Emerging And Developing Economies Flashcards
(129 cards)
1
Q
List me the 3 main measures of development
A
The human development index (HDI)
The inequality-adjusted HDI (IHDI)
The multi-dimensional poverty index (MPI)
2
Q
What is the human development index
A
The HDI is a composite index of development and includes three elements:
Education (the mean years of schooling for an adult aged 25 and expected years of schooling for a pre-school child.
Health (life expectancy at birth)
Real GNI per head at purchasing power parities.
The index results in a number between 0 and 1: the higher the value, the higher the level of development.
3
Q
Tell me about the inequality-adjusted HDI
A
The IHDI is published alongside the HDI and takes into account how human development is distributed. Countries which are very unequal see their human development scores fall more than those that are less unequal. Therefore, the difference between the HDI and the IHDI represents the ‘loss’ in potential human development due to inequality.
4
Q
Tell me about the multi-dimensional poverty index
A
The global MPI is composed of 10 indicators corresponding to the same three components as the HDI: education, health and standard of living. Multi-dimensional poverty is made up of several factors that constitute poor people’s experience of deprivation - such as poor health, lack of education, inadequate living standard, disempowerment, poor quality of work and threat from violence.
5
Q
Which two aspects of poverty does the global MPI combine
A
Incidence, i.e. the percentage of people who are poor
The intensity of people’s poverty, I.e the average of the components identified before in which poor people are deprived.
6
Q
List me other indicators of development
A
The proportion of the male population engaged in agriculture
Energy consumption per person
The proportion of the population with access to clean water
Mobile phones per thousand of population
The proportion of the population with internet access.
7
Q
List me factors influencing growth and development
A
This section is primarily focussed on problems facing developing countries:
Primary product dependancy, Volatility in commodity markets, Level of savings and investment, Foreign exchange gap, Capital flight, Demographic factors, Access to banking and credit, Infrastructure, Education and skills, Absence of property rights, Non economic factors
8
Q
What may primary products be divided into
A
Primary products may be divided into hard commodities, such as copper, tin and iron ore,
and soft commodities, which include most agricultural crops, such as wheat, palm oil, rice and fruit.
9
Q
List me the issues a country may face that are dependant on primary products
A
Price fluctuation
Difficulty of planning investment and output
Natural disasters
Protectionism by developed countries
Low income elasticity of demand for primary products
10
Q
Tell me about the issue facing countries dependant on primary products: difficulty of planning investment and output
A
The price fluctuations cause uncertainty, which is a deterrent to investment
11
Q
Tell me about the issue facing countries dependant on primary products: natural disasters
A
Extreme weather such as hurricanes, tornadoes, droughts and tsunamis can cause severe disruption to the production of primary products, especially agricultural products.
12
Q
Tell me about the issue facing countries dependant on primary products: protectionism by developed countries
A
For example, the huge subsidies given to US cotton farmers have created great difficulties for Indian cotton farmers, who are unable to compete; the EU’s common agricultural policy has meant that there is no free access to European markets for food from developing countries.
13
Q
Tell me about the issue facing countries dependant on primary products: low income elasticity of demand for primary products
A
The Prebisch-Singer hypothesis states that the terms of trade between primary products and manufactured goods tends to deteriorate over time.
14
Q
Tell me what the Prebisch-singer hypothesis
A
This theory suggests that countries export commodities would be able to import less and less for a given level of exports. Prebisch and Singer examined data over a long period of time and found the data suggested that the terms of trade for primary commodity exporters did have a tendency to decline.
A common explanation for this is that the income elasticity of demand for manufactured goods is greater than that for primary products, especially food. Therefore, as incomes rise, the demand for manufactured goods increases more rapidly than demand for primary products and the prices of manufactured goods rise relative to the prices of primary products, so causing a decline in the terms of trade for countries dependant on the export of primary products.
15
Q
How may the Prebisch-Singer theory be criticised
A
First, some countries have developed on the basis of their primary products (eg Botswana: diamonds)
Second, if a developing country has a comparative advantage in a primary product, then its resources will be used more efficiently by specialising in the production of that product
Third, primary product prices rose sharply until the middle of 2008 while the prices of many manufactured products were falling.
Some economists argue that, in the case of food, prices are likely to increase as world population grows and incomes in countries such as China and India rise, so causing higher demand for many food traditionally eaten by those in developed countries.
16
Q
Although the Prebisch-Singer theory is real, why is the outlook for countries such as Bolivia good
A
Nearly half the worlds known reserves of lithium (which can be used to make batteries for hybrid and electric vehicles) are located in Bolivia. Given the decline in oil production, and the subsidies being given to companies to develop electric cars, demand for lithium can be expected to rise sharply in the future.
