4.3 - Emerging and developing economies Content Flashcards

Question 1

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4.3 - Emerging and developing economies

What is economic development?

Answer

A

An increase in living standards in a country

Question 2

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4.3 - Emerging and developing economies

What is the difference between Economic Growth and Economic Development?

Answer

A

Economic growth - an increase in the total value of goods and services produced in an economy in a year
Economic development - an improvement in living standards and economic welfare over time. Most common measure being HDI

Question 3

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4.3 - Emerging and developing economies

What does the difference between HDI and IHDI represent?

Answer

A

The ‘loss’ in potential human development because of poverty.

Question 4

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4.3 - Emerging and developing economies

What is the Human Development Index (HDI) based on?

Answer

A

Health as measured by life expectancy at birth.
Education as measured by the expected years of schooling.
Income as measured by real GNI per capita at purchasing power parity.

Each of these three indicators are given equal weighting and a mean is taken to give a figure between 0 and 1. The higher the number, the greater the development.

Question 5

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4.3 - Emerging and developing economies

What are some advantages of the Human Development Index?

Answer

A

It is a composite indicator which provides a more useful comparison metric than single indicators do
It incorporates three of the most important metrics for households i.e. health, education and income
It is widely used all over the world which provides an opportunity for meaningful comparisons
It provides a goal for governments to use when developing their policies e.g. it may help identify that the education levels are holding back improvements to the HDI and government policy can target that
It provides citizens with an understanding of how their quality of life compares to other countries
** Comparisons over time can be made**

Question 6

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4.3 - Emerging and developing economies

What are some limitations of the HDI

Answer

A

It does not measure the inequality that exists as it uses the mean GNI/capita - doesn’t show Income inequality
It does not measure or compare the levels of absolute and relative poverty that exist
For many countries it does not provide useful short-term information as gathering the data required for the calculation is difficult. This means the data often lags reality by several years
PPP values change quickly and so the numbers can become inaccurate
Doesn’t show political freedoms – gender opportunities and human rights
Equal weighting of indicators may not show the countries priorities

Question 7

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4.3 - Emerging and developing economies

What are some other measures of development

Answer

A

IHDI - inequality adjusted HDI
* Will be equal to HDI when there is no inequality, but falls as inequality rises. Never greater than HDI
* Provides greater insight into differences in human development that exist in a country as oposed to average human development

MPI - Multi-dimensional Poverty Index (MPI)
* It measures the complexities of poor people’s lives,
* Tracks deprivatiion across 3 dimensions - Health (child mortality), education (years of schooling) and living standards (access to clean water). Has 10 indictors within these dimensions
* Household is poor if they have 1/3 or more of the wieghted indicators

Question 8

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4.3 - Emerging and developing economies

What are the factors influencing growth and development?

Answer

A

Primary product dependency
Volatility of commodity prices
The savings gap: Harrod-Domar model
Foreign Currency Gap
Capital Flight
Demographic factors
Access to credit and banking
Infrastructure
Debt
Education and skills
Absence of property rights

Question 9

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4.3 - Emerging and developing economies

What are some the problems with primary product dependency? Give the example of Ghana?

Answer

A

In 2022 copper exports from Zambia accounted for 70% of their total exports and primary products in excess of 90%. They are suffering from over-specialisation
Primary products tend to have a very low-income elasticity of demand (YED). As world income rises, there is a less than proportional increase in demand
* This means that there is limited scope to continue increasing demand
Primary products have very little added value
- Exporting manufactured products raises the added value, incomes and profits
Natural disasters – can wipe out production of the primary product
Often non-renewable. So country suffers when they run out of the product. Natural resources – limited supply
Prebisch-Singer Hypothesis - more on other flashcard
Dutch disease - more on other flashcard

Question 10

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4.3 - Emerging and developing economies

What is the Prebisch Singer Hypothesis

Answer

A

**The Prebisch Singer Hypothesis suggests the long run price of primary goods declines in proportion to manufactured goods. **
Manufactured goods are more YED ELASTIC
which means those dependent on primary exports will see a fall in their terms of trade.
This leads to a fall in purchasing, might lead to balance of payments problems and fall in living standards in the future.
However, in recent years, there has been a rise in the prices of some key commodities, such as food, cocoa and oil and a fall in prices of some manufactured goods due to the expansion to places like China.

Question 11

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4.3 - Emerging and developing economies

What is Dutch disease

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A

Dutch disease refers to the negative economic impact that can occur when a country experiences a resource boom (such as discovering large oil reserves). This boom can lead to a stronger currency and higher wages, which in turn makes the country’s other exports less competitive on the global market. As a result, other sectors, like manufacturing, may decline.

Question 12

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4.3 - Emerging and developing economies

How could the negative impacts of primary product dependence be evaluated? Why might primary product dependence not be so bad?

Answer

A

LEDCs may have a comparative advantage in primary products
- Therefore should continue to develop in areas which they are strongest.
- Argument given by the Bad Samaritans
Some rich countries have been able to use primary products to develop
- Saudi Arabia and oil. - Primary product revenue should be used to reinvest into manufacturing.
Forward markets can be used to fix prices in advanced to reduce volatility and risk.
Not all primary products have a low YED - Diamonds in Botswana.
Primary products rose steeply in price between 2000-2008 while prices for manufactured goods was falling. They also rose post-pandemic.

