Here is my essay plan for the following question: 'Discuss the view that an increase insavings and investment in Zambia is likely to be the most effective policy insustaining economic growth' (20 marker)
Yes savings and investment is an effective policy:
- Harrod-Domar Model states that savings and investment are the key drivers of economic growth
- However it depends on the quality of investment i.e. capital output ratio (how much capital is needed to produce each unit of output)
- Harrod-Domar model states that: Rate of GDP growth = savings ratio/capital output ratio
- Savings drive investment and can lead to expenditure on education, infrastructure, diversification which will help improve Zambia's economic growth by addressing some of its supply-side weaknesses and investment can help to create employment etc.
However:
- Savings aren't as important for investment as the Harrod-Domar model suggests because aid and fdi can be used to plug the savings gap in developed countries. Therefore these capital flows allow more investment to take place than the savings of a country would otherwise suggest
Moreover alternative policies include:
- Public sector investment (i.e. spending by the government)
- Supply-side policies such as deregulation and privatisation
- Fiscal and monetary policy e.g. increasing taxes on mining, lowering interest rates and reducing corporation tax and income tax to increase AD (short-run economic growth), higher interest rates to attract hot money flows (helps to offset the current account deficit), lower corporation tax to encourage FDI