Transcript Development
SPECIFICATION • understand how the following act as a constraint on growth & development: - poor infrastructure - human capital inadequacies - primary product dependency (esp. with declining terms of trade) - savings gap – inadequate capital accumulation - foreign currency gap - capital flight - corruption - population issues - debt - poor governance; civil wars What is development? 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? 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 Harrod-Domar A model helps to explain how growth has occurred and how it may occur again in the future. Basically, the model suggests that the economy's rate of growth depends on: •The level of national saving (S) •The productivity of capital investment (this is known as the capital-output ratio) The Capital-Output Ratio (COR) •For example, if £100 worth of capital equipment produces each £10 of annual output, a capital-output ratio of 10 to 1 exists. •A 3 to 1 capital-output ratio indicates that only £30 of capital is required to produce each £10 of output annually. •If the capital-output ratio is low, an economy can produce a lot of output from a little capital. If the capital-output ratio is high then it needs a lot of capital for production, and it will not get as much value of output for the same amount of capital. Key point: When the quality of capital resources is high, then the capital output ratio will be lower Rate of growth of GDP = Savings ratio / capital output ratio Numerical examples: •If the savings rate is 10% and the capital output ratio is 2, then a country would grow at 5% per year. •If the savings rate is 20% and the capital output ratio is 1.5, then a country would grow at 13.3% per year. •If the savings rate is 8% and the capital output ratio is 4, then the country would grow at 2% per year. Based on the model therefore the rate of growth in an economy can be increased in one of two ways: Increased level of savings in the economy (i.e. gross national savings as a % of GDP) Reducing the capital output ratio (i.e. increasing the quality / productivity of capital inputs) LDCs often have an abundant supply of labour it is a lack of physical capital that holds back economic growth and development. Boosting investment generates economic growth which leads to a higher level of national income. Higher incomes allow more people to save. Limitations / problems of the Harrod-Domar Growth Model •Increasing the savings ratio in lower-income countries is not easy. •Many developing countries lack a sound financial system. Increased saving by households does not necessarily mean there will be greater funds available for firms to borrow to invest •Efficiency gains that reduce the capital/output ratio are difficult to achieve in developing countries due to weaknesses in human capital, causing capital to be used inefficiently •Research and development (R&D) needed to improve the capital/output ratio is often underfunded •Borrowing from overseas to fill the savings gap causes external debt repayment problems later. 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 machinery? • Number of workers • Immigration/emigration, birth/death rates • Skills of workers • Key factor of human capital - education 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. Understand how poor infrastructure acts as a constraint on growth & development • Infrastructure includes physical capital such as transport networks, energy, power and water supplies and telecommunications networks. • http://www.dw.com/en/poor-infrastructure-is-key-obstacle-to-development-in-africa/a-15264436 • Poor infrastructure hampers growth because it causes higher supply costs and delays for businesses. • It reduces the mobility of labour and affects the ability of exporters to get their products to international markets. Understand how human capital inadequacies acts as a constraint on growth & development Human capital is “the knowledge, skills, competencies embodied in individuals that facilitate the creation of personal, social and economic well-being.” (OECD) • Poor education • Measured in HDI, low spending in developing countries on education • Rapid growth in population • High dependency ratios (too many children) • Lower GNI per capita • More support needed http://www.indexmundi.com/g/r.aspx?v=25 Understand how human capital inadequacies acts as a constraint on growth & development • 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) Understand how primary product dependency acts as a constraint on growth & development • Many nations still relying on specializing in and exporting low value added primary commodities • The prices of these goods can be volatile on world markets • When prices fall, an economy will see a sharp reduction in export incomes, an adverse movement in their terms of trade, risks of a higher trade deficit and a danger that a nation will not be able to finance state-led investment in education, healthcare and core infrastructure • Despite being rich in natural resources, for many countries this is a curse rather than a blessing Understand how savings gap acts as a constraint on growth & development • Savings are part of Harrod-Domar model and Rostow – crucial for growth • Savings gap - a situation where the currently level of savings is insufficient to achieve an economic objective. • In the UK economy and other developed economies, a savings gap refers to the gap between current savings for retirement and that necessary to generate a desirable income from retirement • In less developed economies a savings gap commonly refers to the deficit between current aggregate savings and the level of savings required to provide funds for business investment http://www.tutor2u.net/economics/blog/reviving-turkeys-economy Understand how foreign currency gap acts as a constraint on growth & development • When exports are not high enough if developing countries are resource poor. • Some countries have developed manufacturing and service industries e.g. China which has fuelled their development. http://www.tutor2u.net/economics/blog/how-worrying-isbritains-current-account-deficit Understand how capital flight acts as a constraint on growth & development • When citizens and businesses of a country believe that the economy will deteriorate in the future and so send their money abroad by buying foreign currencies and other assets • This reduces the financial resources available within the country. http://www.tutor2u.net/economics/blog/will-china-interveneto-prevent-capital-flight http://www.bbc.co.uk/news/business-32931184 Understand how corruption acts as a constraint on growth & development Understand how population issues acts as a constraint on growth & development Understand how debt acts as a constraint on growth & development Understand how poor governance & civil wars acts as a constraint on growth & development TASK • Assess 2 countries data & look for constraints on growth – suggest problem areas & explain why they constrain growth