4.3 Emerging + developing economies Flashcards
1
Q
what are some examples of market-led strategies to influence growth + development?
A
- trade liberalisation
- foreign direct investment
- removal of state subsidies
- free floating exchange rates
- microfinance
- privatisation
2
Q
what is meant by ‘trade liberalisation’?
A
process of reducing/removing barriers and restrictions that impede the exchange of goods + services between countries
3
Q
what are the advantages of trade liberalisation?
A
- lower prices - real income/purchasing power increased -> higher consumer surplus -> can reduce inequaliities in consumption
- increased competition - lower prices = increased allocative efficiency = higher productivity = lower unit costs; may benefit from EoS
4
Q
what are the disadvantages of trade liberalisation?
A
- loss of import tariff revenue
- increased structural unemployment - if domestic demand shifts away from home suppliers to imports -> worsened if labour is geographically or occupationally immobile
- risk of increased relative poverty
- SR -> rise in trade deficit due to increased imports
- environmental exploitation
5
Q
what are some good evaluation points regarding trade liberalisation?
A
- both a micro and macro effect -> impact depends on scale of tariff reductions and flexibility of domestic businesses to repsond to changing relative prices
- impact can be different for developed, high-income countries vs. low-income ones
6
Q
what is meant by ‘foreign direct investment’?
A
investment made by a company/individual in one country into business interests in another country
7
Q
what are the disadvantages of foreign direct investment?
A
- repatriation of profits - when profits are transferred back to the investor’s home country from the host country -> firms might exploit workers by offering low wages/ poor working conditions
- environmental damage/degradation of natural resources
- imports of components/capital goods -> worsened current account
- domestic industries may struggle to compete against TNCs (transnational corporations)
8
Q
what are the advantages of foreign direct investment?
A
- economic growth - through increased capital investment -> increased production capacity -~> job creation -> AD up -> real GDP up -> actual eco. growth
- job creation - foreign investors establish new businesses/expand exisiting ones -> DFL up
- transfer of technology and knowledge - increased skills -> more productive and innovative -> LRAS up -> real GDP up -> potential eco. growth
- infrastructure development - e.g. transportation and telecommunications
9
Q
what is meant by ‘removal of state subsidies’?
A
process of reducing/eliminatig financial assistance provided by the government; offered to promote eco. development, protect domestic industries + any environmental concerns
10
Q
what are the pros of removing state subsidies?
A
- reduced gov. expenditure -> reduced fiscal deficit -> allows gov. to allocate funds elsewhere
- eliminates market distortion as subsidies encourage overconsumption
- redirects resources from inefficient subsidised sectors
- forces previously subsidised sectors to be more competitive + productive -> incentive to innovate -> reduces overreliance
11
Q
what are the cons of removing state subsidies?
A
- immediate price rise -> potential inflationary pressure (SR)
- reduced standard of living -> reduced purchasing power for low-income households
- increased cost -> higher prices -> possible unemployment in subsidised sector to cut costs
12
Q
what is meant by a ‘floating exchange rate system’?
A
currency value is purely set by market forces. it can appreciate or depreciate. there is no intervention by the central bank
13
Q
what are the advantages of a floating exchange rate system?
A
- monetary policy autonomy - more flexibility -> easier to adjust IR and QE to address unemployment, inflation, growth, etc.
- shock absorption - i.e. during a recession -> can rebalance economy
- trade balance adjustment - i.e. large trade deficit -> currency depreciation -> E=cheap; I=expensive -> net exports inc. -> trade deficit narrows
- country does not have to worry about their gold and foreign currency reserves
14
Q
what are the disadvantages of a floating exchange rate system?
A
- exchange rate volatility - more uncertainyy for businesses involved in international trade and investment
- currency risk for businesses and investors
- inflation - fluctuations -> change in import prices -> imported inflation -> erode real purchasing power
- loss of exchange rate as a policy tool - can limit the direct influence of exchange rates on trade + expenditure
15
Q
pros and cons of a fixed exchange rate system
A
ADV:
- economic stability
- reduces currency speculation
- predictability -> foreign investment up
- helps control inflation
DISADV:
- limits monetary policy flexibility -> can lead to over or undervalued currency
- vulnerable to economic shock
16
Q
what is meant by ‘microfinance’?
