4.3 Emerging economies

Question 1

Economic development

Answer 1

Measured through improvements in living standards

Question 2

Developed country

Answer 2

One with a high GDP per head and tends to be thought of as Western
high levels of education and healthcare
Reliable and safe transport infrastructure and operations
High productivity and investment
Governments democratically elected

Question 3

Developing country

Answer 3

One with lower GDP per head
Low levels of human and physical capital
High levels of unemployment and underemployment
Health tends to be low with high mortality rates and high levels of population growth (high birth rates)
Institutional structures are weak and corrupt

Question 4

HDI

Answer 4

Human development index is a measure of economic development calculated by the UN
Composite index based on health (measured by life expectancy), education (measured by mean years of schooling of adults aged 25+ and expected years of schooling of a current 5 year old over their lives, and income (measured by real GNI per capita at PPP)
Each three indicators are given equal weighting and mean is taken to giver figure between 0 and 1
Higher number = greater level of development

Question 5

HDI advantage

Answer 5

Takes into account three factors which are important to development of country
Relatively easy to calculate because gov tends to collect statistics used in data

Question 6

HDI disadvantage

Answer 6

Some issues with figures
Health takes no notice of quality of life that people enjoy and education doesn’t take into account success of eduction
No consideration of equality of income
Other factors affecting development which are unaccounted for
Only indicator, not a precise measure

Question 7

IHDI

Answer 7

Inequality adjusted human development index
Adds fourth indicator of development - inequality
Broader than HDI but can still be criticised for not taking into account more measures

Question 8

MPI

Answer 8

Multidimensional poverty index
Measures % of population that is multidimensional poor
Uses data for health (nutrition data), education (years of schooling + attendance data), standard of living (Safe drinking water in households, sanitation availability of electricity)
Highlights countries where some areas are extremely rich but where most of population is not
Focuses on poverty
Cannot be calculated for all countries (data is not always available)
Doesn’t take into account environment

Question 9

Genuine progress indicator

Answer 9

26 different indicators grouped into three main categories : economic (personal consumption), environmental (cost of pollution) and social (value of housework and parenting to cost of crime)
aims to look at economic sustainability to ensure development does not limit amount produced and consumed in future
Tend to show developed countries experiencing negative growth over time due to impact on environment
This proves that development is unsustainable vs the index is biased and is constructed to prove the antigrowth case
Changes in electricity production or numbers with mobile phone per 1000 can show development. This is easier to calculate than indexes

Question 10

Primary product dependency

Answer 10

Economic factor influencing growth and development
Include agriculture
Large amount of developing countries economic activity is based on primary product
Natural disasters can wipe out production - farmers left with no income
Often non renewable which means country will suffer when they run out of the product
Tend to have low income elasticity of demand
However not all have this, such as diamonds

Question 11

Prebisch singer hypothesis

Answer 11

Suggests the long run price of primary goods declines in proportion to manufactured goods which means those dependent on primary exports will see fall in their terms of trade
However, in recent years, there has been a rise in the prices of some key commodities such as food and a fall in prices of manufactured goods due to expansion to places like China

Question 12

Dutch disease

Answer 12

When a country becomes a significant commodity producer in a short amount of time, causing an increase in demand for the currency (to enable people to buy the goods) which pushes its value up
This increases export prices and leads to reduction in competitiveness of the economy, causing a fall in output in other areas
Occurred for non oil sectors

Question 13

Volatility of commodity prices

Answer 13

Primary products tend to have inelastic demand and supply curves which means relatively small changes in either leads to huge fluctuations in price
These large changes mean that producers income and countries earnings are also rapidly fluctuating, making it difficult to plan and carry out long term investment as well as meaning that producers can see their income fall very rapidly, causing poverty
When prices of commodities rise for a number of years, there tends to be over investment in the production of the commodity causing long term risk when the price eventually falls

