theme 4

• Economic Growth


  A sustained rise in a country's productive capacity
• Economic Growth


  An increase in real value of GDP/GNI per capita
• Economic Growth


  Increases in the productivity of factors of production
• Economic Development


  Focuses more on living standards
• Economic Development


  Sustained improvement in economic and social opportunities
• Economic Development


  Growth in personal and national capabilities
• Factors influencing growth and development

  • Primary product dependency
  • Volatility of commodity prices
• Primary product dependency


  Can be 'soft commodities' (agricultural/grown products) or 'hard commodities' (mined products)
• Primary product dependency occurs when (typically) LEDC's (lower economically developed countries) are based on the production of primary products
• Primary product dependency


  Leads to risks from overspecialisation, high commodity prices, currency appreciation (Dutch disease/de-industrialization), and vulnerability to changes in prices
• Volatility of commodity prices

  Creates volatile income for primary sector workers, uncertainty about future income, and volatility in the government's fiscal balance
• factors that influence PED of a commodity:

  • number of substitutes
  • level of addiction/habit
  • % of income spent on the good
  • degree of necessity

  
• Developing countries that aim to industrialize may find that the cost of raw materials is volatile, impacting on investment and profitability
• Dutch disease


  Adverse impact of a sudden discovery of natural resources on the national economy via the appreciation of the exchange rate and worsening of export competitiveness
• Ways to overcome the problems of primary product dependency

  • Better government
  • Stabilization fund/Sovereign wealth fund
  • Higher taxes
  • Diversification
• Savings


  • Needed to finance capital investment
  • Invested by banks, or provide funds needed for investment projects
• High levels of poverty make financing capital investment impossible
• Savings gap


  Reliance on aid or borrowing from overseas
• Why are savings low in developing countries?

  • Low income - little money left after buying necessities
  • Lack of banking infrastructure - very little access for households to bank
  • Low levels of literacy/numeracy - accessing banks difficult
  • No protection for household savings - bank can go bust
  • Subsistence work - very low income; saving may be in forms of animals or seeds
• How can savings improve growth and development?

  • Provide a flow into the financial sector; can be lent out to entrepreneurs and business for investment
  • Investment can raise productivity and increase job opportunities
  • Savings help households, especially when income is volatile or unexpected requirements for money
  • Savings can be used for spending on basic education and healthcare in economies where these are not provided
  • Can provide income for the elderly, so younger family members are able to work rather that unpaid carers
• Overcoming the savings gap

  • Attract inflow of foreign direct investment
  • Enhancing from inflows of overseas aid
  • Remittances from people living and working overseas
  • Behavioural interventions to encourage households to save
  • Policies to pay higher real wages on average
• Harrod-Domar model


  • Increased investment
  • Increase savings
  • Higher capital stock
  • Long run economic growth
• Constraints to Harrod-Domar model

  • Persistent savings gap in some countries
  • Small scale financial institutions
  • Deep weaknesses in human capital
  • Risk of borrowing to fund savings gap
• Capital Flight


  Uncertain and rapid movement of large sums of money out of a county
• Reasons for capital flight

  • Political turmoil/unrest/risk of civil conflict
  • Fears that a government plans to take assets under state control
  • Exchange rate uncertainty
  • Fears over the stability of a country's banking system
• Why is capital flight problematic?
• Capital flight


  Can lead to loss of tax revenue
• Capital flight


  Causes currency depreciation as supply of the domestic currency increases
• Capital flight


  Undermines the stability of the financial structure
• Infrastructure gaps can limit economic growth and human development because they can:
• Ways infrastructure gaps can limit growth and development


  • Increase supply costs for businesses and cause higher prices hitting real incomes
  • Reduce geographical mobility of labour leading to higher unemployment
  • Damage export competitiveness and limit intraregional trade
  • Make a country less attractive to inward foreign direct investment
  • Make an economy vulnerable to effects of climate change/natural disaster
  • Contribute to gender inequality
• Factors influencing national debt

  • Pressure to keep corporation tax rates low to attract FDI
  • Existence of extreme poverty - households unable to pay tax
  • Risk of some wasteful/corrupt government spending
  • High interest rates because of poor credit ratings - high debt servicing costs lead to more debt
  • Natural disasters or other shocks, which increases government spending
• High debt


  Reduces an economy's credit-worthiness making it more challenging and expensive to borrow in the future
• High debt


  Can make it more difficult to borrow in the event of an emergency
• High debt


  Can incentivise governments to 'inflate' their way out of debt, but this can have negative impacts on living standards
• Importance of property rights

  Land rights
• High levels of consumption


  Preventing the tragedy of the commons
• Overexploitation of resources
• Leads to allocating inefficiency
• Government decisions often influenced by lobbying