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