Question for discussion:
Should a government only pursue economic growth as its macroeconomic goal?
Tasks: Each group is to read the link in Webquest:
http://zunal.com/webquest.php?user=37349
and research on the respective countries assigned below as the context to respond to the above question:
Group
(1) Singapore
(2) China
(3) Thailand
(4) India
(5) S. Korea
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Cost and Benefits of Economic Growth:
ReplyDeleteEconomic growth is one of the macroeconomic goals a country seeks to achieve but in attempting to achieve it there may be conflicting results with other macroeconomic goals, as we shall see. There are both benefits and costs in pursuing economic growth, for our purposes we will consider economic growth in the context of Singapore.
Growth increases the welfare and living standard of Singaporeans provided economic growth outstrips population growth. With growth, real GDP increases, amount of goods and services available for consumption by Singaporeans increases, thus the material standard of living increases. However, the non-material standard of living, which includes leisure time, does not increase for Singaporeans. This is because Singapore’s growth includes Singaporeans working longer hours. It has been shown that Singaporeans work 44 hours a week. Thus, if growth causes a decrease in leisure time, the non-material aspect of standard of living of Singaporeans does not increase. However, the introduction of the 5-day work week policy has helped to make the loss of leisure time less severe. However, many Singaporeans do still work from home and the self-employed can still continue to work.
There are also environmental benefits. As people grow richer, they can afford to be more concerned about living in a clean environment. Thus, there are many policies by the Singapore government to keep the environment free from pollution caused by factories and vehicles. For example, all cars in Singapore are required to be fitted with catalytic convertors to reduce the emission of carbon monoxide, which are harmful to humans. Industries are also required to comply with emission standards in the design of process plants and installation of pollution control equipment such as chimneys have a minimum height requirement and that fuel used is specified. The ENV also works closely with developers such as the JTC, HDB and private developers to determine the allocation of industrial premises away from residential areas. Furthermore, with such strict environmental controls, it can also further increase GDP as cleaning firms have to be employed to clean up the pollution caused by factories.
Growth also helped to alleviate other macroeconomic problems. When Singapore first gained independence, there was a high unemployment rate. In pursuing economic growth through the signing of Free Trade Agreements (FTAs) and being an attractive location for Foreign Direct Investments (FDIs), the government has created jobs for the people, leading to low levels of unemployment. For example, signing of FTAs, such as the ASEAN Free Trade Area and the FTA with US, encouraged port trade leading to many jobs in terms of port services such as refueling, engineering, transportation of goods and even adding of value to goods (refining crude oil on Jurong island etc.). This also caused an increase in aggregate demand for our exports, which also increased jobs as firms must employ more people to increase their output to fill the demand. The building of the Integrated Resorts in Marina Bay and Sentosa are a good example of FDIs which encourage economic growth in the form of increased tourism while at the same time providing employment (20,000 jobs created in total when both IRs are in full operation).
Inflation rate also consistently remained low to medium. This is partly due to availability of resources due to high levels of trade brought by pursuing economic growth and also control by the central bank, the Monetary Authority of Singapore.
BOP is balanced due to high levels of exports and imports. This is not to be confused with entrepot trade, which contributes to employment but not directly to economic growth.
Although growth causes a widening income gap as the higher skilled get higher wages and the lower skilled get lower wages due to structural change of the Singapore economy into a knowledge-based economy, there are many policies created by the government to help decrease this income gap such as transfer payments to the lower income group to boost their income. Examples include enhancement of the Workfare Income Supplement Scheme where lower income group can receive higher payouts and extension to more workers, GST credits to help Singaporeans cope with the increase in GST with the lower income receiving more GST credits and New Singapore Shares (NSS) which were introduced to help the lower income group tide over the economic downturn. The NSS will earn annual dividends, in the form of bonuses, over a period of 5 years. HDBs flats are also provided at lower rates than that at market levels so that everyone, including the lower income, can afford. Thus, although the increase in income mainly impacts the rich, the poor can also benefit through such transfer payments so everyone’s standard of living increases, not just the higher income group’s standard of living. Without a continuing rise in national income, the scope for helping the poor is much more limited.
