The Causes and Consequences of Economic Growth - Why do some countries grow faster than others?

A further method of achieving this goal is by an expansion of the active labour supply. This may be achieved by a rise in participation ratio, an increase in immigration (both of which strengthen the existing workforce), or a rise in number of hours worked. These can be addressed by use of government intervention. The minimum wage and progressive income tax system in thy UK are designed to attract people to work, (therefore addressing the first and second objectives) while by providing benefits and bonuses to those who work longer will address the third. Meanwhile, in less economically developed countries, these options are rarely available. Governments often do not have the available funds to encourage longer hours, and also the effect of emigration to more economically developed countries will cause a fall in the available workforce. This therefore puts the smaller economic countries at a further loss to other countries, resulting in the growth gap widening. The expansion of the labour supply and of raw materials leads to an expansion of the LRAS, as shown below:

                                    LRAS1  LRAS2

Average Price                                

Level                                                        

                P1

                P2

                                                        AD

     NY1               NY2                National Income

Here, the expansion of the LRAS leads to an increase in the national income, and therefore growth. This is less available to less economically developed countries, and so the gap between country’s growth widens.

        The final two factors, capital stock and innovation, are linked with investment. This can be from private sources, (e.g. firms) or public sources (i.e. the government.). In order to raise productivity, and therefore growth, investment is needed. This both renews the current depreciating capital stock, and also allows research and development for more productive capital. The funds needed for these projects are available in already industrialised countries, but those that have not, find it hard to do so. The gap widens further.

        Finally, the fact that there is already a gap to start with, is a huge factor on the differing growth rates. If we look at a model concerning research and development, we can see that a starting point Aφ is needed:

        Δ A         =         [a K K] β *  [a L L] γ  *  Aφ   ()

(Here, A = Growth, K = Capital, L = Labour, a = R&D in that sector)

This shows that without a starting point(Aφ), no change in growth is possible. Further to this, the greater the starting point, the greater the potential rate of change of growth.

2. Evaluate the argument that the benefits of economic growth might be outweighed by the costs of growth to the environment

(30 Marks)

        In general, I feel that environmental cost far outweigh the environmental benefits, however, there are of course other benefits to growth. However, here I shall highlight the reasons for and against growth in terms of its effect on the environment. At this point, it must be noted that many environmental issues are hard to measure, and so normative statements should also be looked at.

In order to analyse whether benefits of growth outweigh cost, how growth effects the environment. Most of these effects stem from a rise in consumption that is caused by growth. The theory of consumption, as highlighted by Keynes, is that as disposable income rises, consumption rises. When growth takes place, as shown in the first part, the most likely cause is an expansion in the long run aggregate supply, LRAS. As this happens, inflation is likely to stay low, because there is an expansion along the aggregate demand, AD curve. Even if there is rise in AD, the rise in the average price level is compensated for in the outward and downward shift of the LRAS curve. This means that inflation is not a real problem, and so as growth takes place, firms’ and workers’ real income will rise. This will filter through to a rise in disposable income, and so consumption will rise.

        This rise in consumption will both lead to an increase in consumer spending and business spending. This will of course lead to a rise in both household and industrial waste. This is a huge problem to the environment because not only is there a huge blight on the landscape due to landfill sites, but there are rises in methane emissions from these sites. Methane of course contributes to global warming, and so effects the environment further. I shall come back to this later. The problem is of course currently being combated with increases in recycling. By this method, waste emissions are cut down, however, they are not eliminated. This therefore can not be a fully justified solution to the problem of waste, because neither does it eliminate the waste, nor does it at a low cost. The cost of recycling is huge, and one must question its effectiveness. I therefore feel that purely with respect to waste, growth is not beneficial.

        A further problem associated with a rise in consumption, due to a rise in growth, is the increased need for raw materials. As growth takes place, each industry will need more raw materials so as to produce. This therefore means that the earth’s finite resources will be used up. This is firstly a problem to the prosperity of the world as a whole. If all energy sources are used up, then living will be made much harder for future generation, and who are we to decide what should and should not be available to future generations. Further to this, the use of fossil fuels adds to greenhouse emissions and so global warming becomes an even greater problem. Reason for global warming being such a threat is that if it does exist, which from scientific experiments looks fairly likely, huge economic as well as social repercussions will take place. Social problems that will result include the obvious loss of land that will result from a rise in the water levels, whilst economic costs are the financial costs of what may happen, as well as the cost of innovation to try to make sure that it does not happen anyway. The problem of the use of raw material is being combated  by the introduction to new forms of energy that neither uses up the naturally occurring resources, nor contributes to global warming. Most fuel emissions do in fact come from vehicle exhausts, and so were a new method of powering transport to be found, for example hydrogen power, then massive social costs would be saved. Hydrogen potentially powers vehicle effectively and emits only steam, and so many social costs are saved. These plans do of course have much merit attached to them, but there is a huge financial cost to both developing the new system, as well as implementing it. Many people, although seeing it to be a good idea, will be reluctant to switch methods, until they purchase a new car and prices of the new system have fallen to an acceptable level. There will therefore be a time lag before the system will take off, and I feel many government subsidies will be required. This shows only a small percentage of the financial cost of the exercise. I therefore feel that as yet, although raw materials are being used up very quickly, growth is not justified by its effect on new methods of energy sources.

        Finally, possibly one benefit to come out of a rise in growth is that many people see that a generally cleaner environment is possible, and so they demand it. There are many pressure groups that are campaigning for less pollution, such as Friends of the Earth and they feel that if improved quality of the environment is achievable, then it should be done, no matter the financial cost. As it happens, I do not agree with this mentality, but I do feel that if there are small costs, an improvement in the environment is a large benefit, and so should be achieved.

Even though it seems that growth is not in the long term interests of the environment, there are of course other benefits to growth, other than those mentioned above. Although many costs come out of growth, not least the argument of equality, I feel that these cost are outweighed by the potential benefits of growth. Here I say potential, because I feel that there is still some way to go in order to achieve these gains, aside from growth. An increase in growth on its own will not end in advantages such as a rise in employment, increased living standards and international competitiveness. Other factor can of course influence these, and these must be encouraged as well to ensure than the optimum long-term benefits are met.