Economic growth and development Advantages and disadvantages
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Published: Mon, 5 Dec 2016
Economic development can be describe as the development of economic wealth of countries or regions for the well-being of their inhabitants such as the improvement and innovation on the political, economic, and social of its people. Economic development and growth are totally different in terms which are used in economics. Economic development refers to economic growth which accompanied by changes in economic structure and output distribution. So, economic growth may be necessary but not sufficient to attain economic development. Thus, peoples always said that economic development is the problems of underdeveloped countries and economic growth to those of developed countries. Underdeveloped countries always face some problems such as low income, weakness of human resource and also the economic vulnerability. These problems also made the countries hard to attain the development of economic. However, for those developed countries, they do not face the same problems as what underdeveloped countries do, therefore, they are more easily to attain the economic development and treat it as an economic growth.
In addition, in the term of economic development is much more comprehensive because it implies progressive changes in the socio-economic structure of a country. Nowadays, the evolution of new technology is directly related to economic development. Without high technology in a country, it is hard to bring an economic development toward its people. Viewed in this way economic development involves a steady decline in agricultural shares in GNP and continuous increase in shares of industries, trade banking construction and services. However, economic growth just only refers to the rise in total output in a country; development implies change in technological and institutional organization of production as well as in distributive pattern of income.
Hence, if compared to the goal of development, economic growth is much easy to realize. Between, we just need a larger mobilization of resources and raising their productivity by enhance it to be more efficiency and effective, then the output level can be raised and economic growth will occur. However, the development process is far more extensive than the economic growth. Not only a rise in output, it also involved changes in composition of output, and shift in the allocation of productive resources, and reduction or elimination of poverty, inequalities and unemployment.
Nutshell, economic development is impossible without having an economic growth but economic growth is possible without an economic development. Growth is just increase in GNP but it does not have any other parameters to it; unlike development which can be conceived as Multi-Dimensional process.
Are economic growth and development worthwhile?
Economic growth and development have their advantages and also disadvantages. Although economic growth widens the range of human choices, but this may not necessarily bring happiness toward people. Happiness is dependent on the relationship between wants and resources. People may become more satisfied, not only by having more wants met, but perhaps also by renouncing certain material goods. Wealth may make people less happy if it increases wants more than resources. Furthermore, acquisitive and achievement-oriented societies may be more likely to give rise to individual frustration.
Economic growth will decreases famine, starvation, infant mortality, and death; gives us greater leisure; can enhance art, music, and philosophy; and gives us the resources to be humanitarian. Economic growth will especially benefit to societies in which political desire exceed the resources, because it may prevent what might otherwise prove to be social tension that people can’t take it. However, without economic growth, the desires of one group can be met when others expense on it. Lastly, economic growth can help newly independent countries in mobilizing resources to increase the power of a nation.
Growth has its value. First, the disadvantage might be the acquisitiveness, materialism, and dissatisfaction with one’s present state associated with a society’s economic struggles. Second, liquidity, objective, and self-associated with economic growth may undermine the reliance on extended family system, in fact, the focus of the prevailing social structure. Third, economic growth, which depends on the rational and technological innovation and changes in scientific methods, often is the threat in religious and social authority. Fourth, economic growth often require more specialized work, which may be caused by more objective, accompanied more drab and monotonous tasks, more discipline, and a pair of process loss.
In addition, economic growth which follow by large organizational units are more likely to lead to bureaucratization, objective, communication problems, and the use of force were consistent. Economic growth and development of large enterprises with a manufacturer’s products and services while demand increased, and urban growth, this may be is accompanied byrootlessness, environmental blight disease, and unhealthy living conditions, even in the narrow social values change and may ultimately lead to a new dynamic equilibrium that is better than the old static equilibrium, the transition could have some very painful issues. In addition, the political transformation, as rapid economic growth, may lead to greater concentration, stress, social disruption, even authoritarian.
Therefore, even if the population seriously committed to economic growth, its implementation is not likely at all costs pursued. All societies must take into account that the conflicts with the maximization of economic growth and other objectives. Because it was want sits in high level positions, a developing country own citizens can promote the local production control to reduce the growth in the short term. The question now is what will be weighed to achieve an orderly, stable society, and maintain traditional values and culture, and promoting political autonomy?
Economic growth is the increase a country’s per capita output. Economic development, economic growth has resulted in the poorest strata of the population or level of education, changes to improve the output distribution of economic welfare and economic changes in different structures.
