Development

Question 1

Sources of economic growth

Answer 1

1. Increase in quality/quantity of Natural factors
2. Increasing quantity and quality of human and physical capital
3. Improvement in state of technology
4. Institutional factors ( eg banking system, structured legal system, good education system)

Question 2

Consequences of economic growth in terms of economic development

Answer 2

1. Higher Incomes (dependent on how fairly income distributed)
2. Improved economic indicators of welfare (growth has lead to increased average life expectancy)
3. Higher Gvt revues received as result of more economic activity. (in better position to provide essential services but depends ion corruption and how representative gvt is of pop.)
4. Creation of inequality (growth brought by market-based initiatives often leads to increase in equality
5. Negative externalities and lack of sustainability (growth often leads to pollution, soil degradation, deforestation, reduction in biodiversity)

Question 3

Common characteristics of developing countries (according to Michael P. Todaro)

Answer 3

1. Low standards of living characterised by low incomes, inequality, poor health and inadequate education (e.g. high levels of malnutrition, high infant mortality rates)
2. Low levels of productivity (because of poor education, poor health and lack of investment)
3. High rates of pop growth (e.g. Nigeria had 51.08 live norths per 1000 people, Japan had 7.41) leading to dependency burdens
4. High and rising level of unemployment/underemployment (usually between 10 and 20%)
5. Substantial dependence upon agricultural production and primary product exports
6. Prevalence of imperfect markets and limited information.
7. Dominance, dependence and vulnerability in international relations

Question 4

Diversity among developing countries

Answer 4

1. Resource endowment (eg Angola rich in Oil and diamonds but developing)
2. Historical background (length and nature of colony countries were a part of varies)
3. Geographic and demographic factors (ranges form China down to Fiji)
4. Ethnic and religious breakdown
5. Structure of industry
6. Per capita income levels
7. Political structures.

Question 5

International development goals

Answer 5

eg millennium development goals

1. Eradicate extreme poverty and hunger
2. Achieve universal primary education
3. Promote gender equality and empower women
4. Reduce child mortality
5. Improve maternal health
6. Combat HIV/AIDS, malaria and other diseases
7. Ensure environmental sustainability
8. Develop a global partnership for development.

Question 6

Single indicators

Answer 6

i) Financial measures
- 1) GDP per capita or GNI per capita
- 2) GDP or GNI per capita at PPP
ii) Health measures
- 1) Life expectancy at birth
- 2) Infant mortality rate
iii) Education measures
- 1) Adult literacy rate
- 2) Net enrolment ratio in primary education

Question 7

Composite Indicators

Answer 7

HDI
GDI
HPI

Question 8

Institutional factors affecting development

Answer 8

1. Education
2. Health care
3. Infrastructure
4. Political stability & lack of corruption
5. Legal system
6. Financial system
7. Taxation
8. Appropriate technology
9. Empowerment of Women

Question 9

How education affects development?

Answer 9

Improvement in education improve well-being of population.
Leads to:
-more efficient workforce
-better communication and debate on topics meaning more likely to lead to social change (improve role of women in society, improvement in health of pop.)
BUT:
-requires large funding
-necessity of children to earn an income in some areas
-might be large geographical disparities (within countries) in provision of good education

Question 10

How health care affects development?

Answer 10

Increase life expectancy

Question 11

How infrastructure affects development?

Answer 11

Provide the structure necessary to improve communication, transportation and population size necessary to create economic growth and economic development.

Question 12

How political stability and lack of corruption affects development?

Answer 12

More stable countries are more likely to attract FDI (which is more likely to create growth than development) and aid.
More likely to enforce law fairly: incentivising people to invest and increase consumption of products.
Citizens more likely to have an input in the running of the country
Gvt planning more long term and structured

Question 13

How legal system affects development?

Answer 13

If a person cannot guarantee his/her ownership of a property there is no incentive to improve property or buy new ones.

Question 14

How financial system affects development?

Answer 14

Saving is necessary to make funds available for investment. Investment allows low-income people to invest in health care, shelter, education ultimately necessary to break poverty cycle.
Micro-financing provides financial services such as small loans, savings accounts, insurance, cheque books. Leads to micro-entrepeneurships.

