4.3 Emerging economies Flashcards
Economic development
Measured through improvements in living standards
Developed country
One with a high GDP per head and tends to be thought of as Western
high levels of education and healthcare
Reliable and safe transport infrastructure and operations
High productivity and investment
Governments democratically elected
Developing country
One with lower GDP per head
Low levels of human and physical capital
High levels of unemployment and underemployment
Health tends to be low with high mortality rates and high levels of population growth (high birth rates)
Institutional structures are weak and corrupt
HDI
Human development index is a measure of economic development calculated by the UN
Composite index based on health (measured by life expectancy), education (measured by mean years of schooling of adults aged 25+ and expected years of schooling of a current 5 year old over their lives, and income (measured by real GNI per capita at PPP)
Each three indicators are given equal weighting and mean is taken to giver figure between 0 and 1
Higher number = greater level of development
HDI advantage
Takes into account three factors which are important to development of country
Relatively easy to calculate because gov tends to collect statistics used in data
HDI disadvantage
Some issues with figures
Health takes no notice of quality of life that people enjoy and education doesn’t take into account success of eduction
No consideration of equality of income
Other factors affecting development which are unaccounted for
Only indicator, not a precise measure
IHDI
Inequality adjusted human development index
Adds fourth indicator of development - inequality
Broader than HDI but can still be criticised for not taking into account more measures
MPI
Multidimensional poverty index
Measures % of population that is multidimensional poor
Uses data for health (nutrition data), education (years of schooling + attendance data), standard of living (Safe drinking water in households, sanitation availability of electricity)
Highlights countries where some areas are extremely rich but where most of population is not
Focuses on poverty
Cannot be calculated for all countries (data is not always available)
Doesn’t take into account environment
Genuine progress indicator
26 different indicators grouped into three main categories : economic (personal consumption), environmental (cost of pollution) and social (value of housework and parenting to cost of crime)
aims to look at economic sustainability to ensure development does not limit amount produced and consumed in future
Tend to show developed countries experiencing negative growth over time due to impact on environment
This proves that development is unsustainable vs the index is biased and is constructed to prove the antigrowth case
Changes in electricity production or numbers with mobile phone per 1000 can show development. This is easier to calculate than indexes
Primary product dependency
Economic factor influencing growth and development
Include agriculture
Large amount of developing countries economic activity is based on primary product
Natural disasters can wipe out production - farmers left with no income
Often non renewable which means country will suffer when they run out of the product
Tend to have low income elasticity of demand
However not all have this, such as diamonds
Prebisch singer hypothesis
Suggests the long run price of primary goods declines in proportion to manufactured goods which means those dependent on primary exports will see fall in their terms of trade
However, in recent years, there has been a rise in the prices of some key commodities such as food and a fall in prices of manufactured goods due to expansion to places like China
Dutch disease
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 reduction in competitiveness of the economy, causing a fall in output in other areas
Occurred for non oil sectors
Volatility of commodity prices
Primary products tend to have inelastic demand and supply curves which means relatively small changes in either leads to huge fluctuations in price
These large changes mean that producers income and countries earnings are also rapidly fluctuating, making it difficult to plan and carry out long term investment as well as meaning that producers can see their income fall very rapidly, causing poverty
When prices of commodities rise for a number of years, there tends to be over investment in the production of the commodity causing long term risk when the price eventually falls
Harrod domar model evaluation
Economic growth is not the same as economic development
It is difficult for individuals to save when they have little income and borrowing from overseas causes problems with debt
It is possible that investment could be wasted
Harrod-Domar model
Suggests savings provide the funds which are borrowed for investment purposes and that growth rates depend on the level of saving and the productivity of investment
Concludes that economic growth depends on the amount of labour and capital and that developing countries have a vast labour supply so their problems are caused by capital
In order to improve capital, investment is necessary and investment requires savings
Foreign currency gap
This is when exports from a developing country are too low compared to imports to finance the purchase of investment or other goods from overseas required for faster economic growth
Capital flight
Large amounts of money are taken out of the country, rather than being left there for people to borrow and invest
If money was placed in banks within the country then credit could be created by banks for consumers and businesses to spend
This can occur because of lack of confidence in the country’s stability to hide it from government authorities or simply for profit repatriation
Caused Argentine economic crisis 2001
Demographic factors
Developing countries tend to have higher population growth, which limits development
If population grows by 5%, the economy needs to grow by 5% to even maintain living standards
This means developing countries need to have higher rates of growth to develop than more developed would do
High population growth is caused by high birth rates, which increases the number of dependents within a country but does not immediately increase those of working age
