Economic Growth and Sustainable Development

Peter N. Hess

• Publisher: Routledge
• Year: 2016
• ISBN:
  9781317525035
• Edition: 2
• Topic: Business
• Subtopic: Business General
• Index: Business

Economic growth, reflected in increases in national output per capita, makes possible an improved material standard of living and the alleviation of poverty. Sustainable development, popularly and concisely defined as 'meeting the needs of the present generations without compromising the ability of future generations to meet their needs, ' directly addresses the utilization of natural resources, the state of the environment, and intergenerational equity.

Now in its second edition, Economic Growth and Sustainable Development features expanded discussion of income distribution, social capital and the insights of behavioural economics for climate change mitigation. Boxed case studies have been added which explore the impact of economic growth on people and countries in both the developed and developing world. This text addresses the following fundamental questions:

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• What causes economic growth?

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• Why do some countries grow faster than others?

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• What accounts for the extraordinary growth in the world's population over the past two centuries?

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• What are the current trends in population and will these trends continue?

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• How do we measure sustainable development and is sustainable development compatible with economic growth?

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• Why is climate change the greatest market failure of all time?

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• What can be done to mitigate climate change and global warming?

With a blend of formal models, empirical evidence, history and policy, this text provides a coherent and comprehensive treatment of economic growth and sustainable development. It is suitable for those who study development economics, sustainable development and ecological economics.

Part I

Introduction

Chapter 1

Introduction to economic growth

Economic growth, a rise in per capita incomes, allows for an improved material standard of living and tends to reduce absolute poverty. The vast span of human existence has been defined by poverty, with little economic growth and minimal population growth.¹ Most of the people were able to earn only enough income to meet the basic needs for food, shelter, and clothing. Good health and the opportunities for education were generally lacking.

Maddison (2005: 5, 8) estimates that over the first thousand years ad world population grew by only a sixth and per capita income was stagnant. Then in the second millennium, world population rose 23-fold and per capita income rose 14-fold. The economic growth, however, was uneven. Real per capita income in Western Europe, the United States, Canada, Australia, New Zealand and Japan—the so-called West—increased, on average, nearly three-fold between 1000 and 1820, the beginning of the “capitalist epoch.”

Still, as noted by the World Bank (2001a: 45), “Until the mid-18th century, improvements in living standards worldwide were barely perceptible … As late as 1820 per capita incomes were quite similar around the world—and very low.” Average incomes at the turn of the nineteenth century might have ranged from $700 in China and South Asia to between $1,400 and $2,100 in the richest countries of Europe. Three-quarters of the world’s population likely lived on less than $500 a year.²

In the West, economic growth then accelerated, with incomes increasing nearly 20-fold from 1820 to 2001. For the rest of the world, economic growth was comparatively modest, with average per capita incomes rising by a third between 1000 and 1820 and then “only” six-fold from 1820 to 2001.

In 2013, per capita real income for the world averaged $12,500. But there were great differences across nations. In the high-income nations average per capita income was $34,300. In contrast, in the low-income nations, average per capita income was only $1,300.³ And, in the twenty-first century, a seventh of the world’s population were living in extreme poverty, i.e., on $1.25 a day or less.⁴

We begin with a brief history of modern economic growth. The measurement of economic growth and the relationship between economic growth and poverty are illustrated. The sources of economic growth are then identified using an aggregate production function. The differential progress of the nations of the world in generating economic growth and reducing poverty are examined.

BRIEF HISTORY OF MODERN ECONOMIC GROWTH

While there are a number of underlying factors, the accelerated economic growth over the past two centuries has largely been attributed to technological progress—with advances in science and engineering yielding inventions and innovations. This is not to imply that technological progress was absent in the centuries before the industrial era. For example, Maddison (2005: 5, 16) cites major developments in shipbuilding and navigation that contributed significantly to the economic growth in Western Europe between 1000 and 1820. The invention ofthe printing press in the fifteenth century helped spread ideas. Clark (2007: 251) lists other innovations in Europe during this medieval period, including: the windmill (c. 1200), mechanical clock (c. 1285), Arabic numerals (c. 1450), potato (1532), knitting frame (1589), telescope (1608), and microscope (1665). In general, though, there was little investment in physical or human capital that would raise labor productivity.

