4.3 emerging and developing economies Flashcards
what is econmic development about
improvement in living standards
what is a developed country
one with a high GDP per head and tends to be thought of as Western. high levels of education and healthcare, reliable and safe transport infrastructure and operations and high productivity and investment.
what is a developing country
one with a lower GDP per head, low levels of physical health and human capital and high levels of unemployment and underemployment. heath tends to be low with high mortality rates and high levels of population growth, due to high birth rates
what is the human development index
HDI is a measure of economic development calculated by the UN. It is a composite index based on three factors:
health as measured by life expectancy at birth
education as measured by the mean years of scooling of a current 5 year old over their lvies
inccome as measured by real GNI per capita at PPP.
advantages of HDI
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.
disadvantages of HDI
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.
no consideration for the equality of income
Also, there are other factors which affect development, for example freedom from corruption or the environment.
what is the inequality-adjusted HDI
This is an 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 multidimension poverty index
This measures the percentage of the population that is multidimensional poor . It
uses data for health, education and standard of living but uses a broader range of indicators within these categories
It highlights the countries where some areas are extremely rich but where most of the population is not and focuses on poverty .
downside of the MPI
cannot be calculated for all countries as the datra is not always available.
what is the genuine progress indicator
It is 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.
list of economic factors influencing growth and development
primary produt dependency
volatility of commodity prices
savings gap
foreign currency gap
capital fight
democraphic factors
debt
access to credit and banking
infrastructure
education / skills
absence of property rights
primary product dependency as an economic factor influencing growth and development
Primary products include agriculture, mining etc. A large amount of most developing country’s economic activity is based on a primary product.
Natural disasters can wipe out production of the primary product and so means that farmers are left with no income. They are often non-renewable, which means the country will suffer when they run out of the product.
They tend to have a low-income elasticity of demand , which means 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.
volatility of commodity prices as an economic factor influencing growth and development
Primary products tend to have inelastic demand and supply curves which means relatively small changes in demand or supply leads to huge fluctuations in price.
These large changes in price mean that producers’ income and the country’s
earnings are also rapidly fluctuating, making it difficult to plan and carry out long term investment as well as meaning that producers can see their income fall very rapidly, causing poverty.
savings gaps as an economic factor influencing 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
India is a country with a low savings as a share of GDP.
foreign currency gap as an economic factor influencing growth and development
example
This is when exports from a developing country are too low compared to imports to finance the purchase of investment or other goods from overseas required for faster economic growth.
Ethiopia. In 2018, public debt was around 60%
of GDP; most of it in foreign currency so it is possible that they will not have enough foreign currency to repay their debt. It is thought there are only enough currency
reserves to pay for a month of imports
capital flight as an economic factor influencing growth and development
Large amounts of money are taken out of the country , rather than being left there for people to borrow and invest. If money was placed in banks within the country,
then credit could be created by banks for consumers and businesses to spend
This can occur because of lack of confidence in the country’s stability, to hide it from government authorities or simply for profit repatriation.
caused argentina economic crisis in 2001.
democratic factors as an economic factor influencing 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. This means developing countries need to have higher rates of growth to develop than more developed countries would do.
The high population growth is caused by high birth rates, which 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
debt as an economic factor influencing growth and development
example of high debt country
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.
nigeria debt 52% of GDP.
access to credit and banking as an economic factor influencing growth and development
Developing countries have limited access to credit and banking compared to
developed countries, who have complex systems. This means those in developing countries cannot access funds for investment and they struggle to save for the
future.
Some families may use loan sharks, who give high interest rates and leave
individuals permanently in debt.
as an economic factor influencing growth and development
infrastructure as an economic factor influencing growth and development
in a developed country, there is a complex network of buildings, roads, ports,
railways, airports, utilities and electricity cables
oppositte in developing countries
Low levels of infrastructure make it hard for businesses to trade and set up within the country, for example if there are a lack of roads. It makes their services and
production less reliable.
education and skills as an economic factor influencing 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.
Countries like China and South Korea invested heavily in their human capital when they were developing, and this has benefitted them in the long term. Ethiopia suffers from high illiteracy rates at around only 49%.
what is the harrod-domar model
The Harrod-Domar model suggests savings provide the funds which are borrowed for investment purposes and that growth rates depend on the level of saving and the productivity of investment. It concludes that economic growth depends on the amount of labour and capital and that developing countries have a vast labour supply, so their problems are caused by capital. In order to improve capital, investment is
necessary and investment requires savings.
problems with the harrod-domar model
. Economic growth is not the same as economic development. It is difficult for individuals to save when they have little
income and borrowing from overseas causes problems with debt. It is possible that investment could be wasted
non economic factors influencing growth and development
Many developing countries suffer from corruption. Corruption means individuals will make decisions which maximise the bribes they receive as oppose to those which maximise development and output. Leaders are likely to make decisions which benefit themselves rather than benefiting the economy.
Diseases such as HIV/AIDS and malaria have negative impact on economic growth.
Countries with poor climates and geographical terrain may suffer from natural disasters and it may be difficult for farmers or to set up businesses.
civil wars.
trade liberalisation as a strategy to influence growth and development
Countries can aim for export led-growth
Removing trade barriers will mean that domestic industries either close or are forced to become as efficient as other world producers. Resources will be allocated to their best use where the country has a comparative advantage.
promotion of FDI as a strategy to influence growth and development
FDI is investment by one private sector company in one country into another
private sector company in another . It includes direct acquisition of a foreign firm, construction of a facility, investment in a joint venture with a local firm or licensing of
intellectual property.