ReplyDeleteSome countries, in order to achieve faster growth, firms have to invest more which will require financing from the government or from low interest rates. Thus, this will become a burden on government budget so the government must tax the people more in order to gain more tax revenue and to encourage a high savings rate so that banks can receive more deposits and can loan money out to firms at a low interest rate. This reduces the disposable income of the people so they have less money to spend on consumption of goods and services. Thus in the short term, seeking economic growth actually lessens consumption and current welfare. However, in Singapore this has not happened as Singapore encourages growth from FDIs, which fund their investment using money from abroad instead of borrowing from local banks. Furthermore, Singapore already has a high savings rate due to Asian thrift nature and compulsory saving from the Central Provident Fund (CPF).
There are also negative effects of employment from growth. In the past 40 odd years, to maintain her economic growth, Singapore has seen a shift in productive output from industrial goods to capital goods and now a shift into a knowledge based economy. Each time each of the shifts has taken place there has been an increase in unemployment as workers struggle to obtain the skills necessary to work in the new economy as old skills become redundant. Thus in the short run, seeking economic growth actually increases structural unemployment. However, Singapore has many policies to ensure that our workforce continues to remain employable such as the introduction of the Workfare Training Scheme (WTS), which subsidises 90% to 95% of absentee payroll and course fee outlay for employers, when they send their low-wage workers for training, and the expansion of the Continuing Education and Training (CET) system to increase the productivity in workers.
It must be noted that the pursue of each economic goal is unique to every country and that there is no rule of thumb that applies across the board. For Singapore, although growth has many costs and benefits, with her lack of natural resources, we have no choice but to pursue economic growth in order to fulfill the other macroeconomic goals. The only way we can alleviate the costs of growth is to have clever implementation of macroeconomic policies. However, it must be noted that while it may be the main goal for countries like Singapore, it must not and cannot be the only goal the country sets out to achieve but must rather be balanced against the other macroeconomic goals.
Why Singapore succeeded in having economic growth:
ReplyDeleteSingapore has achieved economic growth over the past 4 and a half decades and it is due to several factors of the economy.
Firstly, Singapore has a highly transparent and successful market economy. Singapore is constantly rated as the least corrupt country in Asia and amongst the top 10 cleanest in the world by Transparency International. This is highly important for our economic growth as a corrupt free country means that the surplus gained from the economic growth would be used to invest which might bring about greater economic growth. Moreover, a corrupt free government is likely to attract MNCs. Singapore has attracted over 3000 MNCs from the United States, Japan and Europe and they account for more than two thirds of the manufacturing output and direct export sales. Furthermore, a non-corrupted government is tight on regulations and integrity issues. With the funds of government properly channeled to the public without an incentive to cheat by public workers, the public is able to enjoy monetary benefits and is willing to contribute to the economy; hence one of the successes of Singapore is the non-corrupted and just government policies.
Secondly, Singapore has a compulsory and highly vigorous education system. In the 1960s, Singapore faced massive unemployment. This was mainly due to the low education level that many Singaporeans had. Hence manufacturing firms were set up, solving the problem of unemployment. However, an uneducated workforce is not the way for greater economic growth. Hence the Singapore government came up with a compulsory education system and heavy subsidies are given to the people to ensure that they are able to afford it. Such that everyone has an equal chance for education. Moreover, Singapore has a varied ethnic background. Thus English is chosen as the common language. This connected citizens of all ethnic-cultural backgrounds, so no ethnic group is forced to learn the language of another and it also tied Singapore to the world economy. Thus this education system paved Singapore’s economic growth from the 1960s till today.
Thirdly, the government promotes high levels of savings and investment through a mandatory retirement savings scheme known as the Central Provident Fund. This gives the country potential to invest. Singapore mainly invests in two areas, education and technology.
