Midterm Flashcards
“Third World”
a term given to countries that were not fully developed by the US after their emergence as a super power. First world was designed for them and Third World was used to refer to countries who were least developed. The measures used to decide this were the average levels of income and levels of poverty
HIPC
Heavily indebted poor countries
GDP
the total value of final goods/services produced in an economy in 1 year. The most basic measure of a countries income is the gross domestic product. Measured in either of two ways. Firstly, we can add up the value of all final goods and services produced within the country and then sold. The second way is too add up the cost of all the factor inputs (capital, labor, land) or value added
GDP/Capita
divides the countries gross domestic product by its total population. A measurement of standard of living
PPP
Purchasing Power Party. Economic theory that states that the exchange rate between two countries is equal to the ratio of the currencies’ respective purchasing power
Real vs. Nominal GDP Growth
Nominal prices, sometimes called current dollar prices, measure the dollar value of a product at the time it was produced. Real prices are adjusted for general price level changes over time. These adjustments give us a picture of prices for various years as if the value of the dollar were constant. Main difference between nominal and real values it that real values are adjusted for inflation, while nominal values are not. As a result, nominal GDP will often appear higher than real GDP
Headcount Poverty
measures the proportion of the population that is poor. How many are poor? Poverty headcount index Ph=Q/N. Q people with income below the per capita poverty level and N people in the total population index
Poverty Gap
measures the extent to which individuals fall below the poverty line (the poverty gaps) as a proportion of the poverty line.
The sum of these poverty gaps gives the minimum cost of eliminating poverty, if transfers were perfectly targeted.
The measure does not reflect changes in inequality among the poor.
In short, how poor are they?
GINI index
measures income inequality. Measure of statistical dispersion intended to represent the income or wealth distribution of a nation’s residents.
HDI
Human development index. Statistical tool used to measure a country’s overall achievement in its social and economic dimensions. The social and economic dimensions of a country are based on the health or people, their level of education attainment and their standard of living.
The more money a country has does not mean it will have better human development if there are also deep inequalities.
Ex: Equatorial Guinea is the richest country in Africa, due to high oil wealth within a small number of people, resulting in life expectancy and education to be very low overall.
Harrod-Domar Theory
Classical Keynesian model of economic growth
Used to explain an economy’s growth rate in terms of the level of saving and productivity of capital
Suggests there is no natural reason for an economy to have balanced growth
Capital Stock
total amount of a firm’s capital, represented by the value of its issued common and preferred stock. Total stock authorized or issued by a corporation.
Capital-Output Ratio
the amount of capital it takes to produce one additional unit of output.
Lewis dual-economy model
explains the growth of a developing economy in terms of a labor transition between two sectors, the capitalist sector and the subsistence sector.
Traditional sector versus modern sector (characteristics)
Traditional Sector:
Rural locations, Agricultural economy, subsistence, small-scale, low technical inputs, low productivity, surplus labor.
Modern Sector:
Urban locations, industrial economy, production for markets, economies of scale, high capital inputs, high productivity, scarce labor.
Kuznets Curve
As economy develop, market forces first increase and then decrease economic inequality
Solow’s equation (components, and effects on growth rates)
attempts to explain long-run economic growth by looking at capital accumulation, labor or population growth and increases in productivity, commonly referred to as technological progress.
Change in k = sy-(n+d)k
S = saving per worker
Y = income (or output) per worker
N = population growth
D = depreciation
Higher savings rate raises income/worker
Higher population growth or depreciation do the opposite
Technological change is sometimes referred to as the “Solow factor” or “Solow residual”
Endogenous growth theory
argues that the economic growth is generated from within a system as a direct result of internal processes.
More specifically, the theory notes that the enhancement of a nation’s human capital will lead to economic growth by means of the development of new forms of technology and efficient and effective means of production.
Solow residual
is the portion of an economy’s output growth that cannot be attributed to the accumulation of capital and labor, the factors of production.
It is a measure of productivity growth that is usually referred to as total factor productivity (TFP)
Rostow’s stages of growth
model postulates that economic growth occurs in five basic stages: traditional society, transitional society, take-off, mature stage and age of high mass consumption.
Debt Service
the cash that is required to cover the repayment of interest and principal on a debt for a particular period.
IMF
International Monetary Fund.
Main purpose is not to promote economic development.
Primary purpose is to ensure stability in the international monetary system by: monitoring financial and economic policies of its members.
Providing mainly low- and middle-income countries with practical advice in effectively managing their economies, providing loans to countries that have trouble meeting their international payments
World Bank
international financial instritution that provides loans to countries of the world for capital projects.
It comprises two institutions: the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA).
Stated goal is the reduction of poverty and to help people help themselves and their environment by providing resources, sharing knowledge, building capacity and forging partnerships in the public and private sector.
Types of World Bank Loans: “Investment Operations” in human and physical capital and “policy operations” to support a country’s policy and institutional reforms.
Investment operations account for 70% of loans.
World Bank loan model: Large loans to institutional borrowers (states and development banks) millions of dollars.
