4.3 - Emerging and developing economies Content Flashcards

Question

# 4.3 - Emerging and developing economies What is capital flight?

Answer 1

* 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). Or lack of confidence in country's stability, hide it from the government or for profit repatiration * From Feb 2022 to June 2023 Russia had a net capital outflow of $253 billion due to invasion of Ukraine

Answer 2

* It creates a savings/foreign currency gap, which reduces Investment and the ability to fund imports. * Might make it impossible to pay off debts. Will have to seek an IMF bailout * Reduces any tax inccomes for the government from the withdraw of savings/financial investments.

Answer 3

* If the dependency ratio is high it means there is less money available for savings and investment * Many developing countries have high dependency ratios * Developing countries have higher population growth, which limits development. IF population grows by 5%, the economy needs to grow by 5% to keep living standards the same

Answer 4

* No way to gain loans for spending, or investment * People cannot save money * Poor families have to resort to loan sharks with punitive interest rates, leaving them in debt. Cements people in poverty. However, * Technology might allow people to gain access to financial systems via mobile phone instead of physical branch. * Microfinance encourages people to take out loans for investment.

Answer 5

* Difficult to move raw materials, labour - high costs, not profitable. * Lack of water and energy makes it impossible to run factories. * Lack of communications technology means buyers and sellers cannot communicate. * Therefore deters foreign investment. * Expensive to improve and also conflicts with environmental goals * Makes service and production less reliable if the roads are bad for example

Answer 6

* Foreign aid/loans can be used to improve infrastructure - Belt and Road Initiative and World Bank Loans. * Foreign investors will improve infrastructure where there are valuable raw materials. * Chinese belt and road. - Building a new high speed rail from Nairobi to Mombasa (Kenya)

Answer 7

* High levels of borrowing crowds out the market. * Raises interest rates or creates competition for resources. * Firms want to borrow to expand but crowded out * Opportunity cost - paying off loans means that less can be spent on education and infrastructure. * Higher taxes needed to pay off government debt - reduces business confidence and restrains growth. * May create a debt cycle for developing countries - interest is so high that the country can never repay - e.g. Ferdinand Marcos. Creates intergenerational inequality

Answer 8

* Human capital (Gary Becker) * Adequate human capital ensures the economy can be productive and produce goods and services of a high quality. It helps generate employment and raise standards of living. * Countries like China and South Korea invested heavily in their human capital when they were developing, and this has benefitted them in the long term. Ethiopia suffers from high illiteracy rates at around only 49%. (Unesco) * 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

Answer 9

* Education and skills can be improved - Oportunidades programme in Mexico and Bolsa Familia in Brazil * Foreign aid can also be used

Answer 10

* Savings gap can be filled by FDI, aid or debt cancellation, e.g. FDI flows to Africa in 2014 were about $60bn. * Microfinance

Answer 11

* 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 * Loss of property rights in Zimbabwe led to economic collapse

Answer 12

* Poor Governance * Corruption * Political instability * Wars * Disease * Geography | In order of significance

Answer 13

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 and development

Answer 14

Leads to inefficient use of resources and poor decision-making. It may also result in laws/regulation which directly inhibit growth and development

Answer 15

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

Answer 16

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

Answer 17

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

Answer 18

HIV/AIDS and malaria have a negative impact on economic growth

Answer 19

Factors limiting development include microeconomic ones like inelastic demand and supply for commodities, and macroeconomic ones such as high debt levels. These factors limit growth and development overall. Development improves conditions for individuals through higher incomes and for firms through increased sales.

Answer 20

* Fiscal discipline - greater control on government spending, defcitis and debt * Reallocating state spending away from subsides - to health care, education, infrastructure * Tax reforms * Liberalising market interest rates * Floating rather than fixed exchange rate * Trade liberalisation * Privitisation * Foreign direct investment * Subsidiy removal * Microfinance

Answer 21

Involves a country lowering import tariffs and relaxing import quotas and other forms of protectionism. One key aim is to make an economy more open to trade and investment so that it can engage more directly in regional and global economy.

