Midterm Study Guide Flashcards
What are the three main forms of foreign financial resource inflows to developing countries?
1) FDI and FPI (Direct investment and Portfolio Investment)
2) Remittances
3) Public & Private Development Assistance
What are 4 ways in which FDI / FPI can help promote growth in LIC’s?
1) Fill the savings-investment gap. Domestic savings may not reach investment level needed, and FDI/FPI can fill this gap.
2) Fill the trade gap (makeup for the fact that export income not enough to cover purchase of imports)
3) Increase govt. revenues by taxes or ownership/participation.
4) MNC’s bring skills to locals by giving them training and experience in (technology, management, entrepreneurship)
What are the ways in which FDI / FPI may have a negative impact on domestic savings?
Oman: FDI – large amounts of finance raised locally.
a) Money is NOT invested
b) competition is forced out via exclusive production arrangements with govt.
c) inputs are imported instead of coming from local suppliers
How could the foreign exchange be made worse by FDI / FPI of MNC?
MNC inputs intermediate goods instead of purchasing locally, and repatriates majority of the export profits to home country instead of investing them in developing country production.
How could govt. revenues be substantially decreased with regard to FDI / FPI?
1) Lax tax rules
2) “Rush to the bottom” in which MNC’s shop around for the best deal from host govt.
3) Transfer Pricing (internally transferring profits to branch of MNC with the lowest tax rate)
4) Subsidies and tariff protection
What is a potential limit/setback associated with skills/experience transfer of MNC’s?
If the MNC dominates the local market, it may prevent domestic firms from springing up to compete, thus transfer of skills/experience does not diffuse to wider economy.
What are the more fundamental / ideological problems associated with FDI / FPI?
1) MNC’s mostly produce high-level complex products rather than products of immediate need (agriculture increases)
2) Employment does not always increase as much as hoped due to high use of K rather than L in production process.
3) MNC’s use power to influence the govt to make policies that are best for increasing their profits, not overall development of the country. (protections, cheap land, low taxes, etc)
4) Promote bad consumption behaviors and increase income inequality
Definition: Development
A process whereby the well-being of a society improves significantly in a sustained manner.
Society usually for our purposes = nation.
*Does not mean that everyone benefits. Society as a whole may improve, but some may be left out or lose.
Traditionally, development (as economic concept) has long been measured with what indicators for both current level and progress?
GNI per capita (GDP per capita) - level
Rate of Growth of GNI pc - progress
The concept of development has been around for how long?
Since WWII: Creation of the U.N., breakup of colonial empires, Cold War and competition for allies in developing world, MNC’s seeking consumer mrkts.
When did humanity “break” the Malthusian trap? How?
After 1800 and the onset of the industrial revolution. By substituting sustained technological growth and K accumulation for natural resources fast enough to keep pop. growth from lowering average productivity and p.c. income levels.
Describe the Malthusian Population trap
Idea that population is bound to stop growing b/c natural resource (i.e. food) growth can not keep up with population growth rate. As populations rise, pc incomes decline (less land to farm for each person), leading to population existing at or slightly above subsistence.
Describe stagflation, when did it occur, and what was effect on developing countries?
When you have both high unemployment and high inflation. Occurred in the 1970’s and early 1980’s in the US, forcing Paul Volcker to hike interest rates extremely high. This became one of the main triggers of the debt crisis in Lat America.
What is Keynesianism?
Important role of government in fine-tuning economy. Markets require active monetary policy from central banks and fiscal policy from governments (i.e. state investment programs). Main thinking after Great Depression
What is the “Resource Curse” or “Paradox of Plenty”?
The tendency of a country rich in natural resources (particularly oil or other commodity) to manage it poorly:
- negotiate poor deals from MNC’s
- wealth not widely distributed to population
- rents received are invested poorly, if at all
- rents hugely volatile due to nature of commodity prices
- Dutch disease effects
Define Dutch Disease
Upon receiving large cash inflows from newly found natural resource, the exchange rate of the local currency is pushed higher, making all other exporting sectors of the economy less competitive (as their goods/services are now more expensive to the rest of the world). Domestic firms also compete more with imported goods (which have become cheaper). Growth tends to slow, unemployment tends to increase. Problem comes from converting foreign exchange into local currency. To avoid, Stiglitz says country must spend some resource money on imports and keep some of this cash abroad (stabilization fund - which also helps w/ volatility of prices). First discovered in 1970’s and early 80’s w/ discovery of Dutch North Sea Oil.
