4.3.1 and 4.3.2

Question 1

What is development?

Answer 1

It is fundamentally about people development over time.
As of 2018 nearly 9 per cent of the world’s population still live on an income below $1.90 per day (PPP)
obel Economist Amartya Sen writing in “Development as Freedom”, sees development as concerned with
improving the freedoms and capabilities of the disadvantaged, thereby enhancing the overall quality of life

According to Professor Ian Goldin from Oxford University, development is about the ability to shape our own lives. It requires information, literacy, participation and capabilities.

Question 2

three objectives of development?

Answer 2

1. Life sustaining goods and services: To increase the availability and widen the distribution of basic life-
   sustaining goods such as food, shelter, health and protection services.
2. Higher incomes: To raise levels of living, including, in addition to higher incomes, the provision of more jobs,
   better education, and greater attention to cultural and human values, all of which will serve not only to
   enhance material well-being but also to generate greater individual and national self-esteem
3. Freedom to make economic and social choices: To expand the range of economic and social choices available to individuals and nations by freeing them from servitude and dependence not only in relation to other people
   and nation-states but also to the forces of ignorance and human misery.

Question 3

Difference between Growth and Development?

Answer 3

Economic Growth
o A sustained rise in a country’s productive capacity
o An increase in real value of GDP / GNI per capita
o Increases in the productivity of factors of production

Economic Development
o Progress in expanding economic freedoms
o Sustained improvement in economic and social opportunities o Growth in personal and national capabilities

Question 4

what is the human development index?

Answer 4

The HDI focuses on longevity, basic education and minimal income. It is a broad composite measure of improvements in people’s lives – it is a weighted index. Each of the 3 measures is given a value between 0 and 1 (with 0 being very low development and 1 very high), and then an average is taken of the 3 composite indicators to give an overall measure of development

Question 5

what are the components of HDI?

Answer 5

1. Knowledge: First an educational component made up of two statistics – mean years of schooling (of those already in the workplace) and expected years of schooling (of those still in school)
2. Long and healthy life: Second a life expectancy component is calculated using a minimum value for life expectancy of 25 years and maximum value of 85 years
3. A decent standard of living: The final element is gross national income (GNI) per capita adjusted to purchasing power parity standard (PPP)

Question 6

Countries with the lowest human development in 2017?

Answer 6

Niger 0.354
Central African Republic 0.367
South Sudan 0.388

Question 7

Countries with the highest human development in 2017?

Answer 7

Norway 0.953
Switzerland 0.944
Australia 0.939

Question 8

what is GNI?

Answer 8

GNI (Gross National Income is used because of the growing size of remittances across countries)

Question 9

Disadvantages of using HDI?

Answer 9

The standard HDI measure does not take account qualitative factors, such as cultural identity and political
freedoms (human security, gender opportunities and human rights)
* The GNI per capita figure – and consequently the HDI figure – takes no account of income distribution.
* If income is unevenly distributed, GNI per capita will be an inaccurate measure of people’s well-being
* Purchasing power parity (PPP) values used to adjust GNI data change quickly and can be inaccurate
* Higher GNI may result in more spending on aspects that could reduce living standards e.g. polluting power
stations rather than green energy production, or armaments

Question 10

Advantages of using HDI?

Answer 10

Relatively easy data to collect and compare
* As objective as possible – it could be difficult, for example, to come up with an accurate/reliable measure of
more qualitative factors such as freedom of speech
* Measures such as longevity and education levels are indicative of other development factors

Question 11

what is the gender inequality HDI ranking?

Answer 11

The Gender Inequality HDI rankings includes indicators that reflect the extent to which there are deep and
persistent imbalances in economic, social and political freedoms for women and girls in developed and
developing countries.

Question 12

The difference between gender equality and gender equity?

Answer 12

Gender equality denotes women having the same opportunities in life as men, including the ability to
participate in the public sphere.

Gender equity denotes the equivalence in life outcomes for women and men, recognizing their different
needs and interests

Question 13

Other indicators of development?

Answer 13

• Degree of primary export dependence
• Progress in achieving Sustainable Development Goals (MDGs)
• Prevalence of HIV, years of healthy life expectancy, child mortality
  Access to clean water / improved sanitation facilities

Question 14

what are the Sustainable Development Goals (SDGs)? and some examples?

Answer 14

There are seventeen published sustainable development goals:
2. Goal 2 End hunger, achieve food security and improved nutrition, promote sustainable agriculture
6. Goal 6 Ensure availability and sustainable management of water and sanitation for all
10. Goal 10 Reduce inequality within and among countries
13. Goal 13 Take urgent action to combat climate change and its impacts

Question 15

what is primary product dependancy?

Answer 15

Many developing countries continue to have high dependence on extracting & exporting primary commodities. These economies are vulnerable to volatile global prices. There are significant risks from over-specialisation especially when the terms of trade from their main exports decline; as countries specialise more in primary commodities, it increases the supply of these commodities which, when coupled with relatively price inelastic demand for these goods, causes their price to fall quite significantly

Question 16

what is the natural resource curse?