Question 13

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4.3 - Emerging and developing economies

What is the problems with voltality of commodity prices

Answer

A

Due to the inelastic nature of both the demand and supply of commodities, small changes in demand or supply can lead to large changes in price
In 2020, 25% of Bolivia’s GDP was generated by exports. Commodities accounted for 60% of its exports
- When commodity prices rise, GDP rises - and vice versa
A more diversified range of exports prevents this
Volatility of prices mean that producers income and countries earning are rapidly fluctuating. Making it difficult to plan and carry out long term investment. Rapid falls in producers incomes causes poverty. Investment down and so is confidence so decrease in real GDP
When prices of commodities rise for a number of years – causes over investment in the production of the commodity causes long term risk when the price eventually falls

Question 14

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4.3 - Emerging and developing economies

What are the problems with the savings gap

Harrod-Domar

Answer

A

Developing countries have lower incomes and thus they save less. So therefore there is less money for banks to lend, reducing borrowing and thus reducing investment/consumption. A savings gaps is the difference between the actual savings and the level of savings needed to achieve a higher growth rate

In the 1950’s two economists identified the savings gap as a major constraint on growth
The Harrod-Domar model identified the following benefits of increased savings
- Increased savings → increased investment → higher capital stock → higher economic growth → increased savings
Based on this, any intervention (foreign or governmental) to increase the capital stock in an economy will lead to growth

Question 15

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4.3 - Emerging and developing economies

What are 3 criticisms of the Harrod-Domar model

Answer

A

It does not account for many other factors such as labour productivity, corruption, technological innovation
It was created based on data from wealthier industrialising nations as opposed to very poor undeveloped countries
It focused only on physical investment and ignored other types such as investment in human capital (labour)

Question 16

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4.3 - Emerging and developing economies

What is the Harrod Domar Model? DRAW

Answer

A

Emphasis on the importance of savings in the economy.

Question 17

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4.3 - Emerging and developing economies

What is a foreign currency gap?

Answer

A

A foreign currency gap happens when currency outflows persistently exceeds currency inflows.
If exports are low in either quantity or value, there will not be enough foreign currency to buy the necessary imports

Question 18

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4.3 - Emerging and developing economies

When does a foreign currency gap occur (three reasons)

Answer

A

When a counry runs a persistent current account deficit
When there is an outflow of capital from investors - capital flight
There is a fall in the value of inflows of remittances

Question 19

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4.3 - Emerging and developing economies

Why is a foreign currency gap a problem?

Answer

A

Country does not have enough foreign currency to pay for essential imports such as medicines, food
And other raw materials and replacement component parts for basic machinery.
The country might not be able to pay off debts and might have to default/seek loan from IMF - bad for credit rating and makes it difficult to seek loans in the future

Question 20

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4.3 - Emerging and developing economies

How can you fill a foreign currency gap?

Answer

A

Can be solved by FDI
Or foreign aid to increase the amount of foreign currency in the economy

Question 21

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4.3 - Emerging and developing economies

What is capital flight?

Answer

A

Occurs when money or assets rapidly leave a country
This may happen due to political upheaval, economic sanctions, war, or changes to government policy (e.g. interest rates). Or lack of confidence in country’s stability, hide it from the government or for profit repatiration
From Feb 2022 to June 2023 Russia had a net capital outflow of $253 billion due to invasion of Ukraine

Question 22

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4.3 - Emerging and developing economies

Why is capital flight a problem

Answer

A

It creates a savings/foreign currency gap, which reduces Investment and the ability to fund imports.
Might make it impossible to pay off debts. Will have to seek an IMF bailout
Reduces any tax inccomes for the government from the withdraw of savings/financial investments.

Question 23

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4.3 - Emerging and developing economies

How does demographic factors influence growth and development

Answer

A

If the dependency ratio is high it means there is less money available for savings and investment
Many developing countries have high dependency ratios
Developing countries have higher population growth, which limits development. IF population grows by 5%, the economy needs to grow by 5% to keep living standards the same

Question 24

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4.3 - Emerging and developing economies

Why does poor access to credit and banking hinder economic growth?

Answer

A

No way to gain loans for spending, or investment
People cannot save money
Poor families have to resort to loan sharks with punitive interest rates, leaving them in debt. Cements people in poverty.

However,
* Technology might allow people to gain access to financial systems via mobile phone instead of physical branch.
* Microfinance encourages people to take out loans for investment.

Question 25

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4.3 - Emerging and developing economies

What are the problems with poor infrastructure?

Answer

A

Difficult to move raw materials, labour - high costs, not profitable.
Lack of water and energy makes it impossible to run factories.
Lack of communications technology means buyres and sellers cannot communicate.
Therefore deters foreign investment.
Expensive to improve and also conflicts with environmental goals
Makes service and production less reliable if the roads are bad for example

Question 26

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4.3 - Emerging and developing economies

How can poor infrastructure be evaluated

Answer

A

Foreign aid/loans can be used to improve infrastructure - Belt and Road Initiative and World Bank Loans.
Foreign investors will improve infrastructure where there are valuable raw materials.
- Chinese belt and road. - Building a new high speed rail from Nairobi to Mombasa

Question 27

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4.3 - Emerging and developing economies

What are some of the problems with government debt?

Answer

A

High levels of borrowing crowds out the market.
- Raises interest rates or creates competition for resources.
- Firms want to borrow to expand but crowded out
Opportunity cost - paying off loans means that less can be spent on education and infrastructure.
- Higher taxes needed to pay off government debt - reduces business confidence and restrains growth.
May create a debt cycle for developing countries - interest is so high that the country can never repay - e.g. Ferdinand Marcos. Creates intergenerational inequality

Question 28

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4.3 - Emerging and developing economies

What are the problems with poor education and skills?