Question 15

Harrod domar model evaluation

Answer 15

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

Question 15

Harrod-Domar model

Answer 15

Suggests savings provide the funds which are borrowed for investment purposes and that growth rates depend on the level of saving and the productivity of investment
Concludes that economic growth depends on the amount of labour and capital and that developing countries have a vast labour supply so their problems are caused by capital
In order to improve capital, investment is necessary and investment requires savings

Question 16

Foreign currency gap

Answer 16

This is when exports from a developing country are too low compared to imports to finance the purchase of investment or other goods from overseas required for faster economic growth

Question 17

Capital flight

Answer 17

Large amounts of money are taken out of the country, rather than being left there for people to borrow and invest
If money was placed in banks within the country then credit could be created by banks for consumers and businesses to spend
This can occur because of lack of confidence in the country’s stability to hide it from government authorities or simply for profit repatriation
Caused Argentine economic crisis 2001

Question 18

Demographic factors

Answer 18

Developing countries tend to have higher population growth, which limits development
If population grows by 5%, the economy needs to grow by 5% to even maintain living standards
This means developing countries need to have higher rates of growth to develop than more developed would do
High population growth is caused by high birth rates, which increases the number of dependents within a country but does not immediately increase those of working age
It places strain on the education system snd leads to youth unemployment

Question 19

Debt

Answer 19

1970/80s - developing countries received vast loans from banks in the developed world
Now they suffer high levels of interest payments, sometimes even higher than the loans and aid they receive from developed countries, meaning money is flowing from developing to developed countries
Less money to spend on services for their population - may need to raise taxes, which limits growth and development
Borrowing for growth makes sense, but the problem occurs when government take on too much debt and do not spend it well

Question 20

Access to credit and banking

Answer 20

Developing countries have limited access to credit and banking compared to developed countries, who have complex systems
This means that those in developing countries cannot access funds for investment and they struggle to save for the future
Some families may use loan sharks, who give high interest rates and leave individuals permanently in debt

Question 21

Infrastructure

Answer 21

In developed country, there is complex network of buildings, roads, ports, railways, airports, utilities and electricity cables
Low levels of infrastructure make it hard for businesses to trade and set up within the country e.g if there are lack of roads
It makes their services and production less reliable
However, the development of infrastructure can be expensive and tends to conflict with environmental goods

Question 22

Education / skills

Answer 22

Poor education within these countries means that workers are low skilled, sometimes unable to read or write, so have low levels of productivity
A skilled and educated workforce is crucial for innovation, productivity, and economic diversification.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 (49%)
However, there is debate over what type of education is needed and problems concerning over education i.e if graduates are unable to find graduate level jobs

Question 23

Absence of property rights

Answer 23

Property rights are where individuals are allowed to own and decide what happens to certain resources
A lack of rights means that individuals and businesses cannot use the law to protect their assets, leading to reduced investment
They will be unwilling to buy machinery, build factories or establish brands
Loss of property rights in Zimbabwe led to economic collapse

Question 24

Non economic factors

Answer 24

Corruption is big in developing countries Means that individuals will make decisions which maximise the bribes they receive as oppose to those which maximise development and output Leaders are likely to make decisions which benefit themselves than economy High levels of bureaucracy linked to corruption and this is costly and time consuming, deterring new businesses and reducing output of those establish Diseases (malaria) have negative impact on economic growth Poor climates / geographical terrain - may suffer from natural disasters and it may be difficult for farmers or to set up businesses Civil wars - high levels of poverty and destroys infrastructure making it very difficult for country to rebuild even after war has ended

Question 25

Trade liberalisation

Answer 25

Market oriented strategy for growth and development Countries can aim for export led growth Removing trade barriers will mean that domestic industries either close or forced to become efficient to compete with global producers Resources will be allocated to their best use where the country has a comparative advantage World GFP Singapore and South Korea benefitted

Question 26

Promotion of FDI

Answer 26

Market oriented FDI is investment by one private sector company to one country into another pr.s company in another Includes acquisition, construction of a facility, investment in a joint venture or licensing of intellectual property Firms tend to undertake FDI because production costs are lower in developing countries - enables them to access new market FDI can help create employment (multiplier), encourage the innovation of technology and help promote long term sustainable growth. It 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. It is a source of investment and can help to ​fill the savings gap​.

