4.3 Flashcards

Question

What are the risks of rapid population growth?

Answer 1

1. A large number of young people entering the labour market creates challenges - not least in providing sufficient jobs in the formal economy to prevent a large increase in youth unemployment. 2. Fast-growing population holds back the annual growth of per capita incomes. Income is spread more thinly across large households which makes it harder to satisfy everyone’s basic needs and wants and can lead to rising malnutrition 3. Rapid population growth puts increasing pressure on the natural environment including demand for water and energy and can also threaten bio-diversity 4. High rates of rural-urban migration can lead to problems associated with urban density such as crime, the spread of disease and increased inequalities of income and wealth.

Answer 2

- It describes the movement of highly skilled or professional people from their own country to another country where they can earn more money. - It can lead to de-population.

Answer 3

1. Loss of human capital – this damages long-run supply-side potential and is a barrier to development 2. Loss of enterprising younger workers who might have started up businesses at home 3. Skills shortages affect HDI outcomes e.g. the emigration of skilled doctors, teachers & engineers 4. Risk of a fall in aggregate demand because of a smaller population 5. Depopulation make the country less attractive to inflows of foreign investment

Answer 4

1. Remittances from emigrants flow back to increase a nation’s gross national income (GNI) 2. People living overseas (the diaspora) may be able to help finance private sector capital projects in the future 3. Acquisition of human capital by working & studying in other countries e.g. learning languages, earning degrees – possibly leading to brain gains if they return to their country of origin 4. May help to offset the risks from rapid natural growth of population such as higher inflation and pressure on the built environment and natural resources.

Answer 5

- External debt is owed to external (overseas) creditors and examples of debt includes government bonds sold to foreign investors and private sector credit borrowed from foreign banks.

Answer 6

1. A government is running a budget deficit and finances this by selling government bonds to overseas creditors 2. A country is running a sizeable current account deficit which is partly funded by borrowing from overseas institutions such as the IMF 3. Households and businesses borrow money in a foreign currency including mortgages and corporate bonds. - Debt in itself is not necessarily a problem if the borrowing is being used to help fund capital investment projects which will ultimately increase a nation’s productive potential and increase trend economic growth.

Answer 7

* Returns on investment might fall short of expectations especially if investment goes on projects not subject to a proper cost-benefit analysis * If a country experiences a depreciation/devaluation of their exchange rate, the real value of the debt will increase making it harder to repay * A recession can make it harder to meet the interest payments on debt since government tax revenues shrink * If international investors become nervous about the ability of a government to repay external debt, then a country may suffer a credit-rating downgrade which will increase the interest rate needed to finance new loans.

Answer 8

- connects people into the formal financial system, making day-to-day living easier and allowing them to build assets, mitigate shocks related to emergencies, illness, or injury, and make productive investments. - It also makes it easier for a government to measure economic activity and collect in tax revenues needed to pay for public services.

Answer 9

* Increase supply costs for businesses – this causes higher prices – therefore hitting real incomes for consumers * Reduces geographical mobility of labour causing higher structural unemployment (a labour market failure) * Damages export competitiveness and limits intra-regional trade (trade within a cluster of countries) * Can make a country less attractive to foreign direct investment (FDI) which might then slow economic growth * Makes an economy vulnerable to climate change / natural disasters such as flooding and earthquakes * Contributes to gender inequality * Have a direct impact on basic human development – e.g. having access to basic water and sanitation services

Answer 10

Human capital is the skill, knowledge, talent, experience and ability of workers. Human capital can be increased through investment in education & training.

Answer 11

- Poor human capital hits labour productivity and ability to harness/adapt to new technologies. Low productivity keeps wages down. Human capital deficiencies are closely linked to malnutrition. Better basic health care and nutrition helps to unlock improved human capital by avoiding brain impairment and the effects of stunted growth.

Answer 12

1.Rights to own land and to establish businesses are seen as crucial for wealth creation e.g. private plots to farm 2. Protection of property rights is a major barrier to corruption 3. Property rights are important to tackle gender inequalities 4. Community ownership / husbandry of natural resources can help overcome threats to eco-systems 5. Laws on patents are important to secure investment in research industries 6. Common rules encourage trade & investment between countries by reducing trade friction costs

Answer 13

Corruption is due to a failure of governing institutions who lack transparency in where tax revenues are coming from and how resources are spent. Corruption is defined broadly as the misuse of public power for private benefit. High levels of corruption damages long term growth & development.