Categories of WBG spending: Human capital, infrastructure, public administration, domestic credit, agricultural/rural development and environment/natural resource.
Grameen Bank
started by Yunus Bangladesh in 1976 to provide services to the rural poor.
90% of banks shares owned by borrowers.
Credited with publicizing the idea of microfinance as development strategy.
Small collateral free loans, targeted towards women, locate banks in rural villages, require weekly/biweekly repayments with interest limited to amount of loan, insurance program to repay entire loan is borrower dies
Moral hazard
the two actions problem. Problem: you can’t observe a borrower’s true type.
Only borrower knows if they will use money in a risky or well-behaved way
Effect of OPEC on Third World debt
OPEC members put their money in banks, banks were looking for new borrowers, developing countries needed money but because they remained risky borrowers, banks charged high interest.
This led the “debt crisis” as loans denominated in dollars must be repaid in dollars, so if dollar fails the system fails.
Conditionality
the principal means by which the international financial community has influenced economic policy in the developing world.
Conditions such as: reduce state budgets, raise taxes, raise interest rates, control wages, privatization, liberalize imports, foreign investments, devalue currency.
Special Drawing Rights
defined as a basket of currencies, is an international reserve asset, created by the IMF in 1969 to supplement its member countries’ official reserves consisting of the Euro, Japanese Yen, Pound Sterling and US dollar.
IMF members have SDRs in relationship to the capital they contribute to the IMF
Tied aid
is foreign aid that must be spent in the country providing the aid or in a group of selected countries.
Money that a rich country lends to a poor country, on condition that the poor country spends the money on goods from the rich country.
Devaluation (effects)
this is an issue with food aid.
Tied aid costs at least 50% more than food bought locally and 33% more than food bought in regional markets.
Does not stimulate local economy.
In fact, by flooding the local market with free food, it decreases the price of locally available food and therefore reduces the incentives of local producers to plant more – perpetuating food shortages and actually undermining agricultural development.
Modern vs. Traditional Culture
modern cultures were more conducive to economic development than traditional cultures.
Traditional Culture:
Rural
Communal: priority is survival of the group
Hierarchical society, Kinship ties, Ascriptive values, Defer to authority, Parochialism, Distrust of innovation
Modern Culture: Urban Individualistic: pursuit of self-interest Fluid social mobility Nuclear family Universalistic values Question authority Outward orientation Open to innovation
Weber’s theory about the effect of Protestantism on economic development
Protestantism encourage capitalistic economic development
- Asceticism, disapproval of luxury
- Protestant work ethic
- Moral code
- Emphasis on study, education
Malthusian population trap
theory that states as population growth is ahead of agricultural growth, there must be a stage at which the food supply is inadequate for feeding the population
Positive checks vs. preventive checks
Malthus believed there were two types of “checks” that in all times and places kept the population growth in line with the growth of the food supply: “preventative checks’ such as moral restraints (abstinence, delayed marriage until finances become balanced) and marriage against persons suffering poverty or perceived as defective and “positive checks” which lead to premature death, disease, starvation, war resulting in what is called a Malthusian catastrophe.
Catastrophe would return population to a lower, more “sustainable” level
Demographic transition
is the transition from high birth and death rates to lower birth and death rates as a country or region develops from a pre-industrial to an industrialized economic system.
The theory was proposed in 1929 by the American demographer Warren Thompson, who observed changes, or transitions, in birth and death rates in industrialized societies over the previous 200 years.
Most developed countries have completed the demographic transition and have low birth rates; most developing countries are in the process of this transition
crude birth/death rate vs. Time (development
a. Phase 1: primitive stability
b. Phase 2: epidemiological transition in the rate of population growth,
c. Phase 3: fertility transition (birthrate)
d. Phase 4: modern stability
Microeconomic theory of fertility:
family formation has costs and benefits.
Parents choose the number of children to have depending on these costs and benefits.
Therefore, the number of children per family declines when costs rise, benefits fall, or both.
Ex. of costs: pay for school, food, clothes. Time. Healthcare. Housing. Ex. of Benefits: child labor, support in old age, love.
Hidden momentum of population growth
a population increase that continues even after a fall in birthrates because of a large youthful population that widens the population’s parent base.
Fewer children per couple in the succeeding few generations will not mean a smaller or stable population size because at the same time there will be a much larger number of childbearing couples
Private versus social returns to education
costs/benefits to the individual versus costs/benefits to society.
Tends to result in “over education” in developing countries.
Tends to lead to “brain drain”.
May also lead to political unrest: virtually every revolution led by educated middle-class frustrated by lack of opportunities.
Conditional cash transfers
Conditional cash transfer (CCT) programs aim to reduce poverty by making welfare programs conditional upon the receivers' actions. The government (or a charity) only transfers the money to persons who meet certain criteria.
Brazil - Pioneer in the development of Conditional Cash Transfer programs
• Means-tested programs to efficiently target the poor while increasing social investment
• Provides cash grants to families who send their children to school and public health clinics
• 93% of the women are the recipients of the Bolsa Family check in, child mortality declines 77% in 10 years
• Bolsa has a lower average drop out rate compared to Brazil’s overall average
• The percent of people who live under $2 a day has declined
• Social spending percentage of GDP has risen
Critical juncture
why nations fail: critical junctures- specific political institutions are created at a particular moment in time because of the balance of power and the contextual conditions of that moment in time.
