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
How much of wheat, maize and rice does China hoard since it started in 2017
China held 69% of the world’s maize reserves, 60% of rice and 51% of wheat
What has caused recent Food Commodity Inflation
- Drought in Brazil, USA + horn of africa worst drought in 40 years
- Floods in China; world’s largest wheat producer
- High temp in India; world’s 2nd largest producer of wheat
- Food Hoarding: since 2017 China has been stockpiling food
- War: Russia Ukraine produce 28% of world wheat and 75% of the sunflower oil; Ukraine’s food exports provide calories to feed 400 million people
- Disruption to feriliser: prices tripled between 2021-2 as Russia, Ukraine produce 40% of worlds potash. Brazil imports 84% of ferrtiliser
What has been the impact of food inflation on the poorest
** 95 million additional people could be living in extreme poverty**; goal of bringing global poverty rate to less than 3% by 2030 was now beyond reach
** Number of severely food insecure people has doubled in 2 years** from 135 million pre-pandemic to 276 million today
How does inflation affect the poorest the most
· Lowest income households spend up to 50% of their income on food
· Contrasts with high income households for which the proportion is around 20% on average
1) High-income households can change their expenditure from high quality to low quality
2) They can also buy in bulk e.g. Costco wholesale 20% cheaper on average
How has a rise in food inflation detoriated the Balalnce of Trade of emerging countries
- Increased expenditure on imports can lead to Sir Lanka type scenario where can’t afford basic foods such as rice sugar lentils and milk powder that tripled in price from January to April 2022
What has the effect of rapid rate rises been on emerging countries
- Developed countries increased IR rapidly
- Hot money flows mean developing countries depreciate which means commodities cost even more
What is the middle income trap
countries find it difficult to make the climb from being a middle-income country to achieve high-income fully-developed status.
World Bank finds that only 13 of the 101 countries deemed to be middle-income countries in 1960 had achieved high-income levels
What are possible causes of the middle-income trap
- Rising Wages/Unit Labour Costs - Lewis Turning Point, erosion of comparitive adv.
- Possible failure to invest in human capital
- Institutional Failures - doesn’t support a creative economy
- Social Capital - may not support sustained growth
- Inability to maintain macro-economic stability- fast growing causes inflation
What is a Lewis Turning Point
A Lewis Turning Point occurs when a country’s surplus labour evaporates, pushing up wages, consumption and inflation rates.
Within a country the supply of migrants from the countryside might dry up causing urban wages to surge.
What are strategies to help avoid the Middle Income Trap
- Sufficiently large middle class/rising incomes
- Improvign working condiitons/ welfare safety net
- FDI to higher value industry + diversification
- Investment in human capital –> increase productivity e.g. Korea one of highest PISA
- Open up economy to international comp. e.g. India
- Responsible Macro Policy e.g. independent Central Bank
- Regional Trading Blocs e.g. ASEAN
- Research and Development to boost Innovation
- Tackle income and wealth inequalities
How has debt grew in emerging markets
Government debt as a share of GDP in emerging economies has risen from 27% in 2008 to 55% in 2019, especially in external debt
What are the benefits of a debt-led growth model
· needed to overcome the savings gap
· cover the cost of mega-infrastructure projects - pay itself off in the future
· Borrowing to invest will do the same
* Capital market discipline can sometimes lead to governmens following better macroeconomic policies and introducing economic reforms; help with MI TRAP
How is Mexico in the Middle Income Trap
- Growth of 2.5% over past decade not fast enough (Malaysia 6%)
- Lowest Tax Level of OECD (13%) –> social welfare spending 7% of GDP
- Under-developed financial economy (cash ermaind dominant) –> 1/3 of Adult Mexican have a bank account
- 138th/180 on Corruption
- Crime also major barrier
What was the Third World Debt Crisis
oil exporting countries benefitted from booms, invested in western backets who repackaged them into loans to distribute into developing countries.
