ECONOMICS ASSESSMENT

Economics Assessment



Economics Assessment

Growth and Development

There is a clear difference between the Economic Growth and Economic Development. The concepts have two different functions and their role is different with each other in the economic world. The world economy appeared to start the year well but it all ended badly. It began with the prospect of a continuing recovery from the Great Recession of 2008-09 but from late spring the outlook deteriorated rapidly. By December there were widespread fears of renewed recession; the sovereign debt crisis in Europe was threatening renewed turbulence throughout the global economy; and the managing director of the IMF was raising the spectre of a return to the 1930s. In April the IMF concluded that the recovery had “solidified” and was continuing “broadly as anticipated”, that is, towards a rise in global output of about 4.5 per cent in both 2011 and 2012 (Alesina & Rodrik, 1994, 90).

At the end of May the OECD similarly judged the global recovery to be “firmly under way” and it, too, was expecting similar growth rates of global GDP. With business confidence rising, governments were urged to stabilize and reduce high levels of public debt as soon as possible. By January 2012, however, the estimate for growth in 2011 was 3.8 per cent, falling to 3.3 per cent in 2012. The deterioration in the global outlook was largely due to the developed economies. In the spring the IMF was expecting these to grow by an average of 2.4 and 2.6 per cent in 2011 and 2012, respectively, but by the end of the year these forecasts were revised to 1.6 and 1.2 per cent. Specific factors, such as higher commodity prices, aggravated the situation and matters were made worse from midsummer by increasing scepticism as to the ability of euro zone leaders to contain the euro zone sovereign debt crisis. Matters deteriorated further in September when revised data for the US revealed that the slowdown in the early months of the year had been underestimated and that GDP had decelerated sharply in the second quarter in Europe, Canada and Japan, the last reflecting the consequences of the March earthquake and tsunami. But the underlying weakness basically reflected the aftershocks of the financial crisis (Bates, 1988, 3).

A key insight from the work of a number of writers, Gottfried Haberler (1941), Christopher Dow (1998), Carmen M. Reinhart and Kenneth S. Rogoff (2009) was that recessions triggered by banking crises were not only extremely costly in terms of lost output and jobs, but that recovery from them tended to be slow and more protracted than from the more familiar cyclical downturn. This reflected the attempts of households, companies and banks to restore their balance sheets, which in turn reduced spending by consumers and the corporate sector and restricted the supply of credit. The emerging and developing economies were less directly affected by the financial crisis and with reduced, but still rapid, rates of economic growth were able to wind down the fiscal ...