4.3 Emerging and developing economies Flashcards
Define economic development with the two indicators
Is the sustainable increase in living standards for a country, typically characterised by increases in lifespan, education levels, & income
single indicators: quantitative data
composite indicators: such as the HDI
Human development index (HDI)
A measure of economic development
Index is between 0 to 1
The closer to 1, the higher the economic growth
3 HDI indicators and how they are measured and combined
Health: measured by life expectancy at birth
Education: the mean years of schooling that 25 year old have had and expected years of a current 5 year old
Income: As measured by the GNI per capita at PPP
Disadvantages of HDI as a measure of economic development
- doesn’t measure the inequality (because it uses the mean GNI/Capita)
- it does not compare the absolute/relative poverty
- health doesn’t take the quality of health into account and education doesn’t take quality and success of edu into account
Advantages of the HDI as a measure of economic development
+ composite indicators have a more useful comparison than single indicators
+ incorporates the 3 most important metrics for households (H,E,I)
+ widely used universally meaning there is useful comparisons
+ provides a goal for govts when developing their policies
+ Citizens can compare how their quality of life is against other countries
Other indicators of economic development
IHDI (inequality adjusted HDI) :calculates loss in potential human development due to inequality
MPI (Multi-dimensional poverty index): measures the complexities of poor people’s lives. 10 indicators across 3 dimensions. to track deprivations
State the 11 factors influencing growth and development
- primary product dependency
- volatility of commodity prices
- savings gap [harrod-domar model]
- foreign currency gap
- capital flight
- demographic factors
- debt
- access to credit and banking
- infrastructure
- education/skills
- absence of property rights
primary product dependency
Primary products tend to have a very low YED. As world income rises, there is less than
proportional increase in demand
This means that there is limited scope to continue increasing demand
Primary products have very little added value
Exporting manufactured products raises the added value, incomes & profits
volatility of commodity prices
primary products tend to have inelastic PED
effecting producers incomes and the country’s income. They’re always fluctuating making it difficult to plan and carry out long term investment.
Investment in the production of commodities causes long term risk when prices fall
savings gap
is the difference between actual savings and the level of savings needed to achieve a higher growth rate
Developing countries have lower incomes, so they save less. Meaning there is less money for banks to lend, reducing borrowing and therefore investment/consumption.
However, there are problems with this model.
It is difficult for individuals to save when they have low incomes and borrowing form abroad leads to debt, meaning the investment could be wasted.
harrod-domar model (savings gap)
suggests that savings provides funds which are borrowed for investment purposes and that growth rates depend on the level of saving and productivity of investment. It concludes that economic growth depends on the amount of labour and capital. Developing countries have a large amount of labour meaning their problems are capital related. To improve capital, they need investment, which requires savings
foreign currency gap
when exports from a developing country are too low compared to their imports to finance the purchasing investment or other goods (from overseas) for faster economic growth
Ethiopia suffers from debt of 60% of their GDP
capital flight
large amounts of money are taken out of the country rather than it being left there for people to borrow and invest, this occurs to due the lack of confidence in the country’s stability, to hide it from the govt or for more profit. Leads to weak currency and depreciating ER
This caused Argentinian 2001 crisis
demographic factors
developing countries tend to have higher population growth. this is caused by higher birth rates, which increases the dependents in the country but not those of the working age.
if the pop grows by 5%, the economy needs to increase by 5% to maintain living standards
Africa’s pop is set to double by 2050, complicating hunger reduction
debt
During the 70s and 80s, developing countries received vast loans from the banks in developed countries. They now suffer from high levels of interest repayments. Meaning they have less money to spend on services for their population and they may raise their taxes (limiting g+d)
access to credit and banking
Developing countries have limited access to credit + banking, meaning they can’t access funding for investment and they struggle to save for the future, some families use loan sharks (and struggle with permanent debt)
infrastructure
Low levels of infrastructure make it hard for businesses to set up and trade within a country, making the business unreliable
However infrastructure development can be expensive and conflict environmental goals
education/skills
poor education in LEDCs means workers aren’t skilled, sometimes illiterate, reducing productivity. however, graduates also struggle with finding jobs
countries like china/korea heavily invested in human capital and have benefited in the LR
Ethiopia has 49% illiteracy rates
absence of property rights
where individuals aren’t allowed to own and decide what happens to certain resources. a lack of rights means individuals and businesses cannot use the law to protect their assets, leading to less investment. Unwilling to buy, build, establish
Loss of poverty rights in Zimbabwe led to economic collapse
Impact of non-economic factors on g+d
Corruption: = lower investment
Poor governance: inefficient use of resources, and poor decision making can also result in laws which inhibit g+d
Wars: conflicts destroy infrastructure, disrupt supply chains and reduces supply of labour, it shifts the PPF inwards
Geography: it is harder for landlocked countries to generate EG. Their transportation costs increase and decrease comp. Natural terrain can also be a limiting factor, ie Pakistan
Define market-orinetated
These are measures which make the economy more free, with minimum government intervention.