Furthermore, the quantity of the labour force in Singapore is lacking, so this may be a hindrance to the success of economic growth for Singapore. Hence, the Singapore government is working hard to increase the quantity of labour in both the short run and the long run. In the short run, the Singapore government has loosened immigration laws and has allowed a higher inflow of foreign talent and workers into Singapore to boost the quantity of labour here. To cope with the ageing population problem in Singapore, the government has decided to increase the retirement age to 65 with effect from 2012. This is so to increase the quantity of labour and also to slow down the unproductivity process for the aged population. Hence, with these factors of increasing the quantity of labour, it has increased overall productivity of workers in Singapore and hence leads to economic growth of Singapore.
Another weakness that Singapore faces is the lack of natural resources such as metals and water to manufacture capital of our own. Hence may lead to a lack of capital to improve our economy. Hence the government has found ways to increase capital accumulation by attracting MNCs to set up factories here with tax holidays being offered to these foreign firms. With the transfer of technology expertise, not only will it increase production for these foreign firms and increase export revenue of Singapore, but also increase knowledge of technology expertise by locals here. Hence one factor leading to the success of economic growth. Also, Singapore has invested heavily in human capital besides machine capital and has included heavy investment in education, Singapore’s 3rd highest government expenditure. This is so as to increase the quality of labour force here in Singapore.
ReplyDeleteSingapore has also decided to diversify the economy from one of a labour-intensive industry in the 1970s to one of a knowledge-based economy in the 21st century. With the government’s heavy investment in R and D, it has led to new discoveries being made in Singapore, making Singapore an R and D hub in the future. With such a reputation, pharmaceutical firms are coming down to research institutions and began investing here. Hence, this is one of the successes of economic growth in Singapore, that is to adapt to changing needs of the modern world.
Lastly, Singapore has also depended heavily on international trade to become the stimulus of economic growth here in Singapore. With a huge percentage of the GDP of Singapore on exports and imports, Singapore has been known for its success due to its port-related activities. Singapore’s increased dependence on FTA (Free Trade Agreements) has reduced the cost needed for tariffs and has increased flow of imports into Singapore and exports out of Singapore. This has been one of Singapore’s successes in economic booms; however it would be a hindrance to economic growth in times of recessions, as seen recently in the 2008 Global Economic Crisis. Singapore has hence diversified the economy and expands its links to nations all over the world to cope with its openness to the global economy.
South Korea and Its Economy
ReplyDeletea. Brief Background of Its Economy
Economic growth in South Korea is largely dependent on exports of manufactured goods to developed countries such as United States, European Union and Japan. South Korea’s GNP per capita is similar to rapidly developing East Asian countries. Besides, South Korea has also engaged in trade with North Korea since 1990.
b. Benefits of Economic Growth
(i) South Korea became very successful competing with MEDCs (More economically developed countries) such as the UK
(ii) More jobs were available low unemployment rate 4.1% (unemployment reduced) rise in income of people as more people were employed and earning incomes domestic consumers have higher purchasing power for buying consumer goods increase material SOL of these consumers.
However, exports of goods and services represent more than one-third of the country's GNP. Hence, material aspect of SOL might not have really increased if the export revenue is not transferred to spending on consumer goods by the workers in these export industries. Their spending on domestic goods would have multiplier effects on the economy and increase income of other domestic producers and help improve their SOL.
(iii) increase in purchase of consumer goods (e.g. cars / electrical goods), increase in AD the market lead to rightward shift of AD and actual growth if the national output level is not at the full employment level.
(iv) More money was also available for leisure time (greater disposable income), growth in service sector increase in income of workers in service sectors there would an improvement in SOL if they spend their income on consumers goods.
(v) More money was invested in infrastructure, improving road networks and airports attracted more foreign direct investments as well as domestic investments increase in I and increase in AD.
(vi) The success of industrialisation and the development of South Korea's industries, South Korean Transnational Corporations(e.g. Samsung) investing in places such as the USAincrease growth from income earned overseas transmitted back to Korea
Income and wealth distribution fairly equal - 15% of population below poverty line. Gini index of South Korea was 31.3 which was relatively low.
oops..the symbol can't be shown...it should be "-->" haha sorry =P
ReplyDelete(South Korea and Its Economy Continued...)
