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THE NEW ECONOMY: EFFICIENCY, EQUITY AND SUSTAINABLE ECONOMIC

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 THE NEW ECONOMY: EFFICIENCY, EQUITY AND
SUSTAINABLE ECONOMIC GROWTH

Dumitru-Alexandru BODISLAV
PhD. Candidate, Academy of Economic Studies Bucharest
[email protected]

ABSTRACT
The purpose of this paper is to review and design a new approach for economic growth by redefining
the players (the economic agents, the rational beings), the scene (the market), the director (the
government) and their goals (economic growth and a higher level of welfare). All these components
evolved through time and this research underlines the evolution of economic growth and the
sustainable solution offered for the new economy. The result will be a general guideline for a social,
political, economical and ecological approach for a higher level of social welfare and a better
mechanism for obtaining economic growth.

KEYWORDS
Economic growth, efficiency, equity, sustainability

1. THE ROLE OF THE MARKET AND THE GOVERNMENT

To analyze the concept of economic growth it is needed to start with the entire play,
from the scene – the market and the director – the government to assure the quality of the
play and the evolution to new peaks.
The accepted worldwide definition for the market is that it represents any place where
are sold and bought goods and services. The market doesn’t need a physical representation,
it could be considered as a global network of telecommunication, where the economic
agents (private or state owned) interact with the population in the process of economic
fulfilment. If to this there is added a model that isn’t market correlated with the market for
state governance then it is defined through a small degree of freedom that is usually
antithetic with the idea of competitiveness and capitalism that is why in this paper the
market will be considered fully free.
The economies based on the market work on a competitive basis under the pressure of
the work force, like demand and offer represent the best determinants for the medium and
long term perspective for welfare, development and economic growth of a nation. In the
new economic normal, we deal with an economy based on mixed systems that allow
different forces to set pressure on market activities, involving government intervention to
re-establish market stability if it is demanded. Although the market economy is the main
global economic model, there are debates that stress the optimal and efficient level to
maintain competitiveness in the global economic system. That is why the developed system
in this paper tries to underline a perspective of a correlation between the public
environment and the positive elements of the private environment to create a guidance path
for an optimal level for intervention through corporate governance that is implemented at
state level and designed on the characteristics of an emergent state, like Romania.
On the global concept of government and state governance, it represents an entity that
creates, implements, executes and manages public policies (the government) and deploys
the executive, political and legislative power through methods, laws and institutions in an
designated territory (state governance).

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 1.1. State governance

The process of state governance is defined through the governance process, especially
through the control and administration of public policy in a political system. This process
of state governance is based on a government that acts under the idea of political unity in
which the government influence is executed in the entire apparatus and everything is
executed under the political doctrine implemented depending on the met situation. For a
linear process there is needed a coalition created by the political parties that form the
majority in a parliamentary system, but in the private sector governance represents the
administration, the management or governance of a corporation with the sole purpose to
obtain corporate economic growth. By corporate economic growth the following idea is
stressed: fulfilling the interest of shareholders and stakeholders for obtaining profits in an
extensive or intensive approach or to reach other objectives for growth on the medium or
long term.
There must be considered all the issues through which some economic entities react at
some laws or government procedures that classify the economic interactions between
individuals – this way those principles and objectives resulted from laws and governmental
procedures are satisfied. The idea of offering a clear concept on the entire economic process
having as purpose obtaining economic growth needs a clear approach on the economic
game’s limits and of the players that play legit. Narrowing the discussion for now on the
economy from the framework perspective offers two components that are under the
spotlight because of the interaction between social and economic: the market and the
government. Of course there are other institutions that could have bigger importance, like
companies (this idea was first researched by Coase in the year 1937 and in the evolution of
economic research until this day there isn’t stressed a direct link or a mathematical
microeconomic model to last through time) (Coase, 1937) or not for profit organizations
others than households or the govern.
The Market and the Government are opposite components in achieving individual or
group objectives (in some cases there are founded in opposite visions with opposite results,
the extreme case is the parallel between oligarchy and democracy - Bodislav, 2012a). There
are organizations like companies that in their search for achieving their corporate interests
they will follow other undeclared group interests or other organizations with social
purposes that do not share the same social model with the government (not for profit
organizations).

