1. Limits to growth and development

2. 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

3. 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”

4. How do we measure development?

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

6. 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

7. 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

8. 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

9. 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

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

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

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

13. 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

14. 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

15. 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)

16. 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

17. 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

18. 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

19. 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

20. 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)

21. 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)

22. 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

23. Trade barriers
Protectionism by developed countries

24. Data for poverty and development
World bank data
Single country dashboard, eg China