Answer

A

Human capital (Gary Becker)
- Adequate human capital ensures the economy can be productive and produce goods and services of a high quality. It helps generate employment and raise standards of living.
- 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%. (Unesco)
Investing in this supply-side policy increases the potential output of the country (shifts the production possibility frontier outwards)
Higher education/skill levels → higher human capital → increased productivity → higher output → higher income

Question 29

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4.3 - Emerging and developing economies

How can poor education and skills be evaluated?

Answer

A

Education and skills can be improved - Oportunidades programme in Mexico and Bolsa Familia in Brazil
Foreign aid can also be used

Question 30

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4.3 - Emerging and developing economies

How can the savings gap be evaluated?

Answer

A

Savings gap can be filled by FDI, aid or debt cancellation, e.g. FDI flows to Africa in 2014 were about $60bn.
Microfinance

Question 31

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4.3 - Emerging and developing economies

How is absence of property rights a factor that influences growth and development

Answer

A

In many countries, property is the main household asset which can be used to secure loans or generate income
A lack of property rights in some developing countries prevents this from happening
Loss of property rights in Zimbabwe led to economic collapse

Question 32

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4.3 - Emerging and developing economies

What are some non-economic factors taht affect economic growth and development

Answer

A

Corruption
Poor Governance
Wars
Political instability
Geography
Disease

Question 33

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4.3 - Emerging and developing economies

How is corruption a factor in economic growth and development

Answer

A

This is a major problem in many countries. Often money intended for investment is siphoned off by corrupt politicians resulting in a lower level of investment. Corruption alsodiverts fundsto certain groups who have bribed or lobbied officials (e.g. multinational firms) resulting in projects that deliver alow level of growth and development

Question 34

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4.3 - Emerging and developing economies

How is poor governance a factor in economic growth and development

Answer

A

Leads to inefficient use of resources and poor decision-making. It may also result in laws/regulation which directly inhibit growth and development

Question 35

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4.3 - Emerging and developing economies

How is wars a factor in economic growth and development

Answer

A

Conflict destroys infrastructure, disrupts supply chains and often reduces the post war supply of labour. Conflict shifts the production possibility curve inwards

Question 36

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4.3 - Emerging and developing economies

How is political instability a factor in economic growth and development

Answer

A

If governments keep changing, it results in constantly changing policies and priorities. It alsoreduces confidencein the economy and international investors are slower to invest as they are fearful of losing their investment

Question 37

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4.3 - Emerging and developing economies

How is geography a factor in economic growth and development

Answer

A

It is harder for landlocked countries to generate economic growth. Often transportation and administration costs are higher than those with access to ports, which increases the costs of production and decreases international competitiveness. Natural terrain can also be a limiting factor e.g the arid, mountainous terrain of Pakistan

Question 38

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4.3 - Emerging and developing economies

How is disease a factor in economic growth and development

Answer

A

HIV/AIDS and malaria have a negative impact on economic growth

Question 39

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4.3 - Emerging and developing economies

Synoptic point of factors of economic growth and development

Answer

A

Factors limiting development include microeconomic ones like inelastic demand and supply for commodities, and macroeconomic ones such as high debt levels. These factors limit growth and development overall.

Development improves conditions for individuals through higher incomes and for firms through increased sales.

Question 40

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4.3 - Emerging and developing economies

What are some market-oriented strategies to help growth and development

Answer

A

Fiscal discipline - greater control on government spending, defcitis and debt
Reallocating state spending away from subsides - to health care, education, infrastructure
Tax reforms
Liveralising market interest rates
Floating rather than fixed exchange rate
Trade liberalisation
Privitisation
Foreign direct investment
Subsidiy removal
Microfinance

Question 41

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4.3 - Emerging and developing economies

What is trade liberalisation

Answer

A

Involves a country lowering import tariffs and relaxing import quotas and other forms of protectionism. One key aim is to make an economy more open to trade and investment so that it can engage more directly in regional and global economy.

Question 42

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4.3 - Emerging and developing economies

Diagram of effects of removing an import tariff on cars maybe as part of a new trade agreement

Answer

A

Removing a tariff (ceteris paribus) leads to:

A fall in market prices from P1 to P2
An expansion of market demand from Q2 to Q4
A rise in the volume of imported cars (no longer subject to a tariff) to a new level of Q1-Q3
A contraction of domestic production as demand shifts to relatively cheaper imported products
A gain in overall economic welfare including a rise in consumer surplus
There is a fall in the producer surplus going to domestic manufacturers of these cars

Question 43

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4.3 - Emerging and developing economies

What are the micro effects of trade liberalisation

Answer

A

Lower prices for consumers/households which then increases their real incomes
Increased competition/lower barriers to entry attracts new firms
Improved efficiency - both allocative & productive
Might affect the real wages of workers in affected industries

Question 44

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4.3 - Emerging and developing economies

What are the macro effects of trade liberalisation

Answer

A

Multiplier effects from higher export sales
Lower inflation from cheaper imports - causing an outward shift of short run aggregate supply
Risk of some structural unemployment/occupational immobility
May lead to initially to an increase in the size of a nation’s trade deficit

Question 45

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4.3 - Emerging and developing economies

Points of potential gains from free trade

Answer

A

Lower prices
Economies of scale
Increased market competition
Improved allocative efficiency

Question 46

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4.3 - Emerging and developing economies

Evaluation of potential gains from free trade

Answer

A

Lost tariff revenues
Financing costs for necessary infrastructure
Regulatory refroms for common product standards
Local businesses may suffer loss of profit/jobs when facing stronger competition

Question 47

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4.3 - Emerging and developing economies

What is Foreign Direct Investment

Answer

A

Investment by one private sector company in one country into another private sector company in another country.

