Economic Growth of a Country: Meaning and Views

Let us make in-depth study of the meaning and views of economic growth of a country.

Meaning of Economic Growth:

Economic growth has been defined in two ways. In the first place, economic growth is defined as increase in an economy’s real national income or gross national product (GNP,) over a period of time.

In other words, economic growth means rising trend of national product at constant prices. This definition has been criticized by some economists as inadequate and unsatisfactory.

They argue that total national income may be increasing and yet the standard of living of the people may be falling. This can happen when the population is increasing at a faster rate than total national income. For instance, if national income is rising by 1.5 per year and population is increasing at 2% per year, the standard of living of the people will tend to fall. This is so because when population is increasing more rapidly than national income, per capita income will go on falling.

Therefore, the second and better way of defining economic growth is to do so in terms of per capita income. Thus, economic growth means the annual increase in real per capita income of a country. Professor Arthur Lewis writes that “economic growth means the growth of output per head of population”.

Since the main aim of economic growth is to raise the standard of living of the people, the second way of defining economic growth which runs in terms of per capita income is considered to be better. However, the concept of economic growth is generally used in both these senses, that is, in the sense, of increase In GNP or in per capita real income over a period. Economic growth of a country is a major measure of macro economic performance of a country.

Another point which is worth mentioning in regard to the definition of economic growth is that the increase in national income or increase in per capita income must be a ‘ sustained increase’ if it is to be called economic growth. By sustained increase in per capita income is meant the upward or rising trend in per capita income over a long period of time. A mere short-period rise in per capita income, such as that occurs within a business cycle, cannot be validly called economic growth.

Now, almost universally, rates of economic growth are measured both in terms of increase in overall Gross National Product (GNP) or Net National Product (NNP) and increase in per capita income. While Gross National Product (GNP) measures the value of total output of goods and ser­vices which an economy is capable of producing, per capita income measures how much of the total value of goods and services which an average person of the community will have for consumption and investment, that is, average level of living of a citizen of a country.

Thus, world organisations such as World Bank and IMF have been employing both these measures of economic growth in their annual World Development Reports for comparing growth and levels of living of the developed and the developing countries. In India also our Planning Commission, Central Statistical Organization (CSO), and Reserve Bank of India have been measuring economic growth on the basis of both overall GNP or GDP or NNP and per capita income.

The recent estimates of annual growth in GNP and per capita income are given in Table 3.1. This table reveals an interest­ing feature that economic growth achieved in recent years is higher in the developing countries than in the developed countries. However, it should be noted that in the past several decades the present- day developed countries recorded much higher growth rates than the developing countries which remained static for a long period.

As a result, per capita income and levels of living of the people of the developed countries are now much higher as compared to those of the developing countries. The problem of the developing countries is to catch up with the developed countries through attaining rapid economic growth so as to enjoy higher levels of living.

The World Bank and IMF have been estimating economic growth rates of the world as a whole (i.e. global growth rate) and the growth rates of the major economies of the world. In its latest ‘Global Economic Prospects’ report published in June 2013, the World Bank said that India’s gross domestic product (GDP) at factor cost is estimated to grow at 5.7% in fiscal year 2013-14 and then accelerate to 6.5% in 2014-15 and 6.7% in 2015-16.

This World Bank report also cuts its outlook for global growth as well. For the fiscal year 2013-14 it estimated that the world economy will grow at 2.2 per cent. For this slower world growth rate it cited lower than expected growth in China, India and Brazil and a stubborn contraction in Europe as reasons for the slower growth.

According to the report, India’s greater dependence on foreign invest­ment inflows to finance its significantly larger current account deficit compared to the past has increased its vulnerability to a sudden reversal of investor sentiment. “Sev­eral factors could result in a slowing or reversal of investment inflows – an unanticipated monetary tightening in some high income countries; resurgence of debt tensions; escalation of geopolitical conflict; and even disenchantment with the pace or nature of domestic reforms” it said.

 

The World Bank, however; feels that the continued progress in implementing reforms that relieve supply- side constraints, such as reducing energy supply bottlenecks, labour market reforms, improving the business climate, and investing in education, health and infrastructure would be the key to growth.

Views about Economic Growth and Development:

No distinction was drawn between economic growth and development in the beginning of the evolution of economics of development. However, since the seventies it has been thought neces­sary to distinguish between economic growth and economic development. There are two views even about the concept of economic development.

Economic Growth and Economic Development: Traditional View:

The traditional view has been to interpret it in terms of changes in the structure of national product and the occupational pattern of labour force and the institutional and technological changes that bring about such changes or accompany such changes. In this view share of agriculture in both national product and employment of labour force declines and that of industries and services increases.

Various strategies of development which were suggested until ‘seventies’ generally focused on rapid industrialisation so that structural transfor­mation could be achieved. For this purpose appropriate institutional and technological changes were recommended to bring about such structural changes. Thus, C.P. Kindleberger writes, “economic growth means more output and economic development implies both more output and changes in the technical and institutional arrangements by which it is produced.”

Thus, according to this view, economic development implies growth plus structural change. Structural changes refer to changes in technological and institutional factors which cause shift of labour from agriculture to modern manufacturing and services sectors and also generate self-sus­taining growth of output.