It places strain on the education system snd leads to youth unemployment
Debt
1970/80s - developing countries received vast loans from banks in the developed world
Now they suffer high levels of interest payments, sometimes even higher than the loans and aid they receive from developed countries, meaning money is flowing from developing to developed countries
Less money to spend on services for their population - may need to raise taxes, which limits growth and development
Borrowing for growth makes sense, but the problem occurs when government take on too much debt and do not spend it well
Access to credit and banking
Developing countries have limited access to credit and banking compared to developed countries, who have complex systems
This means that those in developing countries cannot access funds for investment and they struggle to save for the future
Some families may use loan sharks, who give high interest rates and leave individuals permanently in debt
Infrastructure
In developed country, there is complex network of buildings, roads, ports, railways, airports, utilities and electricity cables
Low levels of infrastructure make it hard for businesses to trade and set up within the country e.g if there are lack of roads
It makes their services and production less reliable
However, the development of infrastructure can be expensive and tends to conflict with environmental goods
Education / skills
Poor education within these countries means that workers are low skilled, sometimes unable to read or write, so have low levels of productivity
A skilled and educated workforce is crucial for innovation, productivity, and economic diversification.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 (49%)
However, there is debate over what type of education is needed and problems concerning over education i.e if graduates are unable to find graduate level jobs
Absence of property rights
Property rights are where individuals are allowed to own and decide what happens to certain resources
A lack of rights means 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
Loss of property rights in Zimbabwe led to economic collapse
Non economic factors
Corruption is big in developing countries
Means that individuals will make decisions which maximise the bribes they receive as oppose to those which maximise development and output
Leaders are likely to make decisions which benefit themselves than economy
High levels of bureaucracy linked to corruption and this is costly and time consuming, deterring new businesses and reducing output of those establish
Diseases (malaria) have negative impact on economic growth
Poor climates / geographical terrain - may suffer from natural disasters and it may be difficult for farmers or to set up businesses
Civil wars - high levels of poverty and destroys infrastructure making it very difficult for country to rebuild even after war has ended
Trade liberalisation
Market oriented strategy for growth and development
Countries can aim for export led growth
Removing trade barriers will mean that domestic industries either close or forced to become efficient to compete with global producers
Resources will be allocated to their best use where the country has a comparative advantage
World GFP
Singapore and South Korea benefitted
Promotion of FDI
Market oriented
FDI is investment by one private sector company to one country into another pr.s company in another
Includes acquisition, construction of a facility, investment in a joint venture or licensing of intellectual property
Firms tend to undertake FDI because production costs are lower in developing countries - enables them to access new market
FDI can help create employment (multiplier), encourage the innovation of technology and help promote long term sustainable growth. It provides LEDCs with funds to invest and develop, helping to overcome the savings gap. It allows a transfer of knowledge, bringing production and management techniques which help to improve labour productivity.
It is a source of investment and can help to fill the savings gap.
FDI eval
Usually a repatriation of profits and developing countries may find the company exploit them by offering lower wages and poorer conditions than in a developed country
Lose some sovereignty and become dependent on another firm. Local competition may find it had to set up and compete and best job often go to imported labour, leaving only low skilled jobs for locals
Environmental damage and exploitation of natural resources
Removal of government subsidies
Subsidies are effective at minimising absolute poverty and ensuring a minimum standard of living how severer they are often poorly targeted as subsidies on essential items benefit everyone not just poor
Cash payments to poor may be more effective
Subsidies to farmers and producers lead to inefficiency and if they are given a large amount over long period of time, the subsidy becomes ineffective in increasing development
High opportunity cost as they represent large gov spending leads to high debt levels
Can also cause corruption and criminality e.g fuel subsidies leading to high emissions
Removing subsidy eval
Subsidy can be beneficial in allowing infant industry to grow
Removing can be politically unpopular and some Govs have been thrown out attempting to do it
Best time to remove subsidy is when the free market price is falling - removal will be less noticeable to people
Floating exchange rate
Market forces determine currency
Country does not have to worry about gold and foreign currency reserves and gov does not intervene
Floating exchange rate eval
Currency is volatile which makes it difficult for exporters/importers to make decisions about the future and can cause large changes in macroeconomic variable inc. economic growth
Microfinance schemes
Aim to give poor and near poor households permanent access to range of financial services including loans, savings, insurance and fund transfers
They take little or no collateral and use group lending, pre loan saving requirements and an implicit guarantee of access to future loans if present loans are repaid fully / promptly
Increases income of borrowers and can reduce dependency on primary products (multiplier effect from investment of loan)
