The Benefits and Costs of Economic Growth
Economic growth can transform lives and countries. It is not surprising that it remains one of the highest priorities for most governments.
In recent decades rates of economic growth have tended to be much higher compared to earlier periods in history. It took Britain roughly a century (between the mid 18th and 19th centuries) to complete the industrial revolution and become the world’s economic superpower. At that time the annual rate of economic growth averaged only about 1%. Since the late 1980s China has consistently achieved annual growth of around 10%. It will very soon overtake the USA and be the world’s largest economy. In the process it has lifted hundreds of millions of people out of poverty, giving them education, healthcare, pensions, good housing and a lifestyle we would recognise in Europe or north America.
Countries that are already highly developed, such as the UK cannot hope to achieve such rates of growth, because we have already done the relatively ‘easy’ things that achieve growth, such as educating everyone to a good standard and having an efficient and modern infrastructure of roads, rail, power supply and so on. Economic growth depends more on scientific and technological progress and using resources as efficiently as possible.
Economic growth is a compound rate. This means that even quite a low annual growth rate will make a huge difference to GDP within a few years. Suppose for instance that GDP is £100m and growth is 10% per year. After 1 year GDP is £110m, and after 2 years it is £121m. In the second year the 10% growth is based on the previous year’s GDP of £110m, so the economy grows by £11m, not £10m. After seven years, GDP would be £195m (nearly double) and would be nearly four times greater after 14 years. Even in a country like Britain, where long term growth is about 2.5% it only takes around 30 years for GDP to double.
Benefits of Growth
Economic growth makes it possible for people to enjoy higher living standards, such as:
- Better health care – richer countries can afford to provide more doctors, hospitals and medicines
- Better education – in richer countries nearly everyone gets an education to secondary level and many go on to higher education
- Higher levels of consumption – more holidays, entertainment, consumer durables
- Better housing – including sanitation, heating, power supply and water
- Better nutrition – plentiful and quality food; fewer people suffering from malnutrition and hunger
- State benefits – such as pensions, disability benefits and unemployment benefits paid for out of taxation
- Longer life expectancy – all of the above contribute to people having a longer life
Dis-Benefits of Growth (Negative Effects)
Depletion of non-renewable resources – Mineral deposits such as oil and gas are being rapidly depleted and are likely to rise in price in the long run, but richer countries are able to invest in renewables such as wind and solar power, and replace conventional vehicles with electric vehicles.
Environmental degradation_ – _Again, this is particularly a problem for poorer countries. The ‘dash for growth’ has resulted in pollution of the atmosphere and water supplies. Richer countries have made investment in cleaner technologies. But a lot of polluting industries have moved to poorer countries that are willing to put up with pollution in order to have more employment and higher wages.
Increased inequality – In newly industrialised countries like China and India, economic growth has led to a widening gap between rich and poor. The benefits of growth have not been equally shared. Weak regulation of business, corruption and the absence of trad unions often means low wages, harsh conditions and long hours for workers and big profits for business owners. This can lead to social unrest.
In richer countries economic growth has, until recently led to a narrowing of inequality, as an educated workforce and powerful trade unions have been able to drive up wages. Also governments redistribute income through the tax and benefits system.
But more recently, global economic growth has contributed to rising inequality in rich countries too, as workers in rich countries increasingly find themselves competing with lower paid workers in other parts of the world. New technology is also a cause of widening inequality. Automation may destroy many jobs and drive down wages for many workers. Migration of workers from poor countries to richer ones may also drive down wages in host countries.
Economists and environmentalists are increasingly concerned that economic growth needs to be sustainable. This means that economic growth should not result in environmental degradation, depletion of resources, or social unrest resulting from widening inequality.
Some economists believe that the market mechanism provides a solution to environmental problems and resource depletion. As resources get scarcer they rise in price, givin an incentive to businesses to use them more efficiently and to develop alternatives.
Other economists place a greater emphasis on the need for more regulation; i.e. pollution controls, waste disposal regulations and so on.
The Impact of Growth on Specific Groups
Consumers – Generally it has a positive effect. Goods and services are made to higher standards and by more efficient methods. This makes them cheaper and more plentiful. But the Easterlin paradox suggests that more consumer goods only make us happier if we currently are poor. Once we already have an abundance of consumer goods, having more doesn’t make any difference.
_Businesses __– _Economic growth usually means higher sales and therefore more profit. But the benefits may not be shared equally across firms or industries. New technology can be very disruptive; destroying some older industries altogether, or concentrating market power into the hands of a few ‘tech giants’, such as Amazon and Google. On the other hand, the internet has made it possible for many more people to set up in business, as it lowers barriers to entry for new firms.
_Governments __– _Economic growth is generally good for public finances, as it means governments can collect more tax revenues out of people’s higher incomes and spending. But as living standards rise, people expect public services to improve too, especially health and education. Funding these public services is a major challenge even in rich countries, as people want better services but don’t want to pay more taxes. The ageing population that accompanies higher living standards is a further problem for governments, as the cost of pensions and social care rises steeply.