development economics Flashcards
hows does education affect development
- Higher Productivity → Increased Incomes → Economic Growth
Education equips individuals with skills and knowledge, making them more productive workers → Higher productivity means more efficient use of resources and increased output per worker → This leads to higher wages and incomes, improving living standards → As incomes rise, consumer spending increases, driving higher aggregate demand (AD) and investment → This stimulates economic growth, leading to long-term development. - Increased Job Opportunities → Lower Unemployment → Greater Economic Stability
A well-educated population has better access to skilled jobs, reducing structural unemployment → With higher employment rates, household incomes rise, leading to higher tax revenues for governments → Governments can then invest in public services such as healthcare, infrastructure, and social security → This creates a positive cycle of development, where better jobs lead to better public services, further improving economic stability. - Improved Gender Equality → Higher Workforce Participation → Economic and Social Benefits
Education promotes gender equality by giving women equal opportunities in education and employment → When more women join the workforce, labour market participation increases, leading to higher national output (GDP growth) → Educated women also tend to have fewer children, leading to lower birth rates and reduced population pressures on limited resources → This enables higher investment per child in healthcare and education, improving future human capital → Greater gender equality also fosters social stability and inclusive development. - Better Health Outcomes → Higher Life Expectancy → Sustainable Development
Educated individuals make healthier lifestyle choices and understand the importance of nutrition, sanitation, and disease prevention → This leads to lower infant mortality rates, reduced disease burden, and higher life expectancy → With a healthier population, productivity increases, as fewer people suffer from illness-related absences from work → Governments also spend less on healthcare costs, freeing up funds for infrastructure and education investments → Healthier workers contribute to sustainable economic development by maintaining long-term productivity growth. - Innovation and Technological Progress → Industrial Growth → Higher Competitiveness
Education fosters research, innovation, and entrepreneurship, leading to the development of new technologies → This enables economies to shift from low-productivity agricultural sectors to high-value manufacturing and services industries → A more diversified economy reduces dependence on primary commodity exports, making economies less vulnerable to price fluctuations → This industrial growth increases international competitiveness, attracting foreign direct investment (FDI) and further driving economic progress → Countries with strong education systems (e.g., South Korea and Singapore) have successfully transitioned from low-income to high-income economies due to technological advancement and innovation.
ev points for education and development
Funding Challenges:
- The effectiveness of education in driving development depends heavily on the availability and allocation of funding.
- Developing countries may struggle to finance universal education, leading to disparities in access and quality between rural and urban areas.
- Without adequate resources, the benefits of education may not materialize, perpetuating inequalities and slowing development.
Underlying Structural Problems:
- Addressing education alone may not resolve broader structural issues that hinder development, such as poor governance or lack of infrastructure.
- Even with access to education, barriers like weak job markets, corruption, and inadequate healthcare systems can limit its impact on economic growth and social mobility.
- Development efforts must be holistic, addressing systemic issues alongside educational improvements to achieve meaningful progress.
Quality vs. Quantity of Education:
- Expanding access to education may not guarantee development if the quality of education is subpar.
- Without trained teachers, relevant curriculums, and adequate learning materials, students may not acquire the skills necessary for meaningful contributions to the economy.
- Investments should focus on improving both access and quality to maximize the developmental impact.
Mismatch Between Skills and Job Market Needs:
- Education systems must align with labour market demands to ensure productive employment for graduates.
- If education systems focus on outdated or irrelevant skills, it could lead to underemployment and frustration among educated individuals.
- Policymakers must integrate vocational training and market analysis into educational reforms
how does healthcare increase development
1️⃣ Better Healthcare → Lower Mortality Rates → Larger and More Productive Workforce → Higher Economic Growth
Improved healthcare reduces infant mortality and increases life expectancy, leading to a larger, healthier population.
A healthier workforce means fewer sick days and higher productivity, boosting overall labour supply and efficiency.
Higher productivity raises output (GDP) per capita, leading to faster economic development.
More government tax revenue can then be reinvested into infrastructure, education, and further healthcare improvements.
📌 Evaluation: If healthcare spending is inefficient or poorly managed, gains in productivity may be limited.
2️⃣ Access to Healthcare → Better Child Health & Nutrition → Higher School Attendance & Performance → More Skilled Workforce
Universal healthcare access ensures children receive vaccinations, nutrition, and early-life care, improving cognitive and physical development.
Healthy children are more likely to attend school regularly and perform better, increasing human capital formation.
A more educated workforce leads to higher wages and greater innovation, driving long-term development.
This creates a positive cycle where better education leads to higher tax revenue, which can be reinvested into public services.
📌 Evaluation: If education systems are underfunded or low quality, the full benefits of improved healthcare may not materialise.
3️⃣ Lower Disease Burden → Less Government & Household Spending on Healthcare → More Investment in Development
Preventative healthcare (e.g., vaccination programs, sanitation improvements) reduces the prevalence of chronic diseases.
With lower medical costs, households have more disposable income for education, business investment, and consumption.
Governments spend less on treating preventable diseases, freeing up resources for infrastructure, public services, and economic programs.
This leads to sustained economic growth and poverty reduction.
📌 Evaluation: If healthcare access is unequal, development benefits may be concentrated among wealthier populations, worsening inequality.
4️⃣ Stronger Healthcare System → Attracts Foreign Investment → Economic Growth & Job Creation → Higher Living Standards
Countries with good healthcare systems are more attractive to foreign direct investment (FDI) as businesses seek healthy, productive workers.
More FDI creates jobs and boosts GDP, leading to higher average incomes and improved living standards.
A healthier workforce is also more likely to engage in entrepreneurship, fostering innovation and economic diversification.
This helps transition economies from low-productivity sectors (e.g., agriculture) to high-value industries (e.g., technology, finance, and manufacturing).
📌 Evaluation: If a country lacks skilled healthcare professionals, its healthcare system may struggle to support long-term economic growth.
5️⃣ Improved Maternal & Reproductive Health → Lower Birth Rates → More Resources per Child → Higher Human Development Index (HDI)
Better maternal care and access to contraception reduce infant and maternal mortality rates.
