Developmental Economics Flashcards
economic development
Amartya Sen - process of improving individual well being and quality of life, including
higher SOL
better health and ed
alleviating poverty
greater economic freedom
Characteristics of highly developed economies
- high per capita income
- established economic institutions
- advanced capital, infrastructure and productivity
- strong tertiary sector
- stable or declining populations (top heavy dependency ratio)
- low rural-urban migration
characteristics of lowly developed economies
- low per capita income
- reliance on fewer products
- larger primary sector
- poor capital and productivity
- weak economic instutitons
- natural rate of increase in population (bottom heavy dependency ratio)
- high rural-urban migration due to dual economies
why is productivity low in LEDCs?
human and physical capital!
lower levels of education and health means poorer human capital
fewer skills means less capable of producing valuable output
fewer skills also stops the adoption of modern tech that could improve productivity
low savings and investment in capital
how could primary sector dependence limit growth and development?
- low value added sector relative to manufacturing/processing, e.g. Ethiopia exports unprocessed coffee beans which are roasted after export
- unsustainable! non-renewable
- primary commodity price volatility due to price inelastic demand and supply and vulnerability to D and S shocks
- LT decline in TOT - low YED
reason for CA deficit in LEDCs
these are just the reasons for low productivity!
- lack of savings means low investment in capital for manufacturing/processing - unable to produce high-value goods and services, reducing value of exports
- Poor human capital - insufficient spending on education causes low productivity and high unit labour and uncompetitive exports
- lack of the skills necessary for higher skill jobs in higher value added sectors
what is the savings gap and why does it exist in LEDCs?
- high levels of extreme poverty, high MPC and lack of financial instituitons mean very low savings to provide loanable funds for investment projects that will boost prod., incomes and further savings
- creates difference between savings and spending needed for investment, and reliance on overseas borrowing
why is low savings a barrier to development?
- low savings means less loanable funds for business investment in capital/new businesses
- less loanable funds for households to spend - growth through multiplier effect
- households cannot fund education/healthcare for children
reason for high unemployment in LEDCs
- low productivity due to poor human capital (education, skills, health)
- cultural barriers - e.g. women cannot study or work
- rapid population growth due to natural rate of increase - simply not enough jobs being created in formal labour market
- limited govt funds to support vocational training and support enterprise start ups
reason for high inflation in LEDCs
- faster economic growth in some emerging economies - +ve output gap and DP inflation
- volatile ERs, lack of CB to operate monetary policy - they tend to run CA deficits so large depreciation will cause imported inflation - essentials like food, energy and capital
CP inflation due to rising global demand for raw materials
key external sources of finance for LEDCs
- remittance income
- aid
- debt
- inward FDI flows
define export led growth
economic growth achieved through the exploitation of economies of scale, by focusing on exports to reach a wider
market than would be available within the domestic economy
apart from export-led growth, what contributed to the East Asian Tigers’ success?
- nurtured their human capital
- attracted foreign investment
- Their governments intervened to influence the direction of the economies but also encouraged markets to operate effectively
- developing good infrastructure
- all of this fostered macroeconomic and political stability
- balanced growth (internal and external, range of sources,
why is the population structure of LEDCs a challenge for development?
the population has been growing too
fast for education and healthcare services to keep up - key pillars of development
Malthus suggested there would be diminishing returns to labour - as population of a country increases, the average wage would fall, since a larger labour force would be inherently less productive - lower income means lower SOL
idea of an optimum population
might counter by saying people themselves are a resource, but depends on population relative to available resources
explain what the Kuznets curve shows
the relationship between a country’s stage of development and the level of inequality given by gini coefficient
at low levels of development, income is fairly equally distributed with everyone living at a relatively low income level.
as development begins to increase there will be some individuals at the forefront of enterprise and development, and their incomes will rise more rapidly. worsening inequality. No welfare system in place
At a later stage of development, society will
eventually be able to afford to redistribute income through taxation and transfers to protect the poor, so all enjoy benefits of development
why don’t developing countries have welfare systems?
