Development Economics I

Econ 3071

1
By: Ousni S.
What is Economic
Development?
Meaning,
Measurement, and
Characteristics

By: Ousni S. 2
 UNIT ONE: CONCEPTS AND PRINCIPLES
IN DEVELOPMENT ECONOMICS
• Current interest in Development Economics

• Definition and nature of Development Economics

• The meaning of Economic growth and Development

• Core values and Objectives of Development

• Obstacles to Development

• Basic Requirements for Development

• Development Gap By: Ousni S. 3

 Current interest in Development
Economics
• The growing inequality in the distribution of resources
between different parts of the world.

• China has experienced economic growth at an unprecedented

rate, and India has also made substantial progress.

• Meanwhile, countries in sub-Saharan Africa have stagnated,

and the gap in living standards continues to widen.

• Development economics attempts to explore the economic

challenges to some of the poorest
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countries in the world.
4
 The problem
• Levels of physical capital per person are small.

• Nutrition levels are low.

• Low human capital

• access to sanitation, safe water and housing.

• Population growth rates are high, and so are infant mortality rates.

Why are underdeveloped countries underdeveloped?

Why are the developed countries developed?

What are the causes (root causes as well as symptoms) of

both development and underdevelopment?
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 Factors which were not conducive for
the subject pre 1950 period
• The subject is of recent origin; it was about seven decades
ago.
• There were factors which were not conducive for the
emerging of the subject as a separate field of study pre
1950s
In the 1930s advanced countries were caught up in and fully
engaged in ‘the great economic depression’
In the 1940s countries were fighting world war two(WWII)

The developing countries (Africa, Latin America and Asia) were

caught up with serfdom, stagnation and colonialism.
By: Ousni S. 6
 The favorable factors that helped the rise of the
subject

• The interest from academicians in the development

process of developing countries.

• Recently poor countries became aware of their

backwardness desire to become strong.

• The pursuit for New Economic Order (NOE) based on

equity, sovereignty, equality and common interest among
all nations.
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 The favorable factors that helped the
rise of the subject
Terms of trade improvement,

Access to markets of developed nations,

Greater financial assistance and cancelling of past depts.,

Reform on multinational financial institutions such as International

Monetary Fund (IMF) and World Bank (WB). (Its official name was the
International Bank for Reconstruction and Development (IBRD). When it
first began operations in 1946, it had 38 members. Today, most of the
countries in the world are members.)

• Increasing mutual interdependence of the world economy

through trade and finance By: Ousni S. 8
 The favorable factors that helped the
rise of the subject
• Europe’s economy ruined, called for the “Marshall
Plan”-3 years government intervention. (Appropriate
institutions, Human Resources, knowledge, culture was
there endogenously developed)

• Colonialism failed apart due to the relative power

shift to the USA and USSR, both of which did not have
interest in colonial power.

By: Ousni S. 9
 Definition and Nature of Development
Economics
• Development economics which is a branch of economics that
systematically studies the economic development of the
third world nations of Africa, Asia (except Japan) and Latin
America (including Caribbean nations).

• It became a separate field of study in economics after 1950’s.

• Development economics is different from that of traditional

economics and political economy.

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 Definition and Nature of Development Economics

• Traditional Economics: is concerned with the least cost

allocation of resources and the growth of these resources
overtime.

• It also deals with the advanced capitalist world of perfect market,

consumer sovereignty, marginal and individualistic based decision
making, market equilibrium etc.

• Political Economics: goes beyond traditional economics and studies

the social and institutional process through which certain groups
of economic and political elites dominate the allocation of
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resources.
 Definition and Nature of Development Economics

• Development Economics: deals with economic, social,

political and institutional mechanisms necessary to bring
rapid and large scale improvement in living standards.

By: Ousni S. 12
 Major Terminologies used in
Development Economics
• Less Developed Countries (LDCs), developing,
underdeveloped, poor, backward, ‘Third World’, ‘South’

• Developed Countries (DCs), most developed, industrial,

industrialized, rich, advanced, ‘First World’, ‘North’.

• Some of these terminologies are incorrect when applied to some

countries.