Answer 14

* Deters foreign direct investment by increasing the cost of doing business * Leads to allocative inefficiency / i.e. diverting public resources for private gain, there are numerous extreme examples of extravagant wealth in economically less developed countries * Government decisions are often unduly influenced by lobbying * Contributes to income & wealth inequality and reduced progress in cutting the incidence of extreme poverty * Causes a loss of trust - i.e. a breakdown of social capital * Leads to poorer development outcomes because governments are not collecting sufficient tax revenues.

Answer 15

* Poor governance * Degree of corruption * Civil war and political unrest * The geography of a country e.g. landlocked, mountainous etc

Answer 16

* Fiscal discipline – emphasising greater control of government spending, budget deficits and national debt * Reallocating state spending away from subsidies (e.g. minimum prices to farmers) towards health care, education & infrastructure * Tax reforms – including widening the base of taxation and encouraging lower tax rates to raise enterprise and work incentives as a means of creating wealth * Liberalizing market interest rates – i.e. letting financial markets allocate capital among competing uses * Floating rather than fixed exchange rates – which implies an absence of central bank intervention * Trade liberalisation via reductions in import tariffs and fewer forms of protectionism such as import quotas and other non-tariff barriers * Privatisation – i.e. moving state enterprises into the private sector

Answer 17

- Trade liberalisation involves a country lowering import tariffs and relaxing import quotas and other forms of protectionism. One of the aims of liberalisation is to make an economy more open to trade and investment so that it can then engage more directly in the regional and global economy. Supporters of free trade argue that developing countries can specialise in the goods and services in which they have a comparative advantage.

Answer 18

* Lower prices for consumers / households which then increases their real incomes * Increased competition / lower barriers to entry attracts new firms * Improved efficiency – both allocative & productive * Might affect the real wages of workers in affected industries

Answer 19

* Multiplier effects from higher export sales * Lower inflation from cheaper imports – causing an outward shift of short run aggregate supply * Risk of some structural unemployment / occupational immobility * May lead initially to an increase in the size of a nation’s trade deficit

Answer 20

1. Improved infrastructure especially in power and transport sectors 2. Higher capital intensity / capital deepening i.e. more capital per worker which leads to higher productivity 3. Better training for local workers leading to improved human capital and less risk of structural unemployment 4. Investment grows a country’s export capacity (e.g. via firms attracted into special economic zones) 5. Technology & know-how transfer, promoting diversification of the economy and reducing primary dependence 6. More competition in markets which then lowers prices for consumers and increases their real incomes 7. Creates new jobs leading to higher per capita incomes and increased household savings 8. FDI can promote a shift to higher productivity jobs and high-value added industries

Answer 21

1. Multinationals wield power within host countries especially LEDCs and they can gain favourable laws & regulations 2. Foreign multinationals take advantage of weak laws on anti-competitive practices and environmental protection 3. Multinationals have been criticised for poor working conditions in foreign factories 4. Profits made in an LEDC are often repatriated to the host country 5. Imports of components/capital goods initially have a negative effect on a country’s trade balance 6. Multinationals may only employ local labour in lower skilled jobs

Answer 22

- Attractive rates of corporation tax - Soft loans and tax reliefs/ subsidies. - Trade and investment agreements - Flexible labour force + skilled workers. - Creation of Special Economic Zones. - High quality critical infrastructure - Open capital markets for remitted profits - Attraction of relatively low unit labour costs.

Answer 23

- Subsidies can play an important role in improving (for example) farm incomes which then leads to higher capital investment and supports innovation and improved productivity in the long run. - Subsidies are also a way of encouraging increased production to help overcome the challenges of malnutrition among the poor and they help to generate surpluses for export.

