4.3 - Emerging and Developing Economies

Question 1

Measures of development

Answer 1

1. Human Development Index
2. Inequality-adjusted Human Development Index
3. Multidimensional Poverty Index
4. Genuine Progress Indicator

Question 2

Human Development Index

Answer 2

Measure of economic development calculated by the UN, based on health measured by life expectancy at birth, education measured by mean years of schooling and income measured by by real Gross National Income per capita

Question 3

Advantages of Human Development Index

Answer 3

1. Takes into account three key factors which are important for the development of a country
2. Relatively easy to calculate because governments tend to collect the statistics used in the data

Question 4

Disadvantages of Human Development Index

Answer 4

1. 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
2. No consideration for the equality of income
3. Doesn’t include other factors which affect development, for example freedom from corruption or the environment

Question 5

Inequality-adjusted Human Development Index

Answer 5

An adjustment of the Human Development Index which includes a fourth indicator of development inequality

Question 6

Multidimensional Poverty Index

Answer 6

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

Question 7

Genuine Progress Indicator

Answer 7

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

Question 8

Economic factors influencing growth and development

Answer 8

1. Primary product dependency
2. Volatility of commodity prices
3. Savings gap
4. Foreign currency gap
5. Capital flight
6. Demographic factors
7. Debt
8. Access to credit and banking
9. Infrastructure
10. Education/skills
11. Absence of property rights

Question 9

Primary product dependency

Answer 9

When a country relies heavily on the export of raw materials (primary products) such as agriculture, oil, minerals, and other natural resources, rather than manufacturing or services. Many developing countries face this issue, making their economies vulnerable to external factors

Question 10

Prebisch Singer Hypothesis

Answer 10

The long run price of primary goods declines in proportion to manufactured goods, which means those dependent on primary exports will see a fall in their terms of trade

Question 11

Dutch disease

Answer 11

When a country becomes a significant commodity producer in a short amount of time, causing an increase in demand for the currency (to enable people to buy the goods) which pushes its value up. This increases export prices and leads to a reduction in competitiveness of the economy, causing a fall in output in other areas

Question 12

Savings gap

Answer 12

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.

Question 13

Harrod-Domar model

Answer 13

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.

Question 14

Foreign currency gap

Answer 14

When exports from a developing country are too low compared to imports which are needed to finance the purchase of investment or other goods from overseas, required for faster economic growth

Question 15

Capital flight

Answer 15

When money and assets rapidly leave a country due to economic or political instability, reducing investment and weakening the economy. This can happen through legal means (such as investors moving funds abroad) or illegal means (such as tax evasion or money laundering)

Question 16

Property rights

Answer 16

Where individuals are allowed to own and decide what happens to certain resources. A lack of rights mean that individuals and businesses cannot use the law to protect their assets, leading to reduced investment. They will be unwilling to buy machinery, build factories or establish brands.

Question 17

Non-economic factors influencing growth and development

Answer 17

1. Corruption
2. Diseases
3. Poor climates and geographical terrain
4. Civil wars

Question 18

Market-orientated strategies influencing growth and development

Answer 18

1. Trade liberalisation
2. Promotion of Foreign Direct Investment
3. Removal of government subsidies
4. Floating exchange rate systems
5. Microfinance schemes
6. Privatisation

Question 19

Trade liberalisation

Answer 19

Removal or reduction of trade barriers such as tariffs, quotas, and regulations, allowing for free movement of goods and services between countries. Means that domestic industries either close or are forced to become as efficient as other world producers

Question 20

Foreign Direct Investment

Answer 20

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

Question 21

Benefits of Foreign Direct Investment

Answer 21

1. Involves the transfer of knowledge from one country to another, with the company bringing production and management techniques and training for staff which will benefit the country as a whole
2. Will create jobs and leads to the effect of the multiplier
3. Labour productivity tends to increase and wages are often higher. It is a source of investment and can help to fill the savings gap

Question 22

Drawbacks of Foreign Direct Investment

Answer 22

1. Usually a 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
2. 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
3. Environmental damage and exploitation of natural resources

Question 23

Microfinance schemes

Answer 23

Schemes aimed to give poor and near-poor households permanent access to a range of financial services , including loans, savings, insurance and fund transfers

