11.

DISPLAYS THE INTEREST ON

CONTRIBUTION SUSTAINABLE DEVELOPMENT
THROUGH COMPARATIVE ANALYSES OF THE
MULTIPLICITY OF THE ECONOMIC
DEVELOPMENT

11.1 Analyses causes of the economic growth emphasizing the importance of economic growth

Definition
Causes of economic growth
Measures of economic growth
Changes of economic structure with economic growth
Cost of economic growth

ECONOMIC GROWTH

DEFINITION OF ECONOMIC GROWTH

ECONOMIC GROWTH IS THE CONTINUOUS INCREASE IN REAL GROSS NATIONAL PRODUCT OR

SUSTAINABLE EXPANSION OF FUTURE GROWTH POTENTIAL.

OR

THE EXPANSION OF THE PRODUCTION CAPACITY OR THE POTENTIAL OUTPUT OF AN ECONOMY.

This shows the quantitative changes of goods and services produced in an economy.

Economic growth is a long term process. Economic growth shows the long term increase in real
gross domestic or national product with the increase in standard of living of people in the country.
Therefore the economic growth is the process of expansion of real product in long term
sustainable way.

Potential output shows maximum goods and services produced by an economy securing long term
production capacity or price stability. This potential output known as the full employment output
level. Ie the real output level that can be obtained when all resources fully and optimum utilized.
The long term trend in real gross domestic product shows the optimum output level.

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 THE DIFFERENCE BETWE EN ECONOMIC GROWTH AND ECONOMIC GROWTH RATE

Economic Growth Rate is the increasing percentage of real gross domestic product compared to the
previous year. It can be calculated as follows.

Economic growth rate=the difference between the real gross

Domestic product in two close years
Gross domestic product of 1st year

This recognizes the change in the real gross domestic product with the previous year and it shows a
temporary growth.

ECONOMIC GROWTH RATES AFTER 1977

Year Economic Growth 1996 3.8

Rate(G.D.P%) 1997 6.3
1977 4.2 1998 4.7
1978 8.2 1999 4.3
1979 6.3 2000 6.0
1980 5.8 2001 -1.5
1981 5.8 2002 4.0
1982 5.1 2003 5.9
1983 5.0 2004 5.4
1984 5.1 2005 6.2
1985 5.0 2006 7.7
1986 43.3 2007 6.8
1987 1.5 2008 6.0
1988 2.7 2009 3.5
1989 2.3 2010 8.0
1990 6.2 2011
1991 4.6 2012
1992 4.3 2013
1993 6.9 2014
1994 5.6 2015
1995 5.5
This shows the fluctuations of the economic growth rate in Sri lank
In 1978 the highest economic growth rate 8.2% was recorded
In 2001 the lowest economic growth rate -1.5% was recorded.

Economic growth is a long term process and to find the economic growth average of the economic
growth rate should be compared.

1978-1987 -5.2% 1998-2007-5.0%

1988-1997-4.8% 2007-2015-.

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 PRESENTING ECONOMIC GROWTH

Economic growth can be presented using two ways.

1. By using Production Possibility Curve 2. By using Aggregate supply

PRESENTING ECONOMIC GROWTH USING PRODUCTION POSSIBILITY CURVE

Economic growth can be presented by the rightward shift of the Production possibility Curve. With
the economic growth the production capacity has expanded and the PPC shift rightwards. In other
words economic growth enables a country to produce more goods and services in any given period
as a result of an expansion of its production capacity.

PRESENTING ECONOMIC GROWTH USING AGGREGATE SUPPLY

Economic growth involves a rightward shift in the economys long run aggregate supply curve. This
corresponds to an increase in the economys level of potential output. An increase in the economys
resource endowment and productivity will enable production of more goods and services at any
given price so that the aggregate supply curve will shift AS1 to AS2. This entails an increase in full
employment output (potential output) increase from Y1 to Y2.

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 THE DETERMINANTS OF ECONOMIC GROWTH

Economic growth can be caused by three factors namely

1. Supply factors
2. Demand factors
3. Allocative factors

SUPPLY FACTORS

Theoretically the determinants of economic growth are the factors that can shift the Production
Possibility Frontier (PPF) or Long Run Aggregate Supply (LRAS) curves to the right. These factors
may be called as supply factors in economic growth. They are the physical and institutional
elements that can enhance production and productivity.