Answer 24

1. Subsidies distort the working of the price mechanism 2. Subsidies can stifle innovation because producers are less reliant on innovation as a way of making more profit 3. Producers / growers can become “subsidy-dependent” in the long run and there is also the risk of corruption syphoning off financial support to those who don’t need it 4. From an environmental point of view, subsidies can lower the incentive for producers to improve efficiency, instead they are rewarded by increasing the intensification of farming which can lead to deforestation, a loss of biodiversity and increased water scarcity. Farmers may overuse fertilisers or pesticides, which can then result in soil degradation which reduces the maximum sustainable yield in the long run

Answer 25

1. A floating exchange rate can be helpful for countries exposed to external economic shocks. For example, Poland operates with a floating currency (the Zloty) inside the EU Single Market. When the global financial crisis erupted in 2007-08 and the wider European economy went into recession, the Polish zloty depreciated heavily against the Euro and the US dollar. This helped the Polish economy stabilise since their exports were now more competitive. In contrast, Greece was locked into the single currency and could not rely on a depreciation to restore some loss competitiveness 2. Floating exchange rates mean that a country’s central bank does not have to intervene to change the currency’s price. This means that they do not have to maintain large reserves of gold and other foreign currencies. 3. Many developing countries have become more open to trade in goods and services and inflows and outflows of investment. Maintaining a floating exchange rate implies that capital controls will not be used to limit the inflow and outflow of currency and this in turn may make a country more attractive to foreign investment 4. Floating currencies are not necessarily volatile ones and allowing market forces to determine the price means that a government/central bank is not using up foreign currency reserves to defend a fixed exchange rate that the market has decided is not sustainable

Answer 26

* A floating currency might be more appropriate for a country with a low trade to GDP ratio since exchange rate fluctuations would have less of an impact on the trade balance and the inflation rate. * We have to consider whether a country has the size and reserves to be able to control their own currency. Many smaller EU nations including the island countries of Cyprus and Malta have chosen to join the single European Currency. * An economy with one dominant trade partner might decide that the advantages of a pegged currency outweigh come of the possible gains from currency flexibility.

Answer 27

1. Micro-credit - the provision of small-scale loans to the poor for example by credit unions 2. Micro-savings – for example, voluntary local savings clubs provided by charities 3. Micro-insurance - especially for people and businesses not traditionally served by commercial insurance businesses - a safety net to prevent people from falling back into extreme poverty 4. Remittance management – managing remittance payments sent from one country to another including for example transfer payments made through mobile phone solutions

Answer 28

- on the grounds that compared to men, they perform better as clients of micro finance institutions and that their participation has more desirable long-term development outcomes. The Grameen Bank approach initially focused on small groups 'lending circles' of largely female entrepreneurs from the poorest level in the society. This became the widely accepted view of what micro finance is. In reality there are thousands of commercial microfinance institutions (MFIs) including some large international operators.

Answer 29

* Helps overcome the savings gap which limits entrepreneurship * Encourages entrepreneurship especially social enterprises * Targeted at women entrepreneurs * High rates of repayment because the system is built on social capital / trust

Answer 30

* High interest rates * Low success rate for new small businesses * Alleged forcible collection of debt in many villages – hard to monitor * Perhaps relatively ineffective compared to the impact of migrant remittances & foreign direct investment

Answer 31

1. Private companies have a profit incentive to cut costs and be more productively efficient and raise efficiency 2. Government gains revenue from the sale of assets and no longer has to support a potentially loss-making industry 3. If a state monopoly is replaced by a number of firms this extra contestability in an industry will lead to lower prices which helps to increase the real incomes of poorer households 4. The competitiveness of the macro economy may also improve especially if privatisation leads to increased investment and benefits from economies of scale. Improved competitiveness will drive higher exports and long run GDP growth.

Answer 32

1. Social objectives are given less importance because privately-owned firms are driven by the profit motive 2. Some activities are best run by the state operating in the public interest because they are strategic parts of the economy e.g. water supply, steel and railways and have the characteristics of a natural monopoly 3. Government loses out on dividends from any future profits 4. Public sector assets are often sold cheaply, and the privatisation process may suffer from corruption 5. Privatisation leads to job losses as firms increase their efficiency – this increases the risk of poverty for those affected 6. Unless privatised corporations are regulated effectively, there is a risk of creating private monopolies who use their market power to increase prices and profits, this can have a regressive effect on the distribution of income.