Economic growth and development of Asia
Nowadays, economic development in Asia shows high impact of economic development of this respective continent. Economy of Asia has taken an important part in the view of the world’s economy. These continents have adopted one of the following economic systems such as capitalism, socialism, communism, and fascism. As we know, Asia is the largest continent in terms of area surface and also the population. Beside it, it is also the region with the highest growth rate. Below are Asian countries that contribute their economic development to our society.
Of all the Asian Countries, the only Asian country included among the industrialized countries is Japan. According to the International Monetary Fund, the country per capita was GDP 32,608 U.S. dollars or in 2009, the 23rd highest on record. Moreover, according to certain criteria, the term means that developed countries is the countries that having a high level of development. What standards and which countries are classified as being developed, is a controversial issue which surrounded by a fierce debate. Thus, economic criteria tend to dominate discussions. Countries which having per capita income and high per capita gross domestic product (GDP) will be described as developed countries. Another criterion is the industrialization; countries in the tertiary and quaternary sector-of industry leading will be described as development. Another recent measure, the human development index, which combines economic measures, and other measures of national income, life expectancy and education indicators, have become prominent. This criterion will define the development country as those very high (HDI) rating. However, many exceptions exist when the decision to “developed country” status is used to measure the subject. Countries do not fit this definition are classified as developing countries.
However, Taiwan, Hong Kong and Singapore are regarded as newly industrialized countries. The category of newly industrialized country (NIC) is a socioeconomic classification which applied to various countries in the world by political scientists and economists. NIC is the nation’s economy has not yet reached first world status, but in the macro sense, the development of the countries is normally faster than counterpart. Another feature of newly industrialized countries is that undergoing in rapid economic growth (usually export-oriented). However, the starting or ongoing industrialization is an important indicator of NIC. In many newly industrialized countries, may also be experiencing social unrest by major primary rural, or agricultural, populations migrate to the cities, where the thousand of laborers can be draw by growth of manufacturing concerns and factories.
NIC usually share some characteristic such as increased social freedoms and civil rights, strong political leadership, which switch from an agricultural to an industrial economy, the other common features, especially in the manufacturing sector, an increasingly open market economy with free trade and other heavy capital investment from countries around the world. In addition, the political leadership in their area of influence and lastly is they have lowered poverty rates.
More over, as we know, the history and culture of China is their secret to improve their economy, even if it ruled and control by their state. Prior to 1979, China maintained a centrally planned or command economy. The economy of China with the large proportion is directed by the state which established production goals, controlled prices, distribution, and most of the economic control of resources. During the 1950s, all of China’s individual household farms were collectivized into large communes. To support rapid industrialization, the central government starts to take large-scale physical and human capital investment during 1960-1970s. As a result, by 1978, nearly three quarters of industrial production generated by the central control of state-owned enterprises according to centrally planned output targets. Private enterprises and foreign invested enterprises are almost non-existent.
A central objective of Chinese government was to make China’s economy relatively self-sufficient. Foreign trade was generally limited to those commodity which unable to obtain or receive the goods in China. The Government’s policy to keep the Chinese economy relatively stagnant and inefficient, mainly because of where the profits of some enterprises and farmers to stimulate competition, in fact, does not exist, price and production controls caused widespread economic distortions. China’s standard of living is much lower than those of many other.
In addition, India is contributing in business process outsourcing improvement for the information technology which has a significant impact for the economic development in South Asia.
The Philippines is improving, because they help to remittances from abroad, they send money to their loved ones from overseas Filipino workers to improve their country.
North Korea shows hammer and sling as a symbol for their communistic views of their economic system in Far East Asia. While South Korea shows modern technology that is influence from Western countries which results an improvement of technology in their designated countries.
Indonesia is a Muslim country, the whole of Asia’s largest population by the Dutch colony. It is based on their banking and finance in the Islamic way of life. This is also the case in Malaysia was a British colony.
After analyze the information of some Asian Countries, I discovered that they are facing several problems in economic development. First, they have low standard of living, low level of production, there is a rapid population growth, they having a high rate of unemployment, lastly, there are over dependence on agricultural production and exportation of raw materials and also the international trade.
Finally, Asian nations are going to play a greater and important role in the world’s economy in the coming future. So they must find out the solution to overcome the problems that I stated out above, to make sure that they can be the leadership of world’s economy.
Economic growth and development of Malaysia
According to the recent The Star’s newspaper, Malaysia economic development is one of fastest and steady in global economic scenario. Malaysia GDP per capita has been estimated to be $15,700 in fiscal year 2008. This is a clear indication of tremendous economic development in Malaysia. Malaysia economy is a middle income country that has developed since 1970’s. It was previously a mere raw materials producing economy, which has evolved now as a developing multi-sector economy. This growth bears testimony to impressive economic development at Malaysia.
