4.1. Economic Development

Economic growth is a long-term expansion of the productive potential of the economy

Trend growth refers to the smooth path of long run national output

Measuring the trend rate of growth requires a long-run series of data perhaps of 20-30 years or more in order to calculate average growth rates from peak to peak across different economic cycles

What determines the rate of economic growth?

• Every country is different, each factor will vary in importance for a country at a given point in time

• Remember too that in our inter-connected globalizing world, growth does not happen in isolation. Events in one country and region can have a significant effect on growth prospects in another

Growth Drivers

Here are some of the main determinants of economic growth – they apply for both developing and developed countries although the relative weighting that we might attach to each will depend on the individual circumstances facing each country or region.

• Growth in physical capital stock - leading to a rise in capital per employee (capital deepening)

• Growth in the size of the active labour force available for production

• Growth in the quality of labour (human capital)

• Technological progress and innovation driving productivity improvements i.e. higher GDP per hour worked

• Institutions - including maintaining the rule of law, stable democracy, macro-economic stability

• Rising demand for goods and services - either led by domestic demand or from external trade

The 20 countries with the highest growth of the gross domestic product (GDP) in 2017 (compared to the previous year)

http://www.statista.com/statistics/273977/countries-with-the-highest-growth-of-the-gross-domestic-product-gdp/

Threats / Challenges to Economic Growth

• Changes in the real exchange rate affecting competitiveness

• Cyclical fluctuations in national output and external trade

• Financial instability e.g. unsustainable credit boom and fall in savings

• Volatility in world prices for essential imports and key exports

• Political instability / military conflicts

• Natural disasters and other external supply shocks

• Unexpected breakthroughs in the state of technology

Economic Development

What is Human Development?

“Human development is the expansion of people’s freedom to live long, healthy and creative lives; to advance other goals they have reason to value; and to engage actively in shaping development equitably and sustainably on a shared planet. People are both the beneficiaries and the drivers of human development, as individuals and in groups”

What does economic development mean?

Michael Todaro specified three objectives of development:

• Life sustaining goods and services: To increase the availability and widen the distribution of basic life-sustaining goods such as food, shelter, health and protection.

• Higher incomes: To raise levels of living, including, in addition to higher incomes, the provision of more jobs, better education, and greater attention to cultural and human values, all of which will serve not only to enhance material well-being but also to generate greater individual and national self-esteem.

• Freedom to make economic and social choices: To expand the range of economic and social choices available to individuals and nations by freeing them from servitude and dependence not only in relation to other people and nation-states but also to the forces of ignorance and human misery.

Note the emphasis placed on cultural and human values, self-esteem and freedom from ignorance; it is important to remember that development is about more than advancing economic growth. Many economists believe development should be less about growth, more about inclusive well-being and about building capacities and resilience in a fast-changing and unpredictable world.

The most common measurement of development is the Human Development Index published each year by the United Nations Development Programme Dudley Sears has defined development as “the reduction and elimination of poverty, inequality and unemployment within a growing economy”.

Nobel Economist Amartya Sen writing in “Development as Freedom”, sees development as being concerned with improving the freedoms and capabilities of the disadvantaged, thereby enhancing the overall quality of life - what really matters are the capabilities of people, that is, the extent of their opportunity set and of their freedom to choose among this set, the life they value.

Amartya Sen pursues the idea that development provides an opportunity to people to free themselves from deep suffering caused by

• Early mortality

• Persecution

• Starvation / malnutrition

• Illiteracy

For many, economic development should be about increasing political freedom, cultural and social freedom and not just about raising incomes

Amartya Sen on India

In An Uncertain Glory, Sen argues that India’s main problems lie in the lack of attention paid to the essential needs of the people, especially the poor

Despite considerable economic growth and increasing self-confidence as a major global player, modern India is a disaster zone in which millions of lives are wrecked by hunger and by pitiable investment in health and education services. Economic growth without investment in human development is unsustainable – and unethical.

