4.3 Emerging And Developing Economies

Question 1

What is economic development and how can you measure it?

Answer 1

Economic development is the sustainable increase in living standards for a country, typically characterised by increases in life span, education levels, & income

There are many measures of economic development

Single indicators e.g. number of doctors/1000 people; infant mortality rate; % of the population with access to clean drinking water

Composite indicators such as the Human Development Index (HDI)

Question 2

What is the HDI

Answer 2

Developed by the United Nations, it is a combination of 3 indicators

Health, as measured by the life expectancy at birth e.g.in 2019 it was 81.2 years in the UK

Education, as measured by a combination of the mean years of schooling that 25 year old’s have received, together with the expected years of schooling for a pre-school child

Income, as measured by the real gross national income per capita at purchasing power parity (ppp)

Each indicator is given equal weighting in the index
The index ranks countries on a score between 0 & 1
The closer to 1, the higher the level of economic development & the better the standard of living
A value of < 0.550 is considered low development e.g. Chad 0.394
A value of 0.550-0.699 is considered medium development e.g. El Salvador 0.673
A value of 0.700-0.799 is considered high development e.g Thailand 0.777
A value ≥ 0.800 is considered very high development e.g. Norway 0.957

Question 3

WHAT ARE THE ADVANTAGES OF HDI?

Answer 3

It is a composite indicator which provides a more useful comparison metric than single indicators do

It incorporates three of the most important metrics for households i.e. health, education & income

It is widely used all over the world which provides an opportunity for meaningful comparisons

It provides a goal for governments to use when developing their policies e.g. it may help identify that the education levels are holding back improvements to the HDI & government policy can target that

It provides citizens with an understanding of how their quality of life compares to other countries

Question 4

What are the disadvantages of using HDI?

Answer 4

It does not measure the inequality that exists as it uses the mean GNI/capita

It does not measure or compare the levels of absolute & relative poverty that exist

For many countries it does not provide useful short-term information as gathering the data required for the calculation is difficult. This means the data often lags reality by several years

Does not differentiate between rates of development progress within a country, difference in development between urban &rural areas. The HDI does not account for income inequality within a country and the impact of inequality in development. BUT HDI can be adjusted for income inequality = income inequality adjusted HDI.

Incomes, schooling, and healthcare’s scores= weighted equally in HDI – argued to be arbitrary esp if it’s clear that a certain area such as healthcare is lacing more than another. Makes It harder to efficiently allocate funds – aid money directed to areas that aren’t at need

HDI only comprising 3 areas= quite narrow in outlook, development consists of multitude of factors such as freedom, equality, poverty alleviation. HDI used alongside Global competitiveness index, Gini coefficient, global poverty index, to fully analyse a country’s development of progress

Question 5

What is the Inequality adjusted Human development index ( IHDI)

Answer 5

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 considering more measures and quality.

Created in 2010 to deal with the lack of information that the HDI provides on inequality

The IHDI will be equal to the HDI value when there is no inequality, but falls below the HDI value as inequality rises

This means that the IHDI measures the level of human development when inequality is accounted for

The difference between the HDI & IHDI can be expressed as a percentage & represents the loss in potential human development due to inequality

It provides greater insight into the differences in human development that exist in a country as opposed to the average human development

Question 6

What is the multidimensional poverty index (MPI)

Answer 6

Launched in 2010 by the Oxford Poverty & Human Development Initiative at the University of Oxford

It measures the complexities of poor people’s lives, individually & collectively, each year

It tracks deprivation across three dimensions & 10 indicators: health (child mortality, nutrition), education (years of schooling, enrolment), & living standards (water, sanitation, electricity, cooking fuel, housing, assets)

It first identifies which of these 10 deprivations each household experiences

Then identifies households as poor if they suffer deprivations across 1/3 or more of the weighted indicators

It can focus in on regions, ethnicities & also any of the three dimensions making it a useful tool for policymakers & non-government organisation (NGOs) working to reduce poverty

Question 7

What are growth and development pros?

Answer 7

Specialising in production and export of primary commodities oil, gas, copper net exports increase- AD increases= economic growth. Developing countries - abundance of primary resources- in high demand from advanced economies in west & emerging markets. Developing countries – exploit a comparative advantage in primary commodities – OC advantage over other countries- using revenues generated from these sales to purchase capital imports.

Consequently: IPF

Income growth:

GNI/capita in developing countries will rise, basic life sustaining goods and services more affordable, lifting people out of absolute poverty. Job prospects in economy will improve – increase in demand encourage domestic firms – Increase output- increasing demand for labour- reducing U/E,= economic development -rising incomes and potentially an improvement in income distributing indicated by Gini coefficient tending towards 0

Profits for firms- relying on primary commodities for growth/ development- increasing rev/ profits for domestic firms in developing economies. Prices of primary comm -been increasing, driven by high demand from emerging markets like china. Firms can afford tech -reduce environmental pollution/ resource depletion= sustainable econ growth and development as capital stock increases.

Fiscal dividend- exporting and depending on rev from primary commod= fiscal div for gov resulting from higher econ growth. Developing countries- increase in net exports allows incomes, output nd expenditure to riseincreasing receipts from income tax, VAT/corp tax. Rev= hypothecation into health, education, literacy rates, life expectancy levels, 2 areas of develop Michael Todaro features at the most sig development factors. Govinfrastructure – roads, bridges- decreasing transport costs- increase efficiency – achieving sustainable devbusinesses access markets, families access to hospitals and schools

Question 8

What are growth and development cons?

Answer 8

C, I,,E

Income inequality- gains from commercial exploitation of rich natural resources – kept by power elites in societies, millions of those who live above resource endowment see little significant improvement in SOL where per capita incomes haven’t increase in line with GDP at all. Power elites – increase wealth and incomes, those stuck in agricultural sector – still living in relative and absolute poverty- in poverty trap. Income inequality dealt with fiscal policy – policies unlikely to succeed in corruption ridden developing economies. Income inequality= worse, SOL fall, natural resources are further depleted. Unsustainable econ growth

Negative externalities- primary commodities – rapid depletion of natural resources, neg ext- excessive air pollution, deforestation, resource degradation. Natural resources are exhaustible- risking developing countries being converted from being resource rich- to poor. When this does happen- export earnings- decline rapidly as export sector is responsive for a high proportion of tax rev- severely deteriorate public finances cutting off one major area of development, gov spending on infrastructure develop – improvement of healthcare and education system

Depleting natural resources and other examples – neg externalities ignored but producers following their own interest. Over production= misallocation of resources and a deadweight loss of welfare, over extraction – reducing economic welfare= burden of future generation- constraint on L/T sustainable development

Government corruption-

gov officials use tax money for inefficient purposed such as political oppression, pocketing money themselves in hidden intnl bank accounts. Key development outcomes will not be promoted at all with a divide between elite and worsening of poverty, huge gov failure= misallocation of resources.

a Inflation- uncontrolled and unbalanced economic growth from demand side can trigger high rates of DPI. More pressure is exerted on existing FOP- increasing price of them and thus COP for business- pass these onto consumers via higher prices. Poverty can persist as purchasing power of individuals increases if incomes do not rise in line with inflation, reducing ability to improve material and non-material SOL

Question 9

What is the evaluation for growth and development?

