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Financing Economic Growth in LDCs: A Tale of National Savings and Natural Resources

· economic growth,Natural resources,Economics

Least developing countries save and invest a large share of their limited resources to improve living standards in the future. But even while they are building new roads, schools, parks, clinics, power plants and homes, they are destroying their natural environment at a fast pace. Sustainable growth will require much greater consideration for natural resources.

Originally on The Data Blog by The World Bank.

Investing today is important for economic growth tomorrow: working hard today to build more and better schools, clinics, roads, bridges, parks, factories, offices, houses and other infrastructure will improve both economic output and living standards in the future. Investing sustainably is especially crucial for Least Developed Countries (LDCs) if they are to achieve the 7 percent growth target (8.1) set by the 2030 Agenda of the Sustainable Development Goals (SDGs).

Yet investing for the future means saving more and consuming less today. For every worker building roads and factories that will be used tomorrow, there is one fewer worker producing goods and goodies to be consumed today. For every dollar a family saves, that is one fewer bottle of coke or bag of rice to be consumed today.

Building up assets…

Least Developed Countries (LDCs) are investing. Between 2001 and 2015, LDCs invested an average of 22 percent of their Gross National Income (GNI). That means that close to a quarter of today’s production is not consumed today but, instead, is being invested to improve life and increase economic output in the future. That might sound a lot but it is around the same as the global average (around 23 percent of GNI) and only slightly above the OECD average (around 21 percent of GNI).

Much LDC investment is self-financed. Over the same period, domestic savings in LDCs averaged over 16 percent of GNI. This is lower than the global savings rate (of 25 percent of GNI) but this is to be expected as capital and investment flows in from wealthier countries. It gives LDCs the chance to increase their capital stock while keeping a reasonable degree of consumption.

… but knocking down trees…

But while some assets are going up, others are coming down. The use or destruction of natural assets – such as forests, energy or minerals cost an average of 1.6 percent of global GNI per year (2001-15) and carbon emissions cause damage worth another half a percentage point of global GNI each year. As a result savings are diminished on a net basis.

It’s much worse in LDCs. Families, firms and governments might be saving over 16 percent of national output. But they are depleting natural resources at a rate of over 9 percent of GNI per year, reducing net savings to just 7 percent of GNI (see graph below). That means fewer natural resources to use in the future, and fewer of their benefits – such as cleaner air, fewer landslides, richer soil and natural resource-based industries and jobs. Just as if savings and investment were lower – or as if existing infrastructure such as roads, factories and bridges slowly crumbled away – future economic growth will be more difficult as a result. And this doesn’t even include the high health costs resulting from polluted cities or smoky homes.

…doth not sustainable growth maketh

Allowing natural resources to be depleted at such a high rate is unlikely to be a recipe for long-term high growth. Just as maintaining existing physical infrastructure in good condition is important to be able to continue to benefit from it, it is important to maintain natural resources. That will mean progressively decoupling economic growth from environmental degradation, as envisioned by SDG 8.4. Finding ways to maintain economic growth – and boost it to 7 percent in LDCs – while using fewer natural resources will require action on multiple fronts. Reducing conflict is one important part of the recipe. Structural reforms and economic diversification are likely to be other ingredients, among others. One thing is certain – families, firms and countries work hard to save and invest today for a brighter tomorrow. Realizing their aims of improved living standards will be harder if the natural resources they rely on have disappeared.

Originally on The Data Blog by The World Bank.

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