CONCEPT OF ECONOMIC GROWTH AND ECONOMIC DEVELOPME

CONCEPT OF ECONOMIC GROWTH AND ECONOMIC DEVELOPMENT

Right from Adam Smith, attempts have been made by different scholar to explain economic growth and development. By 1776 when Adam Smith published his first work on political economy title “An Inquiry into the Nature and Causes of Wealth of Nations” also known as “The Wealth of Nations” made him perceived that there will be more output and living standard because of the industrial revolution that transformed the North of England at that time. In the theory of economic growth, he identified both industry and agriculture as playing a vital role. However, that agriculture surplus has a particular important effect on growth and this emerges as both a cause and a consequence of industrialization. He also pinpointed that division of labour in industry has immense potential for growth. Among the benefits of division of labour are increase in dexterity, saves time and invention of better machines and appliances. He however, points out that the degree of division of labour is limited by the extent of the market. Division of labour is profitable only if there is adequate market for goods. Furthermore, he offers the prospect of rising living standards for the masses of the population. Adam Smith gave an important place to saving and accumulation of capital.

The crucial aspects of development theory as propounded by Adam Smith are “Division of Labour” and Capital Accumulation”. According to him, that industry indeed provides the subject which parsimony accumulates, but whatever industry might acquire if parsimony did not save and store up the capital would never be greater. “Parsimony” is the habit of frugality, in this case capitalists. It is clear here that the greatest obstacle to economic development is the deficiency of capital which leads to vicious circle of poverty. The way out of the vicious circle of poverty, according to Smith is if capitalist class saves most of their profits and invest in capital accumulation for accelerating economic growth. In fact, Smith assumed that capitalist class behaves in such a manner and save a very large proportion of their profits. Therefore capital accumulation along with division of labour leads to the increase in industrial output and employment.

Keynesian economics is a theory that advocates for increased government spending which will increase demand and eventually boost growth. The British economists John Maynard Keynes developed this theory in the 1930s during the Great Depression that had defied all prior attempts to end it. Keynes described his promise in “The General Theory of Employment, Interest and Money” published in 1936, it was revolutionary Keynesians believes that consumer demand is the primary driving force in an economy. Hence, the theory supports expansionary fiscal policy. Its main tools are government spending on infrastructure, unemployment benefit and education. He argued that government was necessary to maintain full employment. Keynes advocated deficit spending during the expansionary phase of the business cycle. The drawback of the theory is excessive government intervention (Keynesian policies) increase inflation. One of Keynes’s most fundamental ideology is that what drives a capital economy is the function of saving to finance investment that is, the role of the banking system is to provide credit using the saved funds. Keynes in essence prefers low real interest rates to reduce operating cost.

The Harrod – Domar model is classical Keynesian model of economic growth which is used in development economics to explain an economy’s growth rate in terms of the level of saving and productivity of capital. The model was developed independently by Roy Harrod in 1939 and Evsey Domar in 1946. Although, a similar model had been prosed by Gustav Cassel in 1924. Harrod Domar was initially created to help analyse the business cycle, it was later adopted to explain economic growth. Its implication were that growth depends on the quantity of labour and capital in the sense that more investment leads to capital accumulation which generates economic growth. The model implies that economic growth depends on policies to increase investment by increasing saving and using that investment more efficiently through technological advances. It is important to note that classical economists emphasized the productivity aspect of the investment and took for granted the income aspect. Keynes had given due attention to the problem of income generation, but neglected the problem of productive capacity creation. Harrod and Domar took special care to deal with the problems generated by investment in their models.

It is obvious that economic growth and development have been used interchangeably, although both shows the health of a nation. Other synonymous terms that have been used are economic progress, economic welfare and secular change. Economic development particularly has been defined in different ways, hence makes it difficult to identify a specific definition of economic development. Scholars such as Hicks and Schumpeter have been able to distinguish economic growth from economic development. According to Hicks, economic development refers to the problem of underdeveloped countries and economic growth to those of developed countries. Hicks further pointed out that the problem of underdeveloped countries is concern with the development of unused resources, even though their uses are well- known, while those of advanced countries are related to growth, most of their resources being already known and developed to a considerable extent. This definition has been criticized on the basis that development and growth have nothing to do with the type of economy. Schumpeter makes the distinction clearer by defining development as a discontinuous and spontaneous changes in the stationary state which forever alters and displaces the equilibrium state previously existing, while growth is a gradual and steady change in the long run which comes by about by a gradual increase in rate of savings and population. The view of Schumpeter has been widely accepted and elaborated by majority of economists.

There is difference between these two concepts; economic growth is generally define as the increase in the value of output that is, goods and services of a nation within a period of time and the value of output is measured as Gross Domestic Product (GDP). For instance, Jhingan (2003) define economic growth as the process whereby the real per capita income of a country increases over a long period of time and is measured by the increase in the amount of goods and services produced in a country. Economic growth according to Dwivedi (2004) measures a percentage change in GDP or GNP. On the other hand, development is the increase in a country’s citizens ‘quality of life which is measured using Human Development Index (HDI). This means that development is not just increase in a country’s GDP, but considers intrinsic personal factors such as poverty rate, life expectancy, illiteracy rate, leisure, freedom from oppression, environmental quality and many more that is, economic, social and environmental factors are captured in describing development. It is important to note that country’s GDP does not include intrinsic development factors already mentioned. The World Bank had also stated that the challenges of development is to improve the quality of developing countries not in GDP, GNP and per capital income, it also involves giving the people better condition of health, clan environment, better education, better nutrition, less poverty, more quality opportunity, richer cultural life. This means that development is multi facet because it encompasses economic, social and environmental factors.

In spite of these obvious differences, economic growth and economic development are still used as synonyms. For instance, development was seen in Nigeria prior to 1970 as economic variables such as Grass National Income (GNP), GDP, and per capita income. After 1970 the problem of poverty, inequality of income distribution, unemployment cases kept on rising in Nigeria despite increase in GDP. It was that time developmental issue began to change, government started grappling with poverty, unemployment and other societal problems that led to the introduction of poverty alleviation programmes, unemployment programmes etc. The term “jobless growth” and “inclusive growth” also e

merged.