Answer 9

S, ROG

Growth should be sustainable- future gen benefit from /experience the same econ growth as current gen. E.g., growth without excessive inflationary pressures, significant environ costs and growth with the risk of resource depletion. Effective environmental policy should be enacted and persistent increases in LRAS through supply side policies should be pursued to reduce the risks of inflation conflicts and promote diversification into more valueadded manufacturing sector

For developing countries to achieve true sustainable development via these policies, must be movement towards better and more efficient governance. Includes transparency and accountability to taxpayers – more effective public spending esp on infrastructure and public services such as health and education. Developing countries have high levels of gov fragility High levels of gov corruption and thus gov failure = econ growth = hindered

Role of government = pivotal. S/T whilst demand and success FROM export of primary commodities, gov must ensure tax system in robust, corruption free so full tax rev can be collected = promote development - reduce inequalities may arise from increased growth. Countries that export natural resources experienced faster growth than other economies however HDI does not back this; implying gov promotion of development = ineffective

Gov must act to ensure C.A gains form specialising in primary commodity extraction can be L/T by taxing firms over extracting and risking L/T development. Promote export diversification, sole reliance on export of primary commodities disappear. Subsidising enterprises that produce desired goods and promoting training schemes to provide workers with skills – work in other area, more mobile. L/T solution - promote sust development = a reliance on international trade is still viable, potential to transform a developing economy from unsustainable dependence on export of primary commodities to experiencing L/T gains from continual growth and development

GROWTH IS NECESSARY BUT NIT SUFFIECIENT CONDITION OF DEVELOPMENT (OTHER RESON ABOVE)

Question 10

What is a single measure of development?

Answer 10

GDP/ capital useful to evaluate SOL. A rise in GDP/ capital = rise in SOL- clear indicator of economic prosperity. Link to poverty alleviation, theory, more equal distribution of income. Comparisons w other countries- evaluate effectiveness of one country’s development to another

GDP/ Capita cons:

Only a single measure of development-
changes in income. Big flaw as development= more than income. Health and education= pivotal factors infras, environment, gender equality, freedom. Composite indict HDI- more acc.

Only accounts for the quantity not quality produced, significant negative externalities in production air pollution, resource degradation, depletion, loss of biodiversity. Existence of these reduces SOL

Provides no information regarding the distribution of income increases in GDP may only benefit elite or small part of the population - growth may’ve been generated from one dominant sector = capital intensive- capital owners only see benefit. Corrupt gov = prevent effective distribution of income from higher levels of GDP - increases in tax rev promoting income inequality. Poor may see no improvements in society reducing SOL / abs poverty remaining

The informal economy = official GDP figures are lower than what they should be. Tend to understate development progress. Informal economy= U/E figures being overstated and tax rev collection being lower than what they should be – impacting gov spending for development

Doesn’t consider remittance incomes. income earned abroad won’t be calc in country’s GDP despite its generated by that country’s production. Remittance income boosts SOL yet no account in GDP calc. given increasingly globalised nature of economy, remittances are a sig finance for developing countries- flaw is significant.

Can misguide development progress by included profit made by MNC’s . MNC profit – repatriated back home country not used to inc SOL in country its located. MNCs may impose poor working condition and very low pay upon workers, inc incomes for managers, directors and shareholders. MNCs sig inc real GDP/ capita w/o noticeable impact on SOL and development

Question 11

What is primary product dependency and how does this influence growth and development?

Answer 11

PP,S,F,C,B,D, NORMAL

Primary products include agriculture, mining etc. A large amount of most developing country’s economic activity is based on a primary product.

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

Low-income elasticity of demand. The prebisch singer hypothesis suggests the L/R price of primary goods declines in proportion to manufactured goods, which means those dependent on primary exports will see a fall in their TOT. 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. PREBISHC SINGER HYPOTHESIS FULL- China will also face declining terms of trade. The prebishc singer hypothesis states primary products price will fall in comparison to manufactured goods due to them having more low income elasticity of demand. This is due to the fact when incomes rise we are more likely to buy manufactured gods compared to primary products and this decling terms of trade means people in chile will be able to import comparitively less than what they could before meaning sol of matieral goods decreases. However, this problem may be insignificant for chile compared to other countries as extract say they have strengths in tourism and these goods re elastic income elasticities of demand therefore the terms of trade declining may not worsen as much as anticipated,

Resource curse Prebisch singer hypothesis- constraint on growth. Worsens TOT

Dutch disease- country becomes significant commodity producer in S/R causing an increase in demand for the currency – pushes its value up increases export prices= reduction in comp of economy= fall in output.

1960’s Netherlands exporting lots of gas, manufacturing products- less price competitive

In 2022 copper exports from Zambia accounted for 70% of their total exports & primary products in excess of 90%. They are suffering from over-specialisation

Primary products tend to have a very low-income elasticity of demand (YED). As world income rises, there is a less than proportional increase in demand

This means that there is limited scope to continue increasing demand

Primary products have very little added value
Exporting manufactured products raises the added value, incomes & profits

Question 12

What is volatility of commodity prices and how does this influence growth and development?

Answer 12

Due to the inelastic nature of both the demand & supply of commodities, small changes in demand or supply can lead to large changes in price

In 2020, 25% of Bolivia’s GDP was generated by exports. Commodities accounted for 60% of its exports

When commodity prices rise, GDP rises - & vice versa

A more diversified range of exports prevents this

Question 13

What is the savings gap?

Answer 13

The Harrod-Domar model identified the following benefits of increased savings
Increased savings → increased investment → higher capital stock → higher economic growth → increased savings

Based on this, any intervention (foreign or governmental) to increase the capital stock in an economy will lead to growth

There are many criticisms of the model including

It does not account for many other factors such as labour productivity, corruption, technological innovation

It was created based on data from wealthier industrialising nations as opposed to very poor undeveloped countries

It focused only on physical investment & ignored other types such as investment in human capital (labour)

Developing countries- lower incomes= save less. Savings gap= difference between actual savings and the level of savings needed to achieve a higher growth rate.

Poor have a higher MPC income. Lack of funds for financial insertions to lend for business investment

Harrod-Domar model suggests savings provide funds which are borrowed for investment purposes and that growth rates depend on level of saving/ productivity of investment. Economic growth depends on amount of labour and capital and that developing countries have a vast labour supply, problems are caused by capital. To improve capital, investment is necessary, and investment requires savings.

EV:

Economic growth is not the same as economic development- difficult for individuals to save when they have little income and borrowing from overseas causes problems with debt- investment could be wasted.

Question 14

What is the foreign currency gap?

Answer 14

Value of current account deficit larger than value of capital inflows

a foreign currency gap refers to a situation where a country’s expenditures in foreign currency, such as payments for imports or servicing foreign debt, exceed its foreign currency earnings from exports or other sources, such as foreign investment or remittances.

Foreign currency gaps develop for a number of reasons

Oil importing countries have to pay more (reserves decrease) when world oil prices rise whereas oil exporting countries receive less (less flowing in) when world oil prices fall

Large international debt payments may require continual outflows of currency

Capital flight due to uncertainty or sanctions
This means that central banks are forced to use their reserves to buy vital imports

Developing a diversified, healthy export market prevents foreign currency gaps from developing

Question 15

What is capital flight?

Answer 15

Occurs when money or assets rapidly leave a country

This may happen due to political upheaval, economic sanctions, war, or changes to government policy (e.g. interest rates)

Sanctions applied to Russia in 2022 resulted in $75 billions of capital outflows

Capital flight reduces the money available for investment, reducing growth & development

Rich tend to save money abroad due to higher rates of interest and more stable foreign currency providing lucrative returns. Outflow= capital flight

Outflows of money taken out of country rather than being invested. If placed in banks, credit could be created for consumers and businesses to spend

Where aid is given to elites or corruption

Question 16

What are demographic factors?

Answer 16

Dependency ratio- The ratio of the number of dependents (children & pensioners) to the total working age population

If the dependency ratio is high it means there is less money available for savings & investment

Many developing countries have high dependency ratios

Population -impact the growth and development of a country. Link between keeping birth rates down and fighting hunger, poverty and environmental damage.