Lower birth rates allow families to invest more in each child’s education, healthcare, and overall well-being.
This leads to a better-educated, healthier population, driving socioeconomic mobility and long-term development.
Countries with lower population growth rates often experience higher per capita income growth and improved HDI rankings.
📌 Evaluation: Cultural and religious factors may affect access to reproductive healthcare, limiting its impact on development.
ev points for healthcare and development
Price of Healthcare Services:
- High healthcare costs can limit access for low-income households, particularly in developing countries.
- If healthcare services are unaffordable, a significant portion of the population will remain untreated, reducing productivity and perpetuating poverty.
- This highlights the importance of subsidized healthcare or universal healthcare models to ensure equitable access and support development.
Funding Challenges:
- Insufficient public funding for healthcare can undermine its effectiveness, especially in low-income economies.
- If governments lack resources to invest in hospitals, equipment, or trained professionals, healthcare systems may fail to meet the population’s needs, leading to poor health outcomes.
- Development is stunted as both productivity and life expectancy remain low without adequate investment in healthcare infrastructure.
Dependency on External Aid:
- Many developing countries rely on foreign aid to fund healthcare systems, which can be unsustainable.
- If aid is withdrawn or delayed, healthcare services may collapse, creating gaps in public health delivery.
- This dependency highlights the need for governments to prioritize domestic revenue generation and efficient spending to reduce reliance on volatile external funding.
Quality vs. Affordability Trade-off:
- Balancing affordable healthcare with maintaining quality services can be a challenge.
- Subsidizing healthcare may lead to budgetary pressures, while underfunding risks reducing the quality of care, making the system inefficient.
- A lack of quality healthcare reduces its developmental impact, as low-quality care may not effectively address health issues or improve productivity.
Opportunity Cost of Healthcare Funding:
- Large-scale healthcare spending may divert funds from other critical areas, such as education or infrastructure.
- Governments face trade-offs when allocating budgets, and over-prioritizing healthcare may leave other sectors underfunded, limiting broader development.
- Sustainable development requires a balanced approach to funding healthcare without neglecting other crucial drivers of growth.
factors that affect development: infrastructure
Access to Markets
- Improved infrastructure, such as roads, ports, and telecommunications, enhances access to markets for businesses and consumers.
- With better transport links, producers can reduce distribution costs, expand their customer base, and integrate into global supply chains.
- This boosts productivity and trade, increasing GDP and fostering development.
Access to Schools and Hospitals
- Infrastructure, such as roads and public transport, enables better access to essential services like education and healthcare.
- Easier access allows students to attend schools and patients to visit hospitals, improving literacy, skill development, and health outcomes.
- This enhances human capital, which is a critical driver of economic growth and social well-being.
Attracting Foreign Direct Investment (FDI)
- Well-developed infrastructure attracts FDI by reducing operational and logistical costs for businesses.
- A reliable energy supply, efficient transport networks, and modern communication systems create a favourable business environment for multinational corporations.
- Increased FDI contributes to job creation, technology transfer, and knowledge sharing, accelerating development.
Reducing Regional Inequalities
- Infrastructure development in remote or rural areas helps bridge the gap between urban and rural regions.
- By improving connectivity and access, rural communities can participate in broader economic activities, increasing their incomes and reducing poverty.
- This promotes inclusive development and reduces regional disparities.
Enhancing Productivity and Efficiency
- Reliable infrastructure, such as electricity grids and broadband internet, enhances productivity and supports innovation.
- Firms with access to consistent power and fast communication can operate efficiently, adopt new technologies, and compete globally.
- This drives long-term economic growth, making development more sustainable
evaluation points for infrastructure and development
Funding Challenges:
- Developing infrastructure requires significant capital investment, which may strain government budgets or increase national debt.
Corruption and Mismanagement:
- Poor governance can lead to inefficient allocation of resources, with funds for infrastructure projects being misused or wasted.
Maintenance Costs:
Infrastructure requires ongoing maintenance, and failing to budget for these costs can lead to deteriorating systems that hinder rather than support development.
Environmental Impact:
- Large-scale infrastructure projects, such as dams or highways, can have adverse environmental effects, displacing communities or damaging ecosystems.
Opportunity Cost:
- Focusing heavily on infrastructure might divert funds from other critical areas, such as healthcare or education, limiting balanced development.
taxes and development
- Taxation provides governments with the fiscal dividend needed to fund public services like education, healthcare, and infrastructure.
- By collecting taxes effectively, governments can redistribute wealth and invest in essential services, improving human capital and long-term development.
- This supports economic growth and reduces poverty, contributing to more equitable and sustainable development.
Evaluation:
- Corruption may result in misuse or misallocation of tax revenue, reducing its developmental impact.
- Tax exemptions for corporations and the wealthy can erode the tax base and perpetuate inequality.
- Low levels of corporate activity and incentives to evade taxes can limit revenue collection, especially in developing economies.
- Informal markets dominate in many developing countries, making it difficult to enforce taxation.
WTO trade agreements can restrict countries’ ability to impose tariffs, limiting tax revenue from trade.
Gender equality and development
- Empowering women has significant benefits for children’s health, education, and overall economic well-being.
- Women who have access to education and employment opportunities are more likely to invest in their families, leading to better health and education outcomes for their children.
- Increased participation of women in the economy raises household incomes and improves social outcomes, boosting economic growth and reducing poverty.
EV:
- Social and cultural barriers may limit the effectiveness of policies aimed at women empowerment.
- Unequal access to credit or property rights can hinder women’s ability to achieve economic independence.
what does the HDI(human development index) measure
- life expectancy
- knowledge(adult literacy)
- living standards, using gdp and ppp
- 0 - 0.49 = low development
- 0.5 - 0.69 = medium development
- 0.7 - 0.79 - high development
- > 0.8 = very high development
why is hdi a good measure of development
- Broad and Comprehensive Measure
- The HDI incorporates multiple dimensions of development, including GDP per capita, life expectancy, and education levels.
- By going beyond just economic performance, it provides a more balanced view of societal progress.
