Emerging And Developing Economies

Question 1

What is meant by a primary product dependency?

Answer 1

When an economy relies heavily on primary products for GDP and tax revenue e.g. The Ivory Coast has a primary product dependency in Cocoa.

Question 2

How can a primary product dependency act as a constraint on development?

Answer 2

Due to price volatility in these markets, incomes are unstable, making standards of living also volatile/unstable.
However this could diversify into manufacturing or services/tourist industries, so it is not necessarily a long-term issue.
In addition the terms of trade for primary products tends to fall over time meaning that more exports will need to be sold to buy the same amount of imports.

Question 3

Why do prices of primary products tend to be volatile?

Answer 3

• Supply is inelastic in short run. (Supply is unresponsive to temporary shortages of food).
• Supply can vary due to the weather/geopolitical events.
• Demand is price inelastic in the short-run – a small change in supply causes a bigger percentage change in price.

Question 4

What is the Prebisch-Singer hypothesis and what does it tell you about countries with a primary product dependency?

Answer 4

This hypothesis states that the terms of trade for primary products tends to fall over time relative to manufactured goods. This is because manufactured goods have a higher income elasticity of demand, and when global incomes are rising this means that demand for manufactured goods rises and therefore prices of these goods rise relative to primary goods.

Question 5

How can the Prebisch-Singer hypothesis and primary product dependency act as a constraint on development?

Answer 5

Limited resources. One day developing economies may run out of its finite primary products, e.g. precious metals could become scarce. Without diversification, this would leave the economy with a void. This means consumers will have less choice of products.
Exporters of primary products may see a fall in their bargaining power, and will have to give up more output/primary goods, for the same amount of manufactured goods. This effectively makes them poorer.

Question 6

What is meant by a savings gap?

Answer 6

When the savings ratio in an economy is too low, and therefore there are not enough funds for investment and development.

Question 7

What is the Harrod-Domar development theory?

Answer 7

A development theory that asserts that the rate of economic growth in an economy depends on the saving ratio and capital output ratio, and that the reason why some economies are less developed is because they have low savings ratios and consequently, low investment.

Question 8

How do savings act as a constraint on development?

Answer 8

There is a low ‘capital:labour’ ratio so productivity and real wages are low leading to lower standard of living. This is a long term issue.
Low investment limits growth and the productive potential of an economy. Investment can create jobs, and prosperity, and by doing this generate tax revenue and public spending on services and infrastructure, so can influence all elements of the HDI.

Question 9

What is meant by a foreign currency gap?

Answer 9

A situation in which an LDC is unable to import the goods that it needs for development because of a shortage of foreign exchange.

Question 10

How does a foreign currency gap act as a constraint on development?

Answer 10

Standards of living are low as there is no access to capital so the economy is stuck in a low GDP per capita.
Firms may need to import goods such as computers, or components in order to expand their business, but as they do not make these goods domestically, they would need to import them.

Question 11

What is meant by capital flight?

Answer 11

When residents in an economy move their capital/money abroad as their own economies are too volatile/unstable and they fear the money will be lost.
(Wealth is taken abroad to escape either taxation, or sometimes because of instability in the economy or financial sector, and sometimes because the money was obtained corruptly, and the person want to hide it).

Question 12

How can capital flight act as a constraint on development?

Answer 12

Living standards will be poor as wealth does not stay in the country- a withdrawal from the circular flow of income (negative multiplier effect).

Question 13

What demographic factors can affect the rate at which a country can grow and develop?

Answer 13

Age structure such as an ageing population, or a high fertility rate/population growth, an increase in life expectancy can affect the rate of growth of an economy.

Question 14

How do each of these demographic factors affect growth and development?

Answer 14

Economics growth:
This can be positive as an increase in the population can increase the productive potential of an economy (if caused by an increase in the size of the labour force). Yet an increase in population doesn’t necessarily increase the size of the labour force and so GDP per capita may fall.
Standards of living:
Population growth outpaces public services, leading to overcrowding and little access to health and education.

Question 15

How can external debt act as a constraint on development?

Answer 15

G: Repayments and conditions of loans mean that the government have limited funds for development projects.
D: Standards of living are low as tax revenue flows out of the economy so it is no redistributed to or spent on the poor.

Question 16

What is meant by external debt?

Answer 16

Money owed by governments to overseas governments.

Question 17

How can lack of access to credit and banking act as a constraint on development?

Answer 17

Without access to banking services, payments are made in cash. The little saving impacts investment meaning people have little access to loans/finance for small businesses making entrepreneurship more difficult. This makes it difficult and inefficient to make transactions.

Question 18

How can poor infrastructure act as a constraint on development?

Answer 18

G: This makes it impossible to do business within the country or trade with other countries.
D: Living standards are lower as GDP per capita is low. It’s difficult to get to school or hospital, so the quality of life may also be low. This has long-run impacts.

Question 19

What is meant by infrastructure?