Rapid population growth - complicated efforts to reduce poverty and eliminate hunger in Africa.

Question 17

What is access to credit and banking?

Answer 17

Developed country- sophisticated banking system

Developing countries = limited access to credit and banking- cannot access funds for investment and struggle to save = may use loan sharks- high interest rates, leave individuals permanently in debt.

Financial institutions enable individuals & firms to borrow money which can be used for investment or to generate growth

A lack of financial institutions prevents this from happening

Question 18

How does infrastructure influence growth and development?

Answer 18

Good infrastructure reduces business costs & attracts foreign direct investment

Some developing countries have such poor infrastructure that it makes it difficult to generate economic activity

This is one reason why China has invested so heavily in infrastructure projects in Asia & Africa as it unlocks economic potential

Question 19

How does education and skills impact growth and development?

Answer 19

Investing in this supply-side policy increases the potential output of the country (shifts the production possibility frontier outwards)

Higher education/skill levels → higher human capital → increased productivity → higher output → higher income

Question 20

What is absence of property rights?

Answer 20

Property rights - individuals are allowed to own and decide what happens to certain resources. A lack of rights mean that individuals and businesses cannot use the law to protect their assets= reduced investment, unwilling to buy machinery, build factories or establish brands.

The loss of property rights in Zimbabwe led to economic collapse.

In many countries, property is the main household asset which can be used to secure loans or generate income

A lack of property rights in some developing countries prevents this from happening

Question 21

What are non economic factors affecting growth and development?

Answer 21

Corruption: this is a major problem in many countries. Often money intended for investment is siphoned off by corrupt politicians resulting in a lower level of investment. Corruption also diverts funds to certain groups who have bribed or lobbied officials (e.g. multinational firms) resulting in projects that deliver a low level of growth & development

Poor Governance: leads to inefficient use of resources & poor decision-making. It may also result in laws/regulation which directly inhibit growth & development

Wars: conflict destroys infrastructure, disrupts supply chains & often reduces the post war supply of labour. Conflict shifts the production possibility curve inwards

Political instability: if governments keep changing, it results in constantly changing policies & priorities. It also reduces confidence in the economy & international investors are slower to invest as they are fearful of losing their investment

Geography: it is harder for landlocked countries to generate economic growth. Often transportation & administration costs are higher than those with access to ports, which increases the costs of production & decreases international competitiveness. Natural terrain can also be a limiting factor e.g the arid, mountainous terrain of Pakistan

Question 22

What are sources of development and barriers to development

Answer 22

Improved education can directly improve several development indicators e.g. Adult literacy, enrolment rates. Education can empower women by providing job opportunities and boost health levels through greater understanding of debt, sanitation and disease prevention

Barriers to education for development

Funding.- Indebted gov in developing countries lack funds to provide education free or at an affordable price, reducing access and availability. Even where school do exist, quality, equipment are poor, class sizes may not be adequate to ensure high class education to improve development outcomes.

Income inequality. Rural households with lower incomes than urban counterparts may be unable to afford education. Education is privatised in developing countries. Underdeveloped infrastructure- difficult or time consuming to get to school, limiting access to schooling and development progress.

Culture of child labour. Developing countries age 10= potential income earners. Uneducated parents don’t understand value of education, L/T poverty cycle. Significant barrier to female education, gender equality, empowerment.

2.Healthcare.

Healthcare outcomes - improved through greater number of hospitals, doctors, and nurses. Equipment and vaccination- quality and quantity as well. Health indicators life expectancy/ infant maternal mortality. Productivity, incomes, and quality of life

Barriers to healthcare for development:

§

Indebted govt lack funds to provide universal, free healthcare.

Rural households with lower incomes may be unable to afford healthcare. Significant inequalities

3.Infrastructure.

Essential facilities and services necessary for economic activity to take place such as roads, airports, railways, water systems. Improvements in transport infrastructure make it easier for individuals to access jobs further afield. Families to access school, hospitals businesses. Also reduces costs of production as transporting goods becomes quicker and cheaper= greater profitability, investment, and income growth. Water treatment can help prevent spread of disease

Barriers to infrastructure for development:

Govt lack funds to provide adequate infrastructure. Taxation rev may be limited due to corruption, tax incentives or underdeveloped systems to monitor tax evasion. Only way to access funds is by borrowing in capital markets= excessive debts. Public private partnership can overcome this

4. Political stability. Stable govts will work for the wellbeing and betterment of citizen’s pursuing policies to help alleviate poverty and create jobs. Confidence in gov promotes domestic investment, FDI and aid money

Barriers to political stability for development:

5.

Govt corruption and conflict. Corruption Is when gov officials use tax money for inefficient purposes such as political oppression. Key development outcomes won’t be promoted at all – divide between rich elites and worsening of poverty at low end= huge gov failure and misallocation of resources. Conflict and corruption detracts FDI, trade and aid hindering econ growth and hampering development

Taxation

Barriers to taxation for development

Tax exemptions.- To attract MNCs into the developing country and to encourage domestic firms to stay and produce locally, developing country govts often provide tax exemption’s reducing the fiscal reward of commercial activity and thus development spend capabilities.

Corrupt govt - gov officials use tax money for inefficient purposes such as political oppression. Key development outcomes won’t be promoted at all – divide between rich elites and worsening of poverty at low end= huge gov failure and misallocation of resources

Inefficient govts will not have developed system to collect tax rev. For taxation to be monitored for masses a means of digital payment is necessary through bank accounts. In cash dominant developing countries this doesn’t exist reducing fiscal amount. Tax rev is insignificant to fund large scale infrastructure, health and education projects

Greater role of the WTO. Significant reduction in tariffs and thus tariff revenues. Impacted developing countries the most as heavily dependent trading economies. Tariff revenues are easy to collect and generate large sums for gov. gov development spending has taken a hit.

Question 23

What is micro finance?

Answer 23

Micro finance- the provision of loans at a low interest to small scale entrepreneurs in a developing country

It is a free market oriented strategy

Pros:

Microfinance can break the growth and development poverty cycles in developing countries- increasing investment and profits – thus incomes of small-scale entrepreneurs; incomes can then increase material and nonmaterial SOL- ability to access health and education

Microfinance can fill the savings gap in developing countries – means to gain finance for small businesses to grow- become more productive by buying capital machinery. Profitability therefore increases – increases incomes – families access better standards of education, healthcare, increasing development.

Microfinance can alleviate poverty and create jobs for others. As profits and incomes increase, need to hire more workers- derived demand from the growth of their business. Not only is income rising and poverty alleviated for more entrepreneurs and their families but as jobs are given to others in the community, other family livelihoods improve, and widespread poverty can be alleviated

Microfinance provides a means to finance – official lenders may reject riskier small-scale entrepreneur’s – more capital machinery= boost productivity. Such loans= low interest – paid back over long period of time. Maximum profit and income growth without pressure of having to pay back debts within short period of time.

Microfinance schemes can empower women.
Many small-scale business ventures are started by women who need finance to grow and develop their business. Women make profits, earn incomes become leaders- inspiring more women. SOL increases

Cons:

Presumption of microfinance= every business venture= successful = not the case. Businesses do fail, individuals with very low incomes will have debts to repay – cannot afford- trapping themselves into poverty

Evaluation. To overcome this- microfinance loans are usually issued with a mentor or regular meeting providing guidance and support to make business profitable enough the loan can be paid back. Tend to be given to groups rather than individuals.

Large risk that microfinance institutions become profit motivated rather than being development promotion and alleviating poverty. I/R charged could become exorbitant and repayment periods – shorter- pressure on entrepreneurs to repay loans. Recipients face losing all assets- reducing SOL and causing absolute povertybarrier to growth and develop

Temptation for individuals on low incomes who receive microfinance loans to use money to better SOL of family rather than invest in business. Only improve Short term standards of living and worsen long term position if loan cannot be paid back. Invested into informal economy

Question 24

What are market oriented strategies?

