4.3: Development Flashcards
HDI n that cuzzy
SEN’s definition of economic development
The process of which improving peoples well being and quality of life, involving improvement in standards of living, reduction in poverty, improved healthcare and education along with increased freedom of economic choice
Characteristics of developing countries
-Low standards of living
-Low levels of productivity
-Low levels of savings
-High population growth
-Primary sector dominance (agriculture)
-Incomplete markets - lack of education and weak currencies
-High unemployment
-Low economic power on international stage
Benefits of economic development
-Higher incomes - More jobs, better quality of life - income inequality - reduction in poverty
-Higher profits - technology and jobs
-Fiscal dividend - Infrastructure - health- education
Costs of economic development
-Distribution of incomes
-Negative externalities - Azerbaijan - 80% of their exports is oil but it only accounts for 1% of oil and gas output globally
-Growth in one dominant sector - Senegalese fish industry
4 factors needed for development of a country
-Growth
-Uncorrupted/effective government
-Incentives for firms to reinvest
-Income distribution
Domestic factors affecting development
-Education
-Healthcare
-Infrastructure
-Taxation
-Appropriate use of technology
-Empowerment of women
-Income distribution
5 trade policies for economic development
-Import substitution industrialisation
-Export promotion
-Trade liberalisation
-Bilateral trade agreement and regional PTAs
-Diversification
Explain import substitution industrialisation as a trade policy for economic development
Tariffs on imported manufactured goods to allow domestic industries to grow
+ Protects domestic industries
+ Protects economy from foreign influence and potential dominance of MNCs
-Retaliatory protectionism (trump vs China)
Explain export promotion as a trade policy for economic development
A trade policy designed to encourage the production of goods and services for export as a means of stimulating economic development
+ Potential technological advancements
+ Primary product dependence of developing countries
- Protectionism abroad
- Wider income inequality
- Over dominance of MNCs
Explain trade liberalisation as a trade policy for economic development
A trade policy aimed at reducing or eliminating barriers to trade, such as tariffs, quotas, and import restrictions, to facilitate a freer flow of goods and services across borders.
+ Creating macroeconomic sustability
+ Sustainable growth
- Increased income inequality and exploitation of workers
- More poverty creation —> MNCs have too much power
Explain bilateral trade agreements as a policy for economic development
Trade policies in which two countries mutually agree to reduce or eliminate trade barriers such as tariffs, quotas, and restrictions to promote trade and investment between them
+ Better market access
+ Increased consumer choice
-Trade barriers in other countries
Explain Diversification as a policy for economic development
Involves expanding the range of goods and services produced within an economy to reduce reliance on a narrow set of industries or exports
+ Prevents over reliance on one sector
+ New technology
- Highly skilled workforce is needed
Benefits of trade for development
+ Exploit comparative advantage
+ Consumers benefit from lower prices and increased choice
+ Economies of scale and efficiency benefits
+Technological transfers and growth of secondary industries
Problems of trade for development
- Resource depletion (primary commodity dependence)
- Price fluctuations
- Access to international markets is limited (protectionism)
- Long run decline in the terms of trade
Outline the role of markets in promoting development
To decrease intervention so markets are able and free to allocate resources more efficiently (price mechanism)
+ More efficient allocation of resources
+ Incentivises profit to be made
+ Encourages FDI
- Infrastructure —> lack of quasi public/public goods —> Missing markets
- Market failure
- Under provision of merit goods e.g. Healthcare, education…
Role of the government in promoting development
Governments get involved to increase development in a country
+ Infrastructure —> Quasi public goods
+ Government is a major employer of jobs
+ Stable macroeconomy
+ Welfare state
- Bureaucracy
- Nationalised industries are X-inefficient
- Increased gov spending can lead to fiscal deficit
Benefits of FDI for development
+ Acts as an injection into circular flow of income
+ MNCs can expand infrastructure
+ Improved productivity domestically
+ Technological transfers
+ Total Tax revenue is higher —> Reduces chances of a fiscal deficit
Problems of FDI for development
- MNCs may only stay for a short time
- They may bring their own employees
- They may force politicians to give better tax deals
- Exploitation of workers
- Environmental costs
- May deplete natural resources
Definition of sustainable growth
Meeting the needs of present generations without compromising the ability of the future generations to meet their needs
+ Can promote higher profits which can be reinvested and used to develop more quantity and quality of FOP’s —> More innovation and technology —> Benefits future generations
+ Growth creates a fiscal dividend —> Increased gov spending on infrastructure spending –> increases productive capacity of an economy —> Boosts AD and development
- Resource depletion
- Deforestation (Palm oil in Indonesia)
- Overuse of fossil fuels
Indicators of development
-Proportion of the population who can access to clean water.
UK —> 100% of population
India —> 95% of population
Burundi —> 75% of population
-Proportion of the population who can access the internet
Uk —> 95% of population
India —> 30% of population
Burundi —> 5% of population
-Energy consumption —> Energy consumption is a lot higher in developed countries
UK—> average person uses 2800 kg of oil per year
India —> average person uses 670 kg of oil per year
Burundi —> average person uses 2.5 kg of oil per year
-Proportion of the population in agricultural work, less developed = more people in agricultural work
UK —> 1% are farmers
India —> 45% are farmers
Burundi —> 90% are farmers
3 measures of development
-Human development index (HDI)
-Inequality adjusted human development index (IHDI)
-Multidimensional poverty index (MPI)
Explain the HDI as a measure of development
-Education —> Average number of years spent in school
-Health —> Average life expectancy at birth
-Living standards —> Looks at real gross national income per capita
Application for HDI.