they cannot afford them - people do not make enough income to pay taxes
ineffective collection or corrupt governance
classification according to income
GNI per capita but also GDP and NNI(both per capita)
high income economy - world bank
GNI of 12376 USD and above
low income - world bank
1025
monetary indicators of development
GNI, GDP and NNI per capita, PPP
what is PPP
a way to compare international living standards by using an exchange rate based on the amount of each currency needed to purchase the same basket of goods and services. The exchange rates for 2 countries are at PPP when they have the same purchasing power
non-monetary indicators
life expectancy, infant mortality, expected years of education, etc
composite index
both monetary and non-monetary indicators
HDI
Measurable Economic Welfare
Multidimensional Poverty Index
what does the HDI measure
GNI per capita
education (by expected and mean years of schooling)
healthcare (by life expectancy)
scale of HDI
closer to 1 means higher human development
very high human development - Switzerland at 0.962
low human development - South Sudan at 0.385
why might HDI ranking not match GNI per capita ranking?
GNI is only one of 3 aspects of the HDI so the other 2 might improve or worsen its HDI ranking compared to GNI
e.g. Qatar has higher GNI than HDI possibly due to poor wages and working conditions of immigrant workers
what does MEW measure
adjusts GDP for factors that might improve and reduce living standards
e.g add value of informal production, reduce value of externalities
what does MPI measure
deprivation in terms of the proportion of households lacking requirements for a reasonable standard of living
grouped into the three key
components of the HDI, including school
attainment, child mortality and access to resources like
cooking fuel, sanitation, drinking water, electricity, housing, assets
how can classifying countries by development be useful?
- different indicators may reveal reasons for differences in living standard - e.g MPI can help to see why people are poor
- governments and itl organisations can target economies in need of help and aid
- world bank - use national income to set a reasonable interest rate on loans
problems with comparing economic growth rates over time
- official real GDP/GNI/NNI may understate true change in output due to changes in the shadow economy
- low literacy levels - people are unable to fill out tax forms correctly or at all
- quantifying value of non-material goods, and services
- non-marketed goods and services - e.g homemakers, subsistence farming, DIY projects
- errors and omissions
- does not consider the nature of growth, e.g. sustainability of very high growth rate
shadow economy
output of goods and services hidden from the authorities for tax evasion purposes or because it is illegal activity, like smuggling
issues with comparing SOL over time (GDP/GNI)
- ignores income inequality - increase in GNI/capita doesnt mean everyone’s income rose
- important to use real GDP to account for inflation
- does not reflect changes in hidden and informal economy
- does not factor in changes in the products made (capital/consumer/demerit), how they are made (externalities) and their quality (same quantity but better quality makes people better off)
- non-material indicators like working conditions, working hours ( output remains constant but working hours fall), pollution, economic freedom and choice (Sen and Todaro)
- changes in defensive expenditure - cleaning environmental damage, policing growing levels of crime - will increase income but clearly not improving SOL
issues with comparing SOL between countries
- cannot do this without converting to GDP per capita PPP, or will exaggerate differences
- differences in the quality of data collected as methods may not be as reliable
- informal economy - prevalent in many LDCs, e.g. subsistence agriculture so GNI is lower than it really is
- important to use PER CAPITA income to account for differences in population size - large population is likely to produce more than small population but output has to be shared among more people so living standards not necessarily higher
- Tastes and needs can be different in different countries - e.g. cold climate requires greater spending on heating than warm countries to enjoy the same standard of living.