Allows borrowers to invest in their businesses or start up new ones (reducing savings gap issue)
Protect from loan sharks
Scheme tends to target groups who would be less likely to otherwise receive loans (women)
Microfinance schemes eval
Has become method of financing consumption spending and unemployment - means that most people do not have funds necessary to ensure repayment of their loan - have to sell off family assets, borrow from friends
When actually used for investment, it has increased the informal economy with very little being spent on sustainable methods of development
Financial resources have been diverted away from more productive and sustainable activities
Privatisation eval
If firm is privatised as monopoly, there will be no competition within the market
It can be associated with corruption where politicians or officials sell the company at below market price to a friend or family member or receive bribes to accept one company’s bid
Development of human capital
Interventionist
Provides workers with skills and training and thus help them to become more efficient and improve productivity
Skill shortages = struggle of business expansion and limiting innovation
Human capital development means country can move their production up the supply chain from primary products to manufactured goods and to services which can earn them more
Better education can improve quality of life
Development of human capital eval
Can be difficult to do and is expensive
Time lag
Protectionism
Allows domestic industries to grow as it protects them from strong comp and keeps foreign goods out
Can use policy of import substitution
Will create jobs in short run and will allow industry to develop perhaps to the extent where barriers can be removed and industry can compete globally
Protectionism eval
Countries lose out from benefits of specialisation and comparative advantage and could cause inefficiency since domestic produces suffer from lack of competition
Retaliation likely to occur (trade war)
Managed exchange rates
Currency can be fixed against a number of different exchange rates
Can introduce high exchange rates for import of essential products and lower E.R for other
Could be an even lower one for exports
High E.R for essential products will mean that the price within the country is low which helps reduce poverty if goods are consumer goods and encourages investment if they are capital goods
Lower e.r for other imports will mean price of these goods within country is higher, discouraging imports and encouraging consumers to buy from domestic producers
Managed exchange rates
Often fail to work in practice
Black markets in foreign exchange develop which can destabilise the system and corruption becomes an issue when gov officials buy currency at on exchange rate and sell it for profit at another
Single E.R will reduce volatility but speculation may mean that countries find it difficult to maintain an E.R over a num of years
Infrastructure
Essential for development - country needs roads, airports, schools and hospitals, railways etc
Higher supply costs delay businesses and it reduces the mobility of labour
Gov should provide these systems whilst market based believe private sector should
Has many positive social benefits which suggests the gov should provide it
Infrastructure eval
Infrastructure tends to suffer from free rider problem and has very high capital costs, making it unlikely the private sector will develop it
Gov may not have funds to provide infrastructure and is argued that it may inefficient
Projects often associated with bribery and corruption causing environmental damage and may be poorly built and maintained
Intermediate tech which uses local materials and can be fixed locally is better than large scale infrastructure
Promoting joint ventures with global companies
A way to reduce the exploitation of countries as a result of FDI would be to set up a joint venture
gov may insist that firms setting up production plants in their country find a local partner to create jointly owned company with
This will help to keep some of the profits generated within country which can be used in investment
Buffer stock scheme
Where the gov imposes both a maximum and minimum price for goods buying ups stocks when there is excess supply and selling them off when there is excess demand
As a result should be self financing - money is raised when selling the products which allows the government to buy the next lot of stocks
Used on commodities where prices are volatile and can either be set up by group of countries or within a country
When effective, it is beneficial because it stabilises prices and thus encourages investment since producers can plan for long term
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
Can solve primary product dependency issues
Buffer stock scheme eval
Requires stocks to go up and down
if keep rising, then scheme will run out of money
If they keep falling, the shame will run out of stocks
Require huge start up costs as well as administration costs and problems of storage
Other countries may benefit from a buffer stock scheme since it keeps global prices fishy stable when undertaken by a group of countries and so they can be seen as free riders of the system
May mean that some countries will not want to introduce system
Minimum prices may be set too high, encouraging producers to become inefficient
They will produce as much as they like an know they will be able to sell it anyway, meaning that supply is high and the gov has to continually buy up stocks
if the scheme is operating at a loss, the taxpayer feels the burden and gov finances are worsened
Lewis model
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
Modern industrial sector would attract workers from rural areas (higher wages = higher income = more savings for investment)
Labour productivity was so low in agricultural areas that people leading would have no impact on output = surplus of food since same amount was being shared among less people
Savings and investment key to growth and thus growth was achieved through rural-urban migration
Industrialisation eval
Even though labour productivity is low for some parts of the year, during planting and harvesting vast amounts of labour is needed
Not necessarily true that those with higher wages will save and invest their money
