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Theme 4 > 4.3.2 Factors influencing growth and development > Flashcards

4.3.2 Factors influencing growth and development Flashcards

1
Q

Define economic growth

A

an increase in real GDP/an increase in the productive potential of a country.

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2
Q

Define economic development

A

an increase in welfare or living standards over time. Unlike economic growth, economic development is a subjective concept

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3
Q

What are some factors associated with strong economic development? (Linking econ growth to development)

A
  • Openness, import knowledge, exploit global demand
  • Leadership and governance (Credible, capable competent governments (meeting people’s wants)
  • Market allocation, prices guide resources,
  • High investment and saving
  • Macroeconomic stability, modest inflation, sustainable public finances
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4
Q

Some factors influencing economic development

A
  • Primary products dependency
  • aid
  • levels of savings and investment
  • foreign currency gap
  • capital flight
  • human capital
  • access to credit and banking
  • demographic
  • infrastructure
  • regional effects
  • property rights
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5
Q

Why might primary product dependency be undesirable?

A
  • price fluctuations (the Prebisch-Singer hypothesis)
  • can lead to resource curse
  • over specialisation
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6
Q

Price fluctuations with primary product dependency

A
  • The low value added of commodities/demand for primary products = income inelastic
  • so as world incomes rise = the country’s terms of trade will fall since prices of manufactured goods will rise, relative to the prices of primary products.
  • This is the Prebisch-Singer hypothesis
  • price fluctuations = may deter investment
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7
Q

the Prebisch-Singer hypothesis

A

countries dependent on primary produce will suffer declining terms of trade over time

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8
Q

Resource curse of primary product dependency

A
  • where an economy is stuck in producing primary products with no incentive to diversify the economy.
  • Countries rich in raw materials grow slowly.
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9
Q

Example of country suffering from resource curse/primary product dependency

A

Botswana: world’s largest producer of diamonds
Vulnerable
- reliance on diamond exports = economy is highly sensitive to external shocks (global demand and prices of the natural resource)
- high price and production levels = value of exports is high = high tax revenue
- in 2009, Botswana suffered from a steep fall in exports (-28%) = recession
Sustainability
- it is estimated the main diamond deposits will be exhausted between 2025-2030

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10
Q

Evaluation of primary product dependency

A
  • countries can benefit from it
  • impact depends on how the country decides to utilise the benefits
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11
Q

Evaluation of primary product dependency: how can a country benefit from it?

A
  • primary resources prices have often risen sharply.
  • Second year prices fell in the era of globalisation post 1970s (seaside/China effects)
  • revenues gain from oil have enabled the Gulf states to develop rapidly gaining high levels of real GDP.
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12
Q

Evaluation of primary product dependency: utilising benefits from primary products?

A

E.g Gabon has large oil reserves.
- They produce 300,000 barrels of oil a day however, 60% of Gabon’s population live below $2 a day
-Gabon is a relatively wealthy country but the wealth is not equally distributed.
- The country has already used up most of its oil reserves and failing to find more.
- They have failed to benefit from oil wealth.

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13
Q

What are some solutions Botswana has put in place to help with primary product dependency?

A
  • Eurostar Botswana, joint with the government to ensure money benefits Botswana
  • more local added value
  • Training programmes to improve skills
  • Providing meals to children
  • Supporting local communities = help development
  • Library to help literacy
  • To provide employment and economic opportunities (job skills, commercial activity)
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14
Q

Primary product dependency solution

A
  • Buffer stock scheme
  • diversification (even with tourism)
  • local added value
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15
Q

Evaluation of diversification as a solution to primary product dependency

A

However, depends on labour mobility.
- how able is labour able to level from relatively unproductive agriculture to more productive manufacturing.

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16
Q

Aid (ODA)

A
  • ODA: official development assistance
    The transfer of resources on concessional terms
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17
Q

How can levels of savings/investment promote growth/development?

A
  • inward investment = higher levels of capital & the benefits gains from attracting multinational companies into their economy.
  • can support newly industrialised countries (NICs)
    E.g in 2011, inward investment in Brazil stood at $101bn.
  • Harrod-Domar model
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18
Q

Harrod-Domar model

A

inadequate savings = low investment = capital accumulation will be low = slow economic growth.
- Evaluation: However, this model should be evaluated; for example, it focuses on physical investment only and ignores other sources of investment.