- just GNI/GDP doesn’t account for differences in non-material living standards (e.g. Qatar and Nepal)
population structure of developing countries
natural increase in population due to birth exceeding death rate
high dependency ratio (young)
population structure of developed countries
natural rate of decrease of population
high dependency ratio (old)
may experience net immigration due to higher income and SOL prospects
reasons for differences in population structures
education - work
knowledge and availability of birth control
healthcare and sanitation - infant mortality
using children to work
women’s role in society
costs of raising children
income foregone by having children
what is the optimum population
the size of population that maximised GDP per capita given current state of technical knowledge and quantities of factors of production
if population is below optimum, underpopulated
why does GDP per capita rise then fall as population grows
diminishing marginal returns! better utilisation of FOP lead to GDP growth before overpopulation reduces efficiency
differences in urbanisation
developing - majority live in rural; high rural-urban migration
developed - majority live in urban, low rural-urban migration but there might be urban-rural due to improvements in tech and connectivity
how to calculate gini coefficient from lorenz curve
area between line and bow / total area under the line
differences in patterns of trade
differences in the commodity pattern of trade:
LEDCs - tend to rely mainly on primary sector exports; narrow range of products
MEDCs - manufactured and tertiary exports; wide range of products
risks of LEDC’s pattern of trade
- primary products subject to price volatility due to demand and supply side shocks
- demand is income inelastic and TOT will decline relative to manufactured goods over time as world incomes rise but demand for primary products does not rise as much
international aid
assistance given to other countries on favourable terms
forms of aid
grant
loan on low IR
technical assistance
direct provision of goods and services
types of aid
tied or untied
(aid with conditions; aid without conditions)
bilateral or multilateral
(aid given by one country to another; aid given by countries to intl. orgs like WB or UN which is then distributed to other countries)
reasons for giving aid
- tied bilateral can promote export industries of donor country
- untied aid given in hopes of increasing donor’s exports by developing goodwill and feeling of obligation
- bilateral aid offered to fain political influence e.g. support in disputes with other countries
- both multi and bilateral aid offered to influence economic policies of recipient e.g. end child labour or reduce budget deficit
- recognition that development of other countries can increase global GDP and intl. trade and reduce risk of negative external shocks
- humanitarian motives
effects of aid
- create virtuous cycle of investment in education, healthcare and infrastructure which directly promote development outcomes
- heavy indebtedness from heavy aid reliance - may end up paying more in interest than received in aid even if IR is favourable
- tied aid may come with conditions unsuitable for developing economy - e.g. trade liberalisation when domestic industries underdeveloped, or imposing fiscal discipline by cutting spending on health and education
how can trade promote growth?
- economies of scale
- increased competition stimulates innovation and efficiency
- technological and skill transfer
- specialisation and trade increases incomes and savings and hence investment
- demand for exports will increase GDP through the multiplier effect
why have prices of primary commodities declined relative to manufactured goods
- low YED such that global income growth has not increased demand for them
- manufacturers in MEDCs have monopoly power and charge higher prices
- subsidies to farmers in MEDCs put downward pressure on agricultural prices
importance of investment to LEDCs
tend to run structural CA deficits so need to attract direct and portfolio investments to run FA surplus and finance it
emerging economies
making quick progress towards becoming high-income countries, e.g. BRICS
high rates of econ growth make them desirable for investment although they might carry greater risk
MNC
business with a parent company in one country but with production or service operations in at least one other country
FDI
setting up production units or purchasing existing production units in other countries
what is external debt
loans not repaid and unpaid interest payments to foreign banks, governments and international organisations
reasons for issuing debt through bonds
- structural CA deficit needs to be financed
- may have been overconfident in how much debt it could repay - i.e. overestimated return of an industry being built using a loan relative to IR of loan
- did not make good use of funds - i.e. did not invest in projects with high rates of returns to allow debt repayment
- demand and supply side shocks - e.g. unforeseen depreciation of ER against USD which increased interest payments; global recession; natural disaster
how does a country issue debt?
