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
- 💰 Stimulates economic growth in debtor countries
Debt forgiveness reduces the debt burden.
This allows countries to redirect funds towards economic development projects.
Increased investment in infrastructure and services enhances productivity.
Stimulates long-term economic growth and reduces poverty.
- 🌍 Promotes international cooperation and goodwill
Debt forgiveness can improve diplomatic relations between countries.
Enhances collaboration between debtor countries and creditors.
Increases trust in international organizations (e.g., IMF, World Bank).
Encourages future cooperation in economic development.
- 👩🏫 Focus on social welfare and development
Debt forgiveness frees up resources for social programs (e.g., healthcare, education).
Countries can invest in improving public services and welfare systems.
Leads to better living standards and human capital development.
Reduces inequality and poverty, fostering a more stable society.
- 💵 Reduces the risk of default and financial instability
Debt forgiveness lowers the risk of default, which can destabilize the global economy.
Reduces the strain on struggling economies and prevents economic crises.
A more stable economy encourages investment and economic activities.
Increases confidence in global financial markets and debt management.
- 📉 Relieves pressure on government finances
Countries can allocate their resources more efficiently without the burden of servicing debt.
Debt forgiveness reduces the fiscal pressure on governments.
Lower chance of austerity measures
Increases the flexibility of fiscal policy for addressing domestic challenges.
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
IMF (International Monetary Fund) 🌍
Provides temporary loans to countries in financial crises → Helps stabilize national economies by preventing defaults → This allows countries to maintain economic stability and avoid social unrest → Countries can then focus on growth and recovery, benefiting the global economy.
Monitors and advises on economic policies → Provides technical assistance and financial advice → Countries adjust their policies based on IMF recommendations → This can help improve economic resilience and fiscal management in developing countries.
- The World Bank 🌍
Provides long-term loans to developing countries for infrastructure projects → Funds for projects like schools, hospitals, and roads → Improved infrastructure promotes economic growth → Higher standards of living and development are achieved. - WTO (World Trade Organization) 🌍
Promotes trade liberalization → Encourages countries to reduce tariffs and trade barriers → Increased trade leads to economic growth → Development through access to global markets and enhanced competitiveness.
Dispute resolution → Provides a platform for resolving trade disputes among countries → Helps maintain international trade stability → This creates an environment where countries can invest and develop with confidence.
Ensures a level playing field → Establishes rules to prevent unfair trade practices → Ensures fair competition between countries → Strengthens global economic relationships, which support development.
- Private Banks 🏦
Facilitates investment and entrepreneurship → Provides loans and financial products to businesses → Businesses can expand, create jobs, and generate wealth → Encourages innovation and economic growth in developing countries.
Supports infrastructure development → Offers financing for large infrastructure projects like roads, electricity, and water supply → Better infrastructure improves the quality of life → Creates economic opportunities for the population.
Drives financial inclusion → Provides banking services to the unbanked population → Increases access to credit, savings, and financial security → Promotes individual economic empowerment, which is critical for sustainable development.
- NGOs (Non-Governmental Organizations) 🌍
Directly addresses poverty and inequality → Implements programs that provide basic needs like food, healthcare, and education → Reduces poverty levels and enhances access to essential services → Improves overall well-being and development of communities.
Promotes environmental sustainability → Engages in programs focused on sustainable agriculture, energy, and conservation → Helps preserve natural resources while promoting economic development → Ensures long-term growth without harming the environment.
Advocates for policy change → Works with governments to influence policy decisions in favor of development → NGOs can raise awareness on human rights, education, and health policies → Contributes to an enabling environment for social and economic progress.
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.