Answer 24

Market-orientated strategies are strategies that create the conditions for private individuals & firms to pursue economic activity with the aim of maximising profit

Trade liberalisation- More trade increases output, employment & incomes.

FDI- More FDI increases output, employment & income

Subsidy removal- Subsidy removal can increase competition, efficiency, employment, profits & income

Floating exchange rate systems- Appreciation can generate higher incomes as the cost of imported raw materials reduces possibly leading to higher income

Micro finance- An extremely successful policy in many countries, especially Bangladesh. Microfinance helps to break the poverty cycle

Privatisation- May increase competition leading to an increase in output, employment & incomes

Question 25

What are trade and development pros

Answer 25

Trade, growth and living standards.- Trade allows developing countries to specialise in primary commod. Developing C= exploit comparative adv in primary commod- where they have an OC adv, using revenues generated from these sales to purchase capital imports. Net exp in these economies inc thus inc AD = inc in econ growth. GNI/capita in developing countries will rise, basic life sustaining goods and services more affordable, lifting people out of absolute poverty. Job prospects in economy will improve – increase in demand – encourage domestic firms – Increase output- increasing demand for labour- reducing U/E,= economic development –

Trade, growth and Fiscal dividend- exporting and depending on rev from primary commod= fiscal div for gov resulting from higher econ growth. Developing countries- increase in net exports allows incomes, output nd expenditure to rise- increasing receipts from income tax, VAT/corp tax. Rev= hypothecation into health, education, literacy rates, life expectancy levels, 2 areas of develop Michael Todaro features at the most sig development factors. Gov- infrastructure – roads, bridges- decreasing transport costs- increase efficiency achieving sustainable dev- businesses access markets, families access to hospitals and school

Trade, technology transfer and development- Trades allows for a faster rate of technological transfer – increase market size and openness to production methods across the world provides easier access for developing country producers to develop new tech= better quality products, satisfying local and foreign consumers – firms move towards more efficient, low cost capital intensive production consequently, developing countries move away from a dependence of primary commodities, breaking their dualistic economic structures, developing a strong manufacturing base – future growth and develop can be achieved at a faster rate- inc incomes and job opp

Relying on primary commod for growth and develop – inc revenues and profits for domestic firms- successful strategy for developing countries in recent years = prices of primary commod increasing, driven by high demand from booming emerging markets (china). Firms -afford clean technology, reduce level of environ pollution and resource depletion = sustainable econ growth and develop in future as capital stock is added to. This reduces the neg externalities of production= less divergence between MSC and MPC of production= L/T benefit - productive capacity inc -new capital boosting L/T sustainable growth without inflationary pressure= future inc in AD from export of primary commod

Export of primary commod (high prices) and terms of trade improvements- exporting commod at high prices brings an improvement in commodity exports TOT- benefiting nations to import essential raw mat and capital equipment like new tech= reduce poverty rates = provide needed diversification boost into manu sectors reduce risks of unsustainability

Question 26

What are trade and devlopment cons?

Answer 26

Reliance on overseas demand- solely relying on international trade for develop, economies in developing countries become largely dependent on advanced nations for export demand- problem as shocks or lack of growth in these economies may scupper development in developing economies with export demand and revenues reducing. Fall in demand = reduce employment and incomes per capita= constraining develop through worsening of material SOL

Resource depletion and neg environ impacts. Comp adv gains may be lost over time if natural resources are depleted. Developing C have inflexible labour forces, they’re heavily specialised in extraction and production of primary commod- loss of this CA – sever L/T, structural U/E – constraint on econ develop. Workers find it difficult to find work= occupationally immobile, lacking key skills- inc poverty and income inequality negating any prior develop progress

High volatility of commodity prices. Reliance on primary commod = large fluctuation in export rev, tax receipts and FDI inflows. Price of commod- inelastic nature of both demand and supply = supply or demand shocks =price fluc. Esp damaging if prices fall. Exp rev and profits of commod producers and wages of employees fall, reducing Investment and widening income inequality - GNI declines. Export sectors contribute high proportion of tax receipts, role of gov in alleviating poverty and income inequalities = reduces. Damaging mostly for developing economies – detract FDI- due to falling prices. Inc U/E = reduce development of major infras proj= reduce productivity.

Problems of inefficient, corrupt governance: Many gains form commercial exploitation of rich natural resources are kept by power elites in societies and millions of those who live above resource endowment- see little sig improvement in SOL. Indicating not only are power elites inc wealth and incomes – those stuck in agricultural sec live in absolute and relative pov- poverty trap. This could be dealt with using fiscal policy spreading income distribution through transfer payments- unlikely to success in corruption ridden developing economies. Income inequality worsens, SOL falls as resources are depleted. Unsustainable econ growth.

International protectionism: tariff and quota barriers = reduced, greater spread of subsidies in agriculture = detriment of developing countries reducing the connection between trade lib, econ growth and devlopmnt. WTO= successful in increasing free trade in manu and services sectors- developed countries are dominant whereas for poorer countries still reliant on agricultural sec for their exports and growth- much more work is needed to level the field – ensure developing C experience benefits of trade for development

Declining terms of trades:. The Prebisch-Singer hypothesis states that developing countries reliant on primary commod for growth and development - fall into a poverty trap in L/R suffer a decline in their terms of tradecommodity prices over time tend not to rise as fast as prices of imported capital/ manu goods. Developing economies have to export more primary commod to afford the same level of imported capital goods, trapping countries at a low level or development still highly dependent on the primary sector with falling purchasing power from export revenues.

Question 27

What is the evaluation for trade and development?

Answer 27

Role of government is crucial – ensure tax rev are collected effectively and used in way that promotes development outcomes inclusively to fight poverty. Infra development is pivotal for develop countries to realise enormous benefits of trade for develop – esp ensuring ports, rail and road infra is suitable to deal with demands of international trade. Gov has key role to play in enacting policy to reduce environ impact of trade and primary commod extraction- reducing negative externalities to promote sustainable develop.

Primary commodity dependence

– S/R benefits BUT L/T can trap a country in poverty – hence need for export diversification to overcome what can become a resource curse. Again can be a role for Gov in promoting export diversification through subsidising infant industries in manu or providing training schemes – allow workers access to such industries.

Question 28

What is FDI and what are the reasons for FDI in a developing country?

Answer 28

FDI- When MNCs set up businesses and invest in physical capital in a country that is not their own

Reasons for FDI in a developing country:

Developing country may be rich in natural resources – help a MNC by Increasing, profits through export but also by reducing costs of production in their own country- send resources back home once extracted.

MNC’s may be looking to tap into new market opportunities. Developing countries= large pop and rising income growth- MNC’s can expand and inc global market presence. Locating directly in upcoming developing count, MNC’s have greatest chance to access a large number of new potential customers

A developing country with a stable gov= breed confidence in MNC’s to invest. Developing C= potential to grow and develop quickly- centralised support from accountable, transparent and corruption free govt MNC’s know to trust policy making and ease of doing business if gov fulfil these characteristics incentivising FDI.

