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JAIPUR NATIONAL UNIVERSITY

SEEDLING SCHOOL OF LAW AND GOVERNANCE

Economics Assignment

ECONOMIC GROWTH V/S ECONOMIC DEVELOPMENT

Submitted to: Mam Monica Submitted From: Krishna Agarwal (II sem.)

Economic Growth:
Economic growth is the increase in the amount of the goods and services produced by an economy over time. It is conventionally measured as the percent rate of increase in real gross domestic product, or real GDP. Growth is usually calculated in real terms, i.e. inflation - adjusted terms, in order to net out the effect of inflation on the price of the goods and services produced. In economics, "economic growth" or "economic growth theory" typically refers to growth of potential output, i.e., production at "full employment," which is caused by growth in aggregate demand or observed output. As an area of study, economic growth is generally distinguished from development economics. The former is primarily the study of how countries can advance their economies. The latter is the study of the economic aspects of the development process in low-income countries. As economic growth is measured as the annual percent change of gross domestic product (GDP), it has all the advantages and drawbacks of that measure. Economic Growth is a narrower concept than economic development. It is an increase in a country's real level of national output which can be caused by an increase in the quality of resources (by education etc.), increase in the quantity of resources & improvements in technology or in another way an increase in the value of goods and services produced by every sector of the economy. Economic Growth can be measured by an increase in a country's GDP (gross domestic product).

Historical sources of Economic Growth:


Increases in productivity are the main factor responsible for economic growth, especially since the mid 19th century. Most of the economic growth since that time been due to reduced inputs of labor, materials, energy, capital and land per unit of economic output (less input per widget). The balance of growth has come from using more inputs overall because of the growth in output (more widgets). Opening up new territories was considered a growth factor in the past, being important until the late 19th century and in limited cases in the 20th century, such as the Amazon. During colonial times, what ultimately mattered for economic growth were the institutions and systems of government imported through colonization. There is a clear reversal of fortune between the poor and wealthy countries, which is evident when comparing the method of colonialism in a region. Geography and endowments of natural resources are not the sole determinants of GDP. In fact, those that were blessed with good factor endowments experienced colonial extraction which only provided limited rapid growth; whereas, countries that were less fortunate in their

original endowments experienced European settlement, relative equality, and demand for rule of law. These initially poor colonies end up developing an open franchise, equality, and broad public education, which helps them experience greater economic growth than the colonies that had exploited their economies of scale. During the Industrial Revolution, mechanization began to replace hand methods in manufacturing and new processes were developed to make chemicals, iron, steel and other products. Since the Industrial Revolution, a major factor of productivity was the substitution of energy from, human and animal labor, water and wind power to electric power and internal combustion. Since that replacement, the great expansion of total power was driven by continuous improvements in energy conversion efficiency. Other major historical sources of productivity were automation, transportation infrastructures (canals, railroads, and highways), new materials (steel) and power, which includes steam and internal combustion engines and electricity. Other productivity improvements included mechanized agriculture and scientific agriculture including chemical fertilizers and livestock and poultry management, and the Green Revolution. Interchangeable parts made with machine tools powered by electric motors evolved into mass production, which is universally used today.
Productivity lowered the cost of most items in terms of work time required to purchase. Real food prices fell due to improvements in transportation and trade, mechanized agriculture, fertilizers, scientific farming and the Green Revolution.

Great sources of productivity improvement in the late 19th century were the railroads, steam ships, horse-pulled reapers and combine harvesters, and steampowered factories. The invention of processes for making cheap steel were important for many forms of mechanization and transportation. By the late 19th century, power and machinery were creating overproduction, which eventually caused a reduction of the hourly work week. Prices fell because less labor, materials, and energy were required to produce and transport goods; however, workers real pay rose, allowing workers to improve their diet and buy consumer goods and better housing. Mass production of the 1920s created overproduction, which was arguably one of several causes of the Great Depression of the 1930s. Following the Great Depression, economic growth resumed, aided in part by demand for entirely new goods and services, such as household electricity, telephones, radio, television, automobiles, and household appliances, air conditioning, and commercial aviation (after 1950), creating enough new demand to stabilize the work week. [6] Building of highway infrastructures also contributed to post World War II growth, as did capital investments in manufacturing and chemical industries. The post World War II economy also benefited from the discovery of vast amounts of oil around the world, particularly in the Middle East.