issuing bonds
case FOR LEDC issuing debt through bonds
- overcome savings gap when unable to attract FDI or has volatile remittance - fund infra projects that boost capital stock, productivity, LRAS and competitiveness - higher PC incomes and lower absolute poverty –> LR growth and returns to finance debt in the future
- use to invest in human capital - better education will increase productivity and skills, enabling diversification and reduction of primary commodity dependence e.g. solar power investment - break resource curse, more sustainable and predictable growth
- Capital market may impose discipline by increasing IR on new debt if policies are failing, forcing better macro policies, like SS and inflation control, and stronger institutions
case AGAINST LEDC issuing debt
- may borrow at low IR, but when they inevitably rise, will they still be able to service and repay, especially if currency depreciates
- corruption
- Opp cost of debt servicing - cannot use tax revenue to spend on hospitals/schools to promote development outcomes
- if they borrow in $/euro, and their currency depreciates/devalues, then they need to pay more in interest/total debt in real terms
- corruption - returns from infra projects may not materialise if funds misused
- crowding out
final eval for issuing debt
be very careful of question, though: it might ask you to evaluate the case for issuing debt based on certain conditions that the QUESTION provides
has great potential to contribute to sustainable development, but given how vulnerable LEDCs are to fluctuations in currency and capital market IR, might be better off promoting development by using structural reform to improve governance and stimulate the private sector. This will help to attract stronger FDI inflows which can promote capital growth and development without burdening future taxpayers as much
however, even this is a LR approach. In the SR, may have no choice but to borrow as intl. lender and inward FDI see as too risky
consequences of large external debt
- reduces development as funds are redirected away from investment to repaying loans
- reduces credit rating so harder and more expensive to attract more funds for development
impact of devaluation of currency on LEDCs
- cost push inflation from importing essentials like food and energy, and capital equipment
- value of interest to be paid on debt increases - risk of default; increased OPP COST
role of IMF
3 functions: surveillance, technical assistance and lending
first 2 to promote intl. monetary cooperation and trade; setting up multilateral payment system; ER stability
last to assist countries unable to finance CA deficit
role of World Bank
aims to reduce absolute poverty to 3% by 2030 and and encourage income growth of bottom 40% of every country
supports low and middle income countries through investment payments and loans in areas that promote development like infra, health, education, agriculture, environment, governance (anti corruption)
criticism of IMF and World Bank
imposing ‘Washington Consensus’ of trade liberalisation, privatisation and deregulation on LEDCs, which might increase efficiency but also income inequality and leave underdeveloped markets vulnerable to foreign competition
what is holding back development is market failure and a lack of financial institutions to save, invest and trade
pros of growth leading to development
- income growth - reduced poverty
- higher profits - reinvest in cleaner tech to reduce negative externalities and sustainable growth, and promote diversification into higher value added sectors
- higher fiscal dividend to improve health and education, pillars of development, as well as infra to increase competitiveness of firms
cons of growth leading to development
- income inequality
- negative externalities - depletion of primary commodities means unsustainable growth and pollution means reduced health/welfare
- inflation - rapid, unbalanced growth from the demand side as incomes rise
- government corruption - tax revenues used inefficiently
growth and development eval
- sustainable growth needed with effective environmental policy and supply side policy promoting diversification
- effective governance needed to promote (1) and using tax money to promote development outcomes - more transparency and accountability to taxpayer needed
pros of GDP as measure of development
- internaional benchmark to evaluate SOL - increase in GDP suggests higher SOL, and can be compared to other countries’ development progress
cons of GDP as measure of development
- fails to capture many aspects of the broad concept of development/welfare - non material indicators
- only quantity, not quality, what is produced or how it is produced
- does not reflect income inequality
- may understate true value of GDP due to informal/non-marketed economy
- does not reflect remittance income which is significant for many countries
- misleading effect of MNC activity - they repatriate profits; poor pay and working conditions
5 and 6 overcome by using GNI per capita - all FOP income regardless of location
‘welfare and development are BROAD concepts’ - use this phrase for this question
pros of HDI
- broader measure of SOL and development than GDP/DNI
- used to track development outcomes over time and compare to other countries
- clearly indicates where development progress needs to be focused - inform effective policy decisions
cons of HDI
- 3 pillars of HDI weighted equally when countries may have certain areas that lack more than others - inefficient allocation of funds
- still relatively narrow considering freedom, gender inequality, infrastructure also matter –> BUT these may be difficult to measure and reduce reliability of HDI, also may not be as vital
evaluate your evaluation
HDI final eval
useful but should be used alongside other measures of development like MPI, Gini coefficient, GII (gender inequality index) and Global Competitiveness Index to get an even broader undertsanding of country’s development progress
The diverse characteristics of LDCs demand the use of a range
of alternative measures in order to understand problems facing a particular country. e.g. healthcare it is useful to
look at the number of doctors relative to population. Access to mobile phone and electricity shows level of infra
barriers to education for development
- govt funding
- income inequality
- culture of child labour
barriers to healthcare for development
- govt funding
- income inequality
barriers to infra for development
- govt funding
barriers to political stability for development
- corruption
- conflict
bariers to taxation for development
- tax exemptions to attract MNCs
- corruption
- inefficient tax collection (think India before UPI)
- WTO pushing for removal of tarrifs
- large informal/non-marketed sectors (e.g. subsistence farming)
barriers to financial institutions for development
- foreign commercial banks unwilling to lend
- low savings so low loanable funds
income inequality as a barrier to development
- reduced savings (high MPC) and thus investment
- capital flight - rich save money abroad due to higher interest rates, so less loanable funds
- richer dominate politics - decisions in favour of their own wealth and not the poor
what are the main sources of development?