1. Natural resources 5. Social capital

2. Human capital 6. Technological knowledge
3. Physical capital 7. Property rights structure
4. Entrepreneurial ability 8. Economic freedom

NATURAL RESOURCES

Natural capital involves the renewable and non renewable resources which inputs of the
production that are provided by the nature such as land, rivers, canals, mineral resources, etc.

All of the things found in or on the earth; gifts of nature

Examples: land, water, sun, plants, time, air, minerals, oil, etc.

HOW DO NATURAL RESOURCES INFLUENCE ECONOMIC GROWTH?

Countries that have a lot of natural resources are able to use them to produce goods &
services cheaper than a country that has to import natural resources

Some of the countries in the world developed because of large natural stock.

Ex:

- Australia has the natural resources suited to agriculture and mining they have achieved a
higher growth
- Saudi Arabia and Quait have the crude oil resources and they export them and obtain a
higher standard of living

HUMAN CAPITAL

Human capital involves the knowledge and skills accumulated by the labor force. This is the
process of improvement of knowledge and skills of the labors through education, training and
experiences.
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 All of the skills, talents, education, and abilities that human workers possess---and the value
that they bring to the marketplace

Examples: computer/reading/writing/math skills, talents in music/sports/acting,

ability to follow directions, ability to serve as group leader & cooperate with group
members

A countrys Literacy Rate impacts Human Capital--the percent of the population over 15 that
can read/write

HOW DOES HUMAN CAPITAL CREATED?

Human capital can created with the education. In USA the years of individual go to the
school will increase the earning ability. Ie the increase in education by one year leads to
increase in personal income by 10%.
Not only USA other countries also with the educational level earning ability will increase.
Therefore government should invest in education and encourage the people to get benefits
from it. With the education create positive externalities and increase in human capital leads
to economic growth.

PROBLEMS OF HUMAN CAPITAL

But in developing countries main problem is brain drain related to the human capital. The
people who with higher education level immigrate to other countries will create a challenge
for building human capital

HOW DOES HUMAN CAPITAL INFLUENCE ECONOMIC GROWTH?

Nations that invest in the health, education, & training of their people will have a more
valuable workforce that produces more goods & services

People that have training are more likely to contribute to technological advances, which
leads to finding better uses of natural resources & producing more goods

PHYSICAL CAPITAL

Physical capital means the stock of equipments and structures that are used to produce goods and
services. This helps to increase the efficiency. This includes

1. Machinery and equipment 4. Manufacturing firms

2. Highways 5. Ports and Air Ports
3. Buildings 6. Communication networks
HOW DOES PHYSICAL CAPITAL INFLUENCE ECONOMIC GROWTH?

The more Capital Goods a country has the more goods & services them are able to produce.

Money is NOT a capital good, but rather a medium of exchange.

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 ENTREPRENEURIAL ABILITY

The human resource that organizes land, labor and capital is called entrepreneurship.
Entrepreneurs come up with new ideas about what and how to produce, make business decisions
and bear the risks that arises from the decisions. The economists have find the qualitative changes
in entrepreneurship as the main factor that leads to changes in economic development in countries.

Entrepreneurs have 2 characteristics that make them different from the rest of the labor
force:

1. Innovative (have creative ideas)

2. Risk taker (use limited resources in an innovative way in hopes that people will
buy the product)

It can be several things:

Starting your own business

Inventing something new

Changing the way something was previously done so that it works better

HOW DOES ENTREPRENEURSHIP INFLUENCE ECONOMIC GROWTH?

Entrepreneurship creates jobs and lessens unemployment

Encourages people to take risks, and in doing so, theyve created better healthcare,
education, & welfare programs

The more entrepreneurs a country has, the higher the countrys GDP will be

When equal investments made by two countries and capital stock increase at equal speed the
productivity of two countries will change due to the changes in Entrepreneurship.

After the world war II the growth of Germany has accelerated compared because the rigidness of
business community.

Joseph Schumpeter popular economist confirms with a theoretical approach the entrepreneurship
factor can fulfill significant contribution in the economic growth process.

SOCIAL CAPITAL

Social capital refers to those stocks of social trust, norms and networks that people can draw upon
to solve the problems. Social capital includes

- Institutions develop social inter relationships qualitatively and quantitatively

- Morals - Relationship networks
- Society memberships
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 Networks of civil engagement such as neighborhood associations, sports club and cooperatives
are an essential forms of social capital and the denser these networks , the more likely that
members of the community will cooperate for mutual benefit.