Question 48

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4.3 - Emerging and developing economies

Main gains from attracting inflows of FDI

Answer

A

Technology transfer- Firms bring technologically advanced capital from a more developed country - reduces primary dependances
Current account balance improves - As more is exported
Increased (I) AD - Growth and tax revenues.
Fill a foreign currency gap
Improved infrastructure - MNCs will want road/rail to transport any goods that they produce - also in power sector
Higher capital intensity/capital deepening I.e. more capital per worker leads to higher productivity
Better training for local workers leading to improved human capital and less risk of structural unemployment
Investment grows a country’s export capacity
More competition in markets which then lowers prices for consumers and increases their real incomes
Creates new jobs leading to higher per capital incomes and increased household savings
FDI can promote a shift to higher productivity jobs and high value-added industries

Question 49

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4.3 - Emerging and developing economies

Main risks from policies designed to attract investment into an emerging economy

Answer

A

Multinationals wield power within host countries, and they gain favourable laws & regulations
Foreign multinationals take advantage of weak laws on environmental protection
Multinationals have been criticised for poor working conditions in foreign factories
Profits made in an LEDC are often repatriated to the host country
Imports of components/capital goods initially have a negative effect on a country’s trade balance
Multinationals may only employ local labour in lower skilled jobs
Inequality – profits from FDI flow disproportionately to powerful elites
Many global corporations use tax avoidance techniques to increase their profits
Ethical standards form TNC’s may be poor – especially in mining, farming and textiles

Question 50

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4.3 - Emerging and developing economies

What are some policies designed to attract foreign direct investment

Answer

A

Attractive rates of corporation tax
Soft loans and tax relief/subsidies
Trade and investment agreements
Flexible labour force + skilled workers
Creation of Special Economic Zones
High quality critical infrastructure
Open capital markets for remitted profits
Attraction of relativaly low unit labour costs

Question 51

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4.3 - Emerging and developing economies

What are the pros of removing a government subsidy

Answer

A

Market Efficiency
- Restores market efficiency by aligning prices with true supply and demand.
- Prevents overproduction, promoting long-term market stability.
Encourages Innovation and Efficiency:
- Encourages innovation and cost-effective practices, enhancing long-term competitiveness.
- Eliminates reliance on guaranteed income, reducing complacency among businesses..
Reduces Fiscal Burden and Corruption:
- Reduces subsidy dependency, allowing government funds to be redirected to critical sectors like education and healthcare.
- Minimizes corruption risks by curbing misallocation of financial support.
Environmental Benefits:
- Mitigates environmental harm by reducing intensive farming practices, preserving soil, forests, and biodiversity.
- Aligns energy prices with environmental costs, encouraging cleaner energy alternatives.
Accurate Pricing and Behavioral Incentives:
- Aligns energy prices with environmental costs, promoting sustainable consumption.
- Improves food choices by reducing the unintended shift toward less nutritious options.
Improved Producer Resilience:
- Farmers can enhance efficiency and access markets by diversifying income, adopting technology, or forming cooperatives.

Question 52

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4.3 - Emerging and developing economies

What are the cons of removing a government subsidy

Answer

A

Economic Hardship for Producers
- Leads to a sharp decline in farm incomes, limiting investment in innovation and sustainability.
- Increases risks of business closures, unemployment, and rural poverty, particularly for small-scale farmers.
Food Security Risks
- Reduced agricultural output may worsen malnutrition and food shortages for low-income groups.
- Decline in export surpluses could negatively impact trade balances and foreign exchange earnings.
Higher Consumer Prices
- Rising food and energy costs disproportionately affect poor households, worsening inequality.
- Consumer surplus declines as prices rise, leading to welfare losses.
Short-Term Instability
- Sudden subsidy removal may cause supply shocks, price volatility, and social unrest (e.g., protests over fuel or bread prices).
Potential Environmental Trade-Offs
- Desperate producers might resort to unsustainable practices (e.g., illegal logging) to offset lost income, worsening environmental damage.
Transition Challenges
- Lack of alternative safety nets (e.g., unemployment benefits) in developing economies could deepen poverty during the adjustment period

Question 53

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4.3 - Emerging and developing economies

Arguments to choose a floating exchange rate system

Answer

A

Floating exchange rates help countries absorb external shocks by adjusting currency values, boosting export competitiveness during crises.
They reduce the need for central bank interventions and large foreign reserves, easing monetary policy management.
Floating systems attract foreign investment by eliminating the need for capital controls on currency flows.
Market-determined exchange rates are not inherently volatile and prevent unsustainable defense of fixed rates.

Question 54

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4.3 - Emerging and developing economies

Arguments against choosing a floating currency

Answer

A

A floating currency suits countries with a low trade-to-GDP ratio, as exchange rate fluctuations have a smaller impact on trade balance and inflation.
Smaller nations or those with limited reserves may prefer a shared currency, like the euro, for stability.
Economies with a dominant trade partner might favor a pegged currency to maintain trade advantages.

Question 55

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4.3 - Emerging and developing economies

What are the different types of microfinance products

Answer

A

Micro-credit - small scale loans
Micro-savings - savings clubs provided by charoities
Micro-insurance - safety net to prrevent people from falling back into extreme poverty
Remittance management

Question 56

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4.3 - Emerging and developing economies

What are the benefits of micro-credit

Answer

A

Helps overcome the savings gap which limits entrepreneurship
High rates of repayment because the system is built on social capital/trust
Provides loans to people that would otherwise be able to recieve them - e.g. women.
Provides money for investment and entreprueneurial activity
Helps the poor to increase their incomes so reduces poverty and increases standards of living, e.g. means poor families can afford school fees.
Should increase growth and reduce unemployment.

