Economic Growth and Development - Example

Macroeconomics Client Inserts His/her Name Client Inserts Grade Course Client Inserts Tutor’s Name 22/05/2012 INTRODUCTION Economic growth and development of various societies is a focus of importance for various governments across the globe (Mankiw 2010. p. 16). The welfare of people in general, particularly the improvement of the living standards, has been allegedly the focus of various politicians and the mostly promised goal to achieve by their various political undertakings. Over different periods of time say a year, there is always an announcement of economic growth indices for different nations. However, there lacks a clear manifestation of this growth to the members of different societies at different levels. Specifically, the common public at the grassroots level often fail to even understand the basis of a mention that a particular economy has grown by a particular percentage. The main question of this study then comes in; what do we mean by economic growth and economic development? Is the growth really realizable? What aspect of economic growth and development does a common man look at to seal up the allegation that there is an economic growth and/or development? The most appropriate angle to approach this problem is to first of all internalize the meaning of the terms economic growth and economic development and their interrelationship. According to Mankiw (2010), economic growth of a particular country is an increase in GDP (Gross Domestic Product) of such a country. This literally means an increase in output of goods and services of a country. This reflects an increase in per capita income in a country. Mankiw (2010) elaborates that this increase is a result of improvements in the quantitative and qualitative aspects of the factors of production that are evident in a particular country including the land, labour, capital and entrepreneurship. In other words, economic growth is an expansion of a country’s productivity potential. Manifestation of economic growth should be higher living standards and reduction in unemployment (Besley 2006. p. 35). Economic development is a more comprehensive term and is defined as the overall progressive changes in the socio-economic structure of a country. It is mostly marked by decrease in the agricultural portion of the GDP and a simultaneous replacement by industries, trade banks construction and their services (World Bank 2008b. p. 14). Economic development further refers to occurrence of changes in the institutional and technological organizations of production and the distributive pattern of the income. Some studies argue that the term economic development is highly used in the context of the developing countries while the term economic growth is an issue of importance mostly among the developed world. Economic growth is easier to realize as compared to economic development (Mankiw 2010. p. 34). In general, economic growth index refers to increase or decrease in the output of a country in terms of goods and services while economic development index is the change in the socio-economic aspects of a society as caused by the economic growth (Mankiw 2010. p. 29). Economic development indicates the importance of economic growth. Understanding the role of economic growth towards achieving of economic development is the core of this study. The question as to whether economic growth can effectively help achieve economic development still remains. The reason for this is that improvement of the living standards of a society calls for more than increase in material wealth for each citizen (Lal 2006. p. 17; World Bank 2008b. p. 16). This issue is analysed further below. ECONOMIC GROWTH AND THE VARIOUS ASPECTS OF ECONOMIC DEVELOPMENT The virtue by which output of a country is handled determines its effectiveness in improving the living standards of such a country’s society. First, mobilization of a country’s resources comes into play with a view to achieving a positive economic growth (Mankiw 2010. p. 17). Various governments handle this issue with utmost concern especially in the current continuum of competitiveness between different countries with all efforts allegedly directed towards attainment of economic development. However, there is perhaps a low understanding of the different aspects of economic development and their co-importance for a society’s wellbeing. Increasing output is a positive move but this is not enough to achieve economic development (Gregory 2010. p. 24). However, the increase is of special importance because no economic development can be achieved without economic growth yet growth can be achieved without any economic development. This implies that economic growth parameters need to be handled by gifted hands if economic development is the goal of a particular country (Besley 2006. p 37). This is where accountability and expertise of the country runners is needed most. There is a need for various manipulations of the increased output so that to attain changes in