Does Prosperity Require Economic Growth?

Prosperity is often defined as a continuous improvement in living conditions. However, does economic growth necessarily play a role in achieving prosperity? This article explores the relationship between economic growth and prosperity, examining the perspectives of basic economics, definitions, and empirical evidence from countries at different income levels.

Defining Prosperity and Economic Growth

The concept of prosperity can vary widely, but for the purposes of this discussion, let us define it as having living standards similar to those seen in high-income countries. Economic growth, on the other hand, typically refers to an increase in a country's per capita GDP over time. The relationship between these two concepts is complex and multifaceted.

Economic Growth and Per Capita Income

Basic economics suggests that for a nation to experience positive changes in the standard of living, the overall economic pie must grow, and this growth must be distributed among the population. Assuming a constant population and a divided economic pie, it becomes evident that each individual can only have more by making the economic pie larger.

However, the situation is not as straightforward for countries that already enjoy high living standards. For instance, the United States and the UK saw per capita GDPs of $56,116 and $41,801, respectively, in 2015 (in current international dollars). These countries could theoretically maintain their current level of prosperity by keeping real GDP growth equal to the population growth rate. This scenario, while technically possible, raises questions about its desirability and sustainability.

Low-Income and Middle-Income Countries

For low-income countries like Nepal (with a per capita GDP of $2,462 in 2015) or middle-income countries like India ($6,105 in 2015), economic growth is a necessity for achieving prosperity. These nations do not possess the resources to eliminate extreme poverty solely through income redistribution. Eliminating extreme poverty requires significant investment in infrastructure, education, and healthcare, which are often provided through economic growth.

Empirical Evidence and Theories of Growth

The World Bank’s analysis by Francisco Ferreira and Martin Ravallion, in their paper entitled "Global Poverty and Inequality: A Review of the Evidence," provides a useful framework. They highlight that economic growth tends to be relatively distribution-neutral in developing countries, meaning that inequality increases as often as it decreases. This phenomenon aligns with the saying, “A rising tide lifts all boats,” suggesting that overall improvements in living standards are closely linked to economic growth.

Global Perspective and Historical Evidence

Around the world, if there were any examples of countries achieving prosperity without economic growth, such instances would likely have been widely cited. However, the lack of such examples provides compelling evidence that economic growth is indeed indispensable for poor countries to achieve prosperity. Historical data and global analyses consistently demonstrate the critical role of economic growth in lifting entire populations out of poverty and improving their overall quality of life.

Conclusion

While economic growth is not the sole determinant of prosperity, it plays a crucial role, especially for developing and low-income countries. Achieving prosperity requires a multifaceted approach that includes economic growth, equitable distribution of resources, and sustainable development practices. Understanding this relationship is essential for policymakers and stakeholders aiming to improve living standards globally.