Emerging And Developing Economies- Theme 4

Question 1

What are the three dimensions of the Human Development Index (HDI) ?

Answer 1

• 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.
  Index results in a number between 0 and 1: higher the value, higher the level of development.

Question 2

What are the limitations of using HDI to compare levels of development between countries over time?

Answer 2

• doesn’t consider how free people are politically, their human rights, gender equality or people’s cultural identity.
• doesn’t take the environment into account. It could be argued that this should be included to focus on human development more.
• doesn’t consider distribution of income. A country could have a high HDI but be very unequal. This can mean many people might still be in poverty.

Question 3

What are the advantages of using HDI to compare levels of development between countries over time?

Answer 3

• allows for comparisons between countries to be made, based upon which countries are generally more developed than other countries.
• It provides a much broader comparison between countries than GDP does.
• Education and health are important development factors to consider, and it can provide information about the country’s infrastructure and opportunities. It also shows how successful government policies have been

Question 4

What is the inequality-adjusted HDI (IHDI)?

Answer 4

IHDI published alongside 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 difference between HDI and IHDI represents the ‘loss’ in potential human development due to inequality.

Question 5

What is the multi-dimensional poverty index (MPI) ?

Answer 5

Made up of several factors that constitute poor peoples experience of deprivation- such as poor health, lack of education, inadequate living standard, disempowerment, poor quality of work and threat from violence. Therefore, global MPI combines 2 aspects of poverty:

• incidence ie. percentage of people who are poor
• intensity of people’s poverty, ie. average of the components identified above in which poor people are deprived.

Question 6

What are other indicators of development?

Answer 6

• proportion of male population engaged in agriculture
• energy consumption per person
• proportion of population with access to clean water
• mobile phones per thousand of population
• proportion of population with internet access

Question 7

Impact of primary product dependency in different countries.

Answer 7

• price fluctuations
• difficulty of planning investment and output. Price fluctuations cause uncertainty, which is deterrent to investment.
• natural disaster. Extreme weather can cause severe disruption to production of primary products, especially agricultural products
• protectionism by developed countries.
• low income elasticity of demand for primary products. The prebisch-singer hypothesis states that terms of trade between primary products and manufactured goods tend to deteriorate over time.

Question 8

Impact of volatility of commodity prices in different countries.

Answer 8

Demand for, + supply of, commodities tend to be price inelastic. In case of demand, this because they’re required in production of other goods for which demand also price inelastic eg pasta. Supply inelastic because long growing period required for soft commodities while for hard commodities considerable time is required for developing new mines. Any demand-side or supply-side shock will result in significant price change. In turn, price changes will result in fluctuations in producers’ incomes and foreign exchange earnings.

Question 9

Impact of the savings gap in different countries.

Answer 9

Many developing countries have low GDP per capita and consequently they hold inadequate savings to finance investment seen as essential to achieve economic growth and development. The Harrod-Domar model illustrates the problem.

Question 10

Evaluate the Harrod-Domar model.

Answer 10

However, there are problems with this model. ​Economic growth is not the same as economic development. ​It is difficult for individuals to save when they have little income and borrowing from overseas causes problems with debt. It is possible that investment could be wasted​.

Question 11

What does the Harrod-Domar model suggest?

Answer 11

The ​Harrod-Domar model suggests savings provide the funds which are borrowed for investment purposes and that growth rates depend on the level of saving and the productivity of investment. It concludes that economic growth depends on the amount of labour and capital and that developing countries have a vast labour supply, so their problems are caused by capital. In order to improve capital, investment is necessary and investment requires savings.

Question 12

Impact of the foreign exchange gap in different countries.

Answer 12

This is when ​exports from a developing country are too low ​compared to imports to finance the ​purchase of investment or other goods from overseas required for faster economic growth.
Many developing countries face shortage of foreign exchange as a result of:
- dependence on export earnings from primary products
- dependence on imports of capital goods and other manufactured goods
- capital flight
- debt.

Question 13

Impact of debt in different countries.

Answer 13

Debt has become problem because:

• risky decisions to borrow money to finance major investment projects at times when the world economy was strong and/or prices of goods which they were exporting were high
• increase in oil prices, which presented particular problems over the periods of such price increases.
• a fall in value of currencies of developing countries, which increased the burden of foreign debt.
• loans taken out to finance expenditure on military equipment.

Question 14

Impact of capital flight in different countries.

Answer 14

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 eg:

• it contributes to the savings gap and foreign currency gap, and consequently…
  
  • restricts economic growth
  • reduces tax base because country loses any tax payable on these assets.

Question 15

Impact of demographic factors in different countries.