How does Stiglitz recommend paying for local infrastructure projects in resource rich countries and why is this difficult to achieve?
To protect against Dutch disease, funds should come from local sources and not resources revenues from abroad. Local funding sources, i.e. raising taxes, is hard sell to population who don’t understand why resource revenues shouldn’t be used.
Stiglitz’s suggestions for fighting natural resource curse in general?
1) Develop strong institutions that ensure money is being widely distributed and well invested.
2) Transparency (citizens right to know how much country is selling and what it is receiving)
3) Reform accounting frameworks to think more in terms of Green NNP instead of GDP
4) Stabilization funds and the ability to use them when needed
5) On the part of Western govts. - not partaking in bribery/corruption, setting good example in their own countries of not giving away nat. resources for free, and with IMF, allowing countries to spend from stab. fund if needed during a downturn.
Define Green NNP
“Green net national product (Green NNP) is a measure that subtracts out not just the depreciation of capital but also the depletion of natural resources and the degradation of the environment.” Reflects the fact that if nat res. are being extracted but country is not receiving what it should for them, it is in fact getting poorer (GDP on the other hand, may be raising, making it a less effective measure in this case)
Basic idea of neoclassical economics and when it experience resurgence?
Government shouldn’t have major role in the market, supply creates its own demand and tends to points of equilibrium. Resurgence during stagflation of 70’s/80’s with Reagan/Thatcher and shift in thinking from mrkt failures to government failures.
Basic idea of NIE (New Institutional Economics):
Broadening of neoclassical economics, essentially bringing back in some aspects of Keynesian thinking by saying that markets need to be organized but won’t do so on their own, so stresses the importance of strong economic institutions to regulate/organize mrkt.
Basic ideas of Sen’s “Capabilities” approach to thinking of and measuring development:
Income/Wealth = means to well-being, but is not an end in itself.
- Poor are less able to realize their human potential
- Poor have less freedom to choose what they can become and what they can do.
Gives much more focus to health, education, social inclusion, women’s empowerment, etc as ENDS and as MEANS.
What is PPP?
Purchasing Power Parity: An alternative to using the exchange rate to calculate the cost of goods and services among countries. Takes into account the different prices of goods and especially services (hair cuts!) around the world ($1 will buy you 1/15 of a haircut in US, and 1 haircut in Kenya).
GNI measured with PPP is higher than GNI measured with foreign exchange rate. Sri Lanka’s GNI per capital forex = $1780, and GNI per capital PPP = $4460.
What is HDI
Human Development Index. Gives equal 1/3 weighting to a country’s Health (as measured in life expectancy), Education (as measured by adult literacy and school enrollment ratio), and GNP per cap.
Began in 1990, created by UNDP.
Does money buy happiness?
Differences seen up to income of $20,000 per capita, after, money doesn’t seem to have effect on happiness.
How is NHDI different from HDI? Do NOT confuse with “Multi-Dimensional Poverty Index”.
- Index is now calculated using geometric mean, meaning that a bad score in any one of the three categories drops overall performance and this can’t be easily compensated for as before with good performance in another category.
- GNI used instead of GDP
- Average actual education attainment and expected attainment of children today are the new education indicators, replace literacy and enrollment
- Upper and lower “goalposts” have been raises and lowered, respectively
- Gets more into family/household information (education/health) instead of just national stats.
Idea of Path Dependency:
Idea from Why Nations Fail of the important part history and institutional formation plays in today’s world. i.e. Effect of colonial settler mortality rates on institution forming extractive or inclusive tendencies. Very hard to change.d
Idea of Coordination failure:
Many actors fail to coordinate activities or choices which leaves everyone worse off. Due to difficulties of coordination.
