Suppose you are a famous international economic advisor. You have been asked to asses the possibilities for growth in an African country. It is a country abundant in labor and some natural resources. The capital-to-labor ratio is low. It has a free

Question

market economy. You have found that this country does not have a very strong and healthy banking system, however the political system is stable and the government does a good job protecting property rights. Assess this country's prospects for growth. Recommend two things that would enhance the country's growth.

What will be an ideal response?

Answer 1

The prospects for this country's growth are fairly good. It has a lot of labor and natural resources. Having abundant factors of production can contribute to strong growth. The free market system is also another characteristic that should help enhance economic growth. Entrepreneurs can respond quickly and adopt technological innovations. We know that technological change can increase labor productivity. Also the fact that the government enforces property rights can help the free market to flourish. The political stability of the government is also a good sign. Investors won't be afraid to risk investing in the country. Two things the country could do to increase growth would be to raise the capital-to-labor ratio and develop the financial sector. The country could increase the capital-to-labor ratio by attracting foreign investment, or perhaps giving tax breaks to firms that increase the amount they invest. This is probably one of the most effective ways to increase growth.