Limits to growth and development

Limits to growth and development Specification suggests looking at: savings gap; inadequate capital accumulation foreign currency gap capital flight primary product dependence (focus on declining terms of trade) poor infrastructure human capital deficiencies population issues corruption poor governance; civil wars debt

Measuring development and Millennium Development Goals Overall development means an improvement in living standards. But can consider 3 stages of development: Increasing availability and widening the distribution of basic life-sustaining goods Food, drink, shelter, clothing, health Perhaps add education Raising standard of living Wider range of goods available Expand range of economic and social choices Freedom to choose, political rights, education Homework: Essay “To what extent have we met the Millennium Development Goals”

How do we measure development?

HDI Good composite measure GNI at PPP Life expectancy Number of years in education

Developed and developing First world, “Western”, US, EU, Japan OECD High level of education and healthcare Good infrastructure Non-corrupt democratic government High GDP per capita High productivity and investment De-industrialising (highly developed services eg finance, IT) Aging population Third world, Africa (esp sub Saharan Africa), Some Asia Low level of education, poor healthcare Poor infrastructure Often corrupt and mostly not democratic Low GDP per capita Low productivity and investment Agricultural based (lack of services especially finance_ High birth rate/death rate

Growth models Harrod-Domar Rostow stages of growth g = s/k (s = savings rate, k = capital/output ratio) Savings finances investment, which adds to the capital stock and so potential output Consider PPF capital vs consumer, ie investment means less consumption today (which is what saving is) Rostow stages of growth Stage 1 Traditional society, Stage 2 Pre-conditions for take-off, Stage 3 Take-off, Stage 4 Drive to maturity, Stage 5 The age of mass consumption. Can argue there are more stages after, eg Quaternary

Harrod-Domar model Y = C + I and Y = C + S So S = I S = sY, I = ΔK (addition to K) so sY = ΔK, thus Y = ΔK/s (a) k = ΔK/ΔY (see definition) so ΔY = ΔK/k (b) Since g = ΔY/Y we can now show g in terms of s and k (a/b) g = (ΔK/k)/(ΔK/s) = (ΔK/k) x (s/ΔK) g = s/k s = savings rate K = capital stock k = capital output ratio (how much more capital is required for each extra unit of output) g = growth

Growth Growth comes from: Investment (additions to the capital stock). Relate to Harrod-Domar and savings gap Technical progress (quality of the capital stock) Can countries afford the best machery? Number of workers Immigration/emigration, birth/death rates Skills of workers Key factor of human capital - education

Rostow stages Traditional (agriculture) Preconditions for take-off (technology progresses, savings increase)

Rostow stages Take-off (labour migration rural to urban, S/I↑) Drive to maturity (self sustaining)

Rostow stages Mass consumption (lots of consumer products, service industry takes off) Quaternary?

Savings etc Savings gap, inadequate capital accumulation, foreign currency gap, capital flight Savings gap using Harrod-Domar: eg target growth of 5% with k of 2 requires s of 10%, but with actual s of 5% there is a gap of 5% Basically means low savings (eg 0-5% of GDP Rostow stage 1/2 so limited finance for investment) Why are savings low? Stuck at early stage of development with high primary product dependence

Savings etc Even if savings rise (Rostow stage 2-3) can be Capital flight Corruption/poor governance, particularly lack of property rights (so fear of losing capital) Limited profitable investment opportunities and better/safer opportunities overseas Lack of financial infrastructure Limited banking, which makes it harder to match savers with borrowers – no savings, and thus limited ability for banks to make loans Limited capital markets – limited equity market so hard to raise share capital Nb foreign currency gap Already typically with a current account deficit, capital flows (FDI, loans portfolio investment) inadequate to finance imports of capital goods

Primary product dependence Many poorer developing countries depend on primary products (Rostow stage 1 or 2) Food not so good, gold and oil ok (not oil now) Issues are: Volatile prices (remember unit 1) and more importantly Deterioration in terms of trade (Prebisch-Singer hypothesis)

Prebisch-Singer hypothesis Terms of trade deteriorate, so incomes for developing countries do not rise, and cannot afford to buy capital goods YED for commodities is low whilst YED for manufactures is high So as world income grows, demand for commodities grows more slowly than demand for manufactures So the price of commodities falls relative to the price of manufactures This means the terms of trade for countries dependent on commodities falls Terms of trade = price of exports/price of imports Since these countries export commodities to pay for imports of manufactures, price of exports (commodities)/price of imports (manufactures) falls This means their ability to import capital goods falls as the world economy grows Overall, slow growth in volumes, and low prices, means slow growth in incomes

Poor infrastructure Infrastructure: Reasons for poor infrastructure Transport, communications, energy (eg electricity), legal framework, financial institutions Reasons for poor infrastructure Geography (mountains, desert, landlocked) nb climate Inadequate or misdirected public investment

Human capital issues Poor education Measured directly in HDI, so low spending in developing countries on education means low measured development Poor education means low skills, limited ability to perform skilled jobs in manufacturing/services Slow productivity growth For individuals it is hard to improve standard of living by having a higher-paying high-skilled job

Human Capital Issues Rapid growth in population (stage 2) Three stages of population growth Stage 1 High birth rate, high death rate, population grows slowly. Characterised by disease, wars, famine in most countries pre-1750 (eg UK), and also poor healthcare etc in 20th Century Sub Saharan Africa. No development Stage 2 High birth rate and falling death rate so fast population growth. Better healthcare and sufficient food, but growth in child population (and of elderly). This means high dependence, since the working population has not grown, leading to low GNI per capita, and lower savings rate Stage 3 Falling birth rate and low death rate. First part of this is the golden period with demographics supporting development. The workforce grows as children enter it, so s rises, GNI per capita rises, tax revenues permit increased infrastructure spending etc. Note 50 per 1,000 is a high birth/death rate, 10 is low

Human capital issues Disease - HIV/Aids (and malaria) Costs rise (medical treatment, funerals) Potential output/GDP falls (eg 25% of households in Botswana have lost an earner) Productivity falls (farming households revert to subsistence) Education worsens (children look after sick adults)

Corruption, governance and civil war Democracy, culture of corruption, absence of property rights/legal framework, civil war Each can be developed into full point Corruption: money is appropriated (property rights) or misspent, eg on vanity projects eg palaces/private jets, or on military. Non-democratic, typically dictator style in general Property rights/legal framework when firms/individuals cannot be certain of keeping assets and profits from investment. Link to corruption. Law may be subservient to government (dictator). Can link also to lack of institutions such as a well regulated financial system Civil war Resources (labour and capital) are diverted from productive use so GNI per capita and growth fall Resources destroyed (working age people killed, factories etc destroyed)

Debt Many LDCs have significant international debt (on terms they cannot afford) Reasons for loans Savings gap/forex gap (so normal course of development) Misguided loans from the west (eg IMF), sometimes to corrupt western-supported dictators (which means the loans were not always used for productive purposes) To pay for necessary imports of oil after the sharp increases in 1973/4 and 1979/80 (and there were huge deposits by OPEC into western banks) Problem of the loans Cannot afford to pay the interest from the low tax base of the country Partly because the loans were not used for productive purposes so taxes did not increase Even if they can pay interest, it may mean they cannot afford to improve infrastructure/health/education Jubilee 2000 campaign

Trade barriers Protectionism by developed countries

Data for poverty and development World bank data http://data.worldbank.org/topic Single country dashboard, eg China http://povertydata.worldbank.org/poverty/country/CHN