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Discuss the view that savings gaps in developing countries are the most significant constraint
on economic growth
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This is common in developing countries where there is a deficit between
the current aggregate savings and the level of savings to provide funds for investment
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(Draw
model)
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The model suggests that
the economy’s rate of growth depends on the level of savings
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This means that the society of the country cannot
afford the provision of basic necessities and their standard of living falls
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People will not have jobs and therefore will not have to
pay taxes to the government and the cycle restricting economic growth will continue due to
the savings gap
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It also does not
create the dependency that foreign aid might bring
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In developing countries such as Africa, there is an outbreak of disease such as
malaria
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A shorter
working life means that they don’t have enough time to accumulate income to provide for
basic necessities and therefore their standard of living and human welfare falls, halting
economic development leading to a fall in economic growth
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A lack of investment in infrastructure due to a savings gap
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Therefore, people’s incomes will fall and they will
not contribute to the economy’s growth
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This means that firms will be hesitant to invest when there is such
high risk involved, ultimately restricting the country’s growth because of the initial savings
gap
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However, aid is prone to
corruption which would not benefit the country and there may be a dependency culture on it
which the country could begin to rely on
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