• For example, North–South division is an incorrect division

since some of the major LDCs are in the North (Afghanistan,
By: Ousni S. 13
Bangladesh) and Australia and New Zealand are in the South.
 Major Terminologies….

• Similarly First World–Third World has a cold war background

and is no longer relevant. Specifically,

• The First World consisted of the U.S., Western Europe and

their allies.

• The Second World was the so-called Communist Bloc: the

Soviet Union, China, Cuba and friends.

• The remaining nations, which aligned with neither group, were

assigned to the Third World By: Ousni S. 14
 Major Terminologies….

• Modern Vs. backward countries; this terminology is not

however commonly used because of its negative meaning.

• Developed Vs. underdeveloped( developing) ; this way of

classification is most popular.

• Most developed Vs. least developed countries; this

terminology or way of classification is also commonly used to
differentiate rich nations from poor nations,

By: Ousni S. 15
 Major Terminologies….

• High, middle and low income countries; this classification

is based on the level of income of countries. It has been later
redefined by the World Bank as follows based on specific per
capita income (PCI) ranges.

• both the low and middle-income economies are categorized

as developing economies.

By: Ousni S. 16
 Major Terminologies….
• It Categorizes countries based on their per capita income
levels into 5 groups:

1. Low-income countries (LICs) -$765 or less

2. Lower-middle-income countries (LMCs) -$766 to $3,035

3. Upper-middle-income countries (UMCs) -$3,036 to$9,385

4. High-income OECD countries $9,386 or more

5. Other high income countries -$9,386 or more
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 Many Definitions of Development

 Gross National Income (GNI) Growth

• generating and sustaining an annual increase in GNI (5-

7%)
Income Per Capita (GP) Growth

• Generating and sustaining an annual increase in GNI per

person (GNI/POP)
To account for the fact that population may grow faster than income
So “development” may not occur even if GNI is growing when the
By: Ousni S. 18
 ……..Definition con’d
 Real Economic Development

• Growth of per capita income in excess of inflation (π):

• Growth in GDPpc-π > 0

• Growth in GDPpc= ΔGDPpc/GDPpc

• π = ΔPrice/Price

• If π > Growth in GDP pc then purchasing power is falling even when

income is increasing. So “development” may not occur even if GDPpc is

growing when inflation growing even faster.

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  Structural Change

Development defined to occur when the structure of

production and employment changes so that
agriculture’s share of both declines and that of
manufacturing and service industries increases.

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 Development as Freedom: Amartya
Sen’s “Capabilities” Approach:
1985
• Economic growth is not an end in itself and has to enhance the
lives people lead and the freedoms that they enjoy

• Development can be seen as a process of expanding the real

freedoms that people enjoy. (Amartya Sen, Nobel laureate in
economics)
• Capability to function is what matters for status as a poor/non-
poor person and it goes beyond availability of commodities
• Capabilities: “freedom that a person has in terms of the
choice of his functionings ,…”
• Functionings is what a person does with commodities of
given characteristics that they
By: Ousni S.possess/control 21
 Definition of Economic Development:
Conclusion
“Development is a multi dimensional process involving changes
in social structures, popular attitudes, and national
institutions, as well as the acceleration of economic
growth, the reduction of inequality, and the eradication of
poverty.” (Todaro and Smith)

Note:

• Dynamic & sustainable process of change

• Inclusiveness: equity & fairness

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Economic Growth vs. Economic Development

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 Three Basic Goals of Development

1. Sustenance: the ability to meet the basic needs.

2. Self-esteem: It is concerned with the feeling of self-
respect and independence or not being used as a tool by
others.
3. Freedom of choice

By: Ousni S. 30
 Three Objectives of Development to
Achieve the Basic Goals

1. To increase the availability and widen the distribution of basic

life-sustaining goods (food, shelter, health, protection)

2. To raise the levels of living (higher incomes, more jobs, better

education, etc.)

3. To expand the range of economic and social choices available

By: Ousni S. 31
 Major Obstacles to Economic Development

• Why the economic growth in developing countries is low?

• What stops these countries from developing economically?

The answer to these questions is not simple. However, the

main obstacles for promoting development can be identified
as under.