Question 27

FDI eval

Answer 27

Usually a repatriation of profits and developing countries may find the company exploit them by offering lower wages and poorer conditions than in a developed country Lose some sovereignty and become dependent on another firm. Local competition may find it had to set up and compete and best job often go to imported labour, leaving only low skilled jobs for locals Environmental damage and exploitation of natural resources

Question 28

Removal of government subsidies

Answer 28

Subsidies are effective at minimising absolute poverty and ensuring a minimum standard of living how severer they are often poorly targeted as subsidies on essential items benefit everyone not just poor Cash payments to poor may be more effective Subsidies to farmers and producers lead to inefficiency and if they are given a large amount over long period of time, the subsidy becomes ineffective in increasing development High opportunity cost as they represent large gov spending leads to high debt levels Can also cause corruption and criminality e.g fuel subsidies leading to high emissions

Question 29

Removing subsidy eval

Answer 29

Subsidy can be beneficial in allowing infant industry to grow Removing can be politically unpopular and some Govs have been thrown out attempting to do it Best time to remove subsidy is when the free market price is falling - removal will be less noticeable to people

Question 29

Floating exchange rate

Answer 29

Market forces determine currency Country does not have to worry about gold and foreign currency reserves and gov does not intervene

Question 29

Floating exchange rate eval

Answer 29

Currency is volatile which makes it difficult for exporters/importers to make decisions about the future and can cause large changes in macroeconomic variable inc. economic growth

Question 30

Microfinance schemes

Answer 30

Aim to give poor and near poor households permanent access to range of financial services including loans, savings, insurance and fund transfers They take little or no collateral and use group lending, pre loan saving requirements and an implicit guarantee of access to future loans if present loans are repaid fully / promptly Increases income of borrowers and can reduce dependency on primary products (multiplier effect from investment of loan) Allows borrowers to invest in their businesses or start up new ones (reducing savings gap issue) Protect from loan sharks Scheme tends to target groups who would be less likely to otherwise receive loans (women)

Question 30

Microfinance schemes eval

Answer 30

Has become method of financing consumption spending and unemployment - means that most people do not have funds necessary to ensure repayment of their loan - have to sell off family assets, borrow from friends When actually used for investment, it has increased the informal economy with very little being spent on sustainable methods of development Financial resources have been diverted away from more productive and sustainable activities

Question 32

Privatisation eval

Answer 32

If firm is privatised as monopoly, there will be no competition within the market It can be associated with corruption where politicians or officials sell the company at below market price to a friend or family member or receive bribes to accept one company's bid

Question 33

Development of human capital

Answer 33

Interventionist Provides workers with skills and training and thus help them to become more efficient and improve productivity Skill shortages = struggle of business expansion and limiting innovation Human capital development means country can move their production up the supply chain from primary products to manufactured goods and to services which can earn them more Better education can improve quality of life

Question 34

Development of human capital eval

Answer 34

Can be difficult to do and is expensive Time lag

Question 34

Protectionism

Answer 34

Allows domestic industries to grow as it protects them from strong comp and keeps foreign goods out Can use policy of import substitution Will create jobs in short run and will allow industry to develop perhaps to the extent where barriers can be removed and industry can compete globally

Question 34

Protectionism eval

Answer 34

Countries lose out from benefits of specialisation and comparative advantage and could cause inefficiency since domestic produces suffer from lack of competition Retaliation likely to occur (trade war)

Question 34

Managed exchange rates

Answer 34

Currency can be fixed against a number of different exchange rates Can introduce high exchange rates for import of essential products and lower E.R for other Could be an even lower one for exports High E.R for essential products will mean that the price within the country is low which helps reduce poverty if goods are consumer goods and encourages investment if they are capital goods Lower e.r for other imports will mean price of these goods within country is higher, discouraging imports and encouraging consumers to buy from domestic producers