- This ensures development is measured holistically, capturing improvements in living standards, health, and education. - Focus on Development Outcomes
- HDI emphasizes critical development outcomes, such as life expectancy and education, rather than inputs like spending levels.
- This approach encourages countries to focus on delivering tangible benefits to their populations.
- Governments are motivated to implement policies that directly improve the quality of life for their citizens. - Tracks Progress Over Time
- HDI allows for the measurement of progress in human development over time.
- Countries can assess the impact of their policies by observing improvements or declines in HDI components.
- This makes HDI a valuable tool for accountability and long-term planning, fostering continuous improvements in development. - Highlights Countries with Low Development
- HDI draws attention to countries with low development levels, encouraging international aid and support.
- The ranking system identifies the nations most in need of assistance, ensuring resources are targeted effectively.
- This fosters global cooperation and aligns aid efforts to address disparities in development, promoting equity.
disadvantages of hdi
- Does Not Address Income Redistribution
- HDI focuses on average income (GDP per capita) but does not account for income inequality or redistribution.
- A country with a high HDI may still have significant income inequality, leaving large sections of the population in poverty.
- This limits HDI’s ability to reflect the true quality of life for all citizens, especially those at the bottom of the income scale. - Arbitrary Weighting and Resource Allocation
- The three components of HDI—income, education, and health—are given equal weight, which might not reflect their actual importance in a specific country.
- This arbitrary weighting can misrepresent priorities, as resource allocation should vary based on a country’s specific developmental needs.
- Policymakers might not address pressing issues, focusing instead on areas that artificially boost HDI rankings. - Lacks Consideration of Freedom and Choice
- HDI does not account for individual freedoms, democratic participation, or human rights.
- While economic and health metrics are vital, the lack of consideration for political freedom and societal choices diminishes its comprehensiveness.
- Countries with restricted freedoms but high HDI components may rank well, masking underlying societal issues. - Ignores Other Key Factors of Development
- HDI does not include crucial aspects like poverty rates, crime levels, environmental sustainability, or gender equality.
- Development is multi-dimensional, and excluding these factors can result in an incomplete representation of a country’s progress.
- This limits HDI’s usefulness in guiding policies to address issues such as social equity, security, and sustainable development.
how does political stability increase development
- Attracts Foreign Direct Investment (FDI)
- Political stability creates a predictable environment, reducing risks for foreign investors.
- Investors are more likely to establish businesses, industries, or infrastructure in countries with stable governance and reduced likelihood of conflict or policy reversals.
- This inflow of FDI boosts economic growth, creates jobs, and transfers technology, ultimately fostering long-term development. - Encourages International Aid (AID)
- Stable governments are better positioned to attract and effectively utilize foreign aid.
- Aid agencies and donor countries prefer politically stable nations, as funds are less likely to be lost to corruption or instability. Stable governance also ensures aid reaches its intended recipients, improving health, education, and infrastructure.
- Efficient use of aid directly improves human development indicators like life expectancy, literacy, and poverty reduction. - Facilitates Democracy and Good Governance
- Political stability fosters democratic institutions, promoting transparency, accountability, and inclusive decision-making.
- Stable democracies ensure policies are focused on long-term public welfare, such as investments in education, healthcare, and infrastructure. This also reduces the risk of social unrest or civil wars, which can derail development.
- Democracy encourages citizen participation, reduces inequality, and ensures more equitable resource distribution, all of which contribute to sustained development.
what is fdi
refers to purchase of an asset in another country
how does instability threaten development
- Loss of Infrastructure
- Political instability often leads to destruction or degradation of critical infrastructure such as roads, schools, hospitals, and utilities.
- Armed conflict, riots, or mismanagement during periods of instability can divert resources away from maintenance and development, while physical infrastructure is damaged or destroyed.
- A loss of infrastructure reduces access to essential services, hampers trade and economic activity, and lowers the quality of life, stalling or reversing development progress. - Reduced investment
- Instability discourages both domestic and foreign investment due to heightened risks and uncertainty.
- Investors are less likely to invest in regions where policies may change abruptly, corruption is rampant, or conflict threatens the safety of assets. This results in reduced capital inflow, business closures, and a weaker industrial base.
- The lack of investment slows economic growth, limits job creation, and reduces the government’s fiscal capacity to fund development projects
how does corruption threaten development
- Legal System Compromised
- Corruption undermines the legal system, weakening property rights and contract enforcement.
- When legal decisions can be influenced by bribes, citizens and businesses lose trust in the rule of law, reducing incentives to invest or innovate.
- This erodes the foundation for economic development and stalls progress in building strong institutions. - Inefficient Regulation
- Corruption leads to poorly designed or enforced regulations, prioritizing personal gains over public interest.
- Bureaucratic corruption can create unnecessary red tape to extract bribes, slowing down economic activity and reducing productivity.
- Resources are wasted, and markets become distorted, limiting overall economic efficiency and development outcomes. - Bribes Increase Costs
- Bribes increase the cost of production for firms and divert government investment away from critical sectors.
- Companies must allocate funds to pay bribes rather than invest in growth or innovation, while governments misallocate resources toward projects with greater bribe potential rather than societal benefit.
- This slows economic progress, reduces competitiveness, and worsens inequality by depriving public services of funding. - Lower Foreign Direct Investment (FDI)
- Corruption deters foreign investors, who seek transparent and stable business environments.
- Potential investors view corruption as a risk to profits and a sign of institutional weakness, leading them to avoid corrupt countries in favor of more stable markets.
- The lack of FDI limits technology transfer, industrial expansion, and job creation, stalling development. - Highest Bidder Wins
- Public projects and government contracts are awarded to those offering the highest bribe, not the most qualified firm.
- This results in poor-quality infrastructure and services, as unqualified contractors prioritize cutting costs to recover bribe expenses.
- Inefficiencies compound, and critical sectors like education, healthcare, and transport suffer, slowing long-term development.
the poverty cycle: growth poverty cycle
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Low Incomes
- Low income levels prevent individuals and households from accumulating significant savings.
- When incomes are just enough to cover basic needs, there is little surplus left for saving or investing in productive assets.