But massive recessions meant developing countries couldn’t pay higher rates and money was demanded back. Commodity prices fell and developing countries had little revenue to pay back debt. Western Banks wanted it to be paid in ‘hard’ currencies that would be very expensive to convert their domestic currency int. Export revenue fell more and more so they couldn’t even pay interest rates leading to places such as Mozambique declaring bankruptcy
How did the IMF respond to the Third World Debt Crisis
- Help and bailouts were provided by the IMF such as the Carribean Countries; IMF forced devlopingn countries into ‘structural adjustment’ polcies to reablance economy
- Some economist arguments these led to ‘de-development’
- Strict fiscal policy, austerity, free market policies, reducing protectionist measures, removing intervention in currency markets
- Intervention cut in areas like education, healthcare, protectionism
What are some solutions to indebtedness of emerging markets
- Debt Relief - HIPC
- Reschedule debt - allow it to be paid over a longer time period
- Debt Swaps - UNICEF Debt for Child Relief
- Cancel the Debts - many countries already serviced through interest
What is the HIPC - Heavily Indebted Poor Countries
developed countries agree that debt doesn’t have to be paid back immediately as long as money is spent on development outcomes
Lots of debt relief took place in the Caribbean leading ot greater healthcare, education, tech advancement
What are Debt Swaps
Transfer debt to NGO’s who can redistribute this money, instead of paying money to Western bank in hard currencies, it is paid to NGOs in soft currencies while western banks are given a tax break.
e.g. UNICEF Debt for Child Relief
What is Rostow model of development
- 5 main stages
Agriculture–>pre-conditions–> Industrilisation –> Drive to maturity with diversification –> high mass consumption
oversimplified, simply shows western stages which may not be the same
What were the 2015 Sustainable Development Goals to be achieved by 2030
What are market orientated strategies to enable growth and development
- Free Trade- exploiting comparitive adv. to increase efficiency
- Promotion of FDI
- Removal of government subsidies - subsidies encourage inefficiency
- Microfinance - helps gain access to credit + invest
- Floating Exchange Rate - increases competitiveness
- Privatisation/ Deregulation
- Fiscal Discipline
- Tax Reform
How does trade liberalisation enable growth and development
● Countries can aim for export led-growth.
● Competitive Presssures create efficiency –> Resources will be allocated to
their best use where the country has a comparative advantage.
* Comparative Advantage
* Attractive to FDI
e.g. Countries like Singapore and South Korea and regions like Hong Kong have
benefitted from this method.
Evaluate the effects of trade liberalisation in enabling growth and development
- However, free trade may mean developing economies focus only on
primary products; this may limit development in the long term. - To develop new industry, they may need tariff protection, at least in the short
term. - Encourage Dumping
- Footloose + Enviromental impacts
- Structural UE
How does the Promotion of FDI enable growth and development
- FDI involves transfer of knowledge from one country to another bringing specialist management and traning techniques
- Creates jobs and leads to effects of multipliers –> higher labour productivity
- Helps fill savings gap
- Creation of competitive monoply
- Increasing employments
- MNE’s will invest in infrastructure, allowing reliable finance and transport systems to exist, making banking more accessible for economic agents.
Evaluate the effects of promotion of FDI to enable growth and development
● repatriation of profits and developing countries may find the company exploits them, by offering lower wages and poorer conditions than they would in a developed country.
● The country will also lose some sovereignty and become dependent on another
firm.
* Local competition may find it hard to set up and compete and the best jobs often
go to imported labour, leaving only low skilled jobs for locals.
● Environmental damage and exploitation of natural resources and tend to
become problems.
e.g. India benefitted greatly from FDI ‘Make In India’ liberalised FDI policy and lead to a 48% increase in FDI
Samsung’s investment in Vietnam has been crucial; local firms are now part of their supply chain
How does the removal of government subsidies enable growth and development
- government subsidies to support ailing firms encourages inefficiency.
- government can use money for more productive uses.
- cause problems in terms of corruption and criminality
e.g. Venezuela subsidised fuel is smuggled across its borders and sold in neighbouring countries for profit
Venezuela has subsidies on almost everything yet demand is still higher than supply
Evaluate the effects of removing government subsidies to enable growth and development
● Subsidies are placed on essential items within a country, effective way of minimising absolute poverty and ensuring a minimum standard of living
* Beneficial in helping infant industry grow
* Removing it is politicall unpopular –> bread riots, India farmers
*
What are the effects of floating exchange rates on enabling growth and development
● The country does not have to worry about their gold and foreign currency reserves and the government does not intervene.