Question 57

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4.3 - Emerging and developing economies

What the disadvantages of micro-credit

Answer

A

Low success rate for new small businesses
Alleged forcible collection of debt in many villages – this is hard to monitor
Perhaps relatively ineffective compared to the impact of migrant remittances & foreign direct investment
May be difficult to get off the ground because locals don’t want to take a risk and get into debt.
Lack of education may mean locals don’t understand what micro-finance loans are and what the terms are.
Micro-creditors may take advantage of debtors and charge extortionate rates of interest - India’s SKS charges between 23-35%.
Not actually used for investment - instead used to pay for weddings, school fees.
Mental health issues.
Reduction in other forms of aid

Question 58

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4.3 - Emerging and developing economies

What are the benefits of privatisation

Answer

A

Private companies have a profit incentive to cut costs and be more productively efficient - no more corruption
Government gains revenue from the sale of assets and no longer has to support a loss-making industry
If a state monopoly is replaced by a number or firms this extra contestability in an industry will lead to lower prices which helps to increase the real incomes of poorer households
The competitiveness of the macro economy may improve especially if privatisation leads to increased investment and benefits from economies of scale. Improved competitiveness will then drive higher exports and long run GDP growth

Question 59

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4.3 - Emerging and developing economies

What are the disadvantages of privatisation

Answer

A

Social objectives are given less importance because privately-owned firms are driven by the profit motive
Some activities are best run by the state operating in the public interest because they are strategic parts of the economy e.g. water supply, steel and railways and have the characteristics of a natural monopoly
Government loses out on dividends from any future profits
Public sector assets are often sold cheaply, and the privatisation may suffer from corruption
Privatisation leads to job losses as firms increase their efficiency – this increases the risk of poverty for those affected especially if they are structurally unemployed
Unless privatised corporations are regulated effectively, there is a risk of creative private monopolies who use their market power to increase prices and profits, this can have a regressive effect on the distribution of income.

Question 60

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4.3 - Emerging and developing economies

Economic justifications for Brazil imposing high import tariffs

Answer

A

Protecting domestic industries . This can help to ensure that domestic industries are able to grow and develop, and that they are not undercut by cheaper imports. (Import substitution / infant industry argument)
Generates tax revenues for the Brazilian government. revenue can fund investment in infrastructure, provision of public & merit goods
Import tariffs can support domestic jobs and investment and thereby promote growth & development by lifting per capita incomes

Question 61

Q

4.3 - Emerging and developing economies

Risks / disadvantages of the Brazilian government using protectionism as a growth and development strategy.

Answer

A

Higher prices: Tariffs can lead to higher prices for consumers which reduces real incomes and can worsen relative poverty.
Productive inefficiency: Protectionism can lead to emergence of X-inefficiencies and reduced innovation / dynamic efficiency
Risk of tit-for-tat trade wars: Where countries impose tariffs on each other’s goods with escalating measures. (Game theory)

Question 62

Q

4.3 - Emerging and developing economies

What are the benefits of improved human capital

Answer

A

Enhanced Productivity: Human capital development, particularly in education and skills training, increases the productivity of the labour force.
Poverty Reduction: By improving the skills and employability of the population, human capital development enables individuals to secure higher wages.
Innovation and Technological Advancement: A well-educated and skilled workforce is more likely to engage in research, development, and innovation.
Foreign Direct Investment (FDI): Companies are more likely to invest in countries with a well-educated and skilled workforce, as it reduces their training costs and improves the overall business environment.
Economic Diversification: A skilled labour force can reduce a country’s reliance on a single industry or sector, making its economy more resilient.

Question 63

Q

4.3 - Emerging and developing economies

Barriers to Completing Education

Answer

A

Financial Barriers: Many families in low-income countries struggle to afford school fees, uniforms, books, and transportation. This can lead to children dropping out of school to contribute to household income.
Lack of Access to Schools: In rural and remote areas, schools may be inaccessible or too far from students’ homes.
Quality of Education: Inadequate resources, poorly trained teachers, and overcrowded classrooms can result in a low-quality education.
Gender Disparities: Gender bias often prevents girls from attending school, particularly in societies where traditional roles and early marriage are common.
Cultural and Social Norms: Some cultural norms and practices may prioritize child labor or discourage education, particularly for girls or marginalized groups.

Question 64

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4.3 - Emerging and developing economies

What are some strategies to improve human capital

Answer

A

Strategies to improve nutrition and reduce the extent of stunted growth among young people
Other health interventions can increase school attendance - a famous study in Kenya by Esther Duflo found that deworming in childhood reduced school absences while raising wages in adulthood by as much as 20%
Increased investment in primary and secondary schooling
Incentives to attract an inflow of skilled migrant workers and curb ‘brain drains’ of highly qualified people
Investment in training to re-skill people at risk of structural unemployment from the fast-changing pattern of employment including robotics and AI
Cash transfer interventions can increase demand for education, especially among the poorest families who must make hugely difficult decisions about how to spend a meagre budget

Answer 65

A

Above equilibrium price

Reduce import costs and input prices (increased competitiveness)
A more stable currency - encouarges investment as firms know in advante their export revenues and imported input costs
Make debt easier to repay.

