Civil war/poor governance

Question 1

Introduction

Answer 1

Introduction: A good example of a country that has experienced poor governance and conflict is Zimbabwe. Its economy has collapsed as a result of economic mismanagement, resulting in 94% unemployment and hyperinflation. The economy poorly transitioned in recent years, deteriorating from one of Africa’s strongest economies to the world’s worst.

Question 2

Three points

Answer 2

Opportunity Cost of Lost Output

FDI

Reduced receipts

Question 3

Opportunity cost point

Answer 3

Opportunity Cost of Lost Output: Inefficient operation of government, through poor policy, or even conflicts/civil unrest represents an opportunity cost in terms of lost potential output. The UN estimates that the cost of war in Africa is equivalent to 15 years of development aid. This is because production, use of manpower and government time is being used on a damaging conflict when it might have been used developing improved education, healthcare or infrastructure programmes.

Question 4

Opportunity cost evaluation

Answer 4

Evaluation: The impact on output of course depends on how long the situation remains for. In sub-Saharan countries this has proved to be particularly significant simply because of the length of time that the economies have experienced turmoil. Countries such as Zimbabwe or DR Congo have experienced decades or instability.

Question 5

FDI point

Answer 5

FDI: Poor governance and civil conflicts can significantly inhibit foreign direct investment. Firms looking to locate in a country want to be sure that property rights are maintained, staff are safe, and that the transport of goods and services are achieved without damage. Weak government or war make a country look less attractive as a place for FDI and the associated benefits that this could bring.

Question 6

FDI evaluation

Answer 6

Evaluation: Increased investment can also exhibit negative externalities so it is important not to overplay the loss of FDI in this situation. The benefits that FDI exhibits are also often exaggerated. For example, the impact on the foreign currency gap might not be a significant as first thought as profits generated are moved overseas

Question 7

Aid point

Answer 7

Reduced Receipts from Aid: Where a government is seen to mismanage its funds or the economy in general, they are seen as an untrustworthy place to provide aid to. This can result in a complete loss of aid, or at the very least a loss of autonomy in the way in which aid is used. This can reduce the funding available to spend on education, healthcare or infrastructure programmes.

Question 8

Aid evaluation

Answer 8

Evaluation: Reduced dependence on aid can be a good thing in the long term. It can force a country to become more self-reliant.