4.3 Emerging and developing economies Flashcards
What is the Human Development Index
composite economic development index from 0-1 based on three factors:
1. Health: life expectancy at birth
2. Education: expected years of schooling of a current 5-year old over their lives
3. Income: real GNI per capita at PPP
What are the advantages of using the Human Development Index
● It takes into account three key factors which are important for the development of a country.
● It is relatively easy to calculate because governments tend to collect the statistics
used in the data.
What are the disadvantages of using the Human Development Index
● However, there are some issues with the figures : health takes no notice of the
quality of life that people enjoy and education doesn’t take into account the quality
and success of education.
● There is no consideration for the equality of income - average loss in the HDI due to inequality is about 23%
● Also, there are other factors which affect development, for example freedom from corruption or the environment.
* Within countries there are regional differencestherefore one overall HDI figure can be misleading
What is the Inequality adjusted Human Development Index (IHDI)
adjustment of HDI which includes a fourth indicator of development:
inequality.
The Atkinson Index adjusts measures for education, health and income
according to the level of inequality. It is broader than HDI but can still be criticised
for not taking into account more measures and quality.
What is the Multidimensional Poverty Index (MPI)
- measures the percentage of the population that is multidimensional poor
- uses 10 indicators
- doesn’t take into account the environment.
What is the Genuine Progress Indicator
calculated from 26 different indicators grouped into three main categories:
economic, environmental and social .
It aims to look at economic sustainability ,
to ensure development does not limit the amount produced and consumed in the
future.
tend to show developed countries experiencing negative growth over time, due
to their impact on the environment. Some argue this proves that development is
unsustainable whilst others argue the index is biased and is constructed to prove
the anti-growth case .
What is the difference between economic growth and economic development
What are limitations to economic growth and development
- Poor Infastructure
- Human capital inadequacy –> low level of education and training
- Primary Product Dependency –> low income elasticity
- Savings Gap –> limits investment
- Foreign Exchange Gap
- Capital/Human flight
- Corruption –> reduces tax revenue
- Debt –> High debt interest payments limit investment
- Absence of property rights –> limits investment
- Political Uncertainty –> limits investment
- Volatility of Commodity Prices
- Access to Credit + Banking
What are the advantages of primary product dependency
- Comparitive adv. w/o they would be worse off
- Large + elastic supply of labour willing and able to work
- Doesn’t require costly investment; can be managed by local workers
- Important source of export rev. + foreign currency
- Attract FDI - China has been investing in central Africa to improve access to raw material which has ivolved building roads and railways to have wider benefits to the economy
- Stepping stone in economic development
What are the disadvantaages of primary product dependency
- Volatile Prices
- Finite Supply
- Low YED
- Lack of investment in other sectors
- Dutch Disease + Resource Curse
- Prebish-Singer Hypothesis
What is Dutch Disease
term that refers to the negative consequences arising from large increases in the value of a country’s currency causing:
- A decrease in the price competitiveness for exports of the affected country’s manufactured goods.
- An increase in the quantity of imports.
In the long run this contributes to higher unemployment as manufacturing jobs are moved to lower-cost industriies
What is the example from which Dutch Disease was coined
e.g. newfound wealth and massive exports of oil caused the Dutch guilder to rise sharply, making exports of all nonoil products less competitive on the world market. Unemployment rose from 1.1% to 5.1%, and capital investment in the country dropped.
What is the Prebish-Singer Hypothesis
Prebish-Singer Hypothesis suggests that countries who concentrate on primary products are vulnerable to a declining terms of trade
What is the evidence of the Prebish-Singer Hypothesis in non-oil exporting Countries in Africa ffrfom 1970-97
‘World Bank estimates suggest that 1970-97 declining terms of trade cost non-oil-exporting countries in Africa the equivalent of 119% of their combined annual GDP in lost revenue’
What is the modern reality of the Prebish Singer Hypothesis
Since 1960 theer has been a significant improvement in the terms of trade for Resource Rich countries from around 0.35 to 1.12
What is the natural resource curse
1) Expensive resources create tensions such as corruption + war - Angola Jose dos Santos sent 500 million to London Account
2) Monopoly power: resources are often owned by a small section of society and there is a poor distribution
3) ‘Easy wealth’ from resources discourages economic development in other areas
How does the volatiliity of commodity prices affect growth and development
● These large changes in price mean that producers’ income and the country’s
earnings are also rapidly fluctuating, making it difficult to planand carry out long term investment as well as meaning that producers can see their income fall very rapidly, causing poverty.
