Factors influencing growth and development Flashcards
PPD
Primary product dependency - proportion of exported goods that are primary products
What are primary products
raw materials in industries such as agriculture, mining and fishing.
PPD application
Richer countries have low reliance on primary products, poorer countries in Africa have over 70% dependency on Primary products (67% average), on average rich countries have a 6% dependency on primary products. Mining accounts for over 60% of South Africa’s exports so when the mining industry is not working South Africa cannot pay foreign debts impacting the economy
Volatility of primary products issue
One issue with this is the volatility of commodity prices that can make it hard for workers to plan for the future, and it means incomes of farmers are fickle and hard to predict.
A fall in the price leads to a fall in export incomes, which can make it hard to fund their infrastructure and education. Moreover, relying on primary products is not necessarily sustainable, since they could be over extracted and run out.
High global economic growth………primary products
High global economic growth increases the demand for primary products
Why are LEDC’s conditioned for developing primary products
Low income countries rely on primary products but many rely on a single primary product. LEDC’s have perfect climate for PP and good access to raw materials encouraging mining. A lack of capital and large labour supply means that it is relatively cheap for poor countries to produce primary products which require relatively little capital or skilled labour. Also it’s cheaper for LEDC’S as less opportunity cost for them as they do not have to give up on other industries. By specialising to only PP it will make you more competitive as they’ll become more efficient
What creates price volatility and why is it a barrier to development?
The elasticity of supply and demand has a large impact on the volatility of primary commodities. Generally, primary goods have relatively inelastic supply and demand causing huge fluctuations in prices of the commodities as supply and demand changes. This is a barrier to development because it makes it harder for producers to make future investments because they do not know as to whether they’ll earn enough to sustain an investment due to price volatility. The weather also leads to high volatility as affects supply. Inelastic supply because time lags of food growth. Inelastic PES and PED diagrams
Low income elasticity of demand of primary products hinders development
Low income elasticity means there would be a decline in the terms of trade of primary product exporters resulting in a net flow of income from commodity producers to manufactured goods exporters
Why as world income grows it becomes harder for poor countries to develop
Demand for secondary goods grows faster than demand for primary goods so poorer countries trade more and more goods for the same amount of secondary goods so become worse off
Low price elasticity’s for PP
As income increases, richer countries want less PP, poorer countries want more goods from MEDC’s
Manufactured goods from MEDC’s have higher YED’s
LEDC’s have to produce more PP to buy MEDC goods
EV: population growth will increase demand for primary products
What has happened to world supply and how might dependence on coffee hinder development?
With inelastic demand, an increase in the supply of coffee leads to a loss in total revenue, as price falls more than demand increases. With an increasing population, the supply of coffee is likely to increase, continuing to reduce revenue generated by coffee production. Coffee has a low price elasticity because it is cheap
Market structure (Perfect competition v Oligopoly) in a primary product hinders development
Coffee is a homogenous (perfect substitutes) good with thousands of suppliers in many different countries but the demand for coffee beans is dominated by a few large suppliers. This means the large coffee processing companies are able to extract the most value out of the supply chain. They can keep the price high to consumers in richer countries because of their monopoly power while driving down prices to the small scale farmers in poorer countries. Coffee companies exploit poor suppliers as large amount of suppliers and homogeneous good means companies can demand cheaper prices thus preventing producers from earning large amounts of money from it hindering development
Savings gap
A savings gap is when LEDC’S do not have sufficient average incomes to enable high rates of saving so can only afford to spend in the short run, and therefore accumulation of capital stock through investment is too low to create economic growth
Savings gap application
Africa’s saving rate is around 17%, whilst the average for middle income countries is around 31%. This makes it more expensive for the African public and private sectors to get funds since they have higher borrowing costs impeding capital investment.
A savings gap hinders development because
the current level of savings is less than the level of savings needed to finance enough investment to create high enough economic growth to create development
Why is it more expensive for African public sectors to get funds for investment
Low savings rates and poorly developed or malfunctioning financial markets make it more expensive for African public sectors to get funds for investment. Higher borrowing costs impede capital investment
Why are levels of income, savings and investment linked
with higher levels of income, the opportunity cost of savings fall. As a result, investment increases leading to more economic growth and higher incomes
Criticisms of savings gap model
The model implies poor countries should borrow to finance investment in capital to trigger economic growth; however, history has shown that this often causes repayment problems later
The Harrod-Domar modal states that
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 by the savings ratio / capital output ration in the model, growth increase with more saving or a small capital output ratio
Limitations of Harrod-Domar model
The limitations of the model are that there is a low marginal propensity to save in some countries, or that there might be a poor financial system. Funds might not lead to borrowing and investment – it could also be inefficiency in the workforce. Moreover, the paradox of thrift could be considered. An increase in savings could lead to an increase in investment. However, an increase in savings mean there is a reduction in spending decreases AD.
Harrod-Domar model to explain growth in an economy has what key variables for determining growth
- Economic growth depends on the amount of labour and capital
- As LEDCs often have an abundant supply of labour it is a lack of physical capital that holds back economic growth and development
- Net investment leads to more capital accumulation which generates higher output and income
- Higher income allows higher levels of saving
Capital flight and foreign currency gap
capital and money leave the economy through investment in foreign economics; triggered by an economic threat such as hyperinflation or rising tax rates; it can worsen an economic crisis and cause a currency to depreciate. Capital flight occurs when assets and/or money rapidly flow out of a country, due to an economic event that disturbs investors and causes them to lower their valuation of the assets in that country, or otherwise to lose confidence in its economic strength. This can result in what is referred to as a foreign currency gap. It is usually accompanied by a sharp drop in the exchange rate of the affected country leading to dramatic decreases in the purchasing power of the country’s assets and makes it increasingly expensive to import goods. Foreign investors panic that assets in other countries will devalue due to fall in exchange rate so take money out of the country.