Answer 22

Removing a tariff (ceteris paribus) leads to: * A fall in market prices from P1 to P2 * An expansion of market demand from Q2 to Q4 * A rise in the volume of imported cars (no longer subject to a tariff) to a new level of Q1-Q3 * A contraction of domestic production as demand shifts to relatively cheaper imported products * A gain in overall economic welfare including a rise in consumer surplus * There is a fall in the producer surplus going to domestic manufacturers of these cars

Answer 23

* 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 24

* 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 to initially to an increase in the size of a nation's trade deficit

Answer 25

* Lower prices * Economies of scale * Increased market competition * Improved allocative efficiency

Answer 26

* Lost tariff revenues * Financing costs for necessary infrastructure * Regulatory refroms for common product standards * Local businesses may suffer loss of profit/jobs when facing stronger competition

Answer 27

Investment by one private sector company in one country into another private sector company in another country.

Answer 28

* **Technology Transfer**: Import of advanced tech, expertise, and management from foreign firms, modernizing local firms and spurring innovation. * **Improved Infrastructure**: MNC investments in roads, power, and logistics cut costs and boost long-term efficiency. * **Human Capital Development**: Training local workers to use advanced tech, transition to higher-value sectors, and reduce unemployment. * **Export Capacity Growth**: Boosts production quality/scale for global markets, earning forex and linking to global supply chains. * **Capital Deepening**: More capital per worker (e.g., machinery) raises productivity, wages, and output via modernized methods.

Answer 29

* **Regulatory Capture & Corporate Influence**: Multinationals pressure governments to create favorable laws (e.g., tax breaks, weak regulations), undermining public policy and eroding sovereignty. * **Exploitative Labor/Environmental Practices**: Weak governance allows MNCs to exploit cheap labor (poor wages, unsafe conditions) and bypass environmental protections, harming sustainability. * **Capital Flight via Profit Repatriation & Tax Avoidance**: Profits are siphoned abroad through repatriation or tax havens, draining local resources and starving public budgets. * **Low-Skill Labor Dependency**: MNCs limit locals to low-wage, low-skill roles, stifling human capital development and perpetuating economic stagnation. * **Elite-Centric Wealth Inequality**: FDI benefits flow disproportionately to powerful elites (e.g., politicians, oligarchs), worsening inequality and social tensions.

Answer 30

* **Competitive Fiscal Incentives**: Reduced corporate tax rates, tax holidays for startups, and subsidies for R&D/export-oriented projects lower operational costs and attract multinational firms. * **Special Economic Zones (SEZs)**: Geographically demarcated areas with streamlined regulations, tax exemptions, and modern infrastructure (e.g., ports, reliable electricity) to foster export-driven industries. * **Global Trade Agreements**: Preferential access to international markets via bilateral/regional pacts (e.g., tariff reductions, investor-state dispute protections) to incentivize export-focused FDI. * **Skilled, Affordable Labor**: Vocational training aligned with industry needs, flexible hiring/firing laws, and competitive wage levels to balance productivity with cost efficiency.

Answer 31

* **Market Efficiency**: Aligns prices with true supply/demand, curbing overproduction and enhancing stability. * **Innovation & Competitiveness**: Drives innovation and cost efficiency, reducing business complacency. * **Fiscal & Corruption Reduction**: Lowers subsidy costs, freeing funds for healthcare/education, and limits corruption from misallocated funds. * **Environmental & Behavioral Benefits**: Reduces intensive farming/energy use, aligns prices with environmental costs, and discourages unhealthy food choices. * **Producer Resilience**: Farmers adopt tech, diversify income, and join cooperatives to boost efficiency and market access.