* Acts as an auto-corrector to economic shocks
* Fixed exchange rates can damage competitiveness
* Government MP can focus on other policy rather than maintaining fixed FX rate
Evaluate the effects of floating exchange rates on enabling growth and development
- It means that the currency can be volatile which makes it difficult for exporters/importers to make decisions about the future
- Floating can cause large changes in macroeconomic variables, including economic
growth. - If fixed to low-inflation economy; help keep costs and prices under control
- Reduced costs of currency hedging
How can microfinance schemes enable growth and development
- Helping people on very low incomes gain access to credit t start small-scale projects and avoid excessive interest rates of moneylenders
- Take little or no collateral
- Enable saving + investment
Evaluate the effects of microfinance on enabling growth and development
- DFIF review ‘no clear evidence of positive impacts’
- Most loans are for consumption; SA consumption accounts for 49% of microfinance use
- If used for business than it encounters a lack of demand
- Interest rates can reach 200% per annum such as Banco Comparatamos
What is the effect of privatisation and deregulation on enabling growth and development
● Privatisation can end the corruption within a firm who is owned by the state .
● Selling off a firm, particularly if it is loss making, will improve government finances
and reduce levels of debt.
* Profit Motive creates efficiency + competition
* Deregulation reduces red tape
Evaluate the effects of privatisation on enabling growth and development
- deregulation may increase inequality and cause environmental problems.
- Privatisation may lead to thecreation of private monopolies and inequality (Russia 1995), which charge higher prices for consumers.
- Corruption in selling the industry
e.g. Water Privatisation UK 18.7 billion profit, 18.1 dividends. Bills increased by 40%. Net Debt increased by 55 billion
What are some interventionist strategies on enabling growth and development
- Development of Human Capital
- Protectionism
- Managed Exchange Rate
- Infastructure Development
- Promoting Joint Ventures with global companies
- Buffer Stock Schemes
How does the development of Human capital enable growth and development
● skilled workers are more efficient and improve productivity .
● Higher skills would allow the country to develop from the primary sector to a
manufacturing sector, overcoming primary product dependency.
* Increase in MRP, increase in wages
* Increased tax revenue
* Helps attract FDI
e.g. Both China and South Korea developed their human capital massively in order to
develop, high PISA
Evaluate the effects of the development of Human Capital enable growth and development
· Money could be spent elsewhere e.g healthcare that can increase HDI
· There is a time lag on the results of training and education.
· Increased labour supply = more pressure on wage rate
* Could lead to increased brain drain.
* Overeducation
How does protectionism enable growth and development
● Protectionism allows domestic industries to grow by keeping foreign goods out and protects them from strong competition.
* Infant Industry Argument
* Protection of domestic employment
- Both lead to greater employment, tax revenue and consumption
Evaluate the effects of protectionism on enabling growth and development
● However, it means countries lose out from the benefits of specialisation and
comparative advantage and could cause inefficiency , since** domestic producers
suffer from a lack of competition**.
* Other countries are likely to retaliate.
e.g. Several Asian countries used a degree of tariff protection, when they were
developing.
How do managed exchange rates enable growth and development
● The currency could be fixed against a number of different exchange rates . They
can introduce high exchange rates for the import of essential products and lower
exchange rates for others
* Helps reduce poverty and encourages investment if they are capital goods
* Lower FX rate for impports encourages import substitution
* Confidence and planning ahead
Evaluate the effects of managed exchange rates in enabling growth and development
- fail to work in practice ; black markets in foreign exchange develop which can destabilise the system
-
corruption becomes an issue, when government officials buy currency at ne exchange rate and sell it for profit at another.
● Alternatively, governments can manage a single exchange rate which will reduce
volatility , but speculation may mean that countries find it difficult to maintain an
exchange rate over a number of years.
How does investment in infastructure enable growth and development
● Infrastructure is essential for development ; a country needs roads, airports, schools, hospitals, railways etc.
- Infrastructure tends to suffer from the free rider problem and has very high capital costs , making it unlikely the private sector will develop it. Moreover, it has many positive social benefits which suggests the government should provide it.
Evaluate the effects of investment in infastructure enable growth and development
● government may not have the funds to provide the infrastructure and it is argued that they may be inefficient.