Answer 15

• Developing countries tend to have ​higher population growth​, which limits development. If population grows by 5%, economy needs to grow by 5% to even maintain living standards. This means developing countries need to have higher rates of growth to develop than more developed countries would do.
• The high population growth caused by high birth rates, which increases number of dependents within a country but doesn’t immediately increase those of working age. It places strains on the ​education system and leads to ​youth unemployment​.

Question 16

Impact of access to credit and banking in different countries.

Answer 16

• inability to borrow money important for entrepreneurs who wish to start up new businesses and existing firms that may need credit to fund purchase of capital and raw materials to operate effectively.
• in some developing countries, banking services poor or almost non-existent.
  However, micro finance schemes helped provide extremely poor families with small loans to help them engage in productive activities or grow their tiny businesses. In particular, they can help the poor increase income, build businesses and reduce vulnerability to external shocks.

Question 17

Impact of infrastructure in different countries.

Answer 17

Poor infrastructure will make it difficult to attract both domestic and foreign investment and thus presents significant obstacle to growth and development. On other hand, country rich in natural resource demanded by other countries might benefit from FDI: a transnational company might provide some infrastructure to the country in order to facilitate its business investment.

Question 18

Impact of education and skills in different countries.

Answer 18

A country whose education standards are poor + where there’s a low school enrolment ratio is likely to experience slow rate of economic growth because the productivity of workforce will be low. It will also act as a deterrent to global companies to invest in the country because of the costs involved in educating and training workers.

Question 19

Impact of absence of property rights in different countries.

Answer 19

If individuals don’t have property rights 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 bank loan which they might require to start business.

Question 20

Impact of corruption in different countries

Answer 20

Corruption usually defined as the use of power for personal gain. It may take variety of forms, including bribery, extortion and diversion of resources to the governing elite. Corruption acts as constraint on development when it causes an inefficient allocation of resources.

Question 21

Impact of poor governance in different countries.

Answer 21

Poor governance implies that the rulers of a country have adopted policies that result in the country’s resources being allocated inefficiently. Government failure might also be evident as a part of poor governance.

Question 22

Impact of civil wars in different countries.

Answer 22

Disrupt growth and development. Cause destruction of infrastructure and the death of many people, they might negate any progress made in previous years.

Question 23

Impact of political instability in different countries.

Answer 23

Political instability results in considerable degree of uncertainty, which doesn’t provide a sound basis on which businesses can operate.

Question 24

Describe trade liberalisation as a market-orientated strategy influencing growth and development.

Answer 24

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 + prosperity have opened up their markets to trade + investment. By liberalising trade + focusing on areas of comparative advantage, countries can benefit economically.

Question 25

What is the consumer benefit of trade liberalisation?

Answer 25

Liberalised trade can help lower prices and increase choice and quality of goods and services available.

Question 26

What is the companies benefit of trade liberalisation?

Answer 26

Liberalised trade diversifies risks and enables firms to benefit from economies of scale, resulting in lower long-run average costs.

Question 27

What is the country’s economy benefit of trade liberalisation?

Answer 27

Trade liberalisation promotes competition, and usually leads to increased investment and productivity.

Question 28

What are the drawbacks of trade liberalisation?

Answer 28

• may negatively affect some industries or some jobs
• has adverse effects on the environment
• may negatively affect infant industries in developing and emerging countries.

Question 29

Describe promotion of FDI as a market-orientated strategy influencing growth and development.

Answer 29

FDI acts as injection to circular flow, provides employment opportunities, and increases the productive potential of the economy. Ways to promote FDI:

• reduce corporation tax
• tax incentives and grants
• reduction in bureaucracy eg easing of planning regulations
• liberalisation of labour laws, eg ease of hiring + firing workers
• reducing trade barriers so that it’s easier to import components and to export finished goods

Question 30

Describe removal of government subsidies as a market-orientated strategy influencing growth and development.

Answer 30

Subsidies distort operation of market forces and are likely to result in misallocation of resources. Governments in India, Egypt and Indonesia have been trying to cut food + energy subsidies because of their cost and distorting effects which they have on their economies.

Question 31

Describe floating exchange rates as a market-orientated strategy influencing growth and development.

Answer 31

Allowing exchange rate of currency to float might result in depreciation against other currencies, so making country’s goods + services more competitive. This might encourage global companies to invest in that country since the currency is no longer overvalued.

Question 32

Describe microfinance schemes as a market-orientated strategy influencing growth and development.

Answer 32

Microfinance is a means of providing extremely poor families with small loans to help them engage in productive activities or grow their tiny businesses. Can help the poor to increase income, build businesses and reduce vulnerability to external shocks.

