Positive and Negative impacts of Economic Growth

Keywords: positive impacts of economic growth, negative effects of economic growth

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The concept of economic growth is one which has attracted the interest and focus of researchers worldwide. Weil (2013, p. 12) refers to economic growth as
a “compelling topic” and a rapidly expanding field, based on the significant increase in the amount of research on this topic. Bolton and Khaw
(2006, p.1) state that economic growth is “the most fundamental indicator of an economy’s health”. They define it as the rate of growth
of the national income of a country, measured by the annual percentage rate of change of country’s gross domestic product. According to Mankiw
(2010), economic growth is one of the reasons why advanced countries have become richer and have improved standards of living. As such, there have been a
number of models aimed at studying economic growth, factors that lead to economic growth, and the reasons behind the differing rates of economic growth
among nations. Economic growth has also attracted attention because of the positive impact it has on society, as it has been associated with benefits such
as increased wealth and standards of living among others. Barro and Sala-i-Martin (2004) state that aggregate growth is possibly the single most important
factor influencing individual income levels. However, economic growth has also had negative impacts on society. This essay shall discuss both the positive
and negative impacts economic growth has had, using practical examples to illustrate these.

Positive impacts of economic growth

Improved living standards

When rich countries today are compared to their own history, there is a vast difference in the standards of living (Weil, 2013). As Weil (2013, p. 22)
observes, there has been an unprecedented increase in living standards in most parts of the world over the last half century. While the life expectancy of
a person born in Japan in 1880 was 35 years, today the life expectancy in Japan has gone up to 83 years. Also, the average worker in the United States
would have had to work for 333 hours to buy a refrigerator. Today, a better refrigerator can be bought in 20% of that time by an average worker. While
having a reading light in the night was once a luxury which only the very rich could afford, today about 75% of the world has access to electricity in
their homes (Weil, 2013, p. 22).

Reduction in poverty

Studies have shown that there is a positive relationship between economic growth and the rate of poverty reduction in developing countries (Pernia and
Quibria, 1999; Tisdell, 2008). Barro and Sala-i-Martin (2004) report that there has been a significant increase in the global per capita GDP from 1970 to
2000 with the average person clearly getting richer over time. They note that there has been a shift in the world distribution of income to the right (See
figures 1 and 2 below) and a positive income evolution in most countries worldwide. This has meant that people are able to afford more and can improve
their quality of life. Weil (2013, p.23) also notes that countries such as South Korea have made the transition “from pauper to an industrial power
in a single generation”.

Figure 1 The World Distribution Of Income In 1970

Source Barro and Sala-i-Martin (2004, p.8)

Figure 2 The World Distribution Of Income In 2000

Source Barro and Sala-i-Martin (2004, p. 9)

Education

While there is a lot of literature on the effect of education on economic growth, with considerable evidence showing that education has a positive impact
on economic growth, reverse causality, i.e. the effect of higher economic growth on education may, as The World Bank (2007b, p. 4) notes “be at least
as important as the causal effect” education has on growth. Asteriou and Agiomirgianakis (2001), in a study of the relationship between economic
growth and education in Greece, found that GDP and all educational variables used are cointegrated, thus indicating that a positive long-run relationship
exists between economic growth and education. They further point out that the higher the level of economic development, the higher the demand for higher
education. This could be because as the economy grows and GDP per capita increases, the government and/or people will, on average, have more to spend on
education, in terms of increasing the number of people who have access to education at all levels, as well as improving the quality of education by hiring
more teachers, a wider access to educational materials, books etc.

Improved technology and infrastructure

As economies continue to experience growth, the amount that is spent on infrastructure such as transportation networks, communication, electricity, gas,
water supply as well as various technologies has also increased. In a study of infrastructure and long run economic growth, Canning and Pedroni (1999)
reported that they found strong evidence of the influence GDP has on the infrastructure stock in a society. This has in turn led to an improvement in
living standards of the populace in general, and has also led to further increases in economic growth (Barro and Sala-i-Martin, 2004; Canning and Pedroni,
1999).