* Infrastructure projects are often associated with bribery and corruption , cause environmental damage and may be poorly built and maintained.
● Some argue that intermediate technology , which uses local materials and can be
fixed locally, is better than large scale infrastructure.
What are the effects of promoting joint ventures with global companies on enabling economic growth and development
● One way to reduce the exploitation of countries as a result of FDI would be to set
up a joint venture.
This will help to keep some of the profits generated within the country , which can be used in investment.
e.g. Tata Starbucks Pvt.Ltd is a joint venture company with Starbucks in India
Kellogs Wilmer Collab in China
What are the effects of buffer stock schemes on enabling economic growth and development
- it should be self-financing : money is raised when selling the products, which allows the government to buy the next lot of stock
- Reduces volatility of commodity prices –> encourages investment
- Prevents sharp falls so reduces absolute poverty
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
What are other strategies to enable economic growth and development
- Industrilisation
- Development of Tourism
- Developmet of Primary Industry
- Fairtrade Schemes
- Aid
- Debt Relief
What is the impact of industrilisation on ecnomic growth and development
Countries who rely on primary products face volatile income and limited prospects for growth.
The Lewis model suggests that industrialisation and diversification of the economy enables more rapid economic development and higher growth in the future.
Evaluate the impacts of industrilisation on economic growth and development
- However, although labour productivity is low for some parts of the year, during
planting and harvesting vast amounts of labour is needed - migration has led to urban poverty replacing rural poverty as the industrial sector is unable to provide jobs for all those who have move
- Industrilisation is a result of development, rather than a cause
- India went from agriculture to services
- Governments choose wrong time + place
What is the effect of development of tourism on economic growth and development
- Tourism is a way to make use of natural resources.
- Tourism creates employment and inflows of foreign capital.
- Income elastic so will grow with economic growth
- Encourages FDI + improvements in infastructure
- Creation of Jobs with low skilled workers
- Higher tax revenues
Evaluate the effects of the development of tourism on economic growth and development
- Industry is seasonaland involves low skilled jobs so limited multiplier
- Destinations can go out of fashion
- TNC’s repatriate profits
- Large number of externalities
In Morocco how is tourism being developed
In Morocco, 7 eco-resorts are being built on the north coast where unemployment is
40%. (The Economist)
How is the development of primary industries enabling economic growth and development
- 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
e.g. Norway Sovreign Wealth Fund $250,000 per citizen
Evaluate the effects of the development of primary industries on enabling economic growth and development
- Volatile Prices
- Finite Supply
- Low YED
- Lack of investment in other sectors
- Dutch Disease + Resource Curse
- Prebish-Singer Hypothesis
- Corruption
How do Fairtrade schemes enable economic growth and development
- give farmers a bigger share of the final market price.
- A guaranteed price above the market price when the agreement was made.
- This gives producers stability and raises their income
- Sustainable production without child labour
What did a study in Sri Lanka state about Fairtrade
- those under fair trade had higher income and satisfaction, a greater understanding of the market and a more optimistic view of the future than those not under fair trade.
- They were able to save for the future and invest or provide financial support for their children.
- However, they still did not feel their income was sufficient.
Evaluate the effect of fairtrade schemes on economic growth and development
- system has an insignificant impact on the developing world.
- It benefits the Fairtrade producers but can leave others worse off since non-Fairtrade producers see a fall in demand.
- In the long term, the higher price for Fairtrade goods will increase supply and thus this could bring price back down (but low PES)
- Higher income reduces the incentive to diversify or move to urban
What is the effect of aid on economic growth and development
- used to finance investment in infrastructure and human capital.
- This can increase capital stock / aggregate supply and can enable higher growth rates.
