1. ECONOMIC GROWTH
JAYPAL SINGH CHOUDHARY
ANUPMA TRIPATHI
MBA SGSITS

2. What is Economic Growth ?

3. Benefits of Economic Growth

4. Benefits of Economic growth
 Increases in economic growth should enable more of
everything to be produced
 Increases possibility of providing consumer goods for
all
 More consumer goods, etc. could be equated with an
increase in living standards
 Wealth generated may eventually „trickle down‟ to
those who are poor by means of income distribution –
taxes and benefits, etc.

5. Obstacles to (and Sources of)
Economic Development
 Natural resources
 Human resources
 Capital formation
 Technology
 Sociocultural and institutional factors

6. Natural Resources
 Availability of natural resources varies widely
among LDCs
 If available, LDC natural resources are
sometimes owned or controlled by foreign MNCs.
 Commodity prices subject to price volatility
 Without a strong resource base – a tougher road
to development

7. Human Resources
 Overpopulation
 Extremely low per capita
income
 Relatively high population
growth rates
 Any increase in income
tends to increase population
growth rates
 Un/underemployment
 Low labor productivity
(literacy, health
care, technology, investmen
t)

8. Capital Formation
 Capital investment drives
increases in labor
productivity and per capita
output.
 If output rises faster than
population growth, savings
may enable additional
capital formation.
 But, generating savings is
extremely difficult when
income levels are so low.

9. Technology
 Linked to capital
investment
 Helps drive increases in
productivity
 Ability to borrow
technology from more
advanced countries
 Lack of skilled labor and
existing capital base can
limit application of new
technology

10. Sociocultural Obstacles
 Culture, traditio
n and custom
 Tribal
allegiances and
animosity
 Views
regarding work
and individual
achievement

11. Institutional Obstacles
 Corruption and bribery
 Education systems
 Land ownership (too
concentrated or too
fractured)

12. Models of Development

13. Rostow - Stages of Growth

14. Rostow - Stages of Growth
 The work of American Walt
W. Rostow
 Rostow is an economic
historian
 Countries can be placed in
one of five categories in
terms of its stage of growth:

15. Stages of Growth
1. Traditional Society
 Characterised by
 subsistence economy –
output not traded or recorded
 existence of barter
 high levels of agriculture and
labour intensive agriculture
Village in Lesotho. 86% of the resident workforce in
Lesotho is engaged in subsistence agriculture.

16. Stages of Growth
2. Pre-conditions:
 Development of
mining industries
 Increase in capital use
in agriculture
 Necessity of external
funding
 Some growth in
savings and
investment
The use of some capital equipment can help increase
productivity and generate small surpluses which can be
traded.

17. Stages of Growth
3. Take off:
 Increasing
industrialisation
 Further growth in
savings and
investment
 Some regional growth
 Number employed in
agriculture declines
At this stage, industrial growth may be linked to
primary industries. The level of technology required
will be low.

18. Stages of Growth
4. Drive to Maturity:
 Growth becomes self-
sustaining – wealth
generation enables further
investment in value adding
industry and development
 Industry more diversified
 Increase in levels of
technology utilised
As the economy matures, technology plays an
increasing role in developing high value added
products.

19. Stages of Growth
5. High mass consumption
 High output levels
 Mass consumption of
consumer durables
 High proportion of
employment in service
sector
Service industry dominates the economy –
banking, insurance, finance, marketing, entertainment,
leisure and so on.

20. Criticism
 Too simplistic
 Necessity of a financial infrastructure to channel
any savings that are made into investment
 Will such investment yield growth? Not
necessarily
 Need for other infrastructure – human resources
(education), roads, rail, communications networks
 Efficiency of use of investment – in palaces or
productive activities?
 Rostow argued economies would learn from one
another and reduce the time taken to develop –
has this happened?

21. KEYNESIAN THEORY
 Keynesian economics is a theory suggested by John
Maynard Keynes in which government spending and
taxation is used to stimulate the economy. This
theory is also called fiscal policies or DEMAND-SIDE
ECONOMICS.

22. Theory
 Keynes argued that an economic slump was not a
long-run phenomenon that we should all get
depressed about and leave the markets to sort out.
(Remember that Smith felt that government should always
stay out of economic policy---laissez-faire) Keynes felt
that a slump (or trough) was a short-run problem
stemming from a lack of demand.
 If the private sector was not prepared to spend to
boost demand, then the government should do it
instead by running a budget deficit. When times were
good again and the private sector was spending
again, the government could trim its spending and
pay off the debts they had accumulated during the
slump.