- This perpetuates financial constraints, leaving families and businesses unable to build wealth - Leads to Low Savings
Point: Insufficient income leads to low savings, limiting the resources available for future investments.
- Savings are critical for funding physical and human capital, such as purchasing equipment, starting businesses, or improving education. Without savings, these opportunities are missed.
- This weakens a nation’s capacity to develop its economy, keeping individuals and businesses trapped in poverty. - Leads to Low Investment
- Low savings mean limited funds are available for investment in physical and human capital.
- A lack of investment hinders productivity improvements and the adoption of better technologies, stagnating industries and reducing output potential.
- This slows economic progress, preventing the development of high-income jobs or industries that could uplift communities from poverty. - Leads to Low Economic Growth
- Without adequate investment, economic growth remains sluggish or non-existent.
- Limited growth reduces government revenues from taxes and restricts opportunities for job creation or infrastructure development.
- This reinforces poverty, as low-income households remain unable to access better opportunities or resources to break the cycle. - Cycle Perpetuates
- Low economic growth keeps incomes stagnant, feeding back into the cycle of low savings and low investment.
- Without significant intervention, such as external aid, policy reform, or technological advancement, the poverty cycle continues unbroken.
- Generations remain trapped in poverty, with little hope of achieving long-term development or sustainable growth.
poverty cycle: development - poverty cycle
- Low Incomes
- Low incomes make it difficult for families to afford education and healthcare.
- When resources are scarce, households prioritize immediate needs like food and shelter over long-term investments in education and health.
- This prevents individuals from gaining the skills or maintaining the health necessary to improve their economic prospects. - Leads to Low Levels of Education and Health
- Insufficient investment in education and healthcare results in low levels of human capital.
- Poor education limits literacy and skill development, while inadequate healthcare reduces life expectancy and workforce productivity.
- This creates a poorly equipped labor force, unable to contribute effectively to economic growth. - Leads to Low Levels of Human Capital
- A lack of educated and healthy workers weakens the overall quality of human capital in the economy.
- Human capital is essential for innovation, efficiency, and economic progress. Without it, productivity stagnates, and industries fail to grow.
- This limits the potential for upward mobility and keeps the population trapped in poverty. - Leads to Lower Productivity
- With insufficient human capital, productivity remains low across industries and sectors.
- A poorly educated workforce cannot effectively use advanced technology or improve efficiency, while poor health reduces hours worked and overall output.
- This slows economic growth, further entrenching poverty and reducing opportunities for future development. - Cycle Perpetuates
- Low productivity leads to continued low incomes, restarting the cycle of poor education and healthcare.
- Without external intervention, such as aid, families remain trapped in a cycle of deprivation.
- This intergenerational cycle hinders both individual and national development, making poverty difficult to escape
what is microfinance
the distribution of small loans to individual entrepeneurs or groups to stimulate business activity, profits and incomes
advantages of microfinance
- Fills Savings Gap
- Microfinance provides access to financial services for those who lack savings or collateral.
- Traditional banks often exclude low-income individuals due to the lack of collateral or formal income proof. Microfinance bridges this gap by offering small loans to the underserved.
- This helps individuals start small businesses or invest in productive activities, boosting household income and economic development. - Relieves Poverty
- Microfinance can lift individuals and communities out of poverty by enabling income generation.
- Borrowers use the loans to fund small-scale ventures, such as farming or trade, creating sustainable income sources.
- This leads to improved living standards, reduced dependence on aid, and stronger local economies. - Source of Finance Without Huge Interest
- Microfinance offers loans at lower interest rates compared to informal moneylenders.
- Informal lending often involves exorbitant interest rates that trap borrowers in debt cycles. Microfinance institutions provide a fairer alternative, ensuring affordability.
- This enables borrowers to repay their loans sustainably, improving their financial stability. - Empowers Women
- Microfinance often targets women, who are more likely to reinvest in their families and communities.
- Women gain financial independence and decision-making power through access to credit, enhancing their social and economic standing.
- This contributes to gender equality, better education, and improved health outcomes for children, fostering long-term development. - Promotes Financial Inclusion
- Microfinance integrates marginalized communities into the formal financial system.
- Access to credit and savings accounts builds financial literacy and trust in formal institutions.
Impact: This reduces reliance on exploitative informal systems and supports long-term economic empowerment.
disadvantages of microfinance
- Entrepreneurial Ventures Are Not Always Successful → Debt Burden → Continued Poverty
Microfinance provides small loans to individuals and small businesses, often in developing economies → However, many borrowers lack business experience or face tough market conditions, leading to low success rates → If businesses fail, borrowers struggle to repay loans, leading to debt accumulation → This traps individuals in poverty rather than providing a sustainable path to economic improvement → The cycle of borrowing and defaulting can further worsen financial instability for low-income individuals. - Lenders May Charge High Interest Rates → Increased Financial Pressure → Exploitation of Borrowers
Microfinance institutions (MFIs) often charge high-interest rates due to the high administrative costs of providing small loans → Many borrowers are financially vulnerable and lack collateral, which leads MFIs to charge even higher rates to cover the risk of default → This increases the debt burden on poor individuals, making loan repayment difficult → Some MFIs engage in predatory lending practices, pressuring borrowers and using aggressive repayment collection methods → As a result, microfinance can trap people in cycles of debt rather than lifting them out of poverty. - Loans Are Often Used for Consumption Instead of Investment → No Sustainable Income Growth → Debt Accumulation
Microfinance aims to fund business startups and income-generating activities, but many borrowers use the loans for basic consumption needs (e.g., food, healthcare, school fees) rather than investing in a business → Since the loan does not generate future income, borrowers struggle to repay it, leading to increased financial pressure → Repeated borrowing for consumption rather than investment reduces long-term economic benefits, as there is no productivity improvement or income growth → Instead of fostering entrepreneurship, microfinance may encourage dependency on borrowing, creating long-term financial instability. - Microfinance Alone Cannot Solve Poverty → Need for Infrastructure & Education → Limited Impact on Development
While microfinance provides access to credit, poverty reduction requires more than just loans → Many small businesses fail because there is no adequate infrastructure (roads, electricity, internet), poor access to markets, and low levels of education and skills → Without these supporting factors, microfinance does not lead to significant long-term development → Governments must invest in healthcare, education, and infrastructure to create an environment where microfinance can effectively contribute to economic growth → If these fundamental issues remain unaddressed, microfinance has only a limited impact on reducing poverty. - Microfinance Can Lead to Over-Indebtedness → Financial Distress → Increased Social & Mental Health Issues
Borrowers who struggle to repay loans often take out additional loans to cover previous debts, leading to over-indebtedness → This creates a vicious cycle where individuals continuously borrow but fail to escape financial hardship → The stress of debt repayment can lead to mental health issues, family breakdowns, and in extreme cases, even suicides (as seen in some developing countries where farmers have been unable to repay loans) → Over-indebtedness can also damage the creditworthiness of borrowers, making it harder for them to access future financial support → Instead of improving financial stability, microfinance may contribute to long-term financial distress and social problems.
