Caribbean Economic Development
Karen_2
Unit4econ.pdf
ECON3501
CARIBBEAN ECONOMIC
DEVELOPMENT
UNIT 4 – ECONOMIC GROWTH
RESOURCE MATERIALS
Levitt, Kari; Witter, Michael (1996). The Critical Tradition of Caribbean Political
Economy: The Legacy of George Beckford. Kingston. Ian Randle Publishers
Beckford; George (2000) Persistent Poverty; Underdevelopment in the Plantation
Economies of the Third World. UWI Press.
Todaro Michael & Smith Stephen; C. (2011) 11th Ed. Economic Development. Pearson
Education & Addison-Wesley
Bhagwati Jagdish (2004). In Defence of Globalization, Oxford University Press
Blackman; Courtney. (2005). The Practice of Economic Management: Caribbean
Perspective Kingston: Ian Randle Publishers
United Nations- UNDP, Human Development Report. World Bank-World
Development Report 2
ECONOMIC GROWTH
Economic growth has two meanings.
Firstly, and most commonly, growth is defined as an increase in the
output that an economy produces over a period of time based on per
capita. That is, an increase in GDP or GNI per capita.
The second meaning of economic growth is an increase in what an
economy can produce if it is using all its scarce resources.
An increase in an economy’s productive potential can be shown by an
outward shift in the economy’s production possibility frontier (PPF). 3
PER CAPITA STATISTICS
Per Capita is used to refer to a unit or each person within a population.
A country’s economic growth and comparison of living standards among countries can be expressed using GDP per capita or GNI per capita information.
Per capita GDP or GNP is simply a country’s GDP or GNP divided by its population.
Using per capita statistics is a better measure of the well-being for the average person.
Bahamas, The 2019 34,863.70
Puerto Rico 2019 32,873.70
Turks and Caicos Islands 2019 31,353.30
St. Kitts and Nevis 2019 19,935.00
Curacao 2019 19,689.10
Barbados 2019 18,148.20
Trinidad and Tobago 2019 17,398.00
Antigua and Barbuda 2019 17,112.80
Uruguay 2019 16,190.10
Panama 2019 15,731.00
Top 10 countries in the Latin America and Caribbean
region for 2019 based on figures from Worldbank.org
4
THE PRODUCTION POSSIBILITY FRONTIER
(PPF)
Q u
a n
ti ty
o f
C o
m p
u te
rs P
ro d
u c e
d
Quantity of Cars Produced
3,000
1,000
2,000
2,200 A
700600300 0
1,000
B
C
D
Production possibility frontier
Unattainable
Efficient, Attainable
Inefficient
The Production
Possibility Frontier
(PPF) represents the
points at which an
economy is most
efficiently producing its
goods and services and,
therefore, allocating its
resources in the best way
possible.
PRODUCTION POSSIBILITY CURVE
2000
700
A.B A’2300
850
Q u
a n
ti ty
o f
C o
m p
u te
rs P
ro d
u c e
d
Quantity of Cars Produced
PPF1 0
3,000
4,000
1000 1500
PPF2
• When the PPF curve
shifts outwards, we know
there is growth in the
economy.
• Alternatively, when the
PPF shifts inwards it
indicates that the
economy is shrinking. • A shrinking economy
could be a result of a
decrease in supplies or a
deficiency in technology.
ECONOMIC GROWTH
Growth can be seen as an increase in the quantity of resources and
improvements in technology, or in another way, an increase in the value
of goods and services produced by every sector of the economy.
Economic Growth can be measured by an increase in a country's GDP
(Gross Domestic Product).
Gross Domestic Product (GDP) is the market value of all final goods
and services produced within a country in a given period of time.
7
ECONOMIC GROWTH
Components of GDP
Economists are interested in the composition of GDP among various types of spending.
GDP or National Income (Y) is divided into four components: consumption (C), investment (I), government expenditure or spending (G), and net exports:
Y = C + I + G + (X - M)
This is the expenditure approach when calculating GDP 8
MEASURING ECONOMIC GROWTH
Gross National Product (GNP) is the total
monetary value of all the goods and services
produced by the nationally owned factors of
production.
