Economic Growth Costs and Benefits

In this chapter we consider some of the costs and benefits from expanding levels of production and consumption. In particular we focus on the idea of sustainability. Benefits of Economic Growth Growth has a number of economic and social benefits:

UK Economic Growth and Unemployment

Annual percentage change in GDP at constant prices, percentage unemployed

12.0 10.0 8.0 6.0 4.0

Percent
Unemployment (% of the labour force, LFS)

12.0 10.0 8.0 6.0 4.0 2.0 0.0

Real GDP (Annual % Change)

2.0 0.0 -2.0 -4.0 -6.0 -8.0 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

-2.0 -4.0 -6.0 -8.0

Source: UK Statistics Commission

Improvements in living standards: Growth is an important avenue through which per capita incomes can rise and absolute poverty can be reduced in developing nations. More jobs: Growth creates new jobs sustained growth lead to a halving of the rate of unemployment in the UK from 1993 through to 2007. Recession has reversed this trend. The accelerator effect of growth on capital investment: Rising demand and output encourages investment in capital this helps to sustain GDP growth by increasing LRAS. Greater business confidence: Growth has a positive impact on profits & business confidence The fiscal dividend: A growing economy boosts the tax revenues flowing into the government and generates the money to finance spending on public and merit goods and services without having to raise tax rates. Potential environmental benefits as countries grow richer, they have more resources available to invest in cleaner technologies. And, as nations move to later stages of development, energy intensity levels fall.

Chile from developing to a developed economy Chile, one of South America's most stable and prosperous countries, recently voted in a new president, Sebastin Piera, a 60 year old Harvard educated economist. He has campaigned on being "an entrepreneurial president", focused on the Chilean economy, which became a laboratory for free-market policies like privatisation under the Pinochet regime. In 1973 General Pinochet toppled the socialist government of Salavdor Allende in a bloody coup and subsequently implemented the brick (so-called because of the size of the manuscript prepared by economists at the Catholic University of Chile) of free-market reforms. Along with it came the Chicago Boys market-oriented economists many of whom had been educated at the University of Chicago under the guidance of Milton Friedman and Arnold Harberger. Over the coming years Chile became the outstanding Latin American example of market reform. Chile Today For much of the 20th century, Chiles copper-based economy staggered between by boom-bust cycles. Today, Pinochet-era reforms such as a policy of privatisation and low import tariffs remain in place. While Chile made the largest savings in the region during the commodity price boom, the countrys dependency on commodity exports was equivalent to 41% of GDP in 2008. Overall exports in 2008 account for 47% of GDP which was the largest figure amongst countries in Latin America. Over the period 1990-2008 Chile has posted Latin America's fastest economic growth averaging 5.3%. Poverty has dropped from 40% before the demise of General Augusto Pinochet's government to a regional low of 13.7% today. On the surface, Chile might seem an unlikely country for fast development as it is so isolated on the South American continent's fringe Chile's free trade agenda is accompanied by liberal social spending. It claims to have more bilateral or regional trade agreements than any other country 21 trade deals (not all of them full free trade agreements) with 57 nations such, including the European Union, Mercosur, China, India, South Korea, and Mexico. Furthermore, over the past five years, foreign direct investment inflows have quadrupled to some $17 billion in 2008. The impact of more careful government spending has been productive. 40% of youths now go on to universities or other institutions beyond high school, authorities say, and 70% of those are the first in their families to do so. Sensible economic management not only helped Chile go from being a debtor nation to a net creditor, but also protected it from the global economic crisis in 2007. Chile was extremely careful with the flow of income generated by a commodities boom earlier this decade and saved billions that it has used as a fiscal stimulus in the economy. As a consequence of this its economy is expected to grow 4.5 percent in OECD Membership On 11th January 2010 Chile accepted membership of the Organisation for Economic Cooperation and Development (OECD) proof that Chile is one of the strongest democracies in the world. It is the first country in South America, and 31st overall, to be a member of the international organization. The fact that it has been accepted into the Paris-based club ahead of Brazil, the continent's emerging political and economic powerhouse, is a source of pride for the Andean nation. The OECD was established in 1961 with a mission to bring together governments committed to democracy and the market economy, to encourage sharing policy experiences and to promote economic growth and development. Such a transition from developing to developed country last happened more than a generation ago, e.g. Ireland and South Korea. No one is exactly sure of the timing for Chile. But economists say this country of 17 million will become the first Latin American country to switch categories sometime in the next decade. Chile consistently ranks as the least corrupt government in Latin America and under new president Sebastin Pinera one wonders if there will be many changes to the free-market policies that have cemented Chile as a beacon of economic stability in the emerging world. However, there is no doubt