- able to reduce absolute poverty, particularly emergency relief provided after disasters such as the Haiti earthquake (2010)
- Long term aid builds human capital
Evaluate the effects of aid on economic growth and development
- results in a dependency culture where countries are unconcerned by their finances
- Corruption means impact of aid is limited
- Politically motivated: Israel and Egypt
- May distort market forces
- Magnitude; other parts of external finance are more important
- Principle Agent Problem- failure of Millenium Villages
- Helps donor; get 7-10 dollars back through interest and tied aid
What was the failure of the Millenium Villages
Jeffrey Sachs’ aid project that ended up costing $12,00 to lift out of poverty, 34x average income
What is bi/multi-lateral aid
- Bi-lateral aid: aid from one country to another
Multi-lateral aid: channeled through international bodies
What is project aid
Project Aid: direct financing of projects
improves human capital
What is technical aid
funding of expertise
What is humanitarian aid
emergency disaster relief, food aid,refugee relief
What is a soft/concessionary loan
Soft loan: a loan made to country on concessionary basis
What is tied aid
projects tied to suppliers in donor country
How did Public health aid help treat the parasitic Guinea Worm in Sub-Saharan Africa
1986 3.5 million cases of Guinea Worm reported –> 2015, 126 cases reported
How many times bigger is remittances than aid
2014: 534 billion remitances flow - 3X size of ODA
What is the Lewis Model
- Two sector model/surplus labour model
1) Economy starts with 2 sectors: agriculture + urban sectors
2) Labour is released for work in the **more productive, urban sectors **
3) Industrialisaiton is possible, they make profits which can be reinvested and capital starts to accumulate
4) As more capital accumulates, further economic development can sustain itself
Evaluate the Lewis Model
- Profits may leak out; capital flight
- Capital accumulation –> may reduce need for labout (but LUDDITe FALLACY !)
- Model asssumes competitive labour + Product markets
Urbanisaiton may create problems and trickle down may not happen
According to Clark-Fischer why does the tertiary sector come from
-
High Income Elasticity of Demand- High YED for services, esp leisure tourism and financials services. As incomes rise and demand even more, more resources are allocated to service production e.g. 72% of UK is employed in the service sector
Low Productivity of Labour - Productivity in the service sector is lower because it is harder to apply new tech to services so prices rise relative to primary and secondary goods.
What did Victor Fuchs say that the tertiary sector would cause
Fuchs argued that the service sector contributed to the slow-down in economic growth rates in more developed economies as productivity growth in the service sector would tend to be much slower than for the manufacturing sector
What is balanced growth
: all sectors to support each other, interconnectedness implies growth across economy needed, clear role for gov. in supporting those tha don’t ‘naturally’ grow as much
Govt. should do a Big Push to support industries that aren’t growing
What is unbalanced growth
- Unbalanced growth: overall growth is faster, resource prices pick up where growth is unabalances and this will signal investors to allocate funds to open these bottlenecks, grater investment + growth due to efficient allocation of resources
- Government should support industries with strong linkages to the growth industries
e.g. grants, incentives
What is the warranted growth rate
- Growth Rate at which all saving is absorbed into investment
for example, people save 10 percent of their income, and the economy’s ratio of capital to output is four, the economy’s warranted growth rate is 2.5 percent (ten divided by four)
What is natural growth rate
- Growth rate required to maintian full employment
If the labor force grows at 2 percent per year, then to maintain full employment, the economy’s annual growth rate must be 2 percent
What is the Paradox of Thrift
If everyone saves at once, it can cause a drop in AD and a recession
What is the Paradox of Savings
People save more when they think it’s a bad time to save and save less when it’s a good time
Did Asian economies grow completely from market forces?
