Economic development

Question 1

Economic development

Answer 1

Economic development is the process of improving economic welfare in an economy and fulfilling a wider range of human needs and wants, as well as economic structures which raise living standards.
Economic development involves an increase in real incomes, higher life expectancy, lower poverty and a greater provision of basic amenities.

Question 2

How effective is National Income growth at measuring development levels in a country?

Answer 2

1. GDP doesnt include inflows and outflows of income from outside the country, for example rental income from overseas property and remittances. Lebanon (48% GDP)
2. GDP per capita only indiciates average wealth but has no indication of the level of wealth or income inequality in the country.
3. Large hidden economies could be present, such as a black market, this is not accounted for in GDP, therefore making comparisons misleading and difficult.
4. No indication of welfare, other measures such as the happiness index, may be better used to measure living standards.

Question 3

GDP and GNI

Answer 3

Gross National Product is the market value of all goods and services produced in a year.

GNI is measured as GDP plus net income from abroad, this is any income earned by a country on investments and other assets owned abroad, minus any income earned by foreigners on invesments domestically.

Question 4

Purchasing Power Parity (PPP)

Answer 4

When using GDP per capita to compare living standards in countries that use different currencies, the exchange rate may not reflect the true worth of the two currencies.
Comparisons therefore must be carried out using the principle of purchasing power parity.
Purchasing power is the real value of an amount of money in terms of what you can actually buy with it, this can vary between countries.

Question 5

Possible measurements of development

Answer 5

1. HDI
2. Access to health, education, internet, mobile phone usuage etc.
3. Economic structure of a economy

Question 6

GDP and PPP

Answer 6

GDP does not tell us about a consumers ability to purchase a goven basket of goods in a country. PPP can compare purchasing power in different countries, we can therefore compare living standards across countries.

• Non tradable inputs and FOP tend to be more expensive in HICs, for example rent and wages.

Question 7

Adjusting GDP on a PPP basis

Answer 7

• Using a PPP exchange rate, using the ratio of average prices between country A and the US.
• Total GDP/Price level ratio of PPP conversion factor to market exchange rate index

Question 8

HDI

Answer 8

Human development index is a response to the shortcomings of GDP.

The UN Devlopment Programmes (UNDP) HDI is composed of 3 indicators

1. Health - Life expectancy at birth
2. Education - Mean years of schooling of those aged 25+ AND expected years of schooling at birth
3. Standard of living - Standard of living as measured by GNI per capita on a PPP basis

A value close to 1 is indicative of high level of economic development and a value close to 0 suggests a low level of development

Question 9

Disadvantages of using HDI

Answer 9

1. HDI does not consider many social factors such as how free people are politically, their human rights, gender and equality or peoples cultural identity. How happy is the population?
2. HDI does not take into account enviromental impact, it could be argued that this should be a greater focus of economic development than it is.
3. HDI does not include distribution of income, as it uses GNI per capita. A country could therefore have very high HDI yet very high income inequality with many still in poverty.
4. Reasons for differences in HDI are unkown, its just one number and has multiple factors, therefore we cannot decide what exactly the issue is.

Question 10

Advantages of using HDI

Answer 10

1. HDI DOES allow for effective comparisons between countries to be made, based upon their general level of development.
2. Not as limited as GDP, much broader comparisons of other factors such as health and education standards.
3. Education and Health can provide information about the countries infastructure and oppurtunities, it also shows how successful government policies have been.

Question 11

HPI

Answer 11

Human poverty index

This measures life expectancy, education and the ability for citizens to meet their basic needs. HPI-1 measures poverty in developing countries and HPI-2 measures poverty in developed countreis.

Question 12

GDI

Answer 12

Gender-related development index

This meausures relative inequality between men and women, it combines HDI with a consideration of gender. For example it will consider differences in education between gender.

Question 13

UN Millennium development goals

Answer 13

• Eradicated extreme hunger and poverty.
• Achieve universal primary education.
• Promote gender equality
• Reduce child mortality.
• Ensure enviromental stablitity.

