Relationship between economic growth and social welfare in sustainable development

Previously, economic growth was associated with development, leading to a race to achieve greater Gross Domestic Product growth rates and higher per capita income at any cost. But people have realized that economic growth is only a necessary condition, not a sufficient condition, for development. In other words, attention should be paid not only to growth rates but also to the quality of growth, the way growth is achieved, who are the players, what mechanisms will take shape, and who will benefit from the growth. As resource-rich countries (oil, precious metals…) authorize transnational companies to explore, export, and share profits, their per capita income increases rapidly and may reach a very high level. But only a small number of upper class people enjoy the benefits. The majority of people remain poor because the economic growth does not affect the rest of the national economy. Foreign currencies pour into the banks of developed countries instead of being re-invested. Such economic growth should not be considered development.

Development should be defined as economic growth combined with progress and social fairness. Progress and social fairness have a very broad definition. To illustrate the relationship between progress, social fairness, and economic growth, this article looks only at major social issues such as population, job generation, unemployment, inequality, and social welfare.

1 – Economic growth is a core driving force for development, and a primary factor and material condition for solving social problems.

Horizontal growth, based mainly on an expansion of “inputs” such as cheap labor, capital, land, and low technology, cannot develop sustainably and doesn’t lend itself to sound social policies. Countries which have escaped less-developed status and moved up to the rank of middle-income countries by pursuing horizontal growth face a potential “growth trap” or “middle-income trap” because their growth is based on the export of natural resources, the use of low technology, and cheap labor. A time will come when the natural resources are depleted, income is insufficient for any further technological reform, and workers are dissatisfied with their low incomes but lack any opportunity to train in the use of new technology and avoid unemployment. Such phenomena become obstacles to any follow-up development process.

Sustainable development requires vertical growth, based on increased productivity of labor through improved qualification of workers, application of advanced science and technology, organization and production management reforms, and more efficient use of materials and natural resources combined with environmental protection. The increase of labor productivity pushes up added value, resulting in more products and services to improve people’s living standards.

Economic growth has a double-sided impact on society. On one hand, it transforms the structure of economic sectors, forms many new sectors, and creates jobs. On the other hand, the application of advanced technology and increased demand for a highly-skilled workforce leads to a redundancy of unskilled labor, an increase in unemployment, and a shortage of skilled labor if education and training fail to meet requirements. Economic growth with a market mechanism with fierce competition serves to accelerate production and leads to a widening disparity between the winners, who earn higher incomes and become better off, and the losers, who become poorer, even bankrupt, creating a huge income gap in the population and forcing the State to regulate income in order to ease social inequality.

2 – Appropriate social policies are tools for sustainable socio-economic development.

Other countries’ experiences have shown that dynamic social policies that include appropriate institutions can create conditions for maintaining political stability, reducing conflicts of interest, and boosting economic growth.

There is an erroneous perception that social policies will siphon off resources and reduce production-centered investment, hampering economic growth.  In fact, the contrary is true: the implementation of social policies is an investment in human resources. Humans are both the creative subject and object served by production. Social policies supporting education, health care, insurance, and so on, which help people increase knowledge, maintain health, and lead a secure life, also boost creativity, labor productivity, and economic growth. A policy of raising incomes not only improves the living standards of the most vulnerable, but also stimulates demand and liquidity, strengthening production.

The experience of other countries with a development roadmap similar to Vietnam’s provides vivid practical lessons in managing the relationship between economic growth and social policies. The main points are these:

First, in removing obstacles to the planned economic mechanism and production development in the earliest stage of the market economy, the goal is to liberate production forces, but too much attention to GDP growth and disregard of social issues hamper the beneficiaries of such GDP growth. A low income level for the majority of the public weakens domestic demand in the long run, negatively affecting the comprehensive development of the labor force. Social development is the most important condition for economic growth and it is necessary to shift from preferring economic development over social development to harmonizing economic and social development.

Second, in the context of dominating poverty and egalitarianism, it may be necessary to boost those people and regions with the greatest potential first. But when a market economy develops, various interest groups benefit from the development to various degrees. When economic growth is achieved through the uneven progress of different social groups, the population will inevitably be divided into groups of greater power and groups of losers.

Although advantaged groups within the population may be small, their benefits are disproportionately greater. They have power in hand and own valuable resources. These powerful groups not only can protect their own interests easily, but can also increase their influence on decision making. The wealth disparity continues to widen, leaving the losers in despair and weakening the foundations of social stability. Clearly, it is essential for the State to set a goal of greater equality and greater fairness.

Third, when the private and mixed economic sectors expand and the state-owned sector shrinks, the gap between the rich and the poor widens. The income disparity between urban and rural populations grows. The government should use redistribution as a leverage tool to regulate incomes and narrow this income gap.

Fourth, economic renewal initially begins in rural areas because the rural areas have land and labor. Later on, farmers become disadvantaged when their land rights are constantly violated. For a long time farmers in Vietnam have had limited access to public services. Now an institutional shift toward rural areas is needed to narrow the gap between rural and urban areas and ensure social harmony.

Fifth, rapid economic growth accompanied by a degrading of culture, politics, and society slows the progress of economic reforms. A degradation of social ethics, a lack of trust, and a poor social welfare system pose grave hindrances to development.

In short, to achieve sustainable development it is crucial to combine economic growth with social progress and fairness.

Major approaches to combining economic growth with the implementation of social policies in Vietnam

Documents of the 11^th Congress of the Communist Party of Vietnam say human beings are the center of the development strategy and the subject of development. It is absolutely essential to care for the Vietnamese people, who are patriotic and aware of their mastery role and their citizens’ responsibilities: intellect, health, excellent work performance, a wholesome lifestyle, kindness, and a sincere international sentiment.

