The GDP of the UK vs Kenya

In the world economy, different countries have been ranked different with regards to their level of development. Economists have used different measures to assess the development gap between those countries, each proposing an alternative way of subdividing the world economies as per the level of development. It is through such subdivisions that the three classes of countries have been realized: developed countries, developing countries, and third world countries. Although different measures have been put in place to measure economic development, some of the common indicators of development include Gross Domestic Product, GNP per capita, Human Development Index, Infant mortality rate, Literacy rate, and Life expectancy (Arcand, Berkes and Panizza, 2015, p.105). Regarding financial development indicators, this paper will consider factors such as the total number of financial institutions, insurance companies, pension plans, money markets and capital markets.

The researcher has concluded that developing countries score low on both economic and financial development indicators. To prove whether his conclusion was valid, this paper will consider UK and Kenya to represent developed and developing categories of world economies. Using the two countries as the case study, the major economic and financial indicators will be compared with an aim of affirming the researcher’s conclusion.

Gross domestic product (GDP) is used to measure the national income and the output of a given country’s economy. GDP is basically the total expenditure for a country’s final goods and services which are mainly produced within a certain period of time. GDP can be likened with a satellite in the space because of its ability to reveal an overall picture of a country’s economy (Alam et al, 2015, p.8400). It is a primary indicator which gauges the health of an economy. It is used to represent the total value of both goods and services which are produced in a country over a certain period of time, often seen as the size of an economy. The two figures below compare UK GDP and Kenyan GDP

Kenyan GDP

Considering the two charts above, it comes out clearly that the Gross Domestic Product in the United Kingdom is far much higher, 2622.43 billion US dollars than that of Kenya, 74.94 billion US dollars as per the statistics of 2017. Also, considering the value of GDP between the two countries shows the difference between developed countries and developing countries (Beck, Demirgüç, Levine, 2007, p.40). For instance, the GDP value of UK represents 4.23% of the world economy while that of Kenya represents 0.12% of the world economy. Finally, when the fluctuations in the GDP growth rate are put into consideration, the same results are realized since the United Kingdom has averaged 1162.89 compared to that of Kenya 15.38 USD Billion from 1960 until 2017. Based on this economic development indicator, the researcher’s observation regarding economic and financial development is correct.

GNP per Capita, the UK vs Kenya

GNI per capita which was formerly known as GNP per capita refers to the gross national income after being converted into U.S. dollars by the use of World Bank Atlas method and then divided by midyear population. GNP is, therefore, the sum of value added by both  resident producers and the product taxes which are not included in setting the value of output as well as net receipts of) from abroad. GNP, which is initially calculated in form of national currency, is then converted into U.S. dollars at the official exchange rate for purposes of comparison across different economies (Beck, 2013). GNI per capita is an important economic development indicator because it reflects the standard of living of people within the country. The two graphs below show the comparison between the UK and Kenyan GNP per capita

GNP per Capita, the UK vs Kenya

Based on the above two graphs, the GNI per capita of the United Kingdom is far much higher as compared to that of Kenya. As it can be observed, the statistics of 2016 have recorded the GNI per capita of Kenya as 1,380 while that of United Kingdom as 42,330. This is an indication that the standards of living in the UK are high compared to those of Kenya which is a developing country (Croitoru, 2012, p.10). Also, the statistics from the World Bank have indicated that the GNI per capita in Kenya has fluctuated between 100 and 1380 between 1962 and 2016 which is still low as compared to that of UK which has been fluctuated between 2440 and 48420 between the same disparity of time.  Based on this economic development indicator, the researcher’s observation regarding economic and financial development is correct.

HDI is the summary measure used to assess long-term progress in the three dimensions of human development: healthy and long life is gauged by life expectancy, literacy level by the population which can access or has attendant the education system of the country while the living standard is measured by the Gross National Income per capita (Cypher, 2014). Countries which have an HDI score over 0.800 are considered to be highly developed compared with that score lower. The two figures below show the comparison between the HDI of UK and that of Kenya.

As it can be seen in the above graphs, the HDI score of United Kingdom has been increasing. From the score of 0.775 in 1990 to 0.922 in 2017 and that’s an indicating that the UK has experienced a high human development. The country’s life expectancy has increased 6 years, the mean schooling years by 5 years and the expected schooling years by 3.7 years (Demirguc-and Levine, 2001, p.230). In regard to GNI per capita, the country’s GNI per capita has increased by 46.6% between 1990 and 2017. Contrary to these interesting figures, Kenya, on the other hand, has a registered low value as far as HDI is concerned. The current statistics as indicated in the graph above has shown depicted Kenya having an HDI score of 0.59 which is an increase from the 0.45 score in 1990.  As far as this economic development indicator is concerned also, the researcher’s observation regarding economic and financial development is correct.

