4.3 Emerging and developing economies Flashcards
what is development?
the sustained improvement in the standard of living, well-being and economic opportunities
what is economic growth?
- a sustained rise in a country’s productive capacity
- an increased in real value of GDP/GNI per capita
- increase in the productivity of factors of production
what is economic development?
- progress in expanding economic freedoms
- sustained improvement in economic and social opportunities
- growth in personal and national capabilities
what is the Human Development Index?
focuses on longevity (long, healthy life), basic education and a decent standard of living (minimal income)
- a broad measure of improvements in people’s lives
- each of the three measures is given a value between 0 and 1 (0 being very low development and 1 very high)
- it can be expressed as number between 0 and 100 (if the measure is multiplied by 100) or 0 and 1
what are the disadvantages of using HDI?
- does not take into account qualitative factors
- takes no account of income distribution
- Purchasing power parity values used to adjust GNI data change quickly
what are the advantages of using HDI?
- relatively easy data to collect and compare
- as objective as possible
- measures such as longevity and education levels are indicative of other development factors
what are the other indicators of development?
- changing structure of national output, trade and employment
- access to clean water
- energy consumption per capita
- fertility rate
- prevalence of HIV
what is primary product dependency?
a country’s economy is heavily reliant on the export of primary products or raw materials
- risk of over-specialisation especially when the terms of trade from their main exports decline
- resources rich countries may suffer from the natural resources curse, extractive rents often fuel corruption, inequality and wasteful consumption causing natural resources to be depleted
what is the Prebisch-Singer Hypothesis?
suggests that, over the long run, prices of primary goods such as coffee or cocoa decline in proportion to prices of manufactured goods such as cars and washing machines
- likely to be long-term decline in real commodity prices
- this is because the income elastic of demand for commodities is lower than for manufactured goods which worsens the terms of trade for primary exporters over time
➡️countries would be better off focusing on import substitution policies which encourage rapid industrialisation and improved export diversification so they are more resilient to price shocks
what is Dutch Disease?
the adverse impact of a sudden discovery of natural resources on the national economy via the appreciation of the real exchange rate and the decline in export competitiveness
- if natural resources are found and extracted while the world price is rising then export revenues will increase and there will be investment into the sector
➡️ there is a risk that there investment into other industries will lack + the surge in export incomes can cause an appreciation of the exchange rate
strategies for reducing Primary Product dependency and price volatility?
- better government, more transparency and accountability
- Stabilisation Fund/ Sovereign Wealth Fund ➡️ eg to fund human capital and infrastructure
- higher taxes of natural resource profits
- Buffer stock schemes, when the government or firms stockpile good
- Diversification, including shifting resources into processing, light manafacturing and toursim ➡️ giving higher value added and making the economy less susceptibel to external shocks
whats the saving gap?
- many rich countries have excessive savings while poorer countries with extreme poverty makes it impossible to generate sufficient savings for investment
- banking sector may be underdeveloped causing reliance of foregin aid
➡️ savings lead to investment (if theres a big saving gap then there will be a lack of investment)
what is the Harrod Domar Model of growth?
stresses the importance of savings and investment
- the rate of growth depends on the level of national savings and the productivity of capital investment
what is a foreign currency gap?
imbalance between inflows and outflows of foreign currencies such as $ and euro
when does a foreign exchange gap happen?
- a country is running persistent currency account deficit
- there is an outflow of capital investors
- a fall in the value of inflows of remittances from nationals living and working overseas
➡️ key consequence is that the nation does not have enough foregin currency to pay for essentail imports such as medicines, food and critical raw materials
➡️ severly hamper short run economic growth
what is capital flight?
the uncertain and rapid movement of large sums of money out of a country (outflow of resident capital which is motivated by economic and political uncertainty)
what are the causes of capital flight?
