IB Economics/Development Economics/Consequences of Growth

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5.2 Consequences of Growth[edit | edit source]

Externalities[edit | edit source]

  • Positive: more efficient production methods that are better for the environment, results in larger tax base which may be spent on environment
  • Negative: pollution, overuse of land
  • The market is not responsive to certain externalities and so fails to account for entropy and potentially catastrophic environmental damage
  • Even with government regulation replacing the market, some ecologically relevant externalities may involve damage to the ecosystem itself, and yet the signals going to the regulators may be false and sustainability may not be attainable
  • Environmental Degradation & Pollution
  • Population pressures have led to degradation of the environment:
  • Soil erosion is a serious problem in several countries
  • Forest cover is lost by cutting for fuel
  • Desertification occurs from domestic animals over-grazing land
  • There has been overfishing of lakes and rivers, and now the oceans
  • Most pollution such as depletion of the ozone layer and the greenhouse gasses which are causing global warming are a result of industrialization
  • The question becomes: how can we develop indicators which can be used to adjust national income accounting to alert us when there is a problem and provide a way of evaluating attempts to reverse the degradation?
  • Valuing natural and environmental resources is not simple:
  • Market values can be subtracted from the flow of income generated by a country; while not ideal this does provide an indicator
  • It is usually very difficult to measure changes in quality rather than simple market values of quantities consumed
  • If we attempt to measure resources which have no market value:
  • People may lie about the true value if they think that lying will benefit them
  • Market values usually reflect opportunity costs: the value of substitutes. How do we value a resource for which there is no substitute?
  • Problems With Industrialization
  • Crowding in cities usually leads to pollution, health and sanitation problems, crime and vandalism, and a breakdown in infrastructure
  • The greatest industrial weakness in LDCs is management
  • Labour is more difficult to manage than capital, thus firms use labour saving systems to compensate for weak management
  • Unionization, minimum wage and labour protection laws motivate firms to buy labour saving capital
  • Foreign investors import labour saving capital equipment
  • Prestige attached to industrialization leads to government pressuring for capital intense, modern industries and unnecessary infrastructure:
  • Paid for with taxes on primary sector exports, impoverishing rural areas
  • City infrastructure is heavily subsidized and given priority
  • Firms lobby for subsidized food in the cities
  • Rural-urban migration explodes

Case Study: China

  • China tried to copy the Russian model and put all its investment into industry. Disastrous harvests followed forcing the govt. to change policy:
  • Collectivized farms were abandoned and market driven farmers were encouraged to invest in machinery and chemicals
  • The government restricted rural urban migration, the resulting migration which did occur was not enough to eliminate the rural labour surplus, the government introduced incentives to lower the birth rate
  • Prices to farmers were raised, while input costs were held constant with the result that the terms of trade turned in favour of the agricultural sector
  • Mechanization of farms was slowed down to prevent a drop in demand for surplus farm labour

Case Study: Kenya, Zambia

  • Investment was devoted primarily to industrialization in the cities:
  • Low farm productivity: researchers believed they were a result of diminishing returns because of the limited supply of land, but in fact most African countries had low population densities (many still do)
  • New farm lands were opened up, populations grew rapidly because of the increases in agricultural productivity
  • Eventually the sharp decline in available arable land and the movement of people to the cities reduced per capita food production
  • Resources have been switched back from the cities to the rural areas

Income distribution[edit | edit source]

  • May increase inequality if benefits of growth only seen by a select few, or decrease inequality if benefits seen by entire population.

Fairness of Access

  • Traditional economic growth has attempted to maximize the income per person: making the pie grow bigger and hoping that poorer people with only tiny slices will experience some improvement in welfare
  • More recently, economic development has emphasized the need to distribute the income more evenly amongst persons. Everyone receives a slice which is more fair in size, even if the pie stays the same size.
  • Should growth have priority over the environment?
  • Without adequate environmental protection, development is undermined
  • Without development, resources will be inadequate for needed investments, and environmental protection will fail
  • Poor people have a high marginal propensity to consume compared to rich people who have a high marginal propensity to save
  • Should we reduce poverty by spreading limited resources thinly and see them used more rapidly?
  • Should we allow the rich to accumulate assets knowing they might invest in and take better care of them?
  • People living in poorer countries which are natural resource poor and future generations impoverished by our overused of resources do not have political or economic power to ensure access
  • Uncertainty about environmental systems and their role in our very existence make us wary of engaging in traditional economic net benefit maximization. This is especially true for future generations.

Sustainability[edit | edit source]

  • Economic growth will put pressure on the environment

Sustainable Development: integration of economic, environmental and social components at all levels without destroying resources held in trust for future generations

  • Limits to Growth
  • In the 1960s and 1970s some scientists predicted the end of the world based on physical limits on resources which would restrain economic growth.
  • In the 1980s many prominent studies were published which changed the focus
  • The world’s resources are indeed sufficient to meet long term human needs
  • The uneven spatial distribution of the human population relative to the natural carrying capacity of the environment is of much greater concern
  • There is inefficient and irrational use of natural resources
  • The ability to pollute the world to the point where it is unlivable is likely to happen far more quickly than the exhaustion of natural resources
  • In the 1990s interest has shifted to applying the knowledge accumulated in the natural sciences to the economic process:
  • The scale and rate of throughput, energy and matter passing through economic systems, is subject to entropy, the second law of thermodynamics:
  • Entropy: materials that get used in the economy tend to get dissipated and it requires energy inputs to make these materials useful again
  • Sometimes it is not worthwhile recycling: the cost of transportation required to bring all the used materials together and the energy required to return them to a useful state may cost more than the original materials

Sustainable Human Development (SHD)

  • UNDP (IGO) vision for development that centers on enlarging people’s choices and capabilities, enabling participation in decisions that affect their lives - SHD approach is both inclusive and multisectoral, and works to ensure that the process of development not only generates economic growth, but also distributes its benefits equitably
  • Four key components:
  • Productivity: people must be allowed full participation in the process of income generation and paid employment
  • Equity: people must have access to equal opportunities
  • Sustainability: equity must be ensured not only for the present generations but for future generations as well
  • Empowerment: development must be BY the people, not FOR them - a 'process' not so much an 'end result'