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Sustainable Prosperity Through Qualitative Growth. An Economic Analysis Using The Example Of China

Bachelor Thesis 2012 37 Pages

Economics - International Economic Relations

Excerpt

Table of Content

List of Figures

List of Abbreviations

Brief Summary

1. Introduction and leading question

2. The notion of economic growth and prosperity
2.1 Economic growth in terms of quantity and quality
2.2 Measuring economic growth
2.3 Political and social dimension of economic growth
2.4 Innovation
2.5 How to measure innovation
2.6 Prosperity and sustainable development

3. Striving for economic growth
3.1 Potential dynamics and structure dynamics
3.2 Qualitative Growth

4. China’s economic rise - potentials and threats
4.1 Return of a world power
4.2 Threats to China’s prosperity
4.3 China’s potential for sustainable prosperity
4.4 Interpretation and outlook

5. Conclusion

List of References

List of Figures

1 Subjective well-being by level of economic development

2 OECD and Non-OECD Energy Consumption

3 Hourly compensation costs of manufacturing employees in selected economies and regions

List of Abbreviations

Abbildung in dieser Leseprobe nicht enthalten

Brief Summary

This bachelor thesis with the titleSustainable Prosperity Through Qualitative Growth - AnEconomic Analysis Using The Example Of Chinais analyzes the theoretical framework of economic growth and how it leads to sustainable prosperity. It propounds the notion of prosperity and sustainable development and thus explains the social, ecological and subsequently political dimension of economic growth.

The found insights are applied to the real-life example of the Chinese economic development of the past three decades to draw conclusions and explain why prosperity can be sustainable and which way leads to this goal.

1. Introduction and leading question

The Western world has seen tremendous growth in economic output and also national wealth: All of that started, as we know, with the Industrial Revolution in Great Britain in the second half of the 18th century. Drivers of this dramatic change were technological innovations like the steam engine or the spinning jenny. Thus manufacturers were enabled to multiply their output and produce every single item in a precisely alike manner, which manual production processes could not achieve in the very same way. So they were not only able to produce more but also produce with a higher and consistent quality. The new factories offered work and income to a vast number of peasants, who had before been caught in a feudal agricultural production system. That led to a sharp increase in per capita income and produced national wealth for the first time in history.

This Bachelor Thesis with the title “Sustainable Prosperity Through Qualitative Growth - An Economic Analysis Using The Example Of China” is aiming at propounding what economic growth means in terms of quantity and quality. The paper shall clarify what the drivers of economic growth are and will also deal with what the impacts to society and the environment are, when the economy starts to grow in the way it did in 18th century England. The role of innovation is apparently a crucial one and this thesis shall thus explain how technological progress influences the economic output.

The paper starts with laying the theoretical basis and explaining and defining important terms and notions. This is necessary to understand what this thesis is actually about. Subsequently we go deeper into the topic of qualitative growth.

The example of China will be used to apply the found insights. For that China’s current economic, social, scientific and political situation, including the author’s personal experiences in the country, shall be analyzed and described to draw conclusions for its outlook: Will China be able to achieve sustainable prosperity and can prosperity be sustainable?

2. The notion of economic growth and prosperity

Throughout the years the public established a way of usually ranking countries by their income rather than for instance the social or political system. We speak of low income, middle and high income countries1 or in other words developing, emerging and industrialized countries. The sole focus lies on GDP, the Gross Domestic Product, which defines the value of all goods and services produced by the production factors located within a country within a certain period2. The general notion is, that higher economic growth leads to higher income and prosperity and thus to high quality of life. But Bhutan, a small kingdom, located between India and Tibet, embedded Gross National Happiness into its constitution, to foster the growth of satisfaction instead of simply producing more, hoping to thus achieve happiness3. We thus need to question the classical notion of solely defining wealth and prosperity in material terms.