ReplyDeletec. Costs
(i) Environmental impact
1. Unchecked industrialization and urban development --> deforestation and destruction of wetlands eg Songdo Tidal Flat. (unsustainable development)
However, there have been recent efforts to balance these problems, including government running a $84 billion five-year green growth project aiming to boost energy efficiency and green technology
2. Noise, air and water pollution increased due to the rapid industrialisation, increase in factories led to smog over cities. --> decrease in SOL
3. increased traffic volumes --> taxes on road use in the capital, Seoul
(ii) Opportunity cost of growth
The green-based economic strategy is a comprehensive overhaul of South Korea’s economy, utilizing nearly two percent of the national GDP, which could be used for other purposes instead, such as investment in capital goods.
(iii) Poor non-material SOL
1. Unequal pay (women and immigrants paid only 50-75% the wages paid to men)
2. Sweat-shop working conditions for some
3. Increase in child labour
4. Long working hours ( average 52 hours a week) --> less leisure time
5. Increased rural-urban migration (the most innovative began moving away from the countryside into the nearby cities for work)
6. Social polarisation due to income gap
(iv) More economically developed --> cost of living and stress level rises and the young people tend not to have any child or only have one child --> Low fertility (1.3 children per woman in 2007) --> Aging society --> less productive workforce --> less attractive to investors
(South Korea and Its Economy continued..)
ReplyDeleted. Policies/Factors that Affect Growth
(i) Manufacturing oriented exports as of 2009, South Korea is the world's eighth largest exporter.
Invest KOREA, the national investment promotion agency of South Korea and a member of the World Association of Investment Promotion Agencies (WAIPA), was established within the Korea Trade-Investment Promotion Agency or KOTRA with the sole purpose of supporting the entry and successful establishment of foreign business into Korea. With assistance extending to comprehensive post-establishment services, Invest KOREA enables foreign corporations to maximize the benefits of Korea's investment environment to facilitate their rapid settlement in Korea.
(ii) Highly educated workforce.
Literacy Rate: Age 15 and over can read and write
Total population: 97.9%
Male: 99.2%
Female: 96.6% (2002)
(iii) South Korea has a high-tech infrastructure and is the most wired country in the world.
(iv) FTAs with Canada, New Zealand. --> Lower tariffs on Korean producst --> higher demand for her exports--> more export revenues --> more income of workers as discussed above. X rises and AD shifts to the left. FTAs also create greater market for Korean products --> more likely for significant EOS to be exploited --> lower cost of production, supply increases -->lower price and higher output --> consumers benefit.
(v) Adoption of an outward-looking strategy in the early 1960s. This strategy was particularly well suited to that time because of South Korea's poor natural resource endowment, low savings rate, and tiny domestic market. The strategy promoted economic growth through labor-intensive manufactured exports, in which South Korea could develop a competitive advantage. Government initiatives played an important role in this process. The inflow of foreign capital was greatly encouraged to supplement the shortage of domestic savings.
These efforts enabled South Korea to achieve rapid growth in exports and subsequent increases in income.
(i) Domestic savings were very low, and there was little available domestic capital. This obstacle was overcome by introducing foreign loans and inaugurating attractive domestic interest rates that enticed local capital into production. As incomes rose, so did the savings rate.
(ii) Policies on imports and foreign investment were liberalized to promote competition
(iii) Policy planners selected a group of strategic industries to back, including electronics, shipbuilding, and automobiles. New industries were nurtured by making the importation of such goods difficult. When the new industry was on its feet, the government worked to create good conditions for its export.
(iv) Incentives for exports included a reduction of corporate and private income taxes for exporters, tariff exemptions for raw materials imported for export production, business tax exemptions, and accelerated depreciation allowances.
(v) The government realised that agricultural production was not the route to economic growth and as a result encouraged foreign investment e.g. from the USA and themselves invested in large companies such as the state-owned Steel Works (Pohang Iron and Steel corporation)
(vi) South Korean firms (such as Hyundai, Samsung and Daewoo) were also protected by high import taxes - this ensured that there was a sufficient market for goods, further stimulating production and allow the firms to exploit significant EOS by producing for the domestic market.
