development economics more Flashcards
application for cash transfers
- The hunger safety net Kenya, which has reduced absolute poverty rates by 7.5% and increased school attendance rates by 11%
- Give directly, who operate in various countries in Africa(eg Nigeria, Uganda, Malawi), as well as the US
what is cash transfer
a type of social protection programme in low income countries that provide direct financial assistance to vulnerable households
arguments for cash transfer
- Direct and Effective Way to Reduce Poverty → Immediate Increase in Household Income → Better Living Standards
Cash transfers provide direct financial support to low-income households → This immediately increases disposable income, allowing recipients to afford basic necessities such as food, shelter, and healthcare → As a result, poverty levels decline, and people can improve their quality of life → In the long run, better nutrition, housing, and healthcare can enhance productivity, creating a positive cycle of economic mobility. - Empowers People to Spend Money However They Please → Encourages Financial Independence → Reduces Government Inefficiency
Unlike in-kind assistance (e.g., food stamps or housing support), cash transfers allow individuals to choose how to allocate their funds, based on their specific needs → This promotes dignity and financial autonomy, rather than forcing a one-size-fits-all approach → Additionally, it eliminates inefficiencies associated with bureaucratic distribution, reducing corruption and administrative costs → Households can prioritize long-term investments, such as education and entrepreneurship, rather than being restricted by pre-determined government aid programs. - Can Increase Aggregate Demand (AD) → Boosts Consumption → Stimulates Economic Growth
When recipients spend their cash transfers on goods and services, it leads to a direct increase in consumer demand → Higher demand encourages businesses to expand production, creating more employment opportunities → With more jobs and rising incomes, the economy experiences a multiplier effect, leading to higher GDP growth → Over time, this can help reduce reliance on government support, as people transition to stable employment and self-sufficiency. - Less Expensive Than In-Kind Transfers → Reduces Administrative Costs → More Efficient Use of Public Funds
Providing cash directly to individuals is cheaper than managing in-kind assistance programs, such as food distribution or public housing → In-kind transfers often require government agencies, supply chains, and distribution networks, which involve high operational costs and inefficiencies → By eliminating these additional costs, cash transfers allow a greater portion of the budget to go directly to recipients, ensuring better resource allocation → Governments can then reinvest saved funds into other development projects, such as infrastructure or education.
arguments against cash transfers
- Sustainability Issues (“Plaster Rather Than a Medicine”) → Short-Term Relief Without Structural Change → Fails to Address Root Causes of Poverty
Cash transfers provide immediate financial relief, helping individuals meet their basic needs → However, they do not address the underlying structural issues causing poverty, such as low productivity, weak infrastructure, or lack of education → Without long-term investments in job creation, skills training, and economic diversification, cash transfers risk becoming a temporary fix rather than a sustainable solution → Over time, this can strain government budgets while failing to promote self-sufficiency. - Dependency Culture → Reduced Work Incentives → Long-Term Economic Stagnation
If individuals rely on government cash transfers as their main source of income, they may lose the incentive to seek employment or invest in skill development → This can result in a reduced labor force participation rate, lowering overall productivity and economic output → In extreme cases, it may lead to an intergenerational dependency cycle, where families continue to rely on government aid instead of becoming economically independent → This not only harms individual motivation but also increases the fiscal burden on governments, making welfare systems unsustainable in the long run. - Increased Inflationary Pressures → Higher Demand Without Matching Supply → Erodes Real Purchasing Power
Cash transfers increase disposable income, leading to higher demand for goods and services → However, if supply does not increase proportionally, this pushes up prices, leading to inflationary pressures → For economies already experiencing supply-side constraints, such as limited food production or housing shortages, higher demand exacerbates price increases, making essentials less affordable even for those receiving aid → Over time, this reduces the real value of cash transfers, forcing governments to increase payments or risk reducing their effectiveness. - Corruption and Embezzlement → Misallocation of Funds → Less Aid Reaching the Intended Beneficiaries
In many developing economies, weak governance and lack of transparency create opportunities for corruption within cash transfer programs → Officials may divert funds for personal gain, or middlemen may take a cut before aid reaches recipients → In some cases, eligibility criteria can be manipulated, leading to funds being distributed based on political favoritism rather than genuine need → This reduces the effectiveness of the program, leading to inefficiencies and further distrust in government institutions.
