4.3 Emerging & Developing Economies

Question 1

measures of development - HDI

Answer 1

• human development index (HDI) is a combination of 3 indicators;
• health (measured by life expectancy)
• education (measured by mean years of schooling)
• income (measured by real GNI per capita at PPP)
• a value close to 1 indicates high levels of development, e.g. Thailand and a value close to 0 suggests low levels, e.g. Chad

Question 2

advantages of using HDI for comparison

Answer 2

• composite indicator which provides a more useful comparison than single indicators
• incorporates 3 of the most important metrics for household
• used globally, allowing for meaningful comparisons
• provides goals for govts. to use when developing policies
• provides citizens with an understanding of how their quality of life compares to other countries

Question 3

disadvantages of using HDI for comparison

Answer 3

• doesn’t measure inequality that exists as it uses the mean GNI/capita
• doesn’t measure or compare levels of absolute and relative poverty that exist
• doesn’t provide useful short-term info as gathering data needed for calculation is hard, so the data often lags reality by several years

Question 4

other indicators of development

Answer 4

• human poverty index (HPI); measures life expectancy, education, and ability of citizens to meet basic needs. HPI1 and 2 to measure poverty in developing and developed countries
• gender-related development index (GDI); measures relative inequality between men and women, e.g. by considering differences in life expectancy, income and education between genders

Question 5

factors influencing growth and development - primary product dependancy

Answer 5

• several countries rely on primary products as a significant part of their economy, which isn’t sustainable as they may run out
• an issue is the volatility of commodity prices that makes it hard for workers to plan for the future, and makes farmer’s incomes unpredictable
• a fall in the price reduces their export incomes, making it hard to fund their infrastructure and education
• Prebisch-Singer hypothesis; low income elasticity of demand for primary products; as people get wealthier, they don’t increase consumption of these goods, but instead increase demand for manufactured goods

Question 6

factors influencing growth and development - savings gap: Harrod-Domar model

Answer 6

• developing countries have limited wealth so have limited ability to save, e.g. Africa’s saving rate is around 17%
• Harrod-Domar model suggests that increased savings - increased investment - higher capital stock - higher economic growth
• i.e. it suggests the rate of growth (savings ratio / capital output) rises if savings ratio rises
• however, the model is flawed as funds may not lead to borrowing and investment, and there may be inefficiencies in the workforce

Question 7

factors influencing growth and development - foreign currency gap

Answer 7

• exists when the country isn’t attracting sufficient capital flows to make up for a deficit in the capital account on the BoP
• i.e. value of current account deficit is larger than value of capital inflows

Question 8

factors influencing growth and development - capital flight

Answer 8

• when capital and money leave the economy through investment in foreign economies
• it’s triggered by an economic threat, e.g rising tax rates, and can worsen an economy crisis and cause a currency to depreciate

Question 9

factors influencing growth and development - demographic factors

Answer 9

• rapid population growth has complicated efforts to reduce poverty and eliminate hunger, e.g. in Africa

Question 10

factors influencing growth and development - debt

Answer 10

• the debt crisis emerging in the developing world threatens the fight against poverty and inequality

Question 11

factors influencing growth and development - access to credit and banking

Answer 11

• a lack of financial institutions prevents money being borrowed, which reduces investment

Question 12

factors influencing growth and development - infrastructure

Answer 12

• poor infrastructure discourages MNCs from setting up premise in a country, as production costs increase where basic infrastructure, e.g. a continuous supply of electricity, is unavailable

Question 13

factors influencing growth and development - education / skills

Answer 13

• important for developing human capital, which ensures the economy can be productive and produce products of a high quality
• it helps generate employment and raise standards of living

Question 14

factors influencing growth and development - absence of property rights

Answer 14

• weak / absence property rights mean entrepreneurs can’t protect their ideas, so don’t have an incentive to innovate