(South Korea and Its Economy LAST PART!!! yes finally the last part!!haha:D continued from part c.(vi) )
ReplyDelete(vii) The government also developed its own research and development of hi-tech goods such as robotics. In 2005, Korea Advanced Institute of Science and Technology developed the world's second walking humanoid robot, HUBO. In 2009, the government announced plans to build robot-themed parks in Incheon and Masan with a mix of public and private funding.
(viii) Large TNCs (e.g. Sony from Japan) were attracted by low wages, low taxes and they also brought know-how to South Korea --> more FDIs --> increase AD and also increase potential growth of the nation. A dedicated and substantial workforce was available, willing to work long hours (Asian nature of being diligent) --> further attract both foreign and domestic investments.
(x) Firms were attracted by a large consumer market of SE Asia (e.g. China) and have successfully entered overseas markets. For example, Samsung's liquid crystal display (LCD) TVs took up 11 percent of the Chinese market in July 2009.
e. Conclusion
In the early years of her economic development, South Korea was facing constraints such as limited natural resources and small population which means a small workforce and domestic market for a particular industry to grow. However, being open to foreign firms and markets, South Korea has managed to overcome her constraints. She tried to attract FDIs and boost her export sectors. This enables the firms to tap into the external demand and boost output leading to the exploitation of EOS and to save costs. For certain industries with significant potential such as car industry, she adopted certain degree of protectionism and allowed the infant industries to grow, exploit EOS and become cost competitive. However, her rapid economic development has also brought several problems such as aging population and severe environmental degradation. This increasingly serious demographic change may lead to unproductive workforce and ecological problems may cause unpleasant living environment and unsustainable development. Yet, these problems can be minimized by formulating appropriate policies. For example, South Korea government has been encouraging investments in green technology. The Act of The Long-term Care Security for the Elderly has also been established in April 2007 which aims to help those who cannot live without others’ aid due to aging and senile diseases and helps alleviate burden on the working population. Hence, South Korea can sustain her rapid economic development.
Should a government only pursue economic growth as its macroeconomic goal? (Thailand)
ReplyDeleteThere are 5 main industries in Thailand, namely:
1. Agriculture, forestry and fishing
2. Mining and minerals
3. indutry and manufacturing
4. energy
5. services (incl. tourism and banking & finance)
thailand had a growth rate of 9.4% during the 1980s to 2000s, which was considered average. this was more of a closed country until their prime minister opened up the country's economy to international trade. after teh currency crisis, thailand had a hard time regaining momentum over their currency (thai baht) and their economy. after thaksin took office in 2001, with the support of the citizens, he increased domestic activity and reliance on foreign trade and investments to increase the domestic actvitiy of the country, which increased the GDP of the country by 2.2%. over the years, there is an increase in domestic activity, creating real GDP growth of 5.3%, 7.1% and 6.3% in yeat 2002, 2003 and 2004 respectively. however, in lieu of rising oil prices and a fall after a peak, economic growth slumped to 4.5% in end of year 2004.
by promoting economic growth, there will be an increase in welfare and SoL of the country. thailand has the the 2nd largest economy in SEA, after indonesia. this is based on the PPP of thailand, whole GDP is approximately 8.5 TRILLION baht (USD$627 billion). also, it is he 4th richest nation according to the GDP per capita, not far behind from Singapore, Brunei and Malaysia. most of thailand's labour force is in agricultural sector, which is a primary sector. by promoting eonomic growth, the country can move away towards the secondary and tertiary industries. however, there is a shift in tourism revenue (increasing). however, there is a recent decrease in investor/consumer confidence due to political uncertainty.
currently, about 49% of the labour force of thailand is in agriculture, 37% in services and 14% in industry. thus, the thai govt should shift more of the labour force to services and industry, which is much more likely to increase the amount of funds flowing into the country.
the united states is thailand's largest export market, and second larget supplier after japan. due to these, economic recovery amongst their regional trading partners helped the thai's export growth. by promoting economic growth, they can recover from financial crisis, which depends on increased exports to the rest of the world. also, free trade agreements (FTAs) is also beneficial, but it requires free trade negotiations. also, by pursuing economic growth, one can prevent currency depreciation. this is because by increasing export revenue, one can pay off any debts and need not resort to credit creation to clear debts. thus, there will not be too much inflation or changes in the country's currency exchange rate, thus increasing the reliability of the country.