Question 15

How taxation affects development?

Answer 15

Tax revenue provides government wight he means to finance necessary public services, healthcare and generally to improve the infrastructure of the country.

Question 16

How use of appropriate affects development?

Answer 16

In most developing economies labour is in excess so technology which requires large amount of labour is quite often useful in developing countries. It also has to be durable and cheap.

Question 17

How empowerment of women affects development?

Answer 17

• The well being of families is improved
• education of children in family group improve
• quality of workforce over time improve
• women abel to earn more money (leading to provision of products to improve living standards)
• rate of population growth often controlled.

Question 18

How income distribution affects development?

Answer 18

High income inequality can be a barrier to growth and development because:

• low levels of savings (restricting growth)
• quite often leads to lack of pro-poor growth (political elite make policies to suit themselves)

Question 19

International barriers to development

Answer 19

1. Over specialisation on a narrow range of products
2. Price volatility of primary products
3. Inability to access international markets
4. Long term changes in the TOT.

Question 20

How is over specialisation on a narrow range of products

a barrier to development?

Answer 20

Many developing countries remain dependent on primary commodities to generate export revenue. This leaves them vulnerable to changes in foreign demand for the commodities. Decrease in D will lead to a decrease in prices lead to a decrease in TOT and depreciation in current account balance.
This is also heavily dependent on patterns of weather.

Question 21

How is price volatility of primary products

a barrier to development?

Answer 21

Large fluctuations in price of primary products making export revenue and returns on investment difficult to predict. this discourages investment and makes it difficult for gvts to commit in advance to expensive development projects.

Question 22

How is inability to access intl. markets

a barrier to development?

Answer 22

Protectionist measures may make it difficult for developing countries to exploit their comparative advantage which limits their ability to develop foreign exchange. this makes it difficult for countries with non-convertible currencies.
They are also vulnerable to dumping products they would otherwise earn export revenue on.
It also carries the problem of tariff escalation where governments impose high tariffs on processed goods leading to an inability by developing countries to move on from exporting raw materials. (e.g. tariff for unprocessed cocoa low but partial processing imposes tariff of 9% (by EU) fully processed= 15%)

Question 23

How is long term changes in TOT

a barrier to development?

Answer 23

If commodity prices are falling over time and anny developing countries are primarily exporters of commodities then export revenue (and so ability to spend on development projects) will be decreasing over time.

Question 24

Trade strategies for economic growth and economic development

Answer 24

1) ISI
2) Export production
3) Trade liberalisation
4) The role of the WTO
5) bilateral and regional PTAs
6) Diversification

Question 25

Necessary conditions for ISI

Answer 25

1. gvt in developing country has to identify domestic industries whose growth it wishes to support 2. Subsidies to provide firms in these industries to increase their competitiveness until they grow in scale 3. tariffs and other protectionist measures to keep out imports.

Question 26

Advantages of ISI

Answer 26

1. creates/ protects domestic jobs 2. protects economic sovereignty 3. protects local culture by isolating foreign influence

Question 27

Disadvantages of ISI

Answer 27

1. Country does not enjoy benefits of comparative advantages and specialisation (production is inefficient) 2. May lead to higher rates of inflation due to AS constraints. 3. Lack of competition discourages R&D meaning dynamic inefficiency and possibly slower growth in potential growth 4. Slow economic growth may lead to lack of job creation meaning ISI only protects jobs in the short-run 5. Risks of other countries taking retaliatory protectionsit measures

Question 28

Examples of ISI use

Answer 28

Latin america and former British colonies showed some success in the 1960s an d70s but began to fail in the 80s due to fiscal deterioration and get overspending.

Question 29

Policies countries applying export promotion strategy to create development include:

Answer 29

Liberalising trade, liberalising capital flows, allowing exchange rate to flow, investment of provision of infrastructure, deregulation and minimal get intervention in the labour market.