Question 15

impact of non-economic factors in different countries

Answer 15

• corruption; money intended for investment is siphoned off by corrupt politicians or funds are diverted to lobbied officials resulting in low levels of g&d
• poor governance; leads to inefficient use of resources and poor-decision making
• wars; conflict destroys infrastructure and disrupts supply chains, which shifts the production possibility curve inwards
• political instability; constantly changing policies and reduced confidence

Question 16

market-orientated strategies influencing growth and development - trade liberalisation

Answer 16

• free trade = increased trade
• this can increase output, employment, and income, which can increase standards of living
• however if firms are unable to compete globally, they’ll collapse

Question 17

market-orientated strategies influencing growth and development - promotion of FDI

Answer 17

• more FDI can create employment, encourage innovation of technology and help promote long-term sustainable growth
• improves labour productivity as it allows a transfer of knowledge and better production / management techniques

Question 18

market-orientated strategies influencing growth and development - removal of govt. subsidies

Answer 18

• govt. subsidies may distort price signals by distorting the free market mechanism
• removing this will increase competition, efficiency, employment, profits and income due to the invisible hand of the free market
• however, they can be used to minimise absolute poverty and ensure a minimum standard of living, so the removal of subsidies is unpopular

Question 19

market-orientated strategies influencing growth and development - floating exchange rate systems

Answer 19

• govt. doesn’t need to worry about gold and currency reserves as the ER is determined by the forces of supply and demand
• but the currency will be volatile, making it harder for importers and exporters

Question 20

market-orientated strategies influencing growth and development - microfinance schemes

Answer 20

• involves borrowing small amounts from lenders to finance enterprises
• increases the income of borrowers and can reduce their dependency on primary products, and there may be a multiplier effect
• successful policy in countries like Bangladesh
• they detach the poor from high interest, exploitative loan sharks and help them set up businesses
• however, most people are unable to repay loans as they didn’t spend it on sustainable methods of development

Question 21

market-orientated strategies influencing growth and development - privatisation

Answer 21

• privatisation gives firms incentives to operate efficiently, which increases economic welfare
• this is because they have a profit incentive, which nationalised firms don’t have
• by selling the asset, the govt. also raises revenue, although this is only a one-off payment
• it’s important that the firm isn’t privatised as a monopoly

Question 22

interventionist strategies influencing growth and development - development of human capital

Answer 22

• developing human capital would improve productivity and allow more advanced tech to be used as workers have the skills
• it can raise the productive potential of the economy which leads to a rise in income
• this also improves quality of life
• however this is hard to do and quite expensive

Question 23

interventionist strategies influencing growth and development - protectionism

Answer 23

• this can help reduce a trade deficit as there will be less imports due to tariffs and quotas
• it can protect infant industries and allow them to develop
• it can create jobs in the short-run
• however, it can distort the market as it prevents competition and there’s a loss of consumer welfare - consumers face higher prices and lower variety
• less competition reduces incentives for firms to lower costs of production
• tariffs are regressive and are most damaging to those on low / fixed incomes
• risk of retaliation from other countries, so they may become hostile

Question 24

interventionist strategies influencing growth and development - managed exchange rates

Answer 24

• provides more stability than a floating system and prevents issues such as appreciation and a slowdown in exports, as the govt. can intervene when necessary

Question 25

interventionist strategies influencing growth and development - infrastructure development

Answer 25

• developing infrastructure reduces cost of businesses and makes economic activity easier as it increases mobility of labour
• however, the govt. may not have the funds for this and the project may cause environmental damage

Question 26

interventionist strategies influencing growth and development - promoting joint ventures with global companies

Answer 26

• occurs when a partnership is formed between 2 firms based in multiple countries
• it opens up new markets for small firms, so they can distribute products to customers, saving them time and funds
• it spreads risks which is important where developing a product is expensive
• benefits of FDI without the negatives of exploitation, and some profits remain in the country
• firms can use this to get around the blockage of foreign ownership of firms
• e.g. Tata Starbucks

