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17.ConstraintsonGrowthandDevelopment
Economicgrowthandhumandevelopmentprogressisnotguaranteedandsomecountriesstruggletomaintainthe
minimumgrowthrateneededtobringdownratesofextremepovertyandsustainachosendevelopmentpath.
Overviewofsomeofthekeylimitersongrowthanddevelopment
Infrastructure
PrimaryExportDependency
MacroInstability
ConflictandCorruption
HumanCapitalWeaknesses
SavingsandForeignExchangeGap
NaturalCapitalDepletion
Inequality
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WhatFactorsCanLimitGrowthandDevelopment?
InfrastructureGaps
•
•
•
•
Infrastructureincludesphysicalcapitalsuchascriticalenergypowerandwatersupplies,sanitation,
telecommunications&transportnetworks,schoolsandhospitals
Evidenceshowsapositivecorrelationbetweenacountry'sdevelopmentandthequalityofitsroadnetwork
Poorinfrastructure:
o Causeshighersupplycostsanddelaysforbusinesses
o Reduceslabourmobilityandhurtstheabilityofexporterstogetproductstoglobalmarkets.
AccordingtotheWorldBank,transportcostsare25-30%ofproductcostsindevelopingcountriespartly
becauseofdeficienciesininfrastructure
Examplesofinfrastructuredeficiencies:
1.
2.
3.
4.
India:India’sirrigationsystemisnotproperlymanagedandthishasmadeitdifficulttosustainfoodgrain
productionwhenrainfallislessthanexpected–aswasthecasein2012.Thishasledtoasurgeinfoodprices,
whichhitsthepoorestcommunitieshardest.Forafewdaysinthesummerof2012,muchofnorthernIndia
wasplungedintodarkness.About700millionpeoplewereleftwithoutpower,asituationthataffected
transport,communication,healthcare,industriesandfarming.Indianeedsanestimated$400bninvestment
inthepowersectorifitistomeettheirdevelopmentgoals.AbouthalfofIndia’sroadsarenotpaved.
Asia-inAsia,anestimated300mpeoplehavenoaccesstocleandrinkingwaterduetoinfrastructuregaps
Brazil:Hostforthe2014WorldCupandthe2016Olympics.Brazil’sgrowthisconstrainedbyinfrastructure
weaknesses:In2011,only14%ofherroadswerepaved.TheWorldEconomicForumranksBrazil’squalityof
infrastructure104thoutof142countriessurveyed,behindChina(69th),India(86th)andRussia(100th).
Sub-SaharanAfrica:Thecombinedpowergenerationcapacityofthe48countriesofSub-SaharanAfricais68
gigwatts–nomorethanSpain’s.Poorroad,railandharbourinfrastructureadds30-40%tothecostsof
goodstradedamongAfricancountries.Achronicshortageofenergy-withfirmsandpeoplefacingacute
shortagesofpower–isamajorbarriertogrowthanddevelopment.AccordingtotheAsianDevelopment
BankReportfor2013,Africacurrentlyinvestsjust4%ofitsGDPininfrastructure,comparedwithChina's
14%.Sub-SaharanAfricaloses2.1%ofgrossdomesticproductfromblackoutsalone Onelimitationtoinfrastructureinvestmentindevelopingcountriesisthattaxrevenuesareloworcomefroma
narrowbaseofbusinesses.Manycountrieswillneedtoincreasetheirspendingoninfrastructureintheyearsaheadto
dealwiththeconsequencesofclimatechange.AccordingtotheUnitedNations,between1901and1910therewere
eighty-tworecordednaturaldisasters,butbetween2003and2012thereweremorethan4,000
Examtip:Examinersreportthatstudentsarenotgoodatexplainingexactlyhowimprovedinfrastructurecanraise
development.Takeastep-by-stepapproach,usinggoodappliedexamplestoimproveyourmarks.
