CHAPTER 9

ECONOMIC GROWTH AND

DEVELOPMENT

CAPS requirements

Comparison of South African growth and development in terms of international benchmarks; highlight the North/South divide.• The demand-side approach• The supply-side approach• Evaluation of the approaches used in South

Africa• The North/South divide

UNIT 1

Growth and Development Policies

ECONOMIC GROWTH AND DEVELOPMENT

2 closely linked topics – you can’t have one without the other.

Economic growth: increase in capacity of economy to produce goods and services.

Economic development: sustained actions of policy makers that promote the standard of living and economic health of a country.

What’s the difference???

• Economic growth is about increasing production.

• Economic development is about improving the standard of living.

The HDI

GDP is an objective measure, but development is harder to measure.

A method that countries use to measure economic development is the Human Development Index (HDI).

HDI: measure of a country’s life expectancy, literacy, education, per capita GNI, poverty and environmental sustainability.

Classified as very high, high, medium and low.

WHO DO YOU THINK MADE THE TOP 5?

OUT OF 187 COUNTRIES, WHERE DO YOU THINK SA ARE PLACED?

WHO DO YOU THINK MADE THE BOTTOM 5?

Caused by HIV/AIDS, education, healthcare

↑ in real GDP

(economic growth)

↑ in wages

↑ in economic developm

ent

↑ in education, health

Factors influencing developmental policies

• State of government finances

• Politics: balance needs to be found between the two policies.

• Resources: countries must take into account which they have, and decide on how best to use them.

Factors that promote economic growth (pollev.com/mrsmith1001)

• A greater quality or quantity of resources.• Greater productivity of labour • Improvement of infrastructure• Greater use of technology• Investment in new and existing businesses• Increasing entrepreneurship and establishing

more SME’s• Less government corruption and beaurocracy

Factors that promote economic development(pollev.com/mrsmith1001)

• Policies to reduce poverty• Sufficient gov. finances for welfare payments• ↓ waste & corruption in welfare system• ↓ unemployment• Improvements to education and healthcare• Improved housing, sanitation, water and power

to poor communities• Inspire people to improve their own standard of

living

UNIT 2

The Demand-Side Approach to Growth

and Development

The demand side approach

Demand side = fiscal & monetary policy.

Attempts to stimulate C,I,G,(X-M) – Keynesian policies

Fiscal policy: the use of government revenue collection and expenditure to influence AD and thus the economy.

Monetary policy: central bank policy focussing on the quantity of money in economy and level of interest rates.

Changing Demand using fiscal policy

Can also increase gov. exp

BUT…Budget deficit shouldn’t exceed 3% of GDP

Average: -3.21% from 1989 until 2013

Fiscal policy can improve economic development through…

(pollev.com/mrsmith1001)

• Welfare grants• Progressive tax system• Reducing taxes• Use tax revenue from taxes on dividends, capital gains and

estate duty to finance development.• Housing subsidy schemes• Providing state education, health and physical infrastructure

for all• Means tested benifits• Stimulate employment

Fiscal policy can improve economic growth through… (pollev.com/mrsmith1001)

• Infrastructure• Financial support and advice for new

businesses• Increasing foreign trade increasing (X-M)• Education and training to improve value

added goods/services

Changing demand using Monetary Policy

UNIT 3

The Supply-Side Approach to Growth

and Development

Focusses on factors that affect the production capacity of economy.

Done by increasing quality/quantity of factors of production…– Natural resources– Labour– Capital– Entrepreneurial skills

Natural resources (Land)

What does SA have a lot of???Limited supply of minerals – max. value must be derived when they are mined. Must not negatively affect LT growth potential of region. • E.g. mining vs tourism (ST gain, but LT decline)

Management of renewable resources.• E.g. water and arable land

Labour

Quality of labour force affects economic growth.

Education and training vital to boost supply side of economy.

Capital

No investment in physical production equipment = no production process = no economic growth (increase in capacity/LRAS)

Well organised financial system NB for investment.

Quality of capital is NB for productivity.

Infrastructure

Entrepreneurs

Rules and regulations to start a business can limit economic growth.

Copied from Facebook last week…To register a new company takes over 5.5months! GDP could probably go up a whole 1% if they just streamlined the process!(2 months to register via CIPC, 2 weeks to open bank account, 6 weeks for income tax registration, 6 weeks for VAT registration).

UNIT 4

Evaluation of approaches used in

South Africa

Reconstruction and Development Programme (RDP)

• Set up in 1994• Goal - reform social and economic

environment • Main strategy: alleviate poverty and address

the inequalities in social services

Growth, Employment and Redistribution Programme (GEAR)

Macroeconomic strategy from Department of Finance from 1996 – 2001. Aims…• strengthening economic development• increasing employment• redistributing income• creating socioeconomic opportunities for the

poor.

Key elements of GEAR

A faster fiscal deficit reduction programme

Budget reform to redistribute gov exp to poor

A reduction in tariffs

Consistent monetary policy

Speeding up privatisation

Tax incentives to stimulate new investment in labour intensive business

Accelerated and Shared Growth Initiative for South Africa (AsgiSA)

Launched in 2006.

Objective: to co-ordinate government initiatives to create economic development.

Aims: • halving unemployment and poverty by 2014• Accelerating economic growth to average at least 4,5%

(2005 – 2009) & 6% average annual rate between 2010 and 2014.

• More value added to products/services, costs of production reduced.

The New Growth Path (NGP)

Government’s latest economic policy (Oct 2010)

Targets:• 5 million jobs in ten years• Reducing unemployment from 25% -15%.

Achieved through:• monetary policy interventions• More competitive exchange rate and lower cost of capital• reprioritisation of public spending to ensure fiscal

sustainability.

UNIT 4

Evaluation of approaches used in

South Africa

The North–South divide

North includes…• 4/5 permanent members of UN Security

Council • all members of the G8

Causes of North-South divide

• Capitalism• Globalisation• Immigration• Rate of development• New technologies • Financial aid and debt• Large-scale industrial activities vs. primary

industries