In contrast, countries producing and exporting copper, such as Chile, were faced with a 50% fall in price between the middle of 2008 and 2009.
17
Q
Tell me about volatility in commodity markets as a factor influencing growth and development
A
Demand for, and supply of, commodities tend to be price inelastic. In the case of demand, this is because they are required in the production of other goods for which demand is also price inelastic, such as pasta, bread and steel. Supply is inelastic because a long growing period is required for soft commodities (most agricultural commodities) while for hard commodities, eg coal and diamonds, considerable time is required for developing new mines. Consequently, any demand side or supply side shock will result in significant price change. In turn, price changes will result in fluctuations of producers’ incomes and foreign exchange earnings. For example, since demand is price inelastic, then a fall in price will cause total revenue to fall and, therefore, the foreign currency earnings from exports to fall.
18
Q
Why may a shift in the supply curve of an agricultural commodity occur
A
Any shift in the supply or the demand curve would cause a sharp change in price. A shift in the supply curve of an agricultural commodity might occur if there is a drought, while and earthquake might disrupt the production of copper mining. Since demand is price inelastic, then a leftward shift in the supply curve would cause a significant increase in price.
19
Q
Why has demand for commodities increased
A
A change in the conditions of demand would cause a significant price change because supply is price inelastic( lines are close to vertical). Demand has increased for a number of reasons:
An increase in world population, which is now over 7 billion
An increase in real incomes, which has led to increased demand for many commodities (for example, the demand for beef, which requires large amounts of grain for animal feed, has increased significantly)
An increased demand for grain to be used for fuel
20
Q
What’s the GDP per capita like In developing countries
A
Many developing countries have a low GDP per capita and consequently they hold inadequate savings to finance the investment seen as essential to achieve economic growth and development. The Harrod-Domar model illustrates the problem.
21
Q
What problem does the Harrod-Domar model illustrate
A
Countries have a low GDP per capita and so hold inadequate savings to finance the investment seen as essential to achieve economic growth and development.
22
Q
What does the Harrod-Domar model look like
A
Low incomes -> low savings -> low investment -> low capital accumulation -> low incomes
It illustrates low GDP per capita and the savings gap.
It’s like a cycle woah 🚲
23
Q
What other gap is the foreign exchange gap associated with
A
Associated with the savings gap, many developing countries face a shortage of foreign exchange
24
Q
Why do countries face a shortage of foreign exchange
A
This may be the result of a variety of factors, including:
Dependence on export earnings from primary products
Dependence on imports of capital goods and other manufacturing goods
Capital flight
Debt
25
Why is debt a particular problem for developing countries facing a shortage of foreign exchange
Debt is a particular problem for some emerging and developing countries and has become an issue for some developed countries, for example Greece, since the financial crisis. Many developing countries borrowed money at times of low interest rates, only to find that they were struggling to service the debt (pay interest on it) some years later.
26
Why has debt become a problem to developing countries
Risky decisions to borrow money to finance major investment projects at times when the world economy was strong and/or the prices of the goods which they were exporting were high
An increase in oil prices, which presented particular problems over the periods of such price increases
A fall in the value of the currencies of developing countries, which increased the burden of foreign debt
Loans taken out to finance expenditure on military equipment
When considering debt, it is important to remember that the absolute size of the debt is less important than a country’s ability to finance it. This may be measured by examining data on debt service payments as a percentage of GDP or debt service payments as a percentage of export earnings.
27
What does capital flight and interest payments on debt result in
An outflow of foreign currency from the current account of the balance of payments, thus making it more difficult for developing countries to finance imports.
28
When does capital flight occur
This occurs when individuals or companies decide to place cash deposits in foreign banks or buy shares or other assets in foreign countries. This has serious implications.
29
What are the serious implications of capital flight
It contributes to the savings gap and foreign currency gap, and consequently..
It restricts growth
It reduces the tax base because the country loses any tax payable on these assets
30
Tell me about demographic factors and, growth and development
Population growth is particularly rapid in some of the poorest countries of the world, such as Malawi and Mozambique. Meanwhile, population is falling in some developed countries, such as Italy and Germany.
Population growth may be analysed in relation to the views of Thomas Malthus, who predicted at the end of the 18th century that famine was inevitable because population grows in geometric progression, whereas food production grows in the form of an arithmetic progression. Although his predications were proved to be incorrect for Britain in the 19th century, some economists believe that they are still relevant for some of the poorest developing nations. In these countries the growth of the population is greater than the growth in GDP, with the result that GDP per capita is falling.
31
Tell me how access to credit and banking influences growth and development (micro finance)
Inability to borrow money is obviously important for both entrepreneurs who wish to start up new businesses and existing firms that may need credit to fund the purchase of capital and raw materials to operate efficiently.
