ECONOMIC DEVELOPMENT

ECONOMIC GROWTH

Economic growth – increase in real output of an economy over time

Sources of economic growth

• Natural factors
  • Anything that could increase the quantity / quality of a FOP should lead to an increase in potential growth
  • Quality of the land may be increased by fertilization, better planning of land usage, improved agricultural methods & building upwards
• Human capital factors
  • Could be increased by encouraging population growth / increasing immigration levels & by improving quality by improving health care, improving education, vocational training & re-training for the unemployed + provision of fresh water & sanitation.
• Physical capital & technological factors
  • Definition of physical capital: factory buildings, machinery, shops, offices & motor vehicles
  • Quantity of physical capital is affected by the level of savings, domestic invesments, government involvment & foreign investment
  • Quality can be improved by higher education, R&D, access to foreign technology & expertise
• Capital widening: when extra capital is used with an increased amount of labour but ratio of capital per worker does not change. Total production increases but productivity is likely to remain unchanged.
• Capital deepening: increase in amount of capital for each worker & thus this often means there is an improvement in technology & will usually lead to improvements in labour productivity & total production
• Institutional factors
• Adequate banking system, structured legal systems, good education system, reasonable infrastructure, political stability & good international relationships.
• Does economic growth lead to economic development?
  • Higher incomes
    • It depends on the distribution of income (whether it is fair)
  • Improved economic indicators of welfare
    • Could be linked to increased average life expectancy, average years of schooling & literacy rates.
  • Higher govt revenues
    • The government will gain increased tax revenues & be in a better situation when it comes to the provision of essential services (e.g. education, health care & infrastructure)
  • Creation of inequality
    • Rich get richer & the poor get poorer. Even if the poor get some money, the gap is said to grow with the rich getting the majority of the gains. It does not mean that the rich spend more & some of this goes to the poor
  • Negative externalities & lack of sustainability
    • Often leads to pollution as incomes rise, people drive cars, enjoy plane travel & buy goods that are imported across long distances. This creates negative externalities of consumption & production where market prices of goods & services do not reflect full costs to society & the environment. It could also lead to problems of deforestation, soil degradation & reduction in bio-diversity
    • Lead to an increase in the burning of fossil fuels as demand for energy increases. Results in large emissions of CO₂ and global warming. Forests, coral reefs & other ecological systems will be damaged as a result of their inability to adjust to changing temperature & precipitation patterns. Access to safe water will become more precarious. Tropical diseases spread further north. Droughts will become more intense & frequent, food production in middle & high latitudes becomes easier but this is no gurantee that the risk to food security will lessen. Rising sea level with floods.
  • Uneconomic growth – when increases in production come at an expense in resources & well being that is worth more than the items made.
  • Sustainability – the ability to meet the needs of the current generation without compromising the ability of the future generations to meet their needs. (compromising the living standards of future generation)
  • Common characteristics of developing countries
    • Low standards of living
      • Low incomes
      • Inequality
      • Poor health
      • Inadequate education
      • High infant mortality rates
      • High levels of malnutrition
    • Low levels of productivity
      • Due to low education standards, low level of health amongst workers, lack of investment in physical capital & lack of access to technology.
    • High rates of population growth & dependency burden
      • Definition of crude birth rate: annual numbers of live birth per 1000 of the population [crude birth rate in developing countries is high]
      • High dependency ratios (many young people) & thus those of working age have to support a much larger proportion of children then the work force in developed countries
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• High & rising levels of unemployment & underemployment
  • Firstly, we have to worry about those who have been unemployed for so long that they have given up searching for a job & no longer appear as unemployed.
  • Secondly, there are the hidden unemployed who work for a few hours on a family farm / family business / trade of some sort and do not appear as unemployed
  • Lastly, there are the underemployed. Those would like to work full time but are only able to get part time employment often on an informal basis.
• Substantial dependence on agricultural production & primary product exports
  • Over dependence on primary product exports
• Prevalance of imperfect markets & limited info
  • Developing countries lean towards more market orientated approach to growth but this can be troublesome as market based approaches may work well in economics where markets are efficiently functioning but not in developing countries faced with imperfect markets & imperfect knowledge.
  • Lack of functioning bank system – discourages savgins & investments
  • Lack of developed legal system
  • Lack of adequate infrastructure – for efficient & low cost transport & FDI.
  • Lack of accurate info – imperfect info & misallocation of resources & misinformed purchasing decisions
• Dominance, dependence & vulnerability in international relations
  • Dominated by developed countries
  • Dependent on developed countries (trade, access to technology, aid & investment)
  • Vulnerable on international stage & are dominated and harmed by decisions of developed countries over which they have no control
• Diversity among developing countries
  • Resource endowment
    • It is common for human resources to be undernourished & poorly educated and low skilled however endowment in terms of physical resources can vary immensely between developing countries.
    • They could be poorly endowed with physical resources but have abundances of natural resources / synthetic resources
  • Historical background
    • Colonization
    • Depends on the length of time that the countries were colonized & whether the eventual independence was given freely / it had to be fought for.
    • Historical diff – set countries apart culturally, socially, politically and economically.
  • Geographic & demographic factors
    • Diff geographical & population size
    • Not all developing countries have large populations
  • Ethnic & religious breakdown
    • High levels of ethnic & religious diversity could increase the chances of political unrest & internal conflict
  • Structure of industry
    • It is widely assumed that all developing countries depend upon the production & exportation of primary products but some may depend on exportation of manufactured products and some are mainly exporters of service (in the form of tourism)
  • Per capita income levels
    • Marked diff in per capita income from developing country to developing country
  • Political structure
    • Varying political structure
  • Democracies
  • Monarchies
  • Military rule
  • Single party states
  • Theocracies
  • Transitional political systems – country is in transition  conflict & civil war
  • MDG (millenium development goals)
    • Eradicate extreme poverty & hunger
    • Achieve universal primary education
    • Promote gender equality & empower woman
    • Reduce child mortality
    • Improve maternal health
    • Combat HIV / AIS, malaria & other diseases
    • Ensure environmental sustainability
    • Global partnership for development

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