GNP = GDP + income receipts from overseas
operations minus (-) income payments to
foreigners
Net National Product (NNP) is equal to GNP less
Depreciation. 9
MEASURING ECONOMIC GROWTH
10
STAGES OF ECONOMIC GROWTH
One of the key thinkers in the twentieth century Development Studies
was Walt Whiteman Rostow
an American economist and government official.
Prior to Rostow, approaches to growth had been based on the
assumption that "modernization" was characterized by the Western
world (wealthier, more powerful countries at the time)
which were able to advance from the initial stages of underdevelopment.
11
STAGES OF ECONOMIC GROWTH
12
STAGES OF ECONOMIC GROWTH
Traditional Society: This stage is characterized by a subsistence, agricultural based
economy, with intensive labor and low levels of trading, and a population that does
not have a scientific perspective on the world and technology.
The size of the capital stock is limited and of low quality resulting in very low labor
productivity and little surplus output left to sell in domestic and overseas markets
Transitional Stage or Preconditions to Take-off: Here, a society begins to
develop manufacturing, and a more national/international, as opposed to regional,
outlook.
Savings and investment grow although they are still a small percentage of national income
or GDP. Some external funding is required - for example in the form of overseas aid or
perhaps remittance incomes from migrant workers living or working overseas 13
STAGES OF ECONOMIC GROWTH
Take-off: Rostow describes this stage as a short period of intensive
growth, in which industrialization begins to occur, and workers and
institutions become concentrated around a new industry.
Manufacturing industry, political and social institutions start to develop
with a bit more growth in savings and investments.
There is often a dual economy apparent with rising productivity and
wealth in manufacturing and other industries but a lesser concentration
on agriculture characterized by low, real incomes and lower levels of
productivity. 14
STAGES OF ECONOMIC GROWTH
Drive to Maturity: This stage takes place over a long period of time, as standards
of living rise, use of technology increases, and the national economy grows and
diversifies.
Hence, we will see the economy moving from being dependent on factor inputs for growth
towards making better use of innovation and technology to bring about increases in real per
capita incomes.
High Mass Consumption: At the time of writing, Rostow believed that Western
countries, most notably the United States, occupied this last "developed" stage.
Here, a country's economy flourishes in a capitalist system, characterized by mass
production and consumerism.
Output levels grow, enabling increased consumer expenditure. There is a shift towards tertiary
sector activity and the growth is sustained by the expansion of a middle class of consumers.
15
ROSTOW’S THEORY IN CONTEXT
Industrialization, urbanization, and trade in the vein of Rostow's model is still seen
by many as a roadmap for a country's development.
Singapore is one of the best examples of a country that grew in this way and is now
a notable player in the global economy. Singapore is a southeast Asian country with a
population over 5.8 million, and when it became independent in 1965, it did not
seem to have any exceptional prospects for growth.
However, it industrialized early, developing profitable manufacturing and high-tech
industries.
Singapore is now highly urbanized, with 100% of the population considered "urban."
It is one of the most sought-after trade partners in the international market, with a
higher per-capita income than many European countries. 16
CRITICISM
As the Singapore case shows, Rostow's model still sheds light on a
successful path to economic development for some countries. However,
there are many criticisms of his model.
While Rostow illustrates faith in a capitalist system, scholars have
criticized his bias towards a western model as the only path towards
development.
Rostow lays out five concise steps towards development and critics
have cited that all countries do not develop in such a linear fashion -
some skip steps, or take different paths. 17
CRITICISM
Rostow's theory can be classified as "top- down," or one that emphasizes a trickle-down
modernization effect from urban industry and western influence to develop a country as a
whole.
Later theorists have challenged this approach, emphasizing a "bottom-up" development
paradigm, in which countries become self- sufficient through local efforts, and an urban
industry is not necessary.
Rostow also assumes that all countries have a desire to develop in the same way, with the
end goal of high mass consumption, irrespective of the diversity in priorities that each
society holds and different measures of development.
For example, while Singapore is one of the most economically prosperous countries, it
also has one of the highest income disparities in the world. 18
CRITICISM
Finally, Rostow disregards one of the most fundamental geographical
principals: site and situation.
Rostow assumes that all countries have an equal chance to develop,
without regard to population size, natural resources, or location.
