theme 4- 4.3 emerging and developing economies Flashcards
economic development
concept that measures social and economic progress
includes:
- health
- education
- poverty reduction
- employment opportunities
Human Development Index (HDI)
a composite measure used in the United Nations Development Report
3 elements of HDI
- GDP per head- measured at purchasing power parity
- Health- measured in terms of life expectancy at birth
- Education- measured in terms of mean yrs of schooling at 25 and expected yrs of schooling at 4
advantages of using HDI to measure economic development
- broader measure than GDP per capita
- used to make comparisons of development between countries
- UN- 3 essential contributors for development (long and healthy life, acquire knowledge, access to resources to have a decent standard of living) are captured in the HDI
disadvantages of using HDI to measure economic development
- too narrow- only 3 aspects of development
- average measure so disguises anomalies
- only concerned with long term development outcomes
other indicators of development
- energy consumption per person
- proportion with internet access
- proportion with mobile phones
- proportion of men in agriculture
- access to clean water
- degree of inequality
- degree of democracy
- proportion entitled to civil rights
factors that affect growth and development
- primary product dependency
- non-economic factors e.g. civil war
- absence of property rights
- education/skills
- infrastructure
- access to credit and banking
- debt
- volatility of commodity prices
- savings gap
- foreign currency gap
- demographic factors
primary product dependency
occurs in countries where the value of production of primary products accounts for a large proportion of GDP, exports and employment- can hamper growth and development in developing countries
types of primary product
hard commodities- mined/extracted e.g. copper
soft commodities- agricultural goods e.g. rice
issues of dependency on primary products
- extreme price fluctuations- supply and demand = inelastic
- fluctuations in producer’s revenues from price changes- more difficult to plan
- fluctuations in foreign exchange earnings
- protectionism
- shortages of supplies for domestic consumption- usually exported
- finite supplies of hard commodities
- appreciation of currency
- falling terms of trade
Prebisch-Singer hypothesis
demand for many primary products tend to become inelastic while manufactured are elastic, therefore as real incomes rise, the demand for manufactured goods will increase faster than primary goods and therefore prices will rise quicker
-> terms of trade for developing countries fall relative to developed countries
criticisms of the Prebisch-Singer hypothesis
- the developing country could have a comparative advantage for the primary product
- real price of primary products may increase over time with rising incomes
- FDI has significantly increased in recent years in countries dependent on primary products
Harrod-Domar model
illustrates the problem of how countries with low GDP per capita will experience low savings ratios
low savings = difficult to finance investment and therefore capital accumulation
which translates into low output and low GDP
criticisms of the Harrod-Domar model
- focuses on physical capital and ignores significance of human capital
- assumes a constant relationship between capital and output
- savings gap may be filled by means other than domestic savings e.g. FDI
causes of foreign currency gap
- dependency on exports of primary products
- dependency on imports of oil and manufactured goods
- capital flight
- interest payments on loans in foreign countries
capital flight
occurs when individuals and countries decide to transfer cash deposits to foreign banks, or to buy shares in overseas companies or assets in foreign countries
impact of a foreign currency gap
may have insufficient foreign currency to purchase imported capital goods which are needed to increase productive capacity
Malthus + demographic factors
predicted that famine was inevitable because population grows in geometric progression whereas food production grows in arithmetic progression
in countries where population > GDP growth, GDP per capita will decline
ageing population
results in smaller working populations having to support a larger population of elderly- dependency ratio
causes of debt in developing countries
- primary product dependency (if terms of trade = falling)
- interest payments on debt, especially if loans were taken out when interest rates = low
- depreciation of currency (increasing burden of debt)
- loans for major investment projects or military equipment
importance of access to credit and banking
important for both new entrepreneurs who need to borrow to start their business and existing businesses who need to finance expansion and for cash-flow reasons
infrastructure
physical and organisational structures and facilities required for the efficient operation of a society and its enterprises e.g. railways, roads, electricity generation
impact of poor infrastructure
likely to deter both domestic investment and FDI
impact of education/skills
if school enrolment = low, levels of literacy and numeracy = low
in turn, labour productivity is likely to be low which deters FDI
Hernando de Soto’s argument
a strong market economy depends critically on property rights and the rule of law
property rights
the exclusive authority to determine how a resource is used, whether that resource is owned by the government or by individuals
property rights = ownership rights
need to be protected by the rule of law
example of advantages of property rights
it will be easier to obtain a bank loan if a person has assets as they can be used as collateral
impact of poor governance and political instability on the economy
- will be unlikely that resources will be allocated efficiently
- government failure may occur -> net welfare loss