Health

Improvements in living standards due to economic growth have also led to improvements in the health of the population in general, as they have more of
things such as food, shelter and clothing than can enable them to live longer. This is because, as Frenk (2004) notes that poverty, through child
malnourishment and mortality, has an adverse effect on life expectancy. Education can also have a positive impact on health as well (Todaro and Smith,
2011; Weil, 2013). Preston (1976) as cited in Bhargava et al (2001) stated that economic development is the most important factor determining life
expectancy. This positive relationship between health and economic growth was also confirmed in a study by Rivera and Currais (1999) in a study of the
relationship between these two variables. They pointed out that the association between a growth in income and health status goes in both directions.
Todaro and Smith (2011) report that in 1950, 280 out of every 1000 children in the developing world died before the age of five. However, by 2008, this
number fell to 118 per 1000 in low income countries, and 57 out of every 1000 children in middle income countries. Thoa et al (2013) also note that
households which have experienced economic growth spent less on health care, but had better quality care and were better off in terms of utilisation of
health services, further noting that these results were statistically significant.

Some of the reasons for this are that with increased incomes brought about by economic growth, governments as well as individuals are able to spend more on
health in terms of health facilities and infrastructure, improved nutrition and sanitation, research on diseases, innovations in medical technologies etc.
According to Frenk (2004, p. 1), “national impact has a direct effect on the development of health systems, through insurance coverage and public
spending”. Frenk further cites the 1997 WHO Commission on Macroeconomics and Health for a panel consisting of 167 countries, which noted that
although expenditure on health is determined mainly by the national income, it increases faster than income. Thoa et al (2013) also note that, based on
their studies, when the level of government expenditure on health is high, then this has a positive influence on the quality of health care, compared with
low income areas where out-of-pocket (OOP) expenditure on health care has significant negative economic effects on households. This therefore highlights
the influence of economic growth on health. Nevertheless, Weil (2013) points out that at another extreme, in developed countries, diseases brought on by
too much food have replaced those arising from too little food as a major health issue. Although improvements in technology and increased research could
also lead to improvements in health care in general, these problems as well as several others are still associated with economic growth. Other such
problems will subsequently be discussed in the next section.

Negative impacts of economic growth

Creative Destruction

Generally, economic growth is good for the welfare of an economy. However, as Acemoglu (2009) notes, it tends to create both winners and losers.
Schumpeter (1942) also coined the term ‘creative destruction’ which highlights how the progress brought on by economic growth could lead to a
destruction of an old economic structure, in the process of creating a new one. According to Cox and Alm (2008), this implies that a society cannot reap
the benefits of creative destruction without acknowledging that there will be some individuals who will end up being worse off. Acemoglu (2009, p. 8)
states that “productive relationships, firms and sometimes individual livelihoods will be destroyed by the process of economic growth, because growth
is brought about by the introduction of new technologies and creation of new firms”, and these replace firms and technologies currently in existence.
Economic growth also leads to a shift in the structure of production, with a move from agricultural and manufacturing to services. For instance, in the
United States, at the start of the nineteenth century, around 90% of the population was engaged in agriculture. However, in the second half of the
nineteenth century, there was a considerable decline in the percentage of employment in agriculture, and an increase in both manufacturing and services to
over 20% of employment. Over the years, both the shares of employment in agriculture and manufacturing have experienced a decline, while over 70% of the
current U.S. population now work in service industries. Figure 3 below illustrates this pattern.

Figure 3 The Share Of U.S. Employment In Agriculture, Manufacturing And Services, 1800-2000.

Source Acemoglu (2009, p. 698).

Similar trends have also been observed in Britain and all other Organisation for Economic Cooperation and Development (OECD) countries (Acemoglu, 2009;
Mokyr, 1993). This shift in the structure of production may therefore have possible adverse effects on those engaged in agricultural activities. However,
in the long run, this may not necessarily be a negative effect on the whole. This is because with a shift in the structure of production to services, there
has also been an increase in household income in general, as earlier stated. Furthermore, despite a decline in the percentage of people employed in
agriculture, improvements in technology have led to an increase in agricultural output in general (Sachs, 2009; Todaro and Smith, 2011).

