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Saturday, April 20, 2013

What is economic growth? Why is it a crucial element in analysing development? Highlight and explain some of its limitations as a measure of development.

Economic growth is the process and practices by which a nation strive to enhance  wealth over time and growth can best be described as a process of transformation at different scales. The term economic growth is applied to economies already experiencing rising per capita incomes[i]. Economic growth is defined as an increase in a national income or per capita national income of a country. Growth is fundamental to development and thus the advancement of human welfare[ii] also.
For the American economist W W Rostow; the economic growth proceeds from a traditional society to a transitional one in which the foundations for growth are developed from the “take-off” society (in which development accelerates) to the mature society. Various theories have been advanced to explain the movement from one stage to the next[iii] with wide ranging ramifications.
The term economic growth is usually applied to economies already experiencing rising per capita incomes. For in Rostow’s choice of words; economic growth begins somewhere between the stage of take-off and the stage of maturity; or in Clark’s stipulations, it is between the stage dominated by primary and the stage dominated by secondary production[iv]. So in short, Economic growth occurs whenever people take resources and rearrange them in ways that make them more valuable[v] for instances, take the case of a kitchen at our house and the cooking materials are usually mixed up to make a value.
In fact there are many theories of economic growth which all center on one of important facts that vociferously address on the question of what factors lead to the sustained development of a national economy. So most theories on economic growth focus on interactions between States and free enterprising.
Early economic theories developed in Europe provoked away from feudalism and toward capitalism at the initial stage. There were two early and opposing schools of thought that were the physiocratic and mercantilist theories of economic growth and each stand against other. The physiocratic, an 18th century French theory supposed that economic growth came only from land ownership and agriculture in the fist instances. The second on the other hand believed that trade was the only producer of economic growth in an economy.
Adam Smith in the 1776 work Inquiry into the Nature and Causes of the Wealth of Nations shaped the classical theories of economic growth as a critique of both the physiocrats and the mercantilists and opposed the two thinking equally. To Smith economic growth depends on the specialization and division of labor and the accumulation of wealth in full swing. He believed that the government had to be small and non-interventionalist which would lead to a large free-enterprise sector at the best level.
In addition; Robert Solow helped develop the classical theory by insisting that savings creates growth and consumption should be postponed to permit savings to be built up for most part. Later a new position has been developed that reads that the growth of labour will cause a corresponding economic growth that was developed by Paul Romer and Paul Omerod.
According to Joseph Schumpeter the development of new technology leads to growth. John Maynard Keynes opined that the government must invest in the labour market to boost and enhance consumption and trigger economic growth. Obviously, Friedrich Hayek supposed that many elements of economic growth could not be predicted altogether and he opines that economic growth is something like a Spontaneous Order; realises that there is an "invisible hand" at play in the economy. Therefore; this hand is man made but is accidental rather than by human creation in the market. Milton Friedman believed that the supply of money fashioned growth. It is called Monetarism that stated governments should control the amount of money in supply- but this money should be spent by individuals and individual companies and not by the government t any time.
In short, the economic growth theory has a long and dynamic history of ups and downs[vi]. The study of economic growth and development is not a single branch of economics but falls, in fact, into two quite different fields. So the two fields of growth and development employ different methods of analysis and address two distinct types of inquiry[vii].
Is economic growth a sufficient condition for assessing development?
Economic Growth is a narrower concept than economic development. In fact  an increase in a country's real level of national output which can be caused by an increase in the quality of resources (by education  etc for instances); increase in the quantity of resources and improvements in technology or in another way an increase in the value of goods and services produced by every sector of the economy. Therefore, Economic Growth can be measured by an increase in a country's GDP (gross domestic product). But Economic development is a normative concept that is; it applies in the context of people’s sense of morality (that is right and wrong, good and bad notions) at the outset. The definition of economic development given by Michael Todaro is an increase in living standards; perfection and improvements in self-esteem needs and freedom from oppression as well as a greater choice. For the most accurate method of measuring development is the Human Development Index which takes into account the literacy rates and life expectancy which affect  productivity and could lead to Economic Growth. Meanwhile it also leads to the creation of more opportunities in the sectors of education; healthcare; employment and the conservation of the environment. So it implies an increase in the per capita income of every citizen[viii].
On the other end, Economic Growth does not take into account the size of the informal economy for a critique if we consider. Obviously informal economy is also known as the black economy which is unrecorded economic activity in many cases. Development alleviates people from low standards of living into proper employment with suitable shelter in an economy. So economic growth does not take into account the depletion of natural resources which might lead to pollution; congestion and disease by now. Therefore, development however is concerned with sustainability which means meeting the needs of the present without compromising future needs as envisaged in sustainable development concepts. Such environmental effects are becoming more of a problem for governments now that the pressure has increased on them due to Global warming[ix].
Economic growth is a necessary but not a sufficient condition of economic development[x]. Possibly the most striking findings in the United Nations’ 20th anniversary Human Development Report is the wonderful performance of the Muslim countries of the Middle East and North Africa. The fact is that here was Tunisia that ranked sixth among 135 countries in terms of improvement in its Human Development Index (HDI) over the previous four decade and ahead of Malaysia, Hong Kong, Mexico, and India. Not far behind was Egypt, ranked 14th. This means despite being a poor economy with low economic growth some countries fare well in development. So development is something that some what goes beyond mere physical and material consideration and in fact constitutes some spiritual and non-material considerations[xi].
The HDI was introduced in 1990 as part of the United Nations Development Programme (UNDP) to provide a means of measuring economic development in three broad areas - per capita income, heath and education. The HDI tracks changes in the level of development of countries over time. Every year, the UNDP produces a development report which provides an update of changes during the year; along with a report on a special theme- such as global warming and development and migration and development. The introduction of the index was an explicit acceptance that development is a considerably broader concept than growth, and should include a range of social and economic factors[xii].
Economic development is a wider and expanding concept than economic growth. This means development reflects social and economic progress and requires economic growth. But Growth is a vital and necessary condition for development; yet it is not a sufficient condition as it cannot guarantee development at the most part. Economic growth and economic development are time and again thought to be the same but even though the two are closely associated and linked, there are central and key differences in their meanings and dimensions. Economic growth is defined as a rise in the total output that is goods or services produced by a country. Obviously it is calculated by the percent rate of increase in the gross domestic product. Economic development as defined by Todaro is not purely an economic phenomenon but rather a multidimensional process involving reorganization and reorientation of entire economic and social system.
Most importantly this kind of an understanding is very crucial for countries in Africa, Asia and Latin America since such countries there needs an economic advancement that is measured beyond mere economic yardsticks and have to be considered in a broader frame of comprehensive development of society at all levels.
At many sense, economic growth cannot be taken to effectively assess the economic development for that matter growth is all about statistics, quantity etc., For that matter economic development is all about structural changes of society, changes in socio-economic structures, it is more qualitative such as human development index, gender empowerment index, human poverty index etc., it is more a normative concept, and it is more concerned with quality of life issues.
Goal of economic development is to; reduce poverty; increase quality of life and standard of living. Therefore, for the majority of the population in areas such as- nutrition, health, education, sanitation, housing, employment opportunities. On the whole many NGO (non-governmental organizations) see development in a more widersense rejecting economic growth. Example: Oxfam (Oxford Famine Relief) includes the following in its definition of development-Enables people to meet their essential needs; Reverses the process of impoverishment; Enhances democracy; Makes possible a balance between populations and resources; Improves the well-being and status of women; Respects local cultures; Sustains the natural environment; Measures progress in human, not just monetary terms; Requires the empowerment of the poor; Promotes the interests of the majority of people worldwide[xiii].
Economic development goal (according to Amartya Sen), is to expand the capabilities of people to live the lives they choose to lead.  Economic growth is a necessary but not sufficient condition for improving living standards. It is necessary because with no growth, individuals can become better off only through transfers of income and growth from others and this is of limited effect in poor countries with limited number of rich segment of people. So with economic growth therefore, enables some or even all people to become better off without anyone becoming worse off at for the most case.
Economic growth is not sufficient for improving living standards because of problems related to how income in spent and distributed among people. Governments may promote economic growth to attain other goals other than improving its citizens well-being altogether. Therefore, resources may be heavily invested in further growth with the promise of “future” consumption but here “the rich get richer and the poor get poorer”. Growth cannot therefore work for poor income countries in Latin America, Africa and Asia.


