Theme 4.3 Flashcards
What is the difference between economic growth and economic development?
Whilst economic growth is measured purely by real GDP and the productive potential of the country, economic development is about improvements in living standards, social and economic opportunities as well as growth in national capabilities.
Many people argue growth is the key for development due to the trickle down effect, however, is some nations such as South Africa, this trickle down effect has not occurred, and lots on inequality still remains.
What is a developed country?
-This is a country with a high GDP per capita and tends to be thought of as Western.
-They have high levels of education and healthcare, reliable and safe transport infrastructure and operations, as well as high productivity and investment.
-Likely are in a phase of deinstitutionalisation and have developed their service sector. The government is often democratically elected and not corrupt.
What is a developing country?
-Has a lower GDP per capita, and also low levels of physical and human capital, but high levels of unemployment and underemployment. -Health tends to be low with high mortality rates and high levels of population growth, due to high birth rates.
-They also tend to have weak infrastructure and weak/corrupt institutions.
-High degree of population living in rural areas.
What is the human development index?
HDI is a measure of economic development calculated by the UN. It is a composite index based on three factors:
-Health as measured by life expectancy at birth
-Education as measured by the mean years of schooling of adults aged 25+ and the
expected years of schooling of a current 5-year-old over their lives
-Income as measured by real GNI per capita at purchasing power parity.
Each of the three indicators is given equal weighting and a mean is taken to give a figure between 0 and 1. The higher the number, the greater the level of development.
What are the advantages of HDI?
● It takes into account three key factors which are important for the development of a
country.
● It is relatively easy to calculate because governments tend to collect the statistics
used in the data.
What are the disadvantages of HDI?
-Health takes no notice of the quality of life that people enjoy and education doesn’t take into account the quality
and success of education.
-There is no consideration for the equality of income.
-Also, there are other factors which affect development, for example freedom from
corruption or the environment.
-HDI reflects long-term changes (e.g. life expectancy) and may not respond to recent short-term changes.
-Standard HDI measure does not take into account qualitative factors, (such as cultural identity and political freedoms, human security, gender opportunities and human rights for example)
What are some measures of development other than HDI?
-Inequality adjusted HDI
-Multidimensional Poverty Index
-The Genuine progress indicator
What the Inequality-adjusted Human Dev Index (IHDI)?
● This is an adjustment of HDI which includes a fourth indicator of development: inequality. The Atkinson Index adjusts measures for education, health and income according to the level of inequality. It is broader than HDI but can still be criticised for not taking into account more measures and quality.
-The USA’s IHDI is noticeably lower than its HDI, showing the income and service (e,g health) disparity within the country.
What is the Multidimensional poverty index (MPI)?
-This measures the percentage of the population that is multidimensional poor. It uses data for health, education and standard of living but uses a broader range of indicators within these categories.
● Years of schooling and school attendance data is used for education; child mortality and nutrition data for health; and availability of electricity, sanitation and safe drinking water in households, cooking fuel used, assets owned and the type of floor in a house for standard of living.
What are the pros and cons of the Multidimensional Poverty Index?
-It highlights the countries where some areas are extremely rich but where most of the population is not and focuses on poverty.
-However, it cannot be calculated for all countries as the data is not always available. It also doesn’t take into account the environment.
What is the Genuine progress indicator?
● It is calculated from 26 different indicators grouped into three main categories: economic, environmental and social. It aims to look at economic sustainability, to ensure development does not limit the amount produced and consumed in the future.
● The economic category looks at personal consumption, inequality and the cost of unemployment. Environmental accounts for the cost of pollution, loss of natural areas, CO2 emissions, ozone depletion and the depletion of non-renewable resources. In social, the 10 indicators range from the value of housework and parenting to the cost of crime and commuting to the value of volunteer work.
What does the genuine progress indicator tend to show?
● They tend to show developed countries experiencing negative growth over time, due to their impact on the environment. Some argue this proves that development is unsustainable whilst others argue the index is biased and is constructed to prove the anti-growth case.
-Moreover, figures like changes in electricity production or the numbers with a mobile phone per thousand of the population can show development levels. These are easier to calculate than indexes.
What are some examples of HDI around the world?
Norway- 0.961
UK- 0.929
South Africa- 0.713
South Sudan - 0.385
What is economic development?
This is a process by which real per capita incomes are increased and the inhabitants of a country are able to benefit from improved economic and social living conditions, as well as better economic and social opportunities (lower poverty, better education, health, nutrition and other life essentials).
