Theme 4: Measuring and Encouraging Development

How is economic growth measured

1) GNI per capita

Adv and Dis

Adv

• Can rank and compare countries

• Indicates the state of economy and provision of services

Dis:

• No quality of life indication

• Subsistence/ Barter/ Hidden economy not included

• No inequality indication

• No size of public sector

How is economic growth measured

2) HDI

Adv and Dis

Life expectancy, Education, GNI/capita

Adv:

• Includes quality indication

• Education and health shows improvement of national infrastructure

• Easy and cheap to collect

Dis:

• No inequality

• Lack of qualitative factors e.g war/corruption

• Inequitable development is NOT the same as human development

Examples of countries with high/low HDIs

High:

• Iceland 0.972

• Norway 0.970

• Sweden 0.959

Low:

• Pakistan 0.544

• Chad 0.416

• Mali 0.419

How is economic growth measured

3) Inequality adjusted HDI

Difference to HDI

Adv:

IDHI represents the loss in potential human development due to inequality

Examples of countries with high/low HDIs

High:

• Iceland 0.923

• Norway 0.909

Low:

• South Sudan 0.226

• Somalis 0.229

• CAR 0.253

How is economic growth measured

4) Multidimensional Poverty Index

Shows the number of people who are multidimensionally poor (deprivation of at least 33% in weighted indicators)

What factors impact economic growth and development?

1) Primary product dependency

Primary product dependency occurs when a developing country relies heavily on income from a narrow range of commodities or agricultural exports. Dutch reliance on oil in 1977 led to Dutch Disease, where reliance on a single commodity leads to increased capital and labour investment in that sector at the expense of manufacturing and services. Rising export revenues from the commodity appreciates the exchange rate, making other export sectors less price competitive internationally. As a result, the economy becomes less diversified and more vulnerable to external shocks. For example, diamonds account for around 80% of Botswana’s exports and 25% of its GDP, increasing the risk that growth is overly dependent on global commodity demand rather than broad-based development.

However, primary product dependency does not inevitably prevent development if export revenues are invested effectively in human capital and economic diversification. Botswana has used diamond revenues to fund education, healthcare, and infrastructure, improving labour productivity and the quality of their finance and governance institutes.

While primary product dependency and Dutch disease highlight the risks of relying on commodity exports, investment in human capital and diversification can transform resource revenues into sustained economic development. Commodity price volatility can worsen fiscal instability, making long-term planning difficult and reducing consistent investment in education and skills.

What factors impact economic growth and development?

2) Savings Gap

The Harrod Domar model of growth claims inadequate saving leads to low investment

Many developing countries experience a savings gap, where domestic savings are insufficient to finance the level of investment needed for sustained economic growth. The Harrod–Domar model explains this by arguing that growth depends on the savings rate and the capital-output ratio, expressed as growth = savings/capital output ratio. In low-income economies, low household incomes and high dependency ratios reduce savings, limiting investment and capital accumulation. This can be illustrated using an AD/AS diagram, where low investment restricts the growth of productive capacity, resulting in only a slow rightward shift of long-run aggregate supply. Even if aggregate demand increases, limited capital accumulation constrains potential output, leading to weak long-term growth. In low-income economies, savings rates are low due to low household incomes and high dependency ratios, and this is exacerbated by underdeveloped banking institutions. Capital-output ratios are often high due to poor infrastructure and inefficient use of capita

17% of the African GDP are in savings, compares with 31% for the average middle-income country

However, the Harrod–Domar model emphasises on capital accumulation while neglecting the role of human capital in development. Increasing investment alone may not lead to growth if the workforce lacks education, skills, and health, as capital may be used inefficiently. For example, without skilled labour, infrastructure projects may suffer from low productivity or corruption, raising the capital-output ratio and reducing growth. In contrast, investment in education and healthcare improves labour productivity, encourages innovation, and raises the returns to physical capital, suggesting that long-term development is better explained by human capital–led growth rather than savings alone.

