Emerging And Developing Economies Flashcards
List me the 3 main measures of development
The human development index (HDI)
The inequality-adjusted HDI (IHDI)
The multi-dimensional poverty index (MPI)
What is the human development index
The HDI is a composite index of development and includes three elements:
Education (the mean years of schooling for an adult aged 25 and expected years of schooling for a pre-school child.
Health (life expectancy at birth)
Real GNI per head at purchasing power parities.
The index results in a number between 0 and 1: the higher the value, the higher the level of development.
Tell me about the inequality-adjusted HDI
The IHDI is published alongside the HDI and takes into account how human development is distributed. Countries which are very unequal see their human development scores fall more than those that are less unequal. Therefore, the difference between the HDI and the IHDI represents the ‘loss’ in potential human development due to inequality.
Tell me about the multi-dimensional poverty index
The global MPI is composed of 10 indicators corresponding to the same three components as the HDI: education, health and standard of living. Multi-dimensional poverty is made up of several factors that constitute poor people’s experience of deprivation - such as poor health, lack of education, inadequate living standard, disempowerment, poor quality of work and threat from violence.
Which two aspects of poverty does the global MPI combine
Incidence, i.e. the percentage of people who are poor
The intensity of people’s poverty, I.e the average of the components identified before in which poor people are deprived.
List me other indicators of development
The proportion of the male population engaged in agriculture
Energy consumption per person
The proportion of the population with access to clean water
Mobile phones per thousand of population
The proportion of the population with internet access.
List me factors influencing growth and development
This section is primarily focussed on problems facing developing countries:
Primary product dependancy, Volatility in commodity markets, Level of savings and investment, Foreign exchange gap, Capital flight, Demographic factors, Access to banking and credit, Infrastructure, Education and skills, Absence of property rights, Non economic factors
What may primary products be divided into
Primary products may be divided into hard commodities, such as copper, tin and iron ore,
and soft commodities, which include most agricultural crops, such as wheat, palm oil, rice and fruit.
List me the issues a country may face that are dependant on primary products
Price fluctuation
Difficulty of planning investment and output
Natural disasters
Protectionism by developed countries
Low income elasticity of demand for primary products
Tell me about the issue facing countries dependant on primary products: difficulty of planning investment and output
The price fluctuations cause uncertainty, which is a deterrent to investment
Tell me about the issue facing countries dependant on primary products: natural disasters
Extreme weather such as hurricanes, tornadoes, droughts and tsunamis can cause severe disruption to the production of primary products, especially agricultural products.
Tell me about the issue facing countries dependant on primary products: protectionism by developed countries
For example, the huge subsidies given to US cotton farmers have created great difficulties for Indian cotton farmers, who are unable to compete; the EU’s common agricultural policy has meant that there is no free access to European markets for food from developing countries.
Tell me about the issue facing countries dependant on primary products: low income elasticity of demand for primary products
The Prebisch-Singer hypothesis states that the terms of trade between primary products and manufactured goods tends to deteriorate over time.
Tell me what the Prebisch-singer hypothesis
This theory suggests that countries export commodities would be able to import less and less for a given level of exports. Prebisch and Singer examined data over a long period of time and found the data suggested that the terms of trade for primary commodity exporters did have a tendency to decline.
A common explanation for this is that the income elasticity of demand for manufactured goods is greater than that for primary products, especially food. Therefore, as incomes rise, the demand for manufactured goods increases more rapidly than demand for primary products and the prices of manufactured goods rise relative to the prices of primary products, so causing a decline in the terms of trade for countries dependant on the export of primary products.
How may the Prebisch-Singer theory be criticised
First, some countries have developed on the basis of their primary products (eg Botswana: diamonds)
Second, if a developing country has a comparative advantage in a primary product, then its resources will be used more efficiently by specialising in the production of that product
Third, primary product prices rose sharply until the middle of 2008 while the prices of many manufactured products were falling.
Some economists argue that, in the case of food, prices are likely to increase as world population grows and incomes in countries such as China and India rise, so causing higher demand for many food traditionally eaten by those in developed countries.
Although the Prebisch-Singer theory is real, why is the outlook for countries such as Bolivia good
Nearly half the worlds known reserves of lithium (which can be used to make batteries for hybrid and electric vehicles) are located in Bolivia. Given the decline in oil production, and the subsidies being given to companies to develop electric cars, demand for lithium can be expected to rise sharply in the future.
In contrast, countries producing and exporting copper, such as Chile, were faced with a 50% fall in price between the middle of 2008 and 2009.
Tell me about volatility in commodity markets as a factor influencing growth and development
Demand for, and supply of, commodities tend to be price inelastic. In the case of demand, this is because they are required in the production of other goods for which demand is also price inelastic, such as pasta, bread and steel. Supply is inelastic because a long growing period is required for soft commodities (most agricultural commodities) while for hard commodities, eg coal and diamonds, considerable time is required for developing new mines. Consequently, any demand side or supply side shock will result in significant price change. In turn, price changes will result in fluctuations of producers’ incomes and foreign exchange earnings. For example, since demand is price inelastic, then a fall in price will cause total revenue to fall and, therefore, the foreign currency earnings from exports to fall.