Complementaries:
Economic activity generates spillovers. “An action taken by one firm, worker, or organization that increases the incentives for other agents to take similar actions. Complementarities often involve investments whose return depends on other investments being made by other agents.” - TS text
O-ring model:
Model in which “Production functions exhibit strong com- plementarities among inputs and which has broader impli- cations for impediments to achieving economic develop- ment.” “the value of upgrading skills or quality depends on similar upgrading by other agents” - TS text
Big Push:
State-led investment planning. “A concerted, economywide, and typically public policy–led effort to initiate or accelerate economic development across a broad spectrum of new industries and skills.” - TS text
Basic belief is that small size of demand (low p.c. income/savings) means various industries have to grow at same time to create demands for each others’ products (by creating forward/backward linkages). Big push tries to do this be overcoming coordination failure.
Linkages:
“Connections between firms based on sales. A
backward linkage is one in which a firm buys a good from another firm to use as an input; a forward linkage is one in which a firm sells to another firm.” One of the main strategies to achieving a Big Push is having policies that promote forward and backward linkages in industrial sectors.
Externalities:
“costs or benefits that accrue to companies or individuals NOT doing the producing or consuming” - TS text
Poverty Trap:
Being stuck at a low-level equilibria (D1 on diagram). At any point between D1 and D2, tendency is to fall back to D1. Big push requires going past the D2 threshold.
Multiple Equilibria
“A condition in which more than one equilibrium exists. These equilibria may sometimes be ranked, in the sense that one is preferred to another, but the unaided market will not move the economy to the preferred outcome.”
“the benefits an agent receives from taking an action depend positively on how many other agents are expected to take the action or on the extent of those actions. For example, the price a farmer can hope to receive for his produce depends on the number of middlemen who are active in the region, which in turn depends on the number of other farmers who specialize in the same product.” - TS text
External Economies of Scale
“The lowering of a firm’s costs due to external factors. External economies of scale will increase the productivity of an entire industry, geographical area or economy. The external factors are outside the control of a particular company, and encompass positive externalities that reduce the firm’s costs.” - Investopedia
Example: Invention of the automobile reduces costs/flexibility for all companies w/ regards to transport.
Basic idea of Krugman’s History vs Expectations:
In determining which equilibria is established, there are two camps split along the lines that either history is the main factor, or, future expectations. Krugman argues that the predominate factor “depends on the underlying structure of the economy - in particular, on the costs of adjustment.”
“In the absence of adjustment costs history is irrelevant…. the slower the rate at which the economy adjusts, the more likely it is that history matters; if adjustment is slow enough, history is always decisive.” - Krugman’s History vs. Expectations
Basics of Oman’s Model of Society diagram (Slide 2, Session 2)
Consists of two subsystems: “institutional” and “economic”, each in turn consisting of two parts:
Institutional = formal (laws, govt regs, judiciary, etc) and informal (values, norms, religious beliefs)
Economic = productive resources (L, K, land) and organization of production
Neoclassical thinking would ignore the institutional subsystem, believing that market would create laws etc if needed. Marx saw both subsystems, but forecasted tension between the two, w/ institutional creating mrkt failures. History shows that institutional has been much more adaptable.
Definition of Institutions. Which type tends to prevail?
Rules of the game. The rules that human beings collectively produce to give level of predictability in interaction w/ each other. Both formal and informal, though both are not always aligned (govt. says one thing, your parents say another). Informal institutions tend to prevail over time.
Difference between rich and poor countries in terms of average productivity:
Rich = higher productivity Poor = lower productivity
What are two ways for society to raise productivity
1) Factor accumulation by increasing the productive resources (acquire more land, increase education of people, save more and accumulate more K). Technological change and innovation.
2) Increasing Division of Labor
Why is division of labor important?
1) Allows for specialization
2) Waste less time shifting between tasks
3) Specialist has insight and motivation to develop/produce machinery that allows for increased production
When these 3 are combined, this increases material productivity growth.
**Another important point: DOL fosters cooperation and exchange between specialized groups.
In nomadic hunter-gather societies, why is culture of sharing so important?
Mutualization of risks is the best survival strategy. The larger the group, the less risk you face (i.e. of starvation). Provided a form of insurance. When you supply food to others, they in turn feel obligated to return the favor.
