Development Flashcards
What are the three equal weights within the HDI?
- education - mean years of schooling
- health - life expectancy at birth
- real GNI per head at PPPs
Waht are the advantedges of HDI?
Combines effects of increased growth with other quality of life indicators
What is a disadvantedge of HDI
- does not take into account inequality, poverty or other measurements of deprivation (qualitative factors)
- no income distribution (inequitable development is not human development)
- PPP values used to adjust GNI data change quickly can be in a cure or misleading
When was Inequality adjusted HDI (IHDI) introduced
2010
What is the IHDI
- HDI adjusted for inequalities in the distribution of achievements in each of the three dimensions of the HDI
What is the multi dimensional poverty index?
- published in 2010
- reports and complements money based measures by considering multiple deprivations and their overlap
- identifies deprivations across the same three dimensions as the HDI
- it shows the number of people who are multi dimensionally poor (suffering deprivations in 33% of weighted indicators) and the number of deprivations with which poor households typically contend
What other indicators can be used?
- proportion of the male population engaged in agriculture
- energy consumption per person
- the proportion of the population with access to clean water
- the proportion of the population with internet access
- mobile phones per thousand of population
What is economic development?
- an increase in welfare or living standards over time
- economic development is subjective
What is primary product dependency?
- demand for these products tend to be relatively price elastic (large impact on TR)
- supply is quite inelastic (crops taking a long time to grow)
- change in supply or demand will have a big impact on the country’s export values.
- dependence on volatile products reduces investment
- Angola exports 97% oil
- Kenya: 19% tea, 12% horticulture
Sectoral imbalance - Prebisch-Singer hypothesis
- developing countries may tend to export primary products whilst importing manufactured products
- primary products tend to be income inelastic
- as world incomes rise demand wont increase, unlike manufactured goods
- Firms focused on producing primary products wont be able to afford as many imported goods over time
- ToTs deteriorates relative to prices of primary products
- PREBISCH SINGER HYPOTHESIS (cash crops is not an effective long term development plan)
What
What are some criticism of the PS hypothesis
- as population grows, demand for agriculture products will push up price
- demand for some primary products (oil/gold) is income elastic
How do you calculate terms of trade?
Index of export prices/index of import prices *100
- over 100 means exports are improving
What is the harrod domar model
GDP growth = savings rate/capital output ratio
What is the capital output ratio
- how much capital it takes to make a certain amount of output
How does savings gap lead to a barrier in development
Low GDP per capita -> low marginal propensity of saving
Low savings -> lack of funding for investment
Low investment -> low capital and infrastructure accumulation
Low capital -> low GDP per capita
Compare to saving rates in Africa to middle income countries
17% of GDP vs 31% of GDP
Low saving rates and poorly developed or malfunctioning financial markets make it more…
Exspensive for Africa sectors to get funds for investment (higher interest rates)
How can instability lead to a savings gap?
- capital flight
- people hold money abroad
What is the foreign currency gap?
- outflows of money are higher than inflows of money into an economy
- often due to primary product dependency or foreign debt
Why does a foreign currency gap act as a barrier to development
- does not have enough foreign currency to pay for essential imports such as medicines, food and raw materials
- severely hamper SRAS
Why does a foreign currency gap act as a barrier to development
- does not have enough foreign currency to pay for essential imports such as medicines, food and raw materials
How do countries deal with a foreign currency gap?
- devaluing the exchange rate to improve competitiveness
- may even increase as investors get nervous
Describe debt as a barrier to development
Money was often borrowed at times of low interest rates and has since become harder to repay:
- debt may finance risky projects where export prices for output were high and returns have since fallen
- oil prices have risen
- currency value of the borrowers has declines (especially in comparison to $)
- loans may have been used for military
How does gender inequality contribute to barriers in development
- if woman cannot access the workplace the country misses half of its workforce - misallocating resources/
- lack of education healthcare and opportunities for women will socially hold a nation back as well
In Bangladesh 81.3% labour force participation rate for me, 36% for women
$12 trillion could be added to global GDP by 2025 by advancing women’s equality (McKinsey global institute report)
How does lack of physical capital contribute to barriers of development
- may be due to lack of property rights/lack of investment
- leads to production being relatively inefficient therefore difficult to drive growth
Property rights:
- lack of makes it hard for people to access loans as they have no collateral
How does population growth affect development
- LEDCs have rapid population growth
- if population is growing faster than the economy, GNI per capita decreases
- Increased dependency ration and pressure on social infrastructure
- outwards migration of young people and ageing populations
How does poor infrastructure lead to barriers in development
- businesses will find it costly to trade
- deterrent to FDI and domestic
- low gdp -> low tax revenue
- countries with rich natural resources may receive multinational corporate investment in their infrastructure to facilitate businesses
Give examples of bad infrastructure that may harm development
- unreliable energy supplies
- poor transport networks
- bad internet coverage
What are examples of human capital problems
- low school enrollment leads to low productivity and low gdp growth
- in turn deters FDI because cost of training
- un/deremployment
- prevalence of HIV and AIDS causes problems
How much can malaria reduce GDP in African countries by?