In some developing economies, banking services are poor or almost non existent. However, micro finance schemes have helped to provide extremely poor families with small loans (micro credit) to help them engage in productive activities or grow their tiny businesses. In particular, they can help the poor to increase income, build businesses and reduce vulnerability to external shocks.
32
What is infrastructure
Infrastructure covers the whole range of structures that are essential for an economy to operate smoothly. Includes:
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Transport
Telecommunications
Energy supply
Water supply
Waste disposal
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33
Tell me about infrastructure influencing growth and development
Poor infrastructure will make it difficult to attract both domestic and foreign investment and thus presents a significant obstacle to growth and development. On the other hand, a country rich in a natural resource demanded by other countries might benefit from FDI: a TNC might provide some infrastructure to the country in order to facilitate its business investment eg. New roads, thus benefiting the whole economy.
34
Tell me about education and skills influencing development and growth
A country whose education standards are poor where there is a low school enrolment ratio is likely to experience a slow rate of economic growth because the productivity of the workforce will be low. It will also act as a deterrent to global (transnational) companies to invest in the country because of the costs involved in educating and training workers.
35
Tell me about the education /prevention of HIV and development
A particular problem for some countries is the prevalence of HIV and AIDS; when an adult develops AIDS, he or she may be forced to give up work. This mean that the children might be withdrawn from school, either because the school fee can no longer be afforded or because the children are required to work at home. A further problem arises if it is the teachers who contract AIDS, forcing them to give up work. The training of workers may be disrupted by AIDS, particularly if s global company is involved and it decided that it is no longer profitable to operate in the country. The combined effect of these problems is to reduce the quantity and quality of education and training.
36
Tell me how the absence of property rights may influence development and growth
If individuals do not have property (ownership) rights, eg over land or property, then this might act as a constraint on economic growth and development. The reason is that, without any form of collateral, they would find it difficult to secure a bank loan which they might require to start a business.
37
List to me non economic factors that may influence growth and development
Corruption
Poor governance
Civil wars
Political instability.
Geography
38
How could corruption influence development and growth
Corruption is usually defined as the use of power for personal gain. It may take a variety of forms, including bribery, extortion and diversion of resources to the governing elite. Corruption acts as a constraint on development when it causes an inefficient allocation of resources.
39
How may poor governance influence growth and development
Poor governance implies that the rulers of a country have adopted policies that result in the country’s resources being allocated inefficiently. Government failure (wheee government intervention results in a net welfare loss triangle) might also be evident as part of poor governance.
40
Tell me how civil wars may influence growth and development
Civil wars, such as those that have occurred in Sudan and the democratic republic of Congo, disrupt growth and development. Indeed, in so far as they actually cause destruction of infrastructure and the death of many people, they might negate any progress made in previous years.
Similarly, political instability results in a considerable degree of uncertainty, which does not provide a sound basis on which businesses can operate.
41
How may non economic factors influence development and growth
These issues can deter both domestic investment and foreign direct investment and so limit the possibilities for growth and development.
Geography may also have a significant impact on a country’s ability to develop. For example, economic development is limited in a land locked country such as Niger because of isolation from world markets resulting from transportation costs.
42
Is there a single strategy/list of strategies we can use in every country to promote growth and development
No, each country is individual, having a different history, geography and natural resources. Consequently, policies which may appear to have worked in one country will not necessarily be successful in another country.
In practice it is likely a combination of strategies may be required.
43
List me the market orientated strategies to influence growth and development
Trade liberalisation
Promotion of FDI
Removal of government subsidies
Floating exchange rates
Micro finance schemes
Privatisation
44
List me the interventionist strategies to influence growth and development
Development of human capital
Protectionism
Managed exchange rates
Infrastructure development
Promotion of joint ventures
Buffer stock schemes
45
Tell me other strategies to influence growth and development
Industrialisation
Development of tourism
Development of primary industries
Fair trade schemes
Aid
Debt relief
46
What are market-orientated strategies
These strategies work through the operation of market forces. They usually involve measures to remove government intervention
47
Tell me what trade liberalisation is
A market orientated strategy
Trade liberalisation refers to the lowering or complete removal of trade barriers such as tariffs, quotas and non tariff barriers. Countries that have had sustained growth and prosperity have opened up their markets to trade and investment. By liberalising trade and focusing on areas of competitive advantage, countries can benefit economically.
When tariffs are reduced, the world price of a good falls, resulting in an increase in consumer surplus. Imports will increase of the good to other countries.
48
What are the benefits of trade liberalisation on consumers, companies and a country’s economy.
Consumers benefit because liberalised trade can help to lower prices and increase the choice and quality of goods and services available.
Companies benefit because liberalised trade diversifies risks and enables firms to benefit from economies of scale, resulting in lower long run average costs.
