Economic growth


Published on

  • Be the first to comment

  • Be the first to like this

No Downloads
Total views
On SlideShare
From Embeds
Number of Embeds
Embeds 0
No embeds

No notes for slide

Economic growth

  2. 2. What is Economic Growth ?
  3. 3. Benefits of Economic Growth
  4. 4. Benefits of Economic growth  Increases in economic growth should enable more of everything to be produced  Increases possibility of providing consumer goods for all  More consumer goods, etc. could be equated with an increase in living standards  Wealth generated may eventually „trickle down‟ to those who are poor by means of income distribution – taxes and benefits, etc.
  5. 5. Obstacles to (and Sources of) Economic Development  Natural resources  Human resources  Capital formation  Technology  Sociocultural and institutional factors
  6. 6. 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
  7. 7. 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, investmen t)
  8. 8. 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.
  9. 9. 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
  10. 10. Sociocultural Obstacles  Culture, traditio n and custom  Tribal allegiances and animosity  Views regarding work and individual achievement
  11. 11. Institutional Obstacles  Corruption and bribery  Education systems  Land ownership (too concentrated or too fractured)
  12. 12. Models of Development
  13. 13. Rostow - Stages of Growth
  14. 14. Rostow - Stages of Growth  The work of American Walt W. Rostow  Rostow is an economic historian  Countries can be placed in one of five categories in terms of its stage of growth:
  15. 15. Stages of Growth 1. Traditional Society  Characterised by  subsistence economy – output not traded or recorded  existence of barter  high levels of agriculture and labour intensive agriculture Village in Lesotho. 86% of the resident workforce in Lesotho is engaged in subsistence agriculture.
  16. 16. Stages of Growth 2. Pre-conditions:  Development of mining industries  Increase in capital use in agriculture  Necessity of external funding  Some growth in savings and investment The use of some capital equipment can help increase productivity and generate small surpluses which can be traded.
  17. 17. Stages of Growth 3. Take off:  Increasing industrialisation  Further growth in savings and investment  Some regional growth  Number employed in agriculture declines At this stage, industrial growth may be linked to primary industries. The level of technology required will be low.
  18. 18. Stages of Growth 4. Drive to Maturity:  Growth becomes self- sustaining – wealth generation enables further investment in value adding industry and development  Industry more diversified  Increase in levels of technology utilised As the economy matures, technology plays an increasing role in developing high value added products.
  19. 19. Stages of Growth 5. High mass consumption  High output levels  Mass consumption of consumer durables  High proportion of employment in service sector Service industry dominates the economy – banking, insurance, finance, marketing, entertainment, leisure and so on.
  20. 20. Criticism  Too simplistic  Necessity of a financial infrastructure to channel any savings that are made into investment  Will such investment yield growth? Not necessarily  Need for other infrastructure – human resources (education), roads, rail, communications networks  Efficiency of use of investment – in palaces or productive activities?  Rostow argued economies would learn from one another and reduce the time taken to develop – has this happened?
  21. 21. KEYNESIAN THEORY  Keynesian economics is a theory suggested by John Maynard Keynes in which government spending and taxation is used to stimulate the economy. This theory is also called fiscal policies or DEMAND-SIDE ECONOMICS.
  22. 22. Theory  Keynes argued that an economic slump was not a long-run phenomenon that we should all get depressed about and leave the markets to sort out. (Remember that Smith felt that government should always stay out of economic policy---laissez-faire) Keynes felt that a slump (or trough) was a short-run problem stemming from a lack of demand.  If the private sector was not prepared to spend to boost demand, then the government should do it instead by running a budget deficit. When times were good again and the private sector was spending again, the government could trim its spending and pay off the debts they had accumulated during the slump.