how do natural factors source economic growth
- Natural factors, such as land, can contribute to economic growth through better utilisation and management of resources.
- Fertilization in agriculture allows for more efficient and higher yields, which increases productivity in the agricultural sector.
- By improving agricultural outputs, this can lead to higher food production, increased incomes for farmers, and overall economic growth in rural areas.
- Implementing better agricultural methods increases the efficiency of land use and improves output.
- Methods like crop rotation, irrigation, and mechanisation improve land productivity.
- More efficient land use leads to higher agricultural outputs, which supports both the economy and employment in agricultural sectors. - Building upwards, such as vertical farming or high-rise buildings, maximizes land usage in areas where space is limited.
- Urbanisation and the construction of skyscrapers enable businesses to thrive in crowded cities without expanding horizontally.
- This leads to economic growth through higher real estate value, urban development, and increased business activities.
how does human capital source economic growth
- An increase in human capital contributes significantly to growth by boosting productivity and innovation.
- As workers become more skilled through education and training, they can produce more goods and services in less time.
- Increased productivity raises the overall efficiency of the economy, leading to higher output and economic growth. - Improved access to health and education ensures a healthier, more educated workforce.
- Better health means fewer sick days, while education enables individuals to acquire higher skills, enhancing their productivity.
- Both factors lead to a more efficient workforce, which contributes to a higher standard of living and sustained economic growth. - Vocational training allows individuals to specialize in certain fields, boosting productivity in targeted industries.
- Providing specific skills through vocational training programs helps workers meet the demands of emerging industries.
- With an increasingly specialized and skilled labour force, industries thrive, leading to higher economic growth and more job opportunities.
how do capital and technological factors source economic growth
- Capital investment and technological advancements are critical drivers of growth.
- Investments in infrastructure, machinery, and technology improve productivity and efficiency across sectors.
- As businesses adopt new technologies, they can reduce costs, increase outputs, and compete globally, leading to economic expansion. - Technological innovation, such as automation or digital transformation, increases productivity in almost all sectors.
- Automation reduces labour costs and increases production speed, while digitalization opens up new markets and business models.
- This improves efficiency, expands market access, and contributes to higher economic growth rates.
how do institutional factors source economic growth
- Effective institutions, such as a reliable banking system, are essential for fostering economic growth.
- A stable and well-functioning banking system facilitates access to credit, enabling businesses to invest, expand, and hire more workers.
- As businesses grow and expand, overall economic productivity increases, leading to higher national output. - Institutions that enforce the rule of law and protect property rights promote investment and innovation.
- When businesses feel secure about their intellectual property and financial investments, they are more likely to invest in new ventures.
- This leads to a more dynamic economy, greater innovation, and sustained growth.
evaluation points for sources of growth
- Natural Factors (Land)
Depends on sustainability – Overexploitation of natural resources (e.g., deforestation, soil degradation) can lead to environmental damage and long-term economic decline.
- Limited by geographical constraints – Some countries have poor-quality land or limited natural resources, restricting growth potential.
- Technological advancements may reduce dependence – Advances in hydroponics, synthetic materials, and AI-driven farming could reduce reliance on natural resources for growth. - Human Capital
- Quality of education matters more than quantity – Simply increasing access to education doesn’t guarantee better skills; curriculum and teaching quality are critical.
- Brain drain – High-skilled workers may migrate to developed countries for better opportunities, limiting the benefits of human capital development in their home country.
- Short-term costs vs. long-term benefits – Investments in education and healthcare take time to yield economic benefits, which can be challenging for developing economies with limited resources. - Capital and Technological Factors
- Risk of capital misallocation – Investments in capital may not be efficient if there is corruption, weak institutions, or poor planning.
Technology requires skilled labor – Without proper human capital development, technological advancements may not be fully utilized, leading to underemployment or increased inequality.
- While boosting efficiency, automation and AI can lead to job losses, particularly in low-skilled industries, which could slow consumption-driven growth. - Institutional Factors
- Institutions require strong governance – Corruption, weak enforcement of laws, or political instability can undermine economic growth despite improvements in banking and infrastructure.
- Financial accessibility does not guarantee growth – Even with a strong banking system, high interest rates, risk aversion, or financial exclusion can limit investment and entrepreneurship.
- Government policies can create inefficiencies – Overregulation or excessive state intervention in markets may hinder private sector growth and discourage innovation.
Why Trade is Good for Development
- Exploiting Comparative Advantage
- Trade allows countries to specialize in industries where they have a comparative advantage, leading to more efficient production.
- This increases aggregate demand (AD) as exports rise, boosting economic growth. Higher growth leads to increased tax revenues, which governments can reinvest in infrastructure, healthcare, and education, driving long-term development. - Consumer Benefits
- Through trade, consumers gain access to a wider variety of goods and services at lower prices due to increased competition and specialization.
- This improves living standards and enhances welfare.
- Additionally, trade fosters better political relations between countries, reducing conflict and encouraging cooperation on global development initiatives. - Economies of Scale
- As firms expand into international markets, they benefit from economies of scale, reducing average costs and increasing profit margins. Higher profits lead to greater corporate tax revenues, providing governments with additional funds to support public services and invest in social development projects.