Answer 33

* Basic (universal) and health care * Accessible & affordable education of good quality * Infrastructure especially in telecommunications, health and transport * Core public goods that the free-market under-provides * Institutions of governance (including judiciary) * Public-private partnerships in supporting urbanization * Smarter regulation e.g. building codes, regulation of monopoly power * Welfare provision to provide a basic social safety net and also encourage saving * Progressive taxation and state spending to reduce inequality of income and wealth

Answer 34

1. Strategies to improve nutrition and reduce the extent of stunted growth among young people. An example is the use of conditional cash transfers: Shombhob, a conditional cash transfer piloted in Bangladesh, has been found to reduce wasting among children aged 10-22 months and improve mothers’ knowledge about the benefits of breastfeeding 2. Other health interventions can also increase school attendance - a famous study in Kenya by economist Esther Duflo found that deworming in childhood reduced school absences while raising wages in adulthood by as much as 20 percent. A project in Nepal to improve basic sanitation led to a measured decline in anaemia among the young 3. Increased investment in primary and secondary schooling - including policies to improve the quality of teaching and access to online education 4. Incentives to attract an inflow of skilled migrant workers and curb ‘brain drains’ of highly qualified people - there are more Sudanese doctors working in London than Sudanese doctors working in Sudan. 5. Investment in training to re-skill people at risk of unemployment from the fast-changing pattern of employment including robotics, automatic and artificial intelligence 6. Cash transfer interventions can increase demand for education especially among the poorest families who must make hugely difficult decisions about how to spend a meagre budget

Answer 35

- Import substitution - erecting trade barriers are designed to protect fledgling domestic industries that have not yet achieved sufficient economies of scale to become cost and price competitive in international markets. The infant industry argument is often used as justification for tariffs that increase the prices of substitute products in strategically important industries 2. Need to raise tax revenues - import duty revenues can be a useful source of tax revenues for developing countries especially when per capita incomes and formal employment is low which then limits the tax take from the domestic economy. 3. Tariffs can be justified as a response to alleged dumping of products into a country i.e. selling at a price below cost. Dumping can have a serious impact on the profits, investment and employment in those industries affected 4. Tariffs might also be a retaliatory response to allegations that a country has used a competitive devaluation of their currency to make their exports more price competitive.

Answer 36

1. Tariffs may protect jobs in some industries e.g. car making but have damaging effects elsewhere because they increase the prices of key imported raw materials, components and capital technologies 2. Revenues raised by tariffs might only be a small percentage of total government revenue and lost jobs in other sectors will diminish the net effect on these revenues 3. There is always the risk of retaliatory action by other countries - a good recent example has been the tit-for-tat trade war developing between the United States and China. 4. Protectionist tariffs risk causing a loss of competition for domestic firms which eventually leads to lower productivity, less innovation and weaker competitiveness 5. Tariffs increase prices for consumers leading to higher inflation, reduced real incomes and an increased risk of poverty for poorer households 6. Protectionist subsidies for domestic firms can cost a government a lot of money leading to an increased budget deficit and rising national debt

Answer 37

* Improve the balance of trade in goods and services / improve the current account position * Reduce the risk of a deflationary recession - a lower currency increases export demand and increases the domestic price level by making imports more expensive * Rebalance the economy away from domestic consumption towards exports and investment * Sell foreign currencies to overseas investors as a way of reducing the size of government debt

Answer 38

* To curb demand-pull inflationary pressures * To reduce the prices of imported capital and technology

Answer 39

- to reduce the volatility of exchange rates. This is because big fluctuations in the external value of a currency can increase investor risk and perhaps damage business confidence. If the risk for example of overseas investor buying a government’s bonds rises, then they may demand a higher interest rate (or yield) on those bonds as compensation. - Managed floating exchange rates might also be used as a tool for a government to restore or improve the price competitiveness of exporters in global markets or perhaps respond to an external economic shock.