Basic aspects of nomadic hunter-gather economy:
- Little K (only the small tools, etc they can carry on their backs)
- No sense of private property
- Little division of labor (only along the lines/ages)
- Very little inequality (best hunters were not richer)
Basic aspects of sedentary agrarian economy:
- More physical K
- More specialization, DOL
- Property Rights established to generate strong incentives for people to invest in improving resources (mostly group prop rights at this time)
- State comes into play: 1st societies to use coercive powers of state
Are public goods, such as property rights and social K, typically generated in market system?
No, neither in the amount or types needed. Market institutions, lead by pol. leaders, needed to produced these. Problem is that political leaders often create initiatives to benefit themselves, not society as whole. Gap between benefits to society vs those to pol. leaders.
Aspects of England during Industrial Revolution economy:
- individual property rights (and stronger incentives)
- Rural-Urban migration (peasants freed from land, providing labor supply for industry)
- In Spain, this “enclosure of land” did not take place due to power to sheep owners.
What is the natural resource constraint?
“The food problem” - scarcity of land for food production in LIC’s. 1st development problem LIC’s face. Most severe in Asia (high #’s of people hungry) and Afrique (highest % of pop. hungry)
Ricardian Trap:
Focuses on conflicts of interests between landowners and industrial capitalists. Saw Industrialization leading to growing use of marginal lands. Large property owners would benefit from rents if the demand for food/land went up, shifting distr. of income (DOI) to them, at expense of profits for industrialists.
Important effect on policy making in GB:
1) 1846 GB decides that to overcome this trap (declining profits), it must open to int. trade, export manufactured products and import agricultural goods. Corn laws repealed. Favored industrialists over landowners. This worked b/c GB had manf. goods to export (competitive advantage), and b/c brit population was relatively small on world scale.
Explain briefly the British Corn Laws of 1800’s:
Banned the import of all grains and cereals into Britain if the price got too low, which was good for profits large landowners, but bad for factory owners who had to pay higher wages so that workers could afford high price of bread. Repealed in 1846.
What are some general food trends since WWII? (Population growth, land, and production)
Pop growth: up 2.5x
Farm land: up only 30%
p.c. land down by 1/2
p.c. grain production: up 30% (how? application of science to agriculture - better seeds, industrialization of chem. fertilizer)
How did France and Germany deal with natural resource constraint?
Imported food from colonies
How did U.S., Canada, Australia deal with natural resource constraint?
Didn’t really have to - open frontier of available land
How did G.B. deal with natural resource constraint?
Agrarian revolution + food imports
How did Japan deal with natural resource constraint?
Investments in increase rice yields both domestically and in colonies (1868 and 1918 respectively)
How has Africa traditionally dealt with natural resource constraint?
Open new lands:
- cultivation & grazing onto unsustainable lands
- soil erosion, desertification, other env. damage
- still unable to keep up w/ pop. growth
- only region to not benefit from the Green Rev.
Define: pauperization
When speed of substituting tech growth and K accumulation can’t keep up with the population growth. Happening in SSA today.
Green Revolution in Asia, important figures:
Made possible by technological progress and K in agricultural industries.
- p.c. land availability failing just as fast as SSA
- but p.c. food production increase .8-.9% per year
- India, Pakistan, Indonesia all became self-sufficient in 70’s/80’s
How were higher yields of the Green Rev realized specifically?
- Scientifically selected crop varieties w/ high growth potential (no GMO’s yet, just better selection)
- Large amounts of fertilizer and water thru irrigation
Why did Green Rev. not take hold in SSA?
Lack of infrastructure here probably most important (irrigation and access to fertilizers)
- shifting cultivation & nomadic grazing still widespread
- Culture of communal sharing of tribes/villages and underdevelopment of private prop. rights means not able to facility L.T. investments in land infrastructure.
- B/c lag in settled agric., also a lag in infrastructure (social overhead K) such as roads, irrigation systems, etc
- Lack of/weak government (collective action) needed to produce these public goods
How do govts. get in the way of increased food production in SSA?
- State marketing boards (no private traders/middlemen) often paying farms much less than they should get
- Monopoly powers leads to corruption/inefficiencies
- Focus on transferring wealth from agric. to industry (important to also make investments in agricultural production before or at same time as industrial sectors)
- Strong ties to local/tribal communities makes leaders more inclined to support only those populations and not the society as a whole.