1.2. Efficiency and equity as game changers

Social entities could be divided in two parts after their essential qualities: efficiency and
equity. In choosing between the entities that are oriented for fulfilling the individual interest
and the ones oriented on fulfilling the groups interests (general or national) we have to deal
with the market and the government defined on these two work criteria.
Adam Smith was one of the first to underline the market as main engine for the
economy. It is known the fact that he was the founder of modern economic science and a
supporter for the competitive market as a social entity. The invisible hand shows the ability
of the market to assure the fact that economic choices taken by individuals for fulfilling
their own interests and to fulfil their preferences will bring an added-value effect for the
entire society by increasing the efficiency and welfare, results that lead to obtaining
sustainable economic growth (Smith, 1998: 409). In the same time, Adam Smith does not
reveal what was understood in the 18th century as public interest (efficiency or equity) or
what type of market there was at that moment to underline if the public interest was taken

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in consideration by the state governance from those times. For better understanding of the
institutional choice there must be clarified the concepts of efficiency and equity in all types
of markets.
There are many concepts that define efficiency, like efficient allocation (Pareto
efficiency), x efficiency and dynamic efficiency. To define allocative efficiency, for starters
there must be used the Pareto principle. According to that principle, a group of individuals
grows its welfare by moving from a point to another (from a to b) without at least one
individual to have a bigger welfare in the b point and none of them to have a lower welfare
status. This sentence permits us to classify the two situations a and b from the entire
society’ holistic point of view. It could be considered that this proposition it is a judgement
value, a value that is not shared by the entire society (Sen, 1970: 57). The status of
judgement value of the Pareto principle it does not undermine its importance. This principle
has an important role in the economic science through the fact that it represents a concept
on efficiency: the possibility that one or many individuals could obtain more from
something (a higher utility) without forcing other individuals to get less, all of them using
the same available resources (Acocella, 2009: 11).
The Pareto optimum resulted from the Pareto principle (Pareto, 1906). The social status
of an individual in the starting state is Pareto optimal if by moving from any point to
another there isn’t possible a growth in welfare of an individual without the reduction of the
welfare of another member or members.
There can be shown the fact that a Pareto optimum in an economy founded on
consumption and production needs:
1. An efficient allocation of good consumption that it’s reached when the marginal
rates of substitution for each pair of goods of all consumers is equal;
2. Efficient allocation of inputs, which is reached when the marginal technical
substitution rates for each pair of used inputs in the production of different goods
is equal;
3. The general efficiency that is reached when the marginal substitution rate for each
pair of goods of all individuals is equal with the marginal technical
transformation rate.
The X efficiency represents the ability of companies to choose between efficient
production plans: after the efficient production techniques were selected (the efficient
combination between labour and capital and their given prices), the production must be
organized for maximizing the output. It needs shaping the objectives and the purpose of the
company on the market from the desire to stop the unproductive behaviour of the
employees from entry level to the top management, which would be motivated (or oriented)
to follow their own objectives despite the company’s interest (Leibenstein, 1966: 392-415).
The concept of efficiency has another meaning for the domain of dynamic analysis, the
dynamic efficiency. At microeconomic level we have the concept of adaptive efficiency
(Alchian, 1950: 211–221) that involves a process of information adoption (increasing
know-how through training) that leads to gradually understanding issues before achieving
know-how until finding the right answers.
Another concept of the idea of dynamic efficiency is represented by the ability to
innovate, which considers the capacity of process innovation (lowering costs) or of product
innovation (developing new products).
Equity was introduced in economy by Aristotle (2004), but it evolved along with the
economy. The general known concept on equity is that the distribution of welfare or
income is considered as being equitable if it assures the equality of chances for starting
something new or the equality in finishing a process for the members of the community,
like linear economic growth.

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 In the government’s framework and in the government’s execution process we have as
an implementation model of equity (Lipsey, Chrystal, 2002: 404):
- Income distribution. In this point there are found the types of implemented equity:
o Horizontal equity (in the same situation of an individual, the treatment
must not be differentiated);
o Vertical equity (applying different treatment to individuals that have
different economic statuses, with the purpose of decreasing inequality).
- Wealth distribution. Wealth creates economic power and if it’s unequal distributed
in comparison with income. Reducing inequality based on wealth distribution is
founded on two factors:
o Applying property transfer taxes on value added components (progressive
taxation of property rights);
o The annual tax on wealth (for the first time was used in Great Britain in
1979, today it was reinvented in the US under the name of „the Buffet
rule”, and in the EU it is debated at governmental level, but there isn’t yet
created the legal and implementation framework to apply this kind of rule
– Bodislav, 2012b).
The state has as an entity created for managing equity and efficiency the government,
which is the warrant for reaching the objectives of deploying the economic life at optimal
parameters (Acocella, 2009: 14). The government has as main objectives:
- Protecting life and property through maintaining monopoly on coercition and the
establishiment of property rights;
- Improving economic efficiency by eliminating some causes that determine the
failure on the economic scene – the market;
- Creating and maintatining optimal equity standards;
- Assuring and influencing economic growth;
- Economic stability against income and price fluctuations.
For the efficiency and equity concept there could be shaped through the obtained output
by an economy from the global economic circuit (under globalization’s pressure). To
underline the differences between optimal output (real, optimal and sustainable economic
growth) there is needed to introduce also in the equation the political element and the
power exchange that is created between them.