Question 27

interventionist strategies influencing growth and development - buffer stock schemes

Answer 27

• govts. may buy up harvests during surpluses and then sell the goods onto the market when supplies are low
• it helps income stability of farmers and increases consumer welfare by ensuring prices aren’t excessively high
• however, govts. may not have financial resources to buy up the stock, and storage is difficult and expensive since agricultural goods don’t last long
• it can cause inefficiency as suppliers produce as much as they want because they know the govt. will buy it at whatever price

Question 28

other strategies influencing growth and development - industrialisation: the Lewis model

Answer 28

• explains how a developing country which focuses on agriculture should move towards manufacturing
• it’s based on the assumption that there’s a surplus of unproductive labour in agriculture in developing countries
• it assumes wages in the manufacturing sector are fixed
• workers from agriculture are attracted to the higher wages in the manufacturing sector
• in the manufacturing sector, entrepreneurs charge prices above wage rate which allows them to make profits, which are assumed to be invested into more fixed capital for the business
• as productive capacity of firms has increased, demand for labour increases, and the surplus labour in the agricultural sector is employed in the manufacturing sector
• this moves the economy from a traditional state to an industrialised state
• however, profits aren’t always reinvested into the firm, capital investment may replace labour so demand falls, and there may be urban poverty if there aren’t enough jobs in the cities

Question 29

other strategies influencing growth and development - development of tourism

Answer 29

• excellent source of employment, revenue and income for many developing countries
• ecotourism is also developing as a response to negative externalities of consumption that tourism creates, e.g. increased waste, noise, etc.

Question 30

other strategies influencing growth and development - development of primary industries

Answer 30

• some developing countries have an abundance of raw materials which their govts. may choose to exploit to develop the industry so the country can have a comparative advantage in its production
• however there are issues involving primary product dependency

Question 31

other strategies influencing growth and development - Fairtrade schemes

Answer 31

• these ensure that farmers receive a fair price for their goods, as well as a guaranteed income and certainty about sales, allowing them to plan for the future
• has limitations such as making producers not part of fairtrade worse off, but it leads to an overall sense of community of working with farmers, rather than just for them

Question 32

other strategies influencing growth and development - aid

Answer 32

• proven beneficial in times of distress
• e.g. humanitarian aid (alleviates suffering in emergencies), grants (no repayment) and soft loans (lower rate of interest)
• however, critics argue that aid breeds dependency, corruption and disincentivises individual responsibility

Question 33

other strategies influencing growth and development - debt relief

Answer 33

• the partial or total forgiveness of debt
• many developing nations have high levels of debt, for which the repayments have many opportunity costs, as financial resources are diverted from infrastructure, education and healthcare
• debt forgiveness can allow a country to import more and increase their standard of living, as well as improving govt. finances so public services can be funded again
• however, the forgiveness of debt may encourage more borrowing in the future, which may lead to debt again, or corruption may occur

Question 34

World Bank

Answer 34

• they can loan funds to member countries (189) and they aim to promote economic and social progress by raising productivity and reducing poverty
• they’re involved in several global projects, such as supporting education, helping rebuild countries after earthquakes, etc.

Question 35

International Monetary Fund (IMF)

Answer 35

• aims to promote monetary cooperation between nations
• also aims to help free trade globally, so jobs are supported
• promotes exchange rate stability and tries to avoid competitive depreciations in the economy
• members can borrow from the IMF, e.g. if they need to correct an imbalance in BoP or pay off national debt
• in order to gain loans, countries have to promise to undertake reform, including reducing imports and govt. spending, to ensure they don’t face similar problems in the future

Question 36

NGOs

Answer 36

• can be funded by the govt, firms, or private individuals but they’re not part of governments or for-profit businesses
• they’re voluntary groups which aim to raise a voice
• usually focus on specific issues like human rights or the environment
• they can lobby the govt. to make changes, raise funds, and undertake projects in developing countries such as the establishment of schools