Question 30

Examples of where export promotion strategies have been employed

Answer 30

Asian tigers- Japan , Singapore, Hong Kong, Taiwan

Question 31

Problems with export promotion

Answer 31

1. pressure form TUs and workers in developed countries to increase protectionism 2. relative importance of different policies aimed at export promotion disputed 3. MNCs often have detrimental impact on country 4. May increase income inequality

Question 32

Why MNCs expand into developing countries:

Answer 32

1. Countries may be rich in natural resources. MNCs may have access to technology and expertise to extract them. 2. Some developing countries (BRIC) represent growing markets meaning MNCs have better access to a large number of potential consumers with high demand. 3. Cost of labour is much lower in developed countries 4. Less regulation and/or less strict enforcement of legislation/regulations 5. Tax concessions and other incentives e.g. 2004 more than 20 countries lowered their corporate tax rates to attract FDI

Question 33

Possible advantages associated with FDI

Answer 33

1) FDI fills saving gap and therefore leads to economic growth 2) MNCs provide employment and often education/training improving the skill level and managerial capabilities. 3) Gives greater access to R&D, technology and marketing further enhancing industrialisation 4) increased employment and earning have multiplier effect leading to economy being stimulated. 5) Increased tax revenue form profits of MNCs which can be used for growth (via investment and increased govt expenditure) 6) acquisition sare injection of foreign capital into the economy leading to an increase in AD 7) MNCs improve infrastructure or ac tax spur for got to do so.

Question 34

Disadvantages of FDI

Answer 34

1) MNCs often bring own management teams simply using inexpensive low skilled workers for basic production and providing no education or training. 2) MNCs size allows them to exert authority on policy makers making those with influence less partial and less representative 3) MNCs practice transfer pricing selling good s and services to different divisions in different countries to take advantage of different tax rates meaning they pay less tax meaning there is a large loss of revenue for the government. 4) MNCs foten position themselves in countries with less effective environmental legislation meaning they can reduce private costs whilst increasing external ones. 5) MNCs often enter country to extract resources then strip resources and leave 6) MNCS use capital intensive production methods therefore not fully employing the country's labour 7) acquisitions/mergers etc are often done using stocks in the MNC meaning the country never benefits from an inflow of cash following a merger. 8) MNCs may repatriate profits.

Question 35

Forms of development aid

Answer 35

1. Long term loans 2. Tied aid (grants given on the condition that the funds be used to buy goods and services from donor country) 3. Project aid 4. Technical assistance aid 5. Commodity aid

Question 36

Concerns about Aid

Answer 36

1. in many developing countries gets do not seek to maximise the welfare elf the majority of the pop. thus aid goes to small sector of pop. 2. often given for political reasons (e.g. Israel receives 100 times more aid then Bangladesh does) 3. tied aid less effective then tied aid as essentially = effectively, subsidy creating no employment or additional output 4. Food aid may be essential in short term but long term provision of food increases supply reducing domestic prices and reducing standard of living for domestic farmers (which in many developing countries will be a large part of pop.) 5. Countries can become dependent upon aid reducing incentives to innovate. 6. Aid may be conditional on adopting certain economic policies and it is unclear whether these policies benefit developing countries or developed countries/MNCs more. 7. Aid in the form of loans generates future interest payment liabilities which may deduct form future investment tot improve development.

Question 37

Weaknesses of interventionist policies (evidenced by popular usage following WW2)

Answer 37

1) Public sectors grow too large leading to bureaucracy, over-staffing and inefficiency (lead to growth of corrupt practices) 2) Nationalised industries tends to be inefficient and loss making (also led to hidden unemployment) 3) Government spending tends to be excessive, leading to large budget deficits and thus the need for borrowing and for increasing the money supply 4) The increase in the money supply tends to lead to high levels of inflation 5) Much of the expenditure was on large infrastructure projects saw little success.

Question 38

Reasons for Popularisation of market led policies

Answer 38

- Asian tigers success - Switching of Soviet satellite states to market-led strategies - 3rd World debt crisis led to countries needing to accept IMF terms if they were to receive bail-outs.

Question 39

Strengths of interventionist policies

Answer 39

Provision of infrastructure Investment in human capital Provision of stable macro-economic economy Provision of social safety net

Question 40

Strengths of market led policies

Answer 40

More efficient allocation of market resources | Long term economic growth

Question 41

Weaknesses of market led policies

Answer 41

Market failure occurs without intervention Development of a dual economy(urban and rural divide) Income inequalities.