4.3 - Emerging and Developing economies Flashcards
What are the 5 main indicators of development?
- Access to clean water - 100% in the UK, 94% in India & 76% in Burundi
- Number of mobile phones - UK = 122 per 100, India = 87 per 100, Burundi = 48 per 100
- Access to internet = UK = 95%. India = 30%, Burundi = 5%
- Energy consumption per person - UK = 2764kg of oil per yr, India = 673kg, Burundi = 2.5kg
- Proportion of agricultural work - UK = 1% of economy, India = 44%, Burundi = 91%
What is economic development?
A sustainable increase in living standards in an economy
What are composite indicators?
Multiple individual indicators combined into a single indicator
What is HDI and how is it measured?
- Measure of a country’s development through 3 indicators: education, health, living standards
- Geometric mean is calculated
What do HDI values mean? Give examples of countries with varying HDI values.
- Ranges from 0-1 (where 1 is perfect)
- 0-0.49 -> low development (Burundi = 0.40)
- 0.50-0.69 -> medium development (India = 0.62)
- 0.70-0.79 -> high development (China = 0.74)
- 0.80-1.00 (UK = 0.91)
What are the 3 dimensions of the HDI?
(give case-study examples)
- Education: compares the no. of years spent in school on average across different countries e.g. UK = 15 yrs, India = 9yrs, Burundi = 7yrs
- Health: takes a child’s average life expectancy at birth e.g. UK = 81yrs, India = 68yrs, Burundi = 57yrs
- Living standards: looks at real GNI per capita e.g. UK = $37,000, India = $5,700, Burundi = $700
What are the advantages of using HDI?
- Holistic: looks at the whole of development through 3 important factors -> broad-ranging view of development -> reliable picture
- Good for comparison: easy to compare levels of development across countries -> assess which countries need aid
What are the disadvantages of using HDI?
- Omits other indicators: can be unreliable -> when measuring living standards it only looks at income, neglecting access to electricity, internet etc
- Ignores distribution of development: e.g. Israel’s HDI is 0.90 but it has one of the world’s highest Gini coefficients -> unequal distribution of development -> difficult to compare
What is IHDI?
- Takes our normal HDI and adjusts it to account for different levels of inequality
- Norway, HDI = 0.95, IHDI = 0.90
What is the MPI and what does it calculate?
- Looks at the same 3 indicators as the HDI & IDHI breaking them down into 10 smaller components
- Calculates: 1) No. of people in poverty, 2) Average intensity of poverty -> combines these to produce an overall MPI rating
- High MPI = high poverty
What are the 10 components of the MPI?
Education:
- Average yrs spent in school
- No. of children not in school
Health:
- Child mortality
- Nutrition
Living standards:
- Fuel used
- Access to a toilet
- Access to clean water
- Access to electricity
- Types of floor
- Ownership of gadgets
What 3 main things hinder growth & development?
- Low productivity (fall in LRAS -> fall in income -> fall in profit -> no funds for development)
- High costs (fall in SRAS -> less price competitive -> lower profits -> no funds for development)
- Low investment (falls in AD & LRAS)
What is FDI?
Investments made by a firm in one country into a firm in another country to gain control over a foreign firm
How does poor infrastructure constrain growth & development?
Poor infrastructure → Increases costs → Left shift of SRAS → Increases prices → Decreases competitiveness → Less profit → Less corporation tax revenue → Less government spending on development
What are the two ways of promoting FDI? (Give case study example)
- India received $31bn in FDI (2015)
- Reducing corporation tax: India reduced it from 50% -> 40%
- Reducing wage costs: 2001 min wage established in UK
How does promoting FDI work as a strategy for poor infrastructure?
Improved infrastructure → Decreases costs → Right shift of SRAS → Decreases prices → Increases competitiveness → More profit → More corporation tax revenue → More government spending on development
What is the evaluation of promoting FDI as a strategy for growth & development?
Reducing the rate of corporation tax -> government collects less revenue from corporation tax -> less money to spend on development
How does poor health constrain growth & development?
Poor health → Low productivity → Increases costs → Less profit → Less corporation tax revenue → Less government spending on development
How does aid work as a strategy for poor health?
(include a real world example)
- Aid is intended to promote growth and development and can be used to invest in health & education -> human capital -> productivity
- Kenya received $650 million in 2016 from the USA (1.6 million had HIV)
Evaluate aid as a strategy to growth & development?
