4.3 Emerging and Developing Economies Flashcards
1
Q
Define economic development
A
Increase in economic wellbeing and quality of life
Permanent change
2
Q
Human development index
What does HDI consist of
A
- Longevity/ health (life expectancy at birth)
- Education (adult literacy, school enrolment)
- S.O.L/ income (GDP/ capita PPP)
3
Q
Advantages of HDI
A
- Broad–> still incorporates GDP/capita
- Focus on development outcomes
- Allows for progress to be measured overtime
- Attention focus on those with low development –> AID =allocative effiency (allocation of resources)
- It is a composite indicator which provides a more useful comparison metric than single indicators do (the selectivity makes it a renowned and acclaimed measure of development)
- It incorporates three of the most important metrics for households i.e. health, education & income
4
Q
Disadvantages of HDI
A
- Distribution of Y: It does not measure the inequality that exists as it uses the mean GNI/capita
- It does not measure or compare the levels of absolute & relative poverty that exist
- Arbitrary weighting (allocation of resources) –> Perhaps 3 factors of HDI shouldnt be weighted equally, 1 factor may be more signifcant that the other for some countries
- Freedom and choice?
- Other factors –> crime, corruption, negative externalities
5
Q
2 other useful composite indicators
A
- The inequality adjusted HDI (IHDI)
- The multi- dimensional Poverty Index (MPI)
6
Q
Limitations of using HDI to compare levels of development between countries and overtime
A
ignores qualitative factors, such democracy, quality of education or human rights for example
ignores other measures ranging from gender equity,proportion of workforce in agriculture to environmental biodiversity
ignores income distribution
PPP values change very quickly and are likely to be inaccurate or misleading
7
Q
How does non economic factors influence growth and development
A
- Corruption: individuals will make decisions which maximise the bribes they recieve as oppose to those which maximise development and output. It also diverts funds to certain groups who have bribed or lobbied officials= low levels of growth and development
- Wars: conflict destroys infrastructure, disrupts supply chains & often reduces the post war supply of labour. Conflict shifts the PPF curve inwards
8
Q
How does education influence growth and development
A
- Investing in SSP’s increases potential output (shifts PPF outwards)
- Higher education–> higher human capital–> increase in productivity–> higher output–> increased Y -increased S.O.L
- Promotes social and economic choice
- Gender equality: empowering women in society- promoting sanitation, telecommunications, electricity, cooking facilities
- Health: restricting/ avoiding HIV, take vaccinations, contraception= higher birth rates
9
Q
How does volatility of commodity prices influence growth and development
A
- Primary products tend to have inelastic demand and supply
- So, relatively small changes in S/D–> huge fluctuations in price
- Producers incomes and country’s earnings rapidly fluctuate
- Difficult to plan an carry put long term investment
- Producer Y fall rapidly= poverty
- Govt tax revenue fluctuates–> progressive impact on distribution of income= income inequality
10
Q
How does the savings gap influence growth and development
A
- Difference between actual savings and the level of savings needed to achieve a higher growth rate
- Developing countries: low Y, save less, less £ for banks to lend, less borrowing, decreased investment, lower capital stock, lower economic growth
- Low Y–> low levels of education and health (developing countries: difficult for govt to raise funds for provision of health and education–> private sector allocates resources–> have to pay= less affordable)–> lower levels of human capital (lack of skills= structural unemployment)–> lower productivity
- Harrod Domar model: Economic growth depends on the amount of labour and capital
- Developing countries have a vast labour supply, problems are caused by capital
- In order to improve capital, investment is needed
- Investment requires savings
11
Q
Link to Zambia economy
How does access to credit influence growth and development
A
- Zambia suffers from lack of banks and financial sector
- Not enough Zambians have bank accounts
- This affects the savings gap, because lack of saving affects investment. This affects the international competitiveness of Zambian firms and success of export led growth
- Investment is needed for Zambian firms to grow, for the export market, and to earn foreign currency to pay off the debt Zambia owes to China
- Financial sector provides the role of exchange, equity, forward markets, lending and saving which allow growth and development