A country’s economy may benefit from trade liberalisation because it promotes competition, and usually leads to increased investment and productivity.
49
The OECD has estimated that if G20 economies reduced trade barriers by 50%, then there would be:
Increased employment, eg a 0.3-3% rise in jobs for lower skilled workers and a 0.9-3.9% rise for higher skilled workers, depending on the country.
Higher real wages, an increase in real wages of 1.8-8% for lower skilled workers and 0.8-8.1% for higher skilled workers, depending on the country.
Increased exports: all G20 countries would see a boost in exports. In the long run, many G20 countries could see their exports rise by 20% and those in the eurozone by more than 10%.
50
What are the drawbacks of trade liberalisation
It may negatively affect some industries or some jobs.
It has adverse effects on the environment (external costs associated with trade).
It may negatively affect infant industries in developing and emerging economies.
51
Tell me about the promotion of FDI to encourage growth and development
Foreign direct investment is viewed as being desirable because it acts as an injection into the circular flow, provides employment opportunities, and increases the productive potential of the economy. Therefore, governments may try to promote FDI in a variety of ways.
52
How may governments try to promote FDI
Reduction in corporation tax
Tax incentives and grants
Reduction in bureaucracy, eg easing of planning regulations
Liberalisation of labour laws, eg ease of hiring and firing workers; zero hours contracts
Reducing trade barriers so that it is easier to import components and to export finished goods
53
Tell me about the removal of government subsidies to influence growth and development
Subsidies distort the operation of market forces and are likely to result in a misallocation of resources. Governments in India, Egypt and Indonesia have been trying to cut food and energy subsidies because of their cost and the distorting effects which they have on their economies.
54
Tell me about using floating exchange rates to influence growth and development
Allowing the exchange rate of a currency to float might result in a depreciation against other currencies, so making the country’s goods and services more competitive. This might encourage global companies to invest in that country since the currency is no longer overvalued.
55
What are micro finance schemes
Micro finance is a means of providing extremely poor families with small loans (microcredit) to help them engage in productive activities or grow their tiny businesses. It can help the poor to increase income, build businesses and reduce vulnerability to external shocks. The pioneer of microfinance was Muhammad Yunus, who established the Grameen bank in Bangladesh.
56
What are the key features of micro finance schemes
Microcredit insists on repayment (in contrast to development aid)
Interest is charged to cover the the costs involved
The focus is on groups whose alternative sources of income are limited to the informal sector, where the interest charged would be high.
57
Who are the main clients of microfinance
Women (who form more than 97% of the clients)
The self employed, often household based entrepreneurs
Small farmers in rural areas
Small shopkeepers, street vendors and service providers in urban areas.
58
Why has microfinance been criticised
Concerns have been raised about the repayment rate, collection methods and questionable accounting practices
On a larger scale, some argue that an overemphasis on microfinance to combat poverty will lead to a reduction of other assistance to the poor, such as official development assistance or aid from non government organisations (NGOs)
59
Tell me about privatisation to influence growth and development
The sale of publicly owned assets to the private sector through the issue of shares has been a popularity policy in developed economies for many years and has also been adopted by some developing countries. Privatisation is seen as a way of increasing efficiency and productivity as a result of competition and the profit motive, which are characteristics of the private sector.
60
What are interventionist strategies like
These strategies involve intervention by the state in order to influence the allocation of resources. Various forms are considered in the following cards...
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61
Tell me about the development of human capital to influence growth and development
Countries with poor education standards and low school enrolment ratios are likely to experience slow rates of economic growth. Therefore, improvements in access to education and in the quality of education would help to increase the skills and productivity of the workforce. Such improvements would also encourage FDI by global companies in these countries.
62
Tell me about protectionism as a strategy to promote growth and development
This strategy is aimed at constructing a path towards diversification and industrialisation. It’s characteristics include placing controls on imported goods, eg tariffs and quotas. This helps to promote import substitution (I.e replacement of imports with domestically produced manufactured goods). It is sometimes referred to as an inward-looking strategy.
The aim of protectionism is to enable a country to diversify in a controlled way until it has built a strong domestic base. This approach will be most effective where a country’s domestic market is large enough to enable industries to benefit from economies of scale. Once achieved, industry will be strong enough to cope with foreign competition.
63
What are the drawbacks to protectionism
Comparative advantage is distorted and so resources will not be allocated efficiently.
The lack of competition could result in inefficiency.
64
Tell me about managed exchange rates to influence growth and development
Some countries try to maintain overvalued exchange rates with the aim of keeping down the costs of imports, especially of oil and capital equipment. In turn, this would make it easier for them to grow and develop.
