Todays program Reminder Essay due Monday “To what extent does economic growth bring about increased living standards?” 3 points, 2 evals (25 marks) Tests back and review of areas for improvement Recap on HDI Start Factors influencing Economic Growth and Development (1.5 weeks) Leads to Strategies for Economic Growth and Development”

Specification

In pairs, have a go at ranking the following economic factors (as most/least important) for your developing country: Political stability Institutional stability/independence Education & Skills Infrastructure Technology Level of absolute poverty Income distribution Access to Credit/banking Demographics International Trade Commodity prices Savings Foreign Aid Borrowing and Debt Foreign Direct Investment Remittances Gender issues Environment Incidence of war / civil disturbance Yes use your iPad for further research!

Recap There are so many factors influencing economic growth – each developing country has different challenges Economic development is complex - Agree?

Characterise Developed and Developing Countries Criteria Developed Developing Hemisphere/ Location Education / Healthcare Infrastructure Electoral System Corruption GDP/Cap (hi/lo?) Productivity/Level of Investment Main Industry (Primary/ Secondary/ Tertiary) Population Distribution Income Distribution

Harrod-Domar Model A model helps to explain how growth has occurred and how it may occur again in the future. Basically, the model suggests that the economy's rate of growth depends on: The level of national saving (S) The productivity of capital investment (this is known as the capital-output ratio)

The Capital-Output Ratio (COR) For example, if £100 worth of capital equipment produces each £10 of annual output, a capital-output ratio of 10 to 1 exists. A 3 to 1 capital-output ratio indicates that only £30 of capital is required to produce each £10 of output annually. If the capital-output ratio is low, an economy can produce a lot of output from a little capital. If the capital-output ratio is high then it needs a lot of capital for production, and it will not get as much value of output for the same amount of capital. Key point: When the quality of capital resources is high, then the capital output ratio will be lower

Rate of growth of GDP = Savings ratio / capital output ratio Numerical examples: If the savings rate is 10% and the capital output ratio is 2, then a country would grow at 5% per year. (10% / 2 = 5%) If the savings rate is 20% and the capital output ratio is 1.5, then a country would grow at 13.3% per year. If the savings rate is 8% and the capital output ratio is 4, then the country would grow at ?% per year.

Model postulates 2 means of growth: Increased level of savings in the economy (i.e. gross national savings as a % of GDP) Reducing the capital output ratio (i.e. increasing the quality / productivity of capital inputs) LDCs mostly suffer lack of physical capital (=low economic growth/devt). So ↑ investment -> economic growth -> ↑ national income. And ↑ incomes -> ↑ save.

What does this data imply?

Limitations / problems of the Harrod-Domar Growth Model Increasing the savings ratio in lower-income countries is not easy. Many developing countries lack a sound financial system. Increased saving by households does not necessarily mean there will be greater funds available for firms to borrow to invest Efficiency gains that reduce the capital/output ratio are difficult to achieve in developing countries due to weaknesses in human capital, causing capital to be used inefficiently Research and development (R&D) needed to improve the capital/output ratio is often under-funded Borrowing from overseas to fill the savings gap causes external debt repayment problems later.

Development Constraints (Internal) Education/Skills – Primary education generally useful but higher education risks producing graduates who can’t find jobs Sectoral Imbalances: over-specialisation in primary products (eg. agriculture, mining, oil) may leave economy vulnerable to volatile commodity prices Demographic Transition Thresholds: - as development takes place, death rates fall faster than birth rates – population soars putting a strain on education/health provision – also slightly ↑ GDP may ↓ GDP/head

Constraints (Finance) Lack of Finance & Burden of Debt Repayments: many countries can’t get on the path of ↑ incomes, ↑ tax revenues, ↑ public sector investment because of lack of finance, high debt Efforts to repay debt may ↓ public sector investment → ↓ FDI – a cycle of ↑ degradation of resources & ↓ economic potential Microfinance – may be the way forward to boost start ups.

Constraints (internal) Capital flight: funds may leave the country when accumulated due to higher returns elsewhere Foreign currency gap: not enough foreign currency to import necessary commodities to stimulate growth (not enough exports) Savings gap: inadequate gathering of funds means not enough for investment

Constraints (internal) Poor infrastructure – health, transport, education, attracting MNC’s difficult and may create environmental pollution Technology – can be hard to introduce new tech (especially hi-tech) in developing countries (untrained workforce, poor maintenance, no market for hi-tech products) Human capital deficiencies – education, health, experience Stability - civil wars, terrorism, unstable neighbouring countries can all deter investment, interrupt trade and production

Constraints (external) Volatile commodity & primary product prices: traditionally the main export of developing countries Low levels of FDI: Direct Investment offers huge benefits to recipient countries but involves some loss of sovereignty Trade: Uneven access to world markets owing to tariffs, subsidies, etc. also risks from global recession as economy more exposed to trade

Trade buzzwords Resource Curse: Developing countries with single large resources tend to be vulnerable to: Corruption – as Oil / Diamonds etc. are main source of wealth Demand is inelastic and prices are volatile so revenues are very uncertain – damages planning/budgeting and hence investment

Trade buzzwords Dutch Disease Phrase coined based on Netherlands experience of developing offshore natural gas Gas exporting so successful that Netherlands currency jumped in value as the Dutch sold Gas and stopped importing energy. This made other Dutch export industries uncompetitive and caused unemployment in Dutch export industries.

Political / Institutional factors Weak political institutions, rule of law etc. results in less incentive to invest Corruption leads to inefficiency as officials seek out roles where they can receive bribes (“rent seeking”) Bureaucracy and Regulation, including arbitrary application of tax laws deter investment

Constraints (Corruption) Corruption: corrosive to an economy - money intended for public sector may be siphoned off to individuals - money spent maintaining political structure against the general will - contracts may be awarded on basis of non-market criteria However: corruption exists everywhere – it may just be more invisible in developed countries

Other constraints Remittances: Workers from one country working in another and sending home their pay Good for the home country (remittances are invisible exports) But better to have (usually talented) workers employed in their home country and paying tax there.

Gender issues Women are ~50% of a countries population Under-education, low pay, poor social mobility restrict the ability of women to contribute to economic growth The more educated the mother, the higher the likely education of children Life expectancy of females can be equal to men in developing countries but greater than men in developed countries

Environment Economic Growth tends to increase environmental damage – especially as countries industrialise Pollution controls tend to be better in developed world (- we can afford it - ) where as developing countries and more prepared to sacrifice environment for growth (firms profit)