Over the past couple of decades we have
seen the BRIC (Brazil, Russia, India and China) countries grow rapidly through
various different methods. We already know that to achieve growth; there must
be an increase in aggregate demand, which means there must be an improvement in
at least one of the elements of aggregate demand. However undeveloped countries will already
have low consumerism due to limited disposable income, investment is minimal because
they’re not attractive economies to trade in, consequently the government
receive little in taxation revenue so do not have the finance to spur growth
through fiscal policy. This leaves countries in the position where they must
improve the balance of X-M, they can either increase exports which is known as an
export led growth, or they can reduce imports by producing a high variety of
goods to sell domestically.
China is a great example of an economy
exploiting export led growth as they specialised in cheap consumer goods to export
to the Western economies. India is an example of an import based growth as they
produced all the goods they needed and placed protectionist policies on foreign
goods, this forces up the sales of domestic goods.
How does a country decide on their
method?
One factor and often the deciding factor
is the country’s access to resources, for example as mentioned in the ECON 4
extract many Sub Saharan African countries have found that they’re rich in
natural resources such as oil and gas. This would encourage an economy to opt
for an export led growth of primary commodity goods.
Finding masses of oil would therefore sound
ideal for an undeveloped country as it will encourage firms to invest into the
country, high sales for firms selling the commodities will increase aggregate
demand. Therefore, the government will collect more in taxes so will have
finance available to spend on education and health care which illustrates a
multiplier effect on aggregate demand and will also improve the standard of
life for the people.
So then why have the sub Saharan
countries grown at a rate of 5% (much higher than EU economies) but according
to the Human Development Index still have a standard of living that is significantly
below the world average?
There are number of interconnected
reasons for this, the most important and probably obvious one in my opinion is
the high levels of corruption. Companies trading with foreign oil companies
rarely trade as simplistically as business to business, the executives of the
foreign firms often demand payments into private accounts to ensure the deal.
This links to the second reason which is the inequality created as a result,
the powerful few receive high payments from corporate deals the revenue of
exports are kept in the hands of the elite rather than distributed to the many through
higher wages. This is worsened as the process of extracting natural resources
no longer requires heavy amounts of labour as modernisation and improvements in
technology have caused the industry to become capital intensive. This may be
more efficient for firms but will limit the effect on unemployment.
These reasons identify why the general
population of resource rich countries do not benefit, but demand inflation can
actually cause people to become worse off than they were before. As aggregate
demand rises from the rise in exports it will shift up the supply curve and
cause price level to rise, which is shown by an increase in the rate of
inflation. This will make all the normal goods people buy more expensive, which
will leave people with less money and therefore worse off than before the
natural resources were found. This illustrates how although growth is required
to fund development. Development is not always enjoyed from an increase in
growth.
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