Answer 32

* **Economic Hardship**: Reduces farm incomes, deters investment, risks closures/unemployment (esp. small farmers). * **Food Insecurity**: Threatens food access for low-income groups; lowers export earnings. * **Price Spikes**: Hurts poor households, worsens inequality, cuts consumer welfare. * **Market Instability**: Triggers supply shocks, price swings, protests (e.g., fuel/bread). * **Environmental Harm**: May push producers to unsustainable practices (e.g., illegal logging). * **Inadequate Transition**: Lack of safety nets deepens poverty during adjustment

Answer 33

* **Shock Absorption**: Currency adjusts automatically (e.g., depreciation boosts exports during crises, like Australia post-2008). * **Policy Flexibility**: Central banks avoid wasting reserves on pegs, focus on inflation/employment (impossible trinity). * **Foreign Investment**: No capital controls needed (e.g., South Korea post-1997 vs. China’s restrictions). * **Market Efficiency**: Rates reflect fundamentals, avoiding unsustainable pegs (e.g., UK’s 1992 ERM crisis).

Answer 34

* **Small Nation Stability**: Smaller economies (e.g., Luxembourg) or those with limited reserves often prefer shared/pegged currencies (e.g., euro) to avoid volatility risks. * **Dependent Trade Ties**: Economies reliant on a dominant partner (e.g., Panama pegged to USD) peg to stabilize prices and maintain trade advantages. * **Foreign Debt Risks**: Depreciation raises costs of USD/Euro-denominated debt (e.g., Sri Lanka’s 2022 default linked to rupee volatility).

Answer 35

* Micro-credit - small scale loans * Micro-savings - savings clubs provided by charoities * Micro-insurance - safety net to prrevent people from falling back into extreme poverty * Remittance management

Answer 36

* Helps overcome the savings gap which limits entrepreneurship * High rates of repayment because the system is built on social capital/trust * Provides loans to people that would otherwise be able to recieve them - e.g. women. * Provides money for investment and entreprueneurial activity * Helps the poor to increase their incomes so reduces poverty and increases standards of living, e.g. means poor families can afford school fees. * Should increase growth and reduce unemployment.

Answer 37

* Low success rate for new small businesses * Alleged forcible collection of debt in many villages – this is hard to monitor * Perhaps relatively ineffective compared to the impact of migrant remittances & foreign direct investment * May be difficult to get off the ground because locals don't want to take a risk and get into debt. * Lack of education may mean locals don't understand what micro-finance loans are and what the terms are. * Micro-creditors may take advantage of debtors and charge extortionate rates of interest - India's SKS charges between 23-35%. * Not actually used for investment - instead used to pay for weddings, school fees. * Mental health issues. * Reduction in other forms of aid

Answer 38

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

Answer 39

* Social objectives are given less importance because privately-owned firms are driven by the profit motive * 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 * Government loses out on dividends from any future profits * Public sector assets are **often sold cheaply**, and the privatisation may suffer from **corruption** * Privatisation leads to **job losses as firms increase their efficiency** – this increases the risk of poverty for those affected especially if they are structurally unemployed * Unless privatised corporations are **regulated effectively**, there is a risk of creative private monopolies who use their market power to increase prices and profits, this can have a regressive effect on the distribution of income.

Answer 40

* **Protecting domestic industries** . This can help to ensure that domestic industries are able to grow and develop, and that they are not undercut by cheaper imports. (Import substitution / infant industry argument) * **Generates tax revenues for the Brazilian government**. revenue can fund investment in infrastructure, provision of public & merit goods * **Import tariffs can support domestic jobs and investment** and thereby promote growth & development by lifting per capita incomes

Answer 41

* **Higher prices**: Tariffs can lead to higher prices for consumers which reduces real incomes and can worsen relative poverty. * **Productive inefficiency**: Protectionism can lead to emergence of X-inefficiencies and reduced innovation / dynamic efficiency * **Risk of tit-for-tat trade wars**: Where countries impose tariffs on each other's goods with escalating measures. (Game theory)