Question 14

UNDPs Multidimensional poverty index

Answer 14

MPI is a percentage of the population that are ‘poor’ * average percentage of weighted indicators of poverty

Poverty can be measured by…
- % of population below $1 income per day
- Relative poverty measure, % of poorest quintile in total income.
- Poverty gap ratio, percentage of total income required to bring everyone back up to the $1/day threshold.

Question 15

Access to health, education, the internet and mobile phone usage

Answer 15

Development can be measured by the proportion of the population that has access to health, education, the internet and mobile phones.

Question 16

Other health indicators

Answer 16

Life expectancy at birth
Infant mortality rate (per 1000 live births)
Maternal mortality rate ratio (per 100,000 liver births)

Question 17

Other education indactors

Answer 17

Adult literacy rate - % of over 15s
Primary school enrolement rate
Secondary school enrolment rate

Question 18

Critiques of other education indicators

Answer 18

• Education indicators in particular dont tell us about the quality of outcome, just because people are enrolled does not mean the quality of that service is high. There are therefore shortcomings of quantative analysis.

Question 19

Obstacles of Economic Development in LEDCs

Answer 19

• Natural resource endowment, Resource curse?
• Low levels of health and education
• MEDC trade policy
• Poor level of infastructure
• Capital and technology
• Insitutional weaknesses and poor governance
• High levels of public sector debt
• Rapid population growth
• Harod Domar model

Question 20

Obstacles of Economic Development in LEDCs - Population growth

Answer 20

• The neoclassical Solow model tells us that as population growth rate increases this will result in a fall in income per capita.
  However
  1. If GDP is fixed than larger populations means greater GDP per capita
  2. BUT if the larger population raises GDP, as the labour force size rises, than GDP per capita could also rise.

We must take into account the age structure of the economy and the dependancy ratio, the ratio of non-working population to working population. The lower the ratio the greater the share of workers in the economy and the more likely a increase in poppulation growth will boost GDP.

Question 21

Obstacles of Economic Development in LEDCs - Low levels of education and health

Answer 21

• Education and health are merit goods and therefore tend to be under-consumers in a free market because consumers lack the full information of their externalities.
• Education and health leads to higher productivity, larger labour force and lower unemployment. Boosting long run growth and the potential output of the economy. Raise living standards.
• High teacher absenteeism rates are high in LEDCs, Kremer study in 3,700 indian primary schools showed a absenteeism rate of 45%. Failure of repercussions and corruption.
• Thailand and indonesia invested heavily in primary education in the 60s and 70s prior to their economic boom.
• In LEDCs access to doctors, nurses, clean water and sanitation is low. Under 5 mortality rate is 145 in 2009 Africa and only 11 in North and South America
• Estimates show that a 10% improvement in life expectancy has a 0.4% increase in growth.

Question 22

Obstacles of Economic Development in LEDCs - Brain drain

Answer 22

Lower and middle income countries suffer from brain drain of their younger and more skilled workers looking for better oppurtunities outside of the national economy.

Question 23

Zambia - Education

Answer 23

Mean years of schooling - 6.5
Population with secondary education - 35%
Primary school drop out rate - 50%
Spending on education is less thatn 1.5% of GDP

Question 24

Obstacles of Economic Development in LEDCs - High public sector debt

Answer 24

• Debt servicing costs reduce financing available for other purposes
• Large fiscal deficit usually accompanied by CA deficit, this makes countries reliant on financial account surplus, if investors lose confidence and withdraw funds then currency will devalue quickly and could result in a BOP crisis.

Question 25

Obstacles of Economic Development in LEDCs - MEDC trade policy/barriers to trade

Answer 25

Trade is a key driver of economic growth and therefore economic development, driven the rise of the East Asian economies such as China, Korea and Japan. Barriers to trade that LEDC countries experience therefore is a barrier for development.
- LEDCs face tariff and non-tariff barriers to trading both primary goods and also diversifying.

