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.
Endnotes
[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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