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Economic Growth and Development

Economic Growth and Development. The Ultimate End-Game of Economic Analysis. A Few Warm Up Questions. What is “Development?” What is the difference between economic growth and development? What does it mean for a country to be “developing?”

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Economic Growth and Development

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  1. Economic Growth and Development The Ultimate End-Game of Economic Analysis

  2. A Few Warm Up Questions • What is “Development?” • What is the difference between economic growth and development? • What does it mean for a country to be “developing?” • What factors (economic, political, cultural, social) are necessary for development to occur? • Is promoting the growth and development of LDCs in the best interest of more developed countries?

  3. The Wealth (and Welfare) Gap • The 80/20 rule does apply … • The richest 20% of the world’s population receives more than 80% of the world’s income • At the other end of the spectrum … • The poorest 60% receives less than 6% of the world’s income

  4. A Few Other Comparisons • The GDP of the U.S. is about 70% greater than the combined GDPs of all the developing countries in the world. • The U.S.(with only 5% of the world’s population) accounts for more than 30% of the world’s output.

  5. Defining the Challenge • So, just how big is the global development challenge? • Let’s take a look …

  6. Obstacles to (and Sources of) Economic Development • Natural resources • Human resources • Capital formation • Technology • Sociocultural and institutional factors

  7. Natural Resources • Availability of natural resources varies widely among LDCs • If available, LDC natural resources are sometimes owned or controlled by foreign MNCs. • Commodity prices subject to price volatility • Without a strong resource base – a tougher road to development

  8. Human Resources • Overpopulation • Extremely low per capita income • Relatively high population growth rates • Any increase in income tends to increase population growth rates • Un/underemployment • Low labor productivity (literacy, health care, technology, investment)

  9. Capital Formation • Capital investment drives increases in labor productivity and per capita output. • If output rises faster than population growth, savings may enable additional capital formation. • But, generating savings is extremely difficult when income levels are so low.

  10. Capital Formation • Relatively high level of investment risk in LDCs acts as a disincentive for investment • Political risk • Currency devaluation • Poor public infrastructure

  11. Technology • Linked to capital investment • Helps drive increases in productivity • Ability to borrow technology from more advanced countries • Lack of skilled labor and existing capital base can limit application of new technology

  12. Sociocultural Obstacles • Culture, tradition and custom • Tribal allegiances and animosity • Views regarding work and individual achievement

  13. Institutional Obstacles • Corruption and bribery • Education systems • Land ownership (too concentrated or too fractured)

  14. The Vicious Circle • Low per capita income … • Creates a low level of demand and low (or negative) savings rate … • Which limits new investment … • Which maintains low productivity … • And perpetuates low income, which is further reduced by population growth • And the cycle begins again …

  15. How Can More Developed Nations Help? • Expanding trade • Foreign aid (worth a separate discussion) • Flows of private capital • Direct foreign investment • Technology often moves with capital • Selective regional focus

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