A. Vicious Circle of poverty: It implies a circular association

of forces tending to act and react up on one another in
such a way so as to keep a poor country in a state32 of
By: Ousni S.
  Vicious Circle of poverty:

 Ranger Nurkse in ''Problems of Capital Formation in

Underdeveloped Countries'' describes 'vicious circle of
poverty as the basic cause of under- development of poor
countries.
According to him, a country is poor because it is poor.

Vicious circle of poverty would be explained more from

demand side and from the supply.

By: Ousni S. 33
 Vicious Circle of poverty…
• On the demand side: when people have low real income
the demand for goods to be small. In the small size of
market, there is no incentive of invest. When the rate of
investment is low, the productivity of the factors of
production is bound to be low. Low productivity leads to low
per capital income which is rapidly absorbed by the
rising population.

• The country, therefore, remains poor.

By: Ousni S. 34
 Vicious Circle of poverty:
• From the Supply side: low level of real income contributes
to low rate of saving and this leads to low rate of
investment. The low level of investment leads to low level
of productivity. When the productivity per worker is low, the
real income will obviously be low and so there will be
poverty and the vicious circle is complete.

By: Ousni S. 35
B. Political Instability: In most of the developing countries,
the governments are not stable.

• The new government introduces a new system of rules for

the operation of business which causes frustration and
discontentment (disapproval)among the people.

• it directly affects economic growth. It closes off sources of

internal and external investments.

By: Ousni S. 36
C. Corruption: when bribery becomes an acceptable practice, it
then becomes difficult for businessmen and industrialists to take part
stay and grow in business.
Bribery thus limits economic development

D. Lack of investment

E. Socio-Cultural Obstacles

F. International Forces (colonialism, neocolonialism, trade

imbalance)
By: Ousni S. 37
G. Inadequate Infrastructure Facilities
 Basic Requirements for Development

A. An Indigenous Base: For a poor country to be developed a strong

domestic economic base has to be created. (an internal motivation)

B. Removing Market Imperfections

C. Structural Changes

D. Capital Formation.
 An increase in the volume of real saving

 The existence of credit and financial institutions to mobilize these

savings for converting them in to investible funds.
 The use of these savings for the purpose of investment in capital
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goods
E. Following suitable investment criterion:
I. Social and Economic Overheads: In the beginning, particular
growing points should be developed which intern will set chain
reactions and influence the entire economy.

II. Balanced Growth: Should be based on the principle of balanced

growth (no sector lags behind ).

III. Choice of Techniques: Unskilled labor, Local inputs and raw

materials and Land and environmental favorability etc

By: Ousni S. 39
F. Capital-Output Ratio (K/Y): The lower the capital-output (K/Y)
ratio, the higher is the growth rate of the economy.

G. Socio-Cultural Requirements: changing people’s attitudes from

backward and primitive.

H. Administrative Requirements: The existence of a strong,

competent and uncorrupt administration is crucial for economic
development.

By: Ousni S. 40
 Human Development Index (HDI)
UNDP ranks countries using Countries are ranked into

“human development” three groups:

which is based on: 1. Low human development

1. Life expectancy at birth; (index of 0.0 –0.499)

2. Average adult literacy 2. Medium human

3. Mean years of schooling; development (index of 0.5 –

0.799);
4. Real per capita incomes
3. High human development
By: Ousni S. 41
 How HDI is calculated ??
1. Life Expectancy index (LEI)

LEI=1 when LE is 85
LEI=0 when LE is 20
2. Education index (EI)

Where ……....(15 is the projected max for this indicator for 2025)
and ……..(18 is equivalent to achieve M.Sc. In most countries)

By: Ousni S. 42
 How HDI is calculated ??
3. Income Index (II)

Income index is 1 when GNIpc=75000

Income index is 0 when GNIpc=100

Finally

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 Development Gap

• The term is used to describe the gap in level of development

of two geographical areas.

• There is wide development gap between rich and poor

countries in terms of level of per capita GDP, level of
employment, level of education, quality of
infrastructure, public service, and etc.

