Positive and Negative impacts of Economic Growth

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The concept of economic growth is one which has attracted the interest and focus of researchers worldwide. Weil (2013, p. 12) refers to economic growth as a “compelling topic” and a rapidly expanding field, based on the significant increase in the amount of research on this topic. Bolton and Khaw (2006, p.1) state that economic growth is “the most fundamental indicator of an economy’s health”. They define it as the rate of growth of the national income of a country, measured by the annual percentage rate of change of country’s gross domestic product. According to Mankiw (2010), economic growth is one of the reasons why advanced countries have become richer and have improved standards of living. As such, there have been a number of models aimed at studying economic growth, factors that lead to economic growth, and the reasons behind the differing rates of economic growth among nations. Economic growth has also attracted attention because of the positive impact it has on society, as it has been associated with benefits such as increased wealth and standards of living among others. Barro and Sala-i-Martin (2004) state that aggregate growth is possibly the single most important factor influencing individual income levels. However, economic growth has also had negative impacts on society. This essay shall discuss both the positive and negative impacts economic growth has had, using practical examples to illustrate these.

Positive impacts of economic growth

Improved living standards

When rich countries today are compared to their own history, there is a vast difference in the standards of living (Weil, 2013). As Weil (2013, p. 22) observes, there has been an unprecedented increase in living standards in most parts of the world over the last half century. While the life expectancy of a person born in Japan in 1880 was 35 years, today the life expectancy in Japan has gone up to 83 years. Also, the average worker in the United States would have had to work for 333 hours to buy a refrigerator. Today, a better refrigerator can be bought in 20% of that time by an average worker. While having a reading light in the night was once a luxury which only the very rich could afford, today about 75% of the world has access to electricity in their homes (Weil, 2013, p. 22).

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Reduction in poverty

Studies have shown that there is a positive relationship between economic growth and the rate of poverty reduction in developing countries (Pernia and Quibria, 1999; Tisdell, 2008). Barro and Sala-i-Martin (2004) report that there has been a significant increase in the global per capita GDP from 1970 to 2000 with the average person clearly getting richer over time. They note that there has been a shift in the world distribution of income to the right (See figures 1 and 2 below) and a positive income evolution in most countries worldwide. This has meant that people are able to afford more and can improve their quality of life. Weil (2013, p.23) also notes that countries such as South Korea have made the transition “from pauper to an industrial power in a single generation”.

Figure 1 The World Distribution Of Income In 1970

Source Barro and Sala-i-Martin (2004, p.8)

Figure 2 The World Distribution Of Income In 2000

Source Barro and Sala-i-Martin (2004, p. 9)

Education

While there is a lot of literature on the effect of education on economic growth, with considerable evidence showing that education has a positive impact on economic growth, reverse causality, i.e. the effect of higher economic growth on education may, as The World Bank (2007b, p. 4) notes “be at least as important as the causal effect” education has on growth. Asteriou and Agiomirgianakis (2001), in a study of the relationship between economic growth and education in Greece, found that GDP and all educational variables used are cointegrated, thus indicating that a positive long-run relationship exists between economic growth and education. They further point out that the higher the level of economic development, the higher the demand for higher education. This could be because as the economy grows and GDP per capita increases, the government and/or people will, on average, have more to spend on education, in terms of increasing the number of people who have access to education at all levels, as well as improving the quality of education by hiring more teachers, a wider access to educational materials, books etc.

Improved technology and infrastructure

As economies continue to experience growth, the amount that is spent on infrastructure such as transportation networks, communication, electricity, gas, water supply as well as various technologies has also increased. In a study of infrastructure and long run economic growth, Canning and Pedroni (1999) reported that they found strong evidence of the influence GDP has on the infrastructure stock in a society. This has in turn led to an improvement in living standards of the populace in general, and has also led to further increases in economic growth (Barro and Sala-i-Martin, 2004; Canning and Pedroni, 1999).

Health

Improvements in living standards due to economic growth have also led to improvements in the health of the population in general, as they have more of things such as food, shelter and clothing than can enable them to live longer. This is because, as Frenk (2004) notes that poverty, through child malnourishment and mortality, has an adverse effect on life expectancy. Education can also have a positive impact on health as well (Todaro and Smith, 2011; Weil, 2013). Preston (1976) as cited in Bhargava et al (2001) stated that economic development is the most important factor determining life expectancy. This positive relationship between health and economic growth was also confirmed in a study by Rivera and Currais (1999) in a study of the relationship between these two variables. They pointed out that the association between a growth in income and health status goes in both directions.

Todaro and Smith (2011) report that in 1950, 280 out of every 1000 children in the developing world died before the age of five. However, by 2008, this number fell to 118 per 1000 in low income countries, and 57 out of every 1000 children in middle income countries. Thoa et al (2013) also note that households which have experienced economic growth spent less on health care, but had better quality care and were better off in terms of utilisation of health services, further noting that these results were statistically significant.