PrimaryProductDependency
•
•
•
•
Manynationsstillrelyingonspecializinginandexportinglowvalueaddedprimarycommodities
Thepricesofthesegoodscanbevolatileonworldmarkets
Whenpricesfall,aneconomywillseeasharpreductioninexportincomes,anadversemovementintheir
termsoftrade,risksofahighertradedeficitandadangerthatanationwillnotbeabletofinancestate-led
investmentineducation,healthcareandcoreinfrastructure
Despitebeingrichinnaturalresources,formanycountriesthisisacurseratherthanablessing
Sub-SaharanAfrica(SSA)isoftencitedasaregionwhereprimarysectordependenceishigh.SSA’sshareinglobal
manufacturingtraderemainsextremelylow.
PrimaryDependencyandExternalEconomicShocks
•
•
Eventsinonepartoftheworldcanquicklyaffectmanyothercountries
Forexample,theglobalfinancialcrisis(GFC)broughtaboutrecessioninmanycountriesandfinancialdistress
inmanyregions.ItalsoledtoafallinFDIflowsintomanypoorercountriesandpressureongovernmentsin
richnationstocutoverseasaidbudgets.
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•
•
Ifaresourcerichcountryexportstheresource,itexposesitselftodamagingvolatilityofitsexportearnings
In2010,economistsBrucknerandCicconefoundthata10%fallinincomeduetofallingcommodityprices
raisesthelikelihoodofcivilwarinsub-SaharanAfricabyaround12%.
LandLockedCountries
•
•
Landlockedeconomiesfacechallengestointegrateinglobaltrade–withoutgoodinfrastructureand
efficientlogisticsbusinessesitcanbecostlyandslowtogetproductstothecountriesoftradepartners
Somelandlockedcountrieshavebeendoingwellespeciallywhentheyachieveregionaleconomicintegration
withotherland-lockednations.Investmentinairtransportlinkshelpstoovercomethisdevelopmenttrap
TheSavingsGap
•
•
Savingsareneededtoprovidefinanceforcapitalinvestment.Inmanysmallerlow-incomecountries,high
levelsofpovertymakeitalmostimpossibletogeneratesufficientsavingstoprovidethefundsneededto
fundinvestmentprojects.Thisincreasesrelianceontiedaid.
Thisproblemisknownasthesavingsgap.InAfricaforexample,savingsratesofaround17percentofGDP
compareto31percentonaverageformiddle-incomecountries.Lowsavingsratesandpoorlydevelopedor
malfunctioningfinancialmarketsmakeitmoreexpensiveforAfricanpublicandprivatesectorstogetfunds
forinvestment.Higherborrowingcostsimpedecapitalinvestment
VolatileIncomesandVulnerableEmployment
•
Volatilitycanbedisruptivetoeconomichealth.Itincreasestherisksforbusinessesconsideringcapital
investment,itraisesthechancesofpeoplefallingintoextremepovertyanditmakesanation’sfinancesmore
fragileperhapsloweringthescopeforimportantinvestmentinpublicgoods.
Thereisanincreasingtrendtowardstemporarycontractsandinsecureworkacrosstheworld,accordingtothe
InternationalLabourOrganization(ILO).Infact,onlyaquarterofglobalworkersareonpermanentcontractswhilethe
restareunpaidathome,self-employed,workinginformallyoremployedonatemporarycontract
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WeaknessesinManagement
•
•
•
Fewtextbooksgiveemphasistothequalityofbusinessmanagementasaconstraintongrowthand
subsequentdevelopment.Afundamentalcauseofpovertyislowwagesandpovertypayislinkedto
relativelylowproductivity(measuredindifferentwayssuchasthevalueofoutputperpersonemployed).
EconomistssuchasNicholasBloomfromStanfordUniversityintheUSAhavebeenstudyingtheimpactof
weakmanagementinsomedevelopingcountriesincludingIndia.Bloomhasarguedforexamplethat“InIndia
arebadlymanaged:equipmentisnotlookedafter,materialsarewasted,andtheftiscommonbecause
inventoryisnotmonitored,defectskeepoccurring.InarecentprojectwiththeWorldBank,wefoundthat
givingmanagementadvicetoIndianfactoriesincreasedproductivityby20%.”
