Economic Growth and Economic Growth and DevelopmentDevelopment

The Ultimate End-Game of The Ultimate End-Game of Economic AnalysisEconomic Analysis

A Few Warm Up QuestionsA Few Warm Up Questions What is “Development?”What is “Development?” What is the difference between economic What is the difference between economic

growth and development?growth and development? What does it mean for a country to be What does it mean for a country to be

“developing?”“developing?” What factors (economic, political, cultural, What factors (economic, political, cultural,

social) are necessary for development to social) are necessary for development to occur?occur?

Is promoting the growth and development Is promoting the growth and development of LDCs in the best interest of more of LDCs in the best interest of more developed countries?developed countries?

The Wealth (and Welfare) GapThe Wealth (and Welfare) Gap

The 80/20 rule does apply …The 80/20 rule does apply … The richest 20% of the world’s The richest 20% of the world’s

population receives more than 80% population receives more than 80% of the world’s incomeof the world’s income

At the other end of the spectrum …At the other end of the spectrum … The poorest 60% receives less than The poorest 60% receives less than

6% of the world’s income6% of the world’s income

A Few Other ComparisonsA Few Other Comparisons

The GDP of the U.S. is about 70% The GDP of the U.S. is about 70% greater than the combined GDPs of greater than the combined GDPs of all the developing countries in the all the developing countries in the world.world.

The U.S.(with only 5% of the world’s The U.S.(with only 5% of the world’s population) accounts for more than population) accounts for more than 30% of the world’s output.30% of the world’s output.

Defining the ChallengeDefining the Challenge

So, just how big is the global So, just how big is the global development challenge?development challenge?

Let’s take a look …Let’s take a look …

Obstacles to (and Sources of) Obstacles to (and Sources of) Economic DevelopmentEconomic Development

Natural resourcesNatural resources Human resourcesHuman resources Capital formationCapital formation TechnologyTechnology Sociocultural and institutional factorsSociocultural and institutional factors

Natural ResourcesNatural Resources

Availability of natural resources Availability of natural resources varies widely among LDCsvaries widely among LDCs

If available, LDC natural resources If available, LDC natural resources are sometimes owned or controlled are sometimes owned or controlled by foreign MNCs.by foreign MNCs.

Commodity prices subject to price Commodity prices subject to price volatilityvolatility

Without a strong resource base – a Without a strong resource base – a tougher road to developmenttougher road to development

Human ResourcesHuman Resources

OverpopulationOverpopulation• Extremely low per capita incomeExtremely low per capita income• Relatively high population growth ratesRelatively high population growth rates• Any increase in income tends to Any increase in income tends to

increase population growth ratesincrease population growth rates Un/underemploymentUn/underemployment Low labor productivity (literacy, Low labor productivity (literacy,

health care, technology, investment)health care, technology, investment)

Capital FormationCapital Formation

Capital investment drives increases Capital investment drives increases in labor productivity and per capita in labor productivity and per capita output.output.

If output rises faster than population If output rises faster than population growth, savings growth, savings maymay enable enable additional capital formation.additional capital formation.

But, generating savings is extremely But, generating savings is extremely difficult when income levels are so difficult when income levels are so low.low.

Capital FormationCapital Formation

Relatively high level of investment Relatively high level of investment risk in LDCs acts as a disincentive for risk in LDCs acts as a disincentive for investmentinvestment• Political riskPolitical risk• Currency devaluationCurrency devaluation

Poor public infrastructurePoor public infrastructure

TechnologyTechnology

Linked to capital investmentLinked to capital investment Helps drive increases in productivity Helps drive increases in productivity Ability to borrow technology from Ability to borrow technology from

more advanced countriesmore advanced countries Lack of skilled labor and existing Lack of skilled labor and existing

capital base can limit application of capital base can limit application of new technologynew technology

Sociocultural ObstaclesSociocultural Obstacles

Culture, tradition and customCulture, tradition and custom Tribal allegiances and animosityTribal allegiances and animosity Views regarding work and individual Views regarding work and individual

achievementachievement

Institutional ObstaclesInstitutional Obstacles

Corruption and briberyCorruption and bribery Education systemsEducation systems Land ownership (too concentrated or Land ownership (too concentrated or

too fractured)too fractured)

The Vicious CircleThe Vicious Circle

Low per capita income …Low per capita income … Creates a low level of demand and Creates a low level of demand and

low (or negative) savings rate …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 And perpetuates low income, which

is further reduced by population is further reduced by population growthgrowth

And the cycle begins again …And the cycle begins again …

How Can More Developed Nations How Can More Developed Nations Help?Help?

Expanding tradeExpanding trade Foreign aid (worth a separate Foreign aid (worth a separate

discussion)discussion) Flows of private capitalFlows of private capital

• Direct foreign investmentDirect foreign investment• Technology often moves with capitalTechnology often moves with capital• Selective regional focusSelective regional focus