Some of the reasons for this are that with increased incomes brought about by economic growth, governments as well as individuals are able to spend more on health in terms of health facilities and infrastructure, improved nutrition and sanitation, research on diseases, innovations in medical technologies etc.

According to Frenk (2004, p. 1), “national impact has a direct effect on the development of health systems, through insurance coverage and public spending”. Frenk further cites the 1997 WHO Commission on Macroeconomics and Health for a panel consisting of 167 countries, which noted that although expenditure on health is determined mainly by the national income, it increases faster than income. Thoa et al (2013) also note that, based on their studies, when the level of government expenditure on health is high, then this has a positive influence on the quality of health care, compared with low income areas where out-of-pocket (OOP) expenditure on health care has significant negative economic effects on households. This therefore highlights the influence of economic growth on health. Nevertheless, Weil (2013) points out that at another extreme, in developed countries, diseases brought on by too much food have replaced those arising from too little food as a major health issue. Although improvements in technology and increased research could also lead to improvements in health care in general, these problems as well as several others are still associated with economic growth. Other such problems will subsequently be discussed in the next section.

Negative impacts of economic growth

Creative Destruction

Generally, economic growth is good for the welfare of an economy. However, as Acemoglu (2009) notes, it tends to create both winners and losers.

Schumpeter (1942) also coined the term ‘creative destruction’ which highlights how the progress brought on by economic growth could lead to a destruction of an old economic structure, in the process of creating a new one. According to Cox and Alm (2008), this implies that a society cannot reap the benefits of creative destruction without acknowledging that there will be some individuals who will end up being worse off. Acemoglu (2009, p. 8) states that “productive relationships, firms and sometimes individual livelihoods will be destroyed by the process of economic growth, because growth is brought about by the introduction of new technologies and creation of new firms”, and these replace firms and technologies currently in existence.

Economic growth also leads to a shift in the structure of production, with a move from agricultural and manufacturing to services. For instance, in the United States, at the start of the nineteenth century, around 90% of the population was engaged in agriculture. However, in the second half of the nineteenth century, there was a considerable decline in the percentage of employment in agriculture, and an increase in both manufacturing and services to over 20% of employment. Over the years, both the shares of employment in agriculture and manufacturing have experienced a decline, while over 70% of the current U.S. population now work in service industries. Figure 3 below illustrates this pattern.

Figure 3 The Share Of U.S. Employment In Agriculture, Manufacturing And Services, 1800-2000.

Source Acemoglu (2009, p. 698).

Similar trends have also been observed in Britain and all other Organisation for Economic Cooperation and Development (OECD) countries (Acemoglu, 2009; Mokyr, 1993). This shift in the structure of production may therefore have possible adverse effects on those engaged in agricultural activities. However, in the long run, this may not necessarily be a negative effect on the whole. This is because with a shift in the structure of production to services, there has also been an increase in household income in general, as earlier stated. Furthermore, despite a decline in the percentage of people employed in agriculture, improvements in technology have led to an increase in agricultural output in general (Sachs, 2009; Todaro and Smith, 2011).

Another effect of this process of ‘creative destruction’ is the creation of natural social tension. Because widespread structural transformations often accompany the growth and development of an economy, some relationships which may have been previously established could be destroyed, again creating more winners and losers (Acemoglu, 2009).

Health Challenges

As earlier highlighted, there are newer health challenges arising with increases in economic growth. Frenk (2004) points out that health systems currently face complex challenges due to new pressures such as ageing populations, an increase in the occurrence of chronic illnesses, and an intensive use of health technologies which, while essential, are also expensive. Bloom and Canning (2008, p. iv) further note that the gains which arise due to economic growth may possibly be outweighed by the impact increased survival rates have on population growth, “until a fertility transition occurs”.

However, Bloom and Canning (2008) also point out that this can be addressed by, among other things, carrying out low cost health interventions that have large-scale effects on the health of the population and placing a higher priority on dealing with diseases which are ‘neglected’ but widespread, i.e. those that while having low mortality rates, have significant effects on productivity. Furthermore, with increased access to information, campaigns on relatively low cost ways to enhance the health of the population such as eating the right kinds of food in the right portions can minimise the effect of over-eating, or eating large quantities of food with low nutritional value. Examples of such include the five a day campaign taking place in various developed countries such as the United Kingdom and the United States, which involves eating recommended portions of fruits and vegetables daily (Briggs, 2014; NHS Choices, 2014). Briggs (2014, p. 1) states that evidence from studies shows that an increasing the consumption of fruit and vegetables “is associated with a lower risk of all-cause mortality, particularly cardiovascular mortality”.

