4.3 Emerging and Developing Countries Flashcards
Measures of Development
Improvements in living standards
Human Development Index (HDI)
Inequality-Adjusted Human Development Index (IHDI)
Multidimensional Poverty Index (MPI)
Genuine Progress Indicator (GPI)
Measures of Development
Human Development Index (HDI)
Measure of economic development calculated by UN
Composite index based on three factors
- Health
- Education
- Income
Each indicator given equal weighting and mean is taken to get figure between 0 and 1
Greater the number, greater the level of development
Measures of Development
Human Development Index (HDI)
Advantages and Disadvantages
Takes into 3 key factors which are important
Relatively easy to calculate
Issues with figures, health takes no notice of quality of life that people enjoy and education takes no account of quality and success of education
No consideration for equality of income
Other factors which affect development => freedom from corruption and environment
Only an indicator, not a precise measure
Measures of Development
Inequality-Adjusted Human Development Index (IHDI)
Adjustment of HDI which includes a fourth indicator of development => inequality
Atkinson Index adjusts measures for education, health and income according to level of inequality
Broader than HDI but still can be criticised for not taking into account more measures and quality
Measures of Development
Multidimensional Poverty Index (MPI)
Measures percentage of population that is multidimensional poor => uses data for health, education and standard of living
Highlights countries where some areas are extremely rich but most is not and focuses on poverty
Does not take into account environment
Measures of Development
Genuine Progress Indicator (GPI)
Calculated from 26 different indicators grouped into economic, environmental and social
Aims to look at economic sustainability
Tend to show developed countries experiencing negative growth over time due to impact on environment
Factors Influencing Growth and Development
Economic Factors
Primary Product Dependency Volatility of Commodity Prices Savings Gap Foreign Currency Gap Capital Flught Demographic Factors Debt Access to Credit and Banking Infrastructure Education/Skills Absence of Property Rights
Factors Influencing Growth and Development
Economic Factors
Primary Product Dependency
Large amount of most developing country’s economic activity is based on primary product Many issues: - Natural Disasters - Low Income Elasticity of Demand - Dutch Disease - Development
Factors Influencing Growth and Development
Economic Factors
Primary Product Dependency Issues
Natural Disasters
Can wipe out production of primary products and so means that farmers are left with no income
Often non-renewable => country will suffer when they run out of the product
Factors Influencing Growth and Development
Economic Factors
Primary Product Dependency Issues
Low Income Elasticity of Demand
As people get wealthier, this does not mean they increase amount of primary products purchased but increase demand for manufactured goods
Prebisch Singer Hypothesis suggests LR price of primary goods decline are in proportion to manufactured goods => those dependent on primary exports see a fall in terms of trade
However, there have been rises in prices of some key commodities and a fall in prices of manufactured goods
Factors Influencing Growth and Development
Economic Factors
Primary Product Dependency Issues
Dutch Disease
When a country becomes a significant commodity producer in a short amount of time, causing an increase in demand for the currency
=> pushes value of currency up
Increases export prices and leads to a reduction in competitiveness of economy, causing a fall in output in other areas
Factors Influencing Growth and Development
Economic Factors
Primary Product Dependency Issues
Development
Some countries have been able to use primary products to develop
Suggested that countries should use primary product revenue to invest in manufacturing
Factors Influencing Growth and Development
Economic Factors
Volatility of Commodity Prices
Primary products tend to have inelastic demand and supply curves => relatively small changes in demand or supply leads to huge fluctuation in price
Large changes in price mean producers’ income and country’s earnings also fluctuate => difficult to plan and carry out long term investment as well as meaning producers can see income fall rapidly => poverty
Prices of commodities rise, tends to be over investment in production of commodity causing long term risk when price eventually falls
Factors Influencing Growth and Development
Economic Factors
Savings Gap
Developing countries have lower incomes => save less
=> less money for banks to lend, reducing borrowing leading to reduced investment/consumption
Savings gap is difference between actual savings and level of savings needed to achieve higher growth rate
Harrod Domar Model
Factors Influencing Growth and Development
Economic Factors
Savings Gap
Harrod Domar Model
Suggests savings provide funds which are borrowed for investment purposes and that growth rates depend on level of saving and productivity of investment
Concludes economic growth depends on amount of labour and capital that developing countries have vast labour supply => problems causes by capital
To improve capital, investment is necessary which requires savings