5-6%
What is corruption?
- the use of power for personal gain
- includes bribery, extortion, diversion of resources to the governing elite
How does corruption act as a barrier to development
- deters domestic investment and FDI
- limits G&D
World bank withdrew investment to chad for oil pipeline because of corruption
What are some geographical factors to development
- lack of natural resources or difficulty farming
- landlocked so hard to access trade routes
what are some historical factors that can act as a barrier to devleopment
- exploitation
- slavery
- colonisation
How does disease affect development
- smaller work force
- lower productivity
- strain on healthcare system
How does civil strife affect development
- civil war leads to a reduction in the labour force
- destruction of capital/infrastructure
- often leads to capitral flight/high military spending once over
Give application for debt as a barrier to development
Ghana pays 30% of GDP in debt repayment
What are the two ways to increase growth according to the harrod domar model?
Increase savings rate
- higher savings means increase capital for banks
- increase ability to loan
- increase firm investment in capital
Decrease capital output ratio
- less capital to make the same amount of output (increase productivity)
What is the Lewis model?
- for a country to develop they need to improve their industrial sector
- assumes that there is excess labour capacity in the agricultural sector and therefore there is little opportunity cost to workers moving from agriculture to the industrial sector
- means that theoretically industrial sector can grow without any decrease in agricultural output, higher profits therefore can be invested in capital goods = more production = more profits
What are the drawbacks of the Lewis model?
Assumes manufacturing is labour intensive when its in fact mostly capital investment
- therefore investment in education and training for sectoral change; may be occupational immobility
- profits from investment may be reallocated inefficiently
How does trade liberalisation influence growth and development?
- removes trade barriers (free trade)
- free trade forces firms to become more competitive as there are larger markets + economies of scale
- higher efficiency + competitiveness leads to a rise in exports and export led growth
- reduces price of goods + provides more choice for consumers
- higher economic growth + living standards (led by higher productivity growth)
What are the drawbacks of trade liberalisation
- loss of government import tariffs revenue that could be used to invest in development projects
- risk of structural unemployment if demand shifts from domestic goods to imports
- risk of rise inequality if certain industry’s have little comparative advantages do not grow
- countries with uncompetitive goods will experience a trade deficit
Give an example of trade liberalisation being effective
African continental free trade agreement - 43 African countries
- Creates a single market of 1.3bn people
- liberalises ~90% of tariffs within Africa
What are government subsidies
- financial assistance or benefits provided by governments to support specific business or industries
How does removing subsidies contribute to development?
- cause firms to be inefficient as they don’t try to cut costs and become reliant on subsidies (removal forces them to be efficient)
- subsidies might have high opp cost
Drawbacks to removal of subsidies
- in developing countries (who dont have the same access to resources) removal coudl take them out of the market completely as they wouldn’t be able to continue operating and competing
Give a real life example of removing subsidies benefiting development
- Nigeria removed fuel subsidies, these mostly benefited the elite who could afford fuel at market price
What is FDI?
- the purchase of interest from a company by a foreign investor
Why do firms tend to undertake FDI?
- production costs are lower in developing countries
- enables them access to a new market
What are the benefits of FDI for development?
- creates new jobs and higher wages, leading to consumption, positive multiplier effect -> increase growth + GDP
- can improve capital output ratio and fill savings gap
What are the drawbacks to FDI?
- exploitation of workers in less developed countries by offering lower wages and worse working conditions
- profit earned in the country jay be taken out of the country and spent elsewhere
Give an example of FDI helping economic growth
- Samsungs investment in Vietnam has meant many local firms are part of their supply chain and other businesses have set up around
What are microfinance schemes?
Small loans for people who typically do not qualify for a loan. Uses social responsibility to grant out the loan.
What are the benefits of a microfinance scheme
- used in environments where there is little cash
- loan stimulates a lot of employment
- removes interest rates from loan sharks
- helping people pull sway from absolute poverty
What are the drawbacks of microfinance schemes
- dishonesty or bad investment can mean people cannot pay back their loans
- social responsibility can be detrimental
What are examples of microfinance schemes
- in Bangladesh microfinance schemes have pulled 10% of those engaged in those schemes out of absolute poverty (2.5mil)
What is privatisation
When government owned companies or services are transferred into the private sectors
How does privatisation increase real gdp?