what is external debt
debt that flows out of a country
debt crisis
when countries cant pay off their debt
debt application
63bn will be spent by 75 countries on interest to cover loans taken out over the past 10 yrs
debt forgiveness
complete cancellation of a country’s debt by creditors
(usually cos of a natural disaster)
debt restructuring
involves the negotiation of a countrys debt terms
debt rescheduling
involves changing the schedule of debt payments
debt equity swap
exchanging a country’s debt for equity in local companies/ infrastructure projects
debt jubilee
A period where country doesnt pay off any debt
arguments for debt forgiveness
- Reduces Debt Burden → Frees Up Government Spending → Greater Investment in Public Services
Debt forgiveness reduces the amount of money a country must spend on debt repayments, freeing up fiscal resources → This allows governments to redirect funds toward essential public services such as healthcare, education, and infrastructure → Better public services improve human capital, which raises productivity and long-term economic growth → Over time, this helps break the cycle of poverty and underdevelopment, leading to higher living standards and economic resilience. - Stimulates Economic Growth → Increases Investment and Aggregate Demand → Higher Tax Revenues
High debt levels limit a country’s ability to invest in growth-enhancing projects because a large portion of government revenue is used for interest payments → Debt forgiveness removes this constraint, allowing the government to increase public investment in infrastructure, education, and industries → This boosts aggregate demand (AD) in the short run and encourages private sector investment, leading to higher GDP growth → As the economy grows, tax revenues increase, improving the government’s ability to finance development without accumulating further debt. - Reduces the Likelihood of a Debt Crisis → Increases Investor Confidence → Encourages Foreign Direct Investment (FDI)
Excessive debt increases the risk of default, making it more expensive and difficult for governments to borrow in the future → When debt is forgiven, the risk of default decreases, which improves a country’s creditworthiness → As a result, foreign investors regain confidence, leading to increased FDI and private sector growth → This inflow of investment creates jobs, improves technology transfer, and diversifies the economy, reducing reliance on foreign aid and further borrowing. - Helps Address Historical Economic Injustice → Promotes Global Economic Stability → Encourages Ethical Lending Practices
Many developing countries accumulated debt under unfair conditions, such as colonial rule, corrupt leadership, or unfavorable trade agreements → Debt forgiveness acknowledges these historical injustices, allowing countries to move forward without being trapped by past financial burdens → This also enhances global economic stability, as widespread debt crises can lead to global financial instability and economic downturns → Additionally, it encourages responsible lending practices by making lenders more cautious about issuing unsustainable loans, preventing future debt traps. - Prevents Austerity Measures → Protects Social Spending → Reduces Social and Political Instability
Without debt forgiveness, many heavily indebted countries are forced to implement austerity measures, such as cutting public sector jobs, reducing healthcare spending, and increasing taxes → These measures often worsen poverty, reduce economic growth, and increase public discontent → If social spending is preserved through debt relief, people have better access to education, healthcare, and economic opportunities, which reduces income inequality and improves long-term development → Additionally, lower economic hardship reduces the likelihood of political unrest and social instability, making the country more attractive for investment and business development.
