2.4: The Determinants of Economic Development

Question 1

How can a country’s political, economic, and legal systems impact its level of economic development?

Answer 1

A country’s political, economic, and legal systems can significantly influence its level of economic development, affecting its attractiveness as a market or production location for a firm.

Question 2

What is a common measure of economic development, and how was it traditionally referred to before 2001?

Answer 2

A common measure of economic development is a country’s gross national product per capita. Before 2001, this measure was commonly referred to as GNP, which stands for gross national product, measuring the total value of goods and services produced annually.

Question 3

What is the new measure for economic development, and how does it differ from the traditional measure?

Answer 3

The new measure for economic development is GNI, which stands for gross national income.

Unlike GNP, GNI includes the income of all citizens of a country, including income from factors of production used abroad.

Question 4

Why can GNI per capita figures be misleading, and what is the solution to account for differences in the cost of living?

Answer 4

GNI per capita figures can be misleading because they do not consider differences in the cost of living.

To account for this, one can adjust GNI per capita by purchasing power parity (PPP) adjustment, which allows for a more direct comparison of living standards in different countries.

Question 5

What does PPP stand for, and what does it represent in economics?

Answer 5

PPP stands for “Purchasing Power Parity.”

In economics, PPP is a theory and measurement tool used to compare the relative value of currencies and the standard of living between different countries.

It adjusts a country’s economic statistics, such as income or GDP, to account for differences in the cost of living, enabling more accurate cross-country comparisons of economic well-being.

Question 6

How is the PPP adjustment calculated, and what does it reveal about the cost of living in different countries?

Answer 6

The PPP adjustment is based on the cost of living in the United States as the base.

GNI per capita for a country is adjusted up (or down) depending on whether the cost of living in that country is lower (or higher) than in the United States.

For example, in 2018, the PPP per capita in Ireland was higher than its nominal GNI per capita, indicating that the cost of living in Ireland was lower compared to the United States.

Question 7

What is the “black economy” or “shadow economy,” and why is it significant in some countries?

Answer 7

The “black economy” or “shadow economy” refers to economic activity that goes unrecorded, often involving cash transactions or barter agreements.

In some countries, these unrecorded activities are significant because they are used to evade taxes.

For example, in India, the shadow economy is estimated to be around 17.2 percent of GDP, while it also has a notable presence in countries like Greece, Italy, and Canada.

Question 8

According to Amartya Sen, how should development be assessed, and what does he emphasize as important indicators of development?

Answer 8

Amartya Sen argues that development should be assessed less by material output measures like GNP per capita and more by the capabilities and opportunities that people enjoy.

He believes that development is a process of expanding real freedoms and emphasizes the removal of major impediments to freedom, including poverty, tyranny, poor economic opportunities, social deprivation, and more.

Sen’s view of development includes political aspects and emphasizes basic health care, especially for children, and basic education, especially for women.

Question 9

How does Amartya Sen define development in terms of expanding real freedoms, and what does this perspective entail?

Answer 9

Amartya Sen defines development as a process of expanding the real freedoms that people experience.

This perspective means that development requires addressing various impediments to freedom, including** poverty, political tyranny, poor economic opportunities, social deprivation, and neglect of public facilities. **

It also involves the democratization of political communities, giving citizens a voice in important decisions for the community.

Question 10

What is the Human Development Index (HDI), and how does it align with Amartya Sen’s conception of development?

Answer 10

The Human Development Index (HDI) is a measure developed by the United Nations to assess the quality of human life in different nations.

It incorporates three key measures:

life expectancy at birth,
educational attainment,
and whether average incomes are sufficient to meet basic needs.

The HDI aligns with Amartya Sen’s conception of development because it goes beyond narrow economic measures like GNI per capita and focuses on indicators related to health, education, and income adequacy.

However, Sen suggests that political freedoms should also be included in the index, which is currently not the case.

Question 11

How is the Human Development Index (HDI) scaled, and what are the classifications for countries based on their HDI scores?

Answer 11

The Human Development Index (HDI) is scaled from 0 to 1.

Countries scoring less than 0.5 are classified as having low human development (indicating a poor quality of life),

those scoring from 0.5 to 0.8 are classified as having medium human development,

and countries that score above 0.8 are classified as having high human development (indicating a higher quality of life).

Question 12

What is the nature of the relationship between political economy and economic progress, and why is it a subject of debate?

