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Economics Notes

Features of Economic Growth

• Definitions
• Barriers to economic growth
• Controversies in economic growth
• Less developed economies
• The costs of economic growth

Definitions

Economic growth is defined as an increase in an economy's ability to produce goods and services. Think of an economy as a giant cake. We all have a slice of the cake to eat, and may be happy with the size of our slice or not. If the economy grows, we would be able to see the overall size of the cake increasing.

Whether or not our individual slice grows depends on whether we are able to share in the growing economy. Even if we do not benefit directly, we should still be able to see some advantages to the growing economy. This is because the extra economic growth should produce higher tax revenues, which can then be spent on public services that should benefit everyone.

An increase in an economy's ability to produce goods and services, therefore increasing economic output, is possible under two conditions:

1. More resources are used in the economy.
2. Existing resources are used more efficiently.

What resources are we talking about here? Think about the things that are needed to make goods and services. The images that follow might help you focus your thoughts.

Image copyright: Tijmen van Dobbenburgh, from stock.xchng. The first resource is, of course, land. Even if you are producing a service, you will need somewhere to organise your work and do the necessary administration, such as invoicing your customers and so on. Manufacturers of a product have an even more pressing need for land, as they will require a production site or factory location with storage for supplies and parts. This means using the land resources of an economy. We could use more land if we, perhaps, weaken the controls over the use of greenbelt land. Alternatively, we could make better use of land that has fallen out of productive use. Cleaning up and using what are called 'brownfield' sites could be an example of a more efficient use of resources already available.

We've got our land now. How to produce the added goods and services? With the next resource that we'll need - labour. It's no good going to all the trouble of acquiring the location where we'll make the extra goods and services if we have no labour to carry out the work. Image copyrights: Wilheljm, Gili Fahima and Dan Norder respectively, all from stock.xchng. The images above illustrate workers in different sectors of the economy. Primary - where things are extracted from the ground or grown on the land. Secondary - where products are manufactured or constructed. Tertiary - where services are provided in the retail or financial sectors, for example. Which of these sectors does each image represent?

Economic growth is measured in changes in what is called 'gross domestic product' (GDP). This is a measure of everything that has been produced in an economy. Notice that in the example below of the Argentine economy, the measure used is Gross National Product (GNP). This was the system used before GDP was accepted internationally.

Source: Argentina's Negative Economic Growth 1999-2002, accessed from Wikimedia Commons.

The example of Argentina shows negative economic growth, where the overall 'cake' actually shrinks from year to year. If we are looking for examples of countries where the economy has grown in recent years, a good place to start is India or China. These countries have seen rapid year-on-year growth in GDP.

Try to find recent data to show the rapid GDP growth seen in these two countries in the past ten years.

Barriers to economic growth

We have seen earlier that the ability to grow an economy depends on using more resources (land and labour, for example), or on more efficient use of these resources.

The correct term for the resources used is: factors of production. There are four factors of production: land, labour, capital and enterprise. Economic growth depends on the quality and availability of these factors. If any of the factors of production suffers from a lack of quality or availability, then economic growth will not be as great as its potential.

So what can cause these factors of production to be of low quality or unavailable?

• Insufficient or contaminated land
• Substandard labour supply
• Poor technical infrastructure, such as roads and communications
• Poor social infrastructure, such as schools or hospitals
• Poor industrial infrastructure, such as factories and machinery

Other barriers exist that can hamper countries' ability to grow their economies. They may be unable to gain access to export markets, due to the trade policies of other countries. In order to protect their own domestic producers, many countries block the imports of goods or services from other parts of the world.

The World Trade Organisation (WTO) is a place where member governments go to sort out the trade problems they have with each other.

Controversies in economic growth

The use of GDP to measure economic growth is not without its critics. Whilst it can be useful in seeing how different economies are moving over time, GDP is criticised as a measure of how well-off people are. In other words, GDP is not regarded as a good way of indicating the standard of living of individuals and households in an economy.

How well would this family's living standard be illustrated by their country's GDP rate of growth? Copyright: Craig Jewell, from stock.xchng.

