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The costs of economic growth  

 

·        Inequality of income - growth rarely delivers its benefits evenly. It often rewards the strong, but gives little to the economically weak. This will widen the income distribution in the economy.   Typically seen in Brazil, where the rich minority earn the vast majority of the national income.  More growth has seen the rich get richer and the poor get poorer!

·        Pollution (and other negative externalities) - the drive for increased output tends to put more and more pressure on the environment and the result will often be increased pollution. This may be water or air pollution, but growth also creates significantly increased noise pollution. Traffic growth and increased congestion are prime examples of this.  These negative externalities mean that firms will overproduce goods and services, because the private optimum is greater than the social optimum.

·        Loss of non-renewable resources - the more we want to produce, the more resources we need to do that. The faster we use these resources, the less time they will last, and eventually the more expensive they will be to obtain.

·        Loss of land - increased output puts further pressure on the available land. This may gradually erode the available countryside.  E.g. the Masai in Kenya have been banned from their native land in the Masai Mara, which has now become a famous tourist destination as a result of the desire for economic growth.

·        Lifestyle and cultural changes - the push for growth has in many areas put a great deal of pressure on individuals. This may have costs in terms of family and community life.  E.g. in Indonesia the women are being taken out of their homes so that they can work for local factories and firms, thus removing the role of the ‘housewife’.

·        Inflationary pressures - an increase in the national income of a country may result from a shift of the AD curve outwards, which will cause the price level to rise and thus inflation.

·        Local Unemployment – foreign investors may bring about strong competition against domestic firms by offering cheaper goods and services, thus driving local firms out of business.  Also investors may bring their own skilled employment from abroad, and thus the land occupied by the foreign firm cannot be used to employ locals.  Unemployment in certain areas will mean that some structural adjustment policies will be required.

·        Growth of shanty towns – these will develop as more and more people see the ‘bright lights’ of the city and leave all their possessions back in their rural villages, to find no jobs/housing, and thus shanty towns develop, e.g. outside Rio de Janeiro.

·        Balance of payments deficit – as more investors choose to build firms in the developing country more capital goods will be required to be imported, and thus as imports exceed exports, a deficit builds up.

  • Strain on infrastructure – as more businesses invest in the country more vehicles will travel on the roads and a better distribution of water and electricity will be required, and thus if the infrastructure is weak, significant improvements (expensive) will be required.

 

 

 

E-mail Steve Margetts