By: Ousni S. 44
 Divergence/Convergence/
Trends-1
• Are the developing countries “catching up”? Two Perspectives:

• Divergence: A tendency for per capita income (or output) to

grow faster in higher-income countries than in lower-income

countries so that the income gap widens across countries over
time (as was seen in the two centuries after industrialization
began).

• Convergence: The tendency for per capita income (or output)

to grow faster in lower income countries than in higher-income
countries so that lower-income countries are “catching up” over
time. By: Ousni S. 45
 Why we Bother? Essentially
Because
• Human beings are social animals. So we care about
others.

• “The world is like the human body: If one part aches,

the rest will feel it; if many parts hurt, the whole will
suffer.”

• There can no longer be two futures, one for the few

rich and the other for the very many poor. “There will
be only one future—or none at all.”
By: Ousni S. 46
 Why Bother about Development?-Global
Factors
• Immigration, supporting at the source instead of being
engulfed by immigrants.

• Fundamentalism and terrorism: addressing underlying root

causes of terrorism, why people just decide to blow up?

• Globalization of Crime,

• Global market should expand and increase.

• Humanity: Globalization of Human Rights

• Global agendas like Environment and Climate Change

By: Ousni S. 47
 Assignment
1. Discuss the Millennium development goals (failures
and achievements)

2.Discuss the Sustainable development goals

(challenges and opportunities)

3. Critically analyze Divergence and convergence trend

of development (hypothesis) by taking empirical
examples

4. Do you think Ethiopian economy will converge or

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 END OF
CHAPTER ONE
By: Ousni S. 49
 CHAPTER TWO:
STRUCTURAL FEATURES AND
COMMON CHARACTERISTICS
OF DEVELOPING COUNTRIES
By: Ousni S. 50
 Common Characteristics of Developing
Countries
1 Low levels of living
• Low total and per capita incomes relative to DCs
• Widespread poverty given low incomes and poor distribution of income.
• Poor health and education
• High infant mortality
• Low levels of literacy, significant school dropouts, inadequate and often
irrelevant educational curricula and facilities.

By: Ousni S. 51
 Common Characteristics of Developing
Countries
2 Low levels of labor productivity :

Three explanations (reasons):

a. Law of diminishing returns

b. In some LDCs, poor attitudes towards self-improvement, manual labor,

discipline, low levels of adaptability, work ethic, and general drive to innovate and
experiment.

c. Poor health and nutrition levels

By: Ousni S. 52
 Common Characteristics of Developing
Countries
• High levels of population growth and dependency burdens (older
people and children)
• Substantial dependence on agricultural production and primary-
product exports

• Most LDCs oriented to production and export of primary products

rather than manufactured goods or services. Why?
• What is the implication of this to economic development?

By: Ousni S. 53
 Common Characteristics of Developing
Countries
3. Prevalence of imperfect markets and incomplete information
• Markets do not efficiently function to equilibrate supply and demand
and determine prices.
• Limited access to necessary information to make informed economic
decisions-production, consumption, marketing, etc.

By: Ousni S. 54
 Common Characteristics of Developing
Countries
4. Dependence and vulnerability in international relations
• Many are small countries with little global economic or political
power.
• Price-takers in world markets.
• Subject to “Westernization” pressures (education, cultural and moral
values, food diets and habits). Why might this be a problem?
• Dependent on imports of food, fuel, and other critical materials
making LDCs vulnerable and being held economic hostage by
developed countries as well as rich dominating groups within LDCs

By: Ousni S. 55
 CHAPTER THREE

GROWTH MODELS AND THEORIES

OF DEVELOPMENT

By: Ousni S. 56
3.1 FACTS OF ECONOMIC GROWTH

WHY GROWTH RATE DIFFER ACROSS

COUNTRIES?

By: Ousni S. 57
Why growth rate differ…..?
• Nowadays there is a great diversity of economic growth in the world.
• A lot of diverse and influential factors have been proposed, most
importantly
 factors of government
Technological progress
Population growth
• Meanwhile, it is also significant to realize the fact that there is
mutual influence in economic growth and those relevant factors,
just like the relation ship between egg and chicken.

By: Ousni S. 58
Why growth rate differ…..?

I) The quality of governance: according to the world bank institute,

governance is “ a process and institutions through which decisions
are made and authority in a country is excercised.