Answer 42

* **Enhanced Productivity**: Human capital development, particularly in education and skills training, increases the productivity of the labour force. * **Poverty Reduction**: By improving the skills and employability of the population, human capital development enables individuals to secure higher wages. * **Innovation and Technological Advancement**: A well-educated and skilled workforce is more likely to engage in research, development, and innovation. * **Foreign Direct Investment (FDI)**: Companies are more likely to invest in countries with a well-educated and skilled workforce, as it reduces their training costs and improves the overall business environment. * **Economic Diversification**: A skilled labour force can reduce a country's reliance on a single industry or sector, making its economy more resilient.

Answer 43

* **Financial Barriers**: Many families in low-income countries struggle to afford school fees, uniforms, books, and transportation. This can lead to children dropping out of school to contribute to household income. * **Lack of Access to Schools**: In rural and remote areas, schools may be inaccessible or too far from students' homes. * **Quality of Education**: Inadequate resources, poorly trained teachers, and overcrowded classrooms can result in a low-quality education. * **Gender Disparities**: Gender bias often prevents girls from attending school, particularly in societies where traditional roles and early marriage are common. * **Cultural and Social Norms**: Some cultural norms and practices may prioritize child labor or discourage education, particularly for girls or marginalized groups.

Answer 44

* **Nutrition programs**: Reduce stunted growth via fortified foods, school meals, and parental education. * **Health interventions:** Deworming (e.g., Kenya study) cuts school absences and raises adult wages by 20%. * **Education investment**: Boost primary/secondary school funding for enrollment, infrastructure, and teacher quality. * **Skilled migration incentives**: Tax breaks/visas to attract talent and curb brain drain. * **Reskilling for automation**: Train workers in AI/robotics skills to counter structural unemployment. * **Cash transfers**: Increase education demand among poor families by offsetting opportunity costs (e.g., Mexico’s Progresa).

Answer 45

**Above equilibrium price** * Reduce import costs and input prices (increased competitiveness) * A more stable currency - encouarges investment as firms know in advante their export revenues and imported input costs * Make debt easier to repay. **Below equilibrium price** * Keep goods cheap to make exports more internationally competitive. * Encourage FDI * Prevents primary product exports from appreciating exchange rates - Dutch disease (If set below equilibrium) **General** * **Price Stability**: If a currency is depreciating, it can lead to higher inflation due to increased import prices. Central banks can use interventions to moderate these fluctuations and maintain price stability. * **External shocks mitigation**: A managed floating exchange rate helps developing and emerging market countries withstand external shocks. These include changes in global commodity prices or economic crises in major trading partners, by allowing the currency to adjust to shifting external conditions.

Answer 46

* Not all countries have central banks with sufficient reserves of gold and foreign currency to make intervention in a currency market effective. * There can be political pressure on central banks to intervene in the foreign exchange market for short-term political gains, which may not be in the long term economic interest of the country. * Other countries might regard managed floating as a form of trade protectionism which in turn might lead to the risk of retaliatory action * Maintaining a managed exchange rate may reduce the incentive for a country to implement necessary economic reforms. Governments may rely on the exchange rate as a temporary fix rather than addressing structural issues.

Answer 47

* Navigate around exploitation by TNCs. * The government can insist that any investment that takes place has to be in joint venture with a local company. shared ownership * Profits always stay in the country and the circular flow, knowledge and infrastructure is retained. * **Access to better technology and expertise:** Can help developing countries to improve labour productivity and competitiveness. This will lift per capita incomes. (Improved human capital / knowhow) * **Job creation**: Joint ventures can create jobs. This helps to reduce unemployment, creates positive multiplier effects, raises factor incomes and can generate extra tax revenues for the government. * **Savings Gap and Export Potential:** Investment linked to joint ventures helps to overcome a domestic savings gap. And can promote an increase in productive capacity and capabilities.