Weakermanagementmayalsohelptoexplainwhymanypoorercountrieshavenotfullyandintensively
adoptednewtechnologies.Manyoftheleastdevelopedcountriestendtousetechnologieslessintensively-
fewerpeopleuselessadvancedcomputerslessoften.
CapitalFlight
•
•
•
•
Capitalflightistheuncertainandrapidmovementoflargesumsofmoneyoutofacountry
Therecouldbeseveralreasons-lackofconfidenceinacountry'seconomyand/oritscurrency,political
turmoilorfearsthatagovernmentplanstotakeprivately-ownedassetsunderstatecontrol
Capitalflightcanleadtoalossofforeigncurrencyreservesandputdownwardpressureonanexchangerate
–drivingthepricesofessentialimportsofgoodsandserviceshigher.
Developingcountriesareestimatedtohavelost$5.86trillionin2001-2010toillicitfinancialflows
Conflicts,CorruptionandPoorGovernance
•
•
•
•
Governancereferstohowacountryisrunandwhethertheexerciseofauthoritymanagesscarceresources
wellimprovingeconomicoutcomesandthequalityoflifeforacountry’speople.
Highlevelsofcorruptionandbureaucraticdelayscanharmgrowthbyinhibitinginwardinvestment
Corruptionmakesitlikelythatdomesticbusinesseswillinvestoverseasratherthanathome.
AccordingtotheUnitedNations,“Corruptionundermineshumandevelopmentanddemocracy.Itreduces
accesstopublicservicesbydivertingpublicresourcesforprivategain.”
Corruption
Impact
Fairness
Keepingtrackof
electionpromises
Isthegovernment
deliveringkeypublic
services?
Canpeopletrust
governmentand
institutions?
Lowtransparencyof
wheretaxrevenues
comefrom
Howisthismoney
spent?Doesit
delivergood
outcomesper$
spent?
Howfreeof
corruptionisthe
government?
Howisstatemoney
spentandon
whom?
Isspendingeffective
inpromotinglong
rungrowth?
Isthedistributionof
spendingequitable?
Governmentsneedastableandeffectivelegalframeworktocollecttaxestopayforpublicservices.InIndiafor
example,thereare15timesmorephonesubscribersthantaxpayers.Ifalegalsystemcannotprotectprivateproperty
rightsthentherewillbelessresearchanddevelopment&innovation.
Conflicts–therehavebeenanestimated150conflictssince1945with28milliondeaths(thisistwicethetollof
WW1).Conflictshavehugecollateraldamageeffects–forexample,Angolahaslost80%ofitsfarmlandbecauseof
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landmines.Mostconflictsareintra-statei.e.civilwarandreconstructioncantakedecadesandmanycountries
remainaid-dependent.About1.5billionpeopleliveincountriessufferingwavesofpoliticalandcriminalviolence.
ArecentexampleofthecostofconflictcomesfromtheIvoryCoast.Afteradisputedpresidentialelectioninlate2010
violenceeruptedandthecountrydescendedintoafour-monthcivilwarthatkilledanestimated3000anddisplaced
aroundamillionpeople.ThewarcouldonlybeendedbyaFrenchinterventioninApril2011.Sincethen,anew
governmentunderPresidentOuattarahasstruggledtore-establishsecuritybutraidsagainstarmyandpolicy
installationsstillthreatenstability.
CorruptionhaslongbeenabarriertosustainedgrowthanddevelopmentinAfrica.Conflicthashadterrible
consequences;overonethirdofeconomiesinAfricahavesufferedsomekindofwarfarefromRwanda,SierraLeone,
Eritrea,Uganda,andSomalia.Corruptioncancostacountryupto17%ofitsGDPaccordingtotheUnitedNations.
ThatsaidencouragingprogresshasbeenmadeinbuildingdemocraticinstitutionsinmanyAfricancountries.