Answer 40

- Algeria - Chile - Columbia - Mexico - Ukraine

Answer 41

* Buying up supplies when harvests are plentiful * Selling stocks onto the market when supplies are low - They will be profit making, since they buy up stocks of the product when the price is low and sell them onto the market when the price is high. However, they do not work well in practice, many buffer stock schemes have collapsed, and they can only work effectively for storable commodities.

Answer 42

1. Lower risk of extreme food poverty for poorest consumers 2. More stable incomes and profits for farmers 3. Helps macroeconomic stability / investment 4. Buffer stock ought to be self-financing

Answer 43

1. Buffer stock may not be large enough to change the market price 2. Setting a high price for farmers often causes rising surpluses – i.e. a misallocation of resources 3. High costs of storage and falling quality of product (which might then have to be sold at discounted prices) 4. Many buffer stock schemes fail because of poor administration/corruption

Answer 44

* Strong evaluation involves considering alternative policies to stabilize prices and incomes for farmers * In the long term, investment in capital goods such as irrigation and wider access to affordable insurance can be powerful * So too are policies to reduce dependency on any one particular crop

Answer 45

- A development model of a dual economy, consisting of rural agricultural and urban manufacturing sectors. - Initially labour is employed upon land, which is a fixed resource. Labour is a variable resource and, as more labour is put to work on the land, diminishing marginal returns eventually set in: there may be insufficient tasks for the marginal worker to undertake, resulting in reduced marginal product (output produced by an additional worker) and underemployment. - Urban workers, engaged in manufacturing, tend to produce a higher value of output than their agricultural counterparts. The resultant higher urban wages (Lewis stated that a 30% premium was required) might therefore tempt surplus agricultural workers to migrate to cities and engage in manufacturing activity. High urban profits would encourage firms to expand and hence result in further rural-urban migration.

Answer 46

1. Whilst much manufacturing remains labour-intensive, the rapid adoption of robots and other automated processes can limit the scale of new job opportunities for people moving to urban areas where industries are concentrated 2. Successful manufacturing strategies often have close links back to farming and extractive sectors e.g. developing processing capabilities for farmers who grow fruit. Kenya has established a cut-flower processing industry that employs over 200,000 people and contributes more than $1 billion worth of exports each year 3. Light manufacturing does not always add a great deal of value added to production especially low-level assembly tasks. Countries might do better in the long run if they also invest in building human capital in industries such as research, engineering and design. 4. There are drawbacks from rapid urbanisation especially if a country does not have the infrastructure to cope with high rates of rural-urban migration.

Answer 47

1. Employment creation, tourism is labour intensive industry. 2. Employs a significantly higher % of women helping to increase female labour market participation 3. Export earnings - tourism is a service industry – it helps to generate foreign exchange 4. An important source of diversification for many smaller countries – reducing primary dependency 5. Lifts aggregate demand – possibly creating local and regional income-multiplier effects. 6. Accelerator effects from investment in tourism infrastructure and services such as airlines and telecoms

Answer 48

1. Exploitation of local labour by overseas TNCs. 2. Many workers in tourism are migrants suffering from poor employment conditions such as low wages/long hours 3. Outflow of profits from foreign-owned tourist resorts, many resorts have few locally-owned hotels. 4. All-inclusive deals tend to ignore the local economy 5. Negative externalities from construction projects such as congestion, waste, pressure on the natural environment. 6. Rising property prices makes housing less affordable for local people. 7. Deepening pressures on local cultures from westernisation, the doubtful benefits of slum-tourism + concerns with security and health. 8. Tourism can be a highly cyclical industry vulnerable to global economic and political shocks

Answer 49

One of the driving forces behind the founders of Fair Trade was a desire to correct for multiple market failures in industries for many primary sector commodities. These failures included the effects of monopsony power among transnational food processors and food manufacturers which often led to farmers in some of the world's poorest countries receiving an inequitably low and unsustainable price for their products.

Answer 50

* Guarantee a higher / premium price to certified producers * Achieve greater price stability for growers * Improve production standards. A grower will be able to receive a Fairtrade licence if it can improve working conditions, better pay and guarantees of environmental sustainability.