Firms tend to undertake FDI because production costs are lower in developing countries and because it enables them access to a new market.
It is different from a loan because if the investment fails, it is the company who has to deal with it and the country does not owe money to foreigners.
also creatres jobs and can help fill the savings gap.
downside to fdi as a strategy to influence 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.
removal of government subsidies as a strategy to influence growth and development
They can be an effective way of minimising absolute poverty and ensuring a minimum
standard of living but they create many problems.
They are often poorly targeted since subsidies on basic goods like rice will benefit everyone in the country, not just the poor
Subsidies to farmers and producers tend to lead to inefficiency and if they are given a large amount over a long period of time, the subsidy becomes ineffective in increasing development
floating exchange rates as a strategy to influence growth and development
In these systems, market forces determine the currency. The country does not have to worry about their gold and foreign currency reserves and the government does
not intervene.
downside to floating exchange rates as a strategy to influence growth and development
However, there are problems with this. It means that the currency can be volatile which makes it difficult for exporters/importers to make decisions about the future and can cause large changes in macroeconomic variables, including economic
growth.
privatisation as a strategy to influence growth and development
Privatisation can end the corruption within a firm who is owned by the state, as well as encouraging them to be more efficient by increasing competition.
Selling off a firm, particularly if it is loss making, will improve government finances
and reduce levels of debt.
development of human capital as an interventionist strategy to influence growth and development
This would provide workers with skills and training and thus help them to be more
efficient and improve productivity
Human capital could be developed through schools or vocational training, whether this be apprenticeships or simply classes provided for business people.
Higher skills would allow the country to develop from the primary sector to a manufacturing sector, overcoming primary product dependency.
Better education also improves quality of life.
protectionism as an interventionist strategy to influence growth and development
Protectionism allows domestic industries to grow by keeping foreign goods out and protects them from strong competition.
This will create jobs in the short run and will allow the industry to develop, perhaps
to the extent where the barriers can be removed , and the industry can compete
globally
downside to protectionism as an interventionist strategy to influence growth and development
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.
managed exchange rates as an interventionist strategy to influence 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. There could be an even lower one for exports.
A high exchange rate for essential products will mean that the price within the country is low,
which helps to reduce poverty if the goods are consumer goods and encourages investment if they are capital goods.
A lower exchange rate for other imports will mean that the price of these goods within the country is higher, discouraging their import and encouraging consumers to buy from domestic producers.
downside of managed exchange rates as an interventionist strategy to influence growth and development
The problem with these tiered exchange rates is that they often fail to work in practice; black markets in foreign exchange develop which can destabilise the system and corruption becomes an issue, when government officials buy currency at one exchange rate and sell it for profit at another
infrastructure development as an interventionist strategy to influence 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.
downside to infrastructure development as an interventionist strategy to influence growth and development
the 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.
industrialisation to influence growth and development
the lewis model suggested that the modern industrial sector would attract workers from rural areas by offering higher wages. Lewis believed that labour productivity was so low in agricultural areas that people leaving the area would have no impact on output and would in fact mean there was a surplus of food, since the same amount was being shared amongst less people. Those who moved to the urban areas would have
higher incomes and thus more savings for investment.
believed savings and investment were the key to growth and thus growth
could be achieved through rural-to-urban migration.
It can be argued that industrialisation is a result of development , rather than a cause.
development of tourism as a method to influence growth and development
also the effects (positive)
countries can take advantage of their climate and geography and develop a tourist industry. the Caribbean. This provides them with the
funds to develop their economy and improve living standard
Tourists represent a source of foreign currency, which will fill the currency gap. so countries will be able to fund their imports without negative consequences.
Countries are likely to attract investment from transnational hotel companies, who will also bring knowledge with them. It can help to fund improvements in infrastructure, as tourism requires reliable electricity, airports, clean water etc. and so the government have an incentive to provide this.
Jobs are created locally since the tourism industry relies on low skilled workers who know the local area, rather than to high skilled workers which may be sourced from abroad
The government will see higher tax revenues due to higher income and higher profits.
counter argument to tourism as a way to growth and develop
However, the industry is seasonal and involves low skilled, low paid jobs which means the effect of the multiplier is limited. Tourism destinations can go in and out of fashion , meaning some areas will see a loss of employment and that investment may only receive a short-term return.
info on the world bank
founded at the Bretton woods conference after the second world war. aims to bring about long-term development and a reduction in poverty.
made up of many smaller institutions including the international finance corporation and the international development association.
the world bank has funded over 12k development projects since 1947 through interest free loans and grants and supports long term human and social development.
info on the IMF
the IMF was set up in the Bretton Woods Conference but it was
not set up to promote economic development, instead to ensure that exchange rate systems work well.
They provide loans to help countries when there are international exchange rate crises or when they cannot afford to pay off their international debt.
When providing loans, the IMF insists that countries make macroeconomic reforms to resolve the problems
The IMF also provides advice which aims to bring about economic stability and raise living standards and help countries to develop their economic institutions through training and technical assistance
info on NGO’s
These are non-profit organisations that are run independently from the
government.
they can provide direct assistance to countries in the form of project work,
for example Oxfam or CAFOD
they can act as pressure groups to lobby governments to adopt more pro-development strategies.
downside of NGO’s
it is believed that they alone can never solve the
problem, it is the government who has to fix the issues.
many see them as having an anti-capitalist agenda which blames
problems on the World Bank, the IMF and the WTO. This causes divisions in the development project and is also an issue since past experience suggests global capitalism is the best system for development.