* The government is responsible for providing necessary

infrastructures and social environment for economic development of the
whole society.

By: Ousni S. 59
Why growth rate differ…..?
II) The technological progress: as Clinton (1993) pointed out
technology is the engine of economic growth.
• With a rapid technological progress, it is easy to create new jobs, build
large industries and improve living standards.
• Furthermore, technology is also a powerful tool for making a
government more effective and efficient.
• There are three basic classifications of technological progress:-
Natural technology
Labor intensive technology
Capital intensive technology

By: Ousni S. 60
Why growth rate differ…..?
III) The population growth: population growth is characterized by
higher fertility and relatively lower mortality rates.
• Population growth has both positive and negative influence on
economic growth of a country.
• (Todaro & smith) population growth was not definitely associated
with slower economic growth.
• “ large population provides the needed consumer demand to generate
favorable economies of scale in production, to lower production costs
and provide sufficient and low cost labor supply to achieve a higher
output level.”

By: Ousni S. 61
Why growth rate differ…..?
• Moreover different population policy, age structure and population
growth speed will eventually influence economic growth rates
between countries.

By: Ousni S. 62
 3.2 Factors of economic growth
• The following are some important factors that affect the economic growth of a country.

a. Human resource:- it is the most important factor that affect economic growth of a
country.

• The quality of human resource is dependent on its skill, creative ability, training and
education.

• If the human resource of a country is well skilled and trained the output would also be
of high quality.

• The reverse is also true.

By: Ousni S. 63
FACTORS ……
b. Natural resource:- it also affects economic growth of a country to a
large extent. Natural resource involves resources that are produced by
nature either on the land or inside the land.

• The efficient utilization of natural resources depend on the skill and

abilities of human resource, technology used and availability of fund.

c. Capital formation:- involves buildings, machinery, power,

transportation and medium of communication.
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Factors…
• Producing and acquiring all these manmade products is termed as
capital formation.

• It increases the availability of capital per worker which further

increases capital per labor ratio.

• Consequently the Productivity of labor increases, which ultimately

results in the increase in output and growth of the economy.

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FACTORS….
d. Technological development:-

• Technological development helps in increasing productivity with a limited amount of

resource.

• Selecting appropriate technology plays a role for growth of a country.

e. Social and political factors:- plays a crucial role in economic growth of a country.

• Social factors include:

• customs
• Traditions
• Values and beliefs By: Ousni S. 66
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:

A child in Sierra Leone making breakfast.

Which stage would a country like Sierra Leone
fit in?
Copyright: Dave Dyett, http://www.sxc.hu/

By: Ousni S. 67
 Rostow’s model of economic
development
• Based on the experiences of the rich industrialised nations.

• Concerned with the stages countries go through to achieved economic

growth.

• Investment = key to economic growth.

• With increasing investment, a country will move from a subsistence-based

economy (stage 1) to an economy dominated by the production of
consumer goods and tertiary and quaternary industries (stage 4-5).

• Rostow’s model implies that developing countries need to follow the

stages of development experienced by the western industrialised nations.
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Rostow’s Linear-Stages
Model
1. Traditional society
2. Pre-condition to take-off
3. Take-off
4. Drive to maturity

5. Age of high mass consumption

By: Ousni S. 69
Rostow - 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.
Copyright: Tracy Wade, http://www.sxc.hu/

By: Ousni S. 70
Rostow - 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.
Copyright: Tim & Annette, http://www.sxc.hu

By: Ousni S. 71
Rostow - 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.
Copyright: Ramon Venne, http://www.sxc.hu

By: Ousni S. 72
Rostow - 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.
Copyright: Joao de Freitas, http://www.sxc.hu

By: Ousni S. 73
Rostow - 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.
Copyright: Elliott Tompkins, http://www.sxc.hu

By: Ousni S. 74
• Over time, the importance of the sectors changes.

• Primary is the first sector to be important, followed, in

sequence, by the others.

• As the tertiary and later sectors increase in

importance, the earlier ones (primary and secondary)
decline in relative importance.

• This is not yet experienced the full range of the

changes by LDCs .
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 Criticisms:

• 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
• Rostow argued economies would learn from one another and reduce the
time taken to develop – has this happened?