Below equilibrium price

Keep goods cheap to make exports more internationally competitive.
Encourage FDI
Prevents primary product exports from appreciating exchange rates - Dutch disease (If set below equilibrium)

General
* Price Stability: If a currency is depreciating, it can lead to higher inflation due to increased import prices. Central banks can use interventions to moderate these fluctuations and maintain price stability.
* External shocks mitigation: A managed floating exchange rate helps developing and emerging market countries withstand external shocks. These include changes in global commodity prices or economic crises in major trading partners, by allowing the currency to adjust to shifting external conditions.

Answer 66

A

Not all countries have central banks with sufficient reserves of gold and foreign currency to make intervention in a currency market effective.
There can be political pressure on central banks to intervene in the foreign exchange market for short-term political gains, which may not be in the long term economic interest of the country.
Other countries might regard managed floating as a form of trade protectionism which in turn might lead to the risk of retaliatory action
Maintaining a managed exchange rate may reduce the incentive for a country to implement necessary economic reforms. Governments may rely on the exchange rate as a temporary fix rather than addressing structural issues.

Answer 67

A

Navigate around exploitation by TNCs.
The government can insist that any investment that takes place has to be in joint venture with a local company. shared ownership
Profits always stay in the country and the circular flow, knowledge and infrastructure is retained.
Access to better technology and expertise: Can help developing countries to improve labour productivity and competitiveness. This will lift per capita incomes. (Improved human capital / knowhow)
Job creation: Joint ventures can create jobs. This helps to reduce unemployment, creates positive multiplier effects, raises factor incomes and can generate extra tax revenues for the government.
Savings Gap and Export Potential: Investment linked to joint ventures helps to overcome a domestic savings gap. And can promote an increase in productive capacity and capabilities.

Answer 68

A

One way to reduce MNCs exploiting developing countries is by making foreign firms establishes joint ventures with local firms - shared ownership
- This obliges the MNCs to share profits with a local firm
As a result, not all of the profits are sent back to a foreign country
Also results in a transfer of knowledge from the MNC to the firm in the developing countries

Answer 69

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Dominant partners: Potential ceding of control to multinational organisations who might take a majority stake in the joint venture.
Joint ventures might lead to exploitation of workers and the environment in low-income nations. Much depends on the quality of government & extent of corruption

Answer 70

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Schemes run by the government, a group of countries or a group of producers to stabilise the price of a product.
- E.g. International Cocoa Organisation (ICCO), International tin council (ITC)
They buy and sell on the open market to maintain minimum and maximum prices of the product.
Buffer stock schemes operate in commodity markets where prices are volatile.

Answer 71

A

Cobweb theorum - This year’s output is based on last year’s prices.
- Producers assume that high prices will persist - they all invest and increase their output. Leads to a fall in prices.
- Produces assume that low prices persist - they will decrease their output, increasing the price.
Inelastic demand and inelastic supply
- Price changes are more than proportionate.

Answer 72

A

There is a price ceiling and a price floor
If the price goes above the price ceiling (P2), buffer stock scheme sells x-y of stock to bring down price below the price ceiling.
If price goes below price floor (P1), buffer stock scheme buys a-b of stock to maintain price above price price floor.

Answer 73

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Under this system, the scheme tries to maintain the price at a target price Pt.
If supply > S1 the scheme buys up A-B to maintain the price target.
If supply < S1, the scheme sells back E-F to the market to maintain the price target.

Answer 74

A

Stabilises income of producers
Protects jobs
Stabilises prices for consumers - some commodities are necessities - e.g. wheat, rice.
Improves the balance of payments - importnant for countries that are primary product dependent.
Reduces monopsony power of buyers, e.g. MNCs and coffee.
- Firms can force prices up
Investment: When prices are stable, producers are better able to plan and invest, in new capital which can lead to increased yields and improved quality. This, in turn, can lead to higher per capita incomes and a reduction in extreme poverty.
Food security: In low-income countries, buffer stock schemes can help ensure food security by maintaining adequate supplies of key commodities. This can help prevent food shortages and price spikes for example after an external shock.

Answer 75

A

Costs - admin & storage costs are high.
Could encourage over production
Prevents exit of inefficient producers
Large scale producers may benefit more than the small scale producers it’s supposed to protect - they have EOS.
Fee to join the scheme
Management: Governments may struggle to effectively manage a scheme in poorer rural areas with limited storage infrastructure and technical expertise. Inadequate storage facilities can lead to falling quality of stocks which command lower prices
Inefficiency: Prices might be set too high – favouring producers – which in the long run leads to over-production, surpluses mounting and risks causing environmental damage. These externalities might be seen as a form of government failure.

Answer 76

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Subsidies: Governments can provide subsidies to farmers, either in the form of direct payments or through subsidies for inputs such as fertilizers and seeds. This can help reduce the cost of production and increase the competitiveness of farmers.
Agricultural insurance: Governments can offer insurance programs that provide protection against crop losses due to weather events or other factors.
Rural infrastructure: Governments can invest in infrastructure such as roads, water supply, and electricity, which can improve productivity/competitiveness of farmers.
Market information systems: Governments can invest in market information systems that provide farmers with real-time information on prices, supply and demand
Farmer cooperatives: Governments can support the development of farmer cooperatives, which can help farmers increase their relatively bargaining power against monopsonistic buyers. This can help farmers negotiate better prices for their products.

Answer 77

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A developing economy split into two sectors:
1. Traditional rural/agricultural sector (low productivity, surplus labor).
1. Modern urban/industrial sector (high productivity, capital-intensive).

Answer 78

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Surplus rural laborers can move to the urban sector without reducing agricultural output due to underemployment in subsistence farming.

