Economic Growth and Development The Ultimate End-Game of Economic Analysis

A Few Warm Up Questions What is “Development?” What is “Development?” What is the difference between economic growth and development? What is the difference between economic growth and development? What does it mean for a country to be “developing?” What does it mean for a country to be “developing?” What factors (economic, political, cultural, social) are necessary for development to occur? What factors (economic, political, cultural, social) are necessary for development to occur? Is promoting the growth and development of LDCs in the best interest of more developed countries? Is promoting the growth and development of LDCs in the best interest of more developed countries?

The Wealth (and Welfare) Gap The 80/20 rule does apply … The 80/20 rule does apply … The richest 20% of the world’s population receives more than 80% of the world’s income The richest 20% of the world’s population receives more than 80% of the world’s income At the other end of the spectrum … At the other end of the spectrum … The poorest 60% receives less than 6% of the world’s income The poorest 60% receives less than 6% of the world’s income

A Few Other Comparisons The GDP of the U.S. is about 70% greater than the combined GDPs of all the developing countries in the world. The GDP of the U.S. is about 70% greater than the combined GDPs of all the developing countries in the world. The U.S.(with only 5% of the world’s population) accounts for more than 30% of the world’s output. The U.S.(with only 5% of the world’s population) accounts for more than 30% of the world’s output.

Defining the Challenge So, just how big is the global development challenge? So, just how big is the global development challenge? Let’s take a look … Let’s take a look …

Obstacles to (and Sources of) Economic Development Natural resources Natural resources Human resources Human resources Capital formation Capital formation Technology Technology Sociocultural and institutional factors Sociocultural and institutional factors

Natural Resources Availability of natural resources varies widely among LDCs Availability of natural resources varies widely among LDCs If available, LDC natural resources are sometimes owned or controlled by foreign MNCs. If available, LDC natural resources are sometimes owned or controlled by foreign MNCs. Commodity prices subject to price volatility Commodity prices subject to price volatility Without a strong resource base – a tougher road to development Without a strong resource base – a tougher road to development

Human Resources Overpopulation Overpopulation Extremely low per capita incomeExtremely low per capita income Relatively high population growth ratesRelatively high population growth rates Any increase in income tends to increase population growth ratesAny increase in income tends to increase population growth rates Un/underemployment Un/underemployment Low labor productivity (literacy, health care, technology, investment) Low labor productivity (literacy, health care, technology, investment)

Capital Formation Capital investment drives increases in labor productivity and per capita output. Capital investment drives increases in labor productivity and per capita output. If output rises faster than population growth, savings may enable additional capital formation. If output rises faster than population growth, savings may enable additional capital formation. But, generating savings is extremely difficult when income levels are so low. But, generating savings is extremely difficult when income levels are so low.

Capital Formation Relatively high level of investment risk in LDCs acts as a disincentive for investment Relatively high level of investment risk in LDCs acts as a disincentive for investment Political riskPolitical risk Currency devaluationCurrency devaluation Poor public infrastructure Poor public infrastructure

Technology Linked to capital investment Linked to capital investment Helps drive increases in productivity Helps drive increases in productivity Ability to borrow technology from more advanced countries Ability to borrow technology from more advanced countries Lack of skilled labor and existing capital base can limit application of new technology Lack of skilled labor and existing capital base can limit application of new technology

Sociocultural Obstacles Culture, tradition and custom Culture, tradition and custom Tribal allegiances and animosity Tribal allegiances and animosity Views regarding work and individual achievement Views regarding work and individual achievement

Institutional Obstacles Corruption and bribery Corruption and bribery Education systems Education systems Land ownership (too concentrated or too fractured) Land ownership (too concentrated or too fractured)

The Vicious Circle Low per capita income … Low per capita income … Creates a low level of demand and low (or negative) savings rate … Creates a low level of demand and low (or negative) savings rate … Which limits new investment … Which limits new investment … Which maintains low productivity … Which maintains low productivity … And perpetuates low income, which is further reduced by population growth And perpetuates low income, which is further reduced by population growth And the cycle begins again … And the cycle begins again …

How Can More Developed Nations Help? Expanding trade Expanding trade Foreign aid (worth a separate discussion) Foreign aid (worth a separate discussion) Flows of private capital Flows of private capital Direct foreign investmentDirect foreign investment Technology often moves with capitalTechnology often moves with capital Selective regional focusSelective regional focus