Question 33

What are the key features of microfinance schemes?

Answer 33

• microcredit insists on repayment
• interest is charged to cover costs involved
• focus is on groups whose alternative sources of finance are limited to the informal sector, where the interest charged would be high.

Question 34

Who are the main clients of microfinance?

Answer 34

• women (who form more than 97% of the clients)
• the self-employed, often household-based entrepreneurs
• small farmers in rural areas
• small shopkeepers, street vendors and service providers in urban areas

Question 35

What are the criticisms of microfinance?

Answer 35

• concerns raised about the repayment rate, collection methods and questionable accounting practices
• on a larger scale, some argue that an overemphasis on microfinance to combat poverty will lead to a reduction of other assistance to the poor, such as official development assistance or aid from non-government organisations.

Question 36

Describe privatisation as a market-orientated strategy influencing growth and development.

Answer 36

Sale of publicly owned assets to the private sector through issue of shares has been popular policy in developed economies for many years and has also been adopted by some developing countries. Privatisation is seen as a way of increasing efficiency + productivity as a result of competition and the profit motive, which are characteristics of the private sector.

Question 37

Describe development of human capital as an interventionist strategy influencing growth and development.

Answer 37

Countries with poor education standards + low school enrolment ratios likely to experience slow rates of economic growth. Therefore, improvements in access to education and in quality of education would help to increase skills + productivity of workforce. Improvements would encourage FDI by global companies in these countries.

Question 38

Describe protectionism as an interventionist strategy influencing growth and development.

Answer 38

Strategy aimed at constructing path towards diversification + industrialisation. Characteristics include placing controls on imported goods, this helps to promote import substitution. It is sometimes referred to as inward- looking strategy.

Question 39

What is the aim of protectionism?

Answer 39

To enable a country to diversify in a controlled way until it has built a strong domestic base. This approach will be most effective where country’s domestic market is large enough to enable industries to benefit from economies of scale. Once achieved, industry will be strong enough to cope with foreign competition.

Question 40

What are the drawbacks to protectionism?

Answer 40

• comparative advantage is distorted and so resources will not be allocated efficiently
• lack of competition could result in inefficiency.

Question 41

Describe managed exchange rates as an interventionist strategy influencing growth and development.

Answer 41

Some countries try to maintain overvalued exchange rates with aim of keeping down costs of imports, especially of oil + capital equipment. In turn, this would make it easier for them to grow and develop.

Question 42

Describe infrastructure development as an interventionist strategy influencing growth and development.

Answer 42

Infrastructure refers to physical + organisations, structures and facilities needed for operation of a society or enterprise. Without these it’d be difficult for country to grow and develop.

Question 43

Describe promotion of joint ventures as an interventionist strategy influencing growth and development.

Answer 43

A joint venture is an association of 2 or more businesses for the purpose of engaging in a specific enterprise for profit. Firms might enter into joint ventures to combine strengths and increase their competitive advantage while minimising risks.

Question 44

Give an example of promotion of joint ventures.

Answer 44

In 2012, jaguar Land Rover sealed a joint venture with Chinese company chery automobile for the purpose of manufacturing and distributing luxury cars to Chinese consumers.

Question 45

Describe buffer stock schemes as an interventionist strategy influencing growth and development.

Answer 45

1 method of reducing price stability is to adopt schemes which involve storing and releasing the commodity in times of surplus and shortage.

Question 46

What is a buffer stock scheme?

Answer 46

A scheme designed to reduce price fluctuations. It involves getting a ceiling and a floor price and the buying and selling of stocks to maintain price within these limits.

Question 47

What is one way in which a buffer stock scheme might operate?

Answer 47

• ceiling price: this is maximum price which would be allowed
• floor price: this is minimum price which would be allowed.
• buffer stock would be established: could be operated by government or by a producers’ association. It would store or release stocks as required in order to reduce price fluctuations to the agreed limits.
• yr 1, equilibrium price p1 so no action required because price within permitted price change
• supply s2 in yr 2, then, to prevent the price from falling below floor price, xy removed from market + stored in buffer stock
• if supply fell to s3 in yr 3, then, to prevent price rising above ceiling level, ab would be released from buffer stock.

Question 48

What are the critiques of buffer stock schemes?

Answer 48

• if floor price set too high, then there will be surpluses each year
• if ceiling price set too low, then there will be insufficient stocks available in years of shortage.
• schemes involve costs of storage
• success depends on ensuring that all the major producers agree to be part of the scheme and that none of them cheats. Eg by selling to a major consumer at a reduced price.

Question 49

Describe industrialisation: the Lewis model as a strategy influencing growth and development.

