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IV
Brief Summary
This study with the title Sustainable Prosperity Through Qualitative Growth An Economic
Analysis Using The Example Of China 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
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 18
th
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 book 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 18
th
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
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 countries
1
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 period
2
. 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 happiness
3
. 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 names economic growth as 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 produced
4
. 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 zero
5
.
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 time
4
.
1
Cf. The World Bank Group (2012) a
2
Weil (2005), p. 5
3
Coen, A. (02.12.2011), 40,9 Prozent sind schon glücklich, ZEIT Online
4
Cf. Oppenländer (1988), p.1
5
Cf. Oppenländer (1988), p.1 et seq.
3
Changes in growth in the short term are economic trends or trade cycles
6
. 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 value
7
compared to a previous period, so quantitative changes. Expressed in a mathematical
equation we express growth as follows:
=
8
Economic growth ( ) is therefor the change in the economy's output ( ) 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
and obtain:
= x (1 + )
n 8
To calculate the average growth rate we obviously need to know the economy's output in
all periods considered and fill them into:
=
(
)
1/n
1
8
Let us now apply these formulas to the economy of Germany using data from the time span
2007 up until 2011
9
. We use the year 2007 as the base year
and 2011 will be
. The
output is represented in total GDP in current US$. We obtain the growth rate
=
3,570,555,555,556
-
3,323,807,412,152
3,323,807,412,152
= 0.074 7%
and an average growth rate of
=
(
3,570,555,555,556
3,323,807,412,152
)
1/5
1
= 0.014 1.4% .
6
Cf. Oppenländer (1988), p.3
7
Cf. Oppenländer (1988), p.2
8
Weil (2005), p. 10
9
The World Bank Group (2012) b
4
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 units
10
from 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 inventions
11
. 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 Rome
12
, 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
10
Oppenländer (1988), p.1
11
Oppenländer (1988), p. 2
12
The Club of Rome (2012), The story of the Club of Rome
5
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 trends
13
. The Inner 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
13
Cf. Oppenländer (1988), p. 4
6
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 year
14
.
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 the Law Of One price 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 GDP
15
.
The concept of Purchasing 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 is Income 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"
14
Cf. Weil (2005), p.24
15
Cf. Weil (2005), p.25
16
Weil (2005), p.25
7
the population is. Total GDP and GDP per capita have both advantages, depending on what
we want to find out from our observations
17
.
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-retarding
18
. 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 growing
19
. 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 others
20
.
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 1990
21
. This index shall
present a country's development stage by considering factors, that directly represent the
17
Cf. Weil (2005), p.7
18
Oppenländer (1988), p.171
19
Cf. Oppenländer (1988), p.172
20
Cf. Zabel (2011), p.38
21
Cf. United Nations Organization, Human Development Reports (2012)
8
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 Holub
22
, 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.
22
Cf. Oppenländer (1988), p.173