4.3.2

• What is the Savings Gap?

  • Savings are needed to help finance capital investment
  • Many rich countries have excess savings, whereas in smaller low-income countries, extreme poverty makes it almost impossible to generate sufficient savings to fund capital investment projects
  • Furthermore, the financial / banking sector may be extremely underdeveloped in developing economies, and there may be no guarantees provided by governments for depositors to get their money back in case of bank failure
  • This increases reliance on foreign aid or borrowing from overseas
• Foreign currency gaps


  Many developing countries face imbalance between inflows and outflows of currencies such as US $s and Euros.

  A foreign exchange gap happens when currency outflows exceed currency inflows. This can occur when:

  • A country is running a persistent current account deficit
  • There is an outflow of capital from investors in money and capital markets (known as capital flight)
  • There is a fall in the value of inflows of remittances from nationals living and working overseas
• What is Human Capital?

  Human capital is the skill, knowledge, talent, experience and ability of workers. Human capital can be increased through investment in education and training.

  The quality of education differs strongly between and within different countries.

  Poor human capital hits labour productivity and ability to harness/adapt to new technologies. Low productivity keeps wages down.