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

Simon Davies's picture

This blog is part of a series using data from World Development Indicators to explore progress towards the Sustainable Development Goals and their associated targets. The new Atlas of Sustainable Development Goals 2017, published in April 2017, and the SDG Dashboard provide in-depth analyses of all 17 goals.

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…

Between 2001 and 2015, LDCs invested an average of 22 percent of their Gross National Income (GNI), while the global average was 23 percent and the OECD average 21 percent. This translates to between a fifth and a quarter of today’s production being invested for the future, rather than being consumed now.

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.

In LDCs natural resources are being depleted at a rate of over 9 percent of GNI per year, resulting in a rapid decline in natural resources available for the future. While families, firms and governments may be saving over 16 percent of national output, the net savings after adjustment for resource depletion are just 7 percent (see figure below). At the same time, the benefits of natural resources diminish too. These include cleaner air, fewer landslides, richer soil and natural resource-based industries and jobs. Consequently the health costs resulting from more polluted cities or smoky homes rise.

…makes sustainable growth difficult.

Allowing natural resources to be depleted at such a high rate jeopardizes long-term high growth, and target 8.4 of the SDGs looks to progressively decouple economic growth from environmental degradation. Finding ways to maintain economic growth – and boost it to 7 percent annually in LDCs – while using fewer natural resources will require action on multiple fronts. Reducing conflict plays an important role, as do structural reforms and economic diversification. 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.

The depletion of natural resources in Least Developed Countries reduces the net savings and jeopardizes growth.