A
provision of financial services to individuals or small businesses who are typically excluded from traditional banking services
17
Q
what are the advantages of microfinance?
A
inc. access to credit -> provides for socially excluded groups -> allows them to inc. income or start businesses, etc.
- women empowerment -> inc. social status
-** inc. per capita incomes** -> reduced poverty -> job creation
18
Q
what are the disadvantages of microfinance?
A
- very high interest rates to compensate for the risk of lending to low-income households -> more difficult to repay -> poverty up
- over-indebtedness: borrowers may take multiple loans from diff. microfinance institutions -> accumulation of debt that exceeds current income -> financial stress up
19
Q
what are the advantages of privatisation?
A
-** inc. competition** -> inc. efficiciency and productivity -> product quality improvement -> price reductions -> better service provision = consumer benefit
-** inc. investment** -> eco growth and employment up
- reduced gov. burden -> better allocation of resources to other public services e.g. healthcare + education
20
Q
what are the disadvantages of privatisation?
A
- firms prioritise profit max. > higher costs -> less efficient resource allocation -> income inequality
- services may be less affordable for low-income households -> less access to essential services
- loss of gov. control -> limited ablity to address public interest
- private entities seek cost-cutting measures -> job losses, outsourcing, automation, etc.
21
Q
what are some interventionalist strategies?
A
- development of human capital
- protectionism
- managed exchange rates
- infrastructure development
- promoting joint ventures with global companies
- buffer stock schemes
22
Q
what are the advantages of developing human capital?
A
- enhanced productivity -> provides workers with skills + training -> efficiency and productivity
- reduced poverty -> improved human capital -> higher wages secured -> better quality of life
- innovation + technological advancement -> more skills = more likely to engage in R&D.
- FDI -> companies more likely to invest in high-skilled countries -> dec. training costs -> improves business environment
- economic diversification -> skilled labour force can reduce primary product dependency + overreliance on a single industry
23
Q
what are some barriers to entry to education?
A
- financial barriers
- distance
- poor quality of education
- gender disparities
24
Q
what are some interventions to improve access to education?
A
- conditional cash transfer programmes (CCTs) -> provide cash incentives to low-income families so that children attend and complete school
- school infrastructure investment
- school feeding programmes
25
what are the advantages of protectionism?
- job creation (SR)
- allows domestic industries to grow by keeping foreign goods out (protects them from competition) -> can use "import substitution" -> deliberately replacing imported goods w/ domestic ones
26
what are the disadvantages of protectionism?
- countries lose out on the benfits of specialisation and comparative advantage -> lack of competitiveness -> inefficiency
- other countries may retaliate
27
what is meant by a buffer stock scheme?
mechanism designed to stabilise the price + supply of a commodity e.g. a raw material or agricultural product. this prevents price fluctuations + ensures a steady supply
28
what are the advantages of a buffer stock scheme?
- **price stability** -> stabilises commodity prices -> predictable income for producers -> better living standards
- **investment** -> stable prices -> producers are better able to plan and invest in new capital -> increased yields + improved quality -> increased per capita incomes -> investment up = AD up -> real GDP up -> actual eco. growth
- **food security** -> maintaining adequate food supply -> prevents food shortages + price spikes e.g. after external shocks -> improved living standards
29
what are the disadvantages of a buffer stock scheme?
- **finance** - high startup/administrative costs (LR) -> gov may struggle to finance the scheme (many schemes have failed as operators ran out of money)
- **management** -> gov may struggle to manage with limited storage space + poor infrastructure + poor expertise -> reduced quality of stocks -> lower prices -> reduced profits for producers
- **inefficiency** -> min. prices may be set too high -> overproduction (LR) -> surpluses -> potential environmental damage -> gov. failure
- **vulnerable to political interference** -> undermines effectiveness and can lead to corruption
- vulnerable to changes in: weather patterns, global trade policies, sudden shifts in demand
30
what are some alternatives to buffer stock schemes?