23. Theory
 So his theory was that the government
should actively intervene in the
economy to manage the level of
demand.
 These policies are often known as DEMAND
MANAGEMENT POLICIES, aptly named since the
idea of them is to manage the level of aggregate
demand.
 COUNTER-CYCLICAL DEMAND MANAGEMENT
POLICIES. They are called this because the
government should be doing the exact opposite to
the trade cycle.

24. We can see these policies in the graph below:
AD1
AD2
AD3
AD4
Q
1
Q
2
Q
3
Q4
P
R
I
C
E
S
OUTPUT
If aggregate demand is low (AD1), then government should pursue
Reflationary policies, such as cutting taxes or boosting government
spending to push AD higher and boost employment and output.

25. We can see these policies in the graph below:
AD1
AD2
AD3
AD4
Q
1
Q
2
Q
3
Q4
P
R
I
C
E
S
OUTPUT
However, if aggregate demand is high (AD4), causing demand-pull
inflation, then government should pursue Deflationary policies, such as
increasing taxes or cutting government spending to reduce demand.

26. Keynesian theory application to
underdeveloped countries
 The Keynesian thesis is not appropriate to all
socio-economic groups. It is applicable to
sophisticated democratic capitalist fiscal systems.
Schumpeter has defined as follows: “Practical
Keynesianism is a seedling which cannot be
transplanted into foreign soil; it dies there and
becomes poisonous before it dies. But left in
English soil this seedling is a healthy thing
and promises both fruit and shade. All this
applies to every bit of advice that Keynes ever
offered.”

27. Keynesian Postulations and
Underdeveloped Countries
 Keynesian thesis depends on the subsistence of
cyclical redundancy which happens during
recession. It is due to insufficiency in effective
demand. Redundancy can be eliminated by an
enhancement in the level of valuable demand.
But the nature of redundancy in an under
developed nation is quite diverse than that in
a developed nation.
 In such fiscal systems redundancy is unremitting
somewhat than recurring. It is not caused by the
insufficient effectual demand but consequently
due to insufficiency in capital resources.

28. Continues ……
 The Keynesian Thesis depends on the postulations of
closed financial system. But underdeveloped nations are
not closed financial systems. They are open financial
systems in which overseas trade acts a leading role in
developing them. Such financial systems foremost
depends on the exports of farming and industrial inputs
and the imports of capital goods. Therefore, the Keynesian
financial system has little significance to underdeveloped
nations in this respect.
 The Keynesian thesis presumes a surplus supply of labor
and other complementary resources in the financial
system. This study refers to a recession fiscal system
where “the industries, machines, managers and workers
as well as consumption habits are all there only waiting to
resume their temporarily suspended functions and roles.”

29. The Keynesian Instruments and
Underdeveloped Nations
 Effective Demand
 Inclination to Consume

30. Effective Demand
 Redundancy is due to insufficiency of effective demand and to get over
it, Keynes suggested the stepping up of consumption and non-
consumption outlays. In an under developed nation, nevertheless, there
is no in-deliberate redundancy but camouflaged redundancy.
Redundancy is not due to insufficiency of harmonizing resources.
 The concept of effective demand is appropriate to that financial
system where redundancy is due to surplus thrift. In such a
condition the antidote lies in stepping up the levels of consumption
and investment through assorted monetary and fiscal instruments.
But in under developed financial system earnings levels are
extremely low, the inclination to consume is very huge and
cutbacks are almost zero.
 All labors to enhance money earnings through monetary and fiscal
instruments will, in the non-presence of harmonizing resources
lead to price inflation. Here the difficulty is not one of raising the
effective demand but one of raising the levels of employment and per
capita earnings in the context of fiscal growth.

31. Inclination to Consume
 One of the significance equipment of Keynesian fiscal is
the propensity to consume which emphasizes the
correlation amidst consumption and income. When
earnings enhances, consumption also enhances but
by less than the addition in income. This behavior of
consumption further explains the rise in saving as earnings
hikes.
 In under developed nations these correlations amidst
earnings, consumption and thrift do not grasp. People are
very deprived and with their earnings enhancement,
they expend more on consumption goods for the
reason that their inclination is to meet their unfulfilled
needs. The marginal inclination to consume is very huge
in such nations, whereas the marginal inclination to save is
very less.