Singapore, for instance, has one of the world's busiest trading ports, but
this would not be possible without its advantageous geography as an
island nation between Indonesia and Malaysia.
19
CLASSICALS - GROWTH THEORY
Adam Smith purported that
the productivity of labor
and the ratio of productive
and unproductive labour
would influence economic
growth in an economy.
20
CLASSICALS - GROWTH THEORY
Malthusian Theory
Another name for classical growth theory - Thomas Robert
Malthus.
The theory indicated the clash between an exploding
population and limited resources will eventually bring
economic growth to an end.
Food production increases arithmetically (1,2,3,4,5 etc.) and
Population increases geometrically (1,2,4,8,16,64 etc.) 21
CLASSICALS - GROWTH THEORY
The Basic Idea
Advances in technology and the accumulation of capital bring
increased productivity and increased real GDP per capita.
Classical growth theory says that the increase in real GDP per
person will be temporary because prosperity will induce a
population explosion and the population explosion will decrease real
GDP per person.
22
CLASSICALS - GROWTH THEORY
23
The increasing population decreases capital per hour of labor and
eventually decreases real income to less than subsistence real
income.
If the actual real income is less than the subsistence real income,
some people cannot survive and the population decreases.
No matter how much technological change occurs, real income (real
GDP per capita) is always pushed back toward the subsistence level.
KARL MARX - GROWTH THEORY
Like the Classical Economists, Marx believed that Economic Growth would be dependent on Labour and
influenced by accumulated capita but more so through the exploitation of labour under capitalism.
Labour is exploited using strategies to increase Surplus Value = Profits
1. Increase the length of the work day
2. Increase the intensity of work effort (to produce more goods in a given time)
3. Increase monitoring of workers (to ensure they do not slack off)
4. Reduce wage bill( lower wages or hire women and children to replace men to pay them less)
Competition forces firms to exploit its workers in order to lower costs and increase profits to stay in business.
Economic Growth then is temporary since Capitalism would eventually end through the revolution between the
Bourgeoisie (merchants/factory owners) and Proletariat (exploited workers).
Marxist Stage Theory - (Primitive Communism Imperialism Feudalism Capitalism Socialism Communism)
24
GROWTH THEORY
Neoclassical Growth Theory
The theory that real GDP per person will increase as long as
technology keeps advancing.
Neoclassical growth theory asserts that population growth and
technological change are influential but are not themselves influenced
by real GDP growth.
So according to the neoclassical theory, growth will persist.
25
GROWTH THEORY
Population Growth
Two opposing economic forces influence population growth.
As incomes increase, the birth rate decreases and the
death rate decreases.
These opposing forces are offsetting, so the rate of population growth
is independent of the rate of economic growth.
The historical population trends contradict the views of the classical
economists. 26
GROWTH THEORY
Technological Change
In the neoclassical theory, the rate of technological change influences
the rate of economic growth, but economic growth does not
influence the pace of technological change.
It is assumed that technological change results from chance or
something other than economic events,
i.e. it is exogenous or autonomous – determined independently from the
economic system. 27
GROWTH THEORY
The Basic Idea
Technological advances bring profit opportunities.
Businesses expand and new businesses are created to exploit the
new technologies.
Investment and saving increase, so capital per hour of labor
increases.
The economy enjoys increased prosperity and growth.
28
GROWTH THEORY
But will the prosperity last? And will the growth last?
Neoclassical growth theory says that the prosperity will last but the
growth will not unless technology keeps advancing.
The prosperity persists because no population explosion occurs to
lower real GDP per person.
29
GROWTH THEORY
But growth stops if technology stops advancing because capital accumulation brings
diminishing returns, which slow the growth rate of real GDP and slow the level of
saving and investment.
Eventually, the growth rate of capital slows to that of the population and real GDP per
person stops growing.
A Problem with Neoclassical Growth Theory
The theory does not fully explain what determines technological change. 30
GROWTH THEORY
Greater Efficiency in Resource
Economic planners must direct the use of resources in the most economically efficient
manner in face of globalization.
Firms are thus forced to make the best possible use of scarce resources and to search
for new ways to ensure that this is done.
Many jobs may be lost in the globalization process, but it is argued that losses in one
industry will be compensated by gains in another industry.