Another effect of this process of ‘creative destruction’ is the creation of natural social tension. Because widespread structural
transformations often accompany the growth and development of an economy, some relationships which may have been previously established could be destroyed,
again creating more winners and losers (Acemoglu, 2009).

Health Challenges

As earlier highlighted, there are newer health challenges arising with increases in economic growth. Frenk (2004) points out that health systems
currently face complex challenges due to new pressures such as ageing populations, an increase in the occurrence of chronic illnesses, and an intensive use
of health technologies which, while essential, are also expensive. Bloom and Canning (2008, p. iv) further note that the gains which arise due to economic
growth may possibly be outweighed by the impact increased survival rates have on population growth, “until a fertility transition occurs”.
However, Bloom and Canning (2008) also point out that this can be addressed by, among other things, carrying out low cost health interventions that have
large-scale effects on the health of the population and placing a higher priority on dealing with diseases which are ‘neglected’ but
widespread, i.e. those that while having low mortality rates, have significant effects on productivity. Furthermore, with increased access to information,
campaigns on relatively low cost ways to enhance the health of the population such as eating the right kinds of food in the right portions can minimise the
effect of over-eating, or eating large quantities of food with low nutritional value. Examples of such include the five a day campaign taking place in
various developed countries such as the United Kingdom and the United States, which involves eating recommended portions of fruits and vegetables daily
(Briggs, 2014; NHS Choices, 2014). Briggs (2014, p. 1) states that evidence from studies shows that an increasing the consumption of fruit and vegetables
“is associated with a lower risk of all-cause mortality, particularly cardiovascular mortality”.

Increase in Income Inequality

An increase in income inequality is another possible effect of economic growth. According to Barro and Sala-i-Martin (2004), there has been an increase
in the dispersion of income distribution for a number of countries from the period 1970 to 2000, which as earlier noted, was a period with increased
economic growth. They cite the example of China and some other large countries which have experienced a rise in income inequality. Weil (2013) also notes
that over a 188-year period from 1820 to 2008, the gap between the rich and the poor has widened considerably. In 1820, Weil notes that the income per
capita of the richest part of the world was three times that of the poorest part of the world. However, in 2008, this income per capita ratio increased to
seventeen to one. The experience of South Africa also illustrates this on a country level. As Acemoglu (2009) observes, based on data available from the
start of the twentieth century till the collapse of apartheid, there was a considerable increase in GDP per capita in South Africa. However, black South
Africans, who comprised the majority of South Africa’s population, actually experienced a fall in real wages. Experiences such as these could be one
of the reasons why some sections of society tend to support institutions and policies which do not necessarily encourage growth.

Income inequality is a major issue because it leads to a number of other adverse effects. These include economic inefficiency, undermining of social
stability and solidarity and its unfairness to some sections of the society in general (Todaro and Smith, 2011). As Todaro and Smith observe, as income
inequality increases, the fraction of a population that can qualify for some form of credit reduces. When low income individuals are unable to borrow
money, they may also be unable to afford education for their children, start businesses, and save, thus consequently leading to a lower overall rate of
saving in the society. High inequality also encourages rent seeking behaviour, where the rich focus on encouraging outcomes which benefit them and may also
divert resources from productive purposes which could further enhance growth to other less productive purposes. Nevertheless, increased investments in
public health, education and other relevant infrastructure could help reduce this adverse effect of income inequality.

Increased Pollution

Increased pollution has also been cited as a downside of economic growth. The World Bank (2014) states that while many people have benefited from an
improved quality of life due to economic growth, these gains have not been even, and economic growth usually has negative environmental consequences.
According to The World Bank (2014), the rate at which natural resources, i.e. land, water and air, are being degraded in many countries is
‘alarming’. The health of many is also threatened by factors such as air pollution, waterborne disease and exposure to harmful chemicals. This
is particularly so in developing countries due to their high levels of dependence on natural resources, a limited capacity for adaptation to the changing
climate, and limited resources to remedy the effects of these changes. Furthermore, with changes in the climate globally, there is also an increased risk
of natural disasters and other environmental risks (The World Bank, 2014).

