Monday, 16 March 2015 00:00

Economic Growth - The Costs and Benefits

Generally economic growth is considered a good thing and but it is not enough simply to assume it is good in its own right. We must consider the benefits it creates. These are different in different circumstances. It usually results in:

  • Higher incomes
  • Higher standards of living
  • Lower unemployment
  • Improved government budget balance

When we talk about economic growth we are talking about an increase in the real value of economic output which, without thinking we tend to use as a proxy for quality of life or happiness. They are linked but they are not the same thing as growth can have downsides such as:

  • Environmental damage and depletion of resources
  • Increased inequality 
  • Increased inflation
  • Worsened current account deficit

Generally long run, sustainable growth caused by an increase in productive capacity is likely to bring more of the benefits and be affected by fewer of the costs.

Some economists such as Simon Kuznets suggest that inequality is worst in partially developed countries. In poorer societies the majority of the population have very low wealth and incomes, meaning there is little inequality. As economic development and growth occur, wealth is concentrated in the hands of business owners and those with access to capital. Finally, as higher levels of average income are reached individuals become more concerned about the level of inequality and have the disposable income to devote to charities and welfare systems, thus reducing inequality.

Kuznets Curve

 A similar argument can be made for environmental damage where newly industrialised countries tend to grow rapidly with ‘dirty’ technologies but as development continues people become more concerned about environmental damage and have the resources to devote to reducing environmental impacts.

Published in The National Economy