- political turmoil
- fears that a govt plans to take assets under state control
- exchanges rate uncertainity
- fears over the stability of a country’s fiscal system
which demographic factors affect economic growth?
concerned with the size and composition of a population
- life expectancy is rising
- ageing population and population decline
➡️changes patterns of consumer demand in markets, govt spending, housing market (micro)
➡️rate of productivity, business competitiveness, increased demand for state-funded health care
what are the effect of brain drain?
the movement of highly skilled/ professional people from their own country to another country where they can earn more money
✅
- remittances fro emigrants flow back
- people living overseas may help finance private sector capital projects in the future
- may help offset risks from rapid population growth
❌
- loss of human capital
- loss of enterprising younger workers
- skill shortages
- risk of fall in AD
what is external debt?
debt owed to external (overseas) creditors
- govt bonds sold to foreign investors
- private sector credit borrowing from foreign banks
when do external debts rise?
- govt is running a budged deficit which is financed by;
- the selling of govt bonds to overseas creditors
- borrowing from overseas institutions such as the IMF
- households and businesses borrow money in a foreign currency including mortgages and corporate bonds
whats the risk of external debt?
- returns on investment might fall short of expectations
- if the currency depreciates/devalues the real value of the debt will be harder to pay
- if international investors become nervous about the ability of a govt to repay external debt the country may suffer a downwards credit-rating
how do access to credit and banking impact the economy?
- improving access to basic financial services such as a bank account, credit, insurance is crucial to improve people’s lives
- millions of the worlds poorest people rely on informal loans often at high rates of interest
- many find it difficult to find loans for businesses or to fund education as they have no collateral infrastructure
how does education/skills in human capital impact the economy?
human capital is the skill, knowledge, talent, experience and ability of workers
➡️ affects labour productivity and ability to harness/adapt to new technologies as low productivity keeps wages down
what are property rights?
- land rights
- tragedy of the commons (individual consumer resource at the expense of society)
- intellectual property (copyrights)
- rights to own businesses
why are property rights important for development?
- crucial for wealth creation
- protection of property rights is a major barrier to corruption
- help tackle gender inequalities
- laws on patents are important to secure investment in research industries
- common rules encourage trade and investment
how is gender inequality a barrier to growth and development?
- economies cannot achieve their full and equal participation of women and men
- adolescent birth rate is higher in LDCs
how is corruption a barrier to growth and development?
- corruption due to a failure of governing institutions who lack transparency in where tax revenues are coming from and how resources are spent
example of market-led policies?
-reallocating state spending
- tax reforms
- liberalizing market interest rates
- floating exchange rate
- trade liberalisation
- privatisation
what does trade liberalisation involve?
one country lowering import tariffs and relaxing import quotes
- aim to make an economy more open to trade and investment so that it can engage more directly in the regional and global economy
- countries can specialise in the goods and services which they have a comparative advantage in
what are the effects of trade liberalisation?
- lower prices, increased competition, improved efficiency (micro)
- multiplier effect, lower inflation, structural unemployment, initial increase in trade deficit
what are the main gains from attracting inflows of FDI?
- improved infrastructure
- better training for local workers
- investment grows a country’s export capacity
- new technology
- more competition in markets ➡️lowers prices for consumers
- creates new jobs leading to higher per capita incomes
- FDI can promote a shift to higher productivity jobs
what are the main risks from policies designed to attract investment into an emerging economy?
mulitnatioanls:
- wield power within host countries especially LDC’s
- take advantage of weak laws (environment)
- poor working conditions
- imports of capital goods may negatively effect a country’s trade balance
- may only imploy people in lower skilled jobs
what policies are designed to attract foreign direct investment?
- low corporation tax
- tax subsidies
- trade and investment agreements
- flexible labour force + skilled workers
- high quality infrastructure
- low labour costs
what do free-market critics say about govt subsidies?