The 11^th Congress of the Communist Party of Vietnam set out a policy of comprehensive development of culture and society in harmony with economic growth. It is necessary to complete the policy system, closely combine economic policy targets and social policy targets, and exercise social progress and equality in every development policy that matches specific conditions to ensure rapid and sustainable development. The 11^th Congress of the Communist Party of Vietnam guided the adoption of policies on education, training, health care, labor and employment, the social welfare system, hunger eradication, poverty reduction, improving incomes and living standards, reducing wealth disparity and the gap in living standards between rural and urban areas, providing public services appropriate to a socialist-oriented market economy, widening social assistance and rescue programs, particularly for the disadvantaged, strengthening the fight against corruption and waste, protecting the  environment, and building new urban and rural areas in a harmonious and sustainable manner.

The 2011-2020 Socio-Economic Development Strategy identifies as one of three breakthroughs the rapid development of human resources, particularly highly-skilled human resources, through a concentration on radical and comprehensive education reform and the coordination of human resources training with the development and application of science and technology. The successful achievement of this breakthrough will boost vertical economic growth, generate jobs, and raise workers’ incomes. In 2010, there were only 200 students per 10,000 people in Vietnam. But skilled workers account for a very small proportion of the workforce, only 13.3%, and workers with college or university qualifications account for only 6%. Vietnam aims to have 450 students per 10,000 people by 2020 and increase the proportion of university qualified workers to 7% and the proportion of workers with at least some vocational training to 55% of the workforce. This is an extremely challenging goal. The report of the 10^th Party Central Committee released at the 11^th Congress of the Communist Party of Vietnam set the requirement of building a sufficiently large and able contingent of teachers as a precondition for achieving these labor targets. Although education should be learner-centered and self-study is primary, teachers still play a decisive role in the quality of education. Without proper investment in education and training, including investment in building the necessary contingent of teachers, achieving this breakthrough will be virtually impossible.

Special attention should be paid to developing a comprehensive healthcare system, improving the quality of health services, and reducing hospital overloads, while ensuring social welfare, completing systems of social insurance, health insurance, and unemployment insurance, and creating more flexible and diverse social assistance and rescue programs. These are two focuses in addition to a breakthrough in education and training. A workforce that has good professional qualifications but is not healthy or is vulnerable to catastrophic risks is not sufficient to achieve sustainable economic growth and improve overall living standards. 

A competitive and free market economy does not automatically promote progress and social equality. Only a market economy under State management can achieve this goal, so it is important to build a strong state apparatus and improve the State’s effectiveness in regulating the market economy. Such regulation must include these measures:

First, creating favorable conditions for the people, particularly the poor, to exercise their right to own, possess, and use production resources known as “profitable properties”. The uneven distribution of production resources such as land, capital, and so on has created extreme income disparity between different social groups. Regulation of income must not only alter the distribution of production results, but also change current models of resource concentration to benefit low-income earners. Studies show that the richest 20% in developing countries receive more than 50% of the national income because they own or control over 70% of production resources such as land, capital, and high-quality labor force.

The State should adopt a mechanism to allow the poor, including poor farmers, to access production “inputs” (credit, fertilizers, seeds, education, training, and so on) and marketing means. The best way to reduce poverty is to help the poor find jobs or generate jobs for themselves. To do this, many countries have given farmers the right to long-term possession and use of land, established banks for the poor, provided vocational training for the poor, encouraged agriculture, forestry, and fishery expansion, reduced or exempted school fees, and opened special classes for poor children funded by the State. One valuable lesson many countries have learned is that it is important to adopt a policy of comprehensive rural development and refrain from an excessive acceleration of urban industrialization that ignores rural industrialization and results in an influx of redundant rural laborers into the cities, raising the number of unemployed people and overloading housing and urban transportation.

Second, reducing the income of the rich. The State levies personal income taxes, corporate income taxes, property taxes, and inheritance taxes. These taxes are collected directly and accumulatively. Of course, the highest tax rate should be bearable and not so high as to eliminate motivation and discourage efforts to acquire a fortune legally through personal effort.

Third, increasing income for the poor and the disadvantaged. The State uses its budget to assist the poor and the disabled through socio-economic programs, subsidy funds, price subsidies, and preferential credits. In addition, citizens are encouraged to donate to the funds for hunger relief, poverty reduction, and natural disaster relief.

The State expands public services, such as public health projects, free hospitals for the poor, clean water, nutrition for pre-school children, and care for lonely elderly and orphans. Given that the majority of poor people in developing countries are farmers, programs of comprehensive rural development should be given a high priority.

Fourth, regulating prices and market supply and demand to ensure stable production and secure livelihoods for low-income earners. In particular, this should include stabilizing prices of essential goods like food and common consumer products, and levying high consumption taxes on luxury items  like cars, refrigerators, air-conditioners, and imported liquors.

Fifth, expanding and diversifying the insurance system. A market economy is especially susceptible to risks, natural disasters, and diseases that impact production and people’s lives, so the State should encourage the expansion and diversification of both state and private sector insurance. The insurance field remains underdeveloped in Vietnam. To date only agricultural insurance has been piloted.

Sixth, reforming the administration, making the state apparatus efficient and transparent, and strictly enforcing laws against corruption, speculation, trafficking, fraud, bribery, and collusion between state employees and rich business interests. The foundation of any breakthrough towards a socialist-oriented market economy must be to complete administrative reforms and create an environment that ensures fair competition.

 Only through these measures can the State uphold its positive aims, avoid the negative side effects of a market economy, and create the necessary conditions for a sustainable economic growth that is in harmony with the social progress and fairness that is part of the socialist orientation./.