• High tariffs, exports from LEDCs are less than 1/3 of MEDC imports by value, but generate 2/3 of the tariff revenue.
• Tariffs on agriculture, manafactured goods tend to be much higher. This forces LICs to export primary goods and not engage in domestic processing. Tariff escalation.
• High intra LEDC tarriffs, many regions have customs unions, including LEDC regions. For example SACU for Southern Asia. The level of tariffs between these regions tend to be very high.
• SA tariffs on HIC imports are around 9.5% but 16% on Latin america imports.

Question 26

Obstacles of Economic Development in LEDCs - Price volitility as a result of primary good reliance.

Answer 26

• Many LEDCs are heavily reliant on extracting and exporting primary commodities. Mining accounts for over 60% of south africas exports.
• Volatility of commodity prices means that prices can change to a great degree. Falls in prices can lead to a fall in export incomes and a loss of jobs in that sector. Difficult to predict.
• 55% of Zambian exports is Copper
• Zambian copper fell in price by nearly $6000 USD per tonne between 2011 and 2016. The result is a fall in export revenue and AD.
  Large current account deficit
  Depreciation of currency, leading to inflation.
  Job losses in mining, rise in cyclical and structural unemployment.
  Fall in tax revenues, budget deficit and higher dept. IMF support?

Question 27

Obstacles of Economic Development in LEDCs - Natural resource endowment, resource curse?

Answer 27

• Theoretically countries with higher levels of natural resource can use this for economic development, for example revenues gained from oil have enabled the Gulf states to develop rapidly gaining high levels of GDP.
  RESOURCE CURSE states that countries endowed with a rich source of natural resources can strugge to make effective use of these and often end up with low levels of economic development as a result.
  ESSAY E.G Nigeria, Zambia, Angola, Saudi and Sierra Leone.

Question 28

Prebisch-singer hypothesis

Answer 28

This theory argues that the prices of primary goods will fall over time relative to the prices of secondary and manafactured goods, therefore disporpotionalty effecting LEDCs that are heavily reliant on primary goods for exports.

Manufactured goods have a greater income elasticity of demand than primary products, especially food. Therefore, as incomes rise, the demand for manufactured goods increases more rapidly than demand for primary products.

As the global economy grows demand for these goods will grow less quickly than manafactured/services output. LEDCs will therefore have relative lower demand and worsening ToT.

Question 29

Reasons for resource curse?

Answer 29

Appreciation in the exchange rate
Prebisch singer
Monopoly Ownerhip
Limits investment in diversified industries
Corruption, revenue are not used to productivelt diversfiy the economy and imrpove HDI outcome through invesment in education and healthcare.

Question 30

Reasons for the resource curse - Limits invesment in diversified industries

Answer 30

A country with strong natural resources will invaraibly specialise in the production and export of this natural resource. Therefore it there is less incentive for the economy to diversify into different industries.
It could inhibit growth as the workforce is employed in low-skilled manual labour jobs, productivity is low. The country could become reliant and this is a bad thing.

Question 31

Reasons for the resource curse - Monopoly ownership

Answer 31

Natural resources tend to be owned by firms with signifcant degrees of monoploy and monopsony power, this means profits are taken by a small percentage of wealthy shareholders, they do not flow back into the countries economy.
Profits and tax could also be syphoned off by corruption, workers are paid low wages due to monopsony and efficiency is low.

Question 32

Reasons for the resource curse - Appreciation in the exchange rate

Answer 32

• A country which finds natural resources will tend to have an appreciation f the exchange rate due to the resource effect. Higher demand for exports. This has a benefit of making imports relatively cheaper.
• However appreciation of the exchange rate can damage other export industries and make them less competitive, this results in a unbalanced economy where the only sectors which thrive are resources. This is the DUTCH DISEASE.

If the resource exports decline or run out then there will be a current account deficit, falling tax revenue, unemployment and manafacturing export industires will have shrunk and fallen behind.

E.G Mini-oil boom in 1979 in mexico and venezuela saw rapid appreciation in the exchange rate and meant that all other industires became damaged in the long term.

Canada reported that the influx of foreign capital related to exploitation of the country’s oil sands may have led to an overvalued currency and a decreased competitiveness in the manufacturing sector.