Economic growth in Western nations slowed after 1973, but growth in Asia has been strong since then, starting with Japan and spreading to Korea, China, the Indian subcontinent and other parts of Asia. The Japanese economy has been growing very slowly since about 1990.

Negative effects of Economic Growth:


A number of critical arguments have been raised against economic growth. It may be that economic growth improves the quality of life up to a point, after which it doesn't improve the quality of life, but rather obstructs sustainable living. Historically, sustained growth has reached its limits (and turned to catastrophic decline) when perturbations to the environmental system last long enough to destabilize the bases of a culture.

Consumerism
Growth may lead to consumerism by encouraging the creation of what some regard as artificial needs: Industries cause consumers to develop new taste, and preferences for growth to occur. Consequently, "wants are created, and consumers have become the servants, instead of the masters, of the economy."

Resource depletion
Many earlier predictions of resource depletion, such as Thomas Malthus' 1798 predictions about approaching famines in Europe, The Population Bomb (1968), Limits to Growth(1972) and the SimonEhrlich wager (1980) did not materialize, nor has diminished production of most resources occurred so far, one reason being that advancements in technology and science have allowed some previously unavailable resources to be produced. In some cases, substitution of more abundant materials, such as plastics for cast metals, lowered growth of usage for some metals. In the case of the limited resource of land, famine was relieved firstly by the revolution in transportation caused by railroads and steam ships, and later by the Green Revolution and chemical fertilizers, especially the Haber process for ammonia synthesis. M. King Hubbert's prediction of world petroleum production rates. Virtually all economic sectors rely heavily on petroleum. In the case of minerals, lower grades of mineral resources are being extracted, requiring higher inputs of capital and energy for both extraction and processing. An example is natural gas from shale and other low permeability rock, which can be developed with much higher inputs of energy, capital, and materials than

conventional gas in previous decades. Another example is offshore oil and gas, which has exponentially increasing cost as water depth increases.

Environmental impact
Forest in Indonesia being cut for palm oilplantation. Some critics argue that a narrow view of economic growth, combined with globalization, is creating a scenario where we could see a systemic collapse of our planet's natural resources. Other critics draw on archaeology to cite examples of cultures they claim have disappeared because they grew beyond the ability of their ecosystems to support them. Concerns about possible negative effects of growth on the environment and society led some to advocate lower levels of growth, from which comes the ideas of uneconomic growth and de-growth, and Green parties which argue that economies are part of a global society and a global ecology and cannot outstrip their natural growth without damaging them. Canadian scientist, David Suzuki stated in the 1990s that ecologies can only sustain typically about 1.53% new growth per year, and thus any requirement for greater returns from agriculture or forestry will necessarily cannibalize the natural capital of soil or forest. Some think this argument can be applied even to more developed economies. Those more optimistic about the environmental impacts of growth believe that, although localized environmental effects may occur, large scale ecological effects are minor. The argument as stated by commentators Julian Lincoln Simon states that if these global-scale ecological effects exist, human ingenuity will find ways of adapting to them.

Equitable growth
While acknowledging the central role economic growth can potentially play in human development, poverty reduction and the achievement of the Millennium Development Goals, it is becoming widely understood amongst the development community that special efforts must be made to ensure poorer sections of society are able to participate in economic growth. For instance, with low inequality a country with a growth rate of 2% per head and 40% of its population living in poverty, can halve poverty in ten years, but a country with high inequality would take nearly 60 years to achieve the same reduction. In the words of the Secretary General of the United Nations Ban Ki-Moon: While economic growth is necessary, it is not sufficient for progress on reducing poverty. Researchers at the Overseas Development Institute compares situations such as in Uganda, where during a period of annual growth of 2.5% between 2000 and

2003, the percentage of people living in poverty actually increased by 3.8%. The ODI thus emphasises the need to ensure social protection is extended to allow universal access and that policies are introduced to encourage the private sector to create new jobs as the economy grows (as opposed to jobless growth) and seek to employ people from disadvantaged groups.