- Aid money doesn’t always go to where it is intended, it can end up with corrupt government officials who spend it on themselves rather than on helping people in poverty
- US suspended $21 million of the 650mil it gave to Kenya to dedicate to healthcare as they had failed to use it effectively
- $300 million missing from Venezuela in the last 10 years
How does population growth constrain growth and development?
(include a country example)
Higher birth rate → Overcrowding → Lower quality education → Less productive → Lower incomes → Limits economic development
Higher birth rate → Less time for parents to focus on education/career → Decreases incomes → Limits economic development
In 2010, women in Tanzania with a good education had half the number of children as those without education
How does education work as a strategy for population growth?
Improved education (sex education) → Higher human capital (more productive & career-focused as a result) → Higher productivity → Higher incomes → Decrease birth rate → Higher quality education (less overcrowding) → Increases economic development
Evaluate sex education as a strategy for growth & development.
- Sex education may not help if there are other societal pressures, like religion, which can prevent women from using contraception - rate of population growth can remain high
What is a savings gap?
A gap between the amount of money held at banks in savings and the amount of money that firms want to borrow from banks
What are the reasons for low savings rates in developing countries?
- Low incomes
- Low access to banks
How does the savings gap constrain growth and development?
- Low levels of investment → fall in AD & LRAS → limits real GDP → developing countries stay poor → incomes stay low → savings gap stays large
What is microfinance and how is it a strategy for the savings gap? (include real world examples)
- Small loans provided to tiny businesses who otherwise would have no access to financial services
- $102bn of microfinance given to small businesses in 2016
Increase investment → Increase productivity of capital → Right shift of LRAS → Increase economic growth → Increase economic development
Increase investment → Decrease unit costs → Decrease prices → More competitive → More profit → More corporation tax revenue → More spending on development
Evaluate microfinance as a strategy to growth and development.
- Microfinance lenders charge very high interest rates → unless these small businesses grow very quickly they will struggle to pay this back → spends any extra income repaying the loan → can’t save → savings gap
- Could also lead to bankruptcy or unemployment → Savings gap
What is the Harrod-Domar model and what does it show?
- Harrod-Domar model: describes how low incomes → low savings → which means banks don’t have enough money to lend out → low investment → keeps AD & LRAS left → low economic growth.
Low incomes → Low savings → No money in the bank to lend → Low investment → Low AD and low LRAS → Low economic growth → Low incomes
What are property rights?
The legal right to your property
What is dead capital? (how much dead capital is there globally?)
- Property without property rights
- $9.3tn dead capital globally (De Soto)
What is collateral?
- An asset given as security for the repayment of a loan
- Ensures the bank isn’t out of pocket if you don’t pay back the loan - they can take ownership of the asset
How does dead capital constrain growth & development?
- Dead capital can’t be used as collateral dead capital → people can’t borrow → can’t invest → Low investment
Low levels of investment → Decreases productivity → Left shift of LRAS → Decrease real GDP → Limits economic growth
Low levels of investment → Decrease productivity → Increase unit costs → Increase prices → Less competitive → Less profit → Less corporation tax revenue → Less government spending on development
How does assigning property rights act as a strategy for growth & development? (give case study example)
- NPTC in Colombia aims to establish government presence in remote areas e.g. through building police stations & courts → they can then assign property rights → dead capital (formerly) can now be used as collateral
Evaluate assigning property rights as a strategy for dead capital.
Studies in Argentina & Peru have found that poor people with property rights are no more likely to take out loans than those without property rights → investment stays low
How is trade liberalisation an effective strategy for growth & development?
- Removal of trade barriers
Trade liberalisation → Increased specialisation according to comparative advantage → Increases productivity → Increases output → Increases competitiveness → Increases exports → Increases injections → Increases AD → Increases real GDP → Increases economic growth
How might the removal of government subsidies be an effective strategy for promoting development?
- Subsidies have a huge opportunity cost as the government cannot spend the money on development e.g. education, healthcare.
- Subsidies can encourage inefficiency in firms as the subsidy helps make them more competitive without them actually having to become more productive
How might a switch from a fixed to a floating exchange rate be an effective strategy for promoting development?
- No need to hold large reserves of foreign currency: under a fixed exchange rate, central banks must hold substantial foreign currency reserves to maintain the rate, appreciating their currency by selling reserves & buying up their domestic currency - expensive
- Being able to have an effective monetary policy: fixed exchange rate → change in the interest rate → change the demand for the currency → changes the value of the currency away from the fixed level - floating exchange rate → use monetary policy to increase AD
- Automatic adjustment following economic shocks: floating exchange rate = a decrease in demand will decrease demand for the currency → depreciation of the exchange rate → cheaper exports → brings the demand up again
What is privatisation & might it be an effective strategy for promoting development?
