9.1 - Growth and Development Flashcards
Q1: What is economic development?
A1: Economic development refers to the process of improving individual well-being and quality of life, including improvements in standards of living, alleviating poverty, improving health and education, and increasing freedom and economic choice. (Quoting Sen)
Q2: How does specializing in the production and export of primary commodities contribute to economic growth and development?
A2: By specializing in the production and export of primary commodities such as oil, gas, copper, cotton, etc., developing countries can increase their net exports, which in turn increases aggregate demand and leads to economic growth. Developing countries often have an abundance of primary resources, which are in high demand from advanced economies and emerging markets. They can exploit their comparative advantage in primary commodities, using the revenues generated from exports to purchase capital imports. This can result in income growth, improved job prospects, and profits for domestic firms.
Q3: How does income growth contribute to economic development in developing countries?
A3: Income growth in developing countries leads to an increase in GNI per capita, making basic life-sustaining goods and services more affordable and lifting people out of absolute poverty. The increase in demand also encourages domestic firms to increase their output, creating job opportunities and reducing unemployment. Rising incomes can contribute to economic development and potentially improve income distribution, indicated by a decrease in the Gini coefficient.
Q4: How can relying on primary commodities for growth and development benefit domestic firms in developing economies?
A4: Relying on primary commodities for growth and development can lead to increasing revenues and profits for domestic firms in developing economies. This has been successful in recent years due to high demand for primary commodities from booming emerging markets. The profits can be used to invest in clean technology, reduce environmental pollution, and promote sustainable economic growth. It also allows for diversification into manufacturing, which is a higher value-added sector, generating greater incomes and promoting sustainable development outcomes over time.
Q5: How can exporting primary commodities lead to a fiscal dividend for governments in developing countries?
A5: Exporting primary commodities can result in a fiscal dividend for governments in developing countries due to higher economic growth. Increased net exports lead to higher incomes, output, and expenditure, which in turn increases tax revenues from income tax, VAT, and corporation tax. These additional revenues can be used by the government to invest in improving the health and education sectors, literacy rates, life expectancy levels, and infrastructure development, ultimately promoting sustainable development.
Q6: What are some areas of development that can be improved through government spending?
A6: Government spending resulting from the fiscal dividend can be directed towards improving the health and education sectors, literacy rates, life expectancy levels, and developing infrastructure such as roads and bridges. These investments contribute to sustainable development by enhancing human capital and enabling efficient operations for businesses while improving accessibility to essential services for the population.
Q1: What is one con of growth and development mentioned in the textbook?
A1: One con of growth and development is income inequality. Many of the gains from the commercial exploitation of rich natural resources are kept by power elites in societies, while those who live above the resource endowment see little improvement in their standard of living. This leads to a situation where per capita incomes have not increased in line with GDP, causing relative and absolute poverty for those stuck in the agriculture sector.
evaluation: How can income inequality be addressed in developing economies?
evaluation: Income inequality could be dealt with using fiscal policy, such as income/corporation taxation and spreading income distribution through transfer payments. However, such policies are unlikely to succeed in corruption-ridden developing economies, making it challenging to effectively tackle income inequality.
Q2: What is another con of growth and development discussed in the textbook?
A2: Another con of growth and development is negative externalities. Primary commodity dependence can lead to the rapid depletion of natural resources and other negative externalities in production, such as air pollution, deforestation, resource degradation, and loss of biodiversity. This not only risks converting developing countries from being resource-rich to resource-poor but also affects export earnings and public finances, hampering development in areas like infrastructure, healthcare, and education systems.
evaluation: What is the impact of negative externalities on resource allocation?
evaluation: Negative externalities result in over-production of resources compared to the social optimum (Q*), leading to a misallocation of resources and allocative inefficiency. The diagram shows a deadweight welfare loss, indicating that society is worse off due to over extraction, reducing economic welfare and acting as a burden on future generations. This constraint on long-term sustainable development can have severe consequences.
Q3: How does government corruption affect growth and development?
A3: Government corruption is a significant obstacle to growth and development. It occurs when government officials misuse tax money for inefficient purposes, such as political oppression, personal gain through hidden international bank accounts, or promoting activities that serve their political self-interest. This results in a divide between the rich elite and worsening poverty, leading to a misallocation of resources and key development outcomes not being achieved.
Q4: What economic issue can arise from uncontrolled and unbalanced economic growth?
A4: Uncontrolled and unbalanced economic growth can lead to high rates of demand-pull inflation. Increased pressure on existing factors of production raises their prices, which businesses pass on to consumers through higher prices. If incomes do not rise as quickly as inflation, individuals’ purchasing power decreases, resulting in persistent poverty and a reduced ability to improve material and non-material standards of living.
Q1: What is the importance of sustainability in economic growth and development?
A1: Sustainability in economic growth and development ensures that future generations can benefit from the same possibilities as the current generation. It involves achieving growth without excessive inflationary pressure, significant environmental costs, and the risk of resource depletion. To achieve sustainability, effective environmental policies should be implemented, and supply-side policies should focus on increasing the long-run aggregate supply (LAS) to reduce inflation risks and promote diversification into value-added manufacturing sectors.
Q2: What is the significance of efficient governance for sustainable development in developing countries?
A2: Efficient governance, characterized by transparency, accountability, and effective public spending, is essential for achieving true sustainable development in developing countries. This includes ensuring that tax revenues are collected efficiently and spent effectively on infrastructure, health, and education services. Despite progress in strengthening democratic institutions, developing countries still face high levels of government fragility and corruption, hindering their economic development.
Q3: What role should governments play in promoting development in the short term and long term?
A3: In the short term, governments should focus on ensuring an efficient, robust, and corruption-free tax system to collect full tax revenues. These revenues can then be effectively spent to reduce income inequalities that may arise from increased growth. Additionally, governments should monitor and tax firms engaged in over-extraction of natural resources to promote long-term sustainable development. In the long term, governments should promote export diversification by subsidizing enterprises in manufacturing and services, providing training schemes to develop skills for workers in non-primary sector production. This transforms the economy from unsustainable dependence on primary commodity exports to experiencing continual growth and development.