Prime Minister Abdullah, after coming to power in 2003, has tried to develop economy of this south Asian country by introducing value added production. He took a number of measures to introduce hi-tech technologies and encouraged investments in high technology industries, medical technology and pharmaceuticals.
Efforts have been made by government of Malaysia to stop its dependence on export products. However, exports of electronics goods have always been a major factor in Malaysia economy. There has been huge profit accrued from export of oil and gas and it has been a major factor for Malaysia economic development. There have been huge profits from high energy prices, although there was high cost of gasoline and diesel fuel. This, however, made Kuala Lumpur minimize financial assistance of government. It has been found that currency value of Malaysia has hiked 6 percent per year when pitted against dollar in fiscal years 2006 to 2008.
Through Ninth Malaysia Plan, a five-year national growth agenda in April 2006 had been forwarded by government. This is a comprehensive plan for national budget from 2006-10. Prime Minister Abdullah has made plans to develop various other areas that may attract people for business investment. There is a 6 percent growth in GDP per year, which is being maintained as per economic goals laid down by prime minister.
Economic development of Malaysia is largely dependent on various factors. Malaysia GDP as per purchasing power parity was estimated to be $397.5 billion in 2008. GDP as per official exchange for 2008 was $214.7 billion. Real growth rate of Malaysia GDP of 2008 has been found to be about 5.5 percent.
Different sectors contribute individually for Malaysia economic development. In financial year 2008, contribution of agricultural sector to Malaysia GDP was 9.7%, industrial sector contributed 44.6% and 45.7% came from service sector. Asian Development Bank (ADB), a Manila-based institution, shows Malaysia GDP to be 5.7 percent in fiscal year 2008.
Model of economy development: The production function
In macroeconomics, the production function is a function which specifies combination of all input from the output. In the macro-economy, production functions are functions that determine the output of a company which entered all combinations of input. A meta-production function comparing the practices of companies that has to change input to output to determine the function of the most efficient production practices of the entity that is, whether the most efficient production practices that qualify or production practices that are actually the most efficient. In these cases, the maximum output production process technology is defined as mathematical function of one or more entered. In other words, given a collection of all technical combination allows the output and input, just include a combination of maximum output for a given set of inputs to the production or function. Production function can be defined as specification of minimum input requirements needed to produce a total output that was, by given current technology. It is usually assumed that the production of unique functions can be built for every production technology.
Assuming that the maximum output possible from the set of technology inputs of all, the economic use in the production function analysis is the abstract essence of the technical and managerial problems associated with a specific production process. Engineering and managerial problems of technical competence is assumed to be broken, so the analysis can focus on the problem of efficiency allocate. States are assumed to make choices about how much each input of allocate factors put to use and how much output to produce, remember the cost (purchase price) of each factor, the sale price of output, and the factors represent technology to determine its production function. Frame results in one or more constant input can be used, for example, capital can be assumed to be fixed (constant) in the short term, and labor and possibly other variables such as input raw material, while in the long run, the quantity of capital and the factors that can be made by the company are variable. In the long term, companies may even have the choice of technology, represented by the various functions of production as possible.
Input to output relationship is non-financial, that the production function relating physical inputs to physical outputs, and prices and the cost is reflected in the function. But the production function is not a complete model of the production process: intentionally abstract from the inherent aspects of physical production process that some would consider extremely important, including error, entropy or waste. In addition, the production functions do not typically model business processes, well, ignoring the role of management. (For primer on the basic elements of the production of Microeconomics theory, see production theory policies).
The main purpose of the production function is to address allocate efficiency in the use of input factors in production and distribution of factory income such factors. Based on certain assumptions, the production function can be used to reduce a marginalized product for each factor, which implies an ideal division of the revenue generated from the output to the income from their every input factor of production.
The saving function
In the saving function, there is a mathematical relation between saving and income by the household sector. Thus, the saving function can be stated as an equation such as a simple linear equation or a diagram indicated as the saving line. This function captures the relationship between savings and income, one of the other sides the relationship between consumer incomes, constitutes a cornerstone of Keynesian economics. The two key function to save the parameters are intercept, which indicates that self-saving, side slope, which is the marginal propensity to save, show that the induced savings. The injection- leakage model used in Keynesian economics is based on the saving function.