Implications of global warming


Up to the present there are close correlations of economic growth with carbon dioxide emissions across nations, although there is also a considerable divergence in carbon intensity (carbon emissions per GDP). The Stern Review notes that the prediction that "under business as usual, global emissions will be sufficient to propel greenhouse gas concentrations to over 550ppm CO 2e by 2050 and over 650700ppm by the end of this century is robust to a wide range of changes in model assumptions". The scientific consensus is that planetary ecosystem functioning without incurring dangerous risks requires stabilization at 450550 ppm. As a consequence, growth-oriented environmental economists propose massive government intervention into switching sources of energy production, favouring wind, solar, hydroelectric, and nuclear. This would largely confine use of fossil fuels to either domestic cooking needs (such as for kerosene burners) or where carbon capture and storage technology can be cost-effective and reliable. TheStern Review, published by the United Kingdom Government in 2006, concluded that an investment of 1% of GDP would be sufficient to avoid the worst effects of climate change, and that failure to do so could risk climate-related costs equal to 20% of GDP. Because carbon capture and storage is as yet widely unproven, and its long term effectiveness (such as in containing carbon dioxide 'leaks') unknown, and because of current costs of alternative fuels, these policy responses largely rest on faith of technological change. On the other hand, Nigel Lawson claimed that people in a hundred years' time would be "seven times as well off as we are today", therefore it is not reasonable to impose sacrifices on the "much poorer present generation".

Economic Development:
The economic development in India followed a socialist-inspired policies for most of its independent history, including state-ownership of many sectors; extensive regulation and red tape known as "Licence Raj"; and isolation from the world economy. India's per capita income increased at only around 1% annualized rate in the three decades after Independence.[1] Since the mid-1980s, India has slowly opened up its markets through economic liberalization. After more fundamental reforms since 1991 and their renewal in the 2000s, India has progressed towards a free market economy.
[

In the late 2000s, India's growth has reached 7.5%, which will double the average income in a decade.[1] Analysts say that if India pushed more fundamental market reforms, it could sustain the rate and even reach the government's 2011 target of 10%. States have large responsibilities over their economies. The annualized 1999 2008 growth rates higher is for Gujarat (9.6%), Haryana (9.1%), than for Bihar (5.1%), Uttar the ninth-largest economy in the or Delhi(8.9%) world and were significantly Pradesh (4.4%), or Madhya the third

Pradesh (6.5%). India

largest by purchasing power parity adjusted exchange rates (PPP). On per capita basis, it ranks 128th in the world or 118th by PPP. The economic growth has been driven by the expansion of services that have been growing consistently faster than other sectors. It is argued that the pattern of Indian development has been a specific one and that the country may be able to skip the intermediate industrialization-led phase in the transformation of its economic structure. Serious concerns have been raised about the jobless nature of the economic growth. Favourable macroeconomic performance has been a necessary but not sufficient condition for the significant reduction of poverty among the Indian population. The rate of poverty decline has not been higher in the post-reform period (since 1991). The improvements in some other non-economic dimensions of social development have been even less favourable. The most pronounced example is an exceptionally high and persistent level of child malnutrition (46% in 20056). The progress of economic the reforms in India is followed are closely. The World reform, Bank suggests that most important priorities public sector

infrastructure, agricultural and rural development, removal of labor regulations, reforms in lagging states, and HIV/AIDS. For 2010, India ranked 133rd in Ease of Doing Business Index, which is setback as compared with China 89th and Brazil 129th. According to Index of Economic Freedom World Ranking an annual survey on

economic freedom of the nations, India ranks 124th as compared with China and Russia which ranks 140th and 143rd respectively in 2010. Economic development is a normative concept i.e. it applies in the context of people's sense of morality (right and wrong, good and bad). The definition of economic development given by Michael Todaro is an increase in living standards, improvement in self-esteem needs and freedom from oppression as well as a greater choice. The most accurate method of measuring development is the Human Development Index which takes into account the literacy rates & life expectancy which affects productivity and could lead to Economic Growth. It also leads to the creation of more opportunities in the sectors of education, healthcare, employment and the conservation of the environment. It implies an increase in the per capita income of every citizen. Economic Growth does not take into account the size of the informal economy. The informal economy is also known as the black economy which is unrecorded economic activity. Development alleviates people from low standards of living into proper employment with suitable shelter. Economic Growth does not take into account the depletion of natural resources which might lead to pollution, congestion & disease. Development however is concerned with sustainability which means meeting the needs of the present without compromising future needs. These environmental effects are becoming more of a problem for Governments now that the pressure has increased on them due to Global warming. Economic growth development. is a necessary but not sufficient condition of economic