The nature of the social capital determined by

- Inter personal integrity

- Inter personal responses
- Conflict solving mechanism

When there is social capital

- The cost of conducting businesses will drop.

- Productivity increase through Interpersonal confidence , coordination , and collectivity

Social capital is productive since two farmers exchanging tools can get more work done with less
physical capital: rotating credit associations can generate pool of financial capital for increase
entrepreneurial activity: and job searches can be more efficient information is embedded in
social networks.

If there is no social capital

- Conflict may arise and - Inefficiencies will create

Therefore social capital is an important determinant of economic growth. This builds collectivity
and increase the welfare.

THE CONTRIBUTION OF SOCIAL CAPITAL TOWARDS ECONOMIC PROSPERITY

AND SUSTAINABLE DEVELOPMENT

1. Society can supervise the government performance through social capital.

Ie in one side the government officers include in social relationship network and the
supervision of government services efficiently is considered as public goods
2. Can solve the conflicts with collective actions.
Ex: efficiently utilize the regional public property resources
3. Expansion of technological knowledge
4. Remove the information imperfections and efficient the market operation
Through this products loans, lands and labour market transactions volume will increase
5. Household can have an informal insurance
Through this they can engage in high earning production activities and production
techniques

TECHNOLOGICAL KNOWLDEGE

Technological knowledge is the understanding best ways of producing goods and services.
Technology means the knowledge related to the efficient techniques that can be appropriate for the
goods and services production. Technological innovations may create in two ways.

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 1. Utilize more efficient techniques and obtain more output from the existing capital
equipments.
Ex: not growing seeds by planting nursery plants can obtain a more harvest
2. Utilize new capital equipments in the production
Ex; instead of calculator discover computer

Technology has various forms.

1. Some technological developments are open to everybody. (common knowledge)Ie when one
person discover certain thing others also aware and follow to use it
Ex: After Henry Ford use the assembling method successfully other producers imitate it
2. Some technological knowledge cannot be extracted by others and been as property
rights.(proprietary)
Ex: Coca Cola soft drinks production receipt known only by the Coca Cola Company
3. Some technological innovations relatively in a short term exist as private property
Ex: certain medicines discovered by the pharmaceutical company obtain a patent right and
the exclusive rights to produce the medicine obtained by that company. At the expiry of the
patent period other companies allowed to make the medicines.

Technology knowledge received in any way this makes significant contribution to the increase in
goods and service production.

THE DIFFERENCE BETWEEN TECHNOLOGICAL KNOWLEDGE AND HUMAN CAPITAL

Technological knowledge means the knowledge of society about the activities in the world.

Human capital show the resources quantity spent on labor force about the knowledge of the
activities in the world.

KNOWLEDGE INDUSTRIES

Knowledge industries means the industries based on knowledge such as

- Electronic communication
- Electronic products
- Software
- Bio Technology

These industries play a significant role in economic growth process.

PROPERTY RIGHTS STRUCTURE

Property rights refer to the laws, rules and regulations that define rights for the use and transfer of
resources. Consider two property rights structures. In one structure people are allowed to keep
the full monetary rewards of their labour. In the other people are allowed to keep only half. Many
economists would predict that first property right structure would stimulate more economic
activity than second.

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 ECONOMIC FREEDOM

Some economists would believe that economic freedom leads to economic growth. Countries which
people enjoy a higher degree of economic freedom develop and grow more quickly than countries
in which people have lesser economic freedom.

The Heritage Foundation and the Wall Street Journal have joined together to produce an index of
index of economic freedom. The index is based on 50 independent variables divided into 10
broad categories of economic freedom such as

The data shows that economic freedom and real GNP per capita are correlated.

DEMAND FACTORS IN GROWTH

To realize its growing potential a country must provide for the full employment of its expanding
supply of resources. This requires a growing level of aggregate demand.

ALLOCATIVE FACTORS IN GROWTH

To achieve its productive potential a county must provide not only for the full employment of
resources but also for full production from them. The ability to expand production is not sufficient
condition for the expansion of total output. The actual employment of expanded resource supplies
and the allocation of those resources in such a way as to get the maximum amount of useful goods
produced are also required. To reach the economys production potential, a nation must achieve
not only full employment but also economic efficiency.