arguments against debt forgiveness
- Creates Moral Hazard → Encourages Future Borrowing → Increases Risk of Another Debt Crisis
Debt forgiveness reduces the consequences of excessive borrowing, which may encourage governments to continue taking on unsustainable debt in the future → If governments expect that debts will be forgiven, they may borrow irresponsibly, knowing they will not have to repay in full → This leads to a cycle of repeated debt accumulation, which increases the risk of another debt crisis in the future → Lenders may also become less cautious, issuing risky loans that further destabilize the global financial system. - Damages a Country’s Creditworthiness → Makes Future Borrowing More Expensive → Slows Down Growth
When a country receives debt relief, it signals to lenders that the country is a high-risk borrower → As a result, future loans may come with higher interest rates or stricter lending conditions, making borrowing more expensive → Governments may struggle to finance infrastructure projects, healthcare, and education, as lenders demand higher returns to compensate for perceived risks → This slows down long-term growth and development, as investment in key sectors becomes more difficult and costly. - Unfair to Countries That Managed Debt Responsibly → Reduces Incentive for Good Fiscal Policy → Encourages Corruption
Countries that avoided excessive borrowing and managed their finances prudently do not receive debt forgiveness, while countries that mismanaged their debt are rewarded → This creates an unfair system, where responsible nations bear the cost of others’ poor decisions → It also reduces the incentive for governments to implement sound fiscal policies, as they may expect to be bailed out if they accumulate too much debt → In some cases, debt relief funds are misused by corrupt officials, instead of being directed towards essential services like healthcare and education. - Financial Loss for Lenders → Reduces Willingness to Lend in the Future → Harms Developing Countries’ Access to Finance
Debt forgiveness means that lenders (such as banks, investors, and governments) do not recover the full amount they loaned → This results in financial losses, which may discourage future lending to developing nations → As a result, countries that genuinely need loans for productive investments may struggle to access credit markets → This can slow down economic growth, as governments are unable to finance projects that would otherwise improve infrastructure, education, and healthcare. - Short-Term Solution → Does Not Address Structural Economic Problems → Growth May Remain Weak
Debt forgiveness eliminates the immediate debt burden, but it does not address the root causes of debt accumulation, such as poor governance, inefficient tax systems, low productivity, and dependence on volatile commodity exports → Without structural economic reforms, countries may continue to struggle with low growth and poor fiscal management, leading to another cycle of debt accumulation → In the long run, a more sustainable solution would be to improve domestic tax collection, diversify the economy, and increase productivity rather than relying on periodic debt relief.
Roles of Key Institutions in Development
- International Monetary Fund (IMF) → Provides Financial Stability → Supports Economic Growth
The IMF provides financial assistance to countries facing balance of payments crises, helping them stabilize their economies → By offering short-term loans, the IMF prevents financial collapse and ensures macroeconomic stability, which is necessary for sustained economic growth → The IMF also implements structural adjustment programs (SAPs) that promote market-based reforms, such as reducing fiscal deficits, controlling inflation, and improving governance → These reforms help create an attractive investment climate, encouraging foreign direct investment (FDI) and fostering long-term development.
Potential issue: SAPs often require austerity measures, which can reduce government spending on healthcare and education, negatively impacting social development.
- The World Bank → Provides Long-Term Development Finance → Supports Infrastructure and Human Capital
The World Bank provides long-term loans and grants for development projects in low-income and middle-income countries → These funds are used for infrastructure projects (e.g., roads, electricity, water supply), which improve connectivity, productivity, and access to basic services → It also invests in human capital, funding education and healthcare projects to improve literacy rates, life expectancy, and workforce productivity → By supporting these key sectors, the World Bank helps countries escape the poverty trap and achieve sustainable development.
Potential issue: Some World Bank projects have led to environmental damage and displacement of local communities, raising concerns about sustainability and ethical development.
- The World Trade Organization (WTO) → Reduces Trade Barriers → Encourages Economic Growth Through Global Trade
The WTO negotiates and enforces trade agreements, helping countries reduce tariffs and trade restrictions → This increases market access for developing nations, allowing them to export more goods and services, boosting economic growth → By promoting free trade, the WTO helps developing countries specialize in industries where they have a comparative advantage, increasing efficiency and productivity → This also encourages foreign direct investment (FDI), as multinational corporations are more likely to invest in countries with open trade policies.
Potential issue: WTO policies can benefit richer nations more, as developing countries may struggle to compete with highly industrialized economies, leading to trade imbalances.