Question 34

Managed exchange rates

Answer 34

Often fail to work in practice Black markets in foreign exchange develop which can destabilise the system and corruption becomes an issue when gov officials buy currency at on exchange rate and sell it for profit at another Single E.R will reduce volatility but speculation may mean that countries find it difficult to maintain an E.R over a num of years

Question 35

Infrastructure

Answer 35

Essential for development - country needs roads, airports, schools and hospitals, railways etc Higher supply costs delay businesses and it reduces the mobility of labour Gov should provide these systems whilst market based believe private sector should Has many positive social benefits which suggests the gov should provide it

Question 36

Infrastructure eval

Answer 36

Infrastructure tends to suffer from free rider problem and has very high capital costs, making it unlikely the private sector will develop it Gov may not have funds to provide infrastructure and is argued that it may inefficient Projects often associated with bribery and corruption causing environmental damage and may be poorly built and maintained Intermediate tech which uses local materials and can be fixed locally is better than large scale infrastructure

Question 37

Promoting joint ventures with global companies

Answer 37

A way to reduce the exploitation of countries as a result of FDI would be to set up a joint venture gov may insist that firms setting up production plants in their country find a local partner to create jointly owned company with This will help to keep some of the profits generated within country which can be used in investment

Question 38

Buffer stock scheme

Answer 38

Where the gov imposes both a maximum and minimum price for goods buying ups stocks when there is excess supply and selling them off when there is excess demand As a result should be self financing - money is raised when selling the products which allows the government to buy the next lot of stocks Used on commodities where prices are volatile and can either be set up by group of countries or within a country When effective, it is beneficial because it stabilises prices and thus encourages investment since producers can plan for long term Prevents sharp falls in prices, meaning that producers are kept from falling into absolute poverty and prevents sharp rises in prices meaning that consumers are able to afford the good Can solve primary product dependency issues

Question 39

Buffer stock scheme eval

Answer 39

Requires stocks to go up and down if keep rising, then scheme will run out of money If they keep falling, the shame will run out of stocks Require huge start up costs as well as administration costs and problems of storage Other countries may benefit from a buffer stock scheme since it keeps global prices fishy stable when undertaken by a group of countries and so they can be seen as free riders of the system May mean that some countries will not want to introduce system Minimum prices may be set too high, encouraging producers to become inefficient They will produce as much as they like an know they will be able to sell it anyway, meaning that supply is high and the gov has to continually buy up stocks if the scheme is operating at a loss, the taxpayer feels the burden and gov finances are worsened

Question 40

Lewis model

Answer 40

Assumed that developing countries had dual economies with a traditional agricultural sector which had low wages, low productivity, underemployment and low savings, and a modern industrial sector with high levels of investment and urbanisation Modern industrial sector would attract workers from rural areas (higher wages = higher income = more savings for investment) Labour productivity was so low in agricultural areas that people leading would have no impact on output = surplus of food since same amount was being shared among less people Savings and investment key to growth and thus growth was achieved through rural-urban migration

Question 41

Industrialisation eval

Answer 41

Even though labour productivity is low for some parts of the year, during planting and harvesting vast amounts of labour is needed Not necessarily true that those with higher wages will save and invest their money Recently, migration has led to urban poverty replacing rural poverty as industrial sector is unable to provide jobs for all those who have moved Improvements in technology will lead to reduced demand for labour Industrialisation is a result of development rather than a cause Possible for government to build factories and plants to encourage the transition to industrialisation. Has been successful but in many countries the industry fails and so there is just waste of scarce resources Instead of industrialising you can go to services like India as this is where they have comparative advantage shows that no all countries will develop in the same way

Question 42

Tourism

Answer 42

Due to climate and geography some countries have built a tourism industry Provides them with funds to develop economy and improve living standards Income inelastic nature of tourism means that as global economy grows, demand for industry will increase further, allowing developing country to continue development Tourists represent a source of foreign currency which will fill the currency gap so countries will be able to fund their imports without negative consequences Countries are likely to attract investment from TNC's (hotel) who will also bring knowledge = funds improvements in infrastructure as tourism requires reliable electricity etc and so gov have incentive to provide this. Investment will have multiplier effect in economy Job creation locally since tourism relies on low skilled workers who know local area rather than high skilled Gov sees higher tax revenues due to higher income and higher profits = funds to diversify countries