e.g. collapse of oil prices in 2015 saw recession in Angola
What did volatility of commodity prices in 2014 lead Ghana to do in 2014
Ghana . Gold, cocoa and oil account for 75% of their total exports and they had to ask the IMF for a loan in 2014 due to their unsustainable balance of payments deficit
How does the savings gap affect economic growth and development
● Developing countries have lower incomes and thus they save less. This means there is less money for banks to lend, reducing borrowing and thus **reducing
investment/consumption. **
A savings gap is the difference between actual savings and the level of savings needed to achieve a higher growth rate, so countries often rely on debt/external fiinance
The savings rate in **Africa is around 17% of GDP compared to 31% on average for middle income countries **
What is the Capital-Output Ratio and how does it relate to the rate of growth of GDP
○ For example, if £100 worth of capital equipment produces each £10 of annual output, a capital-output ratio of 10 to 1 exists.
When the quality of capital resources is high and when an economy can better harness capital e.g. by using more advanced ideas, then the capital output ratio will be lower
Rate of growth of GDP = Savings ratio / capital output ratio
What are the contraints to the Harrod-Domar Growth Model
- Persistent savings gap in some countries e.g. Thailand still experienced growth
- Ignores other factors; labour productivity, tech innovations, levels of corrupption
- Small scale financial institutions
- Deep weaknesses in human capital
- Risks from unbalanced growth (C v I)
- Foreign flows can vary and their effectiveness
- Risks of borrowing to fund savings gap
What is the Harrod-Domar Growth Model
- Rate of economic growth depends on:
○ Level of national saving (S) - The productivity of capital investment (capital-output ratio)
What are examples of the Harrod-Domar relationship between savings and investment
- Kenya + Rwanada savings is only 11% of GDP and thus gross capital investment as a % of GDP is only 18%
- On the other Hand Bangladesh has a 32% savings of GDP and 31% of GDP is capital investment
How can the savings gap be overcome
- Attract FDI
- External finacing: aid, remittances, debt
- Nudges to rsavings. Smart opt-in pensions
- Growth of E-Finance; Kenya 2013 63% bank penetration now at 98.3% 2023
- Universal Basic Income (UBI) - Alaska
How does a foreign currency gap impact economic growth and development
● This is when exports are too low compared to finance the import of capital required for faster economic growth.
e.g. Sri Lanka in 2020 ran out of fx reserves so couldn’t import basic food and medicines
How does capital flight impact economic growth and development
● Large amounts of money are taken out of the country , rather than being left there for people to borrow and invest.
● This can occur because of lack of confidence in the country’s stability, to hide it from government authorities or simply for profit repatriation.
* During periods of macroeconomic change investors will likely ‘rotate’ or flight to quality from riskier assets to more secure ones ‘emerging –> blue chip’
What was the effect of capital flight in the 1997 Asian Financial Crisis
The Asian Crisis triggered capital flight leading **international stocks to fall as much as 60% **until the IMF intervened and provided bridge loans
How do Governments deal with capital flight
- Governments institute capital controls restricting flow of the currency outside the country; eval, greater panic + bitcoin can avoid it
- Tax treaties with other jurisdictions to make it expensive to flee
- Gov can raise IR to increase currency valuation
What is an example of illegal Capital Flight
India’s capital flight amounted to billions of dollars in the 70’s and 80s due to stringent currency controls. The country liberalisation of the economy in the 1990s, reversing this capital flight as foreign capital flooded into the resurgent economy
What are the effects of demographics on economic growth and development
● Developing countries tend to have higher population growth , which limits
development. If population grows by 5%, the economy needs to grow by 5% to even maintain living standards.
high birth rates increases the number of dependents within a country but does not immediately increase those of working age. It places strains on the education system and leads to youth unemployment
Population decline in developed countries means a greater strain on those employed for more tax revenue
What are the effects of debt on economic growth and development
● high levels of interest repayment ; for every dollar of aid given from rich to poor, developed countries get 7-10 dollars back
* less money to spend on services for their population and they may need to raise taxes , which limits growth and development
e.g. Sri Lanka’s growing debt contributed to a default in 2022
How does access to credit and banking impact economic growth and development
- those in developing countries cannot access funds for investment and they struggle to save for the future to make basic investments
- families may use loan sharks , who give high interest rates and leave
individuals permanently in debt.