Answer 79

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Excess labor supply keeps wages low; only rise after the Lewis Turning Point (surplus labor exhausted).

Answer 80

A

Profits from industry are reinvested to expand production, creating jobs and absorbing rural migrants

Answer 81

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Initial phase: Labor shifts from rural to urban sectors.
Growth phase: Urban sector expands via reinvestment; rural sector shrinks.
Turning point: Rural surplus labor dries up, wages rise.

Answer 82

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When surplus rural labor is exhausted, causing rural wages to rise and signaling transition to a mature industrial economy.

Answer 83

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Oversimplifies rural productivity (ignores potential agricultural innovation).
Assumes rigid wages and unlimited labor (not always realistic).
Neglects urban unemployment or informal sector challenge
Forced industrialisation has tended to lead to a waste of scarce resources because the industries have failed. Government failure
Encouraging rural depopulation will simply lead to urban poverty, not increased affluence.

Answer 84

A

Focus on industrialization and labor reallocation to modern sectors for structural economic transformation.

Answer 85

A

Industrialisation: the Lewis model
Development of tourism
Development of primary industries
Fairtrade schemes
Aid
Debt relief

Answer 86

A

Employment creation, tourism tends to be a labour-intensive industry
Tourism typically employs a higher percentage of women and younger people starting out in the labour market
Export earnings – it generates important foreign exchange (US$s)
Important source of diversification for many smaller countries – helps them move away from primary product dependency
Gives a boost to AD - creating local and regional income-multiplier effects
Accelerator effects from capital investment such as in airlines, roads and telecoms – leads to an increase in long run aggregate supply (LRAS)

Answer 87

A

Exploitation of local labour by overseas transnational tourist businesses (monopsony)
M/any workers in tourism are migrants suffering from poor employment conditions
Outflow of profits from foreign-owned resorts.
All-inclusive deals often ignore the local economy – reduces the multiplier effect
Negative externalities – for example from construction, congestion and increased waste as tourist resorts expand
Rising property prices can make housing less affordable for local people. Wider risk of increasing inflation if tourism causes a domestic economic boom.
Deepening pressures on local cultures + concerns with security and public health

Answer 88

A

Initiatives ensuring fair payment for producers in developing countries, promoting sustainable farming, and improving working conditions by setting minimum prices and offering community development premiums.

Answer 89

A

Income Generation: Ensures that producers receive a minimum price. Helps stabilize income and provide a safety net against global price volatility. Counter balance to monopsony power
Market Access: Fairtrade certifications allow small scale producers with access to consumers in higher-income global markets that they might not have been able to reach without the certification. Leads to increased sales, higher revenues and profits could fund capital reinvestment
Community development: Fairtrade initiatives sometimes include funds for community development profits e.g. schools, healthcare facilities
Environmental Sustainability: Fairtrade includes environmental standards and promotes sustainable agricultural practices

Answer 90

A

Limited sales: Often criticized for its limited reach. Not all producers reach the certification requirements and many small-scale farmers remain excluded
Certification Costs: Obtaining and maintaining Fairtrade certification can be costly. These costs might be prohibitive for some smaller producers and co-operatives
Market Dynamics: Impact can be limited in markets where it constitutes a small fraction of total sales. In some sectors Fairtrade producers may struggle to compete with non-certified products in terms of price
Complexity and Bureaucracy: It can be complex and bureaucratic, particular for small producers who may lack the resources to navigate it effectively.

Answer 91

A

Calculated to cover the cost of sustainable production and provide a reasonable livelihood for the farmers and workers
Acts as a safety net for producers. Typically set at 15% above the commercial price
Protects small scale farmers from market fluctuations

Answer 92

A

Debt Forgiveness – The complete cancellation of a country’s debt by its creditors. Typically, only granted after a natural disaster of if a country has taken significant steps to implement economic reforms
Debt Restructuring - Involves the renegotiation of a country’s debt terms with its creditors. May involve extending the maturity of the debt, lowering the interest rate, reducing the principal amount owed
Debt Rescheduling: Involves changing the schedule of the debt payments so that a country can meet its debt obligations without defaulting
Debt Equity Swaps - Involve exchanging a country’s debt for equity in local companies or infrastructure projects. Can help to reduce a country’s debt burden and promote economic growth

Answer 93

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Debt relief can help alleviate extreme poverty in low-income countries by freeing up funds for a government that can be used for healthcare, sanitation, education and other key social services
Debt relief might stimulate growth by enabling countries to invest in capital without being burdened by debt interest repayments.
Debt relief can provide humanitarian relief to countries that have experienced natural disasters or civil conflicts, which can further exacerbate their already fragile economic situations.

Answer 94

A

Debt relief may create a moral hazard by encouraging countries to accumulate debt with the expectation that it will eventually be forgiven. This might encourage fiscal irresponsibility in the future.
Debt relief may also have a negative impact on a country’s credit rating, making it more difficult for them to secure loans in the future.
Debt relief may be seen as unfair or inequitable to developing countries that have responsibly managed their government finances and do not receive similar relief.
Debt relief eased pressure on weak governments to be efficient and adopt good econoimc policies

Answer 95

A

Is money or technical assistance given by one country to another to promote economic and social development

Answer 96

A

Project Aid: Financing projects for a doner such as irrigation systems, hospitals
Technical assistance: Funding of expertise such as engineers, medics
Humanitarian aid: Emergency disaster relief, food aid, refugee relief and disaster preparedness
Soft loans: A loan made on a concessionary basis such as China – Africa
Tied aid: Projects tied to suppliers in the donor country
Debt relief