Factors Influencing Growth and Development Economic Factors Savings Gap Harrod Domar Model Problems
Economic growth is not same as economic development
Difficult for individuals to save when they have little income and borrowing from overseas causes problems with debt
Possible that investment could be wasted
Factors Influencing Growth and Development Economic Factors Savings Gap Harrod Domar Model Diagram
Factors Influencing Growth and Development
Economic Factors
Foreign Currency Gap
This is when exports from a developing country are too low compared to imports to finance the purchase of investment or other goods from overseas required for faster economic growth
Factors Influencing Growth and Development
Economic Factors
Capital Flight
Large amounts of money are taken out of the country, rather than being left for people to borrow and invest
If money was placed in banks within the country, then credit could be created by banks for consumers and businesses to spend
Can occur because of lack of confidence in the country’s stability, to hide it from government authorities or simply for profit repatriation
Factors Influencing Growth and Development
Economic Factors
Demographic Factors
Developing countries tend to have higher population growth, which limits development
If population grows by 5%, economy needs to grow by 5% to even maintain living standards => developing countries need to have higher rates of growth to develop than more developed ones do
High population is caused by high birth rates => increase number of dependents within a country but does not immediately increase those of working age
Places strain on education system and leads to youth unemployment
Factors Influencing Growth and Development
Economic Factors
Debt
During 1970s and 1980s, developing countries received vast loans from banks in developed world
Now they suffer from high levels of interest repayment, sometimes even higher than loans and aid received => money is flowing from developing to developed
=> less money to spend on services for their population => raise taxes => limit growth and development
Problem occurs when governments take on too much debt and do not spend well
Factors Influencing Growth and Development
Economic Factors
Access to Credit and Banking
Developing countries have limited access to credit and banking compared to developed countries who have complex systems
Means those in developing countries cannot access funds for investment and struggle to save for future
Some families may use loan sharks => high interest rates and leave individuals permanently in debt
Factors Influencing Growth and Development
Economic Factors
Infrastructure
In developed country, there is a complex network of buildings, roads, ports, railways, airports, etc.
Low levels of infrastructure make it hard for businesses to trade and set up within the country => makes services and production less reliable
However, development of infrastructure can be expensive and tends to conflict with environmental goals
Factors Influencing Growth and Development
Economic Factors
Education/Skills
Poor education means workers are low skilled => low productivity levels
Countries like China and South Korea invested heavily in human capital when they were developing => benefit in long term
However, debate about what type of education is needed and problems concerning over-education
Factors Influencing Growth and Development
Economic Factors
Absence of Property Rights
Property rights are where individuals are allowed to own and decide what happens to certain resources
Lack of rights means individuals and businesses cannot use law to protect their assets, leading to reduced investment
Unwilling to buy machinery, build factories or establish brands
Factors Influencing Growth and Development
Non-Economic Factors
Corruption
Diseases
Climate and Terrain
Civil Wars
Factors Influencing Growth and Development
Non-Economic Factors
Corruption
Means individuals will make decisions which maximise the bribes they receive as oppose to those which maximise development and output
Leaders likely to make decisions which benefit themselves rather than economy
High levels of bureaucracy often linked to corruption and this is costly and time consuming, deterring new businesses and reducing output of those already established
Factors Influencing Growth and Development
Non-Economic Factors
Diseases
Diseases such as HIV/AIDS and malaria have a negative impact on economic growth
Factors Influencing Growth and Development
Non-Economic Factors
Climate and Terrain
Countries with poor climates and geographical terrain may suffer from natural disasters and it may be difficult for farmers or to set up businesses
Factors Influencing Growth and Development
Non-Economic Factors
Civil Wars
Many countries suffer from civil wars
Causes high levels of poverty and destroys infrastructures, making it difficult for the country to rebuild even after the war has ended
Strategies Influencing Growth and Development
Market Oriented Strategies
Trade Liberalisation Promotion of FDI Removal of Government Subsidies Floating Exchange Rate Systems Microfinance Schemes Privatisation
Strategies Influencing Growth and Development
Market Oriented Strategies
Trade Liberalisation
Countries can aim for export led growth
Removing trade barriers means domestic industries either close or forced to become as efficiency as other producers
