economic growth and development

Economic Growth and Development
Growth and Development policies
 Economic growth = economy produces more output more efficiently than it did before
using more inputs.
 Economic development = improvement in quality of life so that people have more g/s
and greater security which makes life easier/more comfortable
 Eco G/D are closely linked development can’t take place without growth
 However if growth occurs it doesn’t mean development will occur – the state must
intervene to make sure that both happen using polices.
 Growth Policies aim to increase output of g/s so real GDP increases – therefore policies
that improve quantity and quality of FoPs
 Development polices aim to improve conditions under which people live so that the
population can increase income – shown by an increase in UN Human Development
Index (HDI) and increase in real per capita GDP
 Eco G = increased production
 Eco D = improved living standard
 G & D policies must work together so improvements can be sustained
 If this happens the population will be better educated/skilled & healthy therefore they’ll
be more productive
 As economy produces more, people receive more and Eco D increases
 Two main instruments to stimulate G & D are taxes and gov. spending

Factors influencing developmental polices
 3 factors influence gov. policies
1. State of Gov. Finances – a key factor of successful development is amount of Gov.
Revenue available for creating basic services for all.
2. Politics – political decisions are made about which G & D polices to adopt
3. Resources – must have allocative efficiency with what resources a country has

Factors that promote G & D
 Growth refers to increase in production so that GDP increases – growth is achieved by:
 Availability of quality/quantity of resources
 Greater productivity of labour
 Efficient infrastructure
 Greater use of technology
 New business investment
 Increasing entrepreneurship
 Democratic, efficient and free of corruption gov.
 Development refers to an increase in standard of living and is achieved by:
 Government policies to reduce poverty
 Enough gov. finances to cover welfare payments
 Well-administered welfare system
 Reducing unemployment rate
 Improving education
 Improving housing
 Inspiring people to improve own standard of living

Benchmarks and international best practices
 UN, World Bank and IMF set standards for suitable polices known as benchmarks
 A benchmark is a standard at which something can be measured
 Countries should not deal with countries who fall short of these benchmarks
 Benchmarking is also known as International Best Practice
 International Best Practice is a set of guidelines that represent the most efficient
socially accepted course to take

, The Demand-Side approach to growth and development
 Demand-side is a policy that focuses on the aggregate demand by consumers and how
to use this demand to grow the economy
 When aggregate-D increases it stimulates business to increase output which leads to
increased employment and improved living standard
 D-side economics uses fiscal and monetary policy to increase aggregate-D
Fiscal policy is tax & gov. spending
Monetary Policy is money supply &
Changing demand using fiscal policy
 Fiscal policy is the main method of influencing demand in the economy as to stimulate
or control Econ G & D
 It’s achieved by changing level of taxation and expenditure by the state
 The budgeted deficit must not be too large
 The international benchmark for a budget deficit is 3% of GDP

 Fiscal Policy can improve development in the following ways:
 Welfare grants – helps reduce poverty
 Progressive Tax system – reduce income inequality
 Reducing taxes – stimulates consumer spending
 Land ownership – fairness in land distribution
 Stimulates employment – people have more income

 Fiscal Policy can improve growth by financing the following:
 Infrastructure – creating efficient transport ,communication and power
 New business – financial support and advice to new business
 Increase foreign trade – increase export promotion
 Training – establish training schemes

Changing demand using monetary policy
 Reserve Bank uses changes in interest rate to influence Econ G & D
 Monetary policy aims to change aggregate demand by increasing/reducing the rate of
interest
 There are 4 Monetary Policy instruments:
1. Open market transactions: are direct actions taken by the central bank to carry
out monetary policy objectives.
o To carry out open market transactions the central bank buys and sells
government securities (bonds).
o When central bank buys bonds, money flows from central to commercial
banks, therefor they have more money available to lend.
o When central bank sells bonds , the commercial banks have less money
available to lend
o The process of buying/selling bonds by central bank is a way of changing
the money supply
2. Cash Reserve Requirement: is the minimum percentage of total deposits that the
bank has to keep as cash and may not be used for lending or investing
o A change in cash reserve makes more or less money available. The cash
reserve ratio in SA is 5%
3. Exchange Control Policy: measures taken to prevent capital assets from being
transferred to other countries
o Usually established in developing countries when the central bank fears
large amounts of foreign currency will be removed from the country
4. Moral persuasion
o Central bank consults commercial banks and they follow the lead of the
central bank