Answer 19

The network of physical capital required to support development such as transport and communications networks as well as health and education infrastructure.

Question 20

How can poor education and skills act as a constraint on development?

Answer 20

G: Means low productivity and a lack of competitiveness limiting trade opportunities, and attractiveness for FDI.
D: Directly impacts on quality of life which has long-run impacts. Poor education leads to a fall in the quality of human capital, and this means low productivity. This means that wages are likely to be low, and therefore real GDP/capita will be low leading to poor growth and development. It may also deter FDI, as oversea firms are looking for good value access to workers and other resources in order maintain their profitability. It may mean that technology adoption is slow, and industrialisation may not happen as this requires more skilled workers

Question 21

What is meant by an absence of property rights?

Answer 21

An absence of rights to ownership of goods and property that is protected by law.

Question 22

How can the absence of property rights act as a constraint on growth and development?

Answer 22

When property rights are not protected, investment is affected. Business will not want to invest as their investments are not safe and so FDI does not happen. This results in capital flight where assets leave the country to where they are safe.

Question 23

What are the three components of the Human Development Index?

Answer 23

• Long and healthy life (measured by life expectancy).
• Knowledge (measured by mean years schooling).
• A decent standard of living (Measured by GNI per capita at PPP).

Question 24

How are the components of the HDI combined?

Answer 24

They are turned into index numbers and the 3 index numbers are combined with equal weight into the HDI.

Question 25

What are the advantages of using the HDI to measure development over time?

Answer 25

It is a composite indicator: It considers more factors than just GNI per capita – factors that are important for development, such as health and education.
GNI is calculated per capita, which is an advantage because it shows the average income, and it is at Purchasing Power Parity, meaning that the exchange rate has taken into consideration differences in the cost of living.
The measures within it are commonly collected, so data is available for many countries for comparison purposes.

Question 26

What are the limitations of using the HDI to measure development over time?

Answer 26

The concept of development includes many other factors such as political freedom which are not included in the indicator.
HDI does is also not adjusted to take into account differences in inequality in a country – the average GNI is used which may be misleading in economies with a very unequal income distribution.
HDI does not show difference in development between regions of countries either, for example life expectancy may be very high in some areas, but low in others.
HDI shows long term changes such as education and health, but may not adjust quickly to short term influences that may be affecting development.

Question 27

Name and explain other measures of development than HDI

Answer 27

• IHDI = the inequality adjusted HDI
• HPI = Human Poverty Index
• Multi-dimensional poverty index
• Ratio method = the % of income spent on basic necessities

Question 28

What is the difference between economic growth and economic development?

Answer 28

Economic growth looks at the change in GDP over time, whereas economic development is interested more in standards of living and the sustainability of current living standards.

Question 29

What non-economic factors affect growth and development and how?

Answer 29

Factors such as poor governance, political instability and civil wars affect economic growth, as uncertainty will reduce consumption and investment, and poor governance will lead to less development as health, infrastructure and education services will be underfunded. Civil wars can be particularly damaging as populations can feel unsafe, and there could be loss of life and loss of capital if damage is caused by bombing and/or fighting.

Question 30

Define trade liberalisation and how it promotes growth and development

Answer 30

Removal of barriers to trade such as tariffs. This promotes free trade, and can lead to export led growth – it can also mean the import of capital and high tech goods that can be used in various sectors including to provide healthcare.

Question 31

Define promotion of FDI and how it promotes growth and development

Answer 31

FDI is Foreign Direct Investment, which means that TNCs set up operations in your country. This can mean investment into new buildings or infrastructure, the purchase of capital, employment of local people, and transfer of technology.

Question 32

Define removal of government subsidies and how they promote growth and development

Answer 32

Government subsidies are payments by the government to suppliers that reduce their costs. Their removal can force firms to become more cost efficient, and force them to reduce costs. This can improve profitability, and allow prices to fall, which many benefit the local population, and can also lead to higher exports.

Question 33

Define floating exchange rate systems and how they promote growth and development

Answer 33

This is when the external value of a currency depends wholly on market forces of supply and demand.
This can free up monetary policy to managing the economy, rather than it being tied up in fixing the exchange rate. This could lead to more economic growth. It also allows the economy to adjust to external shocks, by allowing the exchange rate to restore price competitiveness and balance of payments equilibrium.

Question 34

Define micro finance schemes and how they promote growth and development

Answer 34

Small loans to individuals to start their own businesses – this scheme promotes more gender equality as most of the loans go to women, and these schemes operate in rural areas where there is not access to loans from bigger banks, and where there is often high levels of poverty.

Question 35

Define privatisation and how it promotes growth and development

Answer 35

The transfer of ownership of state owned enterprises into the private sector, this strategy improves efficiency and profitability as the private firm is driven by the profit motive, and must keep costs as low as possible.

Question 36

Define the development of human capital and how it promotes growth and development

Answer 36

This is investing in education, training and health services in order to improve the skills and productivity of the workforce. If this is successful it will improve productivity and therefore increase wages leading to an increase in standards of living.

