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Economic Growth and Development

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Title: Economic Growth and Development


1
Economic Growth and Development
  • The Ultimate End-Game of Economic Analysis

2
A Few Warm Up Questions
  • What is Development?
  • What is the difference between economic growth
    and development?
  • What does it mean for a country to be
    developing?
  • 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?

3
The Wealth (and Welfare) Gap
  • The 80/20 rule does apply
  • The richest 20 of the worlds population
    receives more than 80 of the worlds income
  • At the other end of the spectrum
  • The poorest 60 receives less than 6 of the
    worlds income

4
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 U.S.(with only 5 of the worlds population)
    accounts for more than 30 of the worlds output.

5
Defining the Challenge
  • So, just how big is the global development
    challenge?
  • Lets take a look

6
Obstacles to (and Sources of) Economic Development
  • Natural resources
  • Human resources
  • Capital formation
  • Technology
  • Sociocultural and institutional factors

7
Natural Resources
  • Availability of natural resources varies widely
    among LDCs
  • If available, LDC natural resources are sometimes
    owned or controlled by foreign MNCs.
  • Commodity prices subject to price volatility
  • Without a strong resource base a tougher road
    to development

8
Human Resources
  • Overpopulation
  • Extremely low per capita income
  • Relatively high population growth rates
  • Any increase in income tends to increase
    population growth rates
  • Un/underemployment
  • Low labor productivity (literacy, health care,
    technology, investment)

9
Capital Formation
  • Capital investment drives increases in labor
    productivity and per capita output.
  • 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.

10
Capital Formation
  • Relatively high level of investment risk in LDCs
    acts as a disincentive for investment
  • Political risk
  • Currency devaluation
  • Poor public infrastructure

11
Technology
  • Linked to capital investment
  • Helps drive increases in productivity
  • Ability to borrow technology from more advanced
    countries
  • Lack of skilled labor and existing capital base
    can limit application of new technology

12
Sociocultural Obstacles
  • Culture, tradition and custom
  • Tribal allegiances and animosity
  • Views regarding work and individual achievement

13
Institutional Obstacles
  • Corruption and bribery
  • Education systems
  • Land ownership (too concentrated or too
    fractured)

14
The Vicious Circle
  • Low per capita income
  • Creates a low level of demand and low (or
    negative) savings rate
  • Which limits new investment
  • Which maintains low productivity
  • And perpetuates low income, which is further
    reduced by population growth
  • And the cycle begins again

15
How Can More Developed Nations Help?
  • Expanding trade
  • Foreign aid (worth a separate discussion)
  • Flows of private capital
  • Direct foreign investment
  • Technology often moves with capital
  • Selective regional focus
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