Productive efficiency

Efficiency in Allocating resources

ECONOMIC STABILITY

Economic stability involves the internal stability and external stability. This involves

o Low inflation level and

o Stable level of balance of payments
o Situation without rigid fluctuations in foreign exchange rate

When there is low and stable inflation level and stable foreign exchange rate the economic agents
such as consumers, producers, factor providers , investors and savers take decisions in optimum
way leads to economic growth

Sri lanka like development country for the export competiveness it is important the economic
stability.

Furthermore under the limitations of domestic resource stock required for the economic growth
process attractiveness of foreign investment is important for the economic growth by the capital
accumulation. It is important assuring the economic stability for the attractiveness of foreign
investment.

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 POLITICAL STABILITY

When there is political instability often rituals or army rituals create there may exist various
problems in property rights. Some government obtains power through revolution transfer the
personal property to the government. The investors discourage to invest in these countries.
Business sector also discourage in investment.

Therefore the political stability is important for the economic prosperity. If the country has

- Efficient court system

- Impartial officers
- Stable government statute

will provide more contribution to the economic growth process. These countries will have higher
standard of living compared to the countries with have inefficient court system and corrupted
officials.

GOOD GOVERNANCE

Good governance is an important determinant of economic growth in current context.

Good governance means the institutions and traditions used to control by the authorities in a
certain government should be good.

Good governance can be defined as the process of decision making and the process by which
decisions are implemented or not implemented in good way.

According to the index of good governance prepared by the World Bank six fields have specifically
concerned and classify the countries according to this fields. These fields include

1. Voice and accountability

The participation in selecting the government
Freedom to state opinions
Media freedom
2. Political Stability and Lack of Violence
Freedom from Terrorism
3. Government Effectiveness
Quality of civil service
Ability of government employees
No political influence
4. Regulatory quality
Prepare the correct policies
Not adverse for the private sector growth
5. Rule of Law
Protecting property rights
Independency of police and courts
No criminals

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 6. Control of corruption
Corruption as the abuse of entrusted power for private gain-Transparency
International Organization

When there is good governance process implement economic policies should

- Focused on public needs and

- Transparency

The adverse impacts of poor good governance are bribes and corruption.(Human Development in
South Asia Report-1999). The adverse impacts of poor governance includes

1. This will disorder the investment opportunities and impact in economic growth
2. This will limit the new business opportunities and limit the investments and limits the
productive production opportunities

These reasons will leads to slow economic growth.

THE THEORIES OF ECONOMIC GROWTH

The theories related to the economic growth includes

1. Keynesian approach
2. Theory of stages of Growth
3. Endogenous Growth Theory
4. Harrod Domarr Model

KEYNESIAN APPROACH

The Keynesian Approach of aggregate demand approach which related to the determination of
equilibrium income determination is a short term theory.

THEORY OF STAGES OF GROWTH

American Economist W.W. Rostow states in the economic growth process initially economy from
the underdeveloped primary society stage moves to transfering period and moves to Stage of Take
Off and finally maturity. He highlights the main determinants of economic growth as investment
level and entrepreneurship. Rostow identified 5 stages of growth:

1. The traditional society

2. The pre-conditions for take-off

3. The take-off

4. The drive to maturity

5. The age of high mass consumption

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All advanced economies have passed the stage of take-off into self sustaining growth.Developing
countries are still in the traditional society or the pre-conditions stage. The main reason behind
here is Lack of adequate investment. The financing gap exists.

ENDOGENOUS GROWTH THEORY

Endogenous Growth Theory is the modern theory related to the economic growth and gives a
prominent place for the technology and innovation. This theory explains the productivity growth
directly link with the investment in innovations and human capital. Furthermore this theory
concerns

- The need of government and private sector organizations to encourage innovations and
- The need of incentive system to households and business sector focused on innovation
researches

HAROOD DORMER MODEL

This has introduced by British Economists R.F. Harrod and U.S.A economist Ewsy Domarr in 1840.
The principal strategy for development is mobilization of saving and generation of investment to
accelerate economic growth.

