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16. Economic Growth – Costs and Benefits
The Benefits of Economic Growth
“We now expect to live on average 30 years longer, to work almost half the amount of time we used to
every year, and to enjoy an array of new goods and services, including air travel, antibiotics, computers
and televisions. Economic growth and rising living standards has also meant a cut in rates of carbon
emissions and natural resource depletion never possible in the 20th century”
Professor Nick Crafts, 2002 Royal Economic Society Public Lecture, December 2002
According to the Government web site on sustainable development, ‘a healthy economy leads to higher
living standards and greater prosperity for individuals. It also helps businesses to be profitable, which
generates employment and income’. This quote highlights some of the benefits of growth – developed
further below:
o
Improvements in living standards: The chart above tracks the improvement in real GDP per
head over the years 1984-2003. 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. According to a
report published in August 2004 by the Asian Development Bank (ADB), rapid economic 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".
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Employment change
Thousands per year
219
-564
-645
-341
176
278
266
444
257
327
365
247
156
279
+1464
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
Real GDP growth
% change
0.8
-1.4
0.2
2.3
4.4
2.9
2.8
3.3
3.1
2.9
3.9
2.3
1.8
2.2
o
Rising Employment: Growth stimulates higher employment. Britain has experienced over a
decade of growth since autumn 1992 and during this period we have seen a sustained fall in
unemployment and a rise in the total number of people employed. Including self employment,
the number of jobs has grown by over 3 million since 1992 giving the UK one of the best
employment creation records among all of the European Union countries. The table above shows
the annual changes in whole economy employment together with real GDP growth for the UK
since 1990. Notice the effect of the last recession on the level of employment. In each of the last
ten years there has been a significant rise in total employment as the British economy has
continued to grow. Over the entire period, the number of people in work has increased by over
1.4 million.
o
The Accelerator Effect of Growth on Capital Investment: Rising AD and output encourages
investment in capital machinery – this helps to sustain growth by increasing LRAS.
o
Greater Business Confidence: Growth has a positive impact on company profits & business
confidence – good news for the stock market and for the growth of small and large businesses.
o
The “Fiscal Dividend” to the Government: Government finances are cyclical in nature because
a growing economy boosts the tax revenues flowing into the Treasury and it also provides the
government with more money to finance spending projects. By the time of the 2001 Budget,
Gordon Brown had accumulated a large budget surplus because of the high level of tax revenues
the Treasury has received from a growing economy. Brown announced significant increases in
spending on health, education and transport and followed this up with further increases in
spending in his 2002 Public Spending Review. A year later it had become clear that the economic
slowdown was having an effect on government finances. The budget deficit has now grown
because government spending has surged whereas tax revenues have come in slower than
forecast.
o
Potential Environmental Benefits – richer countries have more resources available to invest in
cleaner technologies. And, as nations move to later stages of development, energy intensity
levels fall. Much depends on how many resources an economy is willing to devote to
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environmental improvement and protection. Evidence that growth can sit happily with
reductions in total pollution includes the fact that in the UK, emissions of chemicals that can
cause acid rain fell by nearly 50 per cent between 1990 and 2001 to 3.4 million tonnes of
sulphur dioxide equivalent. The largest fall was in the electricity, gas and water sector, which
decreased by 70 per cent to 1.0 million tonnes in 2001. Additional evidence is that between
1990 and 2002, total UK greenhouse gas emissions declined 10 per cent. The transport
industries were one of the few exceptions to this downward trend, but the UK is well on its way
to meeting it’s commitments on reducing CO2 emissions as part of the Kyoto Treaty protocol.
The large fall in greenhouse gas emissions over the decade is mainly due to the declining use of
coal for power generation in favour of natural gas. Emissions from the transportation sectors
have continued to grow in part because of the rapid expansion of air transport. The distance
flown by UK airlines doubled between 1990 and 2001, to 1048 million kilometres. This has
meant a greater demand for aviation fuel and a rise in emissions. Several groups are lobbying
for the introduction of a new aviation tax designed to reduce demand for air transport and
thereby control pollution emissions.
Over the last thirty years, the ratio of energy consumption per unit of GDP has fallen quite significantly.
The reduction in our energy intensity is a reflection of improvements in production technologies and
also a gradual switch towards a low carbon economy. Much more progress needs to be made.
Organisations such as the Carbon Trust (www.thecarbontrust.co.uk/carbontrust/) sponsor research into
low carbon technologies and many environmental groups believe that greater investment should be
made in promoting alternative sources of energy.