The elimination of inefficient industries is also seen as important for nations and the
world to achieve greater economic efficiency. 31
GROWTH THEORY
Incentive for Technological Improvement
Growth and development in economies worldwide has led many countries to
make progress towards integration efforts.
Many countries have seen the rewards coming to other countries that became
more technologically advanced and are now making moves to pursue
technological growth through research.
The increase in demand for more and better quality goods and services has
forced many firms to invest more in technology, research and development.
32
GROWTH THEORY
New Growth Theory
The theory that our unlimited wants may lead us to even greater
productivity and perpetual economic growth.
According to the new growth theory, real GDP per person grows
because of the choices people make in the pursuit of profit.
33
GROWTH THEORY
Choices and Innovation
The new theory of economic growth emphasizes three facts about
market economies:
Human capital grows because of choices.
Discoveries result from choices.
Discoveries bring profit, and competition destroys profit. 34
GROWTH THEORY
Human Capital Growth and Choices
People decide how long to remain in school, what to study, and how hard to
study.
Discoveries and Choices
The pace at which new discoveries are made—and at which technology
advances—is not determined wholly by chance.
It also depends on how many people are looking for a new technology and how
intensively they are looking. 35
GROWTH THEORY
36
Discoveries and Profits
The forces of competition squeeze profits, so to increase profit, people constantly seek either lower cost methods of production or new and better products for which people are willing to pay a higher price.
Two other facts play a key role in the new growth theory:
Many people can use discoveries at the same time – technical knowledge is potentially a ‘public good.’
Physical activities can be replicated.
GROWTH THEORY
Growth in the Global Economy
Classical growth theory predicts that the global economy will stagnate under the
pressure of population growth.
It also implies that the richest nations will be the ones with the fastest population
growth and therefore they will be the first to stagnate.
These predictions are resoundingly rejected by the experience of the world
economy over the past few decades.
37
GROWTH THEORY
Neoclassical growth theory predicts that the global economy will grow
and at a rate that is determined by the pace of technological change.
All economies have access to the same technologies, and capital is free
to roam the globe seeking the highest available profits.
So neoclassical theory predicts that national levels of real GDP/capita
and national growth rates will converge.
38
GROWTH THEORY
There is some sign of convergence among the rich countries.
One author puts it that “while this change is not unconditional
convergence, in which all poor countries grow more rapidly than richer
countries, the growth rate of developing countries has been
substantially above that in developed countries for the past 20 years
and seems likely—but not certain—to remain so.
Therefore, convergence is slow, and it does not appear to be imminent
for all countries. 39
KEYNESIAN - GROWTH THEORY
Unlike the Classicals and Monetarists, Keynes believed in Active fiscal and monetary
policy to stabilize the economy and realise economic growth.
Keynes also believed that stimulating Aggregate Demand would be ideal to realise
economic growth.
Once economic agents demand a product, firms would find a means to supply.
As firms increase aggregate supply, economic growth would be realised.
Aggregate Demand can be stimulated by increasing the components of Aggregate Demand =
Aggregate Expenditure = C+I+G+ X-M
He believed in the use of Functional Finance 40
MONETARIST - GROWTH THEORY
The Monetarists believed in minimal Government intervention.
Milton Friedman proposed the concept - Long run monetary neutrality. Expansionary
Monetary Policies would not realize Economic Growth in the long-run since the economy
is at its full potential. Increasing the money supply would only reap inflation.
Quantity Theory of Money: MV=PQ
Factors which would alter the Long Run Aggregate Supply may affect economic growth
which includes: Technological Advancement and increases in the size and productivity of
the labour force.
Friedman also proposed Short run monetary non-neutrality where Expansionary
Monetary Policies could realize Economic Growth in the Short Run due to excess capacity
in the economy.
41
ECONOMIC GROWTH DETERMINANTS
Level of Investment in the Economy
Investment involves purchases by businesses of new capital, including
buildings, machinery, equipment, etc.
This investment is only made possible when there is savings taking place
within the economy.
A lack of savings will hinder investment within the economy and hence
growth.
Unfortunately this is one challenge which the Caribbean governments are
having difficulty meeting. This inhibits the economic growth rates of
Caribbean Economies.
42
ECONOMIC GROWTH DETERMINANTS
Caribbean economies are known for high level of income
consumption.