Once created, however, those institutions set up incentives that tend to perpetuate the power of initial actors.
Institutions are sticky because it is difficult to change institutions once they have been set up, even if the power of actors who created them and even if the contextual conditions change
Three key differences between colonial experience of U.S. and Latin America
a. Latin America
i. No easy wealth: creates economy of production
ii. Colonized by soldiers and adventurers who wanted to get rich, came alone: “encomienda” model, highly unequal distribution of wealth.
iii. Colonized by the Spanish, and absolutist monarchy, controlled directly by Regents
iv. Catholicism
b. US
i. Rich in gold, minerals: creates economy of extraction
ii. Colonized by settlers who brought families to work their own land: small farmer model, relatively equal distribution of wealth (except in South US)
iii. Colonized by the British, a constitutional monarchy, and given extensive self rule
iv. Protestantism
Dependency theory
is the notion that resources flow from a “periphery” of poor and underdeveloped states to a “core” of wealthy states, enriching the latter at the expense of the former.
Import Substitution Industrialization (ISI): definition, associated policies, advantages and disadvantages
a. A trade policy based on the idea that a developing country can industrialize by substituting domestically manufactured products for previously imported manufactured goods.
b. Key components of ISI:
i. Tariffs (raise cost of imports to consumers)
ii. State intervention to subsidize selected industries
1. Loans, infrastructure, subsidies of inputs.
c. Advantages:
i. Establish “infant industries:
1. Like human infants, new industries needed parental (state) protection before they could survive on their own in international markets
ii. Stimulated forward and backward linkages, promoting additional industrialization.
iii. Political support from labor and business.
1. Under ISI, relatively high wages became a benefit (in the form of increased consumer demand) as well as a cost (higher cost of the product).
2. However, since tariffs protected the product from foreign competition, cost mattered less.
3. Jobs and business protected from failure.
4. Both national business and labor unions therefore tended to resist ending ISI protections.
iv. Tax income from tariffs.
d. Disadvantages of ISI
i. Higher consumer prices
ii. Inefficient and uncompetitive industries
iii. Dependence on imports of capital stock
1. Debt
2. Labor-saving technology unemployment
Export Oriented Industrialization (EOI): definition, associated policies, advantages and disadvantages
a. Advantages and Disadvantages:
Demand for manufactured goods grows faster
Price of manufactured goods less unpredictable than primary products
Value added is higher (profit higher)
Creation of synthetics helps rather than hurts
Reliance on foreign markets can cushion economy from domestic recession
South Korea Example: Begin with ISI, to establish infant industries, based on consumer goods in low-tech, labor-intensive industries; Then creates incentives for industries to export goods instead of selling only in domestic markets - lower taxes on profits from exports, no tariffs on imports used in production of exported goods, government subsidies/loans or monopoly rights limited to exporters; Finally, use profits from exports to establish new infant industries, in increasingly capital-intensive and technology-intensive sectors
Can all countries successfully promote exports? Developed country markets are not unlimited: South Korea had special access due to concern about need to prove superiority of capitalism vis-a-vis N. Korea. South Korea was also given leeway by international markets to blend protectionism and open trade, as well as loans and other assistance.
Developing countries compete with each other to supply developed country markets. How many South Koreas/Brazils can there be? According to dependency theory, these countries, which have moved towards industrialization and diversified economies, belong to the semi-periphery. Semi-periphery countries “partially deflect the political pressures which groups primarily located in peripheral areas might otherwise direct against core-states” and thus stabilize the world-system. But they remain a distraction and an illusion: most countries cannot achieve semi-periphery status.
EOI versus “neoliberalism”
Neoliberalism refers to an economic philosophy which embraces free trade, open markets, deregulation, balanced budgets, and privatization, with only a limited role for the state in the economy. Under neoliberalism, the state does not select or promote any particular sector of the economy. Under EOI, the state does selectively promote exports by the manufacturing sector. Under neo, manufacturing exports may increase equally; or not.
Export enclave
An enclave economy is defined as an economic system in which an export based industry dominated by international or non-local capital extracts resources or products from another country.
It was widely employed as a term to describe post-colonial dependency relations in the developing world, especially in Latin America.
Forward and backward linkages
Hirschman introduces the concept of backward and forward linkages.
A forward linkage is created when investment in a particular project encourages investment in subsequent stages of production. Steel –> automobiles.
A backward linkage is when investment in an industry leads to the growth of industries that supply inputs. Coal
Four effects of colonialism on Africa (multi-ethnic states, landlocked countries, slave trade, political institutions)
Establishing territorial boundaries; Creation of political institutions, passed on to colonies at independence; Economic structures (restrictions against development of native industries competing with colonizers, trade restrictions, resources extraction, establishment of monoculture economies); Changes in social structure; Changes in culture: language, religion, education