Why can comparing GNI per capita to HDI be important?
If a country (such as Qatar) is ranked lower on HDI compared to GNI per capita, this suggests that although there may be relatively good income levels, other important factors of development (e,g education may be lacking). In some nations (such as Cuba), the opposite trend may be seen.
How does economic growth spurs development?
• Lifts per capita incomes - raises people out of extreme poverty
• Increased per capita GDP/GNI gives households and businesses greater
financial resources to save (Harrod Domar growth model)
• Creates new jobs providing a flow of incomes for people in work
• Higher incomes can also reduce income and wealth inequality
• Faster economic growth generates higher profits which can then be reinvested – promoting increased productivity and capacity
• Growth can accelerate changes in patterns of production towards investment in manufacturing and services such as business services and tourism
• Economic growth can generate higher tax revenues for the government – providing more funds to finance public and merit goods and welfare spending
What are some common characteristics seen in Developing nations?
-Relatively low incomes per capita and a low level of absolute savings
-Lower absolute levels of productivity (labour and capital)
-High dependency on export incomes from commodities (low export diversification)
-Large share of the population living in rural areas and employed in agriculture
-Limited scope and support provided by a welfare system
-A larger informal sector - for example in partial subsistence farming
-Many industries in low-income countries are distanced from technological
frontiers
-Relatively fast growth of population and a younger average age
-Rapid urbanisation and large-scale rural-urban migration
-Weaknesses in infrastructure such as telecoms, transport, ports, water and sanitation
-Weaknesses in institutions e.g. government, civil service, money and capital markets
-Relatively higher tariffs and other import controls
-Tendency to have capital controls / relatively closed capital markets
-Lower access to advanced (rich) country markets because of trade barriers
What are some indicators of development?
-GDP per capita.
-Health care / life expectancy.
-Education / literacy.
-Gender equality.
-Pollution and environmental standards.
-Access to basic amenities, water, good quality shelter. § Extent of welfare state.
What are some economic factors that influence growth and development?
-Primary product dependency
-Volatility of commodity prices
-Savings gap
-Foreign currency gap
-Capital flight
-Demographic factors
-Debt
-Access to credit
-Infrastructure
-Education/skills
-Absence of properly rights
How does primary product dependency influence growth and development? (Prebisch Singer hypothesis)
● They tend to have a low-income elasticity of demand, which means as people get wealthier, they don’t continue to increase the amount of primary products they buy whereas they are likely to increase their demand for manufactured goods. The Prebisch Singer Hypothesis suggests the long run price of primary goods declines in proportion to manufactured goods, which means those dependent on primary exports will see a fall in their terms of trade. However, in recent years, there has been a rise in the prices of some key commodities, such as food and a fall in prices of some manufactured goods due to the expansion to places like China.
● Some countries have been able to use primary products to develop, for example Saudi Arabia and oil. It is suggested that countries should use primary product revenue to invest in manufacturing etc.
● Not all primary products have a low income elasticity of demand, for example diamonds.
Why is the ‘Dutch-disease’ an issue for primary product dependency?
This is when a country becomes a significant commodity producer in a short amount of time, causing an increase in demand for the currency (to enable people to buy the goods) which pushes its value up. This increases export prices and leads to a reduction in competitiveness of the economy, causing a fall in output in other areas. This occurred for the non-oil sectors in Venezuela and Nigeria.
What are the main issues with primary product dependency?
● Natural disasters can wipe out production of the primary product and so means that farmers are left with no income.
-They are often non-renewable, which means the country will suffer when they run out of the product.
-Dutch-disease concept
What is an example of a nation that suffers from the primary product dependency?
One example of a country that suffers from this is Nigeria. In Nigeria, 90% of export revenue comes from their oil reserves which are extracted from the Niger Delta.
How can the volatility of commodity prices impact growth and development?
● Primary products tend to have inelastic demand and supply curves which means
relatively small changes in demand or supply leads to huge fluctuations in price.
● These large changes in price mean that producers’ income and the country’s earnings are also rapidly fluctuating, making it difficult to plan and carry out long term investment as well as meaning that producers can see their income fall very rapidly, causing poverty.
● When prices of commodities rise for a number of years, there tends to be over-investment in the production of the commodity causing long term risk when the price eventually falls.
How can the savings gap influence growth and development?
● Developing countries have lower incomes and thus they save less. This means there is less money for banks to lend, reducing borrowing and thus reducing investment/consumption. A savings gap is the difference between actual savings and the level of savings needed to achieve a higher growth rate.
