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WHY IS GROWTH OF AN ECONOMY CENTRAL TO THE PROCESS OF DEVELOPMENT?

Updated on March 9, 2011

In a previous hub, the difference between economic growth and development was explained (See Distinction between Economic Growth and Economic Development). Indeed, economic growth precedes economic development and there must be growth, for development to be possible; there cannot be economic development without economic growth. Why is growth central to the process of development? Some answers are provided below.

‘Growth is good for the poor’(see Dollar and Kraay (2002). It is a requisite for poverty reduction. There must be economic growth for poverty alleviation to become possible. There is the need for governments to focus on the involvement of poor people in the development process through upgrading of their skills, offering assistance to raise their health and education level aside ensuring high and sustainable increase in a country’s productive capacity or economic growth. These would afford the populace the opportunity to learn and apply their knowledge and develop. Economic growth is central to most governments’ macroeconomic policies due to the benefits it brings, which include the following:

The first benefit of economic growth is that it leads to an increase in the standard of living of the population. However this may not always be the case especially if the wealth produced within that economy is not fairly distributed. If the economic growth (increase in the GDP) is very low, there is virtually nothing to distribute.

Secondly, economic growth stimulates higher employment. This is because economic growth is associated with an increase in aggregate demand. Aggregate demand is the total demand for goods and services by all demand components in an economy in a year. More output is produced because more resources are employed in order to produce more to meet the increase in demand. Thus the increase in aggregate demand leads to higher output and employment.

Thirdly, economic growth enables the government to generate more fiscal revenue. Economic growth boosts tax revenues and provides the government with extra money to finance spending projects which are mainly developmental in nature. This further provides the government with the capacity to undertake bigger development projects and expand the economy.

Fourthly, growth of the economy increases investment (the accelerator effect). This means rising demand encourages investment in new capital machinery which helps sustain economic growth by increasing long run output within the economy.

Finally, economic growth boosts business confidence as the profits of both small and large businesses rise. Growth normally has a positive effect on firms’ profits, which boosts the stock market, and helps both small and large businesses grow.

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