Question 33

Evaluation of the resource curse

Answer 33

• You could argue it is not the resource that is the issue but instead the instituions and the government. Resources are not neccesarily a impediment to economic growth.
• Botswanna is dependant on the diamond industry for 40% of its GDP but between 1965 and 2002 had one of the world highest growth rates

Question 34

Obstacles of Economic Development in LEDCs - Infastructure gaps

Answer 34

• Poor infastructure discourages MNCs and TNCs from setting up in countries and carrying out FDI.
• Increase supply costs for buisnesses, causing higher prices and hitting real incomes.
• Reduce geographical mobility of labour/higher structural unemployment
• Damage export competivness.
• Make a country vulnerable from the effects of natural hazards.

Question 35

Zambia - Infastructure caps

Answer 35

• Quality of overall infastructure 93/140
• Quality of roads 81/140
• 90% of Zambias power comes from HEP, and they are very vulnerable to drought.

Question 36

Obstacles of Economic Development in LEDCs - Harod Domar model and levels of saving.

Answer 36

In many developing countries there is only limited wealth which means money cannot be put aside for the future and must be spent in the short run. Consumers focus on their immeidate needs, including access to water and food.
Africas savings rate is around 17% whilst MEDCs are around 31%.

The Harrod-Domar model states that investment, saving and technological change
are required in an economy for economic growth. The rate of growth increases if the
savings ratio increases. This leads to increased investment and technological
progress, which leads to higher productivity.

The rate of growth is calculated as the level of savings/capital output ratio.

Increased savings lead to greater investment, higher capital stock and therefore long run growth as the productive potential of the economy increases.

Question 37

Possible approaches to raise economic development

Answer 37

• Liberalisation, both internal and external
• International aid
• Debt relief
• Government intervention
• Encouraging FDI

Question 38

Trade Liberalisation

Answer 38

External liberalisation
Free trade, achieved by countries removing barriers to trade, resulting in specialisation and greater trade, boosting growth. If countries trade according to CA they can increase production and operate beyond their PPF.
- Reducing import/export tariffs, qoutas and non-tariff barriers.

Question 39

Benefits of Trade Liberalisation

Answer 39

1. Specilisation and export led growth will raise long run growth and allow the country to increase production and operate beyond their PPF.
2. Economic growth in the long run can result in greater tax revenue, and greater funds to be spent on education and healthcare.
3. Beneficial to consumers and increases their standard of living through lower prices and wider choice.

EXAMPLE -
Asian tiger economies demonstrated that a export oreinetated focus could drive growth, real average growth rates were 7% from 1950s to 1990s

Question 40

Evaluation of trade liberalisation

Answer 40

• There is a suggestion that countries will specialise, LICS will likely specialise in goods they have a abudance of factor inputs and resources in. Primary goods.
• Prebisch-singer theory
• Dutch disease, other industries may suffer
• Price volatitlity, primary goods are prone to supply shocks and their price is very volatile. E.G ZAMBIA
• Tariff escalation, meaning LEDCs struggle to develop manafacturing sectors, risks of specialisation.
• Income inequality and the creation of winners and losers, (non-export sectors lose vs those in export sectors, govt workers lose vs private sector).

Question 41

International aid

Answer 41

International aid is a cricitcal source of external finance for LICs.

Question 42

Benefits of international aid

Answer 42

• Mutiplier effect, spending on infastructure will increase AD, more people will have jobs, more tax revenue, less benefit spending, more spending on infastructure as a result.
• International aid can be a critical source of finance particularly in the case of LEDCs. This can provide longer term ‘development’ assistance and this can be funded directly through foreign governments.
• They can provide technology, capital equipment and finance in order to increase the productive capacity of the economy and shift the LRAS curve outwards. Resulting in development.
• Poorer economies tend to have much lower savings rates as they have a marginal propensity to consume and struggle to save. Well targeted aid can in theory plug the domestic savings shortfall and fund productive spending on education, health and infrastructure which can pull and economy out of poverty.

