Macroeconomics - Growth and Development Strategies Flashcards
Factors that increase the multiplier effect
Level of spare capacity, nature of goods and services being produced in the economy, marginal propensity to withdraw (import, save, tax)
Measures of development - HDI
HDI (education level (avg. years of schooling for adult aged 25), health (life expectancy at birth), income (real GNI per head at PPPs)
Pros - easy to calculate, good comparison, broad measure, focus on development outcomes
Cons - doesn’t take into account inequality, poverty, political freedom, environmental state of country
Alternative measures of development
Inequality adjusted Human Development Index (IHDI) (gets lower with more inequality), Multi-Dimensional Poverty Index (MPI) (assesses HDI along with multiple other factors, can be deconstructed into regions (e.g. culture, religion, ethnicity), making it useful for policy makers)
Factors affecting growth and development (8 potential)
Level of savings and investment, foreign currency gap (expenditure in foreign currency (debt servicing, imports, high oil prices) exceed foreign currency earnings (exports, foreign investment, remittances)), capital flight, access to loans and credit (ability to to access these in order to invest or start a business), infrastructure (poor infrastructure dissuades FDI and leads to inefficiencies), education/skills level, absence of property rights
Factors affecting growth and development - 2 based on type of product produced by country
Primary product Dependency (dependent on volatile product such as copper), volatility of commodity prices (discourages investment due to uncertainty of prices, Prebisch-Singer hypothesis)
Strategies influencing growth and development - market-orientated strategies
Trade liberalisation, promotion of FDI, removal of gov. subsidies, floating exchange rate systems, microfinance schemes (microcredit (small loans) to help them engage in productive activities or to grow their tiny businesses),
Strategies influencing growth and development - interventionist strategies
Development of human capital, protectionism, managed exchange rates, infrastructure development, buffer stock schemes (see next slide for explanation)
Buffer stock schemes (strategies for growth and development)
Requires price ceiling and a price floor. When price drops, gov. or buffer stock authority buys and stores it to prevent price from reducing, if price rises too high, gov. releases stock to reduce price.
Cons - storage and transport to and from can be expensive, can’t be done with perishable good
Non-economic factors that affect growth and development
Corruption, poor governance, wars, political instability, geography
Strategies for growth and development - Other strategies
Industrialisation (Lewis model), development of tourism (LDC often dependent on it, earns foreign currency and is labour intensive but causes pollution), development of primary industries (where countries have a comparative advantage), fair trade schemes (see slide for more detail), aid (see slide for more detail), debt relief (see slide for more detail)
Free trade schemes - alternative strategies for growth and development
Prevents issue of monopsony power by foreign firms, and farmers being forced to price low due to protectionist measures, guarantee fair prices and stable incomes, argued supermarkets are main beneficiaries of scheme, misallocation of resources (loss making farmers should switch to more profitable markets))
Foreign aid (both forms)
Humanitarian (food and shelter in emergency times), grants (sums of money that don’t need to be repaid), soft loans (concessionary rate of interest)
Cons - bilateral aid often tied (however multilateral aid not), can lead to corruption with ministers taking advantage of it
Debt reliefs
Large debts mean gov. of these countries unable to invest in human capital or other infrastructure necessary for growth and development. Eases pressure on gov. finances, however can lead to moral hazard
Lewis Model
Labour moves from low productivity agricultural sector with excess labour to high productivity urban sector through incentive of higher wages
However: assumption of urban sector being labour-intensive, not capital-intensive and causes strain on urban environment
Harrod-Domar model
Increased savings (more credit so investment easier), increased investment in economy, higher capital stock (capital accumulation, can lead to low capital-output ratio (less capital, still high output), higher economic growth
Ricardian Equivalence Theory
Suggests that increased gov. spending won’t lead to a significant increase in consumption, as consumers are forward looking, so save in anticipation of higher taxes in the future
Prebisch-Singer Hypothesis
Argues that volatility of primary products heavily affect developing countries as they rely heavily on these for exports and represent a significant portion of output
Main functions of World Bank
Grant reconstruction loans to war devastated countries, grant developmental loans to LDCs, providing loans to govs. for agriculture, irrigation, power, transport, water supply, education, health e.t.c., encourage industrial development of LDCs by promoting economic reforms
Main functions of the International Monetary fund (IMF) (international monetary system (IMS))
Ensure stability of IMS (system of exchange rates and international payments that enables countries to transact with each other, maintain stability and prevent crises in IMS but reviewing countries’ policies and developments, provide member countries with finance to correct BoP problems
NGOs
Non-profit, voluntary citizens group, bring community-based development. Key characteristics = local control of small scale projects, self-reliance, emphasis on using the skills available, environmental sustainability