Question 37

Define protectionism and how it promotes growth and development

Answer 37

This means using tariffs, quotas and non-tariff barriers to protect domestic firms from overseas competition. This can work if a country wants to industrialise, and protect infant industries from competition until they have sufficient economies of scale and experience to compete. It can create domestic jobs, and facilitate structural change.

Question 38

Define managed exchange rates and how this promotes growth and development

Answer 38

Managed exchange rates are when the central bank may choose to intervene in the foreign exchange markets to affect the value of a currency to meet specific macroeconomic objectives.
This strategy helps to promote export led growth. If exchange rates are managed so that the currency is kept weak, this will lead to price competitiveness for exports, and consequently increase exports, increasing AD and therefore growth. Employment in export industries is created and so this can lead to development is these are good quality jobs.

Question 39

Define infrastructure development and how it promotes growth and development

Answer 39

Infrastructure includes physical capital such as transport networks, energy, power and water supplies and telecommunications networks.
This can help improve geographic mobility of the workforce, enabling more people to find jobs, but can also make transport of goods and raw materials more efficient, therefore improving the productive potential of the economy.

Question 40

Define promoting joint ventures with MNCs and how this promotes growth and development

Answer 40

Joint ventures means joint projects with overseas companies, for example joining with a construction company to help build power stations, and infrastructure, or with a mining company to help build roads etc. This can benefit both the MNC and the host country.

Question 41

Define buffer stock schemes and how this promotes growth and development

Answer 41

Buffer stock schemes stabilise prices of commodities, so that GDP and the incomes of firms are more stable. This can lead to higher investment, and steady employment.

Question 42

Define ‘the Lewis dual sector model of development through industrialisation’ and how this promotes growth and development

Answer 42

The Lewis dual sector states that the industrial sector has higher productivity, and therefore if you can move employees from the primary into the secondary sector, then this increases productivity and increases wages, which leads to an increase in standards of living.

Question 43

Define tourism and how it promotes growth and development

Answer 43

Tourism is an export that can be used to generate export led growth, earning foreign currency with which to buy capital in order to develop further. It is income elastic, so in the global economy where incomes are rising, demand for tourism will increase which may be more profitable than primary industries such as agriculture.

Question 44

Define the development of primary industries and how this promotes growth and development

Answer 44

Industries relating to the production of primary resources.
Many economies depend on primary industry, so investing in improving these industries would be a huge benefit. For example, governments or joint ventures may invest in irrigation systems so that small scale farmers can produce more efficiently. By helping boost productivity in the primary sector, this will increase the surplus output produced and help generate profit needs to diversify and possibly industrialise, or develop support industries, such as oil refineries, or food processing facilities.

Question 45

Define fair trade and how it promotes growth and development

Answer 45

Fairtrade is about better prices, decent working conditions, local sustainability, and fair terms of trade for farmers and workers in the developing world.
This scheme aims to combat the falling terms of trade for primary goods, and the power of large monopsony purchasers, in order to guarantee and higher price for famers. This means that the incomes of small scale farmers increases, leading to better education for their children and higher standards of living.

Question 46

Define aid and how it promotes growth and development

Answer 46

Aid involves economic assistance from one country to another.
Aid can come in many forms. For example institutions such as the IMF can give loans at preferential rates which can help countries to invest in supply side policies. Aid can also refer to humanitarian aid, which may be multi-lateral (coming from multiple sources) and which is used to recover from disasters such as the current famine in South Sudan. Aid can also be tied, meaning that overseas governments will give donations, as long as the country uses suppliers from the donating country. It can be beneficial as it can bridge a savings or foreign currency gap, and can be used for projects that improve the living standards of the population – for example mass immunisation schemes.

Question 47

Define debt relief and how it promotes growth and development

Answer 47

When a developing country takes a loan but is struggling to pay back the interest – the debt interest may take up the majority of the government’s spending. Debt relief, means the forgiveness, or restructuring of debt in order to give the government fiscal space to spend on supply side policies.

Question 48

What is the role of the World Bank in development?

Answer 48

The World Bank aim to reduce extreme poverty by decreasing the % of people living on less than $1.90 a day , to no more than 3%, and to promote prosperity by fostering the income growth of the bottom 40% for each country. They do this by offering low interest loans and grants. They also offer advice and support on policies to achieve poverty reduction.

Question 49

What is the role of the International Monetary Fund in development (IMF)?

Answer 49

The IMF aim to help countries maintain financial stability, particularly by lending to countries with Balance of Payments problems, they can provide short term loans and support to countries trying to address the underlying issues with their Balance of Payments and they also give loans to countries aimed at poverty reduction.

Question 50

What are NGOs and give an example

Answer 50

NGOs stands for Non-Governmental Organisations. They are not-for-profit organisations who provide aid and development assistance to countries. Examples can be charities such as OXFAM, and bodies such as UNICEF, or private foundations, such as the Bill Gates foundation.