Transcript Constraints-on

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Reminder Essay due Monday “To what extent does
economic growth bring about increased living
standards?” 3 points, 2 evals (25 marks)
Tests back and review of areas for improvement
Recap on HDI
Start Factors influencing Economic Growth and
Development (1.5 weeks)
Leads to Strategies for Economic Growth and
Development”
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Political stability
 Commodity prices
Institutional
 Savings
stability/independence  Foreign Aid
Education & Skills
 Borrowing and Debt
Infrastructure
 Foreign Direct Investment
Technology
 Remittances
Level of absolute poverty  Gender issues
Income distribution
 Environment
Access to Credit/banking  Incidence of war / civil
Demographics
disturbance
International Trade
Yes use your iPad for further research!
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There are so many factors influencing
economic growth – each developing country
has different challenges
Economic development is complex - Agree?
Criteria
Hemisphere/
Location
Education / Healthcare
Infrastructure
Electoral System
Corruption
GDP/Cap (hi/lo?)
Productivity/Level of
Investment
Main Industry (Primary/
Secondary/ Tertiary)
Population Distribution
Income Distribution
Developed
Developing
Harrod-Domar Model
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)
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For example, if £100 worth of capital equipment produces each £10 of
annual output, a capital-output ratio of 10 to 1 exists.
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A 3 to 1 capital-output ratio indicates that only £30 of capital is required
to produce each £10 of output annually.
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If the capital-output ratio is low, an economy can produce a lot of
output from a little capital.
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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.
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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. (10% / 2 = 5%)
•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 ?% per year.
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Model postulates 2 means of growth:
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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)
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LDCs mostly suffer lack of physical capital (=low economic
growth/devt).
So ↑ investment -> economic growth -> ↑ national income.
And ↑ incomes -> ↑ save.
What does this data imply?
Limitations / problems of the Harrod-Domar Growth Model
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Increasing the savings ratio in lower-income countries is not easy.
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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
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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
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Research and development (R&D) needed to improve the
capital/output ratio is often under-funded
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Borrowing from overseas to fill the savings gap causes external
debt repayment problems later.
Education/Skills – Primary education generally useful
but higher education risks producing graduates who
can’t find jobs
 Sectoral Imbalances: over-specialisation in primary
products (eg. agriculture, mining, oil) may leave
economy vulnerable to volatile commodity prices
 Demographic Transition Thresholds:
- as development takes place, death rates fall faster than
birth rates – population soars putting a strain on
education/health provision – also slightly ↑ GDP may ↓
GDP/head
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Lack of Finance & Burden of Debt
Repayments: many countries can’t get on the
path of ↑ incomes, ↑ tax revenues, ↑ public sector
investment because of lack of finance, high debt
Efforts to repay debt may ↓ public sector
investment → ↓ FDI – a cycle of ↑ degradation of
resources & ↓ economic potential
Microfinance – may be the way forward to boost
start ups.
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Capital flight: funds may leave the country
when accumulated due to higher returns
elsewhere
Foreign currency gap: not enough foreign
currency to import necessary commodities to
stimulate growth (not enough exports)
Savings gap: inadequate gathering of funds
means not enough for investment
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Poor infrastructure – health, transport, education,
attracting MNC’s difficult and may create environmental
pollution
Technology – can be hard to introduce new tech (especially
hi-tech) in developing countries (untrained workforce, poor
maintenance, no market for hi-tech products)
Human capital deficiencies – education, health, experience
Stability - civil wars, terrorism, unstable neighbouring
countries can all deter investment, interrupt trade and
production
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Volatile commodity & primary product prices:
traditionally the main export of developing countries
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Low levels of FDI: Direct Investment offers huge
benefits to recipient countries but involves some loss of
sovereignty
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Trade: Uneven access to world markets owing to tariffs,
subsidies, etc. also risks from global recession as
economy more exposed to trade
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Resource Curse: Developing countries with
single large resources tend to be vulnerable
to:
 Corruption – as Oil / Diamonds etc. are main
source of wealth
 Demand is inelastic and prices are volatile so
revenues are very uncertain – damages
planning/budgeting and hence investment
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Dutch Disease
 Phrase coined based on Netherlands experience
of developing offshore natural gas
 Gas exporting so successful that Netherlands
currency jumped in value as the Dutch sold Gas
and stopped importing energy. This made other
Dutch export industries uncompetitive and caused
unemployment in Dutch export industries.
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Weak political institutions, rule of law etc.
results in less incentive to invest
Corruption leads to inefficiency as officials
seek out roles where they can receive bribes
(“rent seeking”)
Bureaucracy and Regulation, including
arbitrary application of tax laws deter
investment
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Corruption: corrosive to an economy
- money intended for public sector may be siphoned
off to individuals
- money spent maintaining political structure
against the general will
- contracts may be awarded on basis of non-market
criteria
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However: corruption exists everywhere – it may just
be more invisible in developed countries
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Remittances: Workers from one country
working in another and sending home their
pay
 Good for the home country (remittances are
invisible exports)
 But better to have (usually talented) workers
employed in their home country and paying tax
there.
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Women are ~50% of a countries population
 Under-education, low pay, poor social mobility
restrict the ability of women to contribute to
economic growth
 The more educated the mother, the higher the
likely education of children
 Life expectancy of females can be equal to men in
developing countries but greater than men in
developed countries
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Economic Growth tends to increase
environmental damage – especially as
countries industrialise
Pollution controls tend to be better in
developed world (- we can afford it - ) where
as developing countries and more prepared
to sacrifice environment for growth (firms
profit)