Theme 4.3 Flashcards

Question

How can the savings gap influence growth and development?

Answer 1

● Developing countries have lower incomes and thus they save less. This means there is less money for banks to lend, reducing borrowing and thus reducing investment/consumption. A savings gap is the difference between actual savings and the level of savings needed to achieve a higher growth rate. ● The savings rate in Africa is around 17% of GDP compared to 31% on average for middle income countries. India is another country with a low savings as a share of GDP.

Answer 2

● The Harrod-Domar model suggests savings provide the funds which are borrowed for investment purposes and that growth rates depend on the level of saving and the productivity of investment. It concludes that economic growth depends on the amount of labour and capital and that developing countries have a vast labour supply, so their problems are caused by capital. In order to improve capital, investment is necessary and investment requires savings. ● However, there are problems with this model. Economic growth is not the same as economic development. It is difficult for individuals to save when they have little income and borrowing from overseas causes problems with debt. It is possible that investment could be wasted.

Answer 3

-This occurs when exports from a developing country are too low compared to imports to finance the purchase of investment or other goods from overseas required for faster economic growth. -Ethiopia. In 2018, public debt was around 60% of GDP; most of it in foreign currency so it is possible that they will not have enough foreign currency to repay their debt. It is thought there are only enough currency reserves to pay for a month of imports.

Answer 4

● Large amounts of money are taken out of the country, rather than being left there for people to borrow and invest. If money was placed in banks within the country, then credit could be created by banks for consumers and businesses to spend. ● This can occur because of lack of confidence in the country’s stability, to hide it from government authorities or simply for profit repatriation. It can also occur because TNCs who caused the growth take profits back to their origin nation. ● This caused the Argentine economic crisis in 2001.

Answer 5

● Developing countries tend to have higher population growth, which limits development. If population grows by 5%, the economy needs to grow by 5% to even maintain living standards. This means developing countries need to have higher rates of growth to develop than more developed countries would do. ● The high population growth is caused by high birth rates, which increases the number of dependents within a country but does not immediately increase those of working age. It places strains on the education system and leads to youth unemployment. ● The population of Africa is expected to more than double by 2050, complicating efforts to reduce hunger.

Answer 6

Some people suggest a developing country could supplement its savings with injections from abroad (aid, borrowing or FDI). The tiger economies were famous for taking advantage if this. However, this can also bring issues for the developing nations: aid could have strings attached, borrowing could lead to debt and FDI will likely lead to profits leaving the country.

Answer 7

These are a group of economies in South East Asia (Hong Kong, South Korea, Singapore and Taiwan) that enjoyed rapid economic growth in the 1960s.

Answer 8

● During the 1970s and 1980s, developing countries received vast loans from banks in the developed world. Now, they suffer from high levels of interest repayment; sometimes even higher than the loans and aid they receive from developed countries, meaning money is flowing from developing to developed countries. ● This means they have less money to spend on services for their population and they may need to raise taxes, which limits growth and development. ● Borrowing for growth makes sense, just as firms borrow to expand, but the problem occurs when governments take on too much debt and do not spend it well.

Answer 9

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

Answer 10

● In a developed country, there is a complex network of buildings, roads, ports, railways, airports, utilities and electricity cables. ● Low levels of infrastructure make it hard for businesses to trade and set up within the country, for example if there are a lack of roads. It makes their services and production less reliable. ● However, the development of infrastructure can be expensive and tends to conflict with environmental goals. ● India is a good example of country suffering from poor infrastructure. For example, they saw power blackouts in 2012 and this damages their potential tourism industry. About half their roads are not paved and they need to invest around $400bn in the power sector.

Answer 11

-This is a process which many developed countries have passed through, where by improved health lowers the death rate, and then subsequently the birth rate also falls. This allows for low and stable population growth. This occurred in England and Wales between 1750 and 2000.

Answer 12

● Poor education within these countries means that workers are low skilled, sometimes unable to read and write, so have low levels of productivity. ● Countries like China and South Korea invested heavily in their human capital when they were developing, and this has benefitted them in the long term. Ethiopia suffers from high illiteracy rates at around only 49%, as the need for education is often underestimated, and drop out rates are high to focus on helping with a family farming business. ●However, there is debate about what type of education is needed and problems concerning over-education i.e. if graduates are unable to find graduate level jobs.

Answer 13

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

Answer 14

-Corruption -Diseases -Poor climates and geographical terrain -Civil wars

Answer 15

● Many developing countries suffer from corruption. Corruption means individuals will make decisions which maximise the bribes they receive as oppose to those which maximise development and output. Leaders are likely to make decisions which benefit themselves rather than benefiting the economy. High levels of bureaucracy are often linked to corruption and this is costly and time-consuming, deterring new businesses and reducing output of those already established. Ghana’s high level of freedom and democracy is one reason why it has been able to develop so quickly.

Answer 16

HIV/AIDS has had a major impact on sub-Saharan developing countries in Africa. In Botswana, 37.3% of the population aged 15-49 was affected in 2003. Due to its impact of those in the working age, it weakens the labour force and also reduces future educational attainment, limiting long-term growth.