Answer 16

Resource-rich (factor input-driven) countries may suffer from the natural resource curse. Extractive rents often fuel corruption, inequality and wasteful consumption as natural resources are depleted.

Question 17

what is the Prebisch-Singer Hypothesis?

Answer 17

The Prebisch-Singer Hypothesis (PSH) suggests that, over the long run, prices of primary goods such as coffee and cocoa decline in proportion to prices of manufactured goods such as cars and washing machines. The core idea behind the Prebisch-Singer hypothesis is as follows:
* There is likely to be a long-term decline in real commodity prices
* In part this is because the income elasticity of demand for commodities is lower than for manufactured goods
* This then worsens the terms of trade for primary exporters over time

Question 18

What is Dutch Disease?

Answer 18

If natural resources are found and extracted and if the world price of them is rising, then export revenues will increase and there will be increased investment into that sector. But the risk is that there is a corresponding loss of investment into other industries such as manufacturing businesses. And the surge in export incomes can cause an appreciation of the exchange rate which then makes other sectors trying to export less competitive in overseas markets.

Question 19

Strategies for reducing Primary Product Dependency and Price Volatility?

Answer 19

1. Better government – including more transparency & accountability to taxpayers so that it is clear how natural resource revenues are being spent
2. Stabilisation Fund / Sovereign Wealth Fund – e.g. to fund human capital and infrastructure or to inject money into an economy when aggregate demand dips
3. Higher taxes of natural resource profits (i.e. extracting resource rents and then reinvesting in the domestic economy to increase a country’s supply-side capacity)
4. Buffer stock schemes – these are designed in principle to reduce some of the effects of price volatility although most less developed countries have limited ability to influence the world prices of their key exports
5. Diversification – including shifting resources into processing, light manufacturing & tourism – giving higher value added and making the economy less susceptible to external shocks

Question 20

What is the savings gap?

Answer 20

• Savings are needed to help finance capital investment
• Many rich countries have excess savings, whereas in smaller low-income countries, extreme poverty make it
  almost impossible to generate sufficient savings to fund capital investment projects
• Furthermore, the financial / banking sector may be extremely underdeveloped in developing economies, and there may no guarantees provided by governments for depositors to get their money back in case of bank
  failure
• This increases reliance on foreign aid or borrowing from overseas (leading to higher external debt)
• This problem is known as the savings gap

Question 21

what is the harried do mar model of growth?

Answer 21

he Harrod-Domar model stresses the importance of savings and investment. The rate of growth depends on:
* Level of national saving (S)
* The productivity of capital investment (capital-output ratio)
The rate of growth of GDP = Savings ratio / capital output ratio.

Question 22

limitations of harried domar model?

Answer 22

Increasing the savings ratio in lower-income countries is not easy. Many developing countries have low marginal propensities to save
Many developing countries lack a sound financial system
Research and development (R&D) needed to improve the capital/output ratio is often under-funded
Borrowing from overseas to fill the savings gap causes external debt repayment problems later.

Question 23

Importance of capital investment for developing countries

Answer 23

Investment is an important driver of growth for developing/emerging countries:
* Injection of demand for capital goods industries
* Creates positive multiplier effects
* Increased capital stock can increase rural productivity and therefore per capita incomes and consumption in
rural areas
* Investment in new machinery and factories supports economies of scale especially in new / infant industries
* It can help achieve export-led growth because of the increase in productive capacity

Question 24

What is a foreign currency gap?

Answer 24

A foreign exchange gap happens when currency outflows exceed currency inflows This can occur when:
o A country is running a persistent current account deficit
o There is an outflow of capital from investors in money & capital markets (this is known as capital
flight)
o There is a fall in the value of inflows of remittances from nationals living and working overseas
A key consequence of a foreign currency gap can be that a nation does not have enough foreign currency to pay for essential imports such as medicines, foodstuffs and critical raw materials and replacement component parts for machinery. In this way, a foreign currency shortage can severely hamper short run economic growth and also hurt development outcomes.

Question 25

Options for developing countries wanting to attract external finance?

Answer 25

Developing economies can draw on a range of external sources of finance, including FDI, portfolio equity flows, long- term and short-term loans (both private and public), overseas aid, and also remittances from migrants living and working overseas.

Question 26

factors influencing growth and development: what is capital flight?