Answer 49

Traditionally been assumed that development is synonymous with industrialisation. The structural change/ dual sector model (the Lewis model) is based on the view that development requires a move away from traditional agriculture to more productive manufacturing

Question 50

What are the key features of the Lewis model?

Answer 50

• Lewis thought, because of excess supply of workers, marginal productivity of agricultural workers might be 0 or close to 0. Based on law of diminishing returns.
• with MP at 0, then opportunity cost of transferring workers from agricultural sector to industrial sector would be 0
• industrialisation will be associated with investment, which will increase productivity and profitability. If profits reinvested, further growth will occur
• share of profits as % of GDP will increase, as will the savings ratio, providing more funds for investment and continued economic growth

Question 51

What does the Lewis model describe?

Answer 51

The transfer of surplus labour from a low productivity agricultural sector to a high productivity industrial sector.

Question 52

What are the criticisms of the Lewis model?

Answer 52

• profits made in industrial sector might not be invested locally, especially if firms owned by TNCs
• reinvestment might be made in capital equipment, with the result that extra labour is not required.
• empirical evidence suggests that the assumption of surplus labour in the agricultural sector and full employment in the industrial sector is invalid.

Question 53

Describe development of tourism as a strategy influencing growth and development.

Answer 53

Some countries have developed on basis of investment in tourism. There are advantages to this strategy over primary product dependency, not least that demand is likely to be income elastic. Expansion of tourism has strong attractions for developing countries.

Question 54

What are the advantages associated with the development of tourism?

Answer 54

• valuable source of foreign currency as tourists spend money on goods + services provided within the local economy
• tourism likely to attract investment by transnational hotel chains. This will increase GDP via the multiplier
• jobs will be created, both as a direct result of investment in tourist and leisure industries and also as a result of the multiplier effects within the economy.
• these all will help to increase tax revenues for the government, which may be used to improve public services.

Question 55

What are the disadvantages associated with tourism?

Answer 55

• may be associated with a significant increase in imports, not only for the capital equipment required to build hotels. + facilities but also to meet demands of tourists for specialist foods + goods. Balance of payments on current account might be adversely affected by repatriation of profits to shareholders of TNCs
• employment may only be seasonal in nature. Jobs created may only be low skilled and low paid if TNC supplies its own managers + professional staff
• in times of recession, demand may fall proportionately more than fall in real income, assuming demand is income elastic.

Question 56

Describe development of primary industries as a strategy influencing growth and development.

Answer 56

Some developing countries achieved growth + development on basis of investing in primary industries. The case for focusing on agriculture + hard commodities is that country may have comparative advantage in production of these goods + so resources more effectively allocated to that use. Such a comparative advantage should be viewed in a dynamic context. As result of such dynamic, country may gain comparative advantage in other products.

Question 57

Describe fair trade schemes as a strategy influencing growth and development.

Answer 57

Aim of fair trade scheme is to address the injustice of low prices’ by guaranteeing that producers receive a fair price. It means paying producers an above-market price for their produce, provided they meet particular labour and production standards. This premium passed back to producers to spend on development programmes.

Question 58

What are the advantages of fair trade schemes?

Answer 58

• producers receive higher price
• extra money available to spend on education, health, infrastructure, clean water supplies, conversion to organic farming + other development programmes in the producers’ countries.
• there are smaller price fluctuations, allowing producers to be shielded from market forces
• extra money can also be used to improve quality of products
• producers are enabled to diversify into other products.

Question 59

What are the criticisms of fair trade schemes?

Answer 59

• distortion of market forces: low prices due to overproduction and producers ought to recognise this as a signal to switch to growing other crops.
• certification is based on normative views on best way to organise labour
• guaranteeing minimum price provides no incentive to improve quality.

Question 60

Describe aid as a strategy influencing growth and development.

Answer 60

Term ‘aid’ describes voluntary transfer of resources from one country to another or to loans given on concessionary terms(ie at less than market rate of interest). Official development assistance related specifically to aid provided by governments + excludes aid given by voluntary agencies.

Question 61

Define tied aid.

Answer 61

Aid with conditions attached

Question 62

Define bilateral aid.

Answer 62

Aid given directly by one country to another.

Question 63

Define multilateral aid.

Answer 63

Occurs when countries pay money to an international agency which then distributes it to countries on the basis of certain criteria.

Question 64

What are the arguments in favour of aid?

Answer 64

• reduction in absolute poverty
• providing funds for infrastructure, aid will help increase AD and investment will have multiplier effect on GDP. This will help promote sectoral development.
• reduction of world inequality
• improving human capital through promotion of healthcare, education, training and expertise.