Importance of H-D growth model (AK model): It explains the mechanism by which investment
leads to growth. Investment comes from savings

Rate of economic growth (GNP growth rate) is determined jointly by the ability of the economy to
save (savings ratio) and the capital-output ratio.

g=s/k
g=economic growth rate

s=savings rate

k= capital output rate( how much capital units required to produce one output unit)

ex: if the savings rate is 20% and the capital output ratio is 4% the economic growth rate may 4%.

This assumes savings automatically flows to investment

MEASURES OF ECONOMIC GROWTH

Economists use two alternative measures for the measurement of economic growth. This includes

1. Increase in real gross domestic product or gross national product with the time past
2. Increase in per capita real gross domestic product or gross national product with the time
past

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 It is important that calculating economic growth rate in a one year cannot obtain accurate idea
about the growth process or potential output growth. It can be estimated by calculating the
average values in a long period of time such as 05 years or 10 years.

ECONOMIC GROWTH AND STRUCTURAL CHANGES OF ECONOMY

With the economic growth structural changes can be seen in the economy. The economic structure
in an economy is the organization of economy according to the productive economic activities in
the country.

With the economic growth the changes in economic structure can be identified broadly in three
sectors.

1. Production structure
2. Employment Structure
3. Foreign Trade

CHANGES IN PRODUCTION STRUCTURE

According to the constitution of Gross Domestic Product the production structure of the country
can be identified. In Sri Lanka Census Department classify according to the sources of industries by
13 sectors and further classified into 3 main sectors known as agriculture, industry and services.

With the economic growth the contribution of Agricultural Production to the Gross
Domestic Production will decrease and the contribution of industrial sector and service
sector will increase.
Service sector came into main sector and the industrial sector 2nd place and the agricultural
sector became 3rd place.]

THE ECONOMIC GROWTH IN SRI LANKA AND SECTORIAL CONTRIBUTION 1950-

2012(CURRENT FACTOR PRICES)

Year Economic Agriculture Industry Services

growth
1951 6.2 45.8 20.2 36.8
1960 6.7 37.8 16.8 45.4
1970 4.3 28.3 23.8 47.9
1980 5.8 27.6 20.6 42.8
1990 6.2 26.3 26.0 47.7
2000 6.0 19.9 27.3 52.8
2005 6.2 11.8 30.2 58.0
2006 7.7 11.3 20.6 58.0
2007 6.8 11.7 29.9 58.4
2008 6.0 13.4 29.4 57.2
2009 3.5 12.7 29.7 57.6

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 2010 8.0 12.8 29.4 57.8
2011
2012
2013
2014
2015
Source: Central Bank Report

According to the above statistics the production sector of Sri Lanka has changed. In the previous
stages after the independence 46% of contribution was from Agricultural Sector but in 2010 it was
13% and decrease by 72%.

Industrial sector and service sector related to the period has grown by 50% and 57% respectively.

CHANGES IN EMPLOYMENT STRUCTURE

In these changes in the employment of agriculture, industry and services can be identified.

With the economic growth previously more employed at agricultural sector and the
importance as a source of employment has decrease
By the expansion of industrial and service sector importance as a souce of employment is
increase.

EMPLOYMENT ACCORDING TO THE ECONOMIC ACTIVITIES (2005-2012)

Sector/Year 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Agriculture 30.7 32.2 31.3 32.7 32.5 32.7
Industrial 24.5 26.6 26.6 26.3 25.5 24.2
Service 44.8 41.2 42.1 41.0 42.0 43.1
In 1963 the contribution to the employment by the agricultural sector was 53% but it has drop
to 33% in 2012 by 38%.

Parallel the contribution to the employment by the industrial sector was 10% in 1963 but
currently it has increased by 150% to 25% rate.

Furthermore the contribution to the employment by the service sector was 37% in 1963 but
currently it has increased by 42% to 14% rate.

CHANGES IN FOREIGN TRADE STRUCTURE

Sri lanka export structure constitutes agricultural exports, industrial exports and mineral exports.

With the economic growth the importance of industrial exports will increase and the importance of
agricultural exports will decrease.

When considering about the newly industrialized countries relative importance of industrial
exports is high.