2.1 Economic growth in terms of quantity and quality

This paper’s title nameseconomic growthas an instrument of striving for prosperity. The term of economic growth describes a change in an economy’s output; with output being the sum of the value all goods and services produced4. That brings us back to GDP, meaning that economic growth is the change in GDP. If the change is positive, we speak of growth and shrinkage in the opposite case. Another phenomenon is stagnation, which takes place, when the change in output is very small or zero5.

We shall here use the term Gross Domestic Product instead of Gross National Product (GNP), because economic changes do not only happen within national borders, but also regions or special political, economic or financial zones, like the Euro zone. So observations of economic growth can be made for different groups that are linked in a way. GNP and GDP basically have the same meaning, with GNP restricting observations to nations; we are going to come back to that in 2.2.

Economic growth - be it positive or negative growth - is a continuous phenomenon. Thus economic growth is simply a change in output compared to a previous point in time4.

Changes in growth in the short term are economic trends or trade cycles6. Trends and growth are separate terms, although trends depict growth in the short term. Trends appear cyclically and fluctuate stronger, whilst growth is a rather steady process. We thus have to integrate economic trends into our observations, when describing economic growth. When we speak of economic growth, we mean absolute changes in the GDP’s value7compared to a previous period, so quantitative changes. Expressed in a mathematical equation we express growth as follows:

Abbildung in dieser Leseprobe nicht enthalten

Economic growth (g) is therefor the change in the economy’s output (x) from a previous period (t) to the following one (t+1). From that equation we can derive more information. If the economy has a constant growth rate ݃ for a number of n years we rearrange for [Abbildung in dieser Leseprobe nicht enthalten]and obtain:

Abbildung in dieser Leseprobe nicht enthalten8

To calculate the average growth rate we obviously need to know the economy’s output ݔ in all periods considered and fill them into:

Abbildung in dieser Leseprobe nicht enthalten

Let us now apply these formulas to the economy of Germany using data from the time span 2007 up until 20119. We use the year 2007 as the base year ݔ௧ and 2011 will be [Abbildung in dieser Leseprobe nicht enthalten] . The output ݔ is represented in total GDP in current US$. We obtain the growth rate

Abbildung in dieser Leseprobe nicht enthalten

and an average growth rate of

Abbildung in dieser Leseprobe nicht enthalten

It can be concluded that the German economy grew by around 7% from 2007 to 2011 with an average annual rate of 1.4%.

The growth that we calculated here determines change in the value of the economy’s output. But value can either be increased by simply raising quantity, so producing more, or increasing the quality of products and services provided. Higher quality means higher value, which can be obtained by for example designing products more efficient, like engines, or extending a product’s useful life. The data provided and used in the above example calculation do not explain explicitly, whether the growth was solely produced in a qualitative or quantitative way. That is reasoned as economic growth is a steady structural mutation or change in economic units10from enterprises and sectors to entire economies. Consequently economic growth comprises quantitative and qualitative changes. While one company improves quality and thus value of its products, demand and subsequently supply for another sector rise. Structural changes are an endless process resulting from consumer and producer behavior and new inventions11. We can see that in our saturated Western societies, where a new product like Apple’s iPad causes absolutely new demands. What Oppenländer does not consider are the predictions published by the Club of Rome12, a group of like-minded personalities with scientific or economic background, in 1972 under the title The Limits to Growth.The publication aroused big attention all over the world, because the group put the illusion of endless material growth to an end, because the world’s natural resources are very obviously limited. Oppenländer’s theory of endless growth has its limits, when it comes to material resources. It is evident, that structural changes can lead to unlimited economic changes and thus to growth, but this economic growth can in the very long run not only be based on quantitative growth. One cannot produce more and more, while the resources used become lesser and lesser. That leads us to the conclusion that economic growth must in the long run mutate to qualitative growth to last.

The descriptions of 2.1 assume an open market economy, where supply and demand are dynamic processes mostly conducted by the market agents. We do not want to ignore other types of economies, as they are also able to achieve economic growth. Planned economies, where the entire production and allocation is centrally planned by the government or a government agency, can also face economic growth. Historically seen was the typical instrument is a five-year-plan, like the ones in the former Soviet Union. These plans prescribe precisely quantitative goals, like for example the length of new railway tracks or the minimum economic growth. Another type is the mixed economy with free markets or sectors but strong governmental control and/or planning. We are going to discuss that further in chapter 4.