the composition of output, the allocation of resources, reduction of poverty, concerns on unequal distribution of wealth and unemployment and concerns of social inequalities including tyranny (Lal 2006. p. 17). Economic development is thus a multi-dimensional phenomenon. Economic growth index is the key determinant of the possibility of economic development whereby an economic growth rate higher than that of increase in per capita income opens a window for economic development. Allocation of Productive Resources A particular country may have vast resources that infer possible economic growth but the technicalities that may be involved in the allocation of these resources over space and time hand in hand with the inclusion of the available technological window may lead to failure to achieve the required economic growth and this affects the rate of economic development (Khan 2006. p. 7). This has been observed in various developing countries. Many such countries resort to lack of production of finished goods where raw materials are sold at a cheaper price to the external world. The best example is the sale of mineral ores other than processing them into finished materials. The implication is that the revenue gained directly enters into the government’s revenue base. This means that the citizens of such a country may never realize these gains especially in the corrupt government systems (World Bank 2004. P. 14). The best option would be to establish local industries for the processing, which would mean a source of employment for local people (World Bank 2008b. p. 15). Another issue of importance is the allocation of land resources (Khan 2006. p. 5). Many countries over the globe have a large number of landless people who potentially would increase say agricultural production if they owned land. Contrary, vast lands are left idle because various governments lack efficient mechanisms to allocate such lands to the landless. Lack of capital is another basic issue of importance. This is the inability for one to initiate his or her own project or business. The result is lack of hope for the future (Weingast & Wittman 2006. P. 17), what with lack of alternative source of income. The financial arms of various governments have often failed to disburse financial resources evenly across the various regions of these countries for developmental purposes (Khan 2006. p. 6). Many governments distribute financial shares of the national revenue in proportion to the number of people in these different regions. To some extent, this is a good method. However, different regions manifest different hardships that require different weights (Fritz 2008. p. 33). A good example is occurrence of quite dissimilar ecological zones that imply different hardship levels. Financial disbursements for development should thus be distributed equitably with reference to different hardship levels as well (World Bank 2004. P. 16). Poverty Most developing countries have poverty as one of the main characteristic. Often, the announcement of a realization of economic growth lacks meaning if it does not improve the living standards of the poor by even an inch (Khan 2006. p. 9). Economic development requires eradication of poverty yet many countries claiming to realize positive economic growth yearly still lag in terms of development what with poverty cases (World Bank 2004. P. 17). The implication is that economic growth does not in reality mean economic development (Badkoubei & Kaiser 2009. p. 19). Economic development does not necessarily imply achievement of a status where every citizen has equal material wealth; it rather calls for a condition where any economic growth attained has equitable effect on the welfare of every citizen. In developed countries for example, there is no issue of development because almost every person literally has ability to afford for all the basic requirements for healthy human life yet the material wealth is not evenly distributed. The remaining issue is only that of maximizing economic growth for the sustenance of the already achieved economic development (Weingast & Wittman 2006. P. 14). The indication here is that economic development has a satisfactory point beyond which the excesses are considered luxurious. Corruption, autonomy and immunities of the elites and the leaders for mischief conducted are the main retrogressive factors in many developing countries (World Bank 2004. p. 16); Fritz 2008. p. 32). Leaders embezzle public funds for self-improvement and thus the gap between the rich and the poor continues to widen every day. The implication is that if trends continue thus, economic development will remain a dream to achieve for eternities in some of the poor countries (Lal 2006. p. 20). Social Equality The existence of a society in which every person has equal democratic rights and is equally a subject to scrutiny and rule of law is a mark of economic development (Fritz 2008. p. 35). There is a need to adopt policies that do not favour or categorize different people in a society (Weingast & Wittman 2006. P. 13). The best policies are ones that promote a win-win situation whereby every citizen enjoys freedom of self-expression (Keefer and Khemani 2005. p. 13) and is entitled to complain if badly treated. What most societies face is the presence of the ‘untouchable’ class of people who even if openly perceived as a threat to the public development, no alternative actions can be taken and the only option is to remain silent. Therefore, when the leaders for example embezzle funds (Keefer & Khemani 2005. p. 20) initially meant for public development, no complains emerge and therefore indications of possible economic development dwindle. Another element of an effective policy is the ruling out of the top-down governance of a country. The end users of any policy are the public (Badkoubei & Kaiser 2009. p. 15). The governance should be bottom-up, a condition where the feelings of the public are respected and its demands attended to. Countries with autocratic leaders face the wrath accruing from the bad decisions that may be made by a few but powerful leaders. Unemployment Economic development means improvement of the living standards and in a major concern; it is marked by having a source of sufficient income and/or increasing the amount of the current income (World Bank 2004. p. 14). If an economic growth is announced yet the number initially unemployed citizens remains the same or increases, then there is not as much economic development. The Implication of Per Capita Income Per capita income is the amount of revenue each person in a population would possibly earn if the total GNP (Gross National Product) is divided by the total population (Rodrik 2008a. p. 6). The marginal difference in the increase rate of GNP over the current amount of per capita income suggest an economic growth and is given as a percentage of the previous GNP responsible for the per capita income of reference. This percentage tells whether there is a room for economic development or not (Rodrik 2008a. p. 7). A positive percentage implies that more funds are available for say initiation of new developmental projects. However, the person responsible for the implementation of the funds rests with the entire fate of economic development of a particular country. Conclusion Economic growth index of an economy is marked by increase or decrease of GDP/GNP. It is a key determinant of whether economic development is possible or not. Economic development is a multi-disciplinary phenomenon largely marked by improvement of living standards of the society. It entails such aspects as reduction of poverty, proper allocation of productive resources, and reduction of social inequalities and equitable distribution of developmental funds for different regions within a country (Keefer & Khemani 2005. p. 25). Achievement of economic development is not at all feasible if there is no economic growth such that an increase in economic growth definitely implies a possibility of further economic development. However, given the returns from economic growth, it calls for highly accountable managers or leaders to guide and/or monitor the use of the funds so as to successfully achieve economic development (Badkoubei & Kaiser 2009. p 20). In fact, most of the underdeveloped countries have sealed their fate through lack of proper use of the realised increase in GNP. List of References World Bank. 2004. World Development Report 2004: Making Services Work for Poor People. Washington DC: World Bank. 13-19. Weingast, B., and D. A. Wittman. 2006. The Oxford Handbook of Political Economy. Oxford: Oxford University Press. 12-17. Rodrik, D., 2008a. Spence Christens a New Washington Consensus. The Economists’ Voice, 5 (3). 6-7. Besley, T., 2006. Principled Agents? The Political Economy of Good Government. Oxford: Oxford University Press. 34-38. Mankiw, G.N., 2010. Macroeconomics. 7th ed. Massachusetts: Harvard University. 15-39. Lal, S., 2006. Can Good Economics Ever Be Good Politics? Case Study of India’s Power Sector. World Bank Working Paper No. 83. Washington, DC: World Bank. 16-21. Khan, M., 2006. Governance, Economic Growth and Development since the 1960s: Back-ground paper for World Economic and Social Survey 2006. New York: United Nations. 5-9. Available at: [Accessed 21 May 2012]. Badkoubei, S., and Kaiser, K., 2009. Governance and Political Economy Issues in Growth Analysis: A Survey of Recent World Bank Country Economic Memoranda (CEMs). Washington DC: World Bank. 12-21. Fritz, V., 2008. Applied Governance and Growth Diagnostics: Basic Framework and Some Illustrations from Zambia. Washington DC: World Bank. 32-37. Keefer, P., and Khemani. S., 2005. Democracy, Public Expenditures, and the Poor: Under-standing Political Incentives for Providing Public Services. The World Bank Research Observer 20 (1): 1-27. World Bank. 2008b. The Political Economy of Policy Reform: Issues and Implications for Policy Dialogue and Development Operations. Washington DC: Social Development Department, World Bank. 14-17. Read More