Question 65

What are arguments against aid?

Answer 65

• aid might not benefit those whom it’s intended. (Corruption)
• results in dependency ( ie. recipients of aid become dependent on it and don’t pursue appropriate macroeconomic policies to achieve independent growth + development.
• aid in from of concessional loans involves repayments of interest, in which case there’ll be opportunity cost for developing countries.

Question 66

Describe debt as a strategy influencing growth and development.

Answer 66

Under the heavily indebted poor countries (HIPC) initiative and the multilateral debt relief initiative (MDRI), the world bank provides debt relief to the poorest countries of world. HIPC initiative started in 1996 by the IMF and world bank with aim of reducing external debts of the poorest + most heavily indebted countries of world to sustainable levels.

Question 67

What are the arguments for debt cancellation?

Answer 67

• developing countries would have more foreign currency with which to buy imported capital and consumer goods from the developed countries.
• to extent that money released from debt cancellation is used for purchase of capital goods, then there’s prospect of higher economic growth in the future
• in turn means developing countries would be able to buy more goods from richer countries.
• help reduce absolute poverty

Question 68

What are the arguments against the cancellation of debt?

Answer 68

• likely to take much longer to agree a debt cancellation programme
• corruption might mean benefits of debt cancellation are channelled to government officials rather than to the poor
• may be much less effective than the introduction of policies to reduce protectionism in developed countries.

Question 69

What was the original role of the world bank?

Answer 69

To provide long term loans for reconstruction and development to member nations that had suffered in the Second World War.

Question 70

What did the role of the world bank change to in the 1970s?

Answer 70

Setting up agricultural reforms in developing countries, giving loans and providing expertise.

Question 71

What are SAPs?

Answer 71

In 1982, Mexico defaulted on its loan repayments. As a result, world bank now imposes structural adjustment programmes (SAPs), which set out the conditions on which loans are given.

Question 72

What is the aim of SAPs?

Answer 72

To ensure that debtor countries don’t default on the repayments of debt.

Question 73

SAPs were based on free market reforms. How were these free market reforms criticised?

Answer 73

• they did little to help the worlds poor
• failed to promote development
• increased inequality
• caused environmental degradation

Question 74

What was aid directed on after the world bank changing its focus to concentrate on poverty reduction strategies?

Answer 74

• countries following sound macroeconomic policies
• healthcare
• broadening education
• local communities rather than central governments.

Question 75

How is the World Bank helping in Nepal with project: The Private Sector-Led Mini Grid Project of Nepal January 30, 2019

Answer 75

the objective is to increase electricity generation capacity from renewable energy mini-grids in selected areas by mobilizing Energy Service Companies (ESCOs). The project is comprised of two components: (1) Credit facilities to support renewable mini-grid subprojects; and (2) Technical assistance to the mini-grid sector, ESCOs and the partner Banks and project management support.

Question 76

What has work of NGOs brought?

Answer 76

The work of non-government organisations (NGOs) has brought community-based development to the forefront of strategies to promote growth + development

Question 77

What are the characteristics of NGOs community based schemes?

Answer 77

• local control of small scale projects
• self-reliance
• emphasis on using the skills available
• environmental sustainability.

Question 78

What was the original role of the IMF?

Answer 78

To increase international liquidity and to provide stability in capital markets through a system of convertible currencies pegged to dollar. Also lent to countries with temporary balance of payments deficits on current account.

Question 79

Why did the IMF extend its role in the 1970s?

Answer 79

There were significant oil price shocks and many countries, especially developing countries, suffered from rapid inflation, huge balance of payments deficits and debt crises. As result most currencies allowed to float. IMF extended role to include involvement in economic development and poverty reduction. To ensure repayments of loans, IMF imposed restrictions + conditions on economic policies to be followed by developing countries- stabilisation programmes- to achieve internal + external balance.

Question 80

What new role was the IMF given in 2006?

Answer 80

To conduct multilateral surveillance of the global economy and to suggest steps that the leading nations should take to promote it. Was also required to ensure more balanced growth + reduce global imbalances.

Question 81

How is the IMF funded?

Answer 81

By quotas from countries, based on their GDP

Question 82

What does the plebiscite-singer hypothesis suggest?

Answer 82

That countries that export commodities would be able to import less and less for a given level of exports.

Question 83

How can the plebiscite-singer hypothesis be criticised?

Answer 83

• some countries have developed on the basis of their primary products
• if developing country has comparative advantage in a primary product, then its resources will be used more efficiently by specialising in the production of that product
• primary product prices rose sharply until the middle of 2008 while the prices of many manufactured products were falling.