Answer 48

* One way to reduce MNCs exploiting developing countries is by making foreign firms establishes joint ventures with local firms - shared ownership * This obliges the MNCs to share profits with a local firm * As a result, not all of the profits are sent back to a foreign country * Also results in a transfer of knowledge from the MNC to the firm in the developing countries

Answer 49

* **Dominant partners**: Potential ceding of control to multinational organisations who might take a majority stake in the joint venture. * Joint ventures might lead to **exploitation of workers and the environment** in low-income nations. Much depends on the quality of government & extent of corruption

Answer 50

* Schemes run by the government, a group of countries or a group of producers to stabilise the price of a product. * E.g. International Cocoa Organisation (ICCO), International tin council (ITC) * They buy and sell on the open market to maintain minimum and maximum prices of the product. * Buffer stock schemes operate in commodity markets where prices are volatile.

Answer 51

* **Cobweb theorum** - This year's output is based on last year's prices. * Producers assume that high prices will persist - they all invest and increase their output. Leads to a fall in prices. * Produces assume that low prices persist - they will decrease their output, increasing the price. * **Inelastic demand and inelastic supply** * Price changes are more than proportionate.

Answer 52

* There is a price ceiling and a price floor * If the price goes above the price ceiling (P2), buffer stock scheme sells x-y of stock to bring down price below the price ceiling. * If price goes below price floor (P1), buffer stock scheme buys a-b of stock to maintain price above price price floor.

Answer 53

* Under this system, the scheme tries to maintain the price at a target price Pt. * If supply > S1 the scheme buys up A-B to maintain the price target. * If supply < S1, the scheme sells back E-F to the market to maintain the price target.

Answer 54

* Stabilises income of producers * Protects jobs * Stabilises prices for consumers - some commodities are necessities - e.g. wheat, rice. * Improves the balance of payments - importnant for countries that are primary product dependent. * Reduces monopsony power of buyers, e.g. MNCs and coffee. * Firms can force prices up * **Investment**: When prices are stable, producers are better able to plan and invest, in new capital which can lead to increased yields and improved quality. This, in turn, can lead to higher per capita incomes and a reduction in extreme poverty. * **Food security**: In low-income countries, buffer stock schemes can help ensure food security by maintaining adequate supplies of key commodities. This can help prevent food shortages and price spikes for example after an external shock.

Answer 55

* Costs - admin & storage costs are high. * Could encourage over production * Prevents exit of inefficient producers * Large scale producers may benefit more than the small scale producers it's supposed to protect - they have EOS. * Fee to join the scheme * **Management**: Governments may struggle to effectively manage a scheme in poorer rural areas with limited storage infrastructure and technical expertise. Inadequate storage facilities can lead to falling quality of stocks which command lower prices * **Inefficiency**: Prices might be set too high – favouring producers – which in the long run leads to over-production, surpluses mounting and risks causing environmental damage. These externalities might be seen as a form of government failure.

Answer 56

1. **Subsidies**: Governments can provide subsidies to farmers, either in the form of direct payments or through subsidies for inputs such as fertilizers and seeds. This can help reduce the cost of production and increase the competitiveness of farmers. 1. **Agricultural insurance**: Governments can offer insurance programs that provide protection against crop losses due to weather events or other factors. 1. **Rural infrastructure**: Governments can invest in infrastructure such as roads, water supply, and electricity, which can improve productivity/competitiveness of farmers. 1. **Market information systems**: Governments can invest in market information systems that provide farmers with real-time information on prices, supply and demand 1. **Farmer cooperatives**: Governments can support the development of farmer cooperatives, which can help farmers increase their relatively bargaining power against monopsonistic buyers. This can help farmers negotiate better prices for their products.

Answer 57

A developing economy split into two sectors: 1. Traditional rural/agricultural sector (low productivity, surplus labor). 1. Modern urban/industrial sector (high productivity, capital-intensive).