Answer 97

A

Overseas aid can play a role in stabilizing post-conflict environments and in disaster recovery
Long-term aid for health and education projects - builds human capital and stronger social institutions.
Targeted aid that lifts trend growth rate of poorest countries benefits donor countries as external trade grows
Fill the savings gap
- Consumers in developing countries have low incomes and therefore save very little. Savings are lower than the level required to generate high economic growth (according to the Harrod Dommar model). Inflows of foreign capital, supplied by foreign aid would help fill the savings gap.
Provides funds for infrastructure and development, HUMAN CAPITAL– therefore creates jobs, a multiplier effect and growth. Help a country MOVE AWAY FROM PPP
Cover the FOREIGN CURRENCY GAP
- Export revenues are likely scarce. Foreign aid would provide foreign currency to import machinery, capital equipment and essential raw materials. OR basic essentials like food to reduce abolsute poverty
Reduce absolute poverty

Answer 98

A

Poor governance - aid might leave the recipient country. It can finance corruption by ruling political elites and reinforce their power
Lack of transparency – hundreds of $m is spent each year on aid consultants and high-income country non-governmental organisations
Dependency culture – heavy reliance on overseas aid might harm an entrepreneurial culture. Most aid is “tied” to the donor country in some shape or form
Aid may lead to a distortion of market forces and a loss of economic efficiency and might also cause higher rates of inflation
WHITE ELEPHANT PROJECTS - Much aid has been wasted on prestige projects E.g. Lotus Tower in Sri Lanka. Rather than schools.
Loans have to be repaid with interest. Current interest on world bank loans are 2.5% (Feb 2023)

Answer 99

A

Skcepticism of Centralized Planning: Easterly is critical of large, top-down development programmes and centralized planning. He argues that such approaches often lack the flexibility and local knowledge required to address the diverse and complex needs of poor communities.
Local Solutions: Easterly advocates for more attention to local, context-specific solutions. He believes that local knowledge and bottom-up approaches are more likely to lead to successful development outcomes.
The Role of Markets: Easterly is supportive of market-based approaches and the importance of entrepreneurship in driving economic growth and development. He sees the private sector as a critical player in poverty reduction.

Answer 100

A

Reducing poverty and inequality: Direct cash transfers provide a direct and effective way of reducing poverty and inequality by giving money to people who need it the most. This improves living standards of low-income households and might reduce the Gini coefficient. It might also reduce the scale of labour migration / possible brain drains.
Empowerment: Direct cash transfers empower individuals by giving them the freedom to spend the money as they see fit. By providing a reliable and predictable source of income, cash transfers help households to plan and make investment in their own human capital. It can keep kids in school for longer. It can improve mental health outcomes.
Stimulating local economies: Direct cash transfers can stimulate local economies by increasing demand. This can lead to increased economic activity and formal job creation, especially in areas where there is high unemployment and under-employment
Cost-effectiveness: Cash transfers may be less expensive to administer than in-kind transfers (such as food or clothing), which can be more difficult to distribute and monitor.

Answer 101

A

Sustainability: Critics argue that direct cash transfers may not be sustainable in the long run, as they do not address the root causes of poverty and inequality, such as lack of access to education, health care, and employment opportunities.
Dependency: Some argue that direct cash transfers may create a culture of dependency among recipients, perhaps discouraging them from seeking employment. This might perpetuate the cycle of absolute poverty.
Inflation: Direct cash transfers may contribute to inflation by increasing demand for goods and services such as food. If prices rise, the real purchasing power of transfers may be eroded, reducing impact on poverty reduction
Corruption: There are concerns that direct cash transfers may be subject to corruption, with government officials or others embezzling funds or diverting them to politically connected individuals or groups.

Answer 102

A

Established in 1945 to promote international monetary cooperation
Functions

Surveillance – Monitoring the global economy and providing policy advice
Financial assistance – lending to member countries facing balance of payments problems
Technical assistance and training to member countries

Answer 103

A

Austerity Measures and Social Impact - IMF programmes often improve austerity measures – reducing spending and subsides, which can lead to negative social impacts such as increased poverty and inequalities
Debt Sustainability – Loans can contribute to a country’s debt burden if not managed effectively. Critics say that the institution should do more to ensure that borrowing countries maintain sustainable levels of government debt
Financial Sector Deregulation - Promoting financial sector deregulation, which some say has contributed to financial crisis in the past
Lack of Accountability - Some say that the IMF is not sufficiently accountable for its policy recommendations and their consequences, making it challenging to hold the institution responsible for any negative outcomes

Answer 104

A

Established in 1944, is a group of 5 institutions
Main objectives include

Providing financial and technical assistance to developing countries
Reducing poverty and fostering sustainable economic development
Supporting infrastructure projects and social programmes

Financial assistance comes in forms of loans, grants and policy advice

Answer 105

A

Critics of the World Bank argue that the institution is risk averse, hugely over-staffed and overly sensitive to criticisms of their flagship projects and with multi-million-dollar expense accounts in stark contrast to their original mission
The institution has been criticized for being influenced by more powerful member countries, potentially leading to decisions that favour those countries’ interests over those of smaller or poorer nations
Infrastructure-Centric Approach: Some contend that the World Bank’s emphasis on infrastructure projects may neglect crucial areas such as education, healthcare and social services
Climate change: Critics claim the World Bank has failed to adequately address the scale of the global climate crisis, alongside its traditional mission of alleviating poverty

Answer 106

A

Not for profit groups – focus on environmental improvements, community developmental and human rights
E,g,

Oxfam
WWF (world wildlife foundation)