Tax incentives could spur MNC’s to invest in a developing country- form of corp tax reductions, VAT exemptions, tariff free access to raw mat. This reduces costs of production for MNC’s providing profit incentive to operate there

Developing countries – abundant low cost of labour for MNC’s to use to bolster production. Gov don’t impose labour laws over min wages or working conditions allowing MNC’s to produce at a very low cost in developing countries without large productivity sacrifice- inc profitability

Governments in developing countries don’t impose strict, anti-business regulation and red tape. Environmental policy, planning laws, and employment law tend to be much more lenient or non-existent providing more business friendly environ with lower costs of production for MNC’s to operate and make large profits incentivising FDI

Question 29

What are the pros of FDI?-

Answer 29

Direct injection into CFI= inc AD and S/T economic growth. FDI inc L/R econ growth and quantity and quality of capital stock in the economy increases. GNI/capita in developing countries will rise- basic life sustaining goods and services more affordable, lifting people out of absolute poverty. Job prospects in economy will improve increase in demand – encourage domestic firms – Increase output- increasing demand for labour- reducing U/E,= economic development -rising incomes and potentially an improvement in income distributing indicated by Gini coefficient tending towards

FDI can produce fiscal dividend for govts resulting from business profitability and economic growth. increasing receipts from income tax, VAT/corp tax. Rev= hypothecation into health, education, literacy rates, life expectancy levels, 2 areas of develop Michael Todaro features at the most sig development factors. Gov- infrastructure roads, bridges- decreasing transport costs- increase efficiency – achieving sustainable dev- businesses access markets, families access to hospitals and schools

When MNCs invest in a developing country tech, skills and expertise are transferred. Capital machinery and labour can be brought into country or specialist workers train local workers – improving skills and implement tech advances. Inc productivity, profitability inc, and incomes, SOL inc.

MNCs directly improve infrastructure in a developing country building roads, rail, ports, electricity pylons, and dams necessary for business to succeed. Such infrastructure develop- is to betterment of developing country reducing COP for all businesses- improving access to jobs, schools, hosp, -promoting development outcomes

FDI can improve BOP for a developing country.
An inc In FDI – improve financial acc on BOP – easier for developing countries to fund C.A deficits. Reduces need to issue debt i.e. borrow to fund C.A def. boost exp and improve c.a position- sustainable growth and development over time.

Question 30

What are the cons/eval for fdi?

Answer 30

Employment from FDI may be lower than expected and S/T in nature. MNCs bring workers from own country instead of employing locals to form the majority workforce in the developing country. Employment may be S/T if MNCS strip resources and leave once own agenda - satisfied. Even worse is if MNCs bring about replacing technology reducing job opportunities from FDI. Absolute poverty, low incomes can persist with FDI inc econ growth but not necessarily SOL

Tax revenue collected could be lower than expected. To attract MNCs into developing county, tax reduction or exemptions are given or MNCs engage in tax avoidance. Fiscal dividend to gov will be smaller – reducing hypothecate on infrastructure, health/ ed – development outcomes won’t be attained

Uncontrolled FDI- rapid depletion of natural resource and other neg externalities in production – excessive air pollution, deforestation, resource degradation and loss of biodiversity. Resource depletion – risk developing countries being converted from resource rich – poor

Once more depleting natural resources = negative externalities ignored by MNCs who follow their own self-interest. There is an over-production of natural resources- allocative inefficiency- welfare loss for society burdening future gen - constraining L/T sustainable development

MNCs may have too much power over a developing country gov. This is because of their size, tax revenue potential and growth/employment boosting capabilities- may Influence policy decisions that favour themselves e.g. loosening environ and implementing deregulation hiring and firing regulation that may not be in the interests of development in developing country

Question 31

How do market oriented strategies impact growth and development?

Answer 31

Promotion of FDI

: FDI is the flow of capital from one country to another, to gain a lasting interest in an enterprise in the foreign country. Helps create employment, encourage innovation of technology -promote L/T sustainable growth.

provides LEDCs with funds to invest and develop, helping to overcome the savings gap. It allows a transfer of knowledge, bringing production and management techniques which help to improve labour productivity.

However, they often repatriate their profits and exploit the workers, by paying low wages and offering poor conditions. The country may suffer from externalities

Removal of government subsidies: Govt subsidies could distort price signals by distorting the free market mechanism. Free market economist- could lead to govt failure- inefficient allocation of resources - market mechanism is not able to act freely. It also has a negative effect on the govt budget and could cause excessive debts.

However, they can be an effective way to minimise absolute poverty and ensure a minimum SOL. Removing the subsidies can be politically unpopular and some govts have even been thrown out for attempting to do so.

Floating exchange rate systems:

The value of the exchange rate in a floating system is determined by the forces of supply and demand. The govt does not have to worry about gold and foreign currency reserves. However, the currency will be volatile and this will make it difficult for importers and exporters.

Microfinance schemes:

aim to give poor and near-poor households permanent access to a range of financial services , including loans, savings, insurance and fund transfers. It is used to refer to loans from providers known as microfinance institutions (MFI) who deliver small loans to unsalaried borrowers, such as ‘Opportunity’.

Privatisation:

Assets are transferred from the public sector to the private sector.

Govt sells a firm so it is no longer in their control. FM economist argue that the private sector gives firms incentives to operate efficiently, which increases economic welfare. This is because firms operating on the free market have a profit incentive, whilst nationalised firms do not.

Firms have to produce the goods and services consumers want as they are on the free market. This increases allocative efficiency and might mean goods and services are of a higher quality. By selling the asset, revenue is raised for the govt.

However, this is only a one-off payment. It is important that it is not privatised as a monopoly.

Question 32

What are the pros of market based development policies?

Answer 32

More efficient allocation of resources -markets are left to run without hindrance. Can allocate scarce resources at the socially optimum level of output achieving allocative efficiency This means that Individuals in society can purchase the goods/services they demand at low prices with high choice in a competitive economy. There would be no surpluses, shortages, welfare losses due to gov intvn in market, improving well-being and living standards

Market based policies are much more successful in achieving L/T sustained and sustainable growth through trade and FDI. Globalised economy, and countries that tend to have abundant natural resources for trade, growth rates are larger and sustained over the L/T creating huge fiscal revenues for the gov to then use to fund essential public services and infrastructure for development.

Less role for govt- less chance of corruption, red tape, bureaucracy and govt failure. Govt intervention -promote further misallocation of resources gov failure- through unintended consequences. More stable environment = trade, domestic investment and FDI. Country more likely receive targeted aid =accelerate development progress.

Profit max is pursued- incentives in market economy are to make profit, drive out waste in business, reduce costs and prices, promote comp, improve quality and see consumers needs are met. Profit and development; tech improvements, labour productivity and diversification can only improve when tech and capital quality improve.

Question 33

What are the cons of market based policies?

Answer 33

Infrastructure will not be fully provided- transport infra = public goods- private firms lack incentive to supply without profit motive- pillar of development will be lacking limiting business efficiency, inc costs of production and reducing access to schools and hospitals for individuals

Free market policies tend to encourage the development of cities and migration from rural to urban areas to access jobs and other services- increases gap between rural - urban areas- raising poverty levels in rural areas with little income change- India and china. Driver of income inequality despite rapid per capita growth rates

There will not be adequate provision of healthcare and education- merit goods with positive externalities= under consumed/ under provided. Prices to access private healthcare & education excluding many families In develop countries. Health & education development outcome= not met if FM policies enacted with little gov intvntn

Although free market approach may lead to economic growth in L/R there may be S/R costs to those on the lowest incomes. U/E can initially rise due to privatisation and deregulation of hiring and firing laws. Prices can rise if price ceilings and subsidies are taken away. If product and health safety standards are deregulated alongside diminished provision of public services- poorest in society will be hit hardest more than higher income householdsincome inequality. Privatisation, deregulation and trade lib- can cause this in S/R

International protectionism: tariff and quota barriers = reduced, greater spread of subsidies in agriculture = detriment of developing countries reducing the connection between trade lib, econ growth and devlopmnt. If IP does exist in areas a developing country wants to specialise and trade- govt intvn =required to allow industry to grow, develop E.O.S and compete internationally. Free market approaches – simply disadv local producers.

