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”

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) Ageing 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 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 machinery? Number of workers Immigration/emigration, birth/death rates Skills of workers Key factor of human capital - education

Harrod-Domar g = s/k (s = savings rate, k = capital/output ratio) 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 productivity of capital investment (this is known as the capital-output ratio) The level of national saving (S) 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 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)

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. 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 2% per year. Based on the model therefore the rate of growth in an economy can be increased in one of two ways: 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 often have an abundant supply of labour it is a lack of physical capital that holds back economic growth and development. Boosting investment generates economic growth which leads to a higher level of national income. Higher incomes allow more people to save.

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.

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. Beginning of London Olympics?

Understand how poor infrastructure acts as a constraint on growth & development Infrastructure includes physical capital such as transport networks, energy, power and water supplies and telecommunications networks. http://www.dw.com/en/poor-infrastructure-is-key-obstacle-to-development-in- africa/a-15264436 Poor infrastructure hampers growth because it causes higher supply costs and delays for businesses. It reduces the mobility of labour and affects the ability of exporters to get their products to international markets.

Understand how human capital inadequacies acts as a constraint on growth & development Human capital is “the knowledge, skills, competencies embodied in individuals that facilitate the creation of personal, social and economic well-being.” (OECD) Poor education Measured in HDI, low spending in developing countries on education Rapid growth in population High dependency ratios (too many children) Lower GNI per capita More support needed http://www.indexmundi.com/g/r.aspx?v=25

Understand how human capital inadequacies acts as a constraint on growth & development 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)

Understand how primary product dependency acts as a constraint on growth & development Many nations still relying on exporting low value added primary commodities Volatile pricing When prices fall, an economy will see a sharp reduction in export incomes, an adverse movement in their terms of trade, risks of a higher trade deficit and a danger that a nation will not be able to finance state-led investment in education, healthcare and core infrastructure Despite being rich in natural resources, for many countries this is a curse rather than a blessing

Prebisch-Singer Hypothesis Over the long run the price of primary goods such as coal, coffee cocoa declines in proportion to manufactured goods such as cars, washing machines and computers Countries with a high export dependence on primary products may lose out from a worsening of the terms of trade. These countries should use revenues from primary commodity exports to fund education, the development of skills and expand technological capacity.

Understand how savings gap acts as a constraint on growth & development Savings are part of Harrod-Domar model and Rostow – crucial for growth Savings gap - a situation where the currently level of savings is insufficient to achieve an economic objective. In the UK economy and other developed economies, a savings gap refers to the gap between current savings for retirement and that necessary to generate a desirable income from retirement In less developed economies a savings gap commonly refers to the deficit between current aggregate savings and the level of savings required to provide funds for business investment http://www.tutor2u.net/economics/blog/reviving-turkeys-economy

Understand how capital flight acts as a constraint on growth & development When citizens and businesses of a country believe that the economy will deteriorate in the future and so send their money abroad by buying foreign currencies and other assets This reduces the financial resources available within the country. http://www.tutor2u.net/economics/blog/will-china-intervene-to-prevent-capital-flight http://www.bbc.co.uk/news/business-32931184

Understand how foreign currency gap acts as a constraint on growth & development When exports are not high enough if developing countries are resource poor. What do they need to import? Current account deficit > capital inflows If exports are insufficient to provide currency for machinery http://www.tutor2u.net/economics/blog/how-worrying-is-britains-current-account-deficit

Understand how demographic factors acts as a constraint on growth & development

Understand how debt acts as a constraint on growth & development

Understand how access to credit and banking acts as a constraint on growth & development

Understand how absence of property rights acts as a constraint on growth & development

June 13