Growth and Development

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Economics MSc 2012-13

|Student number: |2050158 | |MSc Programme: |Finance and Economic Development | |Course name: | | | |Growth and Development | |Submission date: |22, 11, 2012 |

“China was poorer than many countries in Sub-Saharan Africa thirty years ago. Its rapid growth has contributed significantly to the reduction of global income poverty and inequality by lifting over 200 million people out of $1 per day poverty in the past three decades. However, the growth prospects for Sub-Saharan Africa remain pessimistic.” Using economic theory and empirical evidence, discuss the reasons behind the growth disparity between China and Africa.”

Introduction:

China was one of the poorer countries 30 years ago. According to UNCEIF report ‘China, one of the poorest countries in the world three decades ago, with a GDP per capita of only US$175 in 1978, is now a lower-middle-income country with per capita GDP exceeding US$3,000’, whereas in the beginning many of the sub-Sahara African countries had higher GDP per capita than china. China rapid growth significantly increased the income level of the people while growth of sub-Sahara Africa remained negative.1 [1][pic]

Source: world data bank

We have discussed several factors, which might have an effect on the china’s economic growth.

Population growth, saving and investment studies:

Chine chid policy has slowed down its population growth rate, which likely increases its per capita income.

In Solow model, the population growth rate of the economy increases when country reaches its steady state. Solow model supported the argument with an example that if the population of the economy increases, reduces the investment per worker, which is not enough to keep capital-labour ratio constant and at this point, per capita income of economy is less than with which it begins. Thus, increase in population lowers per capita income. Solow model elaborates the point that the countries with higher saving and investment rates are tend to be richer and countries that have high population growth rate are tend to be poorer.

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Source: Solow model, an increase in population growth rate

Mankiw, Romer and Weil (1992), empirical study of Solow model provides an empirical evidence of Solow model; it concludes that, income lowers when population growth is high because available capital will distribute thinly to the population.

One child policy slowed down the population growth rate, which has a likely effect into high saving rate and low consumption due to reduction in dependents.

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Source: China age dependency ratio (%) World data bank(1960-2010)

Wang (2010) conducted an empirical study, based on panel data of 29 china’s provinces from1989-2007, investigates the china’s saving and growth effect of china’s sharp demographic transition originated from one child policy and predicts that lower population rate raise saving rate and GDP per capita, and population aging has an ambiguous effect on saving rate. Therefore, according this study we can say that dependency ratio might have an effect on saving rate.

Obi,Wafure,Gobna,Menson,Elisha (2012) examined the relationship between saving, investment and growth in Nigeria and found that, Nigeria has low range of GDP proportion of savings and perpetually low investment rate. They suggest, to enhance saving and investment, Nigeria need to implement some proactive policy agenda that...
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