Transcript limits-to-developmen..

Limits to growth and development
Limits to growth and development
• Specification suggests looking at:
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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
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”
How do we measure development?
HDI
• Good composite measure
– GNI at PPP
– Life expectancy
– Number of years in education
Developed and developing
Developed
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
Growth models
• Harrod-Domar
– 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
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
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
Rostow stages
1. Traditional (agriculture)
2. Preconditions for take-off (technology
progresses, savings increase)
Rostow stages
3. Take-off (labour migration rural to urban,
S/I↑)
4. Drive to maturity (self sustaining)
Rostow stages
5. Mass consumption (lots of consumer
products, service industry takes off)
6. Quaternary?
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
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
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)
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
Poor infrastructure
• 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
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
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
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)
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)
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 westernsupported 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
Trade barriers
• Protectionism by developed countries
Data for poverty and development
• World bank data
– http://data.worldbank.org/topic
• Single country dashboard, eg China
– http://povertydata.worldbank.org/poverty/countr
y/CHN