Development Flashcards
What is the harrod domer model theory
Assumes (in a closed economy) capital investment is entirely financed by savings
I=s. Therefore higher savings lead to more investment. Problem is poorer countries do not have saving so they can’t invest in infastructure
What is harrod - domer model
Increase in national saving - increase in net capital investment - larger capital stock available - increased productivity- rise in real gdp / gni - increased per capita incomes
What does economic growth depend on according to harrod domer
Level of national savings , productivity of investment, capital output ratio
What is a savings gap
Low per capita incomes limit household savings
Poorer countries also tend to have limited welfare / pensions system
Why can poorer countries not get loans
Countries can’t be sure they’ll get paid back
Sub Saharan savings gap compared to average
17% to 31
Countries like Kenya Rwanda
Kenya =7
Rwanda 11
Mozambique = 36
What is a foreign currency gap
Countries can’t import goods needed such as education, medicine capital. Means country can’t improve growth or development
When does a foreign currency gap
Imbalances of inflows and outflows of foreign currency and major currency needed
A country is consistently running a current account deficit
Remittances - an outflow of money from citizens working
When a countries outflow consistently is larger than currency inflows
What is capital flight
Foreign investors taking their capital out of a country to one with a more stable currency, often as a response to political, economic or social ability. Can lead to currency instability eg: inflation
Can include transfer of funds to foreign banks
Effects of capital flight
Reduced domestic investment
Weakens domestic currency
Loss of tax revenur
What is external debt
How much a country owes to foreign creditors such as other countries or IMF
The higher debt, the less chance of getting loans, meaning poorer countries find it harder to service their debts
Why is high external debt a growth barrier
Debt service cast - countries with high interest rates making it harder to service debts
Macroeconomic instability - may resort to inflationary policies, currency devaluation, fiscal austerity - all of which undermining economic growth and living standards
What are long run importance of human capital
Innovation and technological progress
Long term economic resilience
Increased entrepreneurship
Increased labour productivity - increasing efficiency