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19
Q

How does foreign currency gap influence economic development?

A
  • some developing and emerging economies face a shortage of foreign currency
  • since their earnings from exports are quite low, or world oil prices have increased or they have large international debts on terms that they cannot afford to repay
    e.g if interest rates increase.
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20
Q

How does capital flight influence economic development?

A

The owners of any extra income that could be saved and therefore used for investment often withdraw their money from the country in search of higher returns abroad.

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21
Q

How can human capital (education) influence economic development?

A
  • can influence labour productivity.
  • Without basic literacy and numeracy, it is difficult for an economy to develop form manual labour to new higher tech industries in the service sector.
    -Countries which place an emphasis on education and provide some state funding = more likely to grow and develop = improves human capital and shifts the PPF outwards.
    E.g good levels of education in India have given opportunists for grown in service industries such as IT and call centres.
22
Q

How can human capital (demographic) influence economic development?

A
  • many developing and emerging countries are characterised by high birth and death rates = high dependency ratios and an ageing population = strain on healthcare and reduces labour.
  • Negative demographic dividend
  • E.g China’s one child policy has resulted in an ageing population
23
Q

Negative demographic dividend

A
  • where fewer people have to provide for more dependents e.g retirement
  • This decreases the growth rate of income per capita
  • High level of dependent children, or of elderly who do not work meaning that the country consumes more than it produces
24
Q

How does access to credit and banking influence economic development?

A
  • if individuals cannot access credit and banking services = may not be able to secure loans to start businesses, = limiting the scope for growth and development.
25
Q

How does infrastructure influence economic development?

A
  • if infrastructure is inadequate = difficult and costly for businesses to trade
  • poor infrastructure = a deterrent to domestic investment and to FDI
  • In recent years, economic development in Central Africa has improved due to increased investment in roads, railways and seaports. Part of this investment has come from Chinese companies who have interest in transporting raw materials from countries in Africa.
    E.g Liberia
26
Q

How does regional effects influence economic development?

A
  • Development is influenced by development of neighbouring economies.  
  • E.g in 1980s and 1990s, South East Asia showed strong levels of economic growth and development. However, Sub-Saharan African countries experienced slow growth. This was partly due to gravity effect   
27
Q

Gravity theory of trade

A

ceteris paribus
- an economy will gravitate towards trading with its closest neighbours and economies which are similar in terms of size, geographical proximity, language similarities, cultural preferences and stage of development.   

28
Q

Evaluation of regional differences influencing economic development

A
  • however, with the development of transport, technology and communications,  geographic distance matter less.
  • For intangible services, geographical distances don’t matter much.  
  • E.g In recent years, the fastest growing economies have been in South East Asia (China and India) which offer more scope for growing trade for the UK than Europe.  
29
Q

The Dutch Disease

A

In the Netherlands, manufacturing declines after the discovery of gas fields in the early 1960s.   

30
Q

What does the dutch disease show an example of?

A

The problems associated with a rapid increase in the production of raw materials (oil and gas) = a decline in other sectors of the economy.
- When the raw materials run out, the economy can be in a worse position than before.  

31
Q

What is an example of the discovery of raw material in UK

A
  • After the discovery of North Sea oil, the UK did little to increase investment or saving.
  • The 1980s saw tax cuts, a falling saving ratio and a long-term relative decline in manufacturing.
  • This contrasts with the Norwegian approach of investment and saving.  
32
Q

What are the problems with discovering oil and gas   

A
  • Appreciation of currency
  • Decline in competitiveness
  • Current account deficit
33
Q

How can discovering oil and gas lead to the appreciation of currency?

A

discovering in oil = increase in oil exports = appreciation in exchange rate since higher demand for exports = increase demand for sterling.  
- E.g in late 1970s, Uk saw a rapid appreciation in Sterlings after the discovery of the North Sea oil  

34
Q

How can discovering oil and gas lead to a decline in competiveness?

A
  • other trade-able sectors will become uncompetitive. 
    The high output of raw materials only lasts for a few years so when oil runs out, the economy has been adversely affected and struggles to catch up where it left.
  • (e.g manufacturing industries will see a substantial fall in demand due to higher exchange rate)
  • E.g In the early 1980s, UK manufacturing output fell significantly due to the appreciation in the Pound.  
35
Q

How can discovering oil and gas lead to a current account deficit?