Question 43

Foreign aid evaluation

Answer 43

1. Tied aid occurs when a bilateral aid relationship includes some form of conditionallity. It may have high long term service costs which become too expensive for LICs.
2. Aid in kind may be innapropriate, Tanzania IMF privatisation of the water supply.
3. Corruption means that aid will not neccesarily end up where it is needed and dumping goods into countries means that provate firms cannot compete and are forced out of buisness.
   CORRUPTION is less likely with goods of kind.
4. Even if aid is well designed and well spend there are questions around duration of support. Aid may not allow the country to sustainably improve their living standards in the long run and simply creates a dependanct relationship on external support.
   When aid is removed there is no garuntee that improvements are maintained.
5. Aid is volitle and not reliable, UK committed to the UNs target of spending 0.7% of GDP on foreign aid until 2021, when BJ reduced this to 0.5%. UK has also diluted the definition of ‘aid’ to include more bilateral spending on foreign affairs-related activities.

Question 44

Debt relief

Answer 44

• Frees up money to be spent on improving infastructure and public services, such as healthcare and education, this will contribute to long run economic growth.
• Money freed up can be invested in capital goods.

Question 45

Benefits of dept relief

Answer 45

• Opp. Cost of govt spending, health and education spending will increase.
• Bop risk will fall. 2020 debt security costs of Nigeria.
• HIPC initiative pushed LICs into postitive reforms, dept relief initiative offered dept relief in exchange for LICs pushing poverty reduction, in Uganda this resulted in a large increase in primary school enrolement.

Question 46

EVAL of dept relief

Answer 46

1. Moral Hazard, debt relief may encourage future risk-taking and a continuation of the policies that led to the original debt problem. Not a long term and sustainable tool.
2. Conditionality of dept relief. W.C, reforms can be too rapid, public sector job cuts, they can be inappropriate and have a negative impact on poverty.
   Earlier initiatives such as Washington Consensus (a set of debt relief requirements imposed on LICs following 80s debt crisis. They included market based reforms, such as privatisation, fiscal austerity) and these earlier debt relief initiatives were harmful to LICs. E.G Tanzania and privatisation of the water supply.

Asian crisis of 1997, many countries such as Indonesia, Malaysia and Thailand were required by IMF to pursue tight monetary policy (higher interest rates) and tight fiscal policy to reduce the budget deficit and strengthen exchange rates. However, these policies caused a minor slowdown to turn into a serious recession with very high levels of unemployment.

Question 47

Encouraging FDI

Answer 47

FDI can create employment and encourage the innovation of technology and help promote long term and sustainable growth.

• Increase tax revenues
• Funds the financial account
• More sustainable than hot money flows

EVAL
Enviromental degregation
Dependancy and exploitation of TNCs

Question 48

Internal liberalisation - Privatisation and deregulation, Removing price supports

Answer 48

An important aspect of China’s rapid economic development was the decision to move from a Communist economy to a mixed economy. Several state-owned industries were privatised. This gives firms a profit incentive to cut costs and aim for greater efficiency.

De-regulation involves making state-owned monopolies face competition. This greater competitive pressure can help to create incentives to cut costs. Greater competitive pressures may also be gained through liberalising trade and opening markets to international competition.

Removing price supports such as sibsidies for food and fuel

Question 49

Internal liberalisation - Privatisation and deregulation EVAL

Answer 49

A potential problem of privatisation is that it can exacerbate inequality in society. In Russia, privatisation enabled a small number of oligarchs to gain control of key industries at low cost. Arguably, this does little for economic development because the nation’s resources become owned by a small number of very rich individuals, and there is little ‘trickle down’ to poorer members of society.

Privatisation of firms can cause them to have monoploy power and lead to higher prices and lower choice for consumers. Job losses as the private firm attemtps to become more efficient.

Developing countries face financial constraints which limit ability to effectively regulate, problem is more likely too little/badly enforced regulation.

Question 50

External Liberalisation

Answer 50

Removing capital controls and removing trade barriers

Question 51

What are trade-based approaches to development?

Answer 51

1. Trade Liberalism
2. Protectionism
3. Join a customs union
4. Encouraging FDI