Economicgrowthcancollapseandgointoreversewhenstatesfail–therearenumerousreasonswhychronic
governmentfailurecanhampergrowthanddevelopment:
•
•
•
•
•
Failurestoprotectpropertyrightsandprovidesufficientincentivesfornewbusinessestoflourish
Forcedlabour,castelabourandotherformsofdiscrimination–allofwhichwastescarcehumanresources
notleastlimitingtherolesthatwomencanplayinlabourmarketsand–overthelongterm-holdingback
innovationandtechnologicalprogress(twokeydriversofgrowth)
Powerelitescontrollinganeconomy-usingtheirpowertocreatemonopoliesthatkeepconsumerprices
highandblockingsociallyusefulnewtechnologies
Statelessareas-largepartsoftheworldarestilldominatedbystatelesssocietieswheretheruleoflaw
barelyexists
Publicgoods-chronicfailurestoprovidebasicandeffectivepublicservicessuchaseducation,healthand
transport.Manyoftheworld’sleastdevelopedcountrieshavenotbuilteffectivetaxsystemsandsotheir
revenuebaseisinadequateformuchneededcapitalinvestmentandtheannualrevenuesrequiredtoprovide
publichealthandeducationprogrammes
PopulationDecline,BrainDrainsand/oranAgeingPopulation
•
•
•
Afallingpopulationcanusuallybeattributedtoemigrationand/ordeathratesexceedingbirthrates.
Ifanationlosesyoungerworkers,thiscanhaveadamagingeffectoncompetitivenessandgrowth
Thechangingage-structureofapopulationalsomatters,leadingtoafallintheratioofworkersto
dependantsi.e.ariseintheage-dependencyratio
DemographicchangeisimportanttomanyofthefastgrowingcountriesinAsia.
•
•
•
MostcountriesinEastAsiaareexpectedtoexperienceadeclinetheportionoftheirworkingagepopulation
(15-64years)tototalpopulationfromnowuntil2025
Sevencountriesareexpectedtoseedeclinesof10percentormore(includingChina,Japan,Thailandand
Vietnam)whilethreewillseedeclinesofover20percent(HongKongSARChina,KoreaandSingapore)
CountriessuchasIndonesia,Mongolia,MyanmarandVietnamareforecasttoseeadeclineintheir
populationsizeduetoacombinationofemigrationanddemographics
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DecliningpopulationsinEasternEurope
•
•
•
•
ManycountriesinEasternEuropefacethechallengeofcontinuedpopulationdecline.Onlytwooutoftwelve
countrieswillexperiencepopulationgrowthaccordingtorecentestimates.
Therelationshipbetweendemographictrends,per-capitaincomeandeconomicgrowthiscomplex.
Lowerper-capitaincomeshouldleadtohighergrowth,butithasanegativeimpactonthelaboursupply.
ManycountriesinEasternEuropewillhavetorelyoncapitalaccumulationandproductivitygrowthrather
thanlabourforcegrowthtogeneratefutureeconomicgrowth.
Russia–isexperiencingasustaineddeclineintheirpopulationandtheiractivelabourforce.Highlevelsofnet
migration,risingdeathrateslinkedtoexceptionallyhighaccidentratesandtheeffectsofalcoholabusehaveall
contributedtoafallinpopulationtobelow150million.
Globallytheworld’spopulationisageing.Withinnext10years,therewillbe1billionolderpeopleworldwide.By2050
nearlyoneinfivepeopleindevelopingcountrieswillbeover60
Countrieswiththelowestfertilityratein2014
Thefertilityrateistheaveragenumberofchildrenbornperwomanofchildbearingageinacountry.Usually,a
womanagedbetween15and45isconsideredtobeinherchildbearingyears
Singapore
Macau
Taiwan
HongKong
SouthKorea
Lithuania
Ukraine
Romania
Poland
Slovenia
0.80
0.93
1.11
1.17
1.25
1.29
1.30
1.32
1.33
1.33
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HighrateofInflationandtradedeficits
HighInflation
•
•
•
Fastergrowingcountriesmayexperiencehighinflationwhichcanhavedamagingeconomicconsequences
Developingcountriestypicallyhavehigheraverageinflationratesthanadvanced,richnations
Theseeffectsofhighinflationinparticularcanhitgrowth
o Fallingrealincomesandprofitstogetherwithhighercosts
o Thethreatofariseinextremepovertyforthemostvulnerableinanation’spopulation
o Reducedplannedinvestmentbybusinesses
o Negativeeffectsfromhigherinterestratesusedtocombatinflationproblems
o Reducedcompetitivenessininternationalmarketsleadingtoalossofexportsales
PersistentTradeDeficits
•
•
•
Somecountriesmayexperiencelargedeficitsonthecurrentaccountoftheirbalanceofpayments.This
meansthatthevalueofimportedgoodsandservicesisgreaterthanthevalueofexportsandnetinvestment
incomesleadingtoanoutflowofmoneyfromtheireconomy.