Promoting free markets and business= rapid depletion of natural resources and neg externalities in production excessive air pollution, deforestation, resources degradation and loss of biodiversity. Resource depletion- risk developing countries being converted from resource rich – resource poor

Neg externalities ignored by MNC’s following self-interests. Over production of natural resources= allocative inefficiency, welfare loss for society burdening future gen/ constraining L/T sustainable development

Question 34

What are interventionist strategies?

Answer 34

Interventionist strategies are put in place by governments to correct the failings of the free market & promote the welfare/development of its citizens

HUMAN CAPITAL
PROTECNOSM
MANAGED EXCHANGE RATES
INFRASTRCUTRE DEVELOPMENT
PROMOTING JOINT VENTURES WIHT GLOBAL COMPANIES
BUFFER STOCK SCHEMES

Question 35

Explain human capital

Answer 35

Development of Human Capital:

developing human capital, the skills base in the economy would improve productivity more advanced technology to be used- lower unit costs- inc exports.

Businesses struggle to expand where there are skills shortages -limits innovation. Developing human capital, country can move production from primary products, to manufactured goods and to services= earn them more overcoming primary product dependency

Better education= improves quality of life- difficult to do and is expensive. China and South Korea- developed human cap to develop

Question 36

Explain protectionism

Answer 36

This can intervene in natural market forces which lower wage rates. Protecting employees can lead to higher levels of incom

Protectionism: Import substitution industrialisation (ISI) Increase growth, inc incomes, job creation- development. L/T breaking away from over-dependence of primary products moving into manufacturing, higher tech

Benefits:

§ Use protectionist policy like tariffs to put tariffs on imported manufactured goods to allow domestic industries to grow more lucrative forms of development

§ Protects domestic jobs, allowing a job industry to grow

§ Protects economy from foreign influence and potential dominance of MNC’s. restrict yourself from their influence on policy making

§ Reduce trade defi- increase AD

Disadvantages:

§ § §

Short run job creation vs L/R restrict growth. Restricting size of markets which hinder L/T growth and U/E if these industries cannot compete

Loss of comparative adv gains, lack of efficiency- consumers pay higher prices, specialisation gains are lots and benefits from overseas are lost. Domestic producers suffer from lack of comp- allocative eff- dec

Tariffs = regressive – damaging to those on low and fixed inc

Question 37

Explain managed exchange rates

Answer 37

In a floating exchange rate mechanism, rising exports will lead to currency appreciation which, in time, will lead to a slowdown or fall in exports. Managing currency prevents appreciation & a slowdown in exports leading to long periods of growing income

Currency – fixed against number of diff exchange rates

§ Managed exchange rate systems combine the characteristics of fixed and floating exchange rate systems. The currency fluctuates, but it does not float on a fully free market. Central bank of the country buys and sells currencies to try and influence their exchange rate- more stability but requires less intervention, reduces volatility

§ High E/R- essential products = price within country is low, reduces poverty if goods are consumer goods and encourages inv if they’re capital. Low E/R for other imports= price of these goods within country is higher, discouraging imports encouraging to buy from domestic

§ Fail to work black markets in foreign exchange- destabilise system, corruption

Question 38

Explain infrastructure development

Answer 38

Developing infrastructure reduces the cost of business & makes economic activity easier. This increases FDI, output, employment & income

Higher supply costs delay businesses - reduces the mobility of labour. Infrastructure -positive social benefits, govt should provide it. Infrastructure= free rider problem and high capital costs- unlikely private sector will develop it

However, may not have the funds to provide infrastructure and projects often suffer from bribery and corruption. The project may cause environmental damage. Some argue that intermediate technology, which uses local materials and can be fixed locally, is better than large scale infrastructure.

Question 39

Explain promoting joint ventures with global companies

Answer 39

A partnership is formed between two firms based in multiple countries. Joint ventures open up new markets for small firms- distribute their products to customers= saves them time and funds. Spreads their risk, which is important in industries where developing a product is expensive. They have all the benefits of FDI, without the negatives of exploitation and some of the profits remain in the country. Prevents reptriation

Some countries (e.g. India) block foreign ownership of firms (FDI). Joint ventures (JV’s) are a way that firms can get around that. JV’s can increase trade, output, employment & incomes e.g Tata Starbucks allows Starbucks to sell their product through an Indian global steel giant, Tata

Question 40

Explain buffer stock schemes

Answer 40

Gov imposes both a maximum and minimum price for goods, buying up stocks = excess supply. Excess demand= Buying up stock. Self-financing

In the agriculture market, govts might intervene with a buffer stock system to reduce price volatility. Govts buy up harvests during surpluses and then sell the goods onto the market when supplies are low.

Stabilises prices- encourages investment- producers plan L/T- kept from falling into absolute poverty- prevents sharp rises in prices, consumers can afford goods- can help solve issues of primary product dependency

However, historically, these have been unsuccessful. It helps incomes of farmers to remain stable, because fluctuations in the market are reduced and it increases consumer welfare by ensuring prices are not in excess.

However, govt may not have financial resources to buy stock or storage. Inefficiency suppliers produce as much as they know gov will buy it at whatever price

Evaluation:

§ § § § § §

Not common

Large amount of capital is required to hold stock, carries an opportunity cost whereby capital could’ve been spent elsewhere more productively. High admin cost

Minimum price is often set too high: S/T- good for producers. L/R lose revenue and become inefficient

Requires stocks to go up and down if they keep rising then the scheme will run out of money and if keep falling scheme will run out.

Excess stock= sell it of cheaply to other developing countries inhibiting the growth and devlopm of other countries

If scheme operating at a loss- tax payer feels burden and gov finances can be worsened

It aims to support agricultural producers, consumers & stabilise the market price of agricultural products

While doing good, they create several problems, including:

Storage is expensive

Transport to & from storage is expensive

It is difficult to analyse & control market forces

It requires all producers to participate honestly in the scheme e.g. producers in Vietnam have been caught importing cheap rice from Thailand &
then selling i to the government at a profit in the buffer stock scheme

Question 41

What are the pros of interventionist polices?

Answer 41

Intervention approaches will need to adequate provision of infrastructure, healthcare and education. Governments consider full social cost and social benefits of economic activity, maximise social welfare =socially optimum levels of these pillars of development. Development outcomes in all three areas will improve nonmaterial standards for poorest

Having more nationalise companies = greater investment in human capital and acceleration of
skills/productivity growth. State run companies hire workers not to maximise profit and only because there is need for production but to provide adequate incomes and keep U/E low. it’s extremely difficult to fire workers from state run companies thus incentives are strong to train workers adequately, raising incomes and efficiency.

Government regulation in the economy can correct market failure though effective environmental policy, protect workers rights and product standards. Ensuring individuals well-being and society welfare is cared to ensure development progress is made alongside Econ growth.

Protectionism imposed by developing country governments may be crucial to provide breathing space for domestic companies to grow and compete with larger international corporations. argument holds esp. to promote diversification into manufacturing and service sectors where developed countries specialise and are protectionist themselves. Developing countries may diversify with more = L/T growth and dev overcoming resource curse of primary commodity dependence that could feature if market orientated polices are pursued.

Question 42

What are the cons of interventions policies?

Answer 42

An interventionist apron to development promotes government corruption. Gov officials use tax money for inefficient purposes- political oppression, pocketing it in hidden intnl bank accts. Key development outcomes won’t be promoted at all – divide between rich elites and worsening of poverty at low end= huge gov failure and misallocation of resources

nationalised industries can be bureaucratic, x-inefficient and loss making= large burden on state – step in to subsidise such losses. Waste of tax rev= sig OC given how pro develop policies could have been promoted instead.