When citizens are consuming in higher levels, then they must be
saving out of their income in lower levels or not at all.
This means that there is less money available to for making loans and
to promote investments.
43
ECONOMIC GROWTH DETERMINANTS
The Quantity of Productive Resources Available Within an Economy
Productive resources are relatively scarce throughout the world and the
Caribbean is no exception.
The Caribbean is well endowed with many useful natural resources;
however the region is challenged in such areas as adequate skilled labour and
sufficient and efficient physical capital.
This problem is worsened when many professionals leave the region to seek
better lives for themselves in more developed countries (Brain Drain). 44
ECONOMIC GROWTH DETERMINANTS
The Quality of Available Productive Resources
This is important to ensure an economy’s growth potential.
When the labour force in a country is educated and well trained, then it is far easier to
get better results in a faster time from workers.
Many Caribbean countries are endowed with beautiful beaches, waterfalls and
mountains. These countries need little to beautify them and make them ready for tourist
attraction.
In other areas however, such as quality of entrepreneurial skills, Caribbean countries are
seriously lacking when compared to developed countries. 45
ECONOMIC GROWTH DETERMINANTS
The Extent and Pace of Technological Advancement
Technological progress influences growth within an economy. However, it requires
investment in research and development so that the nation and its citizens can
benefit from new production processes and products.
Since the Caribbean countries lack important capital to invest in research and
development and bring about improved technology, they cannot access relevant
new technologies in sufficient quantities, and in a timely manner.
The result of this is that Caribbean economies suffers from a slow economic
growth rate. 46
ECONOMIC GROWTH DETERMINANTS
The Efficient use of Available Resources
If a country continuously falls short in using its resources efficiently,
then it will not only fail to achieve full employment but it will also fail
in achieving economic growth.
The efficient use of its available resources will allow a nation to get
the most from them and contribute to the production of more
goods and services.
47
ECONOMIC GROWTH DETERMINANTS
Size of the Nation’s Population
The size of a nation’s population needs to be at an optimum level in order to foster growth.
Given the number of available resources and state of technology existing within a nation, a population size which is too small or too large, will hinder growth.
If the population is too small, available resources will not be fully utilized.
If the population is too large, then opportunities for division of labour will be exhausted and some people will be contributing little or nothing to the economy. 48
W. ARTHUR LEWIS - ECONOMIC DEVELOPMENT
1954 article entitled “Economic Development with Unlimited Supplies of Labour.”
Development economics-
The Dual Sector model, or the Lewis model, is a model in Developmental economics that
explains the growth of a developing economy in terms of a labour transition between two
sectors, a traditional agricultural sector and a modern industrial sector.
The "Dual Sector Model" is a theory of development in which surplus labour from
traditional agricultural sector is transferred to the modern industrial sector
whose growth over time absorbs the surplus labour, promotes industrialization and
stimulates sustained development.
Foreign Direct Investment is necessary to expand the operations of the Manufacturing
Sector. 49
W. ARTHUR LEWIS - ECONOMIC DEVELOPMENT
In the model, the traditional agricultural sector is typically characterized by low
wages, an abundance of labour, and low productivity through a labour intensive
production process.
In contrast, the modern manufacturing sector is defined by higher wage rates than
the agricultural sector, higher marginal productivity, and a demand for more
workers initially.
Also, the manufacturing sector is assumed to use a production process that is
capital intensive, so investment and capital formation in the manufacturing sector
are possible over time as capitalists' profits are reinvested in the capital stock. 50
W. ARTHUR LEWIS - ECONOMIC DEVELOPMENT
If some workers move from the agricultural to the manufacturing sector,
regardless of who actually transfers, general welfare and productivity will
improve
as there would have been diminishing returns from the excess labour in
agriculture.
Marginal Productivity in the agricultural product will improve while total
industrial product increases due to the addition of labour
but the additional labour also drives down marginal productivity and wages
in the manufacturing sector. 51
W. ARTHUR LEWIS - ECONOMIC DEVELOPMENT
The end result of this transition process is that:
the agricultural wage equals the manufacturing wage,
the agricultural marginal product of labour equals the manufacturing
marginal product of labour,
no further manufacturing sector enlargement takes place as workers
no longer have a monetary incentive to transition.