Hightradedeficitsmighthavetobecoveredbyforeignborrowing(increasingexternaldebt)orarelianceon
inflowsofcapitalinvestmentfromoverseasmultinationals
Largetradegapscaneventuallyleadtoacurrencycrisisandpossiblelossofinvestorconfidence.
Over-extractionoftheNaturalResourceBase
•
•
•
•
•
Despitebeingheavilyendowednaturalresources,Africahasthehighestpovertyrateintheworld
Naturalresourcesprovideasourceofwealthformanylower-incomecountriesandwhenworldpricesare
high,thereisanincentivetoincreaseextractionratestoraiseshort-termexportearnings.Thismightleadto
ahighrateofextractionthatdamagesgrowthpotential
Deforestationandrapidextractionofoceanicfishstocksthreatendevelopment.TheWorldBankfindsthat
350millionjobsarelinkedtothehealthoftheoceansand1billionofthepoorestpeopleintheworlddepend
onfishastheirmajorsourceofprotein
Criticalwaterscarcityinagricultureisamajorproblem.TheMDGfordrinkingwaterwasmetin2010,yet1
billionstilllackaccesstocleanwater.Thenumbersufferingwithwaterscarcityisexpectedtoriseto2.8
billionby2025
Extremeweathereventsarebecomingmorefrequent.Thedamagingeffectsoftheseextremeclimatic
eventsfallmostheavilyonthepoorestandmostvulnerablecommunitiesindevelopedanddeveloping
countries.
LowLevelofInvestmentinHumanCapital
•
•
•
•
•
•
Tosustaingrowthrequiresimprovementsinproductivity,research&developmentandinnovation.Whilst
physicalcapitalsuchastechnologyplaysarole,sotoodoesthequalityofthehumaninputintoproduction.
Growthmightbelimitedbyskillsshortagesasbusinessesseektoexpandwhichforcesuplabourcosts.
Highlevelskillsandqualificationsarealsoneededtohelpbusinessestomoveupthevaluechainandsupply
productsthatwillgethigherpricesintheworldeconomy.
Inmanycountriesthereareacuteshortagesofhumancapital.Althoughprimaryenrolmentrateshaverisen,
secondaryenrolmentandteacherqualityispoorandthetertiaryeducationsectoristinyandlowquality.
Highereducationisalsohighlyimportant.Forexample,universityenrolmentinAfricaisonly7%ofthe
relevantagegroupversusaworldaverageof30%
Somecountrieslosesomeofitslimitedskilledworkforcetoothercountriesthroughabraindrain
InequalityofIncomeandWealth
Althoughtwodecadesormoreofglobalisationhasstrengthenedgrowthratesinmanylowerandmiddle-income
countries,ithasbroughtanincreaseininequalitiesofincomeandwealth.
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•
•
•
Therearemanypossibledangersofthisnotleastthecostsofsocialtensionandconflictandincreasing
spendingoninsurance,lawandordersystemsandgovernmentwelfarebills.
Recenttheoreticalworkfindsanegativecorrelationbetweenincomeinequalityandeconomicgrowth.One
book-TheSpiritLevel(KatePickettandRichardWilkinson)findsevidencethatunequalsocietiesmay
becomelesscompetitiveovertime.
AnIMFpaperpublishedin2013economistsclaimedthat“inequalitycanundermineprogressinhealthand
education,causeinvestment-reducingpoliticalandeconomicinstability,andundercutthesocialconsensus
requiredinthefaceofshocks,andthustendstoreducethepaceorgrowth.”