[i] http://www.britannica.com/EBchecked/topic/178400/economic-growth
[ii] See WHO http://www.who.int/trade/glossary/story019/en/index.html
[iii] http://www.britannica.com/EBchecked/topic/178400/economic-growth
[iv] http://www.britannica.com/EBchecked/topic/178400/economic-growth
[v] http://www.econlib.org/library/Enc/EconomicGrowth.html
[vi] Neri Salvadori (ed), The Theory of Economic Growth:A ‘Classical’ Perspective, Cheltenham: Edward Elgar, (http://growthbook2.ec.unipi.it/papersLibro/Intro.pdf)
[vii] http://www.britannica.com/EBchecked/topic/178548/economics/236773/Growth-and-development
[viii] http://www.diffen.com/difference/Economic_Development_vs_Economic_Growth
[ix] http://www.diffen.com/difference/Economic_Development_vs_Economic_Growth
[x] http://www.diffen.com/difference/Economic_Development_vs_Economic_Growth
[xi] Dani Rodrik, Feb 13 2011, Economic growth is not enough, http://www.thestar.com/opinion/editorialopinion/2011/02/13/economic_growth_is_not_enough.html,
[xii] Economic development, available at http://www.economicsonline.co.uk/Global_economics/Economic_development.html
[xiii] See http://www.davidbarber.org/research/measuringdevelopment.html

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