Pack 10 Emerging and Developing economies Flashcards
difference between economic growth and economic development
growth: increase in real GDP
development: permanent increase in living standards
different indicators of economic development
- education enrolment figures
- access to clean water
- access to mobile phones
- life expectancy
- Gini co-efficient
- GDP per capita
what is HDI and how is it measured
- equally weighted average of: health, education and living standards
life expectancy at birth, expected years of schooling and mean years of schooling aged 25 and GNI per capita - each indicator is given a ranking between 0 and 1
other composite measures of development
IHDI: inequality adjusted HDI
advantages of HDI
- shows GDP used to increase social welfare
- shows GDP has been well directed by policymakers
- easy/cheap to collect indicators
disadvantages of HDI
- no account for poverty and inequality
- other indicators of quality of life not included: e.g wars, political stability
- data issues
- life expectancy being high may not be good if citizens suffering/poverty
- education figures may not reflect high quality of education+
what are the economic factors influencing growth and development
Primary product issues:
primary product dependency
volatility of commodity prices
Savings and Foreign exchange issues:
savings gap: Harrod Domar model
foreign currency/exchange gap
capital flight
Finance issues:
debt
access to credit/banking
absence of property rights
Labour and infrastructure:
demographics
education and skill
infrastructure
economic factors relating to primary products
-
Volatility of commodity prices:
- market failure: consumer suffer absolute poverty when prices rise, lower revenue for producers, less certainty to invest = lack of business investment
EV: use of forwards markets -
Primary product dependence:
- Prebisch-Singer hypothesis: long-term decline in primary product prices, relative to industrial goods - rising incomes over time = small increase in demand for primary products/ increase in supply of primary goods
- lead to long term decline in terms of trade for those primary product dependent
- also resource curse vulnerable due to lack of diversification
- ‘dutch disease’: negative consequences of large increase in country’s currency if higher FDI in primary sector, can reduce competitiveness of secondary sector and prevent diversification long term
EV: can diversify economy to other sectors, e.g via industrialisation, also some commodities are not income inelastic, e.g diamonds/gold - so falling terms of trade less of an issue
- comparative advantage help boost development especially if commodity prices rise
Economic factors relating to savings and foreign exchange
-
Savings gap(difference between actual level and savigns required to finance investment/growth):
- harrod-domar development model - savings rate in development countries emphasises as fuels investment
- lack of investment fuelled growth: no savings = no lending by banks to businesses = capital accumulation suffers/LRAS falls
- knock on effects on development: less employment in economy and so lower income/higher poverty -
Foreign Exchange gap: exists when the country is not attracting sufficient capital
flows to make up for a deficit in the capital account on the balance of payments. In
other words, the value of the current account deficit is larger than the value of
capital inflows. -
Capital Flight:
- movement of money from one investment to another in search of grater stability/returns
- lead to savings gap in income not saved but sent abroad for investment and foreign exchange gap if foreign funds leave country
- can happen when instability hits and so during a crisis
EV:
- harrod domar model assumes saving = investment-led growth, but dependent on functioning banking system to convert savings into business loans
- depends pm extent to which external finance can plug these gaps
- capital flight shows higher incomes does not necessarily = higher investment/growth as can invest abroad instead (e.g in crisis)
factors relating to finance needed for development
-
debt
- impact on growth/development due to opportunity cost of repayment, can be made worse by country’s credit rating/causing higher interest payments -
Access to credit and banking:
- lack of credit due to low savings in the economy, underperforming banking sector or lack of experience of entrepreneurs, lack of credit will constrain investment -
Absence of property rights:
- difficult to secure loans constraining investment - have no collateral, also less incentive to invest if do not own asset, such as farmers not investing in rented land
Evaluation:
- if can access finance could use debt to promote long-term growth and so generate more tax revenue to pay interest back, helped by debt forgiveness
- microfinance could also help
economic factors relating to labour and infrastructure
-
demographics:
- drags down GDP per capita: rapidly increasing population as spread over more people
- increase in number of dependents: young/ageing
- lack of food to supply population: Malthus: food production cannot rise as fast as population - malnutrition
- not enough essential services for rising population: impact workforce
Evaluation:
- benefits of ageing population: more experience boosting productivity/supporting the family
- gov policies to ensure food shortages don’t occur: subsidies/GM crops and investment/aid into infrastructure
-
Education and Human Capital:
- low productivity impacts on growth
- reduced FDI: if less skilled workforce available
- social impacts
- impact on development: HDI directly affected by lack of human capital - literacy rates lower -
Infrastructure:
- lack of roads/communication (e.g internet) (less incentive for FDI, less trade)
- lack of functioning water/sewage systems: impact on poor - inequality - disease
- lack of hospitals and schools
Evaluation:
- impact on LICs worse as unable to afford investments (high debt/inability to attract finance)
- investment - time lag
non-economic factors that affect development
-
wars, conflicts, natural disasters:
- reduction in working population/productivity
