Economic Growth In Sub Saharan Countries

Economic growth in sub Saharan Countries

Introduction

Economic development in Sub Saharan countries have not progressed at the pace sought after to achieve a sound economic growth. In many of the Sub Saharan countries there has been only small changes in Gross National Product and in some cases the population growth has been higher or the same as the economic growth and a consequence have been an amplified population who is living under or just above the poverty line. There are numerous of economics and scientist that are researching the problem and trying to find a solution for economic growth and human development. In this essay there will firstly be introduced some central terms and definitions will be given. Secondly, statistical information will be given to illustrate the low economic and human development in the Sub Saharan countries. In the third part, there will be a discussion on and around the topic of economic models and the subject if they can explain why there has been almost a stagnant economic development. Further, the essay will look at the Millennium development goals and if economic growth has too bee achieved to reach the ambition set forward at the United Nations Millennium summit in 2000. Finally, a short summary will be given.

Definitions

During this report there will be used acronyms and economic terms and their definitions will follow. The first word the essay will look at is Gross Domestic Product. Gross Domestic Product (GDP) is defined by Todaro & Smith(2003, p797) as" the total final output of goods and services produced by the country's economy, within the country's territory, by residents and non residents, regardless of its allocation between domestic and foreign claims". Another variant of GDP is Gross National Product it is "GDP plus factor incomes accruing to residents from abroad, less the income earned in the domestic economy accruing to persons abroad "(Todaro&Smith, 2003, p797). Another important term in this assignment is Economic growth and it can be defined by Wikipedia (2005)as:

Economic growth is the increase in the value of goods and services produced by an economy. It is conventional measured as the percentage rate of increase in real GDP". Growth is usually calculated in real terms, i.e. inflation-adjusted terms, in order to net out the effect of inflation on the price of the goods and services produced. In growth theories growth often refers to potential output, i.e., production at "full employment" rather than growth of aggregated demand.

Empirical information

In the introduction it was stated that the Sub Saharan countries were achieving only a low growth both economical and in human development. Following, there will be given empirical evidence on this subject. The graph below from international monetary fund and their regional economic outlook for Sub Saharan Africa (May 2005) illustrates the poor economic growth for most SSA., but it also illustrates that there are nations doing well.

The graph illustrates growth percentages in GDP per capita in Sub Saharan countries between 1960 and 1994 have been about 0.9 % and 1.8% in 1995 - 03. There is a need for a substantially higher growth to reduce poverty. After researching the World Wide Web there is evident that there exist variances in the statistical information presented on the GDP growth per capita. However, this graph seemed to present the general stated GDP per capita fairly well. It also shows that there are nations with oil resources that are achieving a 5% economic growth. In the table below a closer look at the last few years of growth in GDP is presented, it also shows Asia's and the middle east economic enhancements for comparison (International Monetary Fund, 2005). There has been a positive trend of growth the last few years and hopefully it will continue. Further, the writer will highlight the Gross Domestic investments and savings in the table as it will be a discussion following on the theory of economic growth.

Harrod-Domar Growth model is a product by two economists; Sir Roy Harrod from Britain and E.V. Domar from the United States of America(Ray, 1998). In short you can say it is a functional relationship in which the growth rate of Gross domestic Product (g) depends directly on the national net savings rate (s) and inversely on the national capital output ratio (k), That is, g=s/k (Todaro & Smith, 2003).It is possible to make additions to the Harrod and Domar model: depreciation and population growth (Ray, 1998). The depreciation causes smaller growth of GDP due to the fact that it cost more to produce a single unit of output in the economy when included (Ray, 1998). By adding the population growth rate to the equation too achieve economic growth per capita it can be found if, or how much growth there is per capita. It is done by subtracting the annual growth rate from the fund GDP growth rate (Ray, 1998).

Looking at the data presented on the World Wide Web, there is evidence that the Sub Saharan countries do not save as much as other developing countries(Latin America (20-22 percent) and Asia (27-29 percent) that is achieving higher growth(World Bank Group, 2005). It is quite obvious that when there is little money to allocate there is less to save. Most students' know how hard it is to save any money when there is almost none to cover the basic needs. This fact might be one reason why the sub Saharan countries are lagging behind. Poor countries are often obligated to meet current and often urgent needs, and therefore savings are low (World Bank, 2005). Low savings again create low investment that is desperately in call for both physical capital and human capital (World Bank, 2005). Without, new investment it can be hard for an economy's productivity to be increased and income cannot be raised (World Bank, 2005). It can be visualized into the following figure and is called the vicious circle of poverty (World Bank, 2005,p3).

Kenya's minister of finance has said that their nations are too poor to generate their own capital from domestic savings (Public Policy and Management, 2001). They are of need for foreign financial aid to help develop a better infrastructure for communications (roads, railways, tele-communications and so on), electric power and all resources that a country would need to encourage new firms to flourish and therefore provide jobs and capital(Public Policy and Management, 2001). There might be other factors that are hampering the savings ratio like the lack of political and economic stability, a reliable banking system and to be short of favorable government policy. Corruption