Economic Growth for DevelopmentWorld Bank est:

16% of growth from physical capital64% 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 H2O: 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.)