65
Tell me about infrastructure development to influence growth and development
Infrastructure refers to the physical and organisational structures and facilities, such as buildings, roads, railways, power supplies and the internet, needed for the operation of a society or enterprise. Without these it would be difficult for a country to grow and develop.
66
Tell me about the promotion of joint ventures to influence growth and development
A joint venture is an association of two or more businesses for the purpose of engaging in a specific enterprise for profit. Firms might enter into joint ventures to combine strengths and increase their competitive advantage whilst minimising risks.
67
Tell me examples of joint venture
In 2012, Jaguar Land Rover sealed a joint venture with Chinese company Chery automobile for the purpose of manufacturing and distributing luxury cars to Chinese consumers.
Kellogg company entered a joint venture agreement with Wilmar international limited for the purpose of selling and distributing cereal and snack foods to consumers in China.
68
Tell me about using buffer stock schemes to influence growth and development
One method of reducing price instability is to adopt schemes which involve storing and releasing the commodity in times of surplus and shortage.
69
Describe how a buffer stock scheme might operate
A ceiling price: this is the maximum price which would be allowed
A floor price: this is the minimum price which would be allowed
A buffer stock would be established: this could be operated either by a government or by a producers’ association. It would store or release stocks as required in order to reduce price fluctuations to the agreed limits.
Analysis of diagram is simpler using a Classical LRAS curve (vertical) so supply shifts are clear in relation to change in price and demand.
70
Define buffer stock scheme
A buffer stock scheme is designed to reduce price fluctuations. It involves setting a ceiling and floor price and the buying and selling of stocks to maintain price within these limits.
71
What’s the critique of buffer stock schemes
If the floor price is set too high, then there will be surpluses each year.
Equally, if the ceiling price is set too low, there may be insufficient stocks available in years of shortage.
The schemes involve costs of storage
Success depends on ensuring that all the major producers agree to be part of the scheme and that none of them cheats, eg by selling to a major consumer at a reduced price.
72
Tell me about industrialisation and the Lewis model to influence growth and development
It has traditionally been assumed that development is synonymous with industrialisation, i.e that development requires an increasingly large manufacturing sector. The structural change/dual sector model (the Lewis model) is based on the view that development requires a move away from traditional agriculture (characterised by subsistence, low productivity and barter) to more productive manufacturing (characterised by high productivity and monetary exchange)
73
What is the Lewis model also known as
The structural change/dual sector model
74
Tell me the key features of the Lewis model
This model describes the transfer of surplus labour from a low productivity (subsistence) agricultural sector to a high productivity industrial sector.
Lewis thought that, because of the excess supply of workers, the marginal productivity (MP) of agricultural workers might be zero or close to zero. This is based on the law of diminishing marginal returns.
With MP at zero, then the opportunity cost of transferring workers from the agricultural sector to the industrial sector would be zero.
Industrialisation will be associated with investment (possibly from global companies), which will increase productivity and profitability. If profits are reinvested, then further growth will occur.
The share of profits as a percentage of GDP will increase, as will the savings ratio, providing more funds for investment and continued economic growth.
75
Define law of diminishing returns
This states that, when successive units of a variable factor of production are added to fixed factors, the marginal product will eventually decrease.
76
Tell me the criticisms of the Lewis model
Profits made in the industrial sector might not be invested locally, especially if firms are owned by TNCs
Reinvestment might be made in capital equipment, with the result that extra labour is not required.
Empirical evidence suggests that the assumption of surplus labour in the agricultural sector and full employment in the industrial sector is invalid, eg favelas in South America.
77
Tell me about the development of tourism to influence growth and development
Some countries have developed on the basis of investment and tourism. There are advantages to this strategy over primary product dependancy, not least that demand is likely to be income elastic. The expansion of tourism has strong attractions for developing countries, such as Kenya and the Maldives.
78
Tell me the advantages associated with the development of tourism
It is a valuable source of foreign currency as tourists spend money on goods and services provided within the local economy.
Tourism is likely to attract investment by transnational hotel chains.
In turn, this will increase GDP via the multiplier.
Jobs will be created, both as a direct result of the investment in the tourist and leisure industries and also as a result of the multiplier effects within the economy.
All of the above will help to increase tax revenues for the government, which may be used to improve public services.
It can help to preserve the national heritage of the country,
Improvements in infrastructure may be made (eg a transnational company provides new roads as part of its contract to build hotels)
79
Tell me the disadvantages associated with tourism
It made be associated with significant increase in imports, not only for the capital equipment required to build hotels and facilities but also to meet the demands of tourists for specialist foods and goods. Further, the balance of payments on current account might be adversely affected by the repatriation of profits to shareholders of TNCs.
In times of recession, demand may fall proportionately more than the fall in real income, assuming that demand is income elastic
Employment may only be seasonal in nature. Further, the jobs created may only be low skilled and low paid if the TNC supplies its own managers and professional staff.