A

with oil exports, countries can run a current account surplus, but when oil exports drop their old exporting industries have faded away so they are left with large current account deficits 

36
Q

What ways can countries prevent events such as the Dutch Disease?

A
  • Depreciate the exchange rate (e.g China)  
  • Spend proceeds of oil revenue on infrastructure and education
  • Reduce foreign capital flows
37
Q

How might spending the proceeds of oil revenue on infrastructure prevent events such as the Dutch disease?

A

spend proceeds of oil revenue on infrastructure and education = help improve infrastructure with positive externalities = help competitiveness of manufacturing export industries = help them deal with higher wages and higher exchange rate  

38
Q

How might reducing foreign capital flows help prevent events such as the Dutch Disease?

A

if a country moved from a budget deficit to a budget surplus, it would attract less foreign investment to purchase the govt bonds. Lower capital inflows = limit rise in exchange rate.

39
Q

Property rights

A

legal control/ownership and associated benefits over an asset- perhaps through government legislation and regulation (also the ability to defend the ownership through legal process)  

40
Q

How might property rights help the economic development?

A

Countries with informally owned land = citizen’s assets could bee taken away at any points.   
- They need proof of ownership since without it they cannot cannot prove they own them = cannot use them as collateral. 
- If small farmers had clear, legal title to their property = borrow money more easily to buy better seeds or start a business = become richer. 
- It constrains the ability to start a business.  

41
Q

Property rights example

A

E.g Indonesia, Thailand and Vietnam have pursued tilting projects attempting to map and register the territory.   
- Rwanda has used cheap aerial photography.   
- It is suggested that tilting has boosted agricultural productivity (especially Asia and Latin America).  

42
Q

Evaluation of property rights to help economic development

A

However, simply giving property-holders a title deed is not enough. 
- A legal document is worth little if its owner cannot easily use it. The institutions needed to enforce property rights smoothly, impartially and transparently are missing.  
- E.g, in Rwanda, 87% of sales involving parcels of rural land were still done informally- five years after the drive to give everyone deeds ended.  
- Politicians have strong incentive to no title projects.  
- There are also lots of loopholes (ancestral land)  
- One law undermining land ownership is that, in some countries, daughters and widows do not have the same land inheritance rights as sons. Customary laws are enforced in many villages.   
- Mining and forestry laws also override land laws. For example, Ethiopia’s registering of millions of land parcels in the 2000s was undermined by restrictions on their use as collateral.  

43
Q

Non economic factors influencing economic development

A
  • Political instability
  • Corruption
  • Macro-econ instability
44
Q

How does political instability affect economic development?

A
  • This is a big factor influencing whether firms will invest in developing economies.
  • Sign of instability increases economic and personal risk of investing.   
  • Prolonged civil unrest/military conflict causes investment to dry up and resources to be wasted in unproductive means.   
45
Q

How might corruption influence economic development?

A

e.g Venezuela 
E.g Liberia has large oil reserves however the government’s inability of the oil sector has meant the country hasn’t benefited greatly from it.   

46
Q

How much macro-econ stability influence economic development?

A
  • Macroeconomic stability encourages investment and development
  • Stability = low rate of inflation and exchange rate stability. Rapid devaluation = capital flight and a decline in growth.  
47
Q

Venezuela case study

A
48
Q

Example of corruption in Africa

A

In sub-Saharan Africa, the money lost from corruption could pay for the education of 10 million children per year in developing countries.

49
Q

Example of how vulnerability to external shocks can influence economic development

A

Nepal was already one of the poorest countries in the world, but the Nepal earthquake in 2015 pushed more people into poverty. & hard to develop infrastructure.

50
Q

How can balance of trade influence growth?

A

Worsening balance of trade can slow growth and lead to currency depreciation (=inflation)

51
Q

How can economic growth lead to economic development?

A
  • It can have trickle down effect
  • Economic growth means higher GDP which can lead to higher incomes
  • this is one of the factors contributing to economic development
52
Q

How can economic growth lead to economic devlepkent?

A

Higher incomes = lower poverty = can afford education and healthcare =higher HDI

Theme 4 (18 decks)

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