Answer 58

Surplus rural laborers can move to the urban sector without reducing agricultural output due to underemployment in subsistence farming.

Answer 59

Excess labor supply keeps wages low; only rise after the Lewis Turning Point (surplus labor exhausted).

Answer 60

Profits from industry are reinvested to expand production, creating jobs and absorbing rural migrants

Answer 61

1. Initial phase: Labor shifts from rural to urban sectors. 1. Growth phase: Urban sector expands via reinvestment; rural sector shrinks. 1. Turning point: Rural surplus labor dries up, wages rise.

Answer 62

When surplus rural labor is exhausted, causing rural wages to rise and signaling transition to a mature industrial economy.

Answer 63

* Oversimplifies rural productivity (ignores potential agricultural innovation). * Assumes rigid wages and unlimited labor (not always realistic). * Neglects urban unemployment or informal sector challenge * Forced industrialisation has tended to lead to a waste of scarce resources because the industries have failed. Government failure * Encouraging rural depopulation will simply lead to urban poverty, not increased affluence.

Answer 64

Focus on **industrialization** and **labor reallocation** to modern sectors for structural economic transformation.

Answer 65

* Industrialisation: the Lewis model * Development of tourism * Development of primary industries * Fairtrade schemes * Aid * Debt relief

Answer 66

* Employment creation, tourism tends to be a labour-intensive industry * Tourism typically employs a higher percentage of women and younger people starting out in the labour market * Export earnings – it generates important foreign exchange (US$s) * Important source of diversification for many smaller countries – helps them move away from primary product dependency * Gives a boost to AD - creating local and regional income-multiplier effects * Accelerator effects from capital investment such as in airlines, roads and telecoms – leads to an increase in long run aggregate supply (LRAS)

Answer 67

* Exploitation of local labour by overseas transnational tourist businesses (monopsony) * M/any workers in tourism are migrants suffering from poor employment conditions * Outflow of profits from foreign-owned resorts. * All-inclusive deals often ignore the local economy – reduces the multiplier effect * Negative externalities – for example from construction, congestion and increased waste as tourist resorts expand * Rising property prices can make housing less affordable for local people. Wider risk of increasing inflation if tourism causes a domestic economic boom. * Deepening pressures on local cultures + concerns with security and public health

Answer 68

Initiatives ensuring fair payment for producers in developing countries, promoting sustainable farming, and improving working conditions by setting minimum prices and offering community development premiums.

Answer 69

* **Income Generation:** Ensures that producers receive a minimum price. Helps stabilize income and provide a safety net against global price volatility. Counter balance to monopsony power * **Market Access:** Fairtrade certifications allow small scale producers with access to consumers in higher-income global markets that they might not have been able to reach without the certification. Leads to increased sales, higher revenues and profits could fund capital reinvestment * **Community development**: Fairtrade initiatives sometimes include funds for community development profits e.g. schools, healthcare facilities * **Environmental Sustainability:** Fairtrade includes environmental standards and promotes sustainable agricultural practices

Answer 70

* **Limited sales**: Often criticized for its limited reach. Not all producers reach the certification requirements and many small-scale farmers remain excluded * **Certification Costs**: Obtaining and maintaining Fairtrade certification can be costly. These costs might be prohibitive for some smaller producers and co-operatives * **Market Dynamics:** Impact can be limited in markets where it constitutes a small fraction of total sales. In some sectors Fairtrade producers may struggle to compete with non-certified products in terms of price * **Complexity and Bureaucracy:** It can be complex and bureaucratic, particular for small producers who may lack the resources to navigate it effectively.