- distort the price mechanism
- stifle innovation as producers are less reliant on innovation
- can become subsidy dependent in the long run
- less likely to improve efficiency
what are microfinance schemes?
refers to a large number of different financial products such as
- micro-credit, small scale loans to the poor
- micro-savings, eg voluntary saving clubs provided by charities
- micro-insurance, safety net to stop people falling back into extreme poverty
- remittance management, managing remittance payments sent from one country to another
➡️key feature of targeting groups of women as they perform better as clients of micro finance institutions leading to long-term development
what are the benefits of micro-credit?
- helps overcome the savings gap
- encourages entrepreneurship
- targeted at women entrepreneurs
- high rates of repayment because the system is built on trust
what are the disadvantages of micro-credit?
- high-interest rates
- low success rates for new small buisnesses
- alleged forcible collection of debt in many villages
what is privatisation?
the transfer of a business, industry or service from public to private ownership
what are the benefits of privatisation?
- provide incentive to cut costs and be more efficient
- govt gains from sale of assets and no longer had to support a potentially loss making industry
- competitiveness of the macroeconomy may improve is privatisation leads to increased investment
what are the drawbacks of privatisation?
- social objectives are given less importance
- some activites are best run by the state
- govt losses any future profits
- public sector assets are often sold cheaply
- privatisation leads to job losses as firms increase their efficiency
- risk of creating monooplies
what are interventionist strategies?
involve many different types of government intervention in markets designed to correct for multiple market failures, influence patterns of trade/investment and address some of the root causes of poverty
what are some of the roles of the state in inventionsist strategies?
- basic health care
- accessible and affordable education
- infrastructure (telecommunications, health and transport)
- core public goods that the free market under-provides
- smarter regulations
- welfare provisions to proved a basic social safety net + encourage saving
- progressive taxation
how can human capital be improved?
- improved nutrition
- increased school attendance
- increased investment in primary and secondary eduation
- incentives to attract skilled migrant workers
- investments in training to re-skill people at risk of unemployment
- cash transfer interventions can increase demand for education
❗️can take several years to have a significant impact
why do countries choose a managed-floating exchange rate system?
when the central bank may choose to intervene in the foreign exchange markets to affect their currency
❗️ reduce the volatility of the exchange rate
- improves the balance of trade - reduces the risk of a deflationary recession
- rebalances the economy away from domestic consumption towards exports and investments
- sell foreign currencies to over seas investors to reduce govt debt
- eg Brazil, India, Thailiand, New Zealand
what are buffer stock scheme?
stabilise the market price of agriculture products by
- buying up supplies when harvest are plentiful
- selling stocks onto the market when supplies are low
❗️dont work well in practice, many have collapsed, can only work effectively for storable commodities
arguments for and against a Buffer Stock Scheme?
✅
- lower risk of extreme food poverty for poor consumers
- more stable incomes and profits for farmers
- helps macroeconomic stability/investment
- ought to be self-financing
❌
- may not be large enough to change the market price
- setting a high price for farmers often causes rising surpluses
- high costs of storage and falling quality of product (might have to sell at discounted prices)
- many buffer stock schemes fail because of poor administration/corruption
what is the Lewis model?
Arthur Lewis put forwards a model of a dual economy, consisting of rural agricultural and urban manufacturing sectors
- initially the majority of the labour is employed upon the land (fixed), as more labour is put to work on the land diminishing marginal returns will eventually set in
➡️ there may be insufficient tasks for the marginal worker to undertake, resulting in reduced marginal product and underemployment
- as urban workers, engaged in manufacturing, have higher outputs than agriculture workers they get higher wages (Lewis said 30%) which might tempt agriculture workers to migrate to cities and engage in manufacturing activity
- high urban profits would encourage firms to expands and result in rural-urban migration
pros and cons of tourism for growth?