By: Ousni S. 76
 Further limitations of the Model

• Argued that the model is too simplistic.

• Dispute the assumption that the experiences of developed countries are
appropriate for all developing countries.
• Despite relatively large injections in aid, many LEDCs (e.g. countries in
Africa) are still at stage one.
• Those which have moved towards the take-off stage may have done so
by incurring huge national debts (Brazil, Mexico).
• The time taken for a country to develop diminishes as countries learn
from already developed nations, the development of the NICs
(Singapore, Hong Kong, South Korea and Taiwan).
• Eurocentric model.
By: Ousni S. 77
The Lewis Development
Model
• Rural agricultural sector
• Low or even zero Marginal Product of Labor so that labor is a
redundant factor and wage rate is at the subsistence level

• Urban industrial sector

• Rising demand for unskilled labor to be trained for industrial
growth results in greater employment and more profits and
higher wages

• Rural-Urban migration
• To find jobs and earn higher wages

By: Ousni S. 78
 Demand for Labor

Wage
R: Rural U: Urban
W: Wage E: Employment
D: Labor Demand S: Labor Supply

Profit
WU SR
WR
Wage Investment in urban areas
increases the demand and
DU1 DU2 employment for rural labor.

E1 E2 Employment

By: Ousni S. 79
Criticisms of Lewis Model

• Industrial technology is generally capital

intensive/labor-saving. Hence, the demand for
unskilled rural labor would not increase employment

• Industrialization must be supported by agricultural

development to supply an ever-increasing supply of
food items and raw materials
• What if the capital is not re invested?
• Due to capital flight
• Re investment in capital intensive technology.

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Demand for Labor

Wage No increase in employment when

technology is labor saving

Profit
SR
WU
WR Wage
DU1
DU2
E1 = E 2 Employment

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HARROD-DOMAR GROWTH MODEL
• Every economy must save a certain proportion of its national income.

• In order to grow new investments representing net additions to the

capital stock is necessary.
• Assumptions:

• There is a direct economic relationship between the size of total

capital stock “K” and the total GDP “Y” (constant capital output
ratio)
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Assumptions cont’d
• National saving equals to net investment.

• There is abundant labor in developing country.

Eg. If $3 capital is always required to produce an annual $1 stream of GDP. It follows that
any net addition to the capital stock in the form of new investment will bring about
corresponding increase in the flow of national output (GDP).

• HDM:

1. S=sY……………..net saving is some proportion of national income.

2. I=…………….net investment is defined as a change in capital stock

By: Ousni S. 83
HDM
• It is because capital stock “K” bears a direct relationship to total
national income or output “Y” as expressed by the capital output ratio
“C”.
• or
• Finally

3. Finally because net national saving “S” must equals to net investment
“I”.
• S=I………………………………….4
By: Ousni S. 84
HDM
• But from equation 1, we know that S=sY and from equation 2 and 3

• Therefore, we can write the identity of saving equating investment

shown in equation 4

• Or simply as …………………….5

• By rearranging ……………………..6 (the simplified form of

HDM)
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HDM
• The HD model of economic growth states simply that the rate of
growth () is determined jointly by net saving ratio “s” and the national
capital output ratio “C”

• More specifically it says that even in the absence of government the

growth rate of national income will be directly or positively related to
the saving ratio.

By: Ousni S. 86
HDM
• The more the economy is able to save and invest out of a given GDP,
the greater the growth of the GDP.

• And it is negatively related to the economies capital output ratio. (the

higher “C” the lower the rate of GDP growth.)

• In this model in addition to investment, two other components are

labor force and technological progress.

• In the context of HDM labor force growth is not described explicitly

in the model. By: Ousni S. 87
HDM

• This is because labor is assumed to be abundant in developing countries

and can be hired as needed. (this assumption is not always true.)

• In general way, technological progress can be expressed in HDM as a

decrease in the required capital output ratio, giving more growth for a
given level of investment.

• Finally the focus of HDM was the role of capital investment .

• Foreign aid

• Private foreign investment

• Increasing saving rate inBy:the economy

Ousni S. 88