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 In 1950 the contribution to the total export by the agricultural exports was 94% but it
has drop to 36% in 1990 by 62% and in 2009 it has increased to 23%.(it has drop by
76% compared to 1950)
In 1950 the contribution to the total export by the industrial exports was 6.3% but it has
increase to 52.2% in 1990 by 72.9% and in 2009 it has increased to 75%.(it has increase
by 109% compared to 1950)

EXPORT STRUCTURE OF SRI LANKA(2005-2010)

Year Agricultural Industrial Other (Mineral)

2005 18 78 04
2006 19 79 03
2007 20 78 02
2008 23 76 01
2009 24 75 01
2010 24.6 74.3 1.1
2011
2012
2013
2014
2015
Sri lanka import structure constitutes consumer goods, interim goods , investment goods and other
(not classified).

IMPORT STRUCTURE OF SRI LANKA(2005-2012)

Year Consumer goods Interim Goods Investment Economic

Goods Growth
1950 61.0 20.3 18.1 6.7
1970 55.4 20.0 23.6 4.3
1977 42.2 44.1 12.4 4.2
1980 29.9 45.7 24.0 5.8
1990 26.4 51.8 21.9 6.2
2000 17.3 53.5 23.6 6.0
2006 17.4 60.1 21.9 7.7
2007 15.6 59.8 23.8 6.8
2008 15.5 61.9 21.6 6.0
2009 16.8 58.1 24.0 3.5
2010 19.3 57.4 22 8.0
2011
2012
2013
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2014
2015

With the economic growth the shift from the consumer goods imports to interim and capital goods
can be identified.

Compared to 1977 in 2009 the relative importance of consumer goods imports has
decrease by 61% and the interim goods imports has increased by 32% and the
investment goods imports has increased by 75%.

ECONOMIC GROWTH AND GOVERNMENT POLICY

Government policies should be developed for the acceleration of economic growth process. This
will include

1. Promotion of Savings and Investment

2. Encouraging foreign investment
3. Investment in human capital
4. Assuring property rights and promoting political stability
5. Trade liberalization
6. Lowering taxes and reducing regulation
7. Increase in investment in research and development

PROMOTION OF SAVINGS AND INVESTMENT

Because capital is a produced factor of production, a country can change the amount of capital it
has. Thus one way of raising future productivity is by investing more current resources in the
production of capital. To raise the level of capital stock of the economy, it requires that the country
sacrifice the present consumption of goods and services. Encouraging saving and investment
through monetary and fiscal policies is one way that a government can encourage growth.

ENCOURAGING FOREIGN INVESTMENT

Another method of increasing the investment level is foreign investments. Investment from abroad
takes several forms. This includes

1. Foreign direct investment and

2. Foreign portfolio investment
In both cases foreign investors contribute to increase the domestic stock of capital.

FOREIGN DIRECT INVESTMENT

FDI is a capital investment that is owned and operated by a foreign entity. This means investors of
foreign countries come into Sri Lanka and start industries.

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FOREIGN PORTFOLIO INVESTMENT
An investment that is financed with foreign money but operated by domestic residents is called
foreign portfolio investment. This means the foreign investor purchases business shares issued by
domestic companies. This will increase the capital fund of the Sri Lankan companies.

INVESTMENT IN HUMAN CAPITAL

Education-investment is important for countrys long run economic success. One way in which
government policy can enhance the standard of living is by providing good schools and quality
education and encourages the population to take advantage of them.

ASSURING PROPERTY RIGHTS AND PROMOTING POLITICAL STABILITY

Property rights refer to the ability of people to exercise authority over the resources they own. For
this reason judicial system serves an important role in market economy. It enforces property rights,
ensuring buyers and sellers live up their contracts.

In many countries the system of justice does not work well. Contracts are hard to enforce, and
fraud often goes unpunished. To do businesses in some countries firms are expected to bribe
powerful governments and official ministers. Thus economic prosperity depends in part on
political prosperity.

A country with an efficient judiciary system honest government officials and stable constitution
will enjoy a higher economic standard of living than a country with a poor judiciary system, corrupt
officials and unstable political system.

TRADE LIBERALIZATION

Most economists today believe that countries are better off pursuing outward oriented policies that
integrate these countries into the world economy. Trade is in some ways a type of technology. A
country exports tea and import steel the country benefits in the same way if it had invented a
technology for turning tea into steel. A country that eliminates trade restrictions will therefore
experience the same kind of economic growth that would occur after a major technological
advance.

LOWERING TAXES AND REDUCING REGULATION

The reduction of tax rates and regulations would encourage private investment.