Why may a shift in the supply curve of an agricultural commodity occur
Any shift in the supply or the demand curve would cause a sharp change in price. A shift in the supply curve of an agricultural commodity might occur if there is a drought, while and earthquake might disrupt the production of copper mining. Since demand is price inelastic, then a leftward shift in the supply curve would cause a significant increase in price.
Why has demand for commodities increased
A change in the conditions of demand would cause a significant price change because supply is price inelastic( lines are close to vertical). Demand has increased for a number of reasons:
An increase in world population, which is now over 7 billion
An increase in real incomes, which has led to increased demand for many commodities (for example, the demand for beef, which requires large amounts of grain for animal feed, has increased significantly)
An increased demand for grain to be used for fuel
What’s the GDP per capita like In developing countries
Many developing countries have a low GDP per capita and consequently they hold inadequate savings to finance the investment seen as essential to achieve economic growth and development. The Harrod-Domar model illustrates the problem.
What problem does the Harrod-Domar model illustrate
Countries have a low GDP per capita and so hold inadequate savings to finance the investment seen as essential to achieve economic growth and development.
What does the Harrod-Domar model look like
Low incomes -> low savings -> low investment -> low capital accumulation -> low incomes
It illustrates low GDP per capita and the savings gap.
It’s like a cycle woah 🚲
What other gap is the foreign exchange gap associated with
Associated with the savings gap, many developing countries face a shortage of foreign exchange
Why do countries face a shortage of foreign exchange
This may be the result of a variety of factors, including:
Dependence on export earnings from primary products
Dependence on imports of capital goods and other manufacturing goods
Capital flight
Debt
Why is debt a particular problem for developing countries facing a shortage of foreign exchange
Debt is a particular problem for some emerging and developing countries and has become an issue for some developed countries, for example Greece, since the financial crisis. Many developing countries borrowed money at times of low interest rates, only to find that they were struggling to service the debt (pay interest on it) some years later.
Why has debt become a problem to developing countries
Risky decisions to borrow money to finance major investment projects at times when the world economy was strong and/or the prices of the goods which they were exporting were high
An increase in oil prices, which presented particular problems over the periods of such price increases
A fall in the value of the currencies of developing countries, which increased the burden of foreign debt
Loans taken out to finance expenditure on military equipment
When considering debt, it is important to remember that the absolute size of the debt is less important than a country’s ability to finance it. This may be measured by examining data on debt service payments as a percentage of GDP or debt service payments as a percentage of export earnings.
What does capital flight and interest payments on debt result in
An outflow of foreign currency from the current account of the balance of payments, thus making it more difficult for developing countries to finance imports.
When does capital flight occur
This occurs when individuals or companies decide to place cash deposits in foreign banks or buy shares or other assets in foreign countries. This has serious implications.
What are the serious implications of capital flight
It contributes to the savings gap and foreign currency gap, and consequently..
It restricts growth
It reduces the tax base because the country loses any tax payable on these assets
Tell me about demographic factors and, growth and development
Population growth is particularly rapid in some of the poorest countries of the world, such as Malawi and Mozambique. Meanwhile, population is falling in some developed countries, such as Italy and Germany.
Population growth may be analysed in relation to the views of Thomas Malthus, who predicted at the end of the 18th century that famine was inevitable because population grows in geometric progression, whereas food production grows in the form of an arithmetic progression. Although his predications were proved to be incorrect for Britain in the 19th century, some economists believe that they are still relevant for some of the poorest developing nations. In these countries the growth of the population is greater than the growth in GDP, with the result that GDP per capita is falling.
Tell me how access to credit and banking influences growth and development (micro finance)
Inability to borrow money is obviously important for both entrepreneurs who wish to start up new businesses and existing firms that may need credit to fund the purchase of capital and raw materials to operate efficiently.
In some developing economies, banking services are poor or almost non existent. However, micro finance schemes have helped to provide extremely poor families with small loans (micro credit) to help them engage in productive activities or grow their tiny businesses. In particular, they can help the poor to increase income, build businesses and reduce vulnerability to external shocks.
What is infrastructure
Infrastructure covers the whole range of structures that are essential for an economy to operate smoothly. Includes:
Transport Telecommunications Energy supply Water supply Waste disposal
Tell me about infrastructure influencing growth and development
Poor infrastructure will make it difficult to attract both domestic and foreign investment and thus presents a significant obstacle to growth and development. On the other hand, a country rich in a natural resource demanded by other countries might benefit from FDI: a TNC might provide some infrastructure to the country in order to facilitate its business investment eg. New roads, thus benefiting the whole economy.
