Savings gap

Question 1

Introduction

Answer 1

Introduction: The savings gap is when LEDCs do not have sufficient average incomes to enable rates of saving that are high enough to support the level of investment required to create the economic growth which could be achieved given the level of other resources. The difference between the required investment and the country’s own savings is called the “financial gap”. Donors fill the financial gap with foreign aid to attain target growth.
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Question 2

Three points

Answer 2

Forces PPD

Inhibits FDI

Restricts competitiveness in international markets

Question 3

PPD point

Answer 3

Forces Primary Product Dependency: Structural change models suggest that development required movement away from production of primary products to manufacturing or the tertiary sector. Those countries that have seen significant development (such as India and Brazil for example) have achieved this through utilising an increasingly skilled workforce. However movement to these types of markets relies upon capital. Without it, it is more likely to be forced into primary product production.

Question 4

PPD evaluation

Answer 4

Evaluation: Is a focus on the production of primary products so problematic LEDCs may maintain a comparative advantage in these products. Some products also exhibit higher YED (such as blueberries produced in Chile) which suggest that revenues will rise as global incomes rise. Therefore specialisation in these products may still make economic sense and allow these countries to maximise foreign currency income.

Question 5

FDI point

Answer 5

Inhibits FDI: A lack of capital caused by the savings gap means that a country less attractive for a foreign firm to invest in a country. This is because it will mean that foreign firms would have import all the equipment needed for their operations, and the labour force would not be experienced using such equipment. This investment could take the form of purchase of shares, building a factory, or taking over a company within the LEDC. This potential loss of FDI could prove detrimental for development because foreign firms bring finance, employment, management know-how and potential tax revenue with them.

Question 6

FDI evaluation

Answer 6

Evaluation: However a loss of FDI is not always problematic for the host country. Often the advantage of this investment is exaggerated. For example, whilst FDI can lead to increased employment, it is often fairly low level, low skilled jobs that are made for workers within the host country. Often management opportunities are only available to nationals from the FDI’s country of original.

Question 7

Competitiveness point

Answer 7

Restricts competitiveness in international markets: A lack of capital caused by the savings gap means that a country can exhibit lower productivity compared to other countries. This increased cost of production leads to reduced international competitiveness. This could lead to reduced income from exports, which could limit the availability of foreign currency, leading to further reduced ability to buy foreign capital, which could further inhibit development.

Question 8

Competitiveness evaluation

Answer 8

Evaluation: Some policies have attempted to counter the problem of the savings gap with variable success. For example, in India and the Philippines there has been development of microfinance initiatives that allow small amounts of capital investment to be made despite a lack of savings and profits. E.g. a small loan might enable the purchase of a sewing machine for a seamstress. Even these schemes providing small amounts of finance could make a big impact to overall productivity levels.