Wednesday, November 25, 2009

Importance of Economic Growth

Economic Growth is often seen as the 'holy grail' of economic policy. This simplistic emphasis on economic growth is often criticised because of the limitations of economic growth in improving living standards. Some suggest rather than economic growth, we should measure economic development through measures such as Human Development Index (HDI) which looks at GDP but also statistics such as literacy and health care standards. Some also argue we should not be using GDP but, a happiness index. (does economic growth increase happiness?)

Economic Growth can definitely have limitations in improving living standards.
  • Depends on the distribution of higher incomes. Economic growth could bypass the poorest in society.
  • Economic growth may cause negative externalities such as pollution, higher crime rates and congestion which actually reduce living standards.
  • Economic Growth may conflict with the environment. e.g. global warming.
  • It depends on what is produced. The Soviet Union has fantastic rates of economic growth, but, often through producing a lot Steel and Pig Iron that was not actually very useful.
  • Economic growth can be unsustainable, especially if it is a boom and bust.
Economic Growth definitely has limitations and we need to be aware of these. But, not withstanding these limitations / potential problems, economic growth is still very important.

Why Growth Matters

  • Reduce Poverty. Growth doesn't necessarily reduce poverty. But, without economic growth it is very difficult to make any meaningful and sustained reduction in poverty. This is especially important in developing economies.
  • Reduces Unemployment. A stagnant economy leads to higher rates of unemployment and the consequent social misery.
  • Note: A modern economy like the UK or US tends to see an average rise in productive capacity of 2-3% a year. Therefore, even with sluggish growth of 1% or less, we can see a rise in spare capacity and rise in unemployment.
  • Budget deficits. The deep recession has led a corresponding rise in budget deficit. Economic growth is essential to improve governments budget deficits.
  • Living Standards. If managed correctly, economic growth enables an increase in resources for important public services like education and health care. Economic growth enables an increase in social spending without an increase in tax rates.
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1 comment:

andrew kilner said...

No one is explaining clearly WHY the UK deficit has got so much worse so suddenly in 2009.
What items are (roughly) responsible for each part of the increase?