Answer 17

Conflicts cause significant levels of poverty as well as infrastructure, which makes rebuilding very difficult. Foreign investment is also likely to be lower in a country which experiences high levels of conflict. The civil wars in DRC has led to very little economic growth and development.

Answer 18

-Land-locked nations such as Rwanda will face challenges with trading and transport. -Some countries will face issues of mountainous terrain or arid conditions, and some may gain comparative agricultural conditions due to their climate.

Answer 19

Policies for growth should be market friendly. This means that wherever possible, markets should be able to function without government intervention. There will obviously, however, be circumstances where this isn’t possible and market intervention will be necessary.

Answer 20

This is a strategy for encouraging development that relies on enabling markets to work effectively.

Answer 21

-Trade liberalisation -Promotion of FDI -Removal of government subsidies -Floating exchange rate systems -Microfinance schemes -Privatisation

Answer 22

● Countries can aim for export led-growth. ● Removing trade barriers will mean that domestic industries either close or are forced to become as efficient as other world producers. Resources will be allocated to their best use where the country has a comparative advantage. -Will also allow developing countries to import the capital they need to develop. ● Countries like Singapore and South Korea and regions like Hong Kong have benefitted from this method.

Answer 23

-Comparative advantage benefits may not always be equal, usually developed countries will benefit most. -Can cause primary product dependency in developing nations. -Creates short term job losses, and reduces protection for infant industries

Answer 24

● Firms tend to undertake FDI because production costs are lower in developing countries and because it enables them access to a new market. ● It is different from a loan because if the investment fails, it is the company who has to deal with it and the country does not owe money to foreigners. ● It also involves the transfer of knowledge from one country to another, with the company bringing production and management techniques and training for staff which will benefit the country as a whole. ● It will create jobs and leads to the effect of the multiplier. Labour productivity tends to increase and wages are often higher. It is a source of investment and can help to fill the savings gap. -Greater tax revenue for the government

Answer 25

● However, there is usually a repatriation of profits and developing countries may find the company exploits them, by offering lower wages and poorer conditions than they would in a developed country. ● The country will also lose some sovereignty and become dependent on another firm. Local competition may find it hard to set up and compete and the best jobs often go to imported labour, leaving only low skilled jobs for locals. ● Environmental damage and exploitation of natural resources and tend to become problems. -There isn’t a guarantee that it will cause the ‘trickle down effect’ which many predict that it will.

Answer 26

● They are often poorly targeted since subsidies on basic goods like rice will benefit everyone in the country, not just the poor. Economic theory suggests the problem would be better solved by giving poor households cash payments, as this would mean they were targeted at the poor. ● Subsidies to farmers and producers tend to lead to inefficiency and if they are given a large amount over a long period of time, the subsidy becomes ineffective in increasing development. In other cases, they can be beneficial in allowing an infant industry to grow. ● They represent a large amount of government spending, incurring an opportunity cost and often leading to high levels of debt. ● They can also cause problems in terms of corruption and criminality, for example in Venezuela subsidised fuel is smuggled across its borders and sold in neighbouring countries for profit. The fuel subsidies have also led to high emissions, an unintended consequence.

Answer 27

-Will be politically unpopular -May increase inequality -Will likely cause structural unemployment as firms will lose their global comparative advantage in the market.

Answer 28

● In these systems, market forces determine the currency. The country does not have to worry about their gold and foreign currency reserves and the government does not intervene. -Less currency speculation which is good for encouraging investment -Trade deficits will be partially corrected automatically.

Answer 29

-If this causes an initial depreciation, domestic firms may not be able to respond to increases in demand for exports, which could create inflationary pressure. -The currency volatility could make it difficult for stakeholders in the economy to make decisions for the future.

Answer 30

Micro finance schemes provide finance for small-scale projects in developing countries. 1) Micro-credit: Provision of small-scale loans 2) Micro-savings: Small amounts of savings can be made overtime, which then allows for this to gradually accumulate into a greater deposit. 3) Micro insurance: Where small businesses in developing nations are able to get small insurances which they couldn’t from commercial insuraners. 4) Technological remittance payments through phones.

Answer 31

-Micro-credit may still result in the selling of family assets, to taking out new loans in order to pay back previous loans. -Micro-savings: If banks charge high interest of the savings, this may erode their value -Micro insurance: Due to high risk and asymmetric info, the insurance may be larger than it would be otherwise. -Remittances: Can be large taxes on remittances, and can result on remittance aid rather than a country developing itself. Also encourages brain drains.

Answer 32

-A famine in Bangladesh in 1974 forced many into poverty. -The Grameen bank initiative was set up in 1976, which allowed those in poverty to access small loans on low interest repayments, by spreading the risk through applying for loans in teams of 5. -By 1998, over $2.4billion had been successfully loaned.

Answer 33

● Privatisation can end the corruption within a firm who is owned by the state, as well as encouraging them to be more efficient by increasing competition. ● Selling off a firm, particularly if it is loss making, will improve government finances and reduce levels of debt. ● The water industry in Ghana was privatised in 2006 but when the