Economic growth has further consequences than expanding real output, including:
- Impact on living standards.
- Impact on the environment.
- Impact on income distribution.
Impact on living standards
Economic growth can lead to higher incomes and improved access to goods and services, ultimately raising living standards. This occurs because:
- GDP per capita increases: if economic growth occurs at a faster rate than population growth, people have higher average income levels.
- Higher consumption of goods and services: people can afford better healthcare, education, and housing, improving quality of life.
Factors affecting the impact of economic growth on living standards
The extent to which economic growth improves living standards depends on:
- Distribution of income: growth benefits all groups if income is equitably distributed, but worsens inequality if concentrated among the wealthy.
- Household spending: economic growth increases consumer spending, which drives demand for more goods and services, stimulating further growth.
- Government spending on merit goods: if growth occurs by an increase in government spending (G) living standards will increase if the government spending is directed in public goods like education, healthcare, and infrastructure.
Growth alone does not automatically improve living standards.
Effective policies must accompany economic growth to ensure efficient resource allocation and inclusive development.
Impact on the environment
Economic growth often comes at an environmental cost, as increased production leads to higher resource consumption and depletion. This is usually driven by unsustainable resource use:
- Rapid industrial expansion can lead to over-extraction of natural resources, threatening future economic stability.
- The "grow now, clean later" approach argues that prioritising growth first and dealing with environmental damage later is preferable, as environmental regulation may slow economic expansion.
Not economic growth itself that harms the environment, but rather how growth is pursued. Sustainable growth policies can reduce environmental damage while maintaining development.
Policy measures to address environmental costs
To mitigate the negative effects of economic growth, governments can implement the following measures:
- Market-based policies: internalising externalities by taxing pollution (e.g., carbon taxes) and encouraging firms to adopt sustainable practices.
- Environmental regulations: imposing legal restrictions on carbon emissions, deforestation, and industrial waste disposal.
- Investment in green technologies: increasing funding for renewable energy sources (wind, solar, hydro...) to reduce dependence on fossil fuels.
Impact on income distribution
Economic growth can either reduce or worsen income inequality, depending on government policies and structural factors.
Growth and income inequality
- If economic growth benefits all income groups, it can lead to higher employment, wage growth, and poverty reduction.
- However, if wealth is concentrated among the rich, income inequality widens, leading to social and economic disparities.
Factors that worsen income inequality
Economic growth can be achieved in many ways. However, some of economic growth drivers are more prone to worsen income inequality, such as:
- Capital-intensive technologies: growth driven by automation and labor-saving technologies can replace low-skilled jobs, disproportionately affecting workers in lower-income brackets.
- Low government investment in human capital: countries that fail to invest in education and skill development create a skills gap, preventing lower-income groups from benefiting from growth.
- Urban-centric growth: economic growth often favors urban areas, leaving rural populations behind and deepening regional inequalities.
Economic growth and its impact on living standards: China
Who/Where: China.
When: 1990s to 2010s.
What: China experienced rapid GDP growth of 9.5% per year, transforming it into a global economic powerhouse.
Why?
Export-led growth and manufacturing dominance:
- China developed a large manufacturing hub, focusing on export-oriented industries.
- Economic reforms shifted China from central planning to freer markets, attracting foreign investment and increasing productivity.
- Cheap labor fuelled the expansion of low-cost production, boosting exports and GDP.
How?:
China’s economic growth follows the aggregate demand formula: C + I + G + (N-X):
- Net exports (NX): China’s exports consistently grew, making it the world’s largest exporter by 2009.
- Government spending (G): Infrastructure projects, such as high-speed rail and urbanisation efforts, increased economic activity.
- Consumption (C) and investment (I): Rising incomes led to higher domestic consumption, and businesses continued investing in industrial expansion.
So?:
- Environmental damage increased:
- COâ‚‚ emissions per capita rose from 2 metric tons in 1990 to 8 metric tons in 2021, as industrial output and energy consumption surged.
- Heavy reliance on coal-powered energy contributed to air pollution and climate challenges.
- Worsening income inequality:
- China transitioned from a moderately unequal country in 1990 to one of the most unequal today.
- Wealth concentration grew as corporations and certain groups benefited disproportionately from economic expansion, aligning with government priorities for growth.
- Improvements in living standards:
- Urbanization and business growth provided better infrastructure, services, and job opportunities.
- Nominal GDP per capita rose from $380 in 1990 to $12,500 in 2021, far exceeding the average 5% inflation rate since the 1990s.
- Despite progress, China did not rank in the OECD Better Life Index, indicating that income gains did not fully translate into well-being improvements.