2.2 Measuring economic growth

Measuring economic growth is everything but easy. As described in 2.1 is economic growth a dynamic and steady process, where sectors or companies as well as demand grow or shrink, new ones appear, while others disappear. This structural change must somehow be measured to be able to determine the rate, by which the economy grows. Precise growth rates simply do not exist.

Oppenländer names two different ways of measuring economic trends13. TheInner Method by Wald reads mathematical regularities or natural rules from past growth trends and thus predicts future developments. The second and more suitable method uses the production factors and includes exogenous and endogenous factors to construct a more dynamic model to measure growth.

In 2.1 we calculated growth rates using Gross Domestic Product. This must clearly be delimited from Gross National Product. When the German car producer Volkswagen produces and sells cars in China, it contributes to GDP in China and GNP in Germany. Volkswagen uses production factors owned by Chinese nationals, who earn an income from the production activity in China. But as Volkswagen is of German nationality the income the company earns from selling the cars contributes to German GNP.

The more popular concept is the one of GDP, because it presents the economic output in geographical areas, ignoring the producer’s nationality, whereas GNP is a great index when it comes to tracing a nation’s economic activities and its successes, which is helpful in a globalized economic environment.

Coming back to GDP: Here we have the choice between using real or nominal GDP. The calculations in 2.1 were based on current prices within one economy, which is the nominal GDP. That makes the nominal GDP dependent on the inflation rate, as it is directly linked to the latest price level developments. This means that a 2% increase in inflation leads to a 2% increase in nominal GDP. Therefor it is rather common to use real GDP to depict economic growth because for its calculation the price level of a base year is used and makes the GDP’s development over time comparable. The concept of real GDP is thus more suitable for calculating economic growth. Crucial instruments for achieving comparability are the Consumer Price Index, depicting the amount of inflation, and the GDP deflator, which simply brings prices down to the level of the chosen base year14.

These ways are helpful when measuring economic growth within one economy respectively one currency zone. But comparing the economic developments between two different ones brings up new difficulties, because we now have to mind the exchange rates between the compared economy’s currencies. Problem here is that exchange rates vary tremendously on a daily basis, without economic output changing at the same pace, which leads to distortions. A further issue arises from the fact that some goods are traded on international markets at common prices, so that in a relatively poorer country the traded good is more expansive than non-traded goods in the same country, because theLaw Of Oneprice states that a good must cost the same all over the world. But for that reason economically poorer countries are overstated, because they appear to be richer, because of these traded goods counting into their GDP15.

The concept ofPurchasing Power Parity exchange rates(PPP) avoids the two problems described above in creating a group of “artificial exchange rates […], which are based on the prices of a standardized basket of goods and services (both traded and nontraded)16”. That makes PPP also helpful for comparing other quantities than GDP.

But GDP itself does not say a lot about how materially wealthy a country’s population actually is, as it only states the sum of all goods and services produced. When we compare a the GDP of Germany with 82 million inhabitants with the GDP of Austria with around 8 million people, we could conclude that Austria is poorer, because its GDP is so much lower. Therefor we need a more informative measurement, which isIncome per Capita, where income stands for GDP. With income per capita we measure how much of the total GDP a single person on average obtains and can from that derive how materially “rich” or “poor” the population is. Total GDP and GDP per capita have both advantages, depending on what we want to find out from our observations17.

2.3 Political and social dimension of economic growth

When we discuss growth, we talk about very abstract processes that involve institutions, regulations and frameworks; formulas describe their act in combination and outcomes. What the theory usually neglects is that these processes affect people’s life and their living conditions.