2. MACROECONOMIC EQUILIBRIUM AND ECONOMIC OUTPUT

To develop an economy through economic growth it must be used to obtain an output

near the potential output of the economy (the potential Gross Domestic Product). To build
the macroeconomic equilibrium the foundation must be built on the long run aggregate
supply, because it has as main characteristics the fact that if the aggregate supply grows it
increases the real output and the short run employment rate, and on the short run can lead to
inflation growth. Equilibrium is achieved at the intersection between aggregate demand and
short run aggregate supply.
The Gross Domestic Product is the main component used to quantify the results of
obtained economic growth and validates government action and the efficiency of state
governance. But it must have an optimal approach, an approach that must be in the
potential area, without overheating the economy or under power the economy, that means
getting a GDP under the potential one (this fact is usually met in an unstable economic
environment or in the conditions of a government that doesn’t coordinate the market or its
interventions restrict development or the country’s or economic agents’ competitiveness).
24
The positive gap (surpassing the potential point) or the negative gap (under powering the
potential) represents the output gap.
The real level for the GDP is created by intersecting the aggregate demand with the
short run aggregate supply – short term equilibrium. If the resulted GDP is under the
potential GDP that means it resulted a negative output. Using production factors under their
optimum and a high level of unemployment leads to receiving a result like this one, but
which is adjustable by lowering real wages or trending the real GDP in line with the
potential one, an opposite fact of what happens if the economy overheats and the resulted
GDP surpasses the potential GDP.

3. FRAMING ECONOMIC GROWTH

Economic growth and the policy for economic growth transformed starting with the end
of World War II as a result of the desire to implement economic recovery and obtain
economic and social prosperity. The main example for benefits created by following the
idea of economic growth are the ones given by the countries from the Far East that after
World War II succeeded to create an environment friendly for social welfare growth and to
satisfy their national interests, that were in line with the population’s interests. The process
for increasing life standards in the Far East were long term processes. The positive
perception of economic growth is clear and correct if only there are some processes in favor
of economic growth understood.
There are many ideas that could be extracted from studies that underline the fact that the
classic model for economic growth which was used until the year 2000 was overused and
overvalued much early than the year 2000. There could be considered as the real moment of
rupture or the moment when there was realized that a new paradigm is needed when the
classic model for economic growth was surpassed by the complexity of the dot.com crisis
from the 2000 – 2001 timeframe, but it could be designed as defaulted from other 3
characteristics:
- 1986: the development of financial derivatives on Wall Street (the first rupture);
- 1990: the development of the Internet as on open platform (the ARPANET – the
second rupture);
- 1998: the abrogation of Glass-Steagall law, abrogation that permitted to unify
special purpose banks in the actual too big to fail banking giants and using liquid
assets under the form of high yield financial instruments (the third rupture).

3.1. The traditional model – the classic economic growth model

The classic model for economic growth couldn’t handle the complexity of newly
created components: Wall Street’s derivability (economic marking of some components
without real foundations: third degree services, services resulted from services that are
founded on other services) and the network economy that reached global productivity,
without boundaries and the 24 hours work day (the Internet came as a solution for some
problems that weren’t legally and commercially framed). In the year 2005 took place the
Initial Public Offering for NASDAQ New York, which happened by the merger with the
biggest worldwide electronic platform, Archipelago Exchange Chicago, this way there was
transformed the model for local transaction into a global operations model with 24 hours
work frame. The new approaches based on new principles and criteria, that were in line
with the technological, economic, social and environmental transformations are elements
that set pressure on the actual economic growth model.