- improve effiency and productivity because privatized companies are driven by profit
- increase economic output and GDP
- employment would rise as privatisation can create jobs
- reduce opportunity for corruption
- attracting FDI as international corporations perceive opportunities
Give the drawbacks to privatisation
- increased inequality if essential services become more exspensive
- private companies could prioritise profits over quality leading to a decline in standards of services provided
- monopolies created
Give a case study for privatisation
- indias pricvatisation led to a boost in FDI which brought in capital and also increased employment opportunities and skills development which contributed to economic growth
In many cases developing countries try to maintain an exchange rate at..
- An artificially high rate
- when exchange rates are floated there is a depreciation of the currency
What are floating exchange rates?
- currency who’s value is determined by foreign exchange markets
- affected by supply and demand of the currency in public markets
- by allowing markets to determine the exchange rate, when demand for exports fall, value of currency will fall, making the exports cheaper and increasing demand
What are benefits of floating exchange rates
- stabilizes bot
- if there is a current account deficit this will lead to an outflow of currency, causing a depreciation. This will lead to a greater demand of exports, improving current account
What are the drawbacks of floating exchange rates?
- you cant have free capital flows
Why is free capital flows a good/bad thing?
- encourages investment and the central bank to have control over interest rates
- allows speculative attacks
Case study - floating exchange rates
Argentina couldn’t match its currency to the true state of the economy
What is human capital
Value of workers experiences and skills
- includes assets like education training intelligence skills and health
- more human capital more productivity
Benefits of human capital
- more educated/skilled/healthier
- more productive workers
- firms costs will decrease, SRAS outwards
- LRAS outwards and real gdp not limited
Drawback of human capital development
- putting kids in schooling means those with sick parents will not have any income at all
- shift left in AD
- healthcare must improve as well
Case study for developing human capital
- Madagascar 1980-1990 - Malagasy
- GNI went from $460 to $240
- lost gen
What is protectionism?
- government policies that restrict international trade to help domestic industries
- in order to improve economy within a domestic economy and overall gdp
What are the benefits of protectionism?
- couteracting protectionism abroad
What is a managed exchange rate?
- when a country’s currency is determined by market forces but has occasional intervention from central banks to stabilise or influence the exchange rate
How do managed exchange rates help break down barriers to entry?
- can stop sharp fluctuations that disrupt economy, help exports and importers who rely on stable/predicable exchange rates to price goods and services
- price volatility reduced (investment increased, consumer confidence increase)
- buffers against speculative attacks when speculartors try to exploit rapid currency movements
What is an example of a country with a managed exchange rate?
Switzerland
What is infrastructure development?
- construction and improvement of physical facilities and systems that support economic growth (transport,water treatment)
What are the benefits of infrastructure development?
- Increase AD
- human capital leads to increased productivity
- crowding in
- corp tax
What are joint ventures?
- business agreement where two or more companies join together to form one collective entity, sharing resources
What are the benefits of joint ventures
- job creation
- access to international markets, distribution networks
- higher quality, labour practices, environmental regulation
- more competitive - FDI
What are the drawbacks of joint ventures
- reliance on foreign partners for investment
- short term profit maximisation by foreign companies
- exploitation
- local businesses may not be competitive
Examples of joint ventures
- 2008 India company
- taya motors with Land Rover
- Improve in car manufacturing led to innovation in India
How does tourism benefit eco growth
- better facilities
- more jobs
- multiplier effect + income tax
Drawbacks to development of tourism
- season
- low skilled so income is limited and the multiplier effect is limited
- transaction corportations may move their profits out of country
- environmental damage
Example of development to tourism
- Morocco
- kings ten year plan includes building seven new eco resorts on the north coast where unemployment is 40%
What is fair trade
- de marginalises small scale farmers and workers by increasing price of good so it covers the cost of sustainably producing the good
Benefits of fair trade
- additional money
- allows access to credit ahead of harvest
- improves working conditions bans child labour
- stronger relationships with buyers
What are drawbacks to fair trade
- higher price discourages consumers from buying the good
- exspensive to become fair trade certified
- dependency on primary resources
Examples of fair trade
- the economist report, for each dollar paid only three cents more are transferred to the country where the product came from
- Guatemalan coffee farmers have been found to have higher incomes, better access to healthcare and education