Answer 12

The nature of the relationship between political economy and economic progress has been a subject of debate among academics and policy makers.

While it is not possible to provide an unambiguous answer, it is possible to make broad generalizations about this relationship.

Question 13

According to the text, what are considered the engines of long-run economic growth?

Answer 13

Innovation and entrepreneurial activity are considered the engines of long-run economic growth.

Question 14

How is innovation defined in the context of economic growth, and what does it encompass?

Answer 14

Innovation, in the context of economic growth, is defined broadly to include not just new products but also new processes, new organizations, new management practices, and new strategies.

It encompasses a wide range of changes and improvements in various aspects of business and industry.

Question 15

How does entrepreneurial activity contribute to innovation and economic dynamism?

Answer 15

Entrepreneurial activity contributes to innovation and economic dynamism by often being the driving force behind the commercialization of innovative products and processes.

Entrepreneurs play a key role in bringing new ideas and technologies to market, leading to economic growth.

Question 16

Why is it important for a country’s economy to have a conducive business environment for innovation and entrepreneurial activity?

Answer 16

A conducive business environment for innovation and entrepreneurial activity is crucial for a country’s economy to sustain long-run economic growth.

Such an environment fosters the consistent production of product and process innovations, which, in turn, drives economic progress and development.

Question 17

What is the key requirement for a business environment to foster innovation and entrepreneurship?

Answer 17

A market economy is a key requirement for fostering innovation and entrepreneurship.

In a market economy, individuals can freely start businesses and pursue entrepreneurial activities to make money. Successful innovations can lead to high profits, providing strong incentives.

Question 18

Why do planned economies have less economic incentive for innovation?

Answer 18

In planned economies, the state owns all means of production, reducing economic incentives for individuals to develop innovations since most gains go to the state.

Question 19

What impact did the lack of economic freedom and incentives for innovation have on former Communist states and some mixed economies?

Answer 19

Lack of economic freedom and innovation incentives led to economic stagnation and, in some cases, the collapse of Communist states.

It also prompted the privatization of state-owned enterprises in mixed economies.

Question 20

What does the evidence suggest about the relationship between economic freedom (linked to a market economy) and economic growth?

Answer 20

Evidence shows a strong relationship between economic freedom and economic growth.

Countries with more economic freedom experienced higher growth and increased citizen wealth.

Persistent economic freedom was linked to top-ten economic growth rates, while low economic freedom correlated with poor growth rates.

Question 21

Why are strong legal protections of property rights considered essential for fostering innovation, entrepreneurial activity, and economic growth?

Answer 21

Strong legal protection of property rights is essential because it allows both individuals and businesses to profit from their innovative ideas without the risk of expropriation.

Without such protection, profits from innovation can be seized by criminal elements or the state through excessive taxation or corruption, reducing incentives for innovation and entrepreneurship.

Question 22

According to Douglass North, what tendency have many governments displayed throughout history, and how does this affect innovation and entrepreneurial activity?

Answer 22

According to Douglass North, many governments have displayed a tendency to engage in behavior that involves expropriating the profits from innovation. Inadequately enforced property rights reduce the incentives for innovation and entrepreneurial activity because the profits from such activities can be “stolen,” leading to reduced economic growth.

Question 23

What argument does Hernando de Soto make regarding property rights in the developing world, and why are his arguments significant?

Answer 23

Hernando de Soto argues that much of the developing world will fail to benefit from capitalism until property rights are better defined and protected.

He emphasizes that the key problem is not just the risk of expropriation but the chronic inability of property owners to establish legal title to the property they own.

This is significant because, in many poor countries, the absence of legal proof of ownership prevents property holders from converting their assets into capital, making it difficult to access financing for business ventures.

Question 24

How does the inability to establish legal title to property affect the poor in many developing countries, and what example does the text provide?

Answer 24

In many developing countries, the inability to establish legal title to property prevents the poor from accessing financial resources for business ventures.

An example is given in Haiti, where individuals must go through a complex and lengthy process, involving 176 steps over 19 years, to own land legally.

This absence of legal proof of ownership prevents property holders from using their assets as collateral for loans, making it challenging for them to start businesses.

Question 25

According to Hernando de Soto, what could be the result if the assets held by the poor in third-world and former communist states could be converted into capital?

Answer 25

Hernando de Soto suggests that if the assets held by the poor in third-world and former communist states, which amounted to more than $9.3 trillion in 2000, could be converted into capital, it could lead to an economic revolution that would enable the poor to lift themselves out of poverty.