- This creates a positive feedback loop that enhances long-term economic stability. - Technological Transfer & Industrial Growth
- International trade facilitates knowledge and technology transfer, allowing developing economies to adopt more advanced production techniques. This encourages industrialization, particularly in secondary industries (e.g., manufacturing), helping economies transition away from reliance on primary commodities. Breaking free from dualistic economic structures promotes sustained development and structural transformation
Problems with Relying on Trade for Development
- Resource Curse & Commodity Dependence
- Many developing countries rely heavily on exporting primary commodities, making them vulnerable to price volatility and external shocks.
- If commodity prices fall, export revenues decline, leading to lower tax revenues and reduced government spending on essential services like healthcare and education. - Over time, resource depletion or shifts in global demand can further weaken economic stability, trapping countries in a cycle of underdevelopment. - Price Fluctuations
- Global markets for commodities and exports are highly volatile, meaning prices can change unpredictably due to external factors like speculation, weather conditions, or geopolitical events.
- Sudden drops in export prices reduce income for producers and governments, leading to economic instability.
- This unpredictability makes it difficult for developing nations to plan long-term investments in infrastructure and social services, slowing down development. - Barriers to International Markets
- Developing countries often face significant trade barriers, such as tariffs, quotas, and protectionist policies from developed nations, limiting their access to lucrative markets.
- Additionally, non-convertible currencies make international transactions more difficult, reducing export competitiveness.
- This restricts their ability to fully benefit from global trade, leading to slower economic growth and limited progress in development. - Long-Term Decline in Terms of Trade
- Over time, many developing economies experience a decline in their terms of trade, meaning the prices of their exports (often primary commodities) fall relative to the prices of imports (often manufactured goods).
- This results in a worsening trade balance, requiring them to export more just to afford the same amount of imports.
- As a result, economic development is hindered, making it harder for these countries to escape dependency on low-value exports.
what is the prebish singer hypothesis
suggests that the prices of primary goods tend to decline relative to the prices of manufactured goods over time.
prebish singer analysis and solution
- Income Elasticity of Imports vs. Exports
= Developing countries primarily export primary commodities, which have low-income elasticity, meaning that as global incomes rise, demand for these goods does not increase significantly.
- However, the goods they import—such as capital equipment and manufactured products—have higher income elasticity, meaning their demand grows rapidly as global incomes rise.
- This creates an imbalance where developing countries struggle to increase their export earnings while facing rising import costs. - Rising Demand for Manufactured Goods
- Globalization and technological advancement have led to an increase in demand for manufactured goods, pushing up their prices relative to primary products.
- Since developing countries rely on importing these goods for industrialization, they face rising costs, reducing their ability to generate long-term economic growth.
- Meanwhile, the prices of their primary exports remain stagnant or decline, worsening trade imbalances. - Long-Run Decline in Terms of Trade
- As manufactured goods become more expensive relative to primary products, developing countries experience a decline in their terms of trade.
- This means they must export more commodities just to afford the same amount of imports, leading to lower real incomes and reduced government revenues.
- This weakens economic development, making it harder for these nations to invest in infrastructure, education, and industrial growth. - (Evaluation) Solution: Diversification
- To break free from declining terms of trade, developing countries should reinvest export revenues into diversifying their economies.
- By developing secondary and tertiary industries, they can reduce dependency on volatile commodity markets and transition towards higher-value-added sectors.
- This would make their economies more resilient and enable sustainable long-term growth.
what is import substitution industrialisation
tariffs on imported manufactured goods to allow domestic industries to grow
advantages and problems with import substitution industrialisation
-
Protecting Domestic Jobs
- By replacing foreign imports with domestically produced goods, ISI helps create jobs in local industries.
- This reduces reliance on volatile global markets and improves income security for workers.
- However, in the long run, industries may become inefficient due to a lack of competition, leading to job losses as firms struggle to remain viable. -
Reducing Foreign Influence & MNC
Dominance
- Restricting imports prevents multinational corporations (MNCs) from dominating domestic markets, allowing local firms to develop without external competition.
- This fosters economic independence and strengthens national industries.
- However, without exposure to international best practices and competition, domestic firms may lack the incentive to innovate, reducing long-term growth potential.
Problems with ISI
-
Short-Run Job Creation vs. Long-Term Unemployment
- In the short term, ISI boosts employment by fostering new domestic industries. However, these industries may become dependent on government protection.
- If tariffs are lifted or subsidies removed, inefficient firms may collapse, leading to mass unemployment and economic stagnation. -
Loss of Comparative Advantage
- By prioritizing domestic production over imports, ISI diverts resources from industries where the country has a comparative advantage.
- This results in inefficiencies, higher production costs, and lower international competitiveness, ultimately reducing export revenue and economic growth. -
Risk of Retaliatory Protectionist Measures
- If a country imposes high tariffs or import restrictions, trading partners may respond with their own protectionist measures.
- This can lead to trade wars, reducing export opportunities and harming industries that rely on global markets. In the long run, this isolates the economy, limiting growth potential and slowing development.
what does export promotion involve
removing protectionist policies, encouraging trade
export promotion advantages and disadvantages
- Reducing Primary Product Dependence
- By focusing on export promotion, developing countries can diversify their economies away from volatile primary product markets.
- This reduces vulnerability to fluctuating commodity prices and long-term declines in terms of trade, stabilizing economic growth. - Encouraging Technological Advancements
- Export-oriented industries often face global competition, pushing firms to adopt better technology and improve productivity.
- This leads to higher-quality goods, increased efficiency, and greater long-term economic growth.
Problems with Export Promotion
- Protectionism Abroad
- Developing countries may face tariffs, quotas, and non-tariff barriers when trying to access global markets.
- High-income nations often implement protectionist policies to shield their industries from competition, making it difficult for developing economies to expand exports. This limits the effectiveness of export promotion policies and can slow economic growth. - Widening Income Inequality
- Export-oriented growth can disproportionately benefit capital-intensive industries and skilled workers, leading to a widening income gap.