Consumptionandmis-allocationof
resources
Risk-taking
• Lowincomefamiliesspendahigher%oftheirincomes- inequalities
depressconsumerdemand
• Investmentskewedtowardspreferencesoftherich
• Incentivesareundoubtedlyneededforenterprise
• Butexcessivecompensationcanencouragetoomuchrisk-taking
especiallyinfinancialmarkets
Marketfailures
• Highinequalitydeprivesmanypeopleofaccesstoeducationlimiting
humancapitalgrowth
• Manyofthepoorestpaymorefortheirdebt
Unemploymentandsocialcohesion/
upheaval
• Structuralunemploymentandvulnerableemploymentincreasesthe
burdenonthestate
• Lowemploymentdamagessocialcapital
EconomicandHumanCostofMalnutrition
Highratesofmalnutritioncanseverelyimpairdevelopmentandbringuntoldhumanmisery.Poornutritioncanhave
seriousnegativeeffectsondevelopmentprospects.
•
•
•
•
•
•
•
Itimpairsbraindevelopment–nearlyoneinfiveunder-5childreninthedevelopingworldareunder-weight.
165millionchildrenunder-5sufferfromstunting
Itisresponsibleforhalfofallchilddeaths–38%ofunder-fivechildreninthepoorest20%offamiliesin
developingcountriesareunderweightcomparedto14%ofunder-fivesinthewealthiest20%
Undernutritioncauses45%ofchilddeathsinsub-SaharanAfrica
Of44countriesinsub-SaharanAfrica,allbuttwohavechildstuntinglevels>20%
ItincreasestherisksofHIVinfectionandcutsthenumberswhosurviveoutbreaksofmalaria
Malnourishedchildrenaremorelikelytodropoutofschoolandsufferreductionsintheirlifetimeincomes
AccordingtotheWorldBank,“theeffectsofthisearlydamageonhealth,braindevelopment,educability,and
productivitycausedbymalnutritionarelargelyirreversible.”
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Therehasbeenprogressinreducingmalnutritiongloballybuthighpricesforbasicfoodsinrecentyearshavebecome
amajorprobleminthefightagainstendemicmalnutrition.Anothereffectisthathighfoodpricesmakesubstitutionof
unhealthycaloriesmorelikely,contributingtoglobalobesitylevel.
Policiestoreducemalnutrition
1.
Spendingonnutritioneducationplusdirectprovisionofmicro-nutrientsupplementsandfortifiedfoods
2.
Growthmonitoringschemesforthenewlybornandinfantssupplementedwithvitaminprovisionfrom
communityorganisations
3.
Targetingculturalnorms–insomecountries,girlsareoftenallowedtoeatonlyaftertheirbrothers
4.
Cashtransfers–i.e.consumersubsidiesthatcanbespentoncertainfoods
5.
Governmentsubsidiesforgrainpricesandexportbansondomesticallyproducedfoods
6.
Highermarketpricespaidtosmall-scalefarmers
7.
Openingupretailmarketstointernationalsupermarketswherefoodpricesmightcomedownthrough
economiesofscaleandincreasedcompetition
8.
Infrastructurespendingtoimproveaccesstoandqualityofsanitationandcleanwatersupplies
GenderInequalitiesandDiscrimination
Theunequalopportunitiesavailabletohundredsofmillionsofwomenaroundtheworldrepresentoneofthebiggest
barrierstogrowthanddevelopment.AccordingtotheUNHumanDevelopmentReport:“Alltoooften,womenand
girlsarediscriminatedagainstinhealth,education,politicalrepresentation,labourmarket,etc.—withnegative
repercussionsfordevelopmentoftheircapabilitiesandtheirfreedomofchoice.”