Question 24

Interventionist strategies influencing growth and development

Answer 24

1. Development of human capital
2. Protectionism
3. Managed exchange rates
4. Infrastructure development
5. Promoting joint ventures with global companies
6. Buffer stock schemes

Question 25

Human capital

Answer 25

The skills, knowledge, experience, and abilities that workers possess, which contribute to their productivity and economic value. It includes both education and training, as well as on-the-job experience

Question 26

Protectionism

Answer 26

Government policies that restrict international trade to protect domestic industries from foreign competition. These policies limit imports through tariffs, quotas, and other trade barriers

Question 27

Impacts of protectionism

Answer 27

1. 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 2. However, it means countries 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

Question 28

Impacts of buffer stock schemes

Answer 28

1. Stabilises prices and thus encourages investment since producers can plan for the long term. It also prevents sharp falls in prices, meaning that producers are kept from falling into absolute poverty, and prevents sharp rises in prices, meaning that consumers are able to afford the good 2. However, it requires stocks to go up and down; if they keep rising, then the scheme will run out of money and if they keep falling, the scheme will run out of stocks. They require huge start-up costs , as well as administration costs and problems of storage

Question 29

Other strategies influencing growth and development

Answer 29

1. Industrialisation 2. Development of tourism 3. Development of primary industries 4. Fairtrade schemes 5. Aid 6. Debt relief 7. International Monetary Fund 8. World Bank 9. Non profit organisations (NGOs)

Question 30

Lewis model

Answer 30

Assumed that developing countries had dual economies with a traditional agricultural sector, which had low wages, low productivity, underemployment and low savings, and a modern industrial sector, with high levels of investment and urbanisation

Question 31

Industrialisation

Answer 31

Process of transforming an economy from primarily agricultural to one based on manufacturing and industry. It involves the growth of factories, mass production, and technological advancements, leading to increased economic output and urbanisation

Question 32

Benefits of development of tourism

Answer 32

1. Income elastic nature of tourism means that as the global economy grows, demand for the industry will increase even further, allowing the developing country to continue development 2. 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 3. 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 4. 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 5. Government will see higher tax revenues due to higher income and higher profits. It can provide funds to allow countries to diversify

Question 33

Drawbacks of development of tourism

Answer 33

1. 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 2. A large amount of wealth created will be withdrawn as TNCs repatriate their profits, causing problems involving capital flight 3. Country can suffer from a large number of externalities, including pollution, waste, environmental damage and impact on culture

Question 34

Impacts of development of primary industries

Answer 34

1. Provides funds to allow a country to diversify as well as allowing infrastructure development and better education 2. However, primary products are volatile and primary product dependency causes many issues. Primary industries also suffer from corruption

Question 35

Fairtrade schemes

Answer 35

Initiatives that ensure producers in developing countries receive fair prices and better working conditions for their goods. These schemes aim to promote ethical trade, sustainability, and social development by supporting small-scale farmers and workers

Question 36

Impacts of fairtrade schemes

Answer 36

1. Gives producers stability and raises their income 2. Means that child labour is not used and that production is sustainable and does not take place at the expense of environmental degradation 3. Can leave others worse off since non-Fairtrade producers see a fall in demand. In the long term, the higher price for Fairtrade goods will increase supply and thus this could bring price back down, but this will depend on the price elasticity of supply 4. Higher incomes reduces the incentive to diversify and keeps farmers engaged in low profit activities

Question 37

Tied aid

Answer 37

Aid with conditions attached, such as economic or political reforms or a commitment to buy goods from the donor country

Question 38

Impacts of aid

Answer 38

1. Able to reduce absolute poverty 2. Can fill the savings gap thus provides funds for investment, whether this be in infrastructure or in human capital 3. Can contribute to increased globalisation and trade as well as reducing world inequality 4. Some argue it results in a dependency culture where countries are unconcerned by their finances as they know they can receive aid from another country

Question 39

Debt relief

Answer 39

Partial or total cancellation, restructuring, or rescheduling of a country's external debt to make repayment more manageable. It is often granted to heavily indebted poor countries (HIPCs) that struggle to meet their debt obligations while funding essential public services

Question 40

Moral hazard

Answer 40

When an individual, business or government takes higher risks because they do not bear the full consequences of their actions. This typically happens when they are protected from the negative outcomes, such as through insurance, bailouts, or debt relief