that the private sector will be very prominent in furthering economic growth in the world's top copper producer, promising to revamp government businesses and introduce further tax breaks to create employment. Source: EconoMax, Mark Johnston Disadvantages of 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 many short and long-term problems. 1. Inflation risks: There is the danger of demand-pull and cost-push inflation if AD grows faster than productive potential Rising inflation can be destabilizing because it puts pressure on interest rates to rise and businesses lose competitiveness in international markets 2. The environment: Growth cannot be separated from its environmental impact not least the connection to man-made climate change. A rapid growth of production and consumption can create negative externalities such as waste, CO2 emissions and increased noise and air pollution and road congestion. 3. Inequality: Not all of the benefits of growth are evenly distributed. A rise in real GDP can often be accompanied by widening income and wealth inequality in society that is reflected in an increase in relative poverty. The Gini coefficient is one way to measure the inequalities in the distribution of income and wealth in different countries. The higher the value for the Gini co-efficient (the maximum value is 1), then greater the inequality. Countries such as Japan, Denmark and Sweden typically have low values for the Gini coefficients whereas African and South American countries have an enormous gulf between the incomes of the richest and the poorest elements of the population. A good example of the uneven spread of the benefits from growth is the enormous wealth gap in China. 4. Regional disparities: Growth is rarely balanced between regions and across industries and sectors. A recent report from the Centre for Cities highlighted the divide between economic growth rates in cities and regions of the UK. Sustainability of Economic Growth Many of the worlds most valuable finite resources are being extracted at such a rate that it questions the 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: 1. The depletion of the global resource base and the impact of global warming. There are plenty of examples around of the tragedy of the commons; the permanent loss of what should be renewable resources from over-extraction of some of our environmental resources. 2. A huge expansion of waste and pollution arising from both production and consumption 3. Over-population (particularly in urban areas) putting increased pressure on scarce land and other resources. More than half of the world's population will live in cities in 2009, most of them in developing countries according to the United Nations Population Fund. 4. Species extinction leading to a loss of bio-diversity - Scientists predict that at least a third and as much as two-thirds of the world's species could be on their way to extinction by the end of this century, mostly because people are destroying tropical forests and other habitats, over-fishing the oceans and changing the global climate.

Decoupling growth and the environment impact The key issue is whether individual countries can successfully manage to decouple the impact of economic growth on the environment. Can they find innovative ways of reducing the ecological impact of rising production and consumption? Can the right incentives lead producers and consumers to change their behaviour in ways that benefit the wider environment? Can countries agree and then enforce policies to mitigate and adapt to existing climate change? What scale of growth sacrifice might be needed to achieve a sustainable rate of GDP growth in the future?

Pollution in Guangzhou Chinas fast growth is creating huge environmental concern

China estimates the costs of pollution clean up The emergence of China as an economic powerhouse is one of the most significant developments of the age but the environmental costs of growth are clearly apparent. China is now introducing a longterm project to quantify the impact of growing pollution, estimating that environmental damage cost the equivalent of 3 per cent of economic output in 2004. Much of the environmental damage comes from transport emissions; over 15,000 new cars join Chinas roads every day, 1,000 of which are in Beijing. The Chinese authorities are now committed to the idea of sustainable or balanced growth and development but questions remain over how the government can control reckless examples of environmental damage across such a vast country and with growth continuing apace. Green National Income Accounts National income accounts have not, until recently, made any adjustment for the environmental impact of growth. Critics including economists from the Green Party 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 difficult to place monetary values on them. Green accounting is starting to make progress in a number of countries. One measure is the Index of Sustainable Economic Welfare (ISEW) developed by economists at the New Economics Foundation. The ISEW adjusts official data on real GDP 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? The term 'sustainable' means 'enduring' and 'lasting' and 'to keep in being'. According to one of the finest environmental economists of his generation, the late David Pearce, sustainable development means that each generation should pass on at least as much "capital" as it inherits, the Pearce approach defines capital in broad terms, to include physical capital (machinery and infrastructure);

intellectual capital (knowledge and technology) and also environmental capital (which includes environmental quality and the stock of natural resources). In 1987 the Brundtland 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: (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 that 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. Growing interest in the impact of economic activity on our natural and man-made resource base has led to the development of concepts such as ecological footprints and carbon footprints. The BBC has recently focused on this issue with a series of reports on ethical man. Many environmentalists are inherently cautious about the long-term impact of 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 Lomborg in The Sceptical Environmentalist challenges beliefs that the environmental situation is getting worse and worse.
Suggestions for further reading on economic growth and the environment Commission on Growth and Development Map reveals extent of deforestation in tropical countries (Guardian, July 2008) Planet under Pressure (BBC news special reports) The Green Room (BBC) Humans failing the sustainability audit (BBC news, November 2007) Nature loss 'to hurt global poor' (BBC news, May 2008) The Amazon in graphics (BBC news, May 2008) Paying the price for global growth (Guardian, July 2008) Ecological debt no way back from bankrupt (BBC news, April 2009) China unfairly seen as eco-villain (BBC news, June 2009) Climate change around the world (BBC news July 2009) World still losing bio-diversity (BBC news July 2009)

2010 Update: Fast and Slow Growing Economies in 2010 In the fast lane: Brazil 5.6%, Czech Republic 5.0%, China 10.0%, India 8.3%, Malaysia 7.4%, Thailand 5.7% In recession or in a growth recession:

Spain -0.3%, Hungary -0.3%, Italy 0.6%, Japan 1.7%, New Zealand 1.9%,