Tourism is subject to changes in fashion. In the developed world, Spain has suffered from a significant downturn in tourism in recent years, as Europeans now prefer more exotic destinations.
There may be significant external costs (eg increase in waste, pollution of beaches, water shortages for local people) as the needs of tourists are prioritised. The demands to the environment caused by tourists might result in restrictions (eg the restrictions on the number of tourists allowed each day on the Galápagos Islands; visitors to Machu Picchu are limited by the requirements to have a guide.
80
Tell me about the development of primary industries to influence growth and development
Some developing countries have achieved growth and development on the basis of investing in primary industries. The case for focusing on agriculture and hard commodities is that the country may have a comparative advantage in the production of these goods and so resources are more efficiently allocated to that use. Such a comparative advantage should be viewed in a dynamic context (ie as the country experiences growth, the government may use its tax revenue to spend on education). As a result of such a dynamic, the country may gain a comparative advantage in other products.
Some countries have specialised in producing primary products with a high income elasticity of demand, eg Peru produces asparagus, Chile producers blueberries, wine and papaya. Consequently, during periods of world economic growth, they have benefited from significant increases in demand.
81
Tell me about fair trade schemes to influence growth and development
The aim of fair trade schemes is ‘to address the injustice of low prices’ by guaranteeing that producers receive a fair price. It means paying producers an above market price for their produce, provided they meet particular labour and production standards. The premium is passed back to the producers to spend on development programmes.
The market for fair trade products has been growing rapidly and there are now over 2,500 product lines, including chocolate, tea, coffee, bananas, wine and clothes.
82
Tell me the advantages of fair trade schemes
Producers receive a higher price
Extra money is available to spend on education, health, infrastructure, clean water supplies, conversion to organic farming and other development programmes in the producers countries.
There are smaller price fluctuations, allowing producers to be shielded from market forces.
The extra money can also be used to improve the quality of products.
Producers are enabled to diversify into other products.
83
Tell me about the criticisms of fair trade schemes
Distortion of market forces: low prices are due to overproduction and producers ought to recognise this as a signal to switch to growing other crops. Further, the artificially high prices encourage more producers to enter the market.
Certification is based on normative views on the best way to organise labour, eg in the case of coffee, certification is only available to cooperatives of small producers.
Guaranteeing a minimum price provides no incentive to improve quality.
It is an inefficient way to get money to poor producers: consumers pay a large premium for fair trade goods but much of this goes to supermarkets in profits. Only 10% of the premium paid for fair trade coffee trickles down to the producer.
The schemes may create a dependancy trap for producers.
84
What is the term ‘aid’ used to describe
Used to describe the voluntary transfer of resources from one country to another or to loans given on concessionary terms (ie less than the market rate of interest).
85
Official development assistance relates specifically to...
Aid provided by governments and it excludes aid given by voluntary agencies.
86
Tell me about aid given for more general purposes
Aid may also be given for emergency relief (eg in the case of natural disasters or for the support of refugees during a civil war). This kind of aid is not usually contentious and so the focus here is on aid given for more general purposes. The UN goal for the amount of aid offered by developed countries (agreed in 1970) is 0.7% of GDP
87
List the 3 types of aid
Tied aid
Bilateral aid
Multilateral aid
88
What’s tied aid
This is aid with conditions attached (eg there might be a requirement to buy goods from the donor country or the aid might be given on condition that there are some economic and political reforms)
89
What’s bilateral aid
This is aid given directly by one country to another
90
What’s multilateral aid
This occurs when countries pay money to an international agency which then distributes it to countries on the basis of certain criteria.
91
Tell me the arguments in favour of aid
The reduction in absolute poverty
Filling the savings gap experienced by many developing countries (this may be related to the Harrod-Domar model)
Providing funds for infrastructure - essential if the country is to industrialise. Aid, therefore, will help to increase aggregate demand and investment will have a multiplier effect on GDP. In turn, this will help to promote sectoral development.
Improving human capital through promotion of health care, education, training and expertise (eg the training of teachers and doctors). In some countries, aid might be used to help the prevention and treatment of aids.
Possible contribution to increased globalisation and trade, both of which are frequently associated with growth and development.
The reduction in world inequality.
92
What are the arguments against the use of aid, except in the case of emergency aid
It results in a dependancy culture (I.e the recipients of aid become dependant on it and do not therefore pursue appropriate macroeconomic policies to achieve independent growth and development.
Aid might not benefit those for whom it is intended (eg it could be diverted into military expenditure or it could be ‘lost’ as a result of corruption)
There is no clear evidence that aid contributes to the reduction of absolute poverty or to growth and development.
