ECONOMIC GROWTH

Economic Growth: Developing Countries



Economic Growth: Developing Countries

Introduction

GDP growth rates in developing countries are on average higher than those in developed countries. Over the 1965-99 period, the average annual growth rate was 4.1 percent in low-income countries, 4.2 percent in middle-income countries, and 3.2 percent in high-income countries(Pawel 2006).

The average growth data for developing countries also mask growing disparities among these countries. Between 1990 and 1999 East Asia and the Pacific experienced the fastest growth of GDP per capita—more than 6 percent a year(www.imf.org). At the same time in Sub-Saharan Africa the average annual growth rate was negative, and in the Middle East and North Africa it was less than 1 percent. The biggest drop in GDP per capita growth occurred in Eastern Europe and Central Asia because of the economic crisis caused by the transition from planned to market economies (www.imf.org).

The two developing countries with the biggest populations did comparatively well during the past decade. In India GDP per capita grew by about 2.4 percent a year, and in China by an unprecedented 6.4 percent a year. Rapid growth rates in China and India explain why almost two-thirds of the world's population live in economies growing faster than 2 percent a year(Pawel 2006). But if India is excluded from the group of low-income countries and China is excluded from the group of middle-income countries, average annual growth rates in these groups become considerably lower than in high-income countries. During the last decade of the 20th century 54 developing countries had negative average growth rates, and most of those with positive growth rates were growing slower than high-income countries(Pawel 2006).

Reasons for High Level of Economic Development

Different observers and theorists often see different reasons for why certain countries (and not others) enjoy a high level of economic development. Many argue that economic development requires some combination of representative government (or democracy), a free market economic model, and a general lack of corruption. Many hold that rich countries grew wealthy by exploitation of poorer countries in the past, through imperialism and colonialism, or in the present, through the process of globalization(Moynihan Titley 2000 pp.198-210).

Savings and Investment

 There are some economic facts of life that underpin all macroeconomic explanations of growth. Perhaps the most important is that in order for capital goods to be accumulated to produce greater quantities of consumer goods in the future, consumer goods have to be given up in the present. For example, if workers are building a textile factory they cannot simultaneously be making textiles - these will only appear in the future as a result of the sacrifices of the present(Ali 20004 pp.78-109). Increases in the amount of capital goods are called investment. For growth to occur the level of investment has to be greater than the amount of depreciation, i.e. the amount by which machines wear out or become obsolete during the year. The higher the level of investment above depreciation the greater the potential output of the economy in the future. Unfortunately, the resources to enable investment have to come from ...