Resources allocated to their best use where country has a comparative advantage
Strategies Influencing Growth and Development
Market Oriented Strategies
Promotion of FDI
Investment by one sector company in one country into another private sector company in another
Firms tend to undertake FDI as production costs are lower in developing countries + access to new market
Different from loan as if investment fails, company has to deal with it
Involves transfer of knowledge
Creates jobs, fills savings gap
Repatriation of product and country may be exploited
Country loses sovereignty and becomes dependant
Environmental damage and exploitation of nature
Strategies Influencing Growth and Development
Market Oriented Strategies
Removal of Government Subsidies
Subsides are placed on essential items within a country or target agriculture and industry in an attempt to increase output and investment
Can be effective way of minimising absolute poverty and ensuring a minimum standard of living
Poorly targeted
Lead to inefficiency
Large amount of government spending => opp cost
Removing subsidy can be politically unpopular
Strategies Influencing Growth and Development
Market Oriented Strategies
Floating Exchange Rate Systems
Market forces determine currency
Country does not have to worry about gold and foreign currency reserves and government does not intervene
Currency can be volatile => difficult for exporters/importers to make decisions about future => cause large changes in macroeconomic variables
Strategies Influencing Growth and Development
Market Oriented Strategies
Microfinance Schemes
Aim to give poor permanent access to range of financial services
Take little/no collateral and use group lending
Allows borrowers to invest
Targets groups who are less likely to receive loans
Strategies Influencing Growth and Development
Market Oriented Strategies
Privitisation
End corruption within a firm who is owned by state
Encourages firms to be more efficient by increasing competition
Selling a firm improves government finances and reduces levels of debt
However if firm is privatised as a monopoly, there will be no competition within market
Can also be associated with corruption where politicians sell company below market price
Strategies Influencing Growth and Development
Interventionist Strategies
Development of Human Capital Protectionism Managed Exchange Rates Infrastructure Development Promoting Joint Ventures with Global Companies Buffer Stock Schemes
Strategies Influencing Growth and Development
Interventionist Strategies
Development of Human Capital
Provide workers with skills and training => more efficient and improve productivity
Developed through schools or vocational training
High skills allow country to develop primary sector to manufacturing sector, overcoming primary product dependency
Better education improves quality of life
Strategies Influencing Growth and Development
Interventionist Strategies
Protectionism
Allows domestic industries to grow by keeping foreign goods out and protects them from competition
Can use policy of import substitution
Create jobs in SR and allow industry to develop
Barriers can be removed, industry can develop globally
Countries lose out from benefits of specialisation and comparative advantage => inefficiency
Other countries may retaliate
Strategies Influencing Growth and Development
Interventionist Strategies
Managed Exchange Rates
Currency can be fixed against different exchange rates
High exchange rate for essentials means price within country is low => reduces poverty + investment
Low exchange rates for other goods means price within country is high
Often fail as black markets develop
Strategies Influencing Growth and Development
Interventionist Strategies
Infrastructure Development
Infrastructure is essential for development
Interventionists believe these should be provided by the government
Suffers from free rider problem and has high capital costs
Many positive social benefits
Government may not have funding for infrastructure and it may be inefficient
Projects associated with bribery and corruption, cause environmental damage and can be poorly built
Strategies Influencing Growth and Development
Interventionist Strategies
Promoting Joint Ventures with Global Companies
One way to reduce exploitation of countries as a result of FDI would be to set up a joint venture
Government may insist firms setting up production plants find a local partner to create a jointly owned company with
Help keep some profits generated within country => used as investment
Strategies Influencing Growth and Development
Interventionist Strategies
Buffer Stock Schemes
Government imposes minimum and maximum prices for goods, buying stocks when there is excess supply and sells them when there is excess demand => self financing
Stabilises prices => encourages investment
Solves issues relating to primary product dependency
Requires stocks to go up and down => huge start up costs
Strategies Influencing Growth and Development
Other Strategies
Industrialisation
Lewis Model assumed developing countries had dual economies with traditional agricultural sector and modern industrial sector
Suggested modern sector attracted workers from other sector => higher incomes + investment
High savings + investment are key to growth => can be achieved from rural to urban migration
Industrialisation is a result not cause of development?