Saving function on Keynesian economics is the starting point for determination of equilibrium output injection, leakage model. It captures the household sector in which the relationship between savings and income. As the income for either consumption or savings to use, saving feature is the complementary consumption function. Reflects the fundamental psychological law put forward by John Maynard Keynes, consumer spending (and saving by the household sector) depends on the income and just some of the revenue is used for consumption and saving the rest.
This function is presented either as a mathematical formula, usually as a simple linear equation, graph or savings line. In either form, income is a measure of disposable income, national income and GDP
However, the saving function makes it easy to divide saving into two basic types such as the autonomous saving and Induced saving. Autonomous saving is the intercept term. Induced saving is the slope. Lastly, the slope of marginal propensity to save (MPS) also considered as saving function
The labor supply function
In mainstream economic theory, labor supply is the total number of hours number of a workers want to work in a given real wage rate. From the diagram above, we can see the positive relationship between the wages rate and also the quantity of labor. When the wage rate is low, the quantity of the labor also is low. However, when there is a rose in wage rate will also increase the quantity of labor.
Realistically, the labor supply is the role of various factors within an economy. For example, as a heavy increased of population will make downward pressure on wages which may lead to high unemployment.
Wage rate versus labor leisure
Labor supply curves are derived from the ‘labor-leisure’ trade-off. More hours worked earn higher incomes but necessitate a cut in the amount of leisure that workers enjoy. Therefore, there are two aspects, to provide the necessary amount of labor is due to changes in real wage rates. For example, the real wage rate raises the opportunity cost of leisure increases as the diagram shows above. This tends to cause workers to supply more labor (the “substitution effect”). However, as the real wage rate rises, workers earn a higher income for a given number of hours. If leisure is a normal good – the demand for it increases as income increases – this increase in income will tend to cause workers to supply less labor (the “income effect”). If the “substitution effect” is stronger than the “income effect” then the labor supply curve will be upward sloping and vice versa.
However, from the view of Marxist, a labor supply is a core requirement in a capitalist society. In order to avoid Labor shortage and ensure a labor supply, a large portion of the population must not possess sources of self-provisioning, which would allow them to be independent, and they must instead be compelled, in order to survive, to sell their labor for a subsistence wage.
Economic development theories: Harrod-Domar theory
The Harrod-Domar theory delineates a functional economic relationship in which the growth rate of gross domestic product (g) depends directly on the national saving ratio (s) and inversely on the national capital/output ratio (k) so that it is written a g = s / k. The equation takes its name from a synthesis of analyses of growth process by two economists (Sir Roy Harrod of Britain and E.V. Domar of the USA). The Harrod-Domar model in the early postwar times was commonly used by developing countries in economic planning. With a target growth rate, the required saving rate is known. If the country is not capable of generating that level of saving, a justification or an excuse for borrowing from international agencies can be established. An example in the Asian context is to ascertain the relationship between high growth rates and high saving rates in the cases of Japan and China. It is more difficult to introduce the third building block of a growth model, the labor and population element. In the long run, growth rate is constrained by population growth and also by the rate of technological change.
The Harrod-Domar model developed in the 1930s which suggests savings provides the funds which are borrowed for investment purposes. The economy’s rate of growth depends on the level of saving and the savings ratio and also the productivity of investment. The Harrod-Domar model developed in the 1930’s to analyze the business cycles and later on to ‘explain’ economic growth. As we know, the economic growth depends on the amount of capital and labour. All the developing countries also have an abundant supply of labour. So it is a lack of physical capital that holds back economic growth hence economic development. However, more physical capital generates economic growth. (Use Production Possibility Boundaries to illustrate). Moreover, net investment leads to more producer goods (capital appreciation) which generate higher output and income. Higher income allows higher levels of saving.
There is an implication of Harrod-Domar Model which state that economic growth requires policies that encourage saving and/or generate technological advances, which lower capital-output ratio.
Criticisms of the Model
According to Domer, Domar’s purpose was to comment on business cycles, not to derive “an empirically meaningful rate of growth.” There are several criticisms of this model, First, it is difficult to stimulate the desired level of domestic savings. Second, it meeting a savings gap by borrowing from overseas causes debt repayment problems later. Third, the diminishing marginal returns to capital equipment exist so each successive unit of investment is less productive and the capital to output ratio rises. Forth, the amount of investment is just one factor affecting development for example, supply side approach (free up markets); human resource development (education and training). Fifth, economic growth is a necessary but not sufficient condition for development. Lastly, is the sector structure of the economy important?