- Private Sector Banks → Provide Capital for Businesses → Drive Economic Growth and Job Creation
Private banks mobilize savings and provide credit to individuals and businesses, allowing firms to invest in new projects, expand operations, and improve productivity → This increases employment opportunities, leading to higher household incomes and poverty reduction → Banks also offer microfinance services, giving small businesses and entrepreneurs access to credit, particularly in developing economies → By financing innovative startups and infrastructure projects, private sector banks boost economic growth and technological progress, contributing to sustainable development.
Potential issue: High-interest rates and strict lending conditions can exclude poorer individuals and small businesses from accessing finance, limiting economic opportunities.
- Non-Governmental Organizations (NGOs) → Address Social and Environmental Issues → Improve Quality of Life
NGOs play a critical role in providing humanitarian aid, advocating for social justice, and delivering essential services → Many focus on healthcare (e.g., providing vaccinations, improving maternal health), education (e.g., building schools, training teachers), and environmental sustainability → NGOs often fill gaps where governments fail, ensuring marginalized communities receive necessary support → They also advocate for policy changes, pressuring governments and international organizations to implement pro-poor policies that promote inclusive and sustainable development.
roles of the IMF
1️⃣ Enabling Growth & Preventing Recession → Restoring Confidence → Increased Investment
The IMF provides financial support and policy advice to countries facing economic crises.
This restores confidence in the economy, preventing capital flight and financial collapse.
With renewed confidence, businesses and consumers continue investing and spending.
This stimulates economic growth and helps prevent a deeper recession.
2️⃣ Providing Temporary Loans/Credit → Liquidity Support → Avoids Economic Collapse
Countries facing balance of payments crises (where they can’t afford to pay for imports or debt) can borrow from the IMF.
This provides immediate liquidity, preventing a default or economic breakdown.
With temporary financial relief, governments can continue funding essential services and stabilise their economies.
Once stability is restored, growth can resume, and the country can repay its loans.
3️⃣ Promoting Economic Stability → Reducing Market Uncertainty → Attracting Investment
The IMF enforces economic policies that help stabilise economies (e.g., controlling inflation, reducing fiscal deficits).
Stability reduces uncertainty for investors and businesses, encouraging investment.
Higher investment leads to job creation and increased productivity, driving long-term economic growth.
This stability also reduces the likelihood of financial crises, ensuring a stronger global economy.
4️⃣ Promoting International Monetary Cooperation → Coordinating Policy → Preventing Global Instability
The IMF brings countries together to discuss and coordinate monetary and financial policies.
By sharing economic insights and policy recommendations, countries can make better economic decisions.
This cooperation reduces risks of global financial contagion (where a crisis spreads from one country to another).
As a result, the global economy remains stable, benefiting both developed and developing nations.
5️⃣ Promoting Exchange Rate Stability → Reducing Currency Fluctuations → Encouraging Trade & Investment
The IMF monitors exchange rates and advises countries on policies to maintain stability.
Stable exchange rates reduce currency volatility, making trade and investment more predictable.
This encourages international trade, as businesses are less worried about currency risk.
why might a country need to rely on IMF
1️⃣ Balance of Payments Crisis → Foreign Reserves Depleted → Cannot Pay for Imports or Debt → IMF Loan Restores Liquidity
If a country spends more on imports than it earns from exports, it may run out of foreign currency reserves.
This makes it unable to pay for essential goods like food, fuel, and medicines.
If it also struggles to repay foreign debt, investors lose confidence, worsening the crisis.
The IMF provides emergency funding, allowing the country to continue essential imports and debt payments while stabilising its economy.
2️⃣ High Debt Levels → Rising Default Risk → IMF Loan Provides Breathing Space → Debt Restructuring
Some countries accumulate unsustainable levels of debt (often due to borrowing for infrastructure or social programs).
As debt payments rise, governments may struggle to pay wages, fund services, or meet obligations.