Right-wing economists argue that aid distorts market forces and results in an inefficient allocation of resources, while left-wing economists regard aid as a form of economic imperialism by which donor countries aim to secure political influence in the countries to which they give aid.
Aid in the form of concessional loans involves the repayment of interest, in which case there will be an opportunity cost for the developing countries, eg improvements in health and education services.
93
Tell me about which countries are affected by debt and who do they owe it to
The burden of debt bears heavily on some countries , eg The Gambia, Mali, Bolivia and Malawi.
The debt is usually owed to all of some of the following: the IMF, the world bank, governments and banks in the developed countries.
94
Tell me about debt relief to influence growth and development and the success of it
The problem is that servicing the debt may account for a disproportionate amount of public expenditure, to the extent that resources available for expenditure on health and education are severely limited. As a result, pressure to cancel the debts of the poorest countries has increased.
Under the heavily indebted poor countries (HIPC) initiative and the multilateral debt relief initiative (MDRI), the world bank provides debt relief to the poorest countries of the world. The HIPC initiative was started in 1996 by the IMF and world bank with the aim of reducing external debts of the poorest and most heavily indebted countries of the world to sustainable levels. Changes were made in 1999 to make the process quicker and deeper to strengthen the links between debt relief poverty reduction and social policies.
In 2005, the HIPC initiative was enhanced by the MDRI in order to speed up progress towards meeting the Millennium development goals (MDGs). Forty one countries were identified as being eligible for HIPC initiative assistance and by the end of 2015, 36 countries had benefited from HIPC debt relief.
95
Tell me the arguments for debt cancellation
Developing countries would have more foreign currency with which to buy imported capital and consumer goods from the developed countries.
To the extent that the money released from debt cancellation is used for the purchase of capital goods, then there is the prospect of higher economic growth in the future.
In turn, this means that developing countries would be able to buy more goods from richer countries.
It would help to reduce absolute poverty
It would help to reduce both the savings gap and the foreign exchange gap.
It might help to conserve the environment, eg ‘debt for nature swaps)
96
Tell me the arguments against the cancellation of debt
In comparison with aid, it is likely to take much longer to agree a debt cancellation programme.
Unless conditions are attached to debt cancellation, there is not guarantee that the governments of these countries will pursue sound macroeconomic policies (I.e there is a moral hazard problem)
Corruption might mean that the benefits of debt cancellation are channelled to government officials rather than to the poor.
Shareholders of banks in the developed world may bear 🐻 some of the burden of debt cancellation.
It may be much less effective than the introduction of policies to reduce protectionism in developed countries.
97
What is the world bank
World bank is an international institute- the international bank for reconstruction and development (IBRD)
98
How has the role of the world bank changed
The original role of the world bank was to provide long term loans for reconstruction and development to member nations that has suffered in the Second World War.
In the 1970s, it’s role changed to setting up agricultural reforms in developing countries, giving loans and providing expertise.
In 1982, Mexico defaulted on it’s loan repayments. As a result, the world bank now imposes structural adjustment programmes (SAPs), which set out the conditions on which loans are given. The aim is to ensure that debtor countries do no default on the repayment of debts.
99
Tell me about why the SAPs from the world bank were criticised
Structural adjustment programmes were based on free market reforms (eg trade liberalisation, removal of state subsidies on food, privatisation and reduction in public expenditure to reduce budget deficits). However, these free market reforms were criticised because they:
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Did little to help the worlds poor
Failed to promote development
Increased inequality
Caused environmental degradation
Resulted in social and political chaos in many countries
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The widespread criticism of SAPs and the devastating effect which they had on some developing countries resulted in the world bank changing its focus to concentrate on poverty reduction strategies.
100
Where the world bank now direct aid towards
The world bank now concentrates on poverty reduction strategies, with aid being directed towards:
Countries following sound macroeconomic policies
Healthcare
Broadening education
Local communities rather than central governments
101
What does IMF stand for
International Monetary Fund
102
What was the original role of the IMF
Increase international liquidity and to provide stability in capital markets through a system of convertible currencies pegged to the dollar. It also lent to countries with temporary balance of payments deficits on current account.
103
How has the role of the IMF changed
In the 1970s, there were significant oil price shocks and many countries - especially developing countries - suffered from rapid inflation, huge balance of payments deficits and debt crises. As a result, most currencies were allowed to float (ie the peg to the dollar was broken). The IMF extended its role to include involvement in economic development and poverty reduction.
To ensure repayment of loans, the IMF imposed restrictions and conditions on the economic policies to be followed by developing countries - stabilisation programmes - to achieve internal and external balance. In practice these were similar to structural adjustment programmes (SAPs) by the world bank.
