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?” 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?

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

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.

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

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

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

Human Resources Overpopulation Un/underemployment 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)

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.

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

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

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

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

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 …

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