- **agricultural insurance** -> provides protection against crop losses due to weather events
- **subsidies** -> reduced production costs -> lower prices -> increased price-competitiveness
- **rural infrastructure** -> roads, water supply, electricity -> increased productivity -> increased LRAS -> increased GDP -> potential eco. growth
31
what are the advantages + dsadvantages of tourism?
ADVANTAGES:
- during a boom, developing economies can rely on tourism as a source of export revenue -> income elastic e.g. Dubai
DISADVANTAGES:
- unstable as it relies on the business cycle (i.e during recession -> individuals have less discretionary income -> quantity demanded for tourism will fall)
- expensive to fund tourism
- can lead to increased pollution (i.e. noise, air, etc.) + environmental degradation
32
disadvantages of primary product dependency
1. **price volatility -> instability** -> primary commodities are price inelastic (demand + supply)/income inelastic -> high price volatility -> if prices fall, less export revenue -> less AD = less real GDP -> less tax revenues -> limited actual growth
- businesses face uncertainty -> less business confidence -> less investment
2. **risk of dutch disease as other goods _ services decline** -> commodity 'boom' -> higher export revenues -> more demand for domestic currency -> currency appreciation -> manufactured goods + services less internationally competitive (E = pricey) -> de-industrialisation as resources shift toward primary sector -> less diversified exports -> vulnerable to external shocks
3. **overreliance on commodities sotps long-term development** -> lack of innovation + skill develpoment as they do not invest in human capital, R&D -> no incentive to diversify -> economic stagnation
33
advantages of aid
1. **closes the savings-gap** -> developing countries have a high savings gap (gap between the amount of money held at banks in savings + the amount of money firms want to borrow) -> low savings due to low incomes -> insufficient domestic investment -> Harrod-Domar model (economic growth depends on investment + capital accumulation) -> aid helps finance infrastructure, education + healthcare -> improves human capital + productivity -> more investment -> more capital stock -> incr GDP -> incr employment + incomes -> living standards improved
2. **reduces poverty + inequality** -> e.g. during natural disasters, aid provides immediate relief -> reduces absolute poverty by providing basic necessities -> improved life expectancy + health
3. **improves infrastructure + attracts FDI** -> aid used to develop infrastructure e.g. roads + clean water -> lower costs of production for businesses -> more FDI -> brings technology, jobs + skills -> more potential eco. growth -> more labour force participation
34
disadvantages of aid
1. **risk of dependency** -> if aid replaces rather than supplements domestic savings -> country may become dependent on external support -> less incentive to develop self-sustaining economic policies
2. **misallocation of resources** -> government may misallocate aid funds due to corruption or inefficiency
3. **risk of 'tied aid'** -> aid can be in the form of concessional loans -> may not be cost-effective and may favour the donor's interests over the needs of the recipient -> geopolitical motives can influence aid allocation -> nations in more need may not be targeted
35
advantages of primary product dependency
1. **high prices = more revenue** -> if commodity prices rise -> exporters face more revenue -> improved growth -> revenue can be reinvested to diversify the economy -> reduce overreliance
2. - **comparative advantage can be leveraged for sustainable growth**
36
what is meany by debt relief
debt relief = partial/complete forgiveness of a country's external debt, allowing it to redirect financial resources toward economic development and social programs
37
advantages of debt relief
1. **more government revenue available** -> less revenue spent on debt repayments -> debt relief lowers interest payments -> funds redirect towards education, healthcare, etc. -> investment in human + physical capital -> potential eco. growth -> improve living standards (more spending = fiscal stimulus = +ve multiplier effect)
2. **encourages private investment** -> high debt levels create uncertainty for investors (speculate higher taxes, economic instability, etc.) -> more FDI + domestic investment -> higher productivity -> more eco. growth
3. **reduces currency depreciation + inflationary pressures** -> high external debt -> investors lose confidence -> lower demand for currency = currency depreciation -> imports more expensive -> imported inflation -> affects low-income households -> debt relief reduces capital outlflows -> stabilised currency -> less inflationary pressures
38
disadvantages of debt relief
- **risk of moral hazard and reduced future credit** -> if countries expect future debt forgiveness, they may borrow irresponsibly -> leading to unsustainable debt cycles (moral hazard)
- investor confidence may not increase