- Japanese government cultivated steel, aluminium, car and shipbuilding industry after WW2 and then targed semi conductors and electronics through credit expansion that fostered investment (window guidance)
- Malaysia has** protected its infant car buildin**g industries through credit from the government and high tariff on imported cars
- Japan and South korea emphasised on large domestic conglomerates like Hitachi and Samsung
How much did Latin America grow when it adopted ISI
averaged 6% in the 1970s
Evaluate government intervention in economic growth and development
- More govt intervention –> leads to overstuffing (underemployment), bureaucracy (red-tape) and inefficiency
- Political instability and a lack of transparency can also contribute to corruption
- Borrowing to cover this create unsustainable debt that are not used on infrastructure
- In total this can lead to capital flight e.g. India
e.g. Zimbabwe, a redistribution of land, lead to the collapse of its agriculture industries
What were the results of basic income grants conducted in Nambia, Mexico, South Africa and Indoneisa
- smooth out consumption deficits
- improve health indicators
- allow people to start small businesses that are successful because they can take advantage of increased local demand
What are Special Economic Zones
- Area in a country that is subject to different economic regulations than other regions within the same country
- SEZ economic regulations tend to be conducive to and attract FDI such as tax incentives or lower tariffs
What are the potential disadavntages of SEZ’s
- SEZ increase export levels but countries may abuse it to retain protectionist barriers
SEZ may **create a level of bureaucracy with possibility of corruption + regulatory capture **
What are SEZ in China and what do they have the power to do
- 4 SEZ in SE coastal region; Shenzen, Zhuhai and Shantou in Guandong province and Xiamen in Fujian Porvince
- Enjoy benefits of power to approve investment projects, offer incentives to foreign investors, import equipment and technology tax free
How has the Shenzen SEZ benefitted
- Shenzhen is a world leader in shipping and supply chain and has the **world’s 4th busiest contianter port as of 2019 **
- Shenzhen’s fast economic growth is characterised by shipping logistics, high technology and financial services
- Has Huawei Tech City wehre R+D has created a global innovation sector and one of the leading financial sector
How much did Shenzhen’s GDP per Capita grow from 1979-2019
By over 30,000%
What are the primary aims of the IMF
- Primary aim is to stabilise exchange rate and provide loans to countries in need
functions
1) International monetary cooperation
2) Promote exchange rate stability
3) To help deal with BOP adjustment
4) Help deal with economic crisis
What does the IMF do in practice
1)Economic surveillance and monitoring; produces reports on member countries economies to suggest weaknesses
2) Loans to countries with a financial crisis: IMF has a $300 billion of loanable funds e.g. Greek $110 billion bailouts
3) Conditional loans/structural adjustment: when giving loans, the IMF usually insists on certain criteria being met
4. Technical assistance and economic training
Financed by member contributions from 183 members
What is structural adjustment in maco and micro policies
Combination of free market policies like privatisation, fiscal austerity, free trade and deregulation
Macro:
* Policies to tackle inflation or budget deficit (tightening monetary/fiscal policy)
* **Removal of tariff barriers **
* Abandoning fixed exchange rates
Micro:
- Privatisation to improve efficiency
- Ending food subsidies
- Reducing red tape (deregulation)
What are the problems of Structural Adjustment
- spending cuts on important welfare services like education are bad in long run
- Privatisation can benefit a small rich elite (Russia 1995 or Egypt’s Open Door Policy) and worsen inequality
- Privatisation of key utilities like water can lead to higher prices for a key commodity
- Unemployment
- Social development ignored
- Free trade hampers diversification; focus on comparitive advantage and raw materials
How did Privatisation affect water prices in Bolivia
Bolivia where the IMF forced privatisation to water as a key part leading to mass protests against the raised price.
It is argued that the privatization process did little to address water access and that the increase in water prices following such measures was met by an approximate 2% increase in levels of poverty
What was the role of the IMF in the 1997 Asian Crisis
Asian crisis of 1997 Indonesia, Malaysai and Thailand were required by IMF to pursue tight monetary policy but this caused a serious recession
What was the Goldberg Scandal
IMF intervention in Kenya in the 1990s made the central bank remove outflow of capital control that made it easier for corrupt politicians to transfer money out of the country
Evaluate the IMF structural adjustment policies and actions
- Dependent on implementation
- Structural adjustment can still provide political will to take necessary and difficulty step for long term growth and stability
- Places too much emphasis on macroeconomic objectives
- Crisis will always have difficulty and the IMF is an easy target
- Provides a confidence boost
- IMF has some successes such as Mexico in 1982, Greece and Cyprus
What is the role of the World Bank
Aid long term economic development and reduce poverty by making technical and financial support available
- lends to MIC and Creditworthy LIC
- offers interest free loans and grants to the world’s poorest countries
- finances investment, capital, mobilisation and gives advisory services to businesses and governments in economically developing nations
- promotes FDI in economically developing countries
What is the critcism of the World Bank
- Smoke screen to use conditional loans in exchange for countries to establish neoliberal economic policy that ultimately benefit western companies and financial insitutions
- Ha Joon-Chang argues that the real point of the World Bank is to **create poliicy friendly to TNCs, deterotiating social development **
- John Pilger argues that the World Bank is the agent of the richest countries in the world that offer **loans only if they privatise and give access to raw materials **