- Privatisation: when government assets are sold to the private sector
Main benefits:
- Selling government assets raises revenue - can be spent on development
- The private sector has a profit incentive - they produce things more efficiently than the government → prices decrease as a result of an increase in competition - good for consumers & should increase AD → increase real GDP → economic development
What is corruption? (real world example)
- When government officials use public funds for private gain
- $300bn gone missing from Venezuela over the last 10yrs
What is a fair trade scheme?
When you buy fair trade products, part of the fair trade price you pay goes directly to the producers and so it increases their incomes → increased consumption → increased AD → increased development
What is a fair trade premium?
A communal fund that fair trade farmers can spend on whatever will develop their communities the most - no reliance on corrupt officials
How do fair trade schemes act as strategy to corruption?
- People buying Fair Trade pay a slightly higher price + some of the extra money is given directly to the producer - raises their income which → increases consumption → increases AD → increases real GDP → increases development
- Some money from Fair Trade goes to the Fair Trade Premium - a communal fund for the community to spend on development - this bypasses the government which means it is less susceptible to corruption
Evaluate fair trade schemes as a strategy to growth & development.
- Fair trade foundation doesn’t monitor how much fair trade products are sold for - one investigation found that less than 1% of the extra price made its way to the farmers → incomes stay low
What is a landlocked country?
When a country has no coasts as it is surrounded by other countries
What is debt relief?
When you tell somebody that has borrowed money from you that they no longer have to pay it back
How is being landlocked a constraint to growth & development? (give a country example)
- Burundi: has to transport goods through its neighbours - has a bad relationship with Kenya + Mozambique faces lots of wars/conflicts - had to borrow $833mil from World Bank
Landlocked → Increases shipping costs → Left shift of SRAS → Increases prices → Decreases competitiveness → Less profit → Less corporation tax revenue → Less government spending on development → Limits development
How is debt relief a strategy for landlocked countries? (give a country example)
- More money to spend on development → Improved education and healthcare → Increases development
- Heavily indebted poor country’s initiative: Burundi has to borrow $833 million from World Bank (2009) → debt was relieved in 2009
Evaluate debt relief as a strategy for growth & development.
- Despite Burundi’s debt relief, most of the extra money they had was taken by corrupt officials → less funds for development → not spent on education, healthcare etc
- Burundi hasn’t experienced growth since debt relief → GDP fell in 2018
What are foreign currency gaps? (give a country example)
- A foreign currency gap occurs when the amount of foreign currency in a country decreases - caused when net imports > net exports
- Lebanon has a current account deficit
- Exports: gold, computers, jewelery → gain foreign currency
- Imports: Saudi Arabia’s oil, UK pharmaceuticals,
How do foreign currency gaps constrain growth & development?
- Foreign currency gap - if there is low demand for Lebanese exports → low demand for Lebanese pound → high demand for foreign imports → have to sell Lebanese pounds in exchange for foreign currency
- Thus Lebanese pound depreciates → price of imports increases → SRAS decreases → cost push inflation → fall in output → economic slowdown → FDI slowdown
How is diversification of exports a strategy to foreign currency gaps?
Give real world examples.
- Ethiopia closed its currency gap (used to export mainly cocoa beans) - also exports leather, textiles, wine
- Done this by not taxing new companies for 5 years + put new schemes in place to encourage FDI
- Diversification → increased demand for Ethiopian exports which → increased demand for Ethiopian currency → Ethiopia’s foreign currency gap has closed → decreased price of imports
Evaluate diversification of exports as a strategy for foreign currency gaps (Give a country example)
- Lebanese government could immediately start spending money on new industries - can’t collect tax revenue for 5 years → impacts will only be seen in the long run
- Lebanon government will have to invest in the policy → increased national debt
How is education a constrain of growth & development?
Poor standard of education→ low levels of human capital → workers are less productive - Low productivity decreases LRAS & shift left → economy has lower productive capacity → limit real GDP → limit economic growth
Poor education → Low human capital → Lower incomes → Lower tax revenue → Less government spending on development → Limits economic growth and development
Evaluate improved education as a strategy to growth & development.
Improved education → More children in school → Less children helping parents with work → Lower income for families → Less consumption → Less aggregate demand → Decrease in real GDP → Limits economic growth in the short run
What are infant industries?
Industries which are too small to benefit from economies of scale
How are infant industries a constraint on growth & development?