Banking sector growth rate the UK vs Kenya

Based on the above graph which has put into comparison the growth rate of the banking sector in different countries like US, Brazil, Australia, South Africa and the UK, Kenya seems to be the least in terms of banking sector growth rate (Easterly and Levine, 2016, p.225). From the six countries compared in this graph, it also comes out clearly that the countries with the highest growth rates are the developed countries like US, Australia, UK and then followed closely by South Africa and Brazil which have just entered the developed phase recently. Since the banking sector is the main financial development indicator in a country, it can be concluded that the researcher’s observation regarding economic and financial development indicators was also correct.

Human development index (HDI)

PART B: ESSAY

In its basic definition, economic development is a term used by economists in reference to the process by which young and small economies advances to become fully grown economies. It can also be seen as a process by which countries with low standards of living advance to become nations with high standards of living (Furtado, 2018, p.125). There are various signs which denote that an economy is in its process of development. Some of those signs include improvement in productivity, overall health and wellbeing and high literacy level. The researcher in his observation argued financial development as the main pre-requisite to economic development in poor countries especially those with large informal sector and I fully support his observation.

In 1911, Schumpeter revealed the secret behind financial intermediation (banks) and its contribution to the growth and development of an emerging economy. His first statement explained financial transactions to be the core in an economic growth process. Although he didn’t use modern approaches of financial transactions, he used bankers as an example and Instead of using economic growth, he termed it as development (Jedwab, Kerby and Moradi, 2017, p1470). Schumpeter suggested that bankers, by selecting the entrepreneurs to fund promoted innovativeness and spur economic growth. According to him, he likened the financial sector with an intermediary between those striving to realize new combinations and the owners of capital necessary for accomplishing investment goals. Thus, a bank issuing loans was indirectly authorizing the implementation of “new combinations” on behalf of the whole society. To him, the financial sector was the main contributing factor as far as economic development was concerned.

A country with a well-functioning financial system put in place and that directs financial resources to where they should  is highly productive and places the economy of such a country in a phase of expansion than any other whose financial systems are ineffective (Kates, 2018). This is in consideration to the fact that the informal sectors of all developing countries lack financial resources and with an opportunity of accessing financial support in terms of loans and others will enable the stakeholders to diversify and expand their businesses.

Some of the main reasons as to why countries are placed under the bracket of developing or underdeveloped categories are because of the low living standards pursued by the citizens. Closely linked to low living standards is the high unemployment rate within those countries (Levine, 1997, p.670). For instance, when UK and Kenya are compared to each other in terms of unemployment rates, Kenya will automatically have high unemployment rates as a developing country while the UK which is a developed country. The same difference has also been captured in the comparison between the banking sector growth rates of the two countries.

It is worthy to note that all the facilitators of economic growth and development will always depend on the financial sector to be able to attain their full growth capacity (Miletzki and Broten, 2017). For instance, innovations have been the driving force behind the developed economies, but can innovations be successful without financial support?  Can the informal sector of an economy proceed without financial support? And finally, can the agricultural sector grow without the use of current technology? Answers to these and other questions affirm the crucial role played by the financial sector in the economic development agenda.

Banking sector growth rate the UK vs Kenya

The informal sector has proved to be the basis of many developing countries and for this sector to be successful, financial support has always been of paramount importance (Malecki, 2018, p.75). This is because most of the stakeholders in the sector cannot afford the capital to finance the startups and that calls for financial support in terms of short and long term loans which are mainly availed by the financial sector of the economy. With financial support from the financial sector, the informal sector stands a position of expanding and can easily acquire more workers hence reducing the high unemployment rates which have been a drawback in the economic development process (Menyah, Nazlioglu and Wolde 2014, p.390). Also, the ability of this sector to reduce unemployment rates translates into reduced dependency rates and that increases savings within the country economy.

Marketing in the informal sector has also proved to be another challenge because of the lack of enough resources to facilitate that. Considering the fact that the availability of market is of paramount importance in any sector, failure to market the products in this sector of economy drags growth of firms within the industry (Meara et al, 2015, p.600).  This is because the sector records low sales as the only market it depends on is small and will rarely expand to create more job opportunities for the local population. For that reason, the financial sector is highly needed at this juncture to enable the stakeholders to market their products by extending loans and other types of financial support to them.

Innovativeness is another important approach in the process of economic development which cannot proceed without financial support. Comparing the statistics of developed countries and developing countries, a difference can be seen clearly as far as allocation of financial resources on the sector are concerned and this is because developed countries have realized the importance of innovation for economic development (Mwanzia and Strathdee, 2016). In every year, for instance, new products, ideas and methods are sold in the market courtesy of business innovators. Innovators look perceive problems differently and therefore come out with solutions that others cannot hence provide an endless stream of value to their country’s economy.

Innovation makes it possible for a country’s economy to grow in leaps and bounds and this fact has been fully supported by economists.  Countries which have fully supported innovation through financial resources have been able to scale up and minimized unemployment rates within their economy (Nissank and Aryeetey, 1998). That has also enabled them to attract more investors and grab a bigger share of the market. Innovation has also made it easier for economies to grow regardless of the size of the economy in the world economy. For instance, a country with small startups but that has invested highly on innovation through financial support to innovators grows faster than others which might be operating on large scale bases but have not invested on innovation factor.