Exogenous Growth theory
The Exogenous Growth theory also called as Neoclassical Growth Model of Robert Solow and others places emphasis on the role of technological change. Unlike the Harrod-Domar model, the saving rate will only determine the level of income but not the rate of growth. The sources-of-growth measurement obtained from this model highlights the relative importance of capital accumulation (as in the Harrod-Domar model) and technological change (as in the Neoclassical model) in economic growth. The original Solow (1957) study showed that technological change accounted for almost 90 percent of U.S. economic growth in the late 19th and early 20th centuries. Empirical studies on developing countries have shown different results.
Even so, in our postindustrial economy, economic development, including in emerging countries is now more and more based on innovation and knowledge. Creating Porter’s clusters is one of the strategies used. One well known example is Bangalore in India.
Exogenous growth model or Neo-classical model
The Exogenous growth model was an extension to the Harrod-Domar model which included the new term, “productivity growth”. The most important contributor to this model, Robert Solow; in 1956 developed a relatively simple growth model which fit available data on US economic growth with some success. Solow received the 1987 Nobel Prize in Economics for his work on this model.
Solow extended the Harrod-Domar model by adding labor as a production factor; requiring diminishing returns to labor and capital separately, and constant returns to scale for both factors combined; and also introducing a time-varying technology variable distinct from capital and labor.
The capital-output and capital-labor ratios are not fixed as they are in the Harrod-Domar model. These refinements allowed increasing capital intensity to be distinguished from technological progress.
Short run implication of the model
There are some implications in the short run of the model. First, policy measures like tax cuts or investment subsidies can affect the steady state level of output but not the long-run growth rate. Second, growth is affected only in the short-run as the economy converges to the new steady state output level. Third, the rate of growth as the economy converges to the steady state is determined by the rate of capital accumulation. Forth, Capital accumulation is in turn determined by the savings rate and the rate of capital depreciation.
Long run implication of model
In neo-classical growth model, the long-run rate of growth is exogenously determined, it is determined outside of the model. A common prediction of these model is that an economy is always converged towards a steady state rate of growth, which depends only on the rate of technological progress and the rate of growth of labor force.
A country with a higher saving rate will experience faster growth, like Singapore had a 40% saving rate in the period 1960 to 1996 and annual GDP growth of 5-6%, compared with Kenya in the same time period which had a 15% saving rate and annual GDP growth of just 1%. This relationship was anticipated in the earlier models, and is retained in the Solow model; however, in the very long-run capital accumulation appears to be less significant than technological innovation in the Solow model.
Assumption of the Model
The key assumption of the this model is that capital is subjected to diminishing returns. Given a fixed stock of labor, the impact on output of the last unit of capital accumulated will always be less than the one before. Assuming for simplicity no technological progress or labor force growth, diminishing returns implies that at some point the amount of new capital produced is only just enough to make up for the amount of existing capital lost due to depreciation. At this point, because of the assumptions of no technological progress or labor force growth, the economy ceases to grow.
Assuming non-zero rates of labor growth complicates matters somewhat, but the basic logic still applies- in the short-run the rate of growth slows as diminishing returns take effect and the economy converges to a constant “steady-state” rate of growth.
Including non-zero technological progress is very similar to the assumption of non-zero workforce growth, in terms of “effective labor”: a new steady state is reached with constant output per worker-hour required for a unit of output. However, in this case, per-capita output is growing at the rate of technological progress in the “steady-state”.
Criticisms of the model
Limitations of the model include its failure to take account of entrepreneurship (which may be catalyst behind economic growth) and strength of institutions (which facilitate economic growth). In addition, it does not explain how or why technological progress occurs. This failing has led to the development of endogenous growth theory, which endogamies technological progress and/or knowledge accumulation.
Surplus Labor Model: Lewis-Ranis-Fei (LRF) theory
The Lewis-Ranis-Fei (LRF) theory of Surplus Labor is an economic development model and not an economic growth model.
Economic models such as Big Push, Unbalanced Growth, Take-off, and so forth, are only partial theories of economic growth that address specific issues. It is a model taking the peculiar economic situation in developing countries into account: unemployment and underemployment of resources (especially labor) and the dualistic economic structure (modern vs. traditional sectors). This model is a classical model because it uses the classical assumption of subsistence wage.
Here it is understood that the development process is triggered by the transfer of surplus labor in the traditional sector to the modern sector in which some significant economic activities have already begun. The modern sector entrepreneurs can continue to pay the transferred workers a subsistence wage because of the unlimited supply of labor from the traditional sector. The profits and hence investment in the modern sector will continue to rise and fuel further economic growth in the modern sector. This process will continue until the surplus labor in the traditional sector is used up, a situation in which the workers in the traditional sector would also be paid in accordance with their marginal pr
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