- Low output -> increased average costs -> SRAS falls -> increased prices -> decreased competitiveness -> less profit -> less CPT -> less GS -> limits development
How is protectionism a strategy for infant industries?
Protects domestic producers from competitive foreign firms
Evaluate protectionism as a strategy for infant industries?
Depends on subsidies -> lower costs -> not work as hard -> fall in quantity produced -> SRAS won’t shift much
What is competitive devaluation as a strategy for infant industries?
- Competitive devaluation: when you devalue your fixed exchange rate in order to keep your exports competitive
- Two ways:
1. Sell the domestic currency
2. Decrease the interest rate - Export prices fall -> increased competitiveness with large industries -> increased profits -> decreased costs -> SRAS rises
Evaluate competitive devaluation as a strategy for infant industries?
- Currency wars - imports become expensive as exchange rate depreciates
What are the characteristics of primary products?
Example countries.
- Demand for primary products is price inelastic
- Supply is price inelastic
- Demand is income inelastic
- Madagascar e.g. vanilla
- Kenya e.g. tea
What is price instability (primary products) and its impact on growth & development?
- Price instability: small changes in the supply and demand for primary products can lead to big changes in price
- Harder for investors to predict future prices -> can’t predict future revenue -> can’t tell if their investment will be profitable -> low investment
What are the market oriented strategies for growth & development?
- trade liberalisation
- promotion of FDI
- removal of government subsidies
- floating exchange rate systems
- microfinance schemes
- privatisation
What are the interventionist strategies for growth & development?
- development of human capital
- protectionism
- managed exchange rates
- infrastructure development
- promoting joint ventures with global companies
- buffer stock schemes
What are buffer stock schemes as a strategy for primary product dependency?
Draw a buffer stock diagram.
- A scheme where the government buys and sells primary products from a market in order to reduce price fluctuations
- Decrease supply when weather is good, increases supply when weather is good
- Interventionist
- Keeps prices within a certain range (sets a floor & ceiling price), which increases price stability -> reduces price fluctuations
Evaluate buffer stock schemes as a strategy for growth & development.
- Gives producers an incentive to overproduce -> expensive to run - opportunity cost on development
- High admin costs
- High storage costs - may be perishable
What is the prebsich singer hypothesis?
- As world incomes rise → demand for manufactured & primary goods will increase → manufactured goods are income elastic → demand will increase by a lot → big increase in the price of manufactured goods → primary goods are income inelastic → demand increases by less → increases price of primary goods by less than the price increase for manufactured goods
- Since developing countries mainly export primary products & import manufactured products → price of their imports will rise by more than the price of their exports → worsens their terms of trade.
What is industrialisation?
Industrialisation occurs when the main industries in an economy shift from agricultural to manufacturing
why are manufacturing firms in developing countries are often able to make supernormal profit?
Before industrialisation, there will be few manufacturing firms in developing countries -> a new manufacturing firm is likely to be a monopsony, as they are the only firm hiring workers -> workers have no choice -> the firm can keep wages super low & still attract workers - low costs -> able to make supernormal profit
What is the Lewis model
Very few manufacturing firms → Monopsony power → Low wages → low costs → Supernormal profit → Investment → Increased productivity → Increased labour demand → Increased wages → Workers move from agriculture to manufacturing → Increases output → Increases supernormal profit for manufacturing firms
Evaluate industrialisation as a strategy for growth & development.
Real world example.
- Coca cola could be sold to foreign daughter companies & charge whatever they like -> avoid paying corporation tax in Swaziland as they’ve made no profit - transfer pricing
- Several hundred billions dollars of tax
What is the World Bank and what is their role?
How much did they loan out in 2016?
- 189 member countries
- Reconstruction loans post-war
- Development loans (recent years) - provide debt relief for these loans
- Loaned out $61bn (2016) to countries in need
What is the IMF and its role?
- World Bank formed IMF to ensure all countries are getting along
- They monitor: exchange rates, economic policies, balance of payments etc
- Greece (2010) was on the verge of collapse - $147bn IMF bailout (South Korea exports $2bn to Greece - maintains stability)
- Maintains stability in the World Economy
What are NGOs and their role?
- Seek to promote growth & development
- 10 million NGOs worldwide
- Examples : Amnesty international (human rights), Wikimedia foundation
What was agreed at the World Trade Organisation Ministerial Conference in 2013?
- The Bali Package: aims to create trade for developing countries by reducing the trade barriers that they face with developed countries
- Enables them to export more and should boost economic growth - estimated to boost world trade by about $1 trillion