  23. 23. Theory  So his theory was that the government should actively intervene in the economy to manage the level of demand.  These policies are often known as DEMAND MANAGEMENT POLICIES, aptly named since the idea of them is to manage the level of aggregate demand.  COUNTER-CYCLICAL DEMAND MANAGEMENT POLICIES. They are called this because the government should be doing the exact opposite to the trade cycle.
  24. 24. We can see these policies in the graph below: AD1 AD2 AD3 AD4 Q 1 Q 2 Q 3 Q4 P R I C E S OUTPUT If aggregate demand is low (AD1), then government should pursue Reflationary policies, such as cutting taxes or boosting government spending to push AD higher and boost employment and output.
  25. 25. We can see these policies in the graph below: AD1 AD2 AD3 AD4 Q 1 Q 2 Q 3 Q4 P R I C E S OUTPUT However, if aggregate demand is high (AD4), causing demand-pull inflation, then government should pursue Deflationary policies, such as increasing taxes or cutting government spending to reduce demand.
  26. 26. Keynesian theory application to underdeveloped countries  The Keynesian thesis is not appropriate to all socio-economic groups. It is applicable to sophisticated democratic capitalist fiscal systems. Schumpeter has defined as follows: “Practical Keynesianism is a seedling which cannot be transplanted into foreign soil; it dies there and becomes poisonous before it dies. But left in English soil this seedling is a healthy thing and promises both fruit and shade. All this applies to every bit of advice that Keynes ever offered.”
  27. 27. Keynesian Postulations and Underdeveloped Countries  Keynesian thesis depends on the subsistence of cyclical redundancy which happens during recession. It is due to insufficiency in effective demand. Redundancy can be eliminated by an enhancement in the level of valuable demand. But the nature of redundancy in an under developed nation is quite diverse than that in a developed nation.  In such fiscal systems redundancy is unremitting somewhat than recurring. It is not caused by the insufficient effectual demand but consequently due to insufficiency in capital resources.
  28. 28. Continues ……  The Keynesian Thesis depends on the postulations of closed financial system. But underdeveloped nations are not closed financial systems. They are open financial systems in which overseas trade acts a leading role in developing them. Such financial systems foremost depends on the exports of farming and industrial inputs and the imports of capital goods. Therefore, the Keynesian financial system has little significance to underdeveloped nations in this respect.  The Keynesian thesis presumes a surplus supply of labor and other complementary resources in the financial system. This study refers to a recession fiscal system where “the industries, machines, managers and workers as well as consumption habits are all there only waiting to resume their temporarily suspended functions and roles.”
  29. 29. The Keynesian Instruments and Underdeveloped Nations  Effective Demand  Inclination to Consume
  30. 30. Effective Demand  Redundancy is due to insufficiency of effective demand and to get over it, Keynes suggested the stepping up of consumption and non- consumption outlays. In an under developed nation, nevertheless, there is no in-deliberate redundancy but camouflaged redundancy. Redundancy is not due to insufficiency of harmonizing resources.  The concept of effective demand is appropriate to that financial system where redundancy is due to surplus thrift. In such a condition the antidote lies in stepping up the levels of consumption and investment through assorted monetary and fiscal instruments. But in under developed financial system earnings levels are extremely low, the inclination to consume is very huge and cutbacks are almost zero.  All labors to enhance money earnings through monetary and fiscal instruments will, in the non-presence of harmonizing resources lead to price inflation. Here the difficulty is not one of raising the effective demand but one of raising the levels of employment and per capita earnings in the context of fiscal growth.
  31. 31. Inclination to Consume  One of the significance equipment of Keynesian fiscal is the propensity to consume which emphasizes the correlation amidst consumption and income. When earnings enhances, consumption also enhances but by less than the addition in income. This behavior of consumption further explains the rise in saving as earnings hikes.  In under developed nations these correlations amidst earnings, consumption and thrift do not grasp. People are very deprived and with their earnings enhancement, they expend more on consumption goods for the reason that their inclination is to meet their unfulfilled needs. The marginal inclination to consume is very huge in such nations, whereas the marginal inclination to save is very less.