Economic Growth and

Development
The Ultimate End-Game of
Economic Analysis
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?
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
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.

Defining the Challenge
So, just how big is the global
development challenge?
Lets take a look
Obstacles to (and Sources of)
Economic Development
Natural resources
Human resources
Capital formation
Technology
Sociocultural and institutional factors
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
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)

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.
Capital Formation
Relatively high level of investment
risk in LDCs acts as a disincentive for
investment
Political risk
Currency devaluation
Poor public infrastructure
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
Sociocultural Obstacles
Culture, tradition and custom
Tribal allegiances and animosity
Views regarding work and individual
achievement
Institutional Obstacles
Corruption and bribery
Education systems
Land ownership (too concentrated or
too fractured)

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


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