Economic Growth - Disadvantages | tutor2u Economics
Study notes

Economic Growth - Disadvantages

  • Levels: AS, A Level, IB
  • Exam boards: AQA, Edexcel, OCR, IB, Eduqas, WJEC

There are economic and social costs of a fast-expanding economy

The costs and benefits of economic growth - revision video

Inflation risk: If demand races ahead of aggregate supply the scene is set for rising prices – many of the faster-growing countries have seen a trend rise in inflation – this is known as structural inflation

Environmental concerns:

  • Fast growth can create negative externalities e.g. noise pollution and lower air quality arising from air pollution and road congestion
  • Increased consumption of de-merit goods which damage social welfare
  • The huge increase in household and industrial waste. These externalities reduce social welfare and can lead to market failure.

Growth that leads to environmental damage may lower the sustainable rate of growth. Examples include the destruction of rain forests through deforestation, the over-exploitation of fish stocks and loss of natural habitat and bio-diversity from the construction of new roads, hotels, malls and industrial estates.

Growth and the Environment: The Sustainability of Economic Growth

Growth may lead to a rapid destruction of rain forests, the over-exploitation of fish stocks and loss of natural habitat created through the construction of new roads, hotels, retail malls and industrial estates. Some of the main environmental threats include:

  • The depletion of the global resource base and the impact of global warming. There are plenty of examples of the “tragedy of the commons”; the permanent loss of what should be renewable resources from over-extraction of some of our environmental resources.
  • A huge expansion of waste and pollution arising from both production and consumption
  • Over-population (particularly in urban areas) putting increased pressure on scarce land and other resources. More than half of the world's population lives in cities in 2009, most of them in developing countries according to the United Nations Population Fund.
  • Species extinction leading to a loss of bio-diversity - Scientists predict that at least a third and as much as two-thirds of the world's species could be on their way to extinction by the end of this century, mostly because people are destroying tropical forests and other habitats, over-fishing the oceans and changing the global climate.

Economic Growth and Income and Wealth Inequality

Not all of the benefits of growth are evenly distributed. A rise in real GDP can often be accompanied by widening income and wealth inequality in society that is reflected in an increase in relative poverty.

The Gini coefficient is one way to measure the inequalities in the distribution of income and wealth in different countries. The higher the value for the Gini co-efficient (the maximum value is 1), then greater the inequality. Countries such as Japan, Denmark and Sweden typically have low values for the Gini coefficients whereas African and South American countries have an enormous gulf between the incomes of the richest and the poorest elements of the population.

A frequently quoted example of the impact on inequality of rapid growth is China. Between 1990 and 2012, China experienced an annual GDP growth rate of 10.2%. During the same period, inequality increased more than 1.6% per year as measured by the Gini coefficient, making it among the highest in developing Asia.

One of the key reasons for high levels of structural inequality in China is the urban-rural divide. In common with many developing countries, China has a dual economic structure made up of an urban economy based on modern manufacturing and services, and rural areas dominated by more traditional but less productive agriculture. According to a report published in 2013 by the Asian Development Bank, the urban-rural divide now contributes nearly half (about 45%) of China’s overall income inequality

Inequality has also risen in India – again against a background of sustained growth - India enjoyed strong GDP growth between 1990 and 2012—averaging 6.6% annually. But there was also increase in inequality, with the Gini coefficient rising from 32.5 in 1993 to 37 in 2010

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