Though interventionist policies can increase economic growth as G in AD rises, such borrowing fuelled growth is unsustainable.
Persistent and excessive gov spending = large budget deficits and inc in national debt. Consequently, future tax rises and spending cuts (austerity) will be necessary to pay back debts and debt interest will need to be regularly services= huge OC- this money could’ve been use for pro devlop policies instead

Interventionist policies like price controls can damage allocation of resources in economy. Price ceilings= shortages whilst price floors = surpluses- individuals don’t get exact quantity they desire. Allocative inefficiency worsening wellbeing= lower social welfare- limiting development progress

Question 43

Market vs interventionist evaluation

Answer 43

In order for L/T growth and dev to be achieved – both market and interventionist policies are needed:

Fully functioning free and fair trade where developed countries agree to trade on a level playing field – developing countries to trade way out of poverty and realise full benefits of trade liberalisation

The operation of free and well-functioning markets- once firms reach a size where E.O.S can be exploited- compete on interntnl level- gov intvnt to correct market failures can be accepted

Political stability and govt free of corruption to ensure where there’s a need for gov involvement in the economy, actions can be trusted where social welfare max is overriding objective. Decision making= transparent and accountable to electorate

Effective aid can enter economy but targeted to where most develop progress can be made and extreme alleviated. Requires a transparent, non- corrupt govt

Apply forms of debt relief to rid developing countries of debt burdens crippling growth and develop

Question 44

What other strategies can be used for growth and development?

Answer 44

Industrialisation: the Lewis model

Development of tourism

Development of primary industries

Fair trade schemes

Aid

Debt relief

Question 45

Explain industrialisation, Lewis model

Answer 45

described economies as having two sectors - the rural agricultural sector & the urban industrial sector

Productivity & incomes are higher in the industrial sector so Lewis argued countries should transform their structure

Critics argue that many developing countries have high unemployment in urban areas; the theory also assumes that manufacturing will be a labour intensive task when in reality it is often capital intensive

Lewis model assumed developing countries = dual economies with traditional agricultural sector- low wages, low productivity, U/E and low savings. Modern industrial sector- high levels of investment and urbanisation

industrial sector would attract workers from rural areas by offering higher wages. Those who move to urban areas= higher incomes= more savings for investment

Excess labour in agris. He believed savings and investment were key for growth

Agriculture to more manufacturing

§ §

Investing into industrialised the better - Rate of capital accumulation increases- increases productive capacity of the economy- L/R economic growth- aids development

Transfer of wealth into industrialised part of the economy. Industrialisation is a result of development rather than cause

However, profits might not be reinvested into the firm. Capital investment might replace labour, so the demand for labour could fall instead. Not always easy for labour in the agricultural sector to move to the manufacturing sector. There could be urban poverty if there are not enough jobs in the cities.

§ May not be easy to transfer labour to industry– workers (often young males) migrating from the countryside will leave § fewer people to do demanding agricultural labour- harvest times there may be no ‘spare workers’ at all.

§ Also, profits aren’t always reinvested locally – abroad or used for consumption.

§ If industrial production is capital intensive - economic growth may not provide many additional jobs.

Question 46

Explain development of tourism with evaluation

Answer 46

For many developing countries this is an excellent source of employment, revenue & income

Rising global incomes have increased demand for tourism

Ecotourism ( A form of tourism which attempts to minimise its impact upon the environment, resources & local culture ) is developing as a response to negative externalities of

consumption that tourism creates. e.g. increased waste, noise, use of scarce resources (drinking water)

Countries take adv of climate and geography –
build up tourism industry, Caribbean- creates jobs, incomes- shift a developing country away from primary product dependency. DevelopingC= high MPC- multiplier effect- diversify economy attracting FDI as infrastructure is developed. TNC hotel companies bring investment fund -infra as tourism requires electricity, airports, wate. Gov = incentive to provide this-investment =injection into CFI- multiplier- greater impact on real GDP. Government = higher tax rev from higher incomes and profits= diversification

§ §

YED of tourism- as global economy grows- demand will increase- continue development. May suffer in recession

Tourism can also be a way of earning foreign currency for developing countries.- fill currency gap= countries will fund imports without negative consequences

Ev- holidaymakers’ demands for products from their home countries= tourism industry associated with an inc in imports and may not help fill currency gap

§ Industry is seasonal and involves low skilled, low paid – effect of multiplier= limited. Tourism = seasonal- areas will see U/E- investment only s.t return

§ Relying on one industry is very risky, over dependence. If it had diversified its economy- better position

§ Changing comparative adv, could lose this- important to try develop the economy to enable better technology and productivity improvements. Developing economies may have a current (static) comparative advantage in the
labour-intensive tourism industry

§ Tourism can increase the cost of living and renting. For example, the growth of Airbnb means that property values have increased as landlords want to buy properties to be able to let out to tourists. But, the downside of this is that
locals then struggle to afford the prices of living in popular areas.

§ § §

Can diminish quality of life for local population who experience greater congestion, higher costs

Large amount of wealth created= withdrawn as TNC’s repatriate their profits- problems involving capital flight

Large neg externalities, pollution, waste, environ damage and cultural impact. Inc in tourism- importing more to build facilities- bad for BOP

Question 47

Explain development of primary industries

Answer 47

Some countries have successfully developed as a result of GDP growth that has been driven by relatively few primary industries e.g Zambia has benefitted from the copper industry; most Middle East countries developed entirely due to oil; Ethiopia depends on coffee & cut flowers

Developing these primary product industries is lucrative due to their comparative advantage

Developing countries = abundance of raw materials, so governments might choose to exploit this advantage and develop the industry so the country can have a C.A in production. Primary industries, especially those allied to farming, only source of inc for some families

Norway overcame this. Invests heavily into sovereign wealth invest into non – oil industries that are less corrupt. Artificially devalue their currency so Dutch disease won’t have a significant impact. Allows them to diversify.

Question 48

Explain fair trade schemes

Answer 48

Definition- trading partnership based on dialogue, transparency, respect, seeking greater equity in international trade’. (WTFO) key princi:: fair price, community development, fair working conditions protecting environ.

§ § § §

Gives producers stability and raises their income

Allows parents to send children to school- no longer expected to stay at home- skills to move away from Agri

Child labour is not used and production is sustainable, doesn’t take place at expense of environ degradation

Those under fair trade- higher income and satisfaction, serve for future- financial support for children

Evaluation:

§

§ §

Still feel their income is low. System has had an insignificant impact on developing world- benefits Fairtrade producers- leave worse off as non-Fairtrade see a fall In demand

Fairtrade goods= inc supply and could bring price back down- depends on PES. Distorts the market equilibrium

Reduced the incentive to diversify and keeps farmers engaged in low profit activities. Kept reliant on primary product

Many developed countries use protectionism to shift profits from developing nations to developed nations
E.g. the USA has no tariff on cocoa beans imported into the USA from Ghana, but does place a tariff of 12% on cocoa powder. It want manufacturers in the USA to benefit from processing cocoa beans

The price of many commodities is set far away from where the farmers are - the Chicago Board of Exchange. Here, prices are set months in advance & determine the price buyers will pay sellers on a particular day in the future

Fair trade schemes aim to bypass these restrictions by connecting ethical buyers directly with the farmers in developing countries
They pay them higher prices
They often help them to develop & market value added products

Question 49

Explain debt relief

Answer 49

Partial or total forgiveness of debt. Developing countries- debt is cause of poverty- human suffering/ misery= hampers develop. Frees up public services, healthcare and education

Many countries suffer - high interest repayments loans- limits growth of poorest countries, whilst being relatively small for the countries and agencies that owed money. Seems reasonable for debt DevelopingC to be written off. Ease govt finances - money to be spent on provision of services/ infrastructure = aid development. Money saved up for developing country – invested in capital goods – help grow its economy

