Factors Needed For Sustained Economic Growth
Sustained economic growth depends heavily on an adequate level of new investment, which will be undertaken if there are expectations of future growth in demand. After investment has taken place on the basis of expectations, the level of income will increase, by the operation of the multiplier.
But there is no reason why the actual level of income should end up increasing as much as the investing business people thought it would. It follows that investment, a factor in growth, is dependent on business confidence in the future, which is reflected in expectations of growth in consumption.
The rate of extraction of natural resources will impose a limit on the rate of growth. Production which uses up a country’s natural resources, such as oil, coal and other minerals, depletes the stock of available resources; it is therefore, in a sense, disinvestment.
Technological progress is a very important source of faster economic growth.
- The same amounts of the factors of production can produce a higher output.
- New products will be developed, thus adding to output growth.
There can be technical progress in the labour force. If workers are better educated and better trained they will be able to produce more. For example, if there is a fault in the production process, a skilled worker will be able to deal with it quickly, whereas an unskilled worker one might have to call for a superior instead.
Technological progress can be divided into three types.
(a) Capital saving: technical advances that use less capital and the same amount of labour per unit of output.
(b) Neutral: technical advances that require labour and capital in the same proportions as before, using less of
each per unit of output.
(c) Labour-saving: technical advance that uses less labour and the same amount of capital per unit of output.
If technological progress is of type (c) and the new technology seems to be labour-saving, then unemployment will rise unless there is either a simultaneous expansion of demand or a reduction in hours worked by each person. In the latter case there is no productivity increase associated with the technological progress.
Technological progress may therefore stimulate growth but at the same time conflict with the goal of full employment.
A further consequence of this could be that those people in work would benefit from economic growth in the form of higher wages, but those people put out of work by the new technology would be left with a lower income.
There is thus a danger that the rich will get richer and the poor will get poorer in spite of economic growth, and this would be regarded by many people as an undesirable development.
External trade influences on economic growth
An improvement in the terms of trade (the quantity of imports that can be bought in exchange for a given quantity of exports) means that more imports can be bought or alternatively a given volume of exports will earn higher profits.
This will boost investment and hence growth. The rate of growth of the rest of the world is important for an economy that has a large foreign trade sector. If trading partners have slow growth, the amount of exports a country can sell to them will grow only slowly, and this limits the country’s own opportunities for investment and growth.
Advantages and disadvantages of economic growth
Economic growth should lead to a higher income per head which can in turn lead to higher levels of consumption and a better standard of living.
A country with economic growth is more easily able to provide welfare services without creating intolerable tax burdens on the community.
There are possible disadvantages to growth, however.
(a) Growth implies faster use of natural resources. Without growth, these resources would last longer.
(b) Much economic activity tends to create pollution, such as acid rain and nuclear waste. It leads to emissions which threaten to produce disruptive climatic changes through an increase in the ‘greenhouse effect’. It results in more roads, new and larger towns, and less unspoilt countryside.
(c) There is a danger that some sections of the population, unable to adapt to the demands for new skills and more training, will not find jobs in the developing economy. This structural unemployment might create a large section of the community which gains no benefit from the increase in national income.
(d) In order to achieve growth, firms need to invest more and this requires financing. This finance can only come from higher savings which in turn require the population to consume less. In the short-run, therefore, higher growth requires a cut in consumption.