Development economics Flashcards
Sen’s definition of economic development
-The process of improving people’s well-being and quality of life, involving improvement in standards of living, reduction in poverty, improved health and education along with increased freedom and choice
Growth and development:
-Why is growth good for development
-Higher income: material standard of living, reduce income inequality, reduction in poverty
-Higher profits: more jobs, advancement in technology dualistic economic structure could disappear move away agriculture based production
-Fiscal dividend: health, education, infrastructure (roads, sanitation, telecommunications).
But:
-Distribution of income
-Negative externalities and sustainability: resource depletion, resource degradation, pollution
-Growth in one dominant sector
Growth is necessary but not sufficient condition of development
Common characteristics of developing countries
-Low standard of living: low income, high levels of poverty
-Low levels of productivity: lack of investment, lack of capital
-Low levels of savings: lack of financial institutions, low incomes, education on why saving is important
-High population growth: subsistence farming, give birth a lot for children to work on the farms
-primary sector dominance (agriculture)
-incomplete markets: lack of financial institutions, soft currencies, lack of provision of property rights
-High unemployment/underemployment: low education
-Low economic power on the international stage: trade more, trade relations, accessing finance
Institutional factors and development
Education: higher productivity, better jobs, higher incomes, choice, women educated, gender equality, health benefits, technology
But: Funding, private sector, exclude, underlying problems, children seen as workers at a certain age, cultures
Healthcare:
-productivity
-jobs
-standards of living
-sanitation & drinking water
But:
-Funding, private sector, is it alright to exclude people from healthcare
-Price
Infrastructure:
-access to markets
-access schools/hospitals
-FDI
But:
-funding
Part II
-promote or hinder development
Taxation:
-fiscal dividend
But:
-corruption and tax exemptions, politicians keep money for themselves, when firms work closely with politicians
-low corporate activity and tax incentives
-informal markets, tax collection limited
-role of WTO, tariffs falling
Appropriate use of technology:
-solar cooker, hygienic
-weather based technology, forecast weather conditions, soil performance, increase productivity for farmers
Empowerment of women:
-Children’s health, vaccinations, sanitation in households
-education, pursue education, value of education, make kids educated
-economic impact
-smaller families, higher incomes through education, no need to give birth to so many people to work on farms
Income distribution:
-low investment
-rich dominating politics, policies that suit themselves
-capital flight
Part III
-the strength of government is fundamental in ensuring development outcomes can be achieved
Political stability: government efficient in allocating resources, efficient in adhering to the needs and wants of the general public, huge development gains as a result
-FDI, no unnecessary bureaucracy, regulation, elongating of the business process
-Aid, more likely to get it knowing the government will allocate it efficiently
-Democracy, needs and wants of the people will be met
But: (if there is instability), revolutions, wars
-loss of infrastructure, telecommunication destroyed, roads destroyed
-loss of investment, reduce potential FDI
A major threat to development is corruption: (misallocation of resources, government failure, hold back development)
-inefficient regulation, turning a blind eye
-FDI
-Bribes, extra costs increasing the cost of producing,
-Highest bidder, resource allocation, project allocation to the highest bidders instead of the most productive
-Legal
The poverty cycle:
-The link between how poverty can cause further poverty and further harm development
Growth poverty cycle:
-Low incomes
-Low levels of savings, no financial institutions, low education on savings
-Low levels of investment
-Low economic growth
-Leads to more low incomes
Development poverty cycle:
-Low incomes
-Cannot afford education and healthcare, hard for gov to fund provision, private sector heavier role
-Low levels of human capital, lack of skills to gain jobs
-low productivity
-leading back to low incomes
Microfinance:
-Pros
-But
-Fills savings gap
-can relieve poverty
-source of finance without huge interest
-can empower women, targeted for women entrepreneurs, deemed more responsible, more likely to re pay loans, spend money wisely, more likely to benefit from it
But:
-entrepreneurial ventures are not always successful, how are loans paid back
-lenders can still apply exorbitant interest rates and bully, promotes debt
-loans are not big enough to alleviate poverty, money spent on consumption such as education and healthcare instead of investment into businesses.
Long term sources of growth and development
Natural factors: (land)
-fertilisation
-better agricultural methods
-building upwards
human capital factors:
-increase population ?, immigration
-improve health & education
-vocational training and re-training
Capital and technological factors:
-funding, savings and investment
-increase productivity
Institutional factors:
-adequate banking system
-good legal system
-good healthcare/education & infrastructure
International trade and development
-exploit comparative advantage, natural resources, increase exports, increase AD, increase growth, this leads to development
-consumers benefit from lower prices, increased choice and improved political relations,
-EoS, increase profits, corporation tax revenues
-technological transfer (importing capital goods, copy and growth of secondary industries breaking dualistic structure
Barriers to trade and development
Resource curse:
-falling prices
-depletion of resources
-slowing demand
Price fluctuations:
-demand and supply is inelastic
-few substitutes, necessities
-long production lags
-reduce incentive to invest, cannot plan into the future
-export revenues are not certain, cannot guarantee profitability
-incomes fall
Access to international markets limited: (link back to development)
-protectionist measures
-tariff escilation, higher tariffs on manufactured goods, incentivise firms to remain producing primary commodities
-non-convertible currencies
Long term decline in the terms of trade
Prebisch-singer hypothesis
Long run decline in the ToT for countries that depend on natural resource exports
Exports of primary exports are income inelastic, as income increases demand may increase a little, necessity goods
Imports are income elastic, as incomes rise demand rises for these imports, capital imports, manufactured goods
Well-being, quality of life, material standards of living, development suffers
Short term swings, use revenues to diversify the economy to break away dependence on primary commodities
X must increase to fund same quantity of M.
Policies to promote trade and thus economic development:
-trade benefits outweigh limitations
-Move away from primary product dependency
-Increase growth
Import substitution industrialisation (tariff on imported manufactured goods to allow domestic industries to grow):
-protects domestic jobs
-protect economy from foreign influence and potential domination of MNC’s.
Problems:
-short run job creation vs long run unemployment
-loss of comparative advantage gains: consumers pay higher prices
-retaliatory protectionism
Export promotion (remove protectionism):
-primary product dependency of developing countries
-potential technological advancements
Problems:
-protectionism abroad
-wider income inequality
-over dominance of MNC’s
Trade policies Part II
Trade liberalisation: (Washington consensus), fiscal discipline, market liberalisation, trade liberalisation
-better allocation of resources, reducing market failure, sustainable growth & development
-macroeconomic stability
-trickle down effect
Problems:
-more poverty creation: MNC’s with too much power
-income inequality
-fiscal cuts in key areas like healthcare and education
Bilateral trade agreements & regional PTA’s:
-better market access
-greater specialisation gains
Problems:
-coincidence of wants
-increased costs of production
-trade barriers in other countries
Diversification
FDI and development:
-Pro’s
-Con’s
Why FDI may occur ?
-abundant natural resources
-large market potential
-low cost labour
-regulations and standards tend to be lower
Pro’s:
-Injections into the circular flow, inc. employment, increase in potential growth
-fills savings gap
-positive BoP
-MNC’s and infrastructure development
-improved productivity domestically
-Technological transfer
-Inc. tax revenue collection
Cons:
-Employment may be short-term or less than expected, make profits and leave, bring workers
-MNC’s have too much power, negotiate a better tax position, influence policy making to benefit them instead local population
-MNC’s may invest in labour saving technology, capital intensive
-MNC’s may strip resources and leave
-Environmental costs, extract raw materials, no regard for environmental impacts
-Tax revenue collected may be lower than expected
Evaluation:
Sustainability and the way in which they are investing
