Explain how economic growth can lead to trade-offs with income inequality and environmental sustainability.
Developing countries such as China have significantly reduced poverty by driving economic growth through industrialisation. However, governments worldwide have come to recognise that such growth often comes with trade-offs, particularly in the form of rising income inequality and environmental degradation.
a. Explain how economic growth can lead to trade-offs with income inequality and environmental sustainability. [10]
Introduction
Economic growth is a fundamental goal for many developing economies as it raises living standards, increases employment opportunities, and reduces poverty. However, the pursuit of growth often involves trade-offs, particularly in terms of income inequality and environmental sustainability. While industrialization, technological advancements, and foreign direct investment (FDI) contribute to higher actual and potential growth, they also create unequal income distribution by disproportionately benefiting high-skilled workers and entrepreneurs. Additionally, increased production and resource extraction associated with economic growth often leads to environmental degradation, as developing economies prioritize rapid industrialization over sustainability measures. These trade-offs highlight the challenges governments face in balancing economic expansion with social equity and environmental responsibility.
How Economic Growth Can Lead to Greater Income Inequality
A certain level of income and wealth inequality is an inherent characteristic of market economies, but economic growth can exacerbate these disparities due to its skills-biased nature.
Technological Advancements and Demand for High-Skilled labour
Economic growth is often driven by technological innovation and industrialization, increasing demand for high-skilled workers who can operate advanced machinery, manage production processes, and develop new technologies.
This leads to higher wages for high-skilled workers, while low-skilled workers, particularly those in primary industries such as agriculture or basic manufacturing, may see stagnant or declining wages.
Foreign Direct Investment (FDI) and Skilled labour Preference
Many developing economies, including China, have attracted FDI through tax incentives and policies that promote capital-intensive industries.
While FDI contributes to economic growth by increasing investment (I) and shifting both aggregate demand (AD) and long-run aggregate supply (LRAS) rightward, it also favors highly skilled workers who can adapt to new technologies.
As a result, wages for high-skilled workers rise faster than those for low-skilled workers, widening the income gap.
Entrepreneurial Gains and Tax Incentives
Economic growth often encourages entrepreneurship, which drives innovation and job creation.
However, government policies such as corporate tax cuts and incentives tend to disproportionately benefit business owners and investors, further increasing wealth concentration among a small segment of the population.
Example: In China, industrialization and rapid economic expansion led to a surge in urban wages and wealth accumulation among high-skilled professionals and business owners, while rural and low-skilled workers experienced slower income growth, exacerbating income inequality.
Thus, while economic growth raises overall national income, it creates a widening wage gap, particularly between skilled and unskilled workers, leading to a trade-off between growth and equitable income distribution.
How Economic Growth Can Lead to Environmental Trade-Offs
Economic growth is often achieved through increased production and industrial activities, which require higher energy consumption and resource extraction. This can lead to environmental degradation, particularly in developing economies where regulatory frameworks are weak.
Increased Resource Depletion
Economic growth typically increases the production of goods and services, leading to higher demand for raw materials such as metals, fossil fuels, and timber.
This results in greater mining, deforestation, and depletion of natural resources, reducing the long-term sustainability of economic activities.
Rising Carbon Emissions and Air Pollution
Most developing economies rely on fossil fuels as their primary energy source. The burning of coal, oil, and natural gas releases carbon emissions, contributing to global warming and climate change.
Industrialization also leads to air and water pollution, negatively affecting public health and biodiversity.
Weak Environmental Regulations in Developing Economies
In the early stages of development, many governments prioritize economic growth over environmental concerns, leading to lax enforcement of pollution controls and sustainability measures.
The absence of strict environmental policies allows businesses to maximize short-term profits at the expense of long-term ecological damage.
Example: The Three Gorges Dam in China, which generates 3% of the country’s electricity, has contributed to economic development but has also caused massive environmental damage, including landslides, habitat destruction, and displacement of local communities.
Thus, while economic growth enhances living standards and industrial output, it often comes at the cost of environmental degradation, making sustainability a major trade-off.
Conclusion
Economic growth, while essential for poverty reduction and national development, often comes with significant trade-offs in terms of income inequality and environmental sustainability. The technological advancements and foreign investments that drive growth tend to favor high-skilled workers and entrepreneurs, leading to widening income disparities. At the same time, the increase in production and energy consumption results in resource depletion, pollution, and climate change risks.
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