- Those in traditional or low-skill sectors may see little benefit, increasing inequality within the economy. If wealth remains concentrated among a small elite, domestic demand and overall development may suffer. - Overdominance of MNCs
- Multinational corporations (MNCs) often play a key role in export promotion strategies, bringing investment, expertise, and global market access.
- However, they may exploit local resources, repatriate profits, and use their power to suppress wages and working conditions.
- This can limit the long-term benefits of export-driven development for local populations
some fairtrade application points
- in 2020, fairtrade sales reached 19.2 billion
- fairtrade supports over 1.8 million producers and workers in over 70 developing countries
- the top 5 fairtrade products are bananas, cocoa, tea, coffee and sugar
- Biggest fairtrade markets are UK,USA, Germany, Switzerland, Netherlands
benefits of fairtrade agreements for developing countries
- Higher Prices for Farmers → Increased Incomes → Poverty Reduction
Fairtrade ensures minimum price guarantees for farmers, protecting them from price volatility → This provides a stable and predictable income, reducing uncertainty and financial insecurity → With higher earnings, farmers can invest in better seeds, equipment, and farming techniques, increasing productivity → Higher productivity leads to greater output and revenue, allowing farmers to escape poverty and improve their standard of living → This ultimately contributes to sustainable economic development. - Helps Farmers Access New Markets → Increases Trade → Economic Growth
Fairtrade agreements provide small-scale farmers access to international markets they might otherwise struggle to enter → This allows them to sell products at better prices rather than relying on local markets where demand may be low → As export opportunities grow, farmers experience higher revenues, which fuels business expansion and job creation → Increased trade contributes to higher GDP growth, stimulating the overall economy of developing nations → Over time, this promotes economic diversification, reducing dependence on primary commodity exports. - Promotes Ethical and Sustainable Farming Practices → Environmental Protection → Long-Term Agricultural Productivity
Fairtrade agreements encourage sustainable farming practices, such as organic farming, soil conservation, and reduced pesticide use → These practices help protect the environment, ensuring that land remains fertile for future generations → By reducing soil degradation and deforestation, farmers can maintain productivity in the long run → This ensures food security and stable agricultural output, allowing developing economies to grow without excessive environmental damage. - Additional Investment in Local Communities → Better Public Services → Long-Term Development
A portion of Fairtrade revenue is allocated to community development projects, such as schools, healthcare facilities, and clean water access → This improves education and healthcare standards, leading to a healthier and more skilled workforce → A better-educated population leads to higher long-term productivity and innovation, increasing economic growth → Investments in infrastructure, such as better roads and irrigation systems, also improve transportation and farming efficiency, supporting further development. - Reduces Exploitation and Child Labor → Better Working Conditions → Social Stability
Fairtrade agreements set strict labor standards, ensuring that workers receive fair wages and operate in safe conditions → This reduces worker exploitation and child labor, leading to improved quality of life for families → With parents earning a stable income, children are more likely to stay in school rather than being forced into work → Education leads to better job prospects in the future, reducing poverty cycles and income inequality → Over time, this creates a more stable and prosperous society.
disadvantages of fairtrade agreements
- Limited Impact on Global Trade → Small Market Share → Minimal Effect on Poverty Reduction
Fairtrade only covers a small proportion of global trade, with less than 0.02% of total world trade in 2020 → This means that most farmers and workers in developing countries do not benefit from Fairtrade certification → As a result, the positive effects on poverty alleviation are limited, as the majority of agricultural producers still face price volatility and exploitation → Without wider adoption, Fairtrade’s influence on reducing global income inequality and improving living standards remains marginal. - Creates Dependency on Ethical Consumerism → Demand is Uncertain → No Long-Term Stability
Fairtrade relies on ethical consumer choices, meaning it depends on consumers in high-income countries being willing to pay premium prices for Fairtrade goods → If demand for Fairtrade products falls due to economic downturns or changing consumer preferences, farmers will lose their higher-income opportunities → This makes Fairtrade an unreliable long-term development strategy, as producers remain vulnerable to shifts in global consumer sentiment → Developing countries may struggle to build self-sustaining industries if they continue to depend on Western markets’ willingness to support Fairtrade. - Distorts Market Incentives → Reduces Productivity Growth → Long-Term Inefficiencies
Fairtrade guarantees minimum prices, which removes some of the risk of price volatility for producers → However, this reduces the incentive for farmers to improve efficiency and adapt to market-driven changes in demand and technology → Without competition forcing improvements, some Fairtrade farmers may lag behind non-Fairtrade competitors, leading to lower productivity growth → Over time, this may hinder the modernization of agriculture in developing nations and prevent farmers from competing effectively in global markets without Fairtrade support.
what is overseas aid
money, or technical assistance given by one country to another to promote social and economic development
done to:
- reduce poverty
- improve living conditions
- promote sustainable development in developing countries
forms:
- grants
- loans
- technical assistance
funded by:
- government
- international organisations
- private foundations
main aid organisations
- UNICEF
- WFP
- WHO
- OXFAM
different types of overseas development aid
- project aid: financing projects for a donor, eg hospitals
- technical assistance - funding of expertise
- humanitarian aid - emergency disaster relief, food aid
- soft loans - a loan made on a concessionaire basis such as China to Africa
- tied aid - projects tied to suppliers in donor countries
- debt relief - refinancing of a countries external debt
disadvantages of overseas aid
- Unsustainability and Economic Pressures
Many developing countries rely heavily on overseas aid to fund essential services and infrastructure. However, this reliance is risky, as donor countries may reduce or withdraw aid during economic downturns or political shifts. If aid is cut unexpectedly, recipient countries may struggle to maintain public services, worsening poverty and instability. This unpredictability makes aid an unsustainable long-term solution for economic development. - Poor Governance and Corruption Risks
In nations with weak institutions, aid can be misused by corrupt governments, leading to money being siphoned off by political elites instead of reaching the intended recipients. This misallocation of funds not only reduces aid effectiveness but can also strengthen authoritarian regimes by giving them financial power to maintain control. As a result, rather than fostering development, aid may contribute to political instability and economic mismanagement. - Lack of Transparency and High Administrative Costs
A significant portion of aid funds do not directly benefit the people in need. Large amounts are spent on aid consultants, administrative fees, and operational costs of non-governmental organizations (NGOs) based in high-income countries. This lack of transparency reduces the efficiency of aid distribution, with funds often benefiting intermediaries rather than addressing the root causes of poverty in recipient countries. - Creation of a Dependency Culture
Long-term reliance on foreign aid can discourage self-sufficiency and weaken incentives for entrepreneurship and domestic investment. If governments and businesses in developing countries become dependent on aid rather than fostering private sector growth, it can hinder economic diversification and innovation. Over time, this dependency culture may reduce the motivation to implement necessary economic reforms, trapping countries in a cycle of reliance rather than sustainable development. - Market Distortions and Inflationary Pressures
Large-scale aid injections can interfere with market dynamics, distorting prices and reducing economic efficiency. For example, if food aid is provided in large quantities, it can drive down prices, making it harder for local farmers to compete. Additionally, an influx of foreign currency from aid may lead to inflation, increasing the cost of living and reducing the purchasing power of domestic consumers. These unintended consequences can ultimately slow down economic progress rather than stimulate it.