Economic growth is the annual percentage increase in an economy's level of real output over time. It is usually measured by the rate of growth of real GDP or GNP over time. The economy of China is the third largest in the world, after the United States and Japan with a nominal GDP of US$4.91 trillion (2009) when measured in exchange-rate terms. China is the fastest-growing major economy in the world, and has had the fastest growing major economy for the past 30 years with an average annual GDP growth rate over 10%. China's income per capita has likewise grown at an average annual rate of more than 8%. China now participates extensively in the world market and private sector companies play a major role in the economy. China has implemented many policies to boost economic growth in its country and the government's actions has brought about many benefits for the country. However, there is also a price to pay for a high rate of economic growth.
ReplyDeleteFirstly, economic growth in China has improved the standards of living of the citizens in the country as well as greatly reduce the poverty within China. With economic growth, the income of the Chinese is generally higher. With a higher income, they will have a higher purchasing power and hence, consumption will be greater, leading to a rise in satisfaction and hence, higher quality of life. Morever, since one important sector of China is agriculture, a rise in income will allow farmers to purchase up-to-date farming equipment to increase productivity of their farms. As agriculture is highly based upon the natural climate, it is very vulnerable to external shocks. Therefore, with more money, farmers have the ability to purchase high technologies which will enable them to increase their output and hence further increase their income. This is one factor that may affect the potential growth of the China economy, which in turn would result in economic growth for China. The higher the rate of net investment, the higher the potential growth rate, the greater would be the shift in China's PPC overtime.
China should purse economic growth, in order to improve the standards of living of chinese citizens in the China economy, and to reduce the poverty in the China economy, which may in turn lead to reducing poverty worldwide. There are numerous benefits for China should it purse economic growth as its marcoeconomic goal.
1) Increased levels of Consumption:
Even though China's population is growing in numbers, the economic growth would still be able to outstrip it, as there are greater emphasis on investments, low-cost manufacturing and population control methods like the "one-child policy". This would mean that there would be higher real income per head for the Chinese citizens. With greater amounts of income, the citizens would have greater spending power to consume more goods. This would mean more benefits to the society, as the citizen's material standard of living would increase.
2) Alleviate other Macroeconomic problems:
Inflationary problems might occur in China, as its population rises which leads to a rise in the aggregate demand without sufficient potential economic growth to match it. Inflation rates would be higher due to the people's demands for rising incomes, which may also cause other problems like balance of payment crises and industrial disputes. This would be solved by the growth in productive potential, like improving their human capital and technology.
3) Redistributive Benefits:
ReplyDeleteWith the rise in the citizens' income levels, the chinese government would be able to collect more taxes, to spend on developing the country and also alleviate poverty. In 1979, immediately after the iron rice bowl was dismantled, there were 20 million unemployed people. Official Chinese statistics reveal that 4.2% of the total urban workforce was unemployed in 2004, although other estimates have reached 10%. As part of its newly developing social security legislation, China has an unemployment insurance system. At the end of 2003, more than 103.7 million people were participating in the plan, and 7.4 million laid-off employees had received benefits.
4) Environment Benefits:
As the citizens grow richer, they would become less preoccupied with thier own provate consumption and more concerned about living in a cleaner environment. Beijing in particular has invested heavily in pollution control as part of its preparation of the 2008 Olympic Games. In 2005, China joined the Asia-Pacific Partnership on Clean Development and Climate, which brings industries and governments together to implement strategies that reduce pollution and address climate change. Some cities have seen improvement in air quality in recent years.
