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Economic Growth for Development World Bank est: 16% of growth from physical capital 64% 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 Two countries starting at the same PPF can achieve very different growth levels depending on where resources are used. Capital Goods A B Consumer Goods 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.)