Answer 26

Capital flight is the uncertain and rapid movement of large sums of money out of a country. The UK Overseas Development Institute (ODI) defines capital flight as "the outflow of resident capital which is motivated by economic and political uncertainty.” There could be several reasons linked to a lack of investor confidence: 1. Political turmoil / unrest / risk of civil conflict 2. Fears that a government plans to take assets under state control 3. Exchange rate uncertainty e.g. ahead of a possible devaluation 4. Fears over the stability of a country’s financial system

Question 27

factors influencing growth and development: Demographic factors

Answer 27

Demography is concerned with the size and composition of a population. Over time, demographic change can have a powerful impact on the growth and development prospects of advanced and emerging / developing countries alike. n a growing number of rich nations, population growth is slowing down, and, in some cases, there is negative natural population growth not offset by inward migration. In Japan for example, an ageing population combined with low female participation and low net inward migration is causing a contraction in the size of their active labour force

Question 28

factors influencing growth and development: Demographic factors, possible micro and macro effects

Answer 28

Possible microeconomic effects 1. Changing patterns of consumer demand in markets / affecting profits of businesses in particular sectors 2. Impact on government welfare spending and tax revenues e.g. health care for the elderly, treatment of chronic illness 3. Impact on housing market e.g. if people can live in their own homes for longer Possible macroeconomic effects 1. Impact on the rate of growth of productivity and long-term GDP growth - for example if there is an increase in the age-dependency ratio 2. Impact on business competitiveness if the median age continues to rise rapidly 3. Increased demand for state-funded health care including social care and a possible reduction in tax revenues if the active labour force contracts

Question 29

factors influencing growth and development: Demographic factors: Opportunities from rapid population growth

Answer 29

1. A young median age and fast natural population growth contributes to an expanding population of working age which can increase long-run aggregate supply (LRAS) causing an outward shift of the PPF. 2. Providing per capita incomes are rising, then population growth increases the size of domestic markets - encouraging economies of scale and increased capital investment spending by businesses 3. More people in work leads to a widening of the tax base to help government finances 4. Population growth and urbanization tend to go together - population growth increases density and, alongside rural-urban migration can lead to benefits from agglomeration economies. Urbanisation has been linked to stronger innovation and it also stimulates demand for new infrastructure which in turn creates jobs and creates positive multiplier effects 5. The challenge of feeding a growing population can be a catalyst for research and development and innovation in farming designed to increase crop yields

Question 30

Risks and drawbacks from rapid population growth

Answer 30

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

Question 31

factors influencing growth and development?

Answer 31

Some countries experience a brain drain effect which describes the movement of highly skilled or professional people from their own country to another country where they can earn more money. Brain drains can lead to de-population. Examples of countries with negative population growth are shown in the table below. Consider the Baltic State of Latvia as an example, their population is forecast to contract by 200,000 people between 2017 and 2030, a fall of over 10%.

Question 32

Disadvantages from a brain drain

Answer 32

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

Question 33

Possible advantages from a brain drain

Answer 33

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

Question 34

what is external debt?

Answer 34

External debt is owed to external (overseas) creditors and examples of debt includes government bonds sold to foreign investors and private sector credit borrowed from foreign banks. The scale of external debt is usually measured as a % of a country’s GNI.

Question 35

when does external debt tends to rise?

Answer 35

1. A government is running a budget deficit and finances this by selling government bonds to overseas creditors 2. A country is running a sizeable current account deficit which is partly funded by borrowing from overseas institutions such as the IMF 3. Households and businesses borrow money in a foreign currency including mortgages and corporate bonds

Question 36

what are the risks with a developing country increasing the scale of external debt?

Answer 36

* Returns on investment might fall short of expectations especially if investment goes on projects not subject to a proper cost-benefit analysis * If a country experiences a depreciation/devaluation of their exchange rate, the real value of the debt will increase making it harder to repay * A recession can make it harder to meet the interest payments on debt since government tax revenues shrink

Question 37

factors influencing growth and development: access to credit and banking

Answer 37

Improving access to basic financial services, such as a bank account, credit, and insurance, is a crucial step in improving people's lives. World Bank research finds that financial inclusion is on the rise globally, accelerated by mobile phones and the internet, but gains have been uneven across countries. Globally, 1.7 billion adults remain unbanked Financial access connects people into the formal financial system, making day-to-day living easier and allowing them to build assets, mitigate shocks related to emergencies, illness, or injury, and make productive investments. It also makes it easier for a government to measure economic activity and collect in tax revenues needed to pay for public services.

Question 38

How can infrastructure gaps limit economic growth and development?

Answer 38

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

Question 39

what is human capital and how does it impact growth and development?

Answer 39

Human capital is the skill, knowledge, talent, experience and ability of workers. Human capital can be increased through investment in education & training. Poor human capital hits labour productivity and ability to harness/adapt to new technologies. Low productivity keeps wages down. Human capital deficiencies are closely linked to malnutrition. Better basic health care and nutrition helps to unlock improved human capital by avoiding brain impairment and the effects of stunted growth.

Question 40

Why are property rights important for development?

Answer 40

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

Question 40

Gender inequality as a barrier to growth and development

Answer 40

No society can achieve its potential without the full and equal participation of women and men * Worldwide, over one hundred economies have laws that keep women out of certain jobs * Gender inequality has cost the world an estimated $160 trillion, according to a new report

Question 42

Corruption as a barrier to growth and development

Answer 42

Corruption is due to a failure of governing institutions who lack transparency in where tax revenues are coming from and how resources are spent. Corruption is defined broadly as the misuse of public power for private benefit.

Question 43

how does corruption damage long term economic growth and development?

Answer 43

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

Question 44

Non-economic factors that can affect development

Answer 44

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