History:
Economic development originated in the post war period of reconstruction initiated by the US. During his 1949 inaugural speech President Harry Truman identified the development of undeveloped areas as a priority for the west: More than half the people of the world are living in conditions approaching misery. Their food is inadequate, they are victims of disease. Their economic life is primitive and stagnant. Their poverty is a handicap and a threat both to them and to more prosperous areas. For the first time in history humanity possesses the knowledge and the skill to relieve the suffering of these people ... I believe that we should make available to peace-loving peoples the benefits of our store of technical knowledge in order to help them realize their aspirations for a better life What we envisage is a program of development based on the concepts of democratic fair dealing ... Greater production is the key to prosperity and peace. And the key to greater production is a wider and more vigorous application of modem scientific and technical knowledge [

There have been several major phases of development theory since 1945. From the 1940s to the 1960s the state played a large role in promoting industrialization in developing countries, following the idea of modernization theory. This period was followed by a brief period of basic needs development focusing on human capital development and redistribution in the 1970s. Neo-liberalism emerged in the 1980s pushing an agenda of free trade and Import Substitution Industrialization (ISI), emphasizing comparative advantage. More recently Postdevelopment theory has emerged to challenge the ideas of western-based development by arguing against reductionism, universalism, and euro centricity. Post-Development Theory is rooted in the experiences of Latin America, Africa, and India.

Negative effects of Economic Development :


Regulation, public sector, corruption
India ranked 133rd on the Ease of Doing Business Index in 2010, compared with 85th for Pakistan, 89th for People's Republic of China, 125th for Nigeria, 129th for Brazil, and 122nd for Indonesia. Extent of corruption in Indian states, asmeasured in a 2005 study by Transparency International India. (Darker regions are more corrupt) Corruption in many forms has been one of the pervasive problems affecting India. For decades, the red tape, bureaucracy and the Licence Raj that had strangled private enterprise. The economic reforms of 1991 cut some of the worst regulations that had been utilized in corruption. Corruption is still large. A 2005 study by Transparency International (TI) India found that more than half of those surveyed had firsthand experience of paying a bribe or peddling influence to get a job done in a public office. The chief economic consequences of corruption are the loss to the exchequer, an unhealthy climate for investment and an increase in the cost of government-subsidised services. The TI India study estimates the monetary value of petty corruption in 11 basic services provided by the government, like education, healthcare, judiciary, police, etc., to be around 21,068 crore (US$4.6 billion). India still ranks in the bottom quartile of developing nations in terms of the ease of doing business, and compared with China, the average time taken to secure the clearances for a startup or to invoke bankruptcy is much greater. The Right to Information Act (2005) and equivalent acts in the states, that require government officials to furnish information requested by citizens or face punitive

action, computerisation of services and various central and state government acts that established vigilance commissions have considerably reduced corruption or at least have opened up avenues to redress grievances. The 2006 report by Transparency International puts India at 70th place and states that significant improvements were made by India in reducing corruption.

Employment
India's labor force is growing by 2.5% every year, but employment is growing only at 2.3% a year. Official unemployment exceeds 9%. Regulation and other obstacles have discouraged the emergence of formal businesses and jobs. Almost 30% of workers are casual workers who work only when they are able to get jobs and remain unpaid for the rest of the time. Only 10% of the workforce is in regular employment. India's labor regulations are heavy even by developing country standards and analysts have urged the government to abolish them. From the overall stock of an estimated 458 million workers, 394 million (86%) operate in the unorganized sector (of which 63% are self-employed) mostly as informal workers. There is a strong relationship between the quality of employment and social and poverty characteristics. The relative growth of informal employment was more rapid within the organized rather than the unorganized sector. This informalization is also related to the flexibilization of employment in the organized sector that is suggested by the increasing use of contract labor by employers in order to benefit from more flexible labor practices. Most children never go beyond primary level schooling. Children under 14 constitute 3.6% of the total labor force in the country. Of these children, 9 out of every 10 work in their own rural family settings. Around 85% of them are engaged in traditional agricultural activities. Less than 9% work in manufacturing, services and repairs. Child labor is a complex problem that is basically rooted in poverty. The Indian government is implementing the world's largest child labor elimination program, with primary education targeted for ~250 million. Numerous non-governmental and voluntary organizations are also involved. Special investigation cells have been set up in states to enforce existing laws banning employment of children (under 14) in hazardous industries. The allocation of the Government of India for the eradication of child labor was US$10 million in 199596 and US$16 million in 199697. The allocation for 2007 is US$21 million.

