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 A B Capital Goods Consumer Goods Two countries starting at the same PPF can achieve very different growth levels depending on where resources are used. 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 H 2 O: 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.)