July 18, 2011Doug Hadden
Carlos Lipari, FreeBalance Washington
What affects the development of a developing nation? This was the question asked during my interview at FreeBalance. The following series of blog entries summarizes my analysis.
Explaining Growth Factors
Trade policy, emigration, remittances and foreign aid (also known as development assistance) impact economic growth. There are others, though, such as the levels of investment, savings and the volume of current account deficits that tend to have an even greater impact. Higher investment and savings rates tend to translate in faster growth, helping a country to develop itself, whereas large and systematic current account deficits tend to indicate lack of savings and competitiveness of a given economy and therefore, problems down the road, with lower economic growth and development levels along with higher unemployment rates.
With the world economy growing 4 to 5% per year, a developing nation should not be satisfied with less than 4% growth. If it does not reach that level of growth, probably it needs to increase savings, invest more and gain competitiveness by devaluating or depreciating its currency. But in order to grow and invest, it is vital for a country to save a considerable part of its income. A considerable part might mean 20 to 30% of its GDP, but some countries actually save much more than this and, therefore, achieve impressive and consistent economic growth rates. China, for instance, is saving 54% of its GDP and, therefore, has resources to finance an investment rate of almost 50% of its GDP, achieving 10% yearly rates of economic growth.
Saving money is something that is particularly hard to do in poor countries, due to low income. Governments in these countries are tempted, therefore, to run budgetary and external deficits, making use of foreign debt and some development assistance to compensate for low levels of savings. But these sources of financing can only provide a limited amount of help to boost growth. At the same time, they can, in the long run, if not properly managed, block the development process of that country. The external debt of African countries was, until recently, pointed out as one of the main development obstacles as interests on debt were depriving governments from essential resources to invest in infrastructure and education.
I will address the following development topics in a series of blog entries:
- Human Development Index
- Impact of Investment on Growth
- Real Economic Growth: Developed vs Emerging & Developing Nations
- Impact of Savings
- Impact of emigration and remittances on developing countries
- Development Impact of Trade Policy
- Development Impact of Foreign Aid
- Development Impact of Good Governance