Answer 71

* Calculated to cover the cost of sustainable production and provide a reasonable livelihood for the farmers and workers * Acts as a safety net for producers. Typically set at 15% above the commercial price * Protects small scale farmers from market fluctuations

Answer 72

* **Debt Forgiveness** – The complete cancellation of a country's debt by its creditors. Typically, only granted after a natural disaster of if a country has taken significant steps to implement economic reforms * **Debt Restructuring** - Involves the renegotiation of a country's debt terms with its creditors. May involve extending the maturity of the debt, lowering the interest rate, reducing the principal amount owed * **Debt Rescheduling**: Involves changing the schedule of the debt payments so that a country can meet its debt obligations without defaulting * **Debt Equity Swaps** - Involve exchanging a country's debt for equity in local companies or infrastructure projects. Can help to reduce a country's debt burden and promote economic growth

Answer 73

* Debt relief can help **alleviate extreme poverty** in low-income countries by freeing up funds for a government that can be used for healthcare, sanitation, education and other key social services * Debt relief might **stimulate growth** by enabling countries to invest in capital without being burdened by debt interest repayments. * Debt relief can provide **humanitarian relief** to countries that have experienced natural disasters or civil conflicts, which can further exacerbate their already fragile economic situations.

Answer 74

* Debt relief may create a **moral hazard** by encouraging countries to accumulate debt with the expectation that it will eventually be forgiven. This might encourage **fiscal irresponsibility** in the future. * Debt relief may also have a **negative impact on a country's credit rating**, making it more difficult for them to secure loans in the future. * Debt relief may be seen as **unfair or inequitable** to developing countries that have responsibly managed their government finances and do not receive similar relief. * Debt relief eased pressure on weak governments to be efficient and adopt good econoimc policies

Answer 75

Is money or technical assistance given by one country to another to promote economic and social development

Answer 76

* **Project Aid**: Financing projects for a doner such as irrigation systems, hospitals * **Technical assistance**: Funding of expertise such as engineers, medics * **Humanitarian aid**: Emergency disaster relief, food aid, refugee relief and disaster preparedness * **Soft loans**: A loan made on a concessionary basis such as China – Africa * **Tied aid**: Projects tied to suppliers in the donor country * **Debt relief**

Answer 77

* Overseas aid can play a role in stabilizing post-conflict environments and in disaster recovery * Long-term aid for health and education projects - builds human capital and stronger social institutions. * Targeted aid that lifts trend growth rate of poorest countries benefits donor countries as external trade grows * Fill the savings gap * Consumers in developing countries have low incomes and therefore save very little. Savings are lower than the level required to generate high economic growth (according to the Harrod Dommar model). Inflows of foreign capital, supplied by foreign aid would help fill the savings gap. * Provides funds for infrastructure and development, HUMAN CAPITAL– therefore creates jobs, a multiplier effect and growth. Help a country MOVE AWAY FROM PPP * Cover the FOREIGN CURRENCY GAP * Export revenues are likely scarce. Foreign aid would provide foreign currency to import machinery, capital equipment and essential raw materials. OR basic essentials like food to reduce abolsute poverty * Reduce absolute poverty

Answer 78

* Poor governance - aid might leave the recipient country. It can finance corruption by ruling political elites and reinforce their power * Lack of transparency – hundreds of $m is spent each year on aid consultants and high-income country non-governmental organisations * Dependency culture – heavy reliance on overseas aid might harm an entrepreneurial culture. Most aid is “tied” to the donor country in some shape or form * Aid may lead to a distortion of market forces and a loss of economic efficiency and might also cause higher rates of inflation * WHITE ELEPHANT PROJECTS - Much aid has been wasted on prestige projects E.g. Lotus Tower in Sri Lanka. Rather than schools. * Loans have to be repaid with interest. Current interest on world bank loans are 2.5% (Feb 2023)

Answer 79

* **Skcepticism of Centralized Planning**: Easterly is critical of large, top-down development programmes and centralized planning. He argues that such approaches often lack the flexibility and local knowledge required to address the diverse and complex needs of poor communities. * **Local Solutions**: Easterly advocates for more attention to local, context-specific solutions. He believes that local knowledge and bottom-up approaches are more likely to lead to successful development outcomes. * **The Role of Markets**: Easterly is supportive of market-based approaches and the importance of entrepreneurship in driving economic growth and development. He sees the private sector as a critical player in poverty reduction.

