global or regional importance, economic indicators have to give them due consideration. for instance, currently, the issue of global warming is an international concern, development indicators in different countries have to factor in the amounts of carbon emissions which factories and individuals are emitting. they have to be developed in a manner that reduces these emission so as to control and reduce global warming effects, which is an international concern. Currently, convergence among national development indicators has been witnessed in most countries in the European Union. This has been fueled by two main reasons; the first and more obvious one is that in the development of indicator systems by newer states, it is obvious that they are largely influenced by development indicators that are applicable in other countries of European Union. The second reason and one that is less obvious is that development indicators that are currently in use in the European Union have been set up after thorough engagements with older member parties that have better well-established development indicators sets. in actual sense, this move has been influential towards the direction that has been adopted by the entire European Union. In order to arrive at different models that can be effective in determining the rate of development in a country, different scholars have derived various theories and approaches that can explain this concept. Of all this theories, the classical theory has been quite instrumental towards this exercise. The capital theory of economic development This classical theory as used in economic development measurement gives focus on investments and capital as its chief factors deterring levels and extent of development in different countries. traditionally, this method restricted itself to understanding economic development aspects through market expansions and increases in the number of human capital across industries. but, with time the theory has widened its scope so that so that it addresses the broader question of how to effectively secure sustainable economic development in every country, this is an important issue to economic policy makers in every country. Sustainable development from a capital perspective adopts a different definition, it puts that this is a non-reducing per capita wealth experienced over time (United Nations et al., 2003). This definition is in tandem with the earlier definition, only that it appears to be more nuanced. Specifically, it clearly underpins the fact that it is imperative to maintain wealth as the main reason for sustainable development. This perspective asserts that populations do increase with time, for this reason, the rate at which wealth increases in an economy must be equivalent to the rate of population growth if countries are supposed to achieve any meaningful sustainable development. It is a fact that all the different kinds of goods and services produced in a country must make use of capital in association with human labour. This is because; the concept of sustainable economic development requires a widened approach towards consumption. In addition, the view increases to have an equivalent broad view of capital. According to this widened view, the total capital base of every society is composed of five main stocks; first, there is financial capital that is made up of things like stocks and bonds as well as currency deposits. Secondly, there is produced capital, this stock item is made up of things like machinery, buildings infrastructure as well as different types of telecommunications and infrastructure. Thirdly, there is natural capital that comes in the form of natural resources like land and different kinds of natural ecosystems. Human capital forms the fourth stock item and includes all forms of skilled, semi-skilled and unskilled labour. the last item is social capital which exists in the form of proper and functioning social networks alongside important institutions. These institutions are crucial towards shaping peoples actions and behavior towards matters of economic development. All this five stock items exist interdependently in the functionality and operational framework. The five different types of capital have not been effectively understood conceptually or experientially. In fact, the order in which these items have been presented clearly reflects the extent to which they can be comprehended. The last item on the list; social capital, has largely remain controversial for which there hasn’t been successful attempts to give it a universal definition. It is imperative to understand that the ability to effectively manage the overall national wealth in a way that keeps it up over time, measured per capita, is the only way to offer the possibility of sustainable economic development. This is because of the assumption that there exists no guarantee that future generations will effectively manage the capital base that they inherit from present generations. Factors that determine economic growth and development keep changing from one generation to another, population factors and technology play a crucial role on the management processes, hence the above assumption. Future generations may not use the resources effectively and could instead squander them excessively on luxurious living or use them on activities like wars and conflicts. Future generations may fail to consider the importance of preservation of these resources for the sake of their descendants. Another significant point of concern is that unwavering or increasing total wealth per capita is not always an assurance for sustainable economic development. Conversely, the contrary is an assurance of its impracticality. Meaning that, in the course of reducing per capital stocks, well-being is bound to deteriorate rapidly in the end, making sustainable development a matter of utmost impossibility (Hamilton and Ruta, 2006). Following the capital perspective, the main challenge associated with sustainable development is cut down into inquiry of whether the total capital base of a country or its overall wealth is being administered in a manner that aims at its maintenance over time. For this case, the issue of sustainable economic development challenge is honed and placed in material terms. The issue of whether the five identifies forms of capital are reducing or increasing over time projects itself to a precise answer. Moreover, this focus is important in helping to make clear the tradeoffs that have to be constantly weighed in the course of development. For instance, in a case where a certain capital stock item like petroleum wealth has happens to reduce, this framework gives us the ability to find out whether it is being offset by growth of a different kind of sock item for instance human capital. Limitations of the capital theory The capital theory is instrumental in understanding some of the important aspects of how development can be measured and preserved for present and current generations. At the same time, the theory has some crucial limitations in its applications. One of the arguments against this theory is the fact that it has some problems which surfaces in its full application. For this theory to reach its potential, all the capital stock items have to be effectively measured using a common unit. This common unit can only be money; the challenge that comes with this approach is that it presents two main problems. First, it is not easy to determine all of the different prevailing ways in which capital plays a role in general well-being, secondly. Those that cannot be effectively measured cannot be valued at all. the second problem with the use of a common unit – money is that the value of money differs from one country to another, this makes it important to convert of the capital stock items into dollars for standard measurement and valuation. this is out of the concept that functioning markets rarely realize the perfect settings which economists impress on them in the process of valuation of their methods and also partly because the respective methods remain immature in most instances. In addition to the issue of valuation, another important debate arises over the issue of ethical underpinnings. Many observers have done a careful analysis of this method and placed a question mark on the right of human beings to make the most of nature in a disparaging manner even if the process may result into an overall increase in the country’s total wealth. The fact is that any forms of exploiting natural resources that do not enhance its improvement and sustainability is unethical. in order to create sustainable economic development, there is need for special policies that safeguards the environment and sustains it for generations to come. Read More