52
W. ARTHUR LEWIS-
ECONOMIC DEVELOPMENT
Criticisms of the Model
The wage differential between industry and agriculture needs to be sufficient to incentivise a
movement between the sectors and, whereas the model assumes any differential will result
in a transfer.
The model assumes rationality, perfect information and unlimited capital formation in
industry.
These do not exist in practical situations and so the full extent of the model is rarely
realized.
However, the model does provide a good general theory on labour transitioning in
developing economies.
Lewis overestimate the extent that the availability of cheap rural migrant labour can
stimulate industrial growth.
53
ECONOMIC GROWTH CONSTRAINTS
Infrastructure:
Infrastructure includes physical capital such as transport networks,
energy, power and water supplies and telecommunications networks.
Dependence on limited exports:
Many nations still relying on specializing in and exporting low value-
added primary commodities. The prices of these goods can be volatile
on world markets.
Vulnerability to external shocks 54
ECONOMIC GROWTH CONSTRAINTS
Low national savings:
Savings are needed to provide finance for capital investment.
In many smaller low-income countries, high levels of poverty make it
almost impossible to generate sufficient savings to provide the funds
needed to fund investment projects. This increases reliance on
overseas borrowing or tied aid.
Limited financial markets:
Many of the least developed countries have limited financial markets
such as banking, money and credit systems, insurance markets and
stock markets.
55
ECONOMIC GROWTH CONSTRAINTS
Capital flight:
Capital flight is the uncertain and rapid movement of large sums of money
out of a country.
There could be several reasons - lack of confidence in a country's
economy and/or its currency, political turmoil or fears that a government
plans to take privately-owned assets under government control
Population decline and / or an ageing population 56
ECONOMIC GROWTH CONSTRAINTS
Conflict, corruption and poor governance:
Governance refers to how a country is governed and whether the exercise
of authority manages scarce resources well, improve economic outcomes
and the quality of life for a country’s people.
High levels of corruption and bureaucratic delays can harm growth by
inhibiting inward investment and making it likely that domestic businesses
will invest overseas rather than at home.
57
BENEFITS OF GROWTH
58
Increases in economic growth should enable more of everything to be
produced.
It increases the possibility of providing consumer goods for all.
More consumer goods, higher quality, etc. could be equated with an
increase in living standards.
Wealth generated may eventually ‘trickle down’ to those who are poor
by means of income distribution – taxes and benefits, etc.
BENEFITS OF GROWTH
Improved standards of living associated with increases in the availability of luxury goods:
TVs
Fridges and freezers
Swimming pools, etc .
In addition:
Infrastructure – roads, rail, energy, water, communication networks
Health and education provision
All associated with a ‘decent’ standard of living 59
BENEFITS OF GROWTH
60
Welfare associated with well-being:
Welfare is improved by the provision of support services for those not necessarily
able to help themselves – often on the margins of society. Welfare includes:
Pensions
Benefits – sickness, disability, etc.
Support – maternity, holidays,
Housing
Infrastructure – homes for the elderly
Such welfare provision are often funded through income redistribution - taxes
COSTS OF ECONOMIC GROWTH
61
Economic growth can bring with it costs:
Not all incomes are distributed equally
Wealth is often in the hands of a few
‘Trickle down’ does not always seems to work in practice
Corruption may reduce redistribution effects
Growth funded in part by spending on weapons do not benefit
the population as a whole
COSTS OF ECONOMIC GROWTH
Environmental Problems
Expansion and growth brings with it the problems of pollution – often developing
countries do not have the infrastructure to cope with the waste generated nor
the legislation or regulation to influence those who produce it.
Negative Externalities - occur when the consumption or production of a good
causes a harmful effect to a third party.
Environmental degradation – over farming reduces productivity of the soil,
deforestation and damage to eco-systems. 62
COSTS OF ECONOMIC GROWTH
Opportunity Cost
Resource Allocation: Consumer Goods vs. Capital Goods.
Necessity of generating growth through allocating resources to the
sources of growth – capital goods
It makes the population initially poorer as fewer consumer goods are
available – often these consumer goods represent the basic essentials
of life
63
COSTS OF ECONOMIC GROWTH
64