Answer 80

1. **Reducing poverty and inequality**: Direct cash transfers provide **a direct and effective way of reducing poverty and inequality** by giving money to people who need it the most. This improves living standards of low-income households and might reduce the Gini coefficient. It might also **reduce the scale of labour migration / possible brain drains**. 1. **Empowerment**: Direct cash transfers empower individuals by giving them the freedom to spend the money as they see fit. By providing a reliable and predictable source of income, cash transfers help households to plan and make investment in their own human capital. It can keep kids in school for longer. It can **improve mental health outcomes**. 1. **Stimulating local economies**: Direct cash transfers can stimulate local economies by **increasing demand**. This can lead to increased economic activity and formal job creation, especially in areas where there is **high unemployment and under-employment** 1. **Cost-effectiveness**: Cash transfers may be less expensive to administer than **in-kind transfers** (such as food or clothing), which can be more difficult to distribute and monitor.

Answer 81

1. **Sustainability**: Critics argue that direct cash transfers may not be sustainable in the long run, as they do not address the root causes of poverty and inequality, such as lack of access to education, health care, and employment opportunities. 1. **Dependency**: Some argue that direct cash transfers may create a culture of dependency among recipients, perhaps discouraging them from seeking employment. This might perpetuate the cycle of absolute poverty. 1. **Inflation**: Direct cash transfers may contribute to inflation by increasing demand for goods and services such as food. If prices rise, the real purchasing power of transfers may be eroded, reducing impact on poverty reduction 1. **Corruption**: There are concerns that direct cash transfers may be subject to corruption, with government officials or others embezzling funds or diverting them to politically connected individuals or groups.

Answer 82

Established in 1945 to promote international monetary cooperation Functions * Surveillance – Monitoring the global economy and providing policy advice * Financial assistance – lending to member countries facing balance of payments problems * Technical assistance and training to member countries

Answer 83

* **Austerity Measures and Social Impact** - IMF programmes often improve austerity measures – reducing spending and subsides, which can lead to negative social impacts such as increased poverty and inequalities * **Debt Sustainability** – Loans can contribute to a country's debt burden if not managed effectively. Critics say that the institution should do more to ensure that borrowing countries maintain sustainable levels of government debt * **Financial Sector Deregulation** - Promoting financial sector deregulation, which some say has contributed to financial crisis in the past * **Lack of Accountability** - Some say that the IMF is not sufficiently accountable for its policy recommendations and their consequences, making it challenging to hold the institution responsible for any negative outcomes

Answer 84

Established in 1944, is a group of 5 institutions Main objectives include 1. Providing financial and technical assistance to developing countries 1. Reducing poverty and fostering sustainable economic development 1. Supporting infrastructure projects and social programmes Financial assistance comes in forms of loans, grants and policy advice

Answer 85

* Critics of the World Bank argue that the **institution is risk averse, hugely over-staffed and overly sensitive to criticisms of their flagship projects** and with multi-million-dollar expense accounts in stark contrast to their original mission * The institution has been criticized for being **influenced by more powerful member countries,** potentially leading to decisions that favour those countries' interests over those of smaller or poorer nations * **Infrastructure-Centric Approach**: Some contend that the World Bank's emphasis on infrastructure projects may **neglect crucial areas such as education, healthcare and social services** * Climate change: Critics claim the World Bank has failed to adequately address the scale of the global climate crisis, alongside its traditional mission of alleviating poverty

Answer 86

Not for profit groups – focus on environmental improvements, community developmental and human rights E,g, 1. Oxfam 1. WWF (world wildlife foundation)

4.3 - Emerging and developing economies Content Flashcards

(110 cards)