12
Q
How does infrastructure influence growth and development
A
- Developed countries: complex network of buildings, roads, ports, railways, airports, utilities and electricity cables- lower costs and attracts FDI
- Access to markets: viable, firms transport G/S at lower costs so consumers access markets and purchase G/S at lower P’s –> increase international competitivness
- Low levels of infrastructure- hard for businesses to trade and set up e.g. lack of roads means services and production are less reliable
13
Q
How does demographic factors influence growth and development
A
- Developing countries have high population growth due to high birth rates
- If dependency ratio is high–> less £ available for savings and investment
- Dependency ratio: ratio of number of dependents (children and pensioners) to the total working age population)
- Strain on education system –> youth unemployment
- Zambia has world’s youngest median population, doubling in 25 years= pressure on FoP
14
Q
How does foreign currency gap influence growth and development
A
- Currency outflows persistently exceed currency inflows
- Occurs when: CA deficit
- Outflow of capital from investors in money and capital markets (capital flight)
- Fall in value of inflows of remittances from nationals living and working overseas
- So, country doesnt have enough foreign currency to pay for essential imports e.g. raw materials, food, medicine
15
Q
How does capital flight influence growth and development
A
- Uncertain and rapid movement of large sums of money or assets out of a country
- This is due to a fall in business confidence due to
- Political turmoil & unrest/ risk of civil conflict
- Threat of nationalism
- Increase in corporate tax rates
- Govt might default on their debts
- E.R. uncertainity (devaluation of their currency)
- Fears of country financial stability–> safety of commercial bank deposits
- Reduces £ available for invesment
16
Q
Why is capital flight damaging for developing economies
A
- It leads to currency weakness- outflow of currency= E.R. depreciates
- Rise in imported inflation and cost of living
- Higher inflation has regressive effects on poorer households
- Currency weakness and instability makes it more expensive for governments to finance new issues of debt
- Capital flight= economy unable to finance essential imports such as pharmaceuticals, food, animals feed and energy
17
Q
How does absence to property rights influence growth and development
A
- ‘Dead capital’ Hernando de soto: assets that cannot be legally bought, sold, valued or used as investment
- Those who live in slums possess far more dead capital
- Income inequality
- No loan to go university, positive wealth effect
- Zambia: customary land is 94%, state land is 6%
- Less patents= slows investment and growth= less product diversification = primary product dependency
- As long as the assets of poor people are not properly documented and tracked within a legal system, they are effectively invisible to the marketplace.
- Home equity loans in developing countries are exceedingly rare, land and buildings are owners largest asset= difficult to prove ownership= difficult to make these assets work
- Lack the process to borrow against their property and create capital
18
Q
How does primary product dependency influence growth and development
A
- Primary goods such as agriculture and mining =low-income elasticity of demand –>as people get wealthier, they don’t continue to increase the amount of primary products they buy whereas they are likely to increase their demand for manufactured goods. (Pre-Bisch singer hypothesis)
- Natural disasters can wipe out production of the primary product = farmers have less income. They are often non-renewable, which means the country will suffer when they run out of the product.
- Dutch disease: Country becomes a significant commodity producer in a short amount of time–> increase D for currency–> appreciation= fall in competitivness of economy= fall in output in other sectors
19
Q
How does debt influence growth and development
A
- During the 1970s and 1980s, developing countries received vast loans from banks in the developed world.
- Now, they suffer from high levels of interest repayment: sometimes even higher than the loans and aid they receive from developed countries, meaning money is flowing from developing to developed countries.
- This means they have less money to spend on services for their population and they may need to raise taxes, which limits growth and development.
- Borrowing for growth makes sense, just as firms borrow to expand, but the problem occurs when governments take on too much debt and do not spend it well.