In developing countries what percentage of adults have access to a bank account
· In developing countries nearly half of adults do not have access to an account at a bank
How were deferred wage payments used to overcome barriers to saving in Malawi
The workers who participated in the scheme increased their net savings by 23% through the program
spent their lump sum mostly on durable goods like home improvements; the amount of their durable assets increased by 10%
How does infastructure impact economic growth and development
● Low levels of infrastructure make it hard for businesses to trade and set up within
the country
● However, the development of infrastructure can be expensive and tends to conflict
with environmental goals.
e.g. In India abouthalf their roads are not paved
What is the impact of education + training on economic growth and development
● Poor education within these countries means that workers are low skilled, sometimes unable to read and write, so have low levels of productivity .
e.g. Ethiopia suffers from high illiteracy rates at around only 49%. (Unesco)
- Debate over type of education needed and over-education; graduates arre unable to find graduate level jobs
What is the impact of an absence of property rights on economic growth and development
Property rights are where individuals are allowed to own and decide what happens to
certain resources. A lack of rights mean that individuals and businesses cannot use
the law to protect their assets, leading to reduced investment
e.g. Loss of property rights in Zimbabwe led to economic collapse as FDI fell to 0 by 2001
What did Research by Simon Johnson say about the importance of property rights to development
well defined property rights are most important in shaping long-run economic growth and prosperity
e.g. the difference in institutions set up in the colonisations of north and south america led to rapidly different economic development
What are some non-economic factors that impact economic development and growth
- Corruption- individuals make decisions to axmisise bribes rather than development; Jose dos Santos Angola $500 million
- Diseases- effects of COVID-19 on Sri Lanka
- Poor Climates + Geographical Terrain - Malawi has to export goods through a one way 800km train to Nacala, Mozambique
- Civil Wars- During Saddam FDI in Iraq was near 0
How does India show that growth doesn’t result in the same rate of development
- India has overtaken the UK making it the 5th largest economy in the world; by 2027 it is expected to become the largest economy in the world
- But India ranks only 132 out of 191 in terms of HDI - same par with Tuvalu and Micronesia
- India is one of the most unequal; top 10% hold 77% of total national wealth
Between 2011-15 how many people in India were lifted out of extreme poverty by economic growth
Between 2011-15 more than 90 million people we lifted out of extreme poverty
How does the development of India and China portray the higher productivity rates of manufacturing compared to the service sector
- Compared to China, GDP per capita is very similar at the start of the period but by the end there is a five-fold difference
- Another difference in China scores much better on infrastructure and productivity growth
- Urbanisation took fast placer with a greater focus on manufacturing compared with the less productive service sector in India
Define FDI
investment from a party in one country into a business or corporation in another country with the intention of establishing a lasting interest. Or when an individual/business owns at least 10% of a foreign company
e.g. Amazon opening new headquarters in Vancouver, Canada
What are the benefits of FDI for business
- Diversification
- Lower labour costs
- Potentially: lower tariffs, taxes and subsidies
- Transfer of knowledge and human capital
What are the beneftis of FDI for the home country
- Economic stimulation
- Development of human capital
- Increase in employment + PPF
- Access to management expertise, skills and technology
- Improved Captal Flow to Finance Account - easier to finance deficit
- Creation of a competitive market; breaking domestic monopolies
What are the main disadvantages of FDI
- Displacement of local businesses
e.g. entry of large firms like Walmart which is criticised for driving out local businesses that cannot compete with its lower prices
- Profit Repatriation e.g. large capital outflows from the host country
- Political + enviromental + cultural impact e.g. Open-Door Policy
- Inequality worsens e.g. Russia 1995
- Creating local monopolies –> higher inflation e.g. OPEC
- TRIPS/TRIMS mean countries have to produce certain products at a higher price through FDI
- Footloose e.g. shoe making Brazil –> China 2/3 share
What is horizontal FDI
Horizontal: same activities but in a foreign country e.g. McDonalds
What is vertical FDI
Vertical: different part of the supply chain abroad e.g. Primark Manufacturing in Bangladesh
What is Conglomerate FDI
Conglomerate: unrelated business in a foreign country
What is Platform FDI
- Platform: Business expands into a foreign country but the output from the foreign operatios is exported to a 3rd country; often happens in low-cost locations inside free-trade areas
e.g. UK manufactures moving to Poland/Ireland to export to the EU
What is Quality FDI characterised by