Innovativeness makes it possible for a country’s products to stand out and attract more customers hence creating a room for expansion. Consequently, expansion in the industrial sector of an economy has its own benefits like minimizing the rates of unemployment since the expansion will create more job opportunities within the country (Rajan and Zingales, 1998, p.560). As it was seen previously, an economy is said to be developing if the living standards of the citizens are high and creation of employment to the unemployed population is one of the approaches of improving their standards of living.

Part B: Essay

Back to the backbone of most of the world economies which is farming, statistics have indicated that countries which use the new technology in farming and other farm operations are the most productive economies compared to those using the traditional methods of farming. This is because the use of machinery in the production process makes work easier and effective than the traditional methods of farming. However, for local farmer machinery and other approaches to decent farming have proved more expensive and unaffordable hence the need for financial support which can enable farmers to compete with the rest of economies favourably (Svirydzenka, 2016). This can only be achieved in an economy where the financial sector is developed and can support such farmers in terms of giving loans and other financial support to be able to afford machinery and other forms of decent farming practices.

Financial support to farmers through funding them will also help eradicate poverty within a country. This is in consideration to the fact that traditional methods of farming have been the main reason behind low productivity in the agricultural sector and that has rendered most of the developing countries unable to sustain their own population in terms of food security (Salahuddin, Gow and Ozturk, 2015, p.320). With machinery and other modern farming approaches, the poverty levels within the country will have been minimized and living standards improved since productivity will have been improved.

Some of the developing countries have suitable environments which can be utilized by foreign investors to create jobs for local population but the fact that the infrastructure has remained undeveloped still poses a challenge for the investors to venture into the markets. This again boils down to the financial development factor in facilitating economic growth. Roads and other public transport means are major factors which are considered by modern investors before making the decision to invest in any country (World Bank Group, 2014). Infrastructural development in an economy requires financial support which can only be realized through a developed financial sector.

On the side of healthcare and which is among the major factors used to assess economic development, financial resources are highly demanded to facilitate the operations of hospitals and other healthcare centres. Insurance cover is among the subsections of the health sector which plays a huge role in attracting foreign investors (World Bank Group, 2014). This is because foreign investors prefer to invest in economies where their assets and investments are secure and can be recovered in case of any risk in the course of operation. Under this category, investors in the transport sector are the central consideration because the transport sector is among the sectors which are highly vulnerable to risks and misfortunes.

A country whose financial sector is well developed highly promotes the culture of entrepreneurship.  Entrepreneurship is among the few sectors which have been recorded in the books of history to have been a stepping stone in most of the currently developed economies. Statistics have shown that most of the potential entrepreneurs fail to make it in developing countries because they lack the capital to push their agenda forward. For instance, a potential entrepreneur in Kenya who may wish to start a small fruit kiosk may find it hard to do so because of the lack of initial capital and that becomes the end of his or her dream (Furtado,2018, p.130). However, with a developed financial sector, such a potential entrepreneur will be able to acquire a small loan and push his or her dream forward. With time, such a small venture may expand and become a source of employment to many and hence reduce the unemployment rates within the country. Statistics have also shown that developing countries have citizens with unique talents and whom talents have hit a wall due to lack of financial support to pursue them.

In summary and from the above discussion, it is beyond any reasonable doubt that the researcher’s assertion that financial development is the main pre-requisite to development in developing countries is valid and I support the observation. This is in consideration of what has been discussed above. First of all, it has come out clearly that economic development is driven by factors such as innovativeness, entrepreneurship, industrial growth and investments. Considering a factor like innovativeness for instance, for it to be successful must be fully supported financially because it entails in-depth research which must be geared by highly motivated and qualified individuals. The same applies to other sectors like the agricultural sector because of the highly productive economies as far as agriculture is concerned are those economies which have already embraced the modern ways of farming like the use of machinery. Embracing modern farming is highly expensive and may not be possible for local farmers who have no financial support. For that matter, the factor of the developed financial sector as a first priority comes in to support the farmers financially by extending loans and other forms of financial support. Entrepreneurship is also another sector of the economy which has shown its potentiality in facilitating economic growth among the major developed economies. However, it has its own challenges especially in developing countries where potential entrepreneurs cannot afford the starting capital. This has rendered most of those potential entrepreneurs unable to pursue their entrepreneurship dreams but with a developed financial sector, they will be in a position to access short loans with minimal interest rates and pursue their entrepreneurship goals. Lastly, the informal sector also requires financial support in order to meet their operational costs and that has rendered most of them in the developing countries unable to expand. So, an economy with developed financial sector will make it possible for the stakeholders to access loans which can help expand the sector to create job opportunities and improve the living standards of the local population.

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