UK Greenhouse gas emissions 1990-2002
900000
800000
700000
600000
Total greenhouse gas
emissions
500000
400000
300000
Of which, emissions
from road transport
200000
100000
0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
All weights in thousand tonnes, source: UK environmental statistics 2003
Disadvantages of Economic Growth
Economic growth does not come risk-free. Although our material progress can be measured in part by
the growth of national output, income and spending, if the economy grows too quickly, it can bring
about short and long-term problems.
o
Inflation risks: There is the danger of demand-pull and cost-push inflation if demand grows
faster than long run productive potential High and rising inflation can be destabilising for an
economy because it puts pressure on interest rates to rise and can cause a loss of
competitiveness for domestic businesses in international markets
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o
The environment: Economic growth cannot be separated from its environmental impact. Fast
growth of production and consumption can create negative externalities such as increased
noise and air pollution and road congestion. Environmental damage can have a negative effect
on our quality of life and limits our sustainable rate of growth
o
Inequalities of income and wealth: Not all of the benefits of growth are evenly distributed. We
can see a rise in real GDP but also growing income and wealth inequality in society which is
reflected in an increase in relative poverty
o
Regional disparities: Although average living standards may be rising, the gap between rich
and poor can widen leading to an increase in relative poverty and a widening of the gap between
different regions. Growth is rarely balanced between regions and across industries and sectors.
Sustainability of Economic Growth
Many of the world’s most valuable finite resources are being extracted at such a rapid rate that it
questions the long-term sustainability of growth. Renewable resources are also being depleted because
of over-consumption. Examples include the destruction of rain forests, the over-exploitation of fish
stocks and loss of natural habitat created through the construction of new roads, hotels, retail malls and
industrial estates. Some of the main environmental threats include:
o
The depletion of global resource base and the impact of global warming
o
A huge expansion of waste and pollution of the environment arising from both production
and consumption
o
Over-population (particularly in urban areas) putting increased pressure on scarce land and
other resources
o
Species extinction leading to a loss of bio-diversity
Green National Income Accounts
National income accounts have not, until recently, made any adjustment for the environmental impact
of growth. Critics argue that because of this omission, the statistics misrepresent improvements in social
welfare. For example, no allowance is made for environmental depletion or money spent on correcting
environmental damage that is actually recorded as an addition to GDP. GDP only records marketed
transactions - at present, there is no market for many important environmental resources and it is also
difficult to place monetary values on them.
The Index of Sustainable Economic Welfare (ISEW): economists at the New Economics Foundation
(www.neweconomics.org) have been at the forefront of developing a system of environmental accounts
that make allowance for the impact of economic activity on the environment. The ISEW adjusts data on
real national output and makes an allowance for defensive spending (i.e. that incurred in cleaning up for
pollution and other forms of environmental damage, together with money spent commuting to work).
Not surprisingly, the net growth of ISEW is well below that of the official data for national income,
output and spending.
What is Sustainable Development?
In 1987 the World Commission on Environment and Development defined sustainable development as:
"development that meets the needs of the present without compromising the ability of future
generations to meet their own needs”. The current Government supports the concept of sustainable
development and focuses on four main objectives set out below:
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(1) Social progress which recognises the needs of everyone: Everyone should share in the
benefits of increased prosperity and a clean and safe environment. Needs must not be met by
treating others, including future generations and people elsewhere in the world, unfairly.
(2) Effective protection of the environment: We must limit global environmental threats, such as
climate change to protect human health and safety from hazards such as poor air quality and
toxic chemicals and to protect things which people need or value, such as wildlife, landscapes
and historic buildings.
(3) Prudent use of natural resources: We need to make sure that non-renewable resources are
used efficiently and that alternatives are developed to replace them in due course. Renewable
resources, such as water, should be used in ways that do not endanger the resource or cause
serious damage or pollution.
(4) Maintenance of high and stable levels of economic growth and employment, so that
everyone can share in high living standards and greater job opportunities.
The UK government publishes an annual report on progress towards sustainable development. It can be
accessed via the internet at this web page www.sustainable-development.gov.uk/. Updated data on
individual indicators linked to improving the quality of life through sustainable development can be
accessed at this page www.sustainable-development.gov.uk/indicators/national/index.htm.
Many environmentalists are inherently cautious about the long term impact of economic growth on our
living environment. They are deeply sceptical about the effects that growth might have in preserving and
or improving it. But others argue that the pessimists are over-stretching their case. Bjorn Lombard in
“The Sceptical Environmentalist” challenges widely held beliefs that the environmental situation is
getting worse and worse.
Unit 5: Macroeconomic Issues
© tutor2u 2004
WJEC A2 Economics Course Companion 2005