How long do people spend in school in UK, India and Burundi
UK —> 15 years
India —> 9 years
Burundi —> 7 years
Application for HDI
Average life expectancies in UK, India and Burundi
Uk —> 81
India —> 68
Burundi —> 57
Explain the scale of HDI
0-0.49 = Low development - Burundi (0.4)
0.5-0.69 = Medium development - India (0.62)
0.7-0.79 = High development - China (0.74)
0.8-1 = Very high development - UK (0.91)
2 key advantages of HDI
+ Holistic —> Looks at three of the most import indicators of development: education, health and living standards. Gives a more reliable measure of development rather than just looking at single indicators
+Good for comparison. Allows us to see what countries are most and least developed, indicating which countries are most in need of aid
2 key disadvantages of HDI
-Omits other indicators such as only looking at income when measuring living standards. Ignores things like access to electricity or crime rates. E.g. In India the average income is $5700 but there is poor access to electricity meaning there are many blackouts. Hence it is still unreliable
-Ignores distribution of development. 2 countries with similar HDI values may have very different distributions of development. E.g. Could have high HDi but also a high Gini coefficient
What will happen to the IHDI value if a country has significant income inequality?
The IHDI will be below the HDI
Explain the multidimensional poverty index (MPI) as a measure of development
Takes into account 10 different factors, meaning it is very holistic
Higher MPI value indicates higher levels of poverty and therefore low levels of development.
Measures number of people in poverty but also average intensity of poverty
E.g. India’s MPI value is 0.28 and Burundi’s MPI value is 0.44
Aim of foreign aid
Aims to fill the savings gap in developing countries and promote economic development
Evaluation for foreign aid and development
-Corruption - The gov may not have the welfare of the state at heart
-Dependency on aid - provides little incentive for innovation in the developing countries
-Aid weariness in developed countries - E.g. America have large homelessness crisis but still fund Israel
-Loan payments can lead to indebtedness problems
-Donor countries give aid to countries of economic /political interest to them. Poorer countries can lose out as a result
Forms of aid
-Official development assistance (ODA)
-Unofficial aid (NGO)
Types of aid
-Humanitarian aid —> Food aid, Medical aid, Emergency aid, Short term suffering
-Development aid —> Project aid, Tied aid, Commodity aid, Long term loans
Classifying aid
-Bilateral aid - From one country
-Multilateral aid - Multiple countries give money to world banks, world bank gives it to the countries in need
Buffer stocks
Used by governments to stabilise fluctuating primary commodity prices to protect producers and consumers from volatile prices. Protects consumers from high prices and producers from low prices
Producers: Gov buys excess supply, increasing prices
Consumers: Gov increases supply, decreasing prices
APPLICATION
In 1980, the GNI per capita for Madagascar was $460. What was the GNI per capita for Madagascar in 1990?
$340
EVAL
Improving education to increase development
Building schools in remote areas may mean that children move from working on farms to being in school. As a result, they are no longer able to help their families in their daily work which means that they will produce less. This will then decrease the families’ incomes.
A decrease in income means that people have less to spend which leads to a decrease in consumption. Since consumption is a component of aggregate demand, a decrease in consumption will lead to a decrease in AD. This will in turn decrease real GDP and therefore limit economic growth and development.
Moreover, as families have lower incomes the government will receive less income tax revenue which means that they have less money available to spend on development.
So, in the short run: More children in school → Less labour supply → Lower incomes → Less consumption → Less aggregate demand → Decrease real GDP → Limits economic growth
Even in the long run, if the standard of education is poor then students will leave school with low levels of human capital meaning the education they received did not make them more productive. In that case, economic growth will still be limited.
AN
How does low levels of education limit development
Low levels of education leaves individuals with low levels of human capital which makes them less productive meaning LRAS shifts left
This means they earn lower incomes and therefore these is less tax revenue for government to reinvest into the the economy, less gov spending further decreases AD. Low government revenue means potential lack of spending on infrastructure projects, limiting development
Low human capital → Low productivity → Shifts LRAS to the left → Limits real GDP → Limits economic development
AN
How does poor infrastructure limit development
Poor infrastructure will make firms less productive as it takes workers longer to get everything done.This increases costs. Higher costs force firms to increase prices which makes them less competitive meaning people demand less of their products. This decreases their profits. As a result, the government will receive less corporation tax revenue meaning it has less money to spend on development. The chain of reasoning is:
Poor infrastructure → Increases costs →Shifts SRAS to the left → Increases prices → Decreases competitiveness → Less profit → Less corporation tax revenue → Less government spending on development.
Ways to improve infrastructure
FDI
In 2015 India got $31 billion of FDI
They did this by reducing corporation tax from 50% to 40% making Indian firms more profitable and reducing wage costs, making it easier for business to fire employees, reducing their costs, increasing profits which can be reinvested to make even more profits. This increases corporation tax revenue for gov which can be used to increase infrastructure spending on high speed trains which reduces travel times for workers, increasing their productivity, shifting LRAS to the right
EVAL
Infrastructure spending
Reducing the rate of corporation tax could mean that the government collects less tax revenue. This means that they have less money to spend on development which may limit economic growth.