● The savings rate in Africa is around 17% of GDP compared to 31% on average for middle income countries. India is another country with a low savings as a share of GDP.
What is the Harrod-Domar model (in relation to savings gaps)
● The Harrod-Domar model suggests savings provide the funds which are borrowed for investment purposes and that growth rates depend on the level of saving and the productivity of investment. It concludes that economic growth depends on the amount of labour and capital and that developing countries have a vast labour supply, so their problems are caused by capital. In order to improve capital, investment is necessary and investment requires savings.
● However, there are problems with this model. Economic growth is not the same as economic development. It is difficult for individuals to save when they have little income and borrowing from overseas causes problems with debt. It is possible that investment could be wasted.
What are foreign currency gaps, and how do they influence growth and development?
-This occurs when exports from a developing country are too low compared to imports to finance the purchase of investment or other goods from overseas required for faster economic growth.
-Ethiopia. In 2018, public debt was around 60% of GDP; most of it in foreign currency so it is possible that they will not have enough foreign currency to repay their debt. It is thought there are only enough currency reserves to pay for a month of imports.
How does capital flight impact growth and development?
● Large amounts of money are taken out of the country, rather than being left there for people to borrow and invest. If money was placed in banks within the country, then credit could be created by banks for consumers and businesses to spend.
● This can occur because of lack of confidence in the country’s stability, to hide it from government authorities or simply for profit repatriation. It can also occur because TNCs who caused the growth take profits back to their origin nation.
● This caused the Argentine economic crisis in 2001.
How can demographic factors influence growth and development?
● Developing countries tend to have higher population growth, which limits development. If population grows by 5%, the economy needs to grow by 5% to even maintain living standards. This means developing countries need to have higher rates of growth to develop than more developed countries would do.
● The high population growth is caused by high birth rates, which increases the number of dependents within a country but does not immediately increase those of working age. It places strains on the education system and leads to youth unemployment.
● The population of Africa is expected to more than double by 2050, complicating efforts to reduce hunger.
How can the Harrod-Domar model be linked to external resources?
Some people suggest a developing country could supplement its savings with injections from abroad (aid, borrowing or FDI). The tiger economies were famous for taking advantage if this.
However, this can also bring issues for the developing nations: aid could have strings attached, borrowing could lead to debt and FDI will likely lead to profits leaving the country.
Who are the tiger economies?
These are a group of economies in South East Asia (Hong Kong, South Korea, Singapore and Taiwan) that enjoyed rapid economic growth in the 1960s.
How can debt influence growth and development?
● During the 1970s and 1980s, developing countries received vast loans from banks in the developed world. Now, they suffer from high levels of interest repayment; sometimes even higher than the loans and aid they receive from developed countries, meaning money is flowing from developing to developed countries.
● This means they have less money to spend on services for their population and they may need to raise taxes, which limits growth and development.
● Borrowing for growth makes sense, just as firms borrow to expand, but the problem occurs when governments take on too much debt and do not spend it well.
How can access to credit and banking influence growth and development?
● Developing countries have limited access to credit and banking compared to developed countries, who have complex systems. This means those in developing countries cannot access funds for investment and they struggle to save for the future.
● Some families may use loan sharks, who give high interest rates and leave individuals permanently in debt.
How can infrastructure influence growth and development?
● In a developed country, there is a complex network of buildings, roads, ports, railways, airports, utilities and electricity cables.
● Low levels of infrastructure make it hard for businesses to trade and set up within the country, for example if there are a lack of roads. It makes their services and production less reliable.
● However, the development of infrastructure can be expensive and tends to conflict with environmental goals.
● India is a good example of country suffering from poor infrastructure. For example, they saw power blackouts in 2012 and this damages their potential tourism industry. About half their roads are not paved and they need to invest around $400bn in the power sector.
What is the demographic transition?
-This is a process which many developed countries have passed through, where by improved health lowers the death rate, and then subsequently the birth rate also falls. This allows for low and stable population growth.
This occurred in England and Wales between 1750 and 2000.
How can education/skills influence growth and development?
● Poor education within these countries means that workers are low skilled, sometimes unable to read and write, so have low levels of productivity.
● Countries like China and South Korea invested heavily in their human capital when they were developing, and this has benefitted them in the long term. Ethiopia suffers from high illiteracy rates at around only 49%, as the need for education is often underestimated, and drop out rates are high to focus on helping with a family farming business.
●However, there is debate about what type of education is needed and problems concerning over-education i.e. if graduates are unable to find graduate level jobs.