Economic growth usually leads to prosperity, which can better living conditions for a vast number of people - in the best case for the entire population. But to strive for growth we need people contributing their workforce, their skills and capital. We need natural resources, which are scarce and thus rivaling. Prof. Oppenländer sifts out six arguments for and against economic growth: Growth is wealth-multiplying, conflict-reducing, aim-fulfilling, environmentally harmful, dehumanizing, equality-retarding18. These arguments prove that growth is by far more than an economic phenomenon. It is also a social and political phenomenon and thus a political task. Politicians dedicating to economic growth do not only take over responsibility for a company’s profit, but also for that companies employees, the natural resources used , so for the external effects to environment and society.

Oppenländer states that people’s desires and needs can never be satisfied. With growing income or the satisfaction of existing needs new needs and desires arise, which causes the economy to continue growing19. We need to take into consideration that materially owning and consuming more does not automatically mean a higher degree of happiness. Happiness arises from the satisfaction of immaterial needs, like family and friendship, leisure, a fair and peaceful society and others20.

We can conclude that material wealth is not an appropriate indicator of a society’s prosperity. Prosperity is rather a mélange of the satisfaction of material and immaterial needs. That is why the United Nations Organization (UNO) started publishing the Human Development Index in their annual Human Development Report in 199021. This index shall present a country’s development stage by considering factors, that directly represent the level of living standard, as for example the availability of food and clean water, education, safety, health care and many more. The result comes very close to being a well representative index, although the weighting of the factors is questionable. Availability of food is not as important in the well-off OECD-countries, but plays an essential role in the everyday-life of people in low-income countries. Other economists also developed indexes like Tobin and Nordhaus or Holub22, but they proved to be either insufficient or too specific. When assuming that growth leads to higher living standards, we can find several more arguments that are pro-growth. Higher living standards for a broad number of people lower crime and social conflict potential, because with higher satisfaction of needs there is no reason to steal and when a vast part of the society profits from prosperity, jealousy and thus inner social conflicts can be avoided.

Economic activity, more precisely economic activity after the industrial revolution, is undeniably a burden for the natural environment. The classical production process uses up natural resources and gives back waste products like carbon dioxide or atomic waste. These waste products can in the current huge scope never be absorbed and compensated by nature and leads thus to imbalances and destruction of our natural environment, which at the same time is our habitat. That is also why many leading scientists opt for internalizing these external effects into corporate finance to force the economy to change their habit. Refining our economic activity to a closed circle that recycles waste and does not produce products to be consumed but rather to be used is a crucial task for securing our own future. The facts discussed in this chapter prove that economic growth is a very delicate task, which involves all members of a society and bears responsibility for current and coming generations. The political class as coordinator and regulator takes over a special role with responsibility for the entire society. That does not mean that this is only the politician’s task. Society elects, in a democratic state, its representatives, who usually act according to the public opinion. Also companies produce by the consumer’s demand. Consumers do have the power to force companies to produce sustainably for example. Companies on the other hand have the power to arouse demands with strategic marketing. All agents, society, economy, political class, form a dynamic whole and influence each other. They are only together able to achieve Oppenländer’s pro-arguments, named above, and to avoid the contra-ones.

2.4 Innovation

The title of this paper speaks of qualitative growth. The improvement of quality and living standard is almost always linked to an improvement in technology, which is based on innovation. We only need to look back in history to understand, how technological improvement has raised living conditions for millions and led to economic growth. The Industrial revolution in Europe was caused by progress in production capabilities. The English by that time had the mechanical loom and the steam engine, which gave them the opportunity of producing faster and with less effort a larger amount of products. The living standard of workers by that time had been admittedly bad, but social and political progress took care of that, so that nowadays, more than 150 years later, Europe, as part of the OECD, so a high-income region, is one of the world regions with the highest living standard and economically strong. Innovation played undeniably a crucial role in this progress and this role shall be propounded in this chapter.

Hitherto sophisticated knowledge has been concentrated in the USA, Japan and the EU, but the recent years have shown strong efforts by the emerging countries to build own knowledge pools and become less dependent on know-how from abroad, because it takes more than only producing more to obtain prosperity, it takes knowledge based economic growth.

Innovationis simply put the invention of technology23, with technology being knowledge from all sciences.