China is an active participant in climate change talks and other multilateral environmental negotiations in organization such as the UN Environment Program (UNEP). While China has taken environmental challenges seriously, it has pushed for the developed world to help developing countries to a far greater extent.
Although Economic growth is important, it should not be seen as the only macroeconomic goal of the China Government. This is because we must not forget that we still have three macroeconomic goals that are just as important to a country as a whole, and they are all equally important. These goals are namely full employment or low unemployment, stable prices or low inflation, and close to BOP equilibrium. Combined with High and sustained economic growth, these should be the four goals that the China Government should be focused on and not just economic growth alone.
Economic growth will bring about increased levels of consumption, and hence, also an increase in SOL Standard of living.
Redistributive benefits
If incomes rise, the government can redistribute incomes from the rich to the poor and help to promote greater income equity. For example, as people's incomes rise, they automatically pay more taxes, when they pay their income tax. These extra revenues for the government can be spent on programs to alleviate poverty, which is extremely important to China as even with its economic growth in the past few decades, it still has the fairly large concentration of poor people in the world.
On the other hand, the government should not only pursue economic growth as its macro economic goal.
Although economic growth has its benefits, it also has its costs that comes along with it.
Current opportunity cost of growth
ReplyDeleteFirms must invest more than average in order to achieve higher economic growth. This will require monetary inputs and this can come from either higher savings or higher taxes. This means that there must be a cut in consumption presently in order to produce these excess financing. In the short run, there will be less consumption. This will lead to lower standards of living as less goods will be consumed by the people.
Employment and distribution of income
The economic growth of China will mean that resources from less efficient industries will be channeled to the more efficient industries. Also, economic growth that is too fast can lead to technological advancement that can overtake that of the speed of the workers learning rate, so that the workers may find it hard to catch up with the new technology available. This is likely to result in structural unemployment as the workforce is not equipped with the skills to operate the machineries involved in the production of goods and services due to technological advancements. Hence, there will be unemployment, or lower wage levels as lower skilled workers are compelled to take on lower paying jobs. This will add on to the unemployment rate of China which is 4.30 percent in December of 2009. To tackle this problem, the China government can start by providing education to the less skilled workers so that they will be equipped with the necessary skills and thus be employed.
Hence, in conclusion, the government should also take into consideration the other 3 macro goals:
1. stable prices or low inflation
2. close to BOP equilibrium.
3. full employment or low unemployment
China should divide its resources equally between the four macroeconomic goals while placing a little more emphasis on economic growth, since economic growth itself will mediate the negative effects that are generated by the other three macroeconomic goals.
Part 1 (India)
ReplyDeleteQuick recap of Economic Growth:
-annual percentage increase in an economy's level of real output over time
-often measured using the rate of growth of real GDP or GNP over time
-comprise of both actual and potential economic growth
COSTS of Economic Growth to India:
1) Structural Unemployment & Inequity Effect
- Rapid growth leads to rapid changes, if the skills and knowledge of the labour does not improve as quickly as technological advancements, people may find that their skills are no longer relevant and this will lead to structural unemployment or low wages. If the means to higher growth are in the form of greater incentives given to specific sectors of the economy, then the rich might get richer and this widens the income gap. According to the statistics, the top 10% of India’s population enjoys 31.1% of the country’s income whereas the lowest 10% suffers with merely 3.6%. In fact, 35 % of the country's population survives on less than $1 a day.
2) Long-term effects of unsustainable growth
- If growth involves using a greater amount of resources, rather than using the same amount of resources more efficiently, certain non-renewable resources will run out more rapidly. India’s oil requirement has doubled since 1992 and by research, India is responsible for draining a major chunk of the world’s resources with their increasingly unsustainable patterns of consumption. With such an amazing speed of growth, resources may become insufficient for future generations and in the longer term; the current rapid growth might seriously undermine the economic survival of the country in the future.
