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The Causes of Economic Growth in Developing Countries


Why does a developing country want to develop?

  • Increase & widen availability of life sustaining goods: food, shelter, health and security
  • Raise living standards: higher incomes, employment, education & cultural development
  • Expand range of economic and social choice to individuals


Economic growth needs to be sustainable:

        Competition can help by providing incentives to become efficient and profit-making

        Use supply-side policies & use labour more efficiently

        Large budget deficits should be avoided & sound fiscal policies needed

        Allow exchange rate to be determined by market forces

        Encourage free trade (possibly together with protectionist policies)

        Attract FDI (Foreign Direct Investment) e.g. by MNCs/TNCs  -this may bring a large multiplier effect

        Through industrialisation,

o       import substitution should occur. Rather than using another country's product, own materials and labour should be used

o       export-orientation should give even faster economic growth

o       cut costs, boost employment & productivity

        Invest in health, infrastructure and education.  This results in a highly educated, motivated, healthy and mobile workforce


Appropriate technology should be used:

  • Step-by-step, structured growth, e.g., hi-tech industries not developed until foundations (e.g. skills and technology) in place
  • Ensure efficiency and allocative-efficiency
  • Reliable power supply is needed first - needed by all industry
  • Replacement parts need to be readily available e.g. after an 'aid project', a developing country should not become reliant on                     highly priced parts from the developed country that gave 'aid'


Aid could be used to stimulate economic growth:

  • debt cancellation - would leave more money to spend on infrastructure and people
  • relevant schemes to encourage the country and its people to increase the size of its   economy


Determinants of Growth:

  • Structural adjustment can be used
  • Imports of capital goods - machinery etc. to build up industry
  • Exports, initially of primary products
  • Improvements of the country's infrastructure
  • Inward Investment, determined by

-         Interest rates - high = low investment

        - low   = high investment and high borrowing

-         Incomes - determinant of induced investment

-         high income = high spending = long term work contracts            = good outlook = firms (esp. TNCs) will invest




E-mail Steve Margetts