Altenburg, Schmitz and Stamm elaborated three system approaches that capture an economy’s ability to strive for becoming an innovative one24.

TheInnovation systems approach25describes the process of innovating as an interactive cycle. Research institutions, financed by public or private agents and often with an official mission, are the producers of knowledge and coordinate the research environment, foster a scientific community and distribute finances to specific projects eligible for funding. The official mission means in this case a formulated intention and the field of action. The German Helmholtz Association for example states that it wants to “contribute to solving grand challenges which face society, science and industry by performing top-rate research in

strategic programs in the fields of Energy, Earth and Environment, Health, Key Technologies, Structure of Matter, Aeronautics, Space and Transport.26” These research institutions are research universities, foundations, institutes or science academies, like the German National Academy of Sciences Leopoldina, which conducts studies with the aim of advising the public and policy makers by studying important issues of global interest. The knowledge produced by the research institutions is put into practice or further used by the private sector. The approach assumes that stronger links between research institutions and private organizations lead to higher quality of the innovation system. Classically it assumed invention systems being limited or expanded to national borders, although the systems can exist in local and regional or international areas. From that can be concluded that innovation is dependent on geographical socio-cultural factors27. The innovation systems approach thus finds part of the explanation of why some countries have a high degree of knowledge while others do not. Admittedly the approach is insufficient when it comes to also considering cooperation between different, trans-regional networks and how they develop with the time.

That is exactly where theGlobal value chain approachsteps in. It explains the development of former or actual low income countries, like China. Producing businesses have been strongly integrated and used in international value chains to manufacture simple finished products or components for foreign western or Hong-Kong Chinese companies. In that process the contractors, calledLead Firms28, order these products and coordinate and supervise the production process. But in the course of that knowledge needs to be transferred to the suppliers, who can thus gain knowledge and benefit from this relationship. Contractors know of course about this and only provide information, where they really have to, so measurements or materials for example. The benefit is substantially stronger in the case of an acquisition. When a supplier is acquired it will no longer be a potential threat to its contractor’s competitive advantage. Another case is, if one company acquires another one it simultaneously acquires its patents, knowledge, the contracts with skilled employees, licenses and so forth. What both cases prove is that the involvement into global value chains opens up opportunities for knowledge sourcing.

[...]


1Cf. The World Bank Group (2012) a

2Weil (2005), p. 5

3Coen, A. (02.12.2011), 40,9 Prozent sind schon glücklich, ZEIT Online

4Cf. Oppenländer (1988), p.1

5 Cf. Oppenländer (1988), p.1 et seq.

6Cf. Oppenländer (1988), p.3

7Cf. Oppenländer (1988), p.2

8Weil (2005), p. 10

9The World Bank Group (2012) b

10Oppenländer (1988), p.1

11Oppenländer (1988), p. 2

12 The Club of Rome (2012), The story of the Club of Rome

13 Cf. Oppenländer (1988), p. 4

14Cf. Weil (2005), p.24

15Cf. Weil (2005), p.25

16 Weil (2005), p.25

17Cf. Weil (2005), p.7

18Oppenländer (1988), p.171

19Cf. Oppenländer (1988), p.172

20Cf. Zabel (2011), p.38

21 Cf. United Nations Organization, Human Development Reports (2012)

22 Cf. Oppenländer (1988), p.173

23Weil (2005), p.217

24Altenburg et al. (2007)

25 Altenburg et al. (2007), p.5

26Helmholtz Association (2012)

27Cf. Altenburg et al. (2007), p.5

28 Cf. Altenburg et al. (2007), p.6

Details

Pages
37
Year
2012
ISBN (eBook)
9783656616214
ISBN (Book)
9783656616191
File size
630 KB
Language
English
Catalog Number
v270717
Institution / College
Martin Luther University – Wirtschaftswissenschaftliche Fakultät
Grade
2,0
Tags
sustainability growth wealth prosperity china economy sustainable growth sustainable properity qualitative growth economic development development economics

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Title: Sustainable Prosperity Through Qualitative Growth. An Economic Analysis Using The Example Of China