An aspect’ of structural change which is of special mention is that during the process of economic development there occurs a shift of working population from low produc­tivity employment in agriculture to the modern industrial and services sectors having higher levels of productivity of labour.

That is, during the process of economic development percentage share of working population in agriculture sharply falls whereas percentage shares of working population employed in modem industrial and services sectors substantially increase.

Along with this change in sectoral distribution of labour force there occurs a change in sectoral composition of national income in which while percentage contribution of agriculture to national income declines, percentage contributions to national income of industrial and services sectors increase. This occurs due to the change in pattern of consumption of the people as economy grows and people’s income increases as well as due to the changes in levels of productivity in the different sectors of the economy.

It is worth mentioning that in this view casual references were made to the role of some social factors such as growth of literacy, education and good health in economic development but they were considered to be of secondary importance.

On the whole, in this view of economic development which generally prevailed till seventies, development was considered to be an economic phenomenon in which benefits from growth in overall GNP or per capita GNP and the structural changes accompany­ing it would trickle down to the poor and unemployed. No separate or special attention was paid to eliminate mass poverty and unemployment and to reduce inequalities in income distribution.

The Concept of Economic Development: The Modern View:

The experience of the developing countries during the sixties and seventies showed that whereas target rates of economic growth were in fact achieved trickle-down effect of economic growth in the form of creation of more employment opportunities, rise in wages and improvement in income distribution did not operate.

The problems of poverty, unemployment and income inequality further worsened instead of getting reduced during the process of growth in the Fifties and Sixties in the developing countries. For instance, in India Dandekar and Rath found that 40 per cent of rural population in India lived below the poverty line in 1968-69. Using somewhat different approach, B.S. Mimhas estimated that 37 per cent of rural population in India lived below the poverty line in 1967-68. Similarly, the magnitude of unemployment and the extent of income inequalities also increased in many other developing countries.

Thus, due to the failure of traditional strategies of development in solving the problems of poverty, unemployment and inequality, it was realised in the seventies that the concept of develop­ment should be broadened so that it should signify that well-being of the people has increased.

This led to the view that economic development should not be judged on the basis of “growth in GNP alone”. Therefore, when we regard the well-being of the masses as the ultimate objective of devel­opment, we have to see whether poverty and unemployment are decreasing and how the increases in gross national product or national income are being distributed among the population.

Economic development will take place in true terms only if the poor people are raised above the poverty line. Late Prof. Sukhamoy Chakravarty rightly writes, “The rate of growth strategy is by itself an inad­equate device to deal with the problems of generating employment opportunities and for reducing economic disparities. Much depends on the composition of the growth process and how growth is financed and how benefits from growth process are distributed.”

It is worth mentioning that there is no guarantee that when there is increase in GNP, employment will also increase. It can happen that with the use of more capital-intensive technique while produc­tion may be increasing at a rapid rate, employment may be falling instead of rising.

According to the modern perception of economic development, rapid increase in GNP secured through displacing labour by the use of capital-intensive technology and thus causing rise in unemployment and under­employment cannot be called true economic development.

Professor Dudley Seers makes the meaning of economic development according to the new perception in the following words:

“The question to ask about a country’s development is therefore: What has been happening to poverty? What has been happening to unemployment? What has been happening to inequality? If all three of these have declined from high levels, then beyond doubt this has been a period of development for the country concerned. If one or two of these central problems have been growing worse, especially if all three have, it would be strange to call the result “development” even if per capita income doubled.”

Recently, the concept of economic development has been further widened so that it now involves not only reduction in poverty, inequality and unemployment but also requires improve­ment in quality of life which includes cleaner environment, better education, good health and nutri­tion.

Thus World Development Report 1991, published by World Bank asserts: “the challenge of development is to improve the quality of life. Especially in the World’s poor countries, a better quality of life generally calls for higher incomes-but it involves much more. It encompasses as ends in themselves better education, higher standards of health and nutrition, less poverty, a cleaner en­vironment, more equality of opportunity.”

Thus the concept of economic development has been greatly broadened. Today, economic development is interpreted as not only in more growth in economic well-being but also in terms of good quality of life which, according to Prof. Amartya Sen, consists in enlargement of opportunities for people and freedom of human choices.

This new concept of development includes achievement of freedom from servitude to ignorance and illiteracy. It also includes enjoyment of human rights. Thus United Nations ‘Human Development Report’ of 1994 in the writing of which Prof. Amartya Sen made a significant contribution, asserts, “Human beings are born with certain potential capabilities.

The purpose of development is to create an environment in which all people can expand their capabilities, and opportunities can be enlarged for both present and future generations……. Wealth is important for human life, but to concentrate on it exclusively is wrong for two reasons.

First, accumulating wealth is not necessary for the fulfillment of some important human choices….

Second, human choices extend far beyond economic well being”.

In his recent book, Amartya Sen writes “Economic growth cannot be sensibly treated as an end in itself. Development has to be more concerned with enhancing the life’s we lead and the freedoms we enjoy.”

On the basis of various ingredients of good quality of life and other criteria such as enlargement of human choices and freedom a human development index is prepared by United Nations Development Programme (UNDP). This human development index is considered as a better indicator of economic development. We now explain below the concept of human development index and to show where India stands in the ranking in terms of this human development index.