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Environmental degradation
About 1.2 billion people in developing nations lack clean, safe water because most household and industrial wastes are dumped directly into rivers and lakes without treatment. This contributes to the rapid increase in waterborne diseases in humans. Out of India's 3119 towns and cities, just 209 have partial treatment facilities, and only 8 have full wastewater treatment facilities (WHO 1992). 114 cities dump untreated sewage and partially cremated bodies directly into the Ganges River. Downstream, the untreated water is used for drinking, bathing, and washing. This situation is typical of many rivers in India as well as other developing countries. Globally, but especially in developing nations like India where people cook with fuelwood and coal over open fires, about 4 billion humans suffer continuous exposure to smoke. In India, particulate concentrations in houses are reported to range from 8,300 to 15,000 g/m3, greatly exceeding the 75 g/m3 maximum standard for indoor particulate matter in the United States. Changes in ecosystem biological diversity, evolution of parasites, and invasion by exotic species all frequently result in disease outbreaks such as cholera which emerged in 1992 in India. The frequency of AIDS/HIV is increasing. In 1996, about 46,000 Indians out of 2.8 million (1.6 % of the population) tested were found to be infected with HIV.

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Difference between Economic Growth & Economic Development:


It is correctly recognized that the terms economic development and economic growth are taken as synonym. But, Prof. Schumpeter in his book "The Theory of Economic Development" (1911) has made clear distinction between economic development and economic growth. Similarly, Ursula Hicks, Alfred Kindleberger etc. have also laid stress on the different meaning of these terms. The main points of differences between them are stated below:

(i) Single Dimensional and Multi-Dimensional:


Economic growth is single dimensional which is concerned with increase in national and per capita income. On the contrary, economic development is multi-dimensional. It is concerned with both income and structural changes. In fact, economic development is a broad term.

(ii) Qualitative Changes:


In the opinion of Prof. J.K. Mehta, the terms development and growth are not synonymous. 'Growth' is quantitative whereas 'development' is qualitative.

(iii) Spontaneous and Discontinuous Changes:


To quote Prof Schumpeter, "Development is discontinuous and spontaneous changes in the stationary state which for ever alters and displaces the equilibrium state previously existing while growth is a gradual and steady change in the long run which comes about by general increase in rate of saving and population." Therefore, the term 'development' is used for spontaneous and discontinuous changes. The term 'growth' is used for continuous and steady changes.

(iv) Economic Development implies Economic Growth:


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Some

economists

used

the

term

economic

development

to

describe

the

determinants of economic growth, such as changes in techniques of production, in social attitudes and in institutions. Due to these changes the national income increases and is called economic growth. In this regard, development is the determinant of growth.

(v) Special Problems of Underdeveloped Countries:


Prof. Ursula Hicks has correctly stated, "Development should relate to backward countries, where there is possibility of developing and using hitherto unused resources. The term growth is applicable to economically advanced countries, where most of the resources are already known and developed."

Comparison Chart:
Attributes Economic Development Economic Growth

Concept:

Normative concept

Narrower concept economic development

than

Scope:

Concerned with structural changes in the economy

Growth is concerned with increases in the economy's output Growth relates to a gradual increase in one of the components of Gross Domestic Product: consumption, government spending, investment, net exports

Growth:

Development relates to growth of human capital indexes, a decrease in inequality figures, and structural changes that improve the general population's quality of life

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Attributes

Economic Development

Economic Growth

Implication:

It implies changes in income,saving and investment along with progressive changes in socioeconomic structure of country(institutional and technological changes) Qualitative.HDI (Human Development Index), genderrelated index (GDI), Human poverty index (HPI), infant mortality, literacy rate etc. Brings qualitative and quantitative changes in the economy

It refers to an increase in the real output of goods and services in the country like increase the income in savings,in investment etc.

Measurement:

Quantitative. Increase in real GDP. Shown by PPF.

Effect:

Brings quantitative changes in the economy

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