- education
- healthcare
- infra
- political stability
- taxation
- financial institutions
- empowerment of women
how can education promote development
improving value of human capital, increasing productivity, increasing MRP, increasing earning potential, increasing incomes, reducing absolute poverty and improving material living standards
how can infra promote development
- easier access to schools, hospitals and workplaces
- easier access to ports/markets for firms -reduces COP for firms, increasing profitability and hence investment and income growth
- water and sanitation infra can prevent disease
- gas/power lines can improve access to electricity and improve cooking hygiene
how can political stability lead to development
- stable, accountable and transparent govt w/o corruption will increase confidence
- encourages both domestic and inward foreign investment
- use tax funds effectively to promote development and reduce inequality
- promotes growth, reduces inequality, promote development
how can effective taxation promote development
revenue collected and use efficiently to invest in the 3 pillars of development - ed, health, infra - providing at socially optimum level when private sector will not
how financial institutions promote development
- needed for sustainable development as they faciliate saving and borrowing for investment
- investment used to grow businesses, create employment, increase profits and increase incomes
- investment in diversification to overcome primary commodity dependence
trade and development pros
- increases incomes and SOL through GROWTH
- increases fiscal dividend through GROWTH
- tech and skills transfer - develop capital intensive production; reinvest in new tech
- export highly priced commodities and improve TOT
trade and development cons (intl. barriers to development)
- reliance on overseas demand
- resource depletion - unsustainable growth
- commodity price volatility
- international protectionism
- declining LT TOT
trade and development eval
- efficient governance needed - collect and use tax revenues well; enforce environmental policy; diversification for sustainable growth
diversification is a key point
3 reasons why inward FDI takes place
- new market opportunities - growing populations and income growth
- stable governance
- tax incentives
- low cost labour and raw materials
- more lax regulation (lower COP)
FDI and development pros
- injection into circular flow, boosting SR growth as incomes rise, but also LR growth as Q+Q of capital stock increases
- fiscal dividend
- tech and skill transfer
- directly improve infra
- increase financial account surplus to finance CA deficit without debt
FDI cons for development
- employment lower than expected - foreign workers or ST employment
- lower tax revenue due to incentives
- -ve externalities - depletiona dn pollution
- MNC lobbying for looser environmental policy and deregulation not in interests of LEDC
final eval for FDI and development
depends on the type of investment and how sustainable it is - e.g. employing locals, policy in place to prevent environmental damage
if not, then the growth will not be sustainable enough to promote development outcomes
cons of aid and development
- corruption
- distort incentive for govt to be efficient
- aid weariness
- loan aid will increase indebtedness
- tied aid not in best interests
aid and development eval
- must be targeted aid to promote internal and sustainable sources of development
- corruption-free govt - transparency and accountability
- unofficial aid better than official to avoid corruption
- aid might be only ST option for poorest countries as international lending and inward FDI too risky
market based policies to promote development
- trade liberalisation
- encouraging FDI (tax incentives)
- floating ER
- privatisation and deregulation
define market based development policies (opp for interventionist)
designed to promote development by maximising the free operation of markets instead of govt
interventionist development policies
- protectionism
- managed ER
- aid
- govt spending
- regulation
- nationalisation
- price controls