Demographic factors with application
Demographic factors – the population can impact the growth and development of a country. There is a link between keeping birth rates down and fighting hunger, poverty and environmental damage. Rapid population growth has complicated efforts to reduce poverty and eliminate hunger in Africa. The current population of 1.1 billion is expected to double by 2050, which is not sustainable
Debt with application
the debt crisis emerging in the developing world threatens the fight against poverty and inequality. Developing countries’ debt is external debt incurred by the governments of third world countries generally in quantities beyond the governments’ political ability to repay. Unpayable debt is a term used to describe external debt when the interest on the debt exceeds what the country’s politicians think they can collect from taxpayers, based on the nation’s GDP thus preventing the debt from eve being repaid. South Korea’s household debt has grown from 7% to 10% in in recent months
Access to credit and banking
without a safe, secure and stable banking system, there is unlikely to be a lot of saving in a country
Infrastructure with application
Infrastructure – poor infrastructure discourages MNCs from setting up premises in the country. This is since production costs increase where basic infrastructure such as continuous electrical supply is unavailable. Can slow the rate of urbanisation in many parts of Africa for example.
Education/skills –
this is important for developing human capital. Adequate human capital ensures the economy can be productive and produce goods and services of a high quality. It helps generate employment and raise standards of living
Absence of property rights
weak or absent property rights mean entrepreneurs cannot protect their ideas, so do not have an incentive to innovate
Corruption
in sub-Saharan Africa, the money lost from corruption could pay for the education of 10 million children per year in developing countries. Causes – aid is a source of government revenue worth winning power for because you can get the funds and you are not responsible to the people. If governments have to rely on taxes then they become accountable; political systems (dictatorship or democracy); natural resource windfalls are susceptible to theft. Costs EU economy £99bn annually.
Conflict
Conflict has long been a barrier to sustained growth and development in Africa, leading to terrible consequences. Causes – religious conflicts, competition for control of resources, increasingly internal, feature of poor income distribution and poorer countries. Effects – output and growth: food production is drastically affected by armed conflict; FDI falls; wars create negative externalities for bordering countries; government finances are employed to resource wars and policing rather than development; education is often disrupted as schools close
Poor governance
Poor governance e.g. property rights and political instability. Weak governance holds back infrastructure development much more in Asia than elsewhere. Poor governance/civil war – this could hold back infrastructure development and is a constraint on future economic development. It could destroy current infrastructure and force people into poverty
Vulnerability to external shocks
Vulnerability to external shocks – an earthquake prone country is likely to find it hard to develop their infrastructure, and people might be pushed into poverty. Nepal was already one of the poorest countries in the world, but the Nepal earthquake in 2015 pushed more people into poverty.
Foreign currency gap
exists when country is not attracting sufficient capital flows to make up for a deficit in the capital account on the balance of payments i.e. the value of the current account deficit is larger than the value of capital inflows. An inflow of foreign exchange may enable LEDCs to import foreign capital which is considered necessary for economic growth and development
FDI =
Foreign direct investment
Dependence on primary product exports
Causes of foreign currency gap:
Reason why it creates gap
Example
Causes of foreign currency gap: Unionisation
Reason why it creates gap: All profits made are sent back to the host country leading to lost income for LEDC
Example: British companies in Africa owning mines generating large incomes
Debt servicing costs
Causes of foreign currency gap:
Reason why it creates gap
Causes of foreign currency gap: High interest rates 10.75% in Uganda
Reason why it creates gap: Very high interest rates discourage foreign investments
Capital flight
Causes of foreign currency gap
Reason why it creates gap
Example
Causes of foreign currency gap: Assets/money rapidly flow out of a country
Reason why it creates gap: As money rapidly flows out of a country it means that the outflow of currency > inflow of currency preventing…
Example: Black Wednesday: UK wanted to keep the £ at a fixed price meaning huge amounts of the £ have to be sold at times
Trade sanctions
Example
Common agriculture policy makes it harder for LEDC’s to sell their goods to the EU. This subsidy therefore acts as a trade sanction
Why do LEDCs have a small tax base
with lower levels of tax revenue available to governments of LEDCs, development of important infrastructure such as roads and railways are difficult to finance informal economy, self sufficiency, government, banking
TNC’s do not want to invest in developing countries because
they do not want their reputation to be harmed if something goes wrong
Why should Africa have a comparative advantage in manufacturing low tech goods and why does it remain uncompetitive
With labour costs at least as low as anything in SE Asia, Africa should have a comparative advantage in manufacturing low tech goods. However higher costs due to poor infrastructure means Africa remains uncompetitive and this hinders development.
Why is low population density bad with application
Low population density makes it harder to provide infrastructure because the higher fixed costs are spread over fewer people – density decreases infrastructure decreases. Africa’s 1.1 billion is expected to double by 2050.
More infrastructure means more jobs which means…
High multiplier effect
Increases productive potential
Increases foreign investment
When is the HDI of an average person in a society less than the aggregate HDI
When there is inequality in the distribution of health, education and/or income
The greater the difference between the IHDI and the HDI
the greater the inequality.
The IHDI will be equal to the HDI when …. but less than the HDI
there is no inequality
as inequality rises
The difference between IHDI and HDI represents
the loss in potential human development due to inequality and can be expresses as a percentage.
An injection (increasing savings) will…
help to increase investment and stimulate the economy
Transition mechanism for injection of increased saving
injections stimulate cycle
investment capital economic growth increases income increased savings (back to start)
LEDC’s have lots of____ but little ___
labour
capital
Infrastructure transition mechanism
infrastructure gives jobs increasing multiplier effect increasing productive potential
lack of infrastructure discourages foreign investment