Strategies Influencing Growth and Development
Other Strategies
Development of Tourism
Provides countries with funds to develop economy and improve living standards
Income elastic nature of tourism means as global economy grows, so does tourism allowing for more growth of country
Jobs created locally, higher tax revenues from higher incomes
Seasonal and involves low skilled/paid jobs => multiplier is limited
Wealth created can be withdrawn as TNCs repatriate profits
Many externalities associated => pollution, waste, environmental damage and impact on culture
Strategies Influencing Growth and Development
Other Strategies
Development of Primary Industries
Some countries able to develop due to abundance in natural resources
Development of primary industry provides funds to allow country to diversify as well as allowing infrastructure development and better education
Primary products are volatile and primary product dependency causes issues
Primary industries suffer from corruption
Strategies Influencing Growth and Development
Other Strategies
Fairtrade Schemes
A trading partnership based on dialogue, transparency and respect, which seeks greater equity in international trade
Organisation conform to key principles; fair price, community development, fair working conditions and protecting environment
Gives producers stability and raises incomes
Argued system has insignificant impact on developing world as non-fairtrade users see fall in demand
Strategies Influencing Growth and Development
Other Strategies
Aid
Country voluntarily transfers resources to another
Helps reduce absolute poverty
Can fill the savings gap, provides for further investment
Fills foreign currency cap
Contributes to increased globalisation and trade as well as reducing world inequality
Results in dependency culture
Potential for corruption
Difficult to know where to spend aid
Strategies Influencing Growth and Development
Other Strategies
Debt Relief
Many countries suffer from high interest repayments
Limits growth of poor countries, whilst being relatively small to countries debt is owed to => seems reasonable to write it off
Ease government finances and allow more money to be spent on provision of services to aid development
Can cause moral hazard, creates prevent => every poor country may not expect debt relief, also eases pressure on weak governments to adopt reforms and good economic policies
Strategies Influencing Growth and Development
Other Strategies
World Bank
Founded at Breton Woods Conference after WW2
Aims to bring long term development and reduction in poverty
Consists of many different departments, all essential in different ways;
Providing finance, policy advice, technical assistance, strengthening private sector in developing countries, political risk insurance and settlement of disputes
Strategies Influencing Growth and Development
Other Strategies
International Monetary Fund
Set up in Bretton Woods Conference to ensure exchange rate systems work well
Provide loans to countries where there are international exchanges rates crises or when they cannot pay of international debt
Insists countries make macroeconomic reforms
Also provides advice which aims to bring economic stability and raise living standards to help countries develop their economic institutions
Strategies Influencing Growth and Development
Other Strategies
NGOs
Non profit organisations that are run independently from government
Can provide direct assistance to countries
Can act as pressure groups to lobby governments to adopt more pro-development strategies
Believe they can alone never solve problem, has to be government to fix issues
Seen as having an anti-capitalist agenda, which blames problems on World Bank, IMF and WTO => divisions in development project
