Saturday, December 13, 2008

Is Too Much Growth Desirable?

Definition: Economic growth is a sustain increase in real GDP

There are many reasons for us to cheer for economic growth:

(1) Lower unemployment.
In the period of high economic growth, generally there will be greater demand for goods & services. There will be an increase in retail sales, more people dine outside, more traveling etc. To produce these firms will necessarily employ more people. Workers are therefore derived-demand. Firms do not increase employment just for the sake of doing it

(2) Lesser social problems. Increase in employment will automatically contribute to lower crime rates such as robbery, snatch thefts etc & other problems such as alienation due to low self-esteem

(3) Rising income. In the period of high economic growth, earnings will be on the increasing trend. As people now have more money, they can afford better various services such as additional medical care, education, recreation & travel & goods of better quality. All these contribute to higher standard of living

(4) Increase in leisure. Higher level of output could probably be achieved by using fewer labour. People may benefit from shorter working hours & can have longer holidays. Also, entertainment industry tend to boom in period of rapid economic growth. There will be more cinemas, theme parks, pubs etc

(5) Increase in tax revenue. As people generate higher income, they are subject to higher direct tax from the government e.g. income tax. Firms will generate greater profits & therefore subjected to greater corporate tax. These two will lead to increase in government’s revenue which thereby can be used to finance public spending such as national defense, police, benefits to disabled & sick, build more schools & hospitals, upgrade infrastructures & telecommunication

(6) Further increase in AD & AS.
Increase private spending into the economy associated with rising employment will lead to a secondary increase in AD due to multiplier effect. Also, the money that people spent now becomes the profit for firms. Businesses can have greater allocation for reinvestment & this will have a long term supply side effects. AS will increase. Increase in both AD & AS to the right will further boost the existing economic growth

(7) Increase in wealth. Higher profits mean greater dividend payment for shareholders. Also firms’ share prices will skyrocket when the public has confidence with prospect of the company. Growth will also give a boost to property market. High consumer confidence will always fuel the demand for property market which actually translates to higher price of houses. All these have positive wealth effect

Economic growth has been the holy grail of studies in economics. Although increase in national output increases economic prosperity, but does that necessarily mean that people’s standard of living increase?

Disadvantages of economic growth

(1) Opportunity costs. From the PPF (production possibility frontier) argument, more capital goods will be produced at the expense of consumer goods. There will be lesser fashionable clothes, plasma TVs, DVDs etc. From economics point of view, when a country chooses to have more capital goods now, it means current standard of living will be lower. Somehow, standard of living will increase in the future. More capital goods by then can produce more consumer goods

(2) Depletion of scarce resources. Economic growth may mean we use up scarce resources more quickly. There will be lesser availability of oil, coal, metal & other natural resources in near future. By then, there will be lesser capital goods. The existing one will probably worn off & inefficient in production. One day, food supplies may diminish & the world population may suffer

(3) More lands allocated for factories. Lands are scarce too. As number of factories is increased to meet the rising demand of goods, it means lesser land available for parks & other recreational activities. This may offset the increase in standard of living due to greater consumption of goods & services

(4) Negative externalities. Rapid economic transaction leads to various negative externalities such as air, river, noise & fume pollution that may contribute to various ailments. Also it aggravates deforestation which will result in flooding, loss of biodiversity, loss of species & climate change. China which shows an impressive growth of at least 8% in the past 2 decades had been blamed for being one the world’s leading contributors to regional & global environmental problems including acid rain & ozone depletion. Also more cars on the road contribute to accident statistics

(5) Rising unemployment. Technical progress may soon cause firms to be capital-intensive rather than labour-intensive. Furthermore, this may lead to greater costs saving in the long run. It could be a matter of time, before machineries in manufacturing sector began to replace the role of a typical worker. This could severely contribute to structural unemployment, where unemployed workers find themselves immobile between jobs, due to mismatch of skills

(6) Rapid urbanisation. From development economics point of view, rapid industrialisation will attract massive inflow of workers from the rural area to urban. Somehow, the main concern is inability of firms to absorb such surplus of workers. As such urban unemployment has replaced rural unemployment. For those poor rural migrants, once they arrived they will face the immediate problem of getting an affordable housing. Therefore they will construct their own houses in the midst of city. This is called urban slums/ shanty towns. More problems follow suit, such as difficulty to get access to clean water, no electricity etc

(7) Social stresses
. Rapid business transactions require individuals & firms to make wise & yet fast decision. Wrong decisions made may lead to large scale of losses. Also some people may find difficulty to cope in a fast pace working environment e.g. lots of paper works with tight deadlines, dynamic changes in working method etc. To finish up their work, very often more time are spent in office rather than with loved ones. Japan & South Korea are said to adopt such working culture

(8) Inflationary pressure. In the period of economic growth, unemployment drops, earning power increase & robust consumer confidence will always ensure strong private consumption into the economy. As AD shifts rightward, price level will increase. Inflationary pressure therefore builds up

(9) Worsen BOP (Balance of payment) deficit. BOP records the financial transaction of one country with the rest of the world. Economic growth is often associated with increase spending onto imported goods & services. People from UK may demand for more LV bags, Swiss watches, international holiday etc. All these are example of outflow of money. Since all these are recorded as negative under the current account (one of the component of BOP), this actually worsen the BOP deficit

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