4.5 Emerging and developing economies Flashcards
(32 cards)
What does the Harrod Domar model show
Countries with low savings -> Low investment -> Low capital accumulation -> Low incomes and outputs -> Low savings
It stated that growth rates depend on the savings ratio (saving as a proportion of GDP) and capital output ratio (productivity of output)
How do you calculate the capital output ratio
Capital:Output
E.g. £100 investment produces £10 output the COR is 10:1 over that period of time
If the COR is lower, more is produced and the savings ratio rises.
If 10% of income are saved, it becomes capital through loans, creating new output
How do you use COR and savings ratio to calculate the rate of growth of GDP?
Savings ratio/capital output ratio
What is the importance of capital investment for developing countries?
- Injection of demand for capital good industries
- Multiplier
- Increases rural productivity and per capita incomes rise and consumption rises
- Supports economies of scale
- Export-led growth rises
What is the savings gap?
-Rich countries have excess savings whereas small low income countries cannot generate sufficient savings to fund capital investment
Lack of financial sector or underdeveloped sector means no guarantees provided by governments for depositors to get money back, lack confidence - increases reliance on foreign aid or overseas borrowing, leading to higher debts. This makes it more expensive for public and private sector funds needed for investment
In Sub Saharan Africa savings around 17% of GDP compared to 31% to middle income countries
What is some evaluation for Harrod-Domar/savings gap theory?
- Only relates to physical capital - ignores human capital
- Assumes constant relationship between capital and output - ignores ability of capital to generate profit for re-investment
- Savings gap may be overcome in other ways e.g. remittances, loans, FDI or aid
What was Lewis Two Stage Model?
-Underemployment in many rural primary product dependent countries, so surplus labour from rural areas could become productive in manufacturing sectors without reducing agricultural outputs
Model is 3 bubbles, where surplus labour goes from the agricultural sector to the manufacturing sector. The manufacturing sectors are then linked as profits/savings/reinvestment leads to benefits to external economies of scale and capital growth
What are the problems with Lewis’ model
- Doesn’t account for skills
- Negative social impacts of moving agricultural workers into cities - think favelas and discrimination
- If industry is foreign it may be repatriated out of the country
- New technology may replace workers
- Assumes all development will be in industrial and manufacturing sector, agriculture may be neglected
What is Rostow’s model?
Growth occurs in 5 stages
- Traditional society - low investment, static incomes
- Preconditions - some manufacturing, markets must develop to grow
- Take off - accelerated growth, entrepreneurs, investment rises faster than GDP, sectors dominate
- Drive to maturity - new sectors, balanced economy, investment high proportion of GDP
- mass consumption - fully diversified, output rises, consumption highest amount of GDP
What is dependency theory?
World is divided into core and periphery nations, where the periphery are exploited by the core through colonization and resource exploitation and so the wealth is unequally distributed.
It states that in order to grow periphery countries must cut ties with core countries and look inward to growth
What are some general problems of developing countries?
- Low capita income and savings
- Low capital (human and fixed)
- Health/IMR
- High debt
- Dependence on aid
- Dependent on volatile primary sectors
- Lack of financial and government institutions
- Lawlessness and corruption
- Exploited by TNCs
- Conflict, disease and natural disaster
- Low tax revenues
- Landlocked
What is primary product dependency?
- At early stages of development countries have narrow ranges of primary products and usually depend on extracting and exporting primary commodities which are volatile and there are risks of over specialization
- This may lead to the resource curse and resources may be sold to fuel corruption, conflict and inequality and not effectively spent on diversifying and improving the economy
What is the Prebish-Singer hypothesis?
- Primary products income inelastic and demand for manufactured products tend to be income elastic
- As global incomes rise, demand for manufactured goods rise faster than demand for primary products as globalization causes them to fall in price
- If developing countries export primary and import manufactured, the terms of trade will fall`
What is dutch disease?
The relationship of discovery of natural resources and a decline in the manufacturing sector as it causes the appreciation of exchange rates and reduces competitiveness.
What are the issues of primary product dependency?
- Volatile and price inelastic in short term
- Fluctuating and uncertain revenues
- Exchange rate fluctuations - commodity price appreciates/depreciates currency
- Protectionism from abroad out competes
- Domestic shortages - conflict, disease, disaster
- Un renewable and finite
- Dutch Disease
- Prebish Singer Hypothesis - Falling terms of trade
What strategies may be used to reduce primary product dependency?
- Better governance - clear how natural resource revenues are spent
- Stabilisation - fund humman capital and infrastrucutre or inject money into economy
- Higher taxes of natural resources profits
- Buffer stock - to counter when prices fall
- Diversification - shift to manufacturing and tourism.
What is some evaluation to primary product dependency?
- Do enable development
- Many primary products needed for manufacturing
- Country with comparative advantage will benefit
- Growth of emerging economies increases demand
How has geography and history affected development?
Geography:
- Land locked
- Natural disaster and disease
- Lacking trade partners and infrastructure
- Few natural resources
- Infertile land, swamp
History:
-Colonial ties has created dependency and exploitation of resources and labor making countries worse off
What is the foreign currency gap?
- Currency outflows are exceeding currency inflows as they lack the foreign exchange reserves to import yet need the imports.
- This may happen during a current account deficit as low returns from primary products, there is an outflow of investment and there is a fall in value of inflows of remittances and overseas incomes. May also be significant interest payments on debts or need to spend foreign currency on importing for their industry.
Countries must earn foreign currency to purchase imports and so if they have a currency gap they cannot buy essential imports and so can severely damage short run economic growth and development
What is capital flight?
- Rapid movements of money out of a country usually due to a lack of confidence resulting from:
- Conflict and unrest
- State control
- Exchange rate uncertainty
- Financial system stability
How does debt inhibit development?
-Developing countries often have high debt to other countries or lenders such as IMF or world bank. This is because:
- Falling terms of trade - borrowing to fill
- Rising interest rate raises debt cost
- oil prices rising
- Borrowing to fund capital and infrastructure projects
- Running budget deficit
- Households or businesses borrow money in a foreign currency depreciates exchange rates and can cause debt
What are the risks of a large amount of debt used for development?
- Returns on investment may fall short of expectations
- If exchange rate depreciates real value of debt rises
- Recession makes harder to meet interest
- Government revenues fall
- May loans external confidence from investors
What are the 2 insitutional gaps for development?
- Financial sector - weak financial esctors with high interest may mean lack of development and public and private sector businesses cannot build assets or investments
- Creates infrastructural gaps as transport costs are higher and infrastructure is unreliable and so often cannot compete with urbanisation. This can:
- Increase costs and prices
- Reduce geographical mobility
- Damage export competitiveness
- Make country less attractive to FDI
- Makes economy vulnerable to natural disasters
- Lack basic human needs - less productive e.g. sanitation
- Causes gaps in human capital as quality of education is much lower
- In developing countries 60% of primary school children do not achieve minimum proficiency and over 260 million do not go to school at all
How do property rights affect development?
- Tragedy of the masses
- Rights to own land crucial for producitivity
- Corruption if no property rights
- Important to tackle inequalities
- Laws on patents secure investment
- Common rules encourage trade and investment between countries