However, there has been conflicting evidence regarding the relationship between economic growth and various environmental indicators. In a study of
economic growth and the environment, using various indicators including concentrations of urban air pollution and various contaminants of river basins,
Grossman and Krueger (1994) found no evidence that an increase in economic growth leads to a deterioration of environmental quality. They observed that
while there was an initial period of deterioration, this was subsequently followed by an improvement phase, thus negating the deterioration effect.
Nevertheless, in a study of the cost of pollution in China, The World Bank (2007a) states that although strong economic growth in China over the last
quarter of the century has had positive impacts on the environment due to improved resource utilisation, increased energy efficiency, pollution control
efforts, technologies which are cleaner and more energy efficient, and implementation of policies for environmental pollution control, new challenges have
also been created. For instance, energy consumption increased by 70% from 2000 to 2005, coal consumption increased by 75%, air pollution emissions have
either gone up or remained the same, and surface water quality deteriorated from 2000 to 2005. This has led to not just increased pollution, but also a
depletion of resources in general.

In a study of the relationship between energy consumption and economic growth using time series evidence from Asian developing countries, Asafu-Adjaye
(2000) reported that high levels of economic growth lead to higher energy demand levels. However, he notes that in order for an increase in the demand for
energy to not have a negative effect on economic growth, then energy conservation policies which are focused on reducing energy usage need to discover
methods of reducing consumer demand. Asafu-Adjaye (2000) points out that this can be done through a suitable mix of taxes on energy, subsidies, as well as
making efforts to encourage industries to adopt technologies which minimise pollution.

Conclusion

Economic growth is a major field of study, due to the significant impact it has on the society in general, as well as the various units that make up the
society. This essay has examined both the positive and negative effects of economic growth on society. Some of the positive impacts include an increase in
wealth/reduction in poverty, improved standards of living, health, education and infrastructure and technology. It was also noted that in a number of
cases, the causality ran both ways. For instance, while economic growth can have positive effects on health, education and infrastructure, these in turn
also have positive effects on economic growth. The negative effects discussed on the other hand include creative destruction, natural social tension,
health challenges, increase in income inequality, increased pollution and a depletion of natural resources. Examples from various countries have been used
to illustrate these effects. In addition, various suggestions and recommendations were highlighted on how to counter some of the negative effects economic
growth can have. While these may not totally eliminate these negative impacts, they can nevertheless go a long way in minimising the negative effects and
enhancing the positive influence economic growth can have.

References

Acemoglu, D. (2009) Introduction to Modern Economic Growth. Princeton Princeton University Press.

Asafu-Adjaye, J. (2000). The relationship between energy consumption, energy prices and economic growth time series evidence from Asian developing
countries. Energy economics, 22(6), 615-625.

Asteriou, D. and Agiomirgianakis, G. M. (2001). Human capital and economic growth time series evidence from Greece. Journal of Policy Modeling, 23(5), 481-489.

Bhargava, A., Jamison, D. T., Lau, L. J., & Murray, C. J. (2001). Modelling the effects of health on economic growth. Journal of health economics, 20(3), 423-440

Canning, D., & Pedroni, P. (1999). Infrastructure and long run economic growth.Consulting Assistance on Economic Reform II Discussion Paper, 57.

Rivera IV, B., & Currais, L. (1999). Economic growth and health direct impact or reverse causation?. Applied Economics Letters, 6 (11), 761-764.

Thoa, N. T. M., Thanh, N. X., Chuc, N. T. K., & Lindholm, L. (2013). The impact of economic growth on health care utilization a longitudinal study in
rural Vietnam. International journal for equity in health, 12(1), 19