While the Harrod–Domar model highlights the importance of closing the savings gap through investment, human capital theory suggests that development depends more on how effectively capital is used, rather than the quantity of capital alone.

What factors impact economic growth and development?

3) Capital flight

(use this last)

Capital flight occurs when domestic or foreign investors move capital abroad in search of higher returns or lower risk, reducing domestic investment and government tax revenues. When FDI leaves an economy, the fall in investment spending reduces aggregate demand in the short run, while lower capital accumulation restricts productive capacity in the long run. This can be illustrated using an AD/AS diagram, where capital flight causes a leftward shift of aggregate demand due to reduced investment, alongside a slower rightward shift, or even a leftward shift, of long-run aggregate supply as potential output is constrained. In the United States, recent protectionist measures such as tariffs and increased trade uncertainty have reduced expected returns for some multinational firms, contributing to delayed or redirected investment abroad. As a result, lower investment weakens job creation and tax revenues, limiting government spending on infrastructure, education, and healthcare, which restricts long-term economic growth. While capital flight initially affects aggregate demand through lower investment, its more significant impact is on long-run growth by reducing capital accumulation and limiting the outward shift of long-run aggregate supply.

However, in advanced economies such as the US, deep capital markets and strong institutions may limit the scale and duration of capital flight, meaning the negative growth effects may be smaller than in developing economies.

Costs of growth/development

Physical	Social	Economic
resource delpetion	lower quality of life	overspecialisation
ecological damage	increased migration	inequality
loss of sustainability	increased unemployment	MNCs

Strategies to encourage growth and development

Market Orientated

Trade liberalisation

Trade liberalisation involves reducing tariffs, quotas and other trade barriers to encourage greater international trade, promoting economic growth and development through increased efficiency and market access. By opening up to trade, countries can specialise according to comparative advantage, benefit from economies of scale and increase export revenues, raising real incomes and employment. Trade liberalisation also attracts foreign direct investment and encourage technology transfer, improving productivity and long-run growth. The African Continental Free Trade Area (AfCFTA) aims to promote free trade within Africa to reduce reliance on primary commodity exports and external markets. Currently, only around 16% of Africa’s trade occurs within the continent, suggesting significant unrealised potential for growth through greater regional integration. By increasing intra-African trade, AfCFTA could support industrialisation, diversification and more inclusive development.

However, the benefits of trade liberalisation may be uneven if countries lack infrastructure, human capital or strong institutions, meaning that without complementary policies, free trade could reinforce existing inequalities rather than deliver broad-based development.

Strategies to encourage growth and development

Market Orientated

Promotion of FDI

The promotion of foreign direct investment (FDI) increases capital accumulation, employment and productivity in developing economies. FDI provides an injection of finance that helps close the savings gap, while also enabling technology transfer, and access to international markets. This can raise labour productivity and stimulate long-run economic growth and development. For example, Ivory Coast has experienced some of the fastest economic growth in Africa, at around 9%, partly due to increased FDI inflows into sectors such as agriculture, infrastructure and manufacturing. By boosting investment and export capacity, FDI can therefore act as a catalyst for structural transformation and sustained development.

However, the benefits of FDI depend heavily on regulation and governance, as multinational corporations may prioritise profit over local development. In Rajasthan, Coca-Cola’s operations have been criticised for over-extraction of groundwater, which damaged farmers’ fields and reduced agricultural productivity. This illustrates how FDI can generate negative externalities, undermine livelihoods and worsen income inequality if environmental and labour standards are weak. As a result, while FDI may raise GDP growth figures, it does not always lead to sustainable or inclusive development, highlighting the importance of strong institutions and regulation.

While FDI can accelerate economic growth by increasing investment and productivity, its impact on development depends on whether governments regulate multinational activity to ensure environmental sustainability and broad-based welfare gains.