The genesis of the modern era of economic growth was the Industrial Revolution, initially centered in England in the late eighteenth century.⁵ Indeed, Sachs (2005: 33) calls the invention of the steam engine the “decisive turning point of modern history.” Primarily fueled by coal, the steam engine facilitated mass production under the factory system, particularly in textiles and steel. In turn, steel was used in the production of machinery. The steam ship reduced transportation costs and promoted international trade. Fossil fuels also were used in the production of chemical fertilizers, contributing to the gains in agricultural output.

Sachs (2005: 42) notes a second wave of technological breakthroughs in the middle of the nineteenth century in transportation (with the expansion of railroads) and communications (with the telegraph), linking markets across countries and promoting economies of scale in production. The opening of the Suez Canal (1869) and the Panama Canal (1914) further reduced transport costs.⁶ A third wave of technological progress came at the end of the nineteenth century with the widespread use of electricity and the internal combustion engine. The application of nitrogen-based fertilizers boosted agricultural productivity in the early twentieth century.

Economic growth in the industrial nations was interrupted by World War I (1914–18). The war was followed by uncertain economic recoveries, the Great Depression and economic stagnation in the 1930s, and then World War II (1941–45). Important institutions, however, were established in the mid-1940s—the International Monetary Fund, the International Bank for Reconstruction and Development (World Bank), and the General Agreement on Tariffs and Trade—with the intent of promoting economic growth and fostering international cooperation. Soon after, a Cold War between the United States and the Soviet Union emerged, lasting through the 1980s.

Nevertheless, the decades following World War II saw significant economic growth in both the industrial nations and the developing economies of Latin America, Asia, Africa, and the Middle East. International trade grew faster than national outputs.⁷ Maddison (2005: 9) labels the period from 1950 to 1973 a “golden age of unparalleled prosperity … with world per capita GDP rising at annual rate near 3 percent.” In the developing nations, however, explosive population growth accompanied the economic growth, and soon became a global concern.

The 1970s brought rising natural resource prices, in particular sharply higher fuel prices sparked by the Organization of Petroleum Exporting Countries (OPEC) oil embargo. The industrial economies experienced stagflation, a combination of recession and inflation. Indeed, all oil-importing nations suffered significant setbacks. As will be discussed later, the industrial nations resumed economic growth fairly quickly. The oil-importing developing nations, seeking to continue their economic growth, took on substantial external debt, a burden that resulted in a lost decade of development for a number of these nations in the 1980s, particularly in Latin America.

With the dissolution of the Soviet Union and end of the Cold War, the difficult transitions of former socialist states and command economies of Russia and Eastern Europe towards democracy and market-oriented systems characterized the 1990s. This last decade of the twentieth century also witnessed steady economic growth for the United States, fueled in part by the information technology revolution, and somewhat lower growth, but increased integration, of the European economies.

Soon into the first decade of the twenty-first century, the industrial economies slowed down. The shock of the terrorist attacks on September 11, 2001 turned the attention of the United States to homeland security. The US launched incursions into Afghanistan and Iraq. Towards the end of the decade, the US economy fell into a deep recession, prompted by a financial crisis that originated in the overextended housing market. Other high-income economies with similar excessive spending and financial recklessness also suffered sharp downturns. Unemployment rates soared and government budget deficits mushroomed. The sovereign debt problems of some of the weaker economies in the European Union, particularly Greece, not only threatened the nations of the euro zone, but cast a pall over the entire international financial system, significantly hindering the recoveries of the ind...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Dedication
• Table of Contents
• Detailed table of contents
• List of figures
• List of tables
• List of boxes
• Preface
• Acknowledgments
• Part I Introduction
• Part II Theories of Growth
• Part III Macroeconomic Models
• Part IV Demography
• Part V Sustainable Development
• Glossary
• Index