The current measure of GDP is not good at reflecting the damage to the environment caused by much economic activity. Many observers complain that this means that all economic activity is seen as a positive event, even though it may harm the environment.

What could be the impact of an oil spill on a city, its region and the overall economy? Image copyright: Csaba Moldován, from stock.xchng.

In response to this, some countries are planning increased emphasis on environmental national accounting, where the effects of activity on natural resources are shown and the environmental impact of growth is highlighted.

Another regular complaint about GDP used as a measure of economic well-being is that it ignores unpaid, voluntary work. It also fails to value domestic work such as caring and child-rearing. Some economists have pointed to the benefits that would flow if unpaid or voluntary work was included in measures of economic activity.

How has an economy developed? Which industries does it depend on? How sustainable are the routes that a country has chosen to follow towards the goal of growth? Why can't the progress of a country be measured in ways other than just the amount of goods and services it produces? How can we measure human happiness? These are all areas of controversy in any analysis of economic growth.

The United Nations Development Programme (UNDP) publishes its Human Development Reports annually. A quote from their Web site illustrates well the reason for focusing on the human aspects of economic activity:

'What is human development' accessed from Human Development Reports.

Another major source of controversy in looking at the features of economic growth is the role played by the International Monetary Fund (IMF), World Bank and WTO in the global economy. Some critics of these organisations suggest that they represent an 'unholy trinity' of bodies, which exist to promote the undemocratic interests of large corporations against the wishes of 'the people'.

In an increasingly global economy, these critics argue that less developed countries are forced to adopt unsuitable policies that favour big business and do little to encourage the reduction of poverty.

Many of these controversial areas exist on the margins of politics and economics. The trade policies of the USA towards Cuba and other unfavoured countries attract attention from those concerned about the lack of growth in some developing economies.

Less developed economies

Less developed economies tend to be in the early stages of industrialisation. In fact many less developed economies have little or no industrial base. People in countries with less developed economies usually have a low standard of living. Seen more broadly than just in economic terms, people in these countries also tend to be ranked in a medium to low position in the Human Development Index, produced by the UNDP.

Less developed economies are often structured in such a way that agriculture forms a large part of their overall economy. Small scale or subsistence farming tends to produce low incomes for the people who work in these countries. This leads to low effective demand for goods and services other than those that are central to life.

These economies are often characterised by having low levels of private investment. This tends to be because people are unable to save much of their already low incomes. High fertility rates are often seen in less developed economies. Children often form part of a family's wealth, as their labour is often seen as essential to the family's survival.

State-run elementary school, Hyderabad, India. Copyright: Christoph Schmitz, from stock.xchng.

Insufficient factors of production usually plague less developed economies. They can lack the ability to improve the social and technical infrastructure needed to boost their economies and can become stuck in a cycle of poverty.

A favela (shanty town) in Brazil. Image copyright: Chico Antonio Tiago Eduardo, from stock.xchng.

The costs of economic growth

One of the main concerns about expanding rates of economic growth focuses on the effects of congestion, pollution and carbon emissions on the environment. Economic growth in China and India raises fears that the resulting environmental damage could have serious impacts on us all. Other observers say that it is hypocritical for those in the developed world to preach to those trying to develop their economies.

Another cost of economic growth is the loss of ancient ways of life and cultures. As countries industrialise, natural resources can be lost as more land is sought. The loss of huge areas of the Brazilian rainforest to cattle-ranching is an example of this effect.

Some opponents to the trend towards greater globalisation in industry and economic development highlight criticisms of economic development that they see as generating large costs:

• The 'one size fits all' view of economic development prevents subtle differences in the routes chosen to development.
• The search for faster economic growth may prevent countries concentrating on social goals such as care for the elderly or children.
• The acceptance of materialism as a general goal in life.
• The homogenised global culture that some observers say has arisen.

Conclusion

When studying the features of economic growth, it's important to remember that there are many aspects to this topic: how growth is defined; the barriers that exist to growth; the experience of less developed economies; and the costs of economic growth. In addition, there are many areas of disagreement among economists, politicians and scientists about many of the aspects to economic growth. It is indeed a subject of interest to us all.

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