Increase in Income Inequality

An increase in income inequality is another possible effect of economic growth. According to Barro and Sala-i-Martin (2004), there has been an increase in the dispersion of income distribution for a number of countries from the period 1970 to 2000, which as earlier noted, was a period with increased economic growth. They cite the example of China and some other large countries which have experienced a rise in income inequality. Weil (2013) also notes that over a 188-year period from 1820 to 2008, the gap between the rich and the poor has widened considerably. In 1820, Weil notes that the income per capita of the richest part of the world was three times that of the poorest part of the world. However, in 2008, this income per capita ratio increased to seventeen to one. The experience of South Africa also illustrates this on a country level. As Acemoglu (2009) observes, based on data available from the start of the twentieth century till the collapse of apartheid, there was a considerable increase in GDP per capita in South Africa. However, black South Africans, who comprised the majority of South Africa’s population, actually experienced a fall in real wages. Experiences such as these could be one of the reasons why some sections of society tend to support institutions and policies which do not necessarily encourage growth.

Income inequality is a major issue because it leads to a number of other adverse effects. These include economic inefficiency, undermining of social stability and solidarity and its unfairness to some sections of the society in general (Todaro and Smith, 2011). As Todaro and Smith observe, as income inequality increases, the fraction of a population that can qualify for some form of credit reduces. When low income individuals are unable to borrow money, they may also be unable to afford education for their children, start businesses, and save, thus consequently leading to a lower overall rate of saving in the society. High inequality also encourages rent seeking behaviour, where the rich focus on encouraging outcomes which benefit them and may also divert resources from productive purposes which could further enhance growth to other less productive purposes. Nevertheless, increased investments in public health, education and other relevant infrastructure could help reduce this adverse effect of income inequality.

Increased Pollution

Increased pollution has also been cited as a downside of economic growth. The World Bank (2014) states that while many people have benefited from an improved quality of life due to economic growth, these gains have not been even, and economic growth usually has negative environmental consequences.

According to The World Bank (2014), the rate at which natural resources, i.e. land, water and air, are being degraded in many countries is ‘alarming’. The health of many is also threatened by factors such as air pollution, waterborne disease and exposure to harmful chemicals. This is particularly so in developing countries due to their high levels of dependence on natural resources, a limited capacity for adaptation to the changing climate, and limited resources to remedy the effects of these changes. Furthermore, with changes in the climate globally, there is also an increased risk of natural disasters and other environmental risks (The World Bank, 2014).

However, there has been conflicting evidence regarding the relationship between economic growth and various environmental indicators. In a study of economic growth and the environment, using various indicators including concentrations of urban air pollution and various contaminants of river basins, Grossman and Krueger (1994) found no evidence that an increase in economic growth leads to a deterioration of environmental quality. They observed that while there was an initial period of deterioration, this was subsequently followed by an improvement phase, thus negating the deterioration effect.

Nevertheless, in a study of the cost of pollution in China, The World Bank (2007a) states that although strong economic growth in China over the last quarter of the century has had positive impacts on the environment due to improved resource utilisation, increased energy efficiency, pollution control efforts, technologies which are cleaner and more energy efficient, and implementation of policies for environmental pollution control, new challenges have also been created. For instance, energy consumption increased by 70% from 2000 to 2005, coal consumption increased by 75%, air pollution emissions have either gone up or remained the same, and surface water quality deteriorated from 2000 to 2005. This has led to not just increased pollution, but also a depletion of resources in general.

In a study of the relationship between energy consumption and economic growth using time series evidence from Asian developing countries, Asafu-Adjaye (2000) reported that high levels of economic growth lead to higher energy demand levels. However, he notes that in order for an increase in the demand for energy to not have a negative effect on economic growth, then energy conservation policies which are focused on reducing energy usage need to discover methods of reducing consumer demand. Asafu-Adjaye (2000) points out that this can be done through a suitable mix of taxes on energy, subsidies, as well as making efforts to encourage industries to adopt technologies which minimise pollution.

Conclusion

Economic growth is a major field of study, due to the significant impact it has on the society in general, as well as the various units that make up the society. This essay has examined both the positive and negative effects of economic growth on society. Some of the positive impacts include an increase in wealth/reduction in poverty, improved standards of living, health, education and infrastructure and technology. It was also noted that in a number of cases, the causality ran both ways. For instance, while economic growth can have positive effects on health, education and infrastructure, these in turn also have positive effects on economic growth. The negative effects discussed on the other hand include creative destruction, natural social tension, health challenges, increase in income inequality, increased pollution and a depletion of natural resources. Examples from various countries have been used to illustrate these effects. In addition, various suggestions and recommendations were highlighted on how to counter some of the negative effects economic growth can have. While these may not totally eliminate these negative impacts, they can nevertheless go a long way in minimising the negative effects and enhancing the positive influence economic growth can have.

References

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