→ Contribution to valued job creation
→ Enhancing skill base (human capital)
→ Facilitating transfer of technology and knowledge
→Boosting competitivness of domestic firms + enabling their access to markets
* Operating in a socially and environmentally responsible manner
What are tailored policies to enable Quality FDI
1) Open Markets to allow for FDI inflow; providing open, transparent conditions . Improving ease of business, flexible labour markets and protection of property + intellectual
2) Investment Promotion Agency (IPA): targets suitable foreign investors, prompt domestic host to provide top notch infrastructure and ready access to skilled workers
3)** Put up infrastructure required for a quality investor**: such as transport, energy, education
4) Strengthen backward linkages + spillovers from FDI into the indigenous economy: Competitive pressure of foreign entrants + forms of direct assistance from foreign to domestic firms in the form of training (setting up production lines, management coaching)
7) Provide access to credit by reforming domestic financial markets
8) Set up a vendor development programme to support the match making process between foreign customer and local supplier - offering financing opportunities to indigenous suppliers for required investment on the basis of purchase contracts from foreign buyers
e.g. Local Industry Upgrading Programme (LIUP) of Singapore
Set up a secondary industrial zone for local suppliers next to the EPZ
Why is Poland the largest recipient of FDI inflows in Central Europe
- Strategic position
- large population with cheap skilled labour
- EU membership , economic stability
- a fiscal system attractive to business with a number of Special Economic Zones and a Polish Investment and Trade Agency (PAIZ) to improve conditions for FDI
What are Polish Policies to motivate FDI
- Regional aid is most used for companies carrying out intial or new investment progests; can be tax exemption, grants or loans
- It is only granted for investments related to: **diversification of the output of an establishment into products not previously produced, setting up a new establishment, extension of the capacity of an existing establishment **
- Maximum level of aiid depends on size and where the project is located
What are Polish Policies to incentivise aid in priority sectors
- Government Grant MASP (Multi-Annaul Support Programme - MASP) dedicated to supporting large investments in ‘priority sectors’ such as automotive, electronics, aviation, biotech, modern centres and R+D
What are Joint Ventures
When 2 Companies work together
- Useful + necessary way to enter markets
- Could be w/o equity in a strategic allliance
What are the advantages of a Joint Venture
- Share technology (increasing know;edge transfer) and complementary IP - intellectural property
- For smaller organisation it allows them to enter a new market
- Provide specialist knowledge of local markets
- Helps to undertake frontier research that is considered too large for an individual company
What are examples of successful Joint Ventures
1) 2008 NBC Universal Television Group (Comcast) and Walt Disney Company created HULU; product became a billion dollar success
2) Kellogg International entered to Chinese market with Wilmar to access its extensive supply chain network
How important are remittances to economic development
- Make up the largest source of external finance and 95% of remittances are sent to MIC
What are the advantages of remittances for families in LDC’s
- Additional disposable income helps to fund education & health care+save for investment
- Lower risk of extreme poverty
- Can be used as collateral for loans including micro-finance debt
Less malnutrition which can impair brain development
Whare are the macroeconomic advantages of remittances for LDC’s
- Lower Gini coefficient if they flow to poorest rural areas
- Higher productivity from better nutrition and health care
- Help absorb the impact of external economic shocks
- A key source of foreign exchange, they help to overcome a domestic savings gap
- Inflow on current account of balance of payments
- Politiical stability
What is the negative impact of remittances
- Firsly needs migrational ‘brain drain’ of workers
- Appreciation of domestic currency
- Increase non-labour income -> incentivisation to nor work as much
- LR takes families away from productive activities as money is used for C rather than I
What did the research of Rodriguez and Tiongson on remittances show for its effect of labour supply
Research of Rodriguez and Tiongson: remittances reduce the labour supply of receiving households in the Phillipines, especially female members
What were the 2015 Sustainable Development Goals to be achieved by 2030
Evaluate the effects of Buffer Stock schemes on enabling economic growth and development
- Requires volatility; if just goes up it will run out of stock
- Huge opp. cost: start-up costs, administration costs and problems of storage
e.g. 66% of EU Budget, butter mountains - Other countries may benefit; free riders
- Minimum Prices set too high and encourage inefficiency
e.g. causes dumping elsewhere, East Africa milk powder - Can cause retalitation
- Harms the enviroment
- Not overcome poverty, fund primarily goes to large farmers
How many times bigger is remittances than aid
2014: 534 billion remitances flow - 3X size of ODA