Developing Countries: similarities and differences

There are many indicators that can be used to compare and contrast developing countries

Fall in Extreme Poverty

The number of people living on less than US$1.25 a day is projected to be 883 million in 2015, compared with 1.4 billion in 2005 and 1.8 billion in 1990. However, much of this progress reflects rapid growth in China and India, while many African countries lag behind

Diversity between developing countries

• No two developing countries are the same! There is a huge diversity between them

• There are many key structural economic differences between nations – for example:

1. The size of an economy (i.e. population size, basic geography, annual level of national income)

2. Historical background including years since independence from colonial rule

3. Natural resource endowment such as access to mineral deposits and a favourable climate

4. The age structure of the population, natural rates of population growth

5. Ethnic and religious composition

6. Relative size / importance of public and private sectors of the economy

7. Structure of national output (e.g. primary, secondary, tertiary and quaternary sectors)

8. Structure of international trade (both geographical and the commodity pattern of trade)

9. Political stability, strength of democratic institutions, transparency of government, level of corruption and ease of doing business

10. Ethnic and gender equality, opportunity and tolerance

11. The ease with which new businesses can be created and sustained

12. Other competitiveness indicators (see the chapter on competitiveness, trade and growth)

Percentage of people living below the poverty line in Asia-Pacific region - https://www.statista.com/statistics/651253/asia-pacific-proportion-of-population-below-the-poverty-line-by-country/

What are some of the Common Characteristics of Developing Countries?

These characteristics might include:

• Relatively low incomes per capita and a low level of absolute savings

• Lower absolute levels of productivity (labour and capital)

• Often endowed with rich natural resources

• A higher dependency on export incomes from primary commodities / low export diversification

• They have a large share of the population living in rural areas and employed in agriculture

• Limited scope and support provided by a welfare system

• A higher informal sector for example in partial subsistence farming

• Many industries in low-income countries tend to be some distance from technological frontiers

• Relatively fast growth of population and a younger average age

• Rapid urbanisation and large-scale rural-urban migration

• Weaknesses in infrastructure such as telecommunications, transport, ports, water and sanitation

• Weaknesses in institutions such as stable government, civil service money and capital markets

• Relatively higher tariffs and other import controls

• Tendency to have capital controls / relatively closed capital markets

• Lower access to advanced country markets

Poverty Cycle

The poverty cycle is a seemingly endless continuation of poverty. It is a vicious positive feedback loop. However, it can also be a negative feedback loop. Once a person or community falls below a certain level of resourcefulness, a chain of events starts to occur that tends to perpetuate the situation: progressively lower levels of education and training leading to lack of employment opportunities, leading to criminal activity (such as sale of illegal drugs) for survival, looting (another form of crime and a way of survival), leading to addiction, shattered health, early death, and breakup of family, leading to even bleaker future for the next generation ... and so on. This cycle continues until someone intervenes by providing worthwhile means (not handouts) for people to climb out of destitution, and by ensuring children's health and education. With help the poverty or vicious cycle can be turned into a virtuous one. The poverty cycle is also a great example of a negative feedback loop. This is an extremely hard cycle to break internally it is almost impossible so the external sources must help the people suffering from this cycle to become productive members of society.

Another cycle consists of the fact that low income leads to low savings, which leads to low investment, which leads to low income again.

Source: http://centralecon.wikia.com/wiki/Barriers_to_Growth_and_Development, accessed Monday, 9 November 2015

Example of Poverty Cycle Diagram

Economists generally assume that people's willingness to save for future consumption grows with their incomes. The poorer people are, the less they can afford to plan for the future and save. The same logic applies to businesses and governments. Thus in poor countries, where most incomes have to be spent to meet current- often urgent-needs, national saving tends to be low. Low saving hinders desperately needed domestic investment in both physical capital and human capital. Without new investment, an economy's productivity cannot be increased and incomes cannot be raised. That closes the vicious circle of poverty (Figure 6.2) So are poor countries doomed to remain poor?

Recent data on gross domestic investment in East Asia suggest that the answer is no. Despite low initial GNP per capita, gross domestic saving and gross domestic investment in the region were high and growing until the 1998 financial crisis (Figure 6.3). Experts are still trying to explain this phenomenon. Generally speaking, however, many of the factors that encourage people to save and invest are well known, including political and economic stability, a reliable banking system, and favorable government policy.

Task 3: Economic Development in Malawi - you should watch the four videos below and answer the case study questions on pages 12 - 16 of the document '4.1. Economic Development'

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