Question 43

Tourism eval

Answer 43

Holidaymakers’ demands for products from their home countries mean that the tourism industry is associated with an ​increase in imports and so may not help the foreign currency gap at all. Also means suffering in recession Very labour intensive Industry is seasonal and involves low skilled, low paid jobs meaning multiplier effect is limited In and out of fashion meaning some areas will see loss of employment and that investment may only receive a short term return Large amount of wealth created will be withdrawn as TNCs repatriate their profits = capital flight Country can suffer externalities including pollution, waste and impact on culture

Question 44

Development of primary industries

Answer 44

Some countries (Saudi, Norway) able to develop because of an abundance in their natural resources Provides funds to allow country to diversify as well as allowing infrastructure development and better eduction Gov can address Dutch disease

Question 45

Development of primary industries eval

Answer 45

Primary products are volatile and primary product dependency causes many issues Primary industries suffer from corruption

Question 46

Fairtrade schemes

Answer 46

Trading partnership based on dialogue, transparency and respect which seeks greater equity in international trade WTFO Num of organisations which monitor that what is being sold under fair-trade label conforms to a num of key principles; a fair price, community development, fair working conditions and protecting environment Fair price typically means that agreements are made to buy guaranteed amount of produce over period of time at price which is above market price when agreement was made Gives producers stability and raises income Means that child labour is not used and that production is sustainable and does not take place at expense of environmental degradation Those under scheme have higher income and satisfaction, a greater understanding of market and more optimistic view of future They were able to save for the future and invest

Question 46

Fair trade shame eval

Answer 46

They did not feel as though income was sufficient in study Argued that system has an insignificant impact Benefits the fair trade producers but can leave others worse off since non fair-trade producers see a fall in demand Long term = higher price for fair trade goods will increase supply and thus price can fall but this will depend on PES Higher income reduces incentive to diversify and keeps farmers engaged in low profit activities However, it allows parents ti send children to school and this will allow them to gain skills to move from agriculture

Question 46

Aid

Answer 46

Country voluntarily transfers resources to another or gives loans on concessionary terms There is tied aid, bilateral aid, multilateral and concessional loans Reduces absolute poverty, particularly emergency relief after disasters Can fill savings gap and thus provides funds for investment whether in human capital or infrastructure Both have to be done by gov as they are public goods Provides foreign exchange to full foreign currency gap Contributes to increased globalisation and trade as well as reducing inequality

Question 47

Aid eval

Answer 47

Unclear whether money really reduces absolute poverty as improving infrastructure does little to help those suffering most creates depenmdecny culture where countries are unconcerned by finances Corruption means that money does not always go where it is meant to Difficult to know the best way to develop country and therefore difficult to split spending

Question 48

Debt relief

Answer 48

Many countries suffer from high interest payments to loans Limits growth of some of poorest countries whilst being relatively small for countries and agencies that are owed money Seems reasonable for debt o be written off Eases gov finances and allows more money to be spent on provision of services and infrastructure to aid development

Question 49

Debt relief eval

Answer 49

Moral hazard Creates a precedent - every poor country may now expect to receive debt relief also eases pressure on weak governments to adopt reforms and good economic policies

Question 50

World Bank

Answer 50

Aims to bring long term development and a reduction in world poverty It is made up of: o the International Bank for Reconstruction and Development (IBRD) o the International Development Association (IDA) o the International Finance Corporation (IFC) o the Multilateral Investment Guarantee Agency (MIGA) o and the International Centre for Settle of Investment Disputes (ICSID). The IBRD and IDA provide ​financing, policy advice and technical assistance​: IDA helps the poorest countries whilst IBRD helps middle income and creditworthy poorer countries. IFC, MIGA and ICSID help ​strengthen the private sector in developing countries by providing them with ​finance, technical assistance, political risk insurance and settlement of disputes​.