4.5 Emerging and developing economies Flashcards
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