3) Environmental concerns (and implication to SOL)
ReplyDelete- Population growth and economic development are contributing to many serious environmental calamities in India. These include heavy pressure on land, forests, habitat destruction and loss of biodiversity. An estimated 60% of cultivated land suffers from soil erosion, waterlogging, and salinity. It is also estimated that between 4.7 and 12 billion tons of topsoil are lost annually from soil erosion. From 1947 to 2002, average annual per capita water availability declined by almost 70% to 1,822 cubic meters, and over exploitation of groundwater is problematic in the states of Haryana, Punjab, and Uttar Pradesh. The Indian Agricultural Research Institute of Parvati has estimated that a 3 °C rise in temperature will result in a 15 to 20% loss in annual wheat yields. These are substantial problems for a nation with such a large population depending on the productivity of primary resources and whose economic growth relies heavily on industrial growth. Civil conflicts involving natural resources—most notably forests and arable land—have occurred in eastern and northeastern states.
4) Causing BOP Deficits (disequilibrium)
- In the late 80s, the government led by Rajiv Gandhi eased restrictions on capacity expansion for incumbents, removed price controls and reduced corporate taxes. While this increased the rate of growth, it also led to high fiscal deficits and a worsening current account. The collapse of the Soviet Union, which was India's major trading partner, and the first Gulf War, which caused a spike in oil prices, caused a major balance-of-payments crisis for India, which found she was facing the prospect of defaulting on her loans. India asked for a $1.8 billion bailout loan from IMF, which in return demanded reforms.
BENEFITS of Economic Growth to India
ReplyDelete1) Rise in income and SOL
- If economic growth outstrips population growth, it will lead to higher real income per head. This can lead to higher levels of consumption of goods and services in India. Also, aggregate demand increases because of this, which may further cause rising real GDP per capita. People’s general standard of living improves as a whole. According to the data released for the year 2006-2007, India's GDP grew at an impressive 9.2 per cent. The share of different sectors of the economy in India's GDP is as follows: Agriculture - 18.5 per cent, Industry - 26.4 per cent, and Services - 55.1 per cent. The fact that the service sector now accounts for more than half the GDP is a milestone in India's economic history and takes it closer to the fundamentals of a developed economy.
2) Environmental conservation as a result of economic growth
- As Indians grow richer, they can afford to become less preoccupied with their own private consumption and more concerned about living in a clean environment. The Indian Constitution imposes a constitutional obligation on the state to protect and improve the environment and safeguard the forests and wildlife of the country. The India government also imposes a constitutional obligation on the citizens to protect and improve the natural environment, including forests, lakes, rivers and wildlife and to have compassion for all living creatures. With these conservation efforts, better living environment will be created for Indians to live in future.
3) Redistributive effect; bridging the income gap
ReplyDelete- As the income of the people rises, they automatically pay more taxes and government can redistribute incomes from the rich to the poor without losing in absolute terms. For people who earn more than Rs500000 per month in India, 30% is required to pay as personal income tax, then the India government can use these tax revenues to fund programs to alleviate poverty. Another example is seen in August 2005, when the Indian parliament passed the Rural Employment Guarantee Bill, the largest programme of this type in terms of cost and coverage, which promises 100 days of minimum wage employment to every rural household in all the India's 600 districts. Without a continuing rise in national income, the scope of helping the poor is very much limited. Hence, the widening income gap as a result of economic growth can actually be alleviated by economic growth itself.
Conclusion:
-Economic growth is an inevitable process and can indeed be beneficial to India as mentioned above. However, the Indian government must take steps to make sure that the negative effects like increasing inequality of income are tackled through means such as redistribution of income as well as skills training for those unemployed due to structural changes brought about by economic growth. Furthermore, the government should place more emphasis on India's long-term growth rather than speed through with extremely rapid economic growth but having to suffer later in the longer run when the economy finds itself unable to support itself because its resources have depleted to too much of an extent. At the moment, India is growing at an accelerated rate, as with China, and will prove to be an economic giant in the near future. With the above-mentioned recommendations, India's economic prospect will be bright and its international footing will surely be strengthened and at the same time, its people will enjoy a higher standard of living as the economy continues to develop and prosper.