Defaulting on debt leads to economic collapse, currency devaluation, and hyperinflation.
The IMF steps in to provide financial support, often alongside debt restructuring, so the country can manage its obligations without collapsing.
3️⃣ Currency Crisis → Sharp Depreciation → Inflation Rises → IMF Steps in to Stabilise Currency
If investors lose confidence in a country’s currency, they sell it, causing rapid depreciation.
This makes imports more expensive, leading to higher inflation and declining purchasing power.
Businesses struggle to import essential goods and pay foreign-denominated debts, worsening the economic downturn.
The IMF provides financial support and policy recommendations (e.g., monetary tightening) to restore confidence and stabilise the exchange rate.
4️⃣ Banking System Collapse → Credit Crunch → Businesses & Households Suffer → IMF Restores Stability
If banks become insolvent or face bank runs, lending stops, leading to an economic standstill.
Businesses cannot get loans, workers lose jobs, and consumers cut spending, leading to a deep recession.
The IMF provides emergency liquidity to restore confidence in the banking system.
It also advises governments on banking reforms to prevent future crises.
5️⃣ Structural Weaknesses → Low Growth & High Unemployment → IMF Provides Policy Guidance & Investment Support
Some countries suffer from long-term economic stagnation due to poor governance, corruption, or weak institutions.
They may lack investment in infrastructure, healthcare, and education, preventing sustainable growth.
The IMF provides technical assistance, policy recommendations, and financial support to help countries implement structural reforms.
what is sustainability
meeting the needs if the present generation without reducing the ability of future generations to meet their own needs
how does tourism increase development
1️⃣ More Tourists → Increased Spending → Higher GDP Growth → More Tax Revenue for Public Services
Tourists spend money on hotels, food, transport, and attractions, boosting local businesses.
This stimulates GDP growth, increasing national income and improving economic stability.
Governments collect more tax revenue from tourism-related industries, which can be reinvested into healthcare, education, and infrastructure.
Improved public services enhance quality of life and long-term human capital development.
📌 Evaluation: Overdependence on tourism can be risky, as economic shocks (e.g., pandemics, political instability) can collapse the industry.
2️⃣ Expansion of Tourism Industry → Job Creation → Reduced Unemployment → Higher Disposable Income & Living Standards
Tourism requires a large workforce (hotels, restaurants, transport, tour guides, entertainment), providing direct and indirect employment.
This reduces unemployment and underemployment, particularly in rural areas where job opportunities are limited.
As people earn wages, they spend more on goods and services, creating a positive multiplier effect.
Increased income allows families to afford better healthcare, education, and housing, improving living standards.
📌 Evaluation: Many tourism jobs are low-paid, seasonal, and insecure, which limits long-term economic benefits.
3️⃣ More Tourists → Demand for Infrastructure & Transport → Improved Roads, Airports & Public Facilities → Long-Term Economic Growth
Tourism encourages governments and private investors to develop transport, energy, and communication infrastructure.
Improved airports, roads, and public transport benefit both tourists and local businesses, making trade and commuting easier.
Modern infrastructure attracts foreign direct investment (FDI), helping diversify the economy beyond tourism.
Over time, this leads to greater economic resilience and competitiveness in global markets.
📌 Evaluation: Poorly planned tourism can lead to overcrowding, congestion, and environmental damage, harming long-term sustainability.
4️⃣ Foreign Tourists → Increased Foreign Exchange Earnings → Stronger Currency & More Import Capacity → Improved Economic Stability
International tourists bring foreign currency (e.g., USD, GBP, EUR), increasing foreign exchange reserves.
A higher supply of foreign currency strengthens the domestic currency, improving trade stability.
Countries can use these reserves to import capital goods, healthcare equipment, and technology, aiding long-term development.
A stable currency reduces inflationary pressures, helping maintain affordable living costs.
📌 Evaluation: If tourism dominates exports, an economic shock (e.g., recession in tourist-origin countries) can lead to a collapse in foreign exchange earnings.