Define interventionist
The government intervenes in the market to try and influence growth and development using interventionist strategies.
6 Market-orientated strategies
Trade liberalisation
Promotion of FDI
Removal of govt subsidies
Floating exchange rate
MIcrofinance schemes
Privitisation
6 Interventionist strategies
Developing human capital
Protectionism
Managed exchange rates
Infrastructure development
Joint ventures
Buffer stock schemes
explain the market orientated strategies
trade liberalisation: frees trade, creates the opportunity to exploit a country’s comparative advantage; firms become more efficient and innovative
promotion of FDI: provides funds to invest and transfer knowledge. creates employment and promotes long term sustainability.
removal of subsidies: will avoid over-dependency on the subsidies, meaning they will become more efficient.
floating exchange rate: the lack of control over the FER can limit economic growth as they are fluctuating
microfinance schemes: small scale loans given to entrepreneurs, gives the ability to increase investment, well being…
privitisation: assets are sold from the public sector to the private sector. this increases consumer welfare as firms have to compete for the consumers and will have high quality and efficiency - increases AE
Explain the interventionist strategies
Development of human capital: businesses struggle to expland with limited skills and this limits innovation. Developing HC allows a country to move away from primary product dependency
Protectionism: Imposing tariffs and quotas can help avoid unfair advantages from foreign competition, this will protect local industries (Welsh lamb is cheaper then the better quality NZ lamb. NZ will impose a tariff to avoid importing cheaper lamb)
Managing exchange rates: central banks will buy and sell currency to try and influence their ER. This will give the currency more stability by manipulating S+D
Infrastructure development: Reduces the businesses’ costs. they only invest if it is profitable to them; under provided in the free market
promotion of jv: leads to capital inflows, creates jobs and increases output , enhances efficiency
buffer stock schemes: the govt will buy excess supply and stock until a shortage occurs and they will have enough supply. this aims to stabilise the volatile prices
Give 2 disadvantages of protectionism
- there is a loss of consumer surplus as they will often lose access to the cheaper goods due to the barrier of trade
- the taxes are often regressive as they impact the lower income households more
Other strategies to ensure growth in the economy
- industrialisation: moving from rural agricultural sector to urban industrial sector. Productivity and incomes are higher in the industrial sector. However, transferring labour can be expensive as it requires training and education
- development of tourism: employment, revenue and income can increase from tourism. Rising global incomes have increased the demand for tourism. Ecotourism battles negative ext.
- development of primary industry: invest to strengthen the comparative advantage. the income generated can be used to diversify the market with higher value (i.e tourism investing in infrastructure) increased efficiency = decreased COP = pass on
- aid and debt relief: reduces absolute poverty, fill savings gap, forex gap and creates a multiplier effect. debt relief involves cancelling a country’s debt
However, this can lead to over-dependency and high expectations. Corrupt govts can use this incorrectly
Lewis Model
Lewis proposed that developing countries can achieve economic growth by transferring labour from traditional agricultural sector to the modern industrial sector
labour is abundant and wages are low as they are low skilled. industrialisation begins and labour moves from A to I and there is a shortage of labour in the agricultural stage
Lewis turning point: supply of labour from agriculture becomes limited and the wages begin to rise. This increases COP and rises prices of agricultural goods; more competitive
in 2020 Vietnam had 62.4% in the rural population, they’re at the beginning of their industrialisation
This is not a guarantee of economic development, there must be appropriate policies in place to support the industrialisation process.
International organisations and NGOs (strategies for growth and development)
The World Bank, International Monetary Fund(IMF) & many nongovernmental organisations (NGOs)play an active role in economic development
Explain the International organisations and NGOs (strategies for growth and development)
- The world bank: Set up in 1944 to promote economic development. Provide low interest loans. Interest free credit and grants for developing countries
- International Monetary Fund (IMF) : to ensure stability of the international monetary systems. Each country has a quota on the amount of financial resources they have to make available to the IMF. These resources are then provided to offer loans to poor countries to fight poverty
- World Trade Organisation (WTO) : Promotes liberalisation of trade, supports governments in negotiating trade deals and removing trade barriers (so that they don’t get taken advantage of)
Act as mediators (arbitrator) in issues - NGOs: private orgs, charities that support objectives such as reducing poverty, protect the environment. ie water aid