25
 Another component that isn’t considered at full capacity was the geographic issue,
because in the third millennia there is the “global village” that is founded on the network of
global growth by satisfying the individual or group interests (national, union or global). The
idea of globalization led to mutations in the concept of economic growth, because there is
to deal with transformations of the social-economic life.
The concept of economic growth and the concept of economic policy for obtaining
economic growth were created after World War II, but they suffer continuous changes
because of the economic evolution that appeared at the beginning of this millennium, be it
the dot.com crisis, be it the economic-financial-social crisis started in the year 2007. The
new problems create the new hypothesis for sustainable approach of implementing
economic growth.
Economic growth is a concept that appears to be ordinary, especially in recession, but
not in the sustainable or healthy economic growth approach. This idea was first established
in an economic context better than two centuries ago, and was conceived as an approach on
increasing productivity at company level (microeconomic logic). The actual path for
economic growth was developed starting with the creation of the theory of economic
growth in the 4th decade of the 20th century as a result/answer la the Great Depression from
1929 – 1933, showing this way the limits of a microeconomic approach of the
macroeconomic reality.
What is economic growth? It could be described as a positive motion of some global
economic values (GDP growth or income growth) on a longer period of time (economic
growth isn’t executed with a projection on the short run, because there are needed some
year cycles to pass, it couldn’t be considered as economic growth the yearly evolution). For
a better shaping of the economic growth, the positive movement must be trended on the
long run and not as a result of exogenous factors. Although it is based on the GDP growth,
the approach must have a social approach in comparison with the GDP per capita and its
increasing trend. According to academic standards positive economic growth is wanted in
any country form the desire to increasing individual welfare, but there are situations like the
one of stagnation: “zero economic growth” and the one of descendent trend: “negative
economic growth”.
The growth of welfare is a qualitative measure resulted as an effect of economic growth,
but the concept of economic growth is based on quantitative and structural modifications
that are resulted on medium and long term. Through the roll-over phenomenon we have to
deal with an irreversible phenomenon, auto generated by the performances of production
factors that maintain development.
From the quantitative point of view of the evolutionary concept of economic growth
there is the traditional concept of transformations that take place in the economic
environment as a result of economic growth: the idea of economic activity volume that
create the validated result as economic growth and the quantifying of the macroeconomic
result. This traditional model was observed as having some limitations starting with the
70’s when there were observed some incompatibilities between production growth and
directly available natural resources, between present’s generation’s welfare and the chance
to satisfy their own needs by the future generations, but also between economic
performance and preserving the natural environment.
As a result of the limits of classical vision and the economic fluctuations after the 70’s
there were some syncope in the flow of economic growth, especially because of the
interruption of standard parity between the US dollar and gold by stopping the Bretton
Woods agreement (fiat currency). The pressure created by this syncope led to the
reinterpretation of the traditional approach on the economic, social and ecological

26
environment by adopting modern concepts that are adaptive and developed at the beginning
of the third millennium: durable growth.

3.2. The actual model – the durable economic growth model

How did it led to durable economic growth? During the reinterpretation of the
theoretical approach as a result of the pressure created by the syncope from the 80’s there
was realized the fact that these plans were needed to create the new economy, “the
information economy”, based on information technology that wasn’t a component of the
classical approach. Practically, the new economy is based on the idea of the existence of
some unconventional new resources without depletion (know-how and human capital’s
capacity for innovation).
The main asset under the influence of accelerated extensive and intensive development
effect is nature (the holder of finite resources) fact that led to the acceleration of the scarcity
effect of resources through an exponential growth of consumption of resources and to
excessive exploitation that had as result the degradation of the environment, that through
the roll-over of the problem will lead on the long run to endangering economic growth and
the impossibility of developing the society. To this issue there can be added the
discrepancies on educational level, which create instability intra and inter national and
make the catching up process between emergent economies and developed ones become
harder or even impossible to fulfill.
To regulate the idea of durable economic growth many summits took place during the
last two decades. The most important of them were Rio de Janeiro in 1992, Monterrey (on
durable development) and Johannesburg (durable economic growth) in 2002 and
Copenhagen (on environmental friendly and climate development) in 2009. These summits
offered the globally connected engine for following a global interest: creating a conceptual,
normative and institutional consensus for implementing durable economic growth.
Durable economic growth is based on its tridimensional development (Angelescu,
Stanescu, 2004: 19-20):
1. Economic: based on investment in scientific research and information
technology and stimulating the capacity for innovation of the human capital;
2. Social: reducing the disparities between different social groups (assuring equality
of chances and access to education, culture, information and the possibility to
create tangible welfare);
3. Ecological: logical exploitation, consumption and utilizing efficiency of
resources leads to obtaining a long term effect that leads to durable economic
growth for the long run, this way offering repletion time for the used resource,
and prolonging the used resources life cycle.
Durable economic growth allows and assures the development of human society in tune
with nature on the medium and long run. Practically, it rationalizes resource consumption
per delivered goods. The engine for durable economic growth is based on the economic
sector for business services, the producer of information and scientific services that have a
lower yield for polluting than the real (goods) production sectors, and that have as main
consumed resource – human intelligence (innovation, implementation and logical power).
A new evolution in the domain of human capital management is represented by
rediscovering hard skills (the technical component), but in line with minor support from
soft skills (the human component). The production factors aren’t the main element of
obtained growth, but the human being (executioner and beneficiary of the process of
durable economic growth), that is why is needed that the human being must be handled
with social justice and equity. Durable economic growth is based on the elements

