Transcript Econ-Growth-for-Development

Economic Growth for Development
World Bank est:
16% of growth from physical capital
64% of growth from human
20% from natural endowments eg. oil
Physical Capital: any good that can produce
goods or services in the future
Human Capital: productive potential of people
Technological Progress: increased application to
capital of new knowledge (augments both
physical & human capital) - disadvantage that
“new” capital can become obsolete
Investment and Savings
• Increased human and physical capital, and
technological progress require investment
• Investment requires giving up current
consumption in favour of future consumption
• Investment requires saving
• May not be able to afford to give up current
consumption thus constraining growth
• Return on investment in primary education is 40%!
PPF Model of Development Potential
Two countries starting
at the same PPF can
achieve very different
growth levels
depending on where
resources are used.
Capital
Goods
A
B
Consumer
Goods
The Harrod-Domar
model suggests high
rates of savings are
necessary for
economic growth
Improving Levels of Investment
• Gov’t may make savings compulsory or provide
incentives
• Gov’t may invest themselves using enforced
savings (taxation)
• Gov’ts or firms may borrow from other countries
or aid agencies – pay back interest from future
growth
Investment must be balanced between human,
physical, and technological resources
Evaluating Investment / Savings for
Economic Growth
• ↑ savings doesn’t necessarily lead to growth – funds
must find their way to those who will invest it wisely
• Investment projects must be coordinated between
interrelated firms
• Savings is not independent of GDP – people will only
save if income is high enough
• Extra capital equipment will eventually be wasted if
labour supply is limited – technological change to
improve efficiency may be more important
• Gov’t financed investment may not be most effective
Macroeconomic Stability
for Economic Growth
• Growth will depend upon the stability of
the economy (fiscal balance, steady
inflation, etc.)
• Reduces risk for investment
• Encourages foreign direct investment
Trade Liberalisation, Capital
Mobility, and Exch. Rate Policy
• Widening mkts allows econ. of scale and
exploitation of comp. adv.
• Exch. rates may need to be ↓ to ↑ exports
• Restrictions on capital flows may need to be
reduced to encourage FDI
• Above are conditions for IMF loans
*However, ↑ exposure to foreign markets may hurt
the most vulnerable
Costs of Growth - Negative Externalities
• Loss of biodiversity: an intergenerational issue
• Deforestation: many knock on effects
• Exhaustion of Resources: includes desertification
(land looses nutrients, fish stocks are depleted etc)
• Contamination of H2O: outbreak of disease
• Pollution & Climate Change
The environment is ‘capital’ and must be preserved
for future growth – sustainable development
(Western push for wealth may be at odds with local
ideals closer to nature.)