INCREASE IN INVESTMENT IN RESEARCH AND DEVELOPMENT

The primary reason that living standards are higher today than they were century ago is that
technological knowledge has advanced. Although most technological advances come from private
research by firms and individual investors, the government has a role in encouraging the research
and development of new technologies. Government can encourage research and development by

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 - Using fiscal policy instruments the government can grant incentives
- Patent system
By allowing inventors to profit from their inventions the patent system enhances the incentive for
individual and firms to engage in research.

THE ADVANTAGES OF EC ONOMIC GROWTH

1. Achieve higher standard of living and reduce the poverty

With the economic growth production capacity of economy will increase. Can produce and
consumes goods and services compared to the previous level
2. Increase in employment level
With the economic growth can achieve a higher employment level. When increase in
production of goods and services the demand for labour will increase aand unemployment
reduce and employment rate will increase
3. Increase in business confidence
The economy with strengthen economic growth can easily build the business confidence.
Economic growth process contribute to
o Look at the economys future with confidence and
o Build a favorable and confidence environment for taking decisions on long term
investments

With the growth of business profits in a accelerated growing economy leads to the growth of
share market. This will again attract more investors.

4. Reduce the budget deficit(Government finance impacts)

Government revenue will increase. As a result of production and income level at the existing
tax rates can earn higher tax income.
Then the government can conduct the government activities include providing public goods
efficiently. Therefore can minimize the pressure on budget and can maintain a successive
government finance management.
5. Strengthen investments
Increase in income and production leads to expansion of demand and investment should be
accelerated for the expansion of production. With the encouragement of investment can
maintain the economic growth process continuously.
6. Increase in income
7. Achieve higher profits by the businesses

THE COSTS OF ECONOMIC GROWTH

1. Environmental problems
With the accelerated economic growth process rapid increase in consumption and
production create environmental problems (negative externalities). This includes
o Environmental pollution o Environmental depletion
o Destroying non renewable resources

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 o Create negative externalities in production and consumption
Because of the economic growth process excessive utilization of environmental resources
results in depletion of the quality of life and may also impede a countrys sustainable
development process.
2. Human obsolescence
The changing technology that is the core of growth, poses new anxieties and new sources of
insecurity for workers. Both high level and low level workers face the prospect of having
their hard-earned skills and experience made obsolete by onrushing technology ,thus
becoming structurally unemployed.
3. Opportunity cost of Economic Growth
It is required to increase in investment or capital goods considerable way to create the
economic growth. When the limited resources in an economy allocated more towards
capital goods will decrease the production of consumer gods. Ie. Forgone the current
consumption and increase the savings can have the ability to increase production of
capital goods. Therefore the opportunity cost of economic growth is the decrease in
current consumption. But for the economic growth current consumption forgone but the
improve in production capacity leads to increase in future consumption

4. Risk of a rising inflation

When the economic growth process accelerated
o The demand for the factors of production will increase tremendously. Therefore the
prices of factors include labour will increase
o Furthermore as a result of increase in income the demand for goods and services will
expand.

With these reasons the increase in prices of goods and factors will create inflationary
situation in the economy.

5. Inequity in income distribution

Mostly the benefits of economic growth will not distribute in all areas in the economy in
equally. Sometimes the wealth may accumulate on small segment. Furthermore
geographically only some regions took place accelerated growth but some with slow growth.
This leads to Regional disparities.
6. Not increase the standard of living
With the economic growth the government income increases , government not invest in the
fields improve welfare ( education, health, shelter, infrastructure ) but invest in purchasing
weapons and military equipments or political projects the public expectation of increase un
standard of living will damage. There is no increase in consumption goods include merit
goods
7. The classification as higher income earning country and loss of international
support to human welfare

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 LESSONS THAT CAN BE OBTAINED BY THE ECONOMIC GROWTH
ACHIEVED COUNTRIES

1. Obtain the complete advantage from the global economy

2. Maintain economic stability
3. Maintain higher savings and investment rates
4. Resource allocation done by market forces
5. Existence of committed credential effective government

THE LIMITATIONS OF THE DEVELOPING COUNTRIES IN ACHIEVING

ECONOMIC GROWTH

1. Low level of labour productivity

2. Under developed Technology and education
3. Labour is inefficiently utilized
4. Low level of natural resources(ex: Ithiopia,Chad)
5. Poor financial system
6. Problems of infrastructure facilities
7. Scarcity of entrepreneurs
8. Inefficient government enterprise

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