Recently, migration has led to urban poverty replacing rural poverty as industrial sector is unable to provide jobs for all those who have moved
Improvements in technology will lead to reduced demand for labour
Industrialisation is a result of development rather than a cause
Possible for government to build factories and plants to encourage the transition to industrialisation. Has been successful but in many countries the industry fails and so there is just waste of scarce resources
Instead of industrialising you can go to services like India as this is where they have comparative advantage
shows that no all countries will develop in the same way
Tourism
Due to climate and geography some countries have built a tourism industry
Provides them with funds to develop economy and improve living standards
Income inelastic nature of tourism means that as global economy grows, demand for industry will increase further, allowing developing country to continue development
Tourists represent a source of foreign currency which will fill the currency gap so countries will be able to fund their imports without negative consequences
Countries are likely to attract investment from TNC’s (hotel) who will also bring knowledge = funds improvements in infrastructure as tourism requires reliable electricity etc and so gov have incentive to provide this. Investment will have multiplier effect in economy
Job creation locally since tourism relies on low skilled workers who know local area rather than high skilled
Gov sees higher tax revenues due to higher income and higher profits = funds to diversify countries
Tourism eval
Holidaymakers’ demands for products from their home countries mean that the tourism industry is associated with an increase in imports and so may not help the foreign currency gap at all. Also means suffering in recession
Very labour intensive
Industry is seasonal and involves low skilled, low paid jobs meaning multiplier effect is limited
In and out of fashion meaning some areas will see loss of employment and that investment may only receive a short term return
Large amount of wealth created will be withdrawn as TNCs repatriate their profits = capital flight
Country can suffer externalities including pollution, waste and impact on culture
Development of primary industries
Some countries (Saudi, Norway) able to develop because of an abundance in their natural resources
Provides funds to allow country to diversify as well as allowing infrastructure development and better eduction
Gov can address Dutch disease
Development of primary industries eval
Primary products are volatile and primary product dependency causes many issues
Primary industries suffer from corruption
Fairtrade schemes
Trading partnership based on dialogue, transparency and respect which seeks greater equity in international trade WTFO
Num of organisations which monitor that what is being sold under fair-trade label conforms to a num of key principles; a fair price, community development, fair working conditions and protecting environment
Fair price typically means that agreements are made to buy guaranteed amount of produce over period of time at price which is above market price when agreement was made
Gives producers stability and raises income
Means that child labour is not used and that production is sustainable and does not take place at expense of environmental degradation
Those under scheme have higher income and satisfaction, a greater understanding of market and more optimistic view of future
They were able to save for the future and invest
Fair trade shame eval
They did not feel as though income was sufficient in study
Argued that system has an insignificant impact
Benefits the fair trade producers but can leave others worse off since non fair-trade producers see a fall in demand
Long term = higher price for fair trade goods will increase supply and thus price can fall but this will depend on PES
Higher income reduces incentive to diversify and keeps farmers engaged in low profit activities
However, it allows parents ti send children to school and this will allow them to gain skills to move from agriculture
Aid
Country voluntarily transfers resources to another or gives loans on concessionary terms
There is tied aid, bilateral aid, multilateral and concessional loans
Reduces absolute poverty, particularly emergency relief after disasters
Can fill savings gap and thus provides funds for investment whether in human capital or infrastructure
Both have to be done by gov as they are public goods
Provides foreign exchange to full foreign currency gap
Contributes to increased globalisation and trade as well as reducing inequality
Aid eval
Unclear whether money really reduces absolute poverty as improving infrastructure does little to help those suffering most
creates depenmdecny culture where countries are unconcerned by finances
Corruption means that money does not always go where it is meant to
Difficult to know the best way to develop country and therefore difficult to split spending
Debt relief
Many countries suffer from high interest payments to loans
Limits growth of some of poorest countries whilst being relatively small for countries and agencies that are owed money
Seems reasonable for debt o be written off
Eases gov finances and allows more money to be spent on provision of services and infrastructure to aid development
Debt relief eval
Moral hazard
Creates a precedent - every poor country may now expect to receive debt relief
also eases pressure on weak governments to adopt reforms and good economic policies
World Bank
Aims to bring long term development and a reduction in world poverty It is made up of:
o the International Bank for Reconstruction and Development (IBRD)
o the International Development Association (IDA)
o the International Finance Corporation (IFC)
o the Multilateral Investment Guarantee Agency (MIGA)
o and the International Centre for Settle of Investment Disputes (ICSID).
The IBRD and IDA provide financing, policy advice and technical assistance: IDA helps the poorest countries whilst IBRD helps middle income and creditworthy poorer countries. IFC, MIGA and ICSID help strengthen the private sector in developing countries by providing them with finance, technical assistance, political risk insurance and settlement of disputes.