Tell me about education and skills influencing development and growth
A country whose education standards are poor where there is a low school enrolment ratio is likely to experience a slow rate of economic growth because the productivity of the workforce will be low. It will also act as a deterrent to global (transnational) companies to invest in the country because of the costs involved in educating and training workers.
Tell me about the education /prevention of HIV and development
A particular problem for some countries is the prevalence of HIV and AIDS; when an adult develops AIDS, he or she may be forced to give up work. This mean that the children might be withdrawn from school, either because the school fee can no longer be afforded or because the children are required to work at home. A further problem arises if it is the teachers who contract AIDS, forcing them to give up work. The training of workers may be disrupted by AIDS, particularly if s global company is involved and it decided that it is no longer profitable to operate in the country. The combined effect of these problems is to reduce the quantity and quality of education and training.
Tell me how the absence of property rights may influence development and growth
If individuals do not have property (ownership) rights, eg over land or property, then this might act as a constraint on economic growth and development. The reason is that, without any form of collateral, they would find it difficult to secure a bank loan which they might require to start a business.
List to me non economic factors that may influence growth and development
Corruption
Poor governance
Civil wars
Political instability.
Geography
How could corruption influence development and growth
Corruption is usually defined as the use of power for personal gain. It may take a variety of forms, including bribery, extortion and diversion of resources to the governing elite. Corruption acts as a constraint on development when it causes an inefficient allocation of resources.
How may poor governance influence growth and development
Poor governance implies that the rulers of a country have adopted policies that result in the country’s resources being allocated inefficiently. Government failure (wheee government intervention results in a net welfare loss triangle) might also be evident as part of poor governance.
Tell me how civil wars may influence growth and development
Civil wars, such as those that have occurred in Sudan and the democratic republic of Congo, disrupt growth and development. Indeed, in so far as they actually cause destruction of infrastructure and the death of many people, they might negate any progress made in previous years.
Similarly, political instability results in a considerable degree of uncertainty, which does not provide a sound basis on which businesses can operate.
How may non economic factors influence development and growth
These issues can deter both domestic investment and foreign direct investment and so limit the possibilities for growth and development.
Geography may also have a significant impact on a country’s ability to develop. For example, economic development is limited in a land locked country such as Niger because of isolation from world markets resulting from transportation costs.
Is there a single strategy/list of strategies we can use in every country to promote growth and development
No, each country is individual, having a different history, geography and natural resources. Consequently, policies which may appear to have worked in one country will not necessarily be successful in another country.
In practice it is likely a combination of strategies may be required.
List me the market orientated strategies to influence growth and development
Trade liberalisation
Promotion of FDI
Removal of government subsidies
Floating exchange rates
Micro finance schemes
Privatisation
List me the interventionist strategies to influence growth and development
Development of human capital
Protectionism
Managed exchange rates
Infrastructure development
Promotion of joint ventures
Buffer stock schemes
Tell me other strategies to influence growth and development
Industrialisation
Development of tourism
Development of primary industries
Fair trade schemes
Aid
Debt relief
What are market-orientated strategies
These strategies work through the operation of market forces. They usually involve measures to remove government intervention
Tell me what trade liberalisation is
A market orientated strategy
Trade liberalisation refers to the lowering or complete removal of trade barriers such as tariffs, quotas and non tariff barriers. Countries that have had sustained growth and prosperity have opened up their markets to trade and investment. By liberalising trade and focusing on areas of competitive advantage, countries can benefit economically.
When tariffs are reduced, the world price of a good falls, resulting in an increase in consumer surplus. Imports will increase of the good to other countries.
What are the benefits of trade liberalisation on consumers, companies and a country’s economy.
Consumers benefit because liberalised trade can help to lower prices and increase the choice and quality of goods and services available.
Companies benefit because liberalised trade diversifies risks and enables firms to benefit from economies of scale, resulting in lower long run average costs.
A country’s economy may benefit from trade liberalisation because it promotes competition, and usually leads to increased investment and productivity.
The OECD has estimated that if G20 economies reduced trade barriers by 50%, then there would be:
Increased employment, eg a 0.3-3% rise in jobs for lower skilled workers and a 0.9-3.9% rise for higher skilled workers, depending on the country.
Higher real wages, an increase in real wages of 1.8-8% for lower skilled workers and 0.8-8.1% for higher skilled workers, depending on the country.
Increased exports: all G20 countries would see a boost in exports. In the long run, many G20 countries could see their exports rise by 20% and those in the eurozone by more than 10%.
What are the drawbacks of trade liberalisation
It may negatively affect some industries or some jobs.
It has adverse effects on the environment (external costs associated with trade).
It may negatively affect infant industries in developing and emerging economies.
Tell me about the promotion of FDI to encourage growth and development
Foreign direct investment is viewed as being desirable because it acts as an injection into the circular flow, provides employment opportunities, and increases the productive potential of the economy. Therefore, governments may try to promote FDI in a variety of ways.
