Economic Growth and Development

Houphouet-Boigny of the Côte d’Ivoire moved the capital from Abidjan to his
home village Yamoussoukro, where he constructed a five-star hotel, motorway,
conference centre and a cathedral. There was no economic rationale or
prospect of any future return from this ‘investment’ which would probably be
better labelled as grandiose consumption. This chapter explores when, where
and how investment can be good for economic growth.

Investment and economic growth

Investment as a proximate determinant of growth influences both supply and
demand conditions in an economy. Unless there is underutilized capacity, invest-
ment to increase the productive capacity of the economy is likely to be required
for economic growth. This could be direct investment in new plant and equipment
(including improved technology), or indirect investment in infrastructure –
increased power supply for example – to enable an expansion of textile produc-
tion. Keynes argued that investment also has an important influence on growth via
demand (see Box 3.2 on p. 72). Investment typically accounts for some 10–30 per
cent of aggregate spending and consequently increases consumer spending power
and so the market for producers. Investment also influences growth through
education and productivity. Investment in human capital may improve the
productivity of the labour force. These linkages are shown in Figure 3.1.
Some advisers treat investment as a variable that can be chosen by govern-
ments. Calls to ‘increase investment’ typically occupy a central place in
economic policy-making. To take one typical example; for the first South
African multi-racial elections in 1994 the African National Congress (ANC)
argued in their election manifesto:

As a legitimate government, the ANC will be able to work with others to

create an environment of peace and stability, boosting investor confidence.

62 Sources of Growth in the Modern World Economy since 1950

GDP growth

Investment

in physical

capital

Investment

in human

capital

See Chapter 6 See Chapter 5

Investment

in new

technology

Figure 3.1 Investment and economic growth