advantages of overseas aid
- Better Trade Relations with Other Countries
Providing aid strengthens diplomatic and economic ties between nations. Countries that receive aid may develop trade agreements with donor nations, leading to increased exports and investment opportunities. Over time, this fosters mutual economic growth and geopolitical stability, benefiting both parties. - Helps Overcome the Savings and Foreign Currency Gap
Many developing countries struggle with low domestic savings and a lack of foreign exchange reserves, limiting their ability to invest in productive industries. Overseas aid can fill this gap by providing necessary capital for infrastructure, businesses, and social programs. This enables long-term economic growth and reduces reliance on external borrowing. - Stabilises Post-Conflict and Disaster Recovery
Aid plays a crucial role in rebuilding war-torn economies and regions affected by natural disasters. Immediate financial assistance allows governments to restore essential services, reconstruct infrastructure, and provide humanitarian relief. This fosters political stability, reduces the likelihood of future conflicts, and supports long-term economic resilience. - Investment in Infrastructure
Aid directed toward infrastructure projects—such as roads, energy grids, and communication networks—enhances economic productivity and market access. Improved infrastructure lowers business costs, attracts foreign direct investment, and facilitates trade, leading to higher economic output and employment opportunities. - Long-Term Health and Education Benefits
Sustained aid in healthcare and education contributes to human capital development. Access to better medical facilities reduces mortality rates, while investments in education equip individuals with skills for higher-paying jobs. This boosts productivity, increases income levels, and improves overall quality of life in recipient nations. - Targeted Aid Lifting Trend Growth & Benefits to Donor Countries
Aid that focuses on industrial development, technological advancement, and skill-building can enhance long-term growth rates in developing nations. This not only reduces global income inequality but also benefits donor countries by creating new trade partners and expanding global markets, leading to increased exports and economic interdependence.
what is the lewis model
a theory that suggests that countries can achieve economic growth by transferring labour from the traditional agricultural sector to the modern industrial sector
lewis turning point analysis
- according to the LM, in a traditional agriculture economy, labour is abundant, as wages are low because workers are not highly skilled
- As industrialisation begins, labour is gradually drawn from the agricultural sector to the modern industrial sector, leading to a shortage of labour in the agricultural sector
- at the Lewis Turning Point, the supply of labour from agriculture becomes limited, and wages in farming begin to rise. This increase in wages leads to higher production costs in agriculture, which raises the price of agricultural goods
- as a result, the modern industrial sector becomes more competitive, as they can produce goods at a lower cost than the agricultural sector
lewis model chain of analysis
- Surplus Labour in Agriculture → Migration to Industry → Industrial Growth
In the early stages of development, agriculture employs a large share of the workforce, often at subsistence wages → Many workers are underemployed, meaning their marginal productivity is close to zero → The Lewis Model suggests that this excess supply of rural labor gradually moves to the industrial sector, where wages are higher → This leads to increased industrial output, higher economic growth, and greater capital accumulation, driving structural transformation in the economy. - Industrial Sector Benefits from Cheap Labour → Rising Profits → More Capital Investment
Since labour migration keeps wages in industry low, firms in the industrial sector gain higher profits → These profits can be reinvested in capital equipment, leading to greater productivity and technological advancements → This cycle of investment-driven growth supports urbanization, expansion of secondary industries, and higher overall national income, shifting the economy from agriculture-based to industry-based. - Rural Labour Surplus Diminishes → Wage Pressures Begin → Labour Costs Rise
Over time, as more workers leave agriculture for industry, the rural labour surplus begins to shrink → Once this happens, industrial firms struggle to find new low-cost workers, which pushes wages up → As wages rise, industrial profit margins start to decline, leading to less reinvestment in capital → This marks the Lewis Turning Point, where the industrial sector can no longer rely on cheap labour to sustain growth. - Higher Wages → Shift to Capital-Intensive Production → Need for Productivity Growth
As wages rise, firms seek alternative ways to maintain competitiveness, such as investing in capital-intensive production methods (e.g., automation, machinery) → This transition requires higher-skilled workers, increasing demand for education and vocational training → Countries that successfully invest in human capital and innovation can transition into higher-value manufacturing and services, ensuring continued economic growth beyond the Lewis Turning Point. - Countries Struggle if Productivity Fails to Keep Pace → Risk of Stagnation → “Middle-Income Trap”
If labour costs rise faster than productivity, firms lose competitiveness, and growth may slow down → Without innovation or industrial upgrading, countries can get stuck in the middle-income trap, where they are too expensive for low-cost manufacturing but not advanced enough for high-tech industries → This creates economic stagnation, where industrial expansion plateaus and wages fail to rise further, limiting long-term development.
application for lewis model
China(as of 2020):~
- Rural population = 510 million (36%)
- urban population = 891 million (63%)
