Limits To Growth & Development

Question 1

What is economic growth?

Answer 1

Refers to the increases in real GDP/ growth in the productive capacity of the economy

Question 2

What is economic development?

Answer 2

Refers to changes in living standards & welfare over time

Question 3

What type of concept is economic development? And what does this mean?

Answer 3

Normative, therefore dependent on value judgements

Question 4

How would you measure economic development?

Answer 4

Human Development Index (HDI)

Question 5

What is the HDI?

Answer 5

Consists of 3 elements:

1) GDP per head - measured at purchasing power parity (PPP)
2) Health - measured in terms of life expectancy at birth
3) Education - measured in terms of mean years of schooling at age 25 & expected years of schooling at age 4

Question 6

Why is HDI a narrow measure of development?

Answer 6

It ignores a range of other indicators such as:

1) Proportion of population with access to clean water
2) Proportion of working population employed in agriculture
3) Energy consumption per person
4) Proportion of households with internet access
5) Mobile phones per thousand of population

Question 7

What are the main limits to economic growth & development?

Answer 7

1) Poor infrastructure
2) Human capital problems
3) Primary product dependency
4) Savings gap; inadequate capital accumulation
5) Foreign currency gap
6) Capital flight
7) Corruption
8) Population issues
9) Debt
10) Poor governance, political instability & civil wars

Question 8

How does poor infrastructure limit E.G & development?

Answer 8

Infrastructure covers range of structures essential for economy to operate smoothly
e.g transport, telecommunications, energy/water supply, waste disposal
Poor infrastructure means:
- difficult to attract domestic & FDI

Question 9

How does human capital inadequacies limit E.G & development?

Answer 9

Poor education standards: low school enrolment ratio,
1) slow rate of E.G
- productivity of workforce low
2) deterrent to TNCs to I in country (lower FDI)
- costs involved in educating & training workers
HIV/AIDS
- if adult develops aids has to give up work
- his/hers child withdrawn from school lack of funds or required to work at home
- TNCs involved in company where workers disrupted by AIDS pull out of countries
- as feel no longer profitable to operate
Combined effect of problems reduces the quantity & quality of education & training

Question 10

What are primary products?

Answer 10

Divided into:

1) Hard commodities
e. g copper, tin, iron ore
2) Soft commodities
e. g agricultural crops such as wheat, palm, oil, rice, fruit

Question 11

What is primary product dependency?

Answer 11

Occurs where production of primary products accounts for a large proportion of a country’s GDP

Question 12

How does primary product dependency limit E.G & development?

Answer 12

1) Price fluctuations
- PED & PES tend to be inelastic
- any demand-side/ supply-side shock result in significant price change
2) Fluctuations in producers’ incomes & foreign exchange earnings
- price fluctuations lead to fluctuation in producers’ incomes
- since PEDs
6) Falling terms of trade (Prebisch-Singer hypothesis)

Question 13

What are the key elements of the Prebisch-Singer hypothesis?

Answer 13

1) Primary products tend to be YED1
2) As real incomes rise, D for manufactured goods increase at faster rate than D for primary products
3) Result: prices of manufactured goods rise more quickly than prices of primary products
4) Consequently terms of trade of developing countries will fall relative to those of developed countries
- as developing countries dependent on X of primary products

Question 14

How may the Prebisch-Singer hypothesis theory be criticised?

Answer 14

1) Some countries have developed on basis of primary products
e. g Botswana: diamonds
2) If developing country has comparative advantage in primary product then its resources will be used more efficiently by specialising in the production of that product
e. g Kenya comparative advantage in tea therefore specialising in tea production
3) Primary product prices rose sharply until middle of 2008 while prices of many manufactured products were falling
- causing terms of trade of developing countries to increase

Question 15

How does the foreign currency gap limit E.G & development?

Answer 15

Associated with savings gap,
Developing countries would have insufficient foreign currency to M capital goods which might be needed to increase productive capacity of foreign exchange,
This is a result of:
- dependence on X earnings from primary products
- dependence on M of capital goods & other manufactured goods
- servicing debt
- interest payments on debt to foreign countries
- capital flight

Question 16

What is capital flight?

Answer 16

Occurs when individuals/ companies place cash deposits in foreign banks/ buy shares or other assets in foreign countries

Question 17

How does capital flight limit E.G & development?

Answer 17

Serious implications:

• contributes to savings gap & foreign currency gap
• restricts E.G
• reduces tax base because country loses any tax payable on these assets

Question 18

What is corruption?

Answer 18

The use of power for personal gain

e.g bribery, extortion, diversion of resources to governing elite

Question 19

How does corruption limit E.G & development?

Answer 19

Slower rate of E.G & E.D:

• inefficient allocation of resources
• increase in costs of doing business in the country
• decrease in FDI
• capital flight

Question 20

How does debt limit E.G & development?

Answer 20

Many developing countries borrowed money at times of low IRs
- only to find struggling to service the debt (pay interest on it) some years later
- risky decisions to borrow money to finance major I projects at time when world economy was strong &/or prices of goods which X were high
- Increase in oil prices, presented particular problems over periods of such P increases
- fall in value of currencies of developing countries, which increased burden of foreign debt
- loans taken out to finance expenditure on military equipment
Important to consider that the absolute size of the debt is less important than country’s ability to finance it
- measured by examining data on debt service payments as % of GDP or debt service payments as % of X earnings

Question 21

How do population issues limit E.G and development?

Answer 21

1) Population growth particularly rapid in poorest developing countries of world
e.g Malawi and Mozambique
Population falling in developed countries
e.g Italy & Germany
2) Thomas Malthus predicted end of 18th Century famine was inevitable as:
- population grows in geometric progression
- food production grows in arithmetic progression
Proved to be incorrect but still relevant for some poor developing countries as:
- growth of population>growth in GDP
- GDP per capita falling
3) Ageing populations causes significant implications
e.g smaller working populations support larger proportion of elderly which is an issue for Western Europe as well as China and Japan