EV: Moral hazard

–precedent, every poor country may expect to receive debt relief. Eases pressure on weak gov to adopt reforms and good economic policies. Dependency culture. Cancelling debt – run by corrupt gov – more money is misused for personal gain - internal repression. Debt cancellation can be used by a donor country secure influence in recipient country

Many developing nations have borrowed significant sums of money in the past which have to be repaid (with interest) over a long period of time

The opportunity cost of these repayments is significant & often includes
Loss of infrastructure development
Inability to create a welfare system
Investment in human capital/education

Countries began to default on their loans in 1982 (Mexico was the first) & this has led to restructuring of these loans to make it more affordable

More recently there has been significant progress in writing off the entire debt of the most heavily indebted poor countries (HIPC) so that they can focus on building their economies

Question 50

Explain foreign aid and development

Answer 50

Foreign aid-

any assistance given to a country that wouldn’t have been provided through market forces

Aid can be official from one gov to another- development assistance or unofficial where a gov is bypassed or aid is sent from 3 rd party charitable org. development aid- focuses on alleviating L/T poverty and achieving develop outcomes whereas humanitarian aid= provision of food, shelter, emergency needs to alleviate S/T pain and suffering after natural disasters or conflict. Development aid:

L/T loans –to improve infrastructure, health and education= develop- without burdening the developing country with debt- I/R are usually low and with repayments over a long time period- investment in hospitals, transport infr- takes years to build and generate a return but are bedrock for consistent nd sustainable develop.

Tied aid- aid money given to a developing country- condition to buy certain goods and services from donor country- help developing C to access essential goods without need for local expenditure. If these reach those in greatest need- SOL and health outcomes= improve

Project Aid involves donor providing money purely for development project in developing country- i.e building a new motorway, port, schools, hospital, sewage. Naturally development outcomes can be achieved with such spending but added benefit is that this money can be monitored and directed into areas that are needed in developing country

Technical assistance- nonfinancial aid- tech is shared from donor country or experts sent to a DevelopingC to boost labour and capital productivity, reducing costs for businesses and inc incomes. Sharing of tech can help a developingC to diversify whilst boosting prod and income growth. Donor country experts can boost skills, raising human capital and labour prod – diversification as workers can transfer into diff industries. More directly business eff= inc competitiveness- inc profitability, incomes, GNI/ capita and - SOL.

Commodity Aid: movement of commodities from a donor country to developing country – help with production process of domestic businesses. Commodity aid- benefit all businesses reducing costs for farmers if feed and grain is provided but perhaps more sig manuf firms who access commodities without direct payment= accelerate diversification = strong incentive for entrepreneurs to build manu and service businesses = L/T exp growth and sust develop. Aid fills savings gap- Harrod domar= investment through accelerator

Question 51

What are the cons of aid and development?

Answer 51

Doesn’t tackle root cause of problem

Government corruption- gov use aid money for inefficient purpose, political oppression. Promote activity in own self-interest. Key develop outcomes won’t be promoted- divide between rich elite and poor worsening of poverty= huge gov failure and misallocation of resources. Are aims for inclusivity??

Aid can distort incentive of gov promoting inefficiency, lack of transparency and lack of accountability. To promote development, gov must encourage FDI, trade lib and raise funds from intnl cap markets- fund gov develop spending to inc SOL. Failure to promote development outcomes- party dismissal and new leadership regime- gov are accountable to electorate with strong incentives to promote develop. Aid dependency model changes incentives towards satisfying donor – Not in L/T interest of developing country- harm development progress- contrary to intentions of aid. Subsiding food significant= depress the prices- discouraging local production= poverty

Aid dependency reduces incentive for firms to be innovative- aid money coming in covers costs, provide steady environ for business instead of needing to take risks with innovation to inc profits/ eff. Dynamic efficiency gains = limited with stagnant tech growth restricting productivity, growth and development improvements.

Aid weariness- occur where donor countries lose willingness to continually provide funds to developing countries when problems exist countries, times of economic turmoil. Politically - becomes difficult for gov to continue with foreign aid spending when electorate would prefer money used for domestic policy instead. For developing countries who are reliant on aid money, develop progress could stall if funding can’t be replaced from other sources.

Aid in form of L/T loans can inc indebtedness for developing country. Consequently, future tax rises and (austerity policy) will be necessary to pay back such debts and service debt interest with huge OC given this money could be used for pro develop policies instead.

Aid with conditions may not be in interest of a developing country. Donor countries may offer aid if developing GOV relaxes imp duties, environ policy. If aid is coming in from an intnl org like World Bank, market-based Washington policies might have to be followed = U/E and income inequality for countries. Tied aid - inc prices of goods from donor country = not price comp whilst potentially destroying domestic industries. United aid and aid without conditionality have better chance of promoting development in developing country

Question 52

Evaluate aid and development

Answer 52

Aid money coming in must be targeted in areas of urgent development needs such as building of equipment for schools, hospital and infrastructure to aid more market based and internal sources of growth and development such as trade and FDI

Aid requires transparent and accountable gov – focused on developing internal and sustainable ways for the country to grow and develop without inducing aid dependency model and L/T indebtedness issues

Unofficial aid in certain circumstances be better than official aid avoiding corrupt gov where aid money will not be sued for develop purposed

For the poorest in developing countries, aid might be only S/T option for develop finance. International lender may not be willing to risk loaning funds and MNC’s may not be ready to enter the country in which case targeted aid can be useful to provide environ necessary for a developing count to support themselves in L/T

Question 53

What is thr world bank and what do they do?

Answer 53

Founded in 1944 as the International Bank for Reconstruction and Development to fund postwar redevelopment

They provide reconstruction loans to countries devastated by war

They provide loans to developing countries to aid in their development

They provide loans to countries to assist with the development of infrastructure

They work with governments & institutions so as to encourage economic reform & trade liberalisation

Question 54

What is the International Monetary Fund ( IMF)

Answer 54

Founded in 1944 with the aim of establishing a stable global financial system that could help with postwar reconstruction efforts & better deal with challenges such as the Great Depression of the 1930’s

John Maynard Keynes was one of two founders
They aim to facilitate a stable global financial system

They oversee exchange rates & the system of international payments that occurs between nations & individuals

They monitor country policies & national, regional & global economic & financial developments through a formal system known as surveillance

They provide member countries with currency to help deal with balance of payments problems

When providing loans, the IMF insists that countries make macroeconomic reforms to resolve the problems. The IMF has received criticism for this because it causes problems for countries. Usually, it involves reducing imports and increasing exports which reduces the amount of resources available for domestic consumption. It can also be in the form of lower govt spending.

However, countries are not forced to turn to the IMF for help but many do because the alternative is defaulting on their loans - cause even more problems than the reforms do. The reforms intend to help countries to overcome issues and should allow a country to develop in the L/T; they are not meant to be a punishment.

The IMF also provides advice which aims to bring about economic stability and raise living standards and help countries to develop their economic institutions through training and technical assistance, the central bank in Kosovo.

Question 55

What are NGOs

Answer 55

These are typically voluntary, community based organisations which do not aim to make a profit but seek to meet a need or provide a service

They operate locally, nationally and/or internationally

With a community based emphasis, they are able to
Engage in small scale projects giving control to community stakeholders
Draw on local skills
Encourage sustainability & remove the need for aid
Tackle environmental sustainability using local knowledge & resources

They can lobby the govt to make changes, raise funds and undertake projects in developing countries, such as the establishment of schools.

They alone can never solve the problem- gov has to fix issues

Anti-capitalist agenda- blames problems on world bank, IMF, WTO- causes divisions in the development project – issue since past experience suggests global capitalism is best system for development