4.15.2 - Economic Growth and Development

Question 1

How can economic development be measured?

Answer 1

• A general improvement in living standards
• Access to resources such as food and housing
• Access to opportunities for human development
• Sustainability and regeneration
• Access to healthcare

Question 2

What are indicators of development?

Answer 2

The main methods by which countries measure development.

e.g. GDP per capita, GNI per capita etc.

Question 3

Why is GDP per capita normally higher than GNI per capita in developing economies?

Answer 3

Profit outflows and interest payments out of developing countries to developed countries lead to GNI falling.

Question 4

What is economic welfare made of?

Answer 4

Welfare derived from goods and services purchased + welfare derived from public goods + economic welfare derived from QoL factors

Question 5

What is HDI?

Answer 5

An index based on life expectancy, education and income per capita.

Question 6

How is HDI ranked?

Answer 6

• Very high human development
• High human development
• Medium human development
• Low human development

Question 7

How is HDI constructed?

Answer 7

• Life expectancy at birth
• Mean years of schooling and expected uears of schooling
• GNI per capita, reflecting PPP in US dollars

Question 8

What issues does HDI not take into account?

Answer 8

Income equalities.

Question 9

Illustrate how economic growth does not always lead to economic development.

Answer 9

As the economy grows from PPF1 to PPF2, the economy actually uses more of its available resources on producing armaments and reduces the amount of education it provides.

Question 10

What are the main barriers to growth and development?

Answer 10

• Corruption
• Institutional factors
• Poor infrastructure
• Lack of human capital
• Lack of property rights

Question 11

Why is corruption a barrier to growth and development?

Answer 11

Resources are diverted away from more productive uses to protect less efficient resource use.

This causes production costs and consumer prices to rise.

Question 12

What are institutional factors?

Answer 12

Factors such as the rule of law, legal structures, public administration systems, financial institutions etc.

Question 13

Why are institutional factors barriers to growth and development?

Answer 13

If rules of law are not upheld, then the ‘law of contract’ would not be upheld. If this necessary step is not upheld, then businesses and consumers are less likely to do business as there is no guarantee of the provision of goods or payment.

Question 14

Why is poor infrastructure a barrier to growth and development?

Answer 14

Poorer developing countries do not have infrastucture that allows them to trade effectively.

The lack of infrastructure by the public sector damages external economies for the private sector, and disincentivises MNCs to trade in those countries with weak infrastructure.

Question 15

Why is a lack of human capital a barrier to growth and development?

Answer 15

If the stock of human capital is not improving in quality or size, the country cannot develop their economy as their productive capacity will not really improve.

Technological improvements are great, but if there are no workers who understand how to use the technology, then the productive capacity benefits sum to pretty much zero.

Question 16

Why is the lack of property rights a barrier to growth and development?

Answer 16

Property rights prevent theft of goods and services, and many developing countries do not have extensive private property rights.

Tradeable private property rights underlie the development of capitalist economies, which are arguably the most successful in achieving economic development.

Question 17

What are some policies that might be adopted to promote economic growth and development?

Answer 17

• Demand-side fiscal policy
• Demand-side monetary policy
• Supply-side policies

Question 18

Why is economic growth perhaps an issue for developing countries?

Answer 18

If you pursue ‘growth for growth’s sake’, economic depletion and degradation may likely exceed the benefits of higher living standards and economic welfare. In this case, economic growth has damaged economic development.

Question 19

How can the issue of economic growth be somewhat corrected by the government of developing countries?

Answer 19

They can introduce appropriate microeconomic policies.

• Taxes and subsidies
• Redistributive policies
• etc.

Question 20

Why is capital flight such an issue for developing countries?

Answer 20

Much of their capital gains are sent to other countries by the elites in the country, rather than re-investing their profits into their own countries to further development.

Question 21

What is aid?

Answer 21

Money, goods, services and soft ‘loans’ given from one country or multicountry organisation to help another country.

Question 22

What do free market economists believe is more important, aid or free-trade. Why?

Answer 22

Free trade.

International specialisation and complete free trade, in accordance with the principle of comparative advantage will benefit all countries involved.

Question 23

What is the strategic trade theory argument against free market economists in terms of aid?

Answer 23

Governments in developed nations tend to only support free trade when it benefits them. Once competition arises with lower wages in other countries, developed nations engage in protectionism to protect themselves.

For developing countries to develop faster, they must select, and then protect, key industries deemed vital for economic growth.

Question 24

What is the free market argument against the strategic trade theory in terms of aid?

Answer 24

The growth of free trade has:
* Brought about improved transport links
* Developing countries can build up their own industries
* Encourages investment in other areas that promote economic development

Question 25

What are the main types of aid?

Answer 25

• Military aid
• ‘Hard’ loans
• ‘Soft’ loans
• Disaster relief
• ‘Tied’ aid
• ‘Lending’ experts

Question 26

What is military aid?

Answer 26

Aid that must be spent on the purchase of weaponry.

(Questionable if this is really aid)

Question 27

What is a ‘hard’ loan?

Answer 27

A loan given in a hard currency, that has to be paid back at a market rate of interest.

(Closer to a normal loan than real aid)

Question 28

What is a ‘soft’ loan?

Answer 28

A loan given in a hard currency, that has a below-market rate of interest attached. The loan must eventually be repaid, but little or no interest is charged by the donor.

Question 29

What is disaster relief?

Answer 29

Much dispensed by NGOs, but is sometimes matched by government.

This is a form of ‘band-aid’ relief, as it doesn’t provide any real, long-lasting economic development.

Question 30

What is ‘tied’ aid?

Answer 30

A form of either a ‘soft’ loan or a gift of money that must be spent on the exports of the donor country.

(This often benefits the donor country as much as, if not more than, the recipient)

Question 31

What is the ‘lending’ of experts?

Answer 31

Experts provide advice on how to improve a country’s governance, exports, productivity etc.

China has used to this, and gone one stage further, as they have used Chinese workers and managers to build roads and other infrastructure in Africa, in exchange for the export of minerals and raw materials going to China rather than competitors.

Question 32

Why is the export of high-tech. capital goods from rich to poor a form of ineffective aid?

Answer 32

If a high-tech piece of equipment breaks, the country may lack a workforce with sufficient expertise to fix it.

Spare parts produced in developed economies would have to be purchased, using up foreign exchange.

Question 33

Why do developing countries want high-tech. capital goods?

Answer 33

Trade and aid in developing countries are often ‘skewed’ to the purchase of high-tech goods due to the desire of countries’ governments and elites to invest in prestige projects, despite occasionally lacking the expertise to use or fix the projects.

Question 34

Where has aid caused issues?

Answer 34

Africa

Chinese aid has actually improved infrastructure in these countries, so aid has begun to improve Africa.

In previous years it was said to make Africa poorer rather than richer.

Question 35

Where has trade caused improvements?

Answer 35

Asia