4.3.2 Factors Influencing Growth + Development Flashcards
How can primary product dependency of commodities affect development
How does the demand for primary commodities affect this
primary commodities are vulnerable to volatile prices
dependent on natural resources for growth which is usually quite slow
there is usually highly inelastic demand for commodity goods, meaning if specialisation occurs to increase supply, prices will fall significantly
What is the Prebisch-Singer Hypothesis
How does this hypothesis relate to terms of trade
What is the problem with this hypothesis
Over the long run, prices of primary goods decline in proportion to prices of manufactured goods
Due to these price declines (with inelastic demand) terms of trade for primary product exporters decline
However in reality for many countries this hasn’t happened
What is the Dutch disease
How does it relate to the value of the currency
the adverse impact of the sudden discovery of scarce resources via appreciation of exchange rate and hence the decline of export competitiveness
This is due to demand for the currency suddenly increasing
Leading to premature deindustrialisation
How does the savings gap affect levels of development
extreme poverty in low-income countries make it almost impossible to generate sufficient savings to fund capital investment projects
underdevelopment of Financial + Banking sectors could lead to limited welfare + pension systems
What is the Harrod Domar Model of Growth
how does it link to capital investment
Rate of growth = Savings ratio/Captial inputs ratio
When the quality of capital resources is high and when an economy can better apply capital inputs and appropriate technology
e.g. using more advanced ideas, then capital-output ratio will be lower
IRL: over-investment in China
List the importance of capital investment in developing countries
- Injection of demand for manufacturers of capital goods - multiplier effect
- increases productivity, hence per capita incomes
- Economies of scale
- Export lead growth - shown in China
What is the Foreign currency gap
Happens when currency outflows exceed inflows
This can occur from persistent CA deficit
A nation could then not have enough foreign currency to pay for essential imports
How would developing countries attracting external finance affect levels of development
FDI, Portfolio investment, long + short term flows, overseas aid, remittances
can create demand within a country and cause a multiplier effect
can cause hot flows of money, increasing the demand for a currency and cause an appreciation
How does Capital flight affect levels of development
The outflows of resident capital/money which is motivated by economic growth + political uncertainty
this can be political uncertainty, exchange rates, stability of countries financial system
Common in Russia, Pakistan + Nigeria and countries trouble by Civil war
How can demographic factors affect levels of development
The world has experienced an unprecedented increase in population size
Most of this increase in population size is in developing countries, should allow for a bigger workforce and increased productivity
Problems with increased life expectancy + ageing population
is globally rising and since 1990 has increased in 96% of countries
However, with this increase in older people, working populating growth is slowing and sometimes is not offset by migration
e.g. Japan has had a contraction in the size of their workforce
OEDC - “ageing population may result in reduced innovation, reduced output growth and real interest rates”
What is brain drain and what are the problems with it
Movement of highly skilled or professional people from their own countries tow another where they can earn more money
Can lead to depopulation, loss of human capital and enterprise
How does External Debt affect levels of development
Many developing countries accumulate growing amounts of external debt
Can grow to negative budget deficits, current account deficits, and borrowing from international lenders
- Can cause low return on investment
- depreciation can cause debt to grow
- tax revenues shrinking (i.e in a recession) make it harder to pay off interest
- less likely to gain future finance
How can access to credit and banking affect levels of development
What are the benefits to financial institutions
Low income or irregular income, can lead to expensive pay-day lending, check-cashing services or informal money lenders to cover short-falls in incomes
Financial institutions allow for: building assets, mitigating shocks, productive investment, makes it easier for Gov to collect tax
some of the poorest are trapped by loan sharks with high rates of interest
How does Infrastructure affect levels of development
Insufficient infrastructure can
Infrastructure needs to be robust to cope with effects of rapid urbanisation + climate change and large growth in population sizes
poor infrastructure can increase costs for business, reduce geographical mobility and limits competitiveness