- infrastructure damage, direct funds away from investment, all discourage business investment = capital flight? -
Disease rates:
- size/quality of workforce, pressure on healthcare systems - funding directed away from other areas
- social problems - higher dependency ratio -
Corruption and poor governance:
- money not as well directed, limit effectiveness of FDI
Evaluation:
- external support: e.g FCDO from UK, or IMD
- magnitude of disasters
7 factors impacting development (more geog)
location
resource endowment
trade agreements
historical factors
debt
TNCs
war/conflict
strategies influencing growth and development
industrialisation
development of tourism
development of primary industries
fairtrade schemes
aid
debt relief
finance development strategies
-
foreign aid:
- e.g China: One belt, one road initiative, UK/Malysia Pergau Dam, UK and Uganda: GETFit
- bilateral, multilateral, relief aid, development aid
- tied aid: issues of dependency/corruption
EV: corrupt governments, dependency, how effective its spent/tailored to the country : Malaysia/UK: Pergau Dam example - £1 billion arms deal -
debt relief:
- opportunity cost of spending on interest repayments, so allows spending instead on healthcare etc, helping countries escape poverty - e.g Uganda education budget reduced by 12% after debt cancellation 20% overall increase in gov spending
- HIPC initiative
EV: conditions on getting debt relief, issues of moral hazard, depends on effectiveness of money spent - corruption, drawbacks for developed countries who now do not receive these payments -
Microfinance:
- small loans to very poor people for self-employment projects
- e.g Grameen bank - 97% to women
- small size, flexible terms, if person cannot pay loan renegotiated, clients met personally - personal service
EV: not sufficient for development as living standards determined by gov policies not citizens income - e.g healthcare, education
- concerns over high repayment rates, coercive collection methods and over indebtedness of some clients who use multiple organisations - problem?
use of international institutions, NGOs and FDI for development
-
NGOs:
- e.g Oxfam - South Sudan hunger crisis 2017 - 500,000 helped, specific projects for countries and funded by donations so no opportunity cost for gov and lower risk of corruption
EV: less impact at times if smaller scale, harder to regulate if lack transparency/accountability, issue of funding -
FDI:
- benefits: greater employment, tax revenue, exports, improved infrastructure
EV: whether benefits enjoyed by developing country - depend if workers outsourced or local, whether profits reinvested or sent home, global companies importing? -
international institutions:
- world bank - long term growth/development: finance for internal investment projects - can be below market interest rates
- IMF - times of crisis
EV: support is conditional - criticisms of structural adjustment policies:
- e.g cuts to spending = lower AD/damage living standards
- free trade = job losses in manufacturing/primary product dependence
- dominated by rich counties
Development strategy: development of primary industries
- growth through exports, employment
EV: - primary product dependence, lack of diversity/volatility, low-value added, protectionism from developed economies (hurts comparative advantage)
Strategies: Buffer stock schemes:
- encourage production despite fluctuating prices
EV: incorrect target price, costly to run/administer, perishability issues
Fairtrade:
- boost equality and prevent poverty by reducing monopsony power
EV: not all farmers qualify, farmers become dependent on fairtrade, may hold back investment
Industrialisation
Harrod-domar model:
- need for savings to reach certain level to facilitate investment/capital accumulation, investment likely in secondary allows economy to develop beyond primary product dependence
Lewis model:
- arguesurplus labour in rural areas - labour that has zero marginal product
- this labour could be transferred to secondary sector and be put to more productive use - attracted to city by wage premium
- higher industrial productivity = higher profits for firms= higher investment = expansion = higher growth = trickle down to boost living standards
- industrialisation = diversify economy, attract FDI, boost productivity and employment, higher tax revenue - higher business profits
- export-led growth
EV:
- surplus labour in urban areas
- issue of world competition
- issue of external shocks: depends on products/risk diversified by producing larger range
- neglect of agriculture
- disruption to culture/values
- issues of foreign ownership - profits sent abroad not re-invested into local economy
development of tourism
- can help diversify, reducing risk and attracting FDI
- income elastic demand unlike primary industries, can boost growth, provide employment to large number of unskilled workers + tax revenue, exports and foreign exchange
EV:
- external costs: litter, crime, pollution - e.g in Venice
- issue of external shocks: e.g Jamaica during COVID - 65% decline in tourists
- seasonal nature of tourism
- high marginal propensity to import: e.g Jamaica: 74% in 2015 Americans who import lots of goods
- issue of foreign ownership: profits sent abroad - depend if local workers employed
- over-reliance and volatility
what are the market orientated development strategies
International:
trade liberalisation: reduce tariffs/quotas, EV: competition with international markets and income inequality
promotion of FDI: reduce regulations. taxation, min wage
Floating exchange rates: more robust, EV: volatility affecting trade
Domestic:
Removal of gov subsidies: increase efficiency, EV: unpopular
Microfinance
Privatisation: efficiency, growth/competitiveness, EV: consumer exploitation, corruption
what are the interventionist development strategies
International:
- protectionism: EV: retaliation, economic inefficiency of protected industries
- promotion of joint ventures with global companies: benefits of FDI gained by local economy
- managed exchange rate: EV: can break down
Domestic:
- Infrastructure development: EV: opportunity cost/time lag
- development of human capital: EV: depend on quality of education/brain drain
buffer stock schemes