27
developed in beginning of this paper, the market or the government, because they represent
the backbone that sustains the needed structure for positive functioning and evolution. It is
also representative for maintaining and increasing the potential of an economy and of social
welfare (it is a system for fighting against poverty), the GDP per capita is understood as the
main indicator for observing the ascendant trend in the evolution of a state.

3.3. The new model – the sustainable economic growth model

According to Simon Kuznets, economic growth also consists of increasing the capacity
of a country to deliver more and more different economic goods through cutting edge
technologies for production and institutional and ideological adaptability (Muler, 2008),
this way showing the macroeconomic nature of the concept (on social, economic and
ecological level) (Ruttan, Hayami, 2011: 82).
Economic growth is based on the direct relation between resource input and production
and GDP output, and the difference measures the efficiency in the growth process, the
rational consumption of allocated resources on industry sectors and the efficiency in
qualitative distribution and redistribution in the domains that excel and represent a
competitive/comparative advantage against other countries.
As a reform of the durable economic growth there is the sustainable economic growth,
chosen as a tie from the present moment in which the Great Recession is founded on the
durable economic growth model. Sustainable economic growth is based on obtaining
economic growth by approaching a national or union economic system through the same
mechanisms and levers found in a corporation, but shifted at the level of national work
levers. This way an ultra-efficient approach on pollution and social security issues can be
obtained, and as main innovation there is achieving long term economic stability and the
progress of social welfare, assuring harmonic welfare between the economy, society, nature
and technology.
Sustainable economic growth set under the globalization’s pressure the idea of the
network economy, having as positive externalities obtaining access at new markets,
especially the access to new clients (bigger demand, higher production), occupational
modeling (decreasing unemployment in countries with a work force able to work on a wage
below average of the same sector’s wage in the host country or based on the outsourcing of
some services in other countries, the host country having a wage cost lower than the paid
wage in the home country of the outsourced service or product). A check point for the
imported flow from the corporate framework is represented by keeping normal limits that
do not harm the work force migration, the economic, social, educational disparities and the
resources that are distributed equitable and efficient.

CONCLUSIONS

The political component is needed to be in consensus, because the parties must create,
debate and negotiate work instruments (conceptual, normative and institutional) that must
be implemented depending on the existent resources. During the above elaborated process
there are many obstacles met, like: global distribution of resources in non linear (some
countries are privileged and some countries have a deficit in natural resources – the idea of
comparative advantage) and the intersection between different paths of the interests of
political factors that want to obtain tangible results on the short run, because of the idea of
political economic cycle that is founded on obtaining some economic performance during
the timeframe of an electoral cycle with a (temporary) growth in social welfare. The short

28
 run cannot be yielded through economic growth, be it traditional, durable or sustainable,
because these are programmed and created to obtain economic growth on the long run.
The obtained results on the short run imply an accelerated consumption of resources and
production factors that are utilized in an irrational way. For durable and sustainable
economic growth there is the need to quantify through a result, but the used metrics in the
traditional model is logical, but not complete, that is why on the long run there are needed
new ways of evaluating, maybe even through a model based on performance indicators
from a global business that can be transferred in the macroeconomic environment for
measuring sustainable economic growth.

ACKNOWLEDGMENTS

This work was cofinanced from the European Social Fund through Sectoral Operational
Programme Human Resources Development 2007-2013, project number
POSDRU/107/1.5/S//77213 “Ph.D. for a career in interdisciplinary economic research at
the European standards”.

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