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1)
2)
3)
4)
Justoverhalfoftheworld’sfemalepopulationaged15-64isinemployment,comparedtomorethan8outof
10men.Buttheproportionofeconomicallyactivewomenhasdeclinedinthelast20years
Inmanycountrieswomenaresubjecttoculturalnormspreventingthemplayingafullandactiverole
a. AccordingtotheWorldBank,232millionwomenliveineconomieswheretheycan'tgetajob
withouttheirhusband'spermission
b. Only1in4womenintheArabworldparticipateinthelabourforce
c. Lessthan10%ofcreditforsmallfarmersinAfricaisdirectedtowomen
d. WithoutID,womencan’taccessabankaccount,vote,claimentitlementsorinheritproperty
e. Womenmakeup70%ofAfrica’sfarmersbutthemajorityarelockedoutoflandownership
f. Inonlytwocountries,CubaandRwanda,doestheshareofwomeninparliamentmatchorexceed
theirshareinthepopulation
Someprogressisbeingmade,from2009to2011,39developingcountriesmadelegalchangestowards
genderparity–butonly38outof141nationssetthesamelegalrightsformenandwomen
Womeninmanycountrieshaveasubstantialroleintheinformaleconomy,workinginfamilybusinesses,
doingdomesticworkandproducinggoodsforself-consumption.Thistypeofworkgenerallyofferslow,
irregularornopayandlittleornoaccesstosocialsecurityorlegalprotection
SavingsGapandForeignExchangeGap
LimitedScalesandEfficiencyofFinancialMarkets
•
•
•
Manyoftheleastdevelopedcountrieshavelimitedfinancialmarketssuchasbanking,moneyandcredit
systems,insurancemarketsandstockmarkets.
Worldwide,approximately2.5billionpeopledonothaveaformalaccountatafinancialinstitution.Accessto
financialservicesislinkedtoovercomingpoverty,reducingincomedisparities,andincreasinggrowth
Theseareessentialforprovidinglongtermcapitalfortheprivatesectorandhelpingtochannelsavingsand
providefundsforinvestmentprojects.
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•
SomeprogressisbeingmadeinSub-SaharanAfrica–therearenow19stockmarketsinoperation–butmost
ofthesearesmallbyinternationalstandards.TheNigerianstockmarketaccountsforonly3%ofBrazilor
India’sstockmarketcapitalization.
SavingsGaps
•
•
Manypoorercountriesdonothavesufficientdomesticsavingstobeabletofinancetherequiredrateof
capitalinvestmenttopromoteeconomicgrowth
Manydevelopingcountriesalsosufferfromashortageofforeignexchangethatcanbeusedtofinance
importsofconsumergoodsandservices,rawmaterialsandcomponentsandnewcapitalinputs
Derivingthesavingsgapandtheforeignexchangegaps
Thinkingbacktointroductorynationalincomeaccounting
•
•
•
•
•
•
•
•
Yistotaloutputproducedinagivenyear(GDP)
Cisprivateconsumption
Istandfortotalinvestment
Gisgovernmentconsumption
Xdenotesexports
Mrepresentsimports
Sissavings
Tstandsfortotalgovernmenttaxrevenue
Weknowthat
•
•
Y(GDP)=C+I+G+X-M
YisalsothesumofC+S+T
Rearranging
•
C+I+G+X-M=C+S+T
Therefore
•
S-I=(X-M)+(G-T)
Thisgivesusanequationexplainingthetotalresourcegapofaneconomyintointernalbalance(i.e.thegovernment
budget)andalsotheexternalgap(balanceoftrade)
OverviewofFinancingforDevelopment
Themainsourcesoffinancefordevelopmentare:
•
•
•
•
•
Savingsfromthedomesticprivatesector
Revenuesofdevelopingcountrygovernmentsthemselves
Overseasdevelopmentassistance(otherwiseknownasoverseasaid)
Loanstakenoutby(orguaranteedby)developingcountrygovernments,frominternationalfinancial
institutionsorprivatesources
Privateexternalfinance,intheformofforeigndirectinvestment(FDI)andotherportfolioflowse.g.into
bondandstockmarkets
Withoutquestion,privatesectorfinancingnowdominatesthefinancialflowsthatarefundingdevelopmentprojects
inmostoftheworld’slowerandmiddle-incomecountries.
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