Growth of Developing Countries

Readers Question: To what extent can a government influence the rate of growth of a developing country?

There are various policies the government can use to try and increase the economic growth of developing economies.

Demand side policies.

Cutting taxes, and cutting interest rates. These help to increase aggregate demand and boost short term growth. However, demand side policies are only really appropriate for helping short term problems of slowing demand. Demand side policies do not deal with the fundamental structural weaknesses of an economy.

Supply Side Policies

These are policies which help to increase the long run rate of productivity in an economy. For example, spending money on better education and training helps to increase labour productivity. These policies can help to increase productivity in the long run.

Increasing Savings Ratio

It is argued if a government can increase savings ratio, it enables a higher rate of investment. This can lead to higher rates of growth over time. However, it depends on the efficiency of the investment. Higher savings rates do not always equate to higher growth rates

Tackling Corruption

One problem many developing economies face is the problem of corruption. This leads to lower tax revenues and misplaced aid. If corruption can be overcome it helps the economy be more efficient. However, it is often difficult for the government to deal with these issues because corruption is deeply embedded

Market Liberalisation

The IMF and World bank often place great emphasis on the importance of market liberalisation in the development of economies. Market liberalisation includes policies such as privatisation, deregulation and lower taxes. It is argued that if market forces are allowed to operate effectively, it can help increase efficiency in the economy and lead to higher rates of growth. However, increased market liberalisation can often lead to greater inequality within society.

Endogenous growth Theories

These theories argue the most important thing is for the government to encourage the development of new technology. This might be done by encouraging foreign multinationals. It is argued that improved technology can avoid diminishing returns in increasing capital

See also:

Theories of economic growth