Question 26

What is the subject of debate regarding the political system and its role in achieving a functioning market economy with strong property rights?

Answer 26

There is debate regarding the type of political system that best achieves a functioning market economy with strong property rights.

Question 27

How is democracy typically associated with economic progress and property rights protection in Western societies?

Answer 27

In Western societies, democracy is often associated with economic progress and strong property rights protection. It is generally believed that democracy is beneficial for economic growth.

Question 28

What is the common feature shared by South Korea, Taiwan, Singapore, and Hong Kong at the start of their rapid economic growth, and what does this fact challenge?

Answer 28

At the start of their rapid economic growth, South Korea, Taiwan, Singapore, and Hong Kong all had undemocratic governments. This challenges the common belief that democracy is a prerequisite for economic progress.

Question 29

According to Lee Kuan Yew, what does he believe is more important for a country’s development than democracy, and why?

Answer 29

Lee Kuan Yew, Singapore’s leader, believed that discipline is more important for a country’s development than democracy.

He argued that democracy can lead to undisciplined and disorderly conduct, which can be detrimental to development.

Question 30

What challenges did some Eastern European and former Soviet Union countries face when democracy arrived before economic reform?

Answer 30

Some Eastern European and former Soviet Union countries faced challenges when democracy arrived before economic reform.

Elected governments found it difficult to introduce the necessary policies for rapid economic growth, as these policies were often painful in the short run.

Question 31

What distinguishes the type of totalitarian regime capable of promoting economic growth, and what is the role of property rights in this context?

Answer 31

The type of totalitarian regime capable of promoting economic growth is one committed to a free-market system and strong protection of property rights.

Property rights play a crucial role in ensuring economic progress in such regimes.

Question 32

Why does the text suggest that democratic regimes are likely more conducive to long-term economic growth than dictatorships?

Answer 32

Democratic regimes are considered more conducive to long-term economic growth because they provide a well-functioning, mature democracy where property rights are truly secure.

Dictatorships, even benevolent ones, may not offer the same level of security for property rights, and there is no guarantee that they will continue to pursue progressive economic policies.

Question 33

What negative impact does the text attribute to totalitarian states in relation to human development and progress?

Answer 33

Totalitarian states, by limiting human freedom, also suppress human development and are considered detrimental to progress.

Question 34

Is democracy considered a necessary precondition for a free market economy with protected property rights, and why?

Answer 34

Democracy is not considered a necessary precondition for a free market economy with protected property rights.

While it may not always be the initial cause of economic progress, democracy often follows as a consequence of economic growth.

Question 35

How does the belief that economic progress leads to the adoption of a democratic regime affect Western governments’ attitudes toward human rights violations in China?

Answer 35

The belief that economic progress leads to the adoption of a democratic regime has led to a fairly permissive attitude among many Western governments regarding human rights violations in China.

Some Western countries are hesitant to criticize China too severely out of concern that such criticism might hinder China’s transition to a free-market system and, eventually, democracy.

Question 36

Geography and Economic Development

Answer 36

Geography can influence a country’s economic policy and growth rates. Coastal states tend to be more supportive of market institutions, while landlocked states often organize hierarchically.

Mountainous regions may neglect market-based trade, and temperate climates support higher population densities.

Question 37

Impact of Geography on Growth

Answer 37

effrey Sachs found that landlocked countries grew more slowly than coastal economies.

Being entirely landlocked reduced a country’s growth rate by approximately 0.7 percent per year.

Additionally, tropical countries grew 1.3 percent more slowly each year than countries in the temperate zone.

Question 38

Education and Economic Development

Answer 38

Investment in education is an important determinant of economic development.

Nations that invest more in education tend to have higher growth rates because an educated population is more productive.

Question 39

Impact of Education on Growth

Answer 39

A survey of 14 statistical studies concluded that investment in education has a positive and statistically significant impact on a country’s rate of economic growth.

This is supported by the example of South Korea, where high enrollment in primary schools correlated with significant economic growth compared to Pakistan.

Question 40

Education and Tropical Geography

Answer 40

Investments in education have helped countries in Southeast Asia, such as Indonesia, Malaysia, and Singapore, overcome the disadvantages associated with tropical geography and achieve rapid economic growth compared to tropical nations in Africa and Latin America.