✅
- employment (especially for women)
- export earnings
- source of diversification for many smaller countries
- lifts aggregate demands ➡️multiplier effect
- accelerator effects from investment in infrastructure and services such as airlines
❌
- exploitation of local labour overseas by TNC’s (eg rapid growth of the sex industry)
- many workers are migrants suffering from poor employment conditions)
- outflow of profits to foreign-owned tourists resorts
- all inclusive deals tend to ignore the local economy
- negative externalities from construction projects
- rising property prices makes housing less affordable for locals
- deepening pressure on local cultures from westernisation
- tourism can be highly cyclical industry (vulnerable to global economic and political shocks)
what are the key aims of Fairtrade?
- guarantee a higher/premium price to certified producers
- achieve greater pricestability for growers
- improve production standards
what are the critiques of fairtrade?
- impact on non-participating farmers (cuts demand for those in countries that can’t participate, worsens extreme poverty)
- evidence that much of the price goes to processors and distributors rather than farmers themselves
- fundamental causes of poverty are not addressed, should be investing into farming infrastructure or encouraging farmersd to establish producer co-operatives
what are the types of Overseas Development Assistance?
- Bi lateral aid, from one country to another
- Multi lateral aid, United Nations
- project aid, direct financing of projects for a donor country
- technical assistance
- humanitarian aidemergency disaster relief, food air, refugee relief
- soft loans, a loan made to a country that has low rates of interest
- tied aid, projects to supplies in donor country
- debt relief
risks/drawbacks of high levels of overseas aid?
- poor governance, aid might leave the recipitent country (corruption)
- lack of transparency
- dependency on culture (aid tends to be most effect where is it needed least)
- aid may lead to a distortion of market forces and a loss of economic efficiency
what is debt relief?
the cancellation, rescheduling or refinancing of a nation’s external debts
- many poor countries have high levels of external debt owed to other governments and the IMF
- the Heavily Indebted Poor Countries Initiative (HIPCI) is an initiative to provide debt relief to heavily indebted low-income countries
what are the arguments against extensive debt relief?
- moral hazard argument, governments will spend and borrow more if they know some of their debt will be written off in the future
- if governments ran better macroeconomic policies then the interest rates charges on new loans would fall making the repayment of debt less costly (controlling inflation)
what does the world bank do?
- provides grants and low-interest loans
- offers policy advice and technical assistance to developing countries
- co-ordinate projects with governments
what is the International Monetary Fund?
is a global organization that works to achieve sustainable growth and prosperity for all of its 190 member countries
what are the key roles of the IMF?
- promote international monetary co-operation
- facilitate the expansion of international trade
- provide exchange stability
- make resources available to members experiencing balance of payments difficulties
what is the difference between gender equality and gender equity?
equality
- women have the same opportunites as men
equity
- women can have the same life outcomes as men
what are the sustainable development goals?
- End poverty
- End hunger
- Ensure healthy lives and promote well being
- Ensure inclusive education
- Achieve gender equality
countries with high HDI rankings?
Norway, Switzerland, Australia, Ireland and Germany
countries with low HDI rankings but high GNI per capita?
Quatar, Kuwait, Iraq
countries with much lower GNI per capita than their HDI ranking?
- Cuba
- Tonga
- Georgia
what external sources of finance can developing countries get?
- FDI
- portfolio equity flows
- long and short term loan
- overseas aid
- remittances from migrants living and working overseas
statistics for demographic factors?
population growth
-1960 - 3 billion people
- 2010 - 7 billion
- in the next 35 years another 2.5 billion people will be added to the population
what are interventionist supply side policies?
- govt spending on education/training
- govt spending on infrastructure
- subsidies to firms to promote investment
what are market based policies?
(reduce role of government)
-** tax reforms;**
- lower income tax and lower corporation tax
**- labour market reform; **
- reduce benefits, reduce min wages, reduce trade union power
**- competition policy; **
- privatisation, deregulation, trade liberation
cons of market based and interventionist methods?
- no guarantee of success
- cost
- time lags
- negative stakeholder impacts
- output gaps
- need for targeted SSPs