104
In 2006, what was the new role that the IMF was given
Namely, to conduct multilateral surveillance of the global economy and to suggest steps that the leading nations should take to promote it. It was also required to ensure more balanced growth and to reduce global imbalances.
105
How is the IMF funded
The imf is funded by quotas from countries, based on their GDP. Up to a quarter of the quota is payable in dollars, euros, yen or sterling or special drawing rights (SDR) and the other three quarters in the country’s own currency.
In 2010 December, it was agreed that the IMFs quota resources would be doubled in order to deal with expected new demands resulting from the sovereign debt crisis.
The IMF can also borrow on the basis of the ‘New arrangement to below” and the ‘general agreement to borrow’. These provide the possibility of accessing about $580 billion in the event of a major financial crisis.
106
What is an SDR
A special drawing right value is defined as the value of a fixed amount of yen, dollars, pounds and euros, expressed in dollars at the current exchange rate. These SDRs represent a potential claim on other countries foreign currency reserves, for which they can be exchanged voluntarily.
107
Tell me about the roles of the IMF and world bank as currently blurred
Both have a role in the developing world and in poverty reduction and it is suggested that they should be reformed to reflect the changed needs of the global economy.
108
Critics of the IMF as they currently operate suggest what reforms
The IMF should be slimmed down and should undertake short term lending to crisis hit countries
109
Critics of the World bank as they currently operate suggest what reforms
The world bank should act as a development agency and undertake a detailed appraisal of the creditworthiness of recipient countries.
110
Tell me about the work of NGOs
The work of non-government organisations (NGOs) has brought community-based development to the forefront of strategies to promote growth and development (ie the focus has moved away from stare managed schemes).
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The key characteristics of these community based schemes by NGOs are:
Local control of small scale projects
Self reliance
Emphasis on using the skills available
Environmental sustainability
112
Are there several ways of measuring development
Yes, such as the human development index (HDI)
113
What’s one of the most significant factors in influencing growth and development
Primary product dependancy. This may be analysed by reference to the Prebisch -Singer Hypothesis
114
List factors affecting growth and development
Insufficient saving and foreign currency, fluctuations in commodity prices, capital flight, population issues, debt, access to credit and banking, primary product dependancy, education and skills, unallocated property rights.
Non economic factors include corruption, wars and political instability
115
What are the market orientated strategies to achieve growth and development
Trade liberalisation, floating exchange rates and privatisation
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What are the interventionist strategies to achieve growth and development
Protectionism, managed exchange rates and buffer stock schemes
117
What are the other strategies to achieve growth and development
Industrialisation, development of tourism, aid, debt relief and fair trade schemes
118
What are organisations can play an important role in promoting growth and development
The IMF, world bank and non-government organisations (NGOs)
119
Why is the demand for most primary products income inelastic
Many hard commodities such as cotton and iron ore are raw materials used to manufacture goods required for everyday purposes, while soft commodities such as wheat and rice are part of the staple diets of many people therefore, the demand for both hard and soft commodities tends to rise proportionately less than increases in real income.
120
Is the value of the marginal propensity to save likely to be high or low in poor countries
The marginal propensity to save is likely to be low because poor people have have to spend a high proportion of their incomes simply to provide for their basic human needs.
121
What will happen to a country’s dependency ratio if the birth rate remains high but the death rate decreases
It will increase because there will be more dependants, ie those under 16 and over 65, relative to the number of workers.
122
Why might an absence of property rights restrict growth and development
If individuals have no property rights, they will not have any collateral to secure a loan from a bank to start a business.
123
Why might trade liberalisation be resisted by some developing countries
Producers in developed countries may have monopsony power, enabling them to drive down the prices they pay for goods from producers in developing countries.
124
Give two examples of market orientated strategies and two examples of interventionist strategies to promote growth and development
Market orientated strategies include trade liberalisation and removal of government subsidies.
Interventionist strategies include managed exchange rates and development of human capital.
125
Name two countries in which tourism has been a significant factor in influencing growth and development
Kenya and Mexico
126
What is the difference between aid and FDI
FDI is undertaken by transnational companies with the aim of making a profit for shareholders, whereas aid refers to grants or loans at less than the market rate of interest (called concessional loans) given to developing countries by governments, international organisations or non governmental organisations.
127
What is meant by debt servicing and why is it significant
This refers to the interest paid on loans. In the case of a government, it means that it would have less money available to spend on public services.
128
Why might there be a moral hazard problem if debts of developing countries are cancelled
There is a danger that countries whose debts have been cancelled will follow policies that result in further debts being built up in the future.
129
What has been the role of the IMF in helping countries with sovereign debt crises
It has loaned money to countries such as Greece, Ireland and Portugal in an attempt to prevent their governments defaulting on their debts. Strict conditions are attached to these loans, eg austerity measures to reduce fiscal deficits.