Answer 51

1. Impact on non-participating farmers: Some claim that by encouraging consumers to buy their products from Fairtrade sources, this cuts demand for farmers in poorer nations not covered by the Fairtrade label thereby worsening the risk of extreme poverty 2. Who captures the gains from Fair-Trade coffee? There is some evidence that a large part of the premium price goes to processors and distributors rather than the farmers themselves. 3. Others argue that the fundamental causes of poverty are not really addressed by Fairtrade. Greater investment needs to be made in raising farm productivity, reducing vulnerability to climate change, and reaching multilateral trade agreements between countries to reduce import tariffs and improve access for poor countries into the markets of rich advanced nations. 4. Other investment might be better targeted at encouraging farmers to establish producer co-operatives of their own and create their own branded products selling direct to consumers

Answer 52

1. Bi-lateral aid: From one country to another 2. Multi-lateral aid: Channelled through international bodies such as the United Nations 3. Project aid: Direct financing of projects for a donor country 4. Technical assistance: Funding of expertise of various types including engineering / medicine 5. Humanitarian aid: Emergency disaster relief, food aid, refugee relief and disaster preparedness 6. Soft loans: A loan made to a country on a concessionary basis that offers a lower rate of interest 7. Tied aid: i.e. projects tied to suppliers in the donor country 8. Debt relief – e.g. cancellation, rescheduling, refinancing of a country’s external debts

Answer 53

1. Helps to overcome the savings gap + aid can help stabilize post-conflict environments and in disaster recovery 2. Project aid can fast-forward investment in critical infrastructure – eventually leading to higher productivity 3. Long-term aid for health and education projects – this builds human capital and stronger social institutions 4. Targeted aid might add around 0.5% to the annual growth rate of the poorest countries - this benefits donor countries too as trade grows.

Answer 54

1. Poor governance - aid might leave the recipient country. It can finance corruption by ruling political elites 2. Lack of transparency – hundreds of $m is spent on aid consultants and developed country non-governmental organisations. 3. Dependency culture – one aid paradox is that aid tends to be most effective where it is needed least – it may harm an entrepreneurial culture 4. Aid may lead to a distortion of market forces and a loss of economic efficiency and might cause higher inflation

Answer 55

* Debt relief involves the cancellation, rescheduling, or refinancing of a nation’s external debts. * Many of the world’s poorest countries have high levels of external debt owed to other governments, institutions such as the IMF and foreign companies, banks and individuals. * The Heavily Indebted Poor Countries Initiative (HIPCI) is an initiative to provide debt relief to heavily indebted low-income countries * Debt relief agreements are often conditional on the host country introducing structural economic reforms.

Answer 56

1. High debt and the interest payments on debt can further impoverish the most vulnerable people in poor countries – debt relief is an appropriate form of aid for countries who lack access to global capital markets 2. Poor countries highly dependent on exports of primary commodities are exposed to global economic shocks which can damage their export revenues and take them further into external debt. There is a moral argument for helping. 3. Debt relief can be made partially conditional on governments introducing economic and social reforms.

Answer 57

1. Moral hazard argument – governments will spend and borrow more – perhaps recklessly – if they know/expect that some of their debts will be written off in the future – this increases the risk of government failure 2. If governments ran better macroeconomic policies e.g. to control inflation and state borrowing, then the interest rates charged on new loans would fall making the repayment of debt less costly.

Answer 58

* Provides grants and low interest loans * Offers policy advice and technical assistance to developing countries * Co-ordinates projects with governments

Answer 59

* The IMF works to foster global monetary cooperation, secure financial stability, facilitate global trade, promote high employment and sustainable economic growth, and reduce poverty around the world * The IMF provides financing to its members when they are suffering economic difficulties * Financial assistance can come in the form of conditional loans or training * Emerging market countries argue that the IMF requires reform given the changing balance of power in the world economy. 1. Promote international monetary co-operation 2. Facilitate the expansion of international trade 3. Provide exchange stability 4. Make resources available to members experiencing balance of payments difficulties

Answer 60

An NGO is any not-for-profit voluntary group – it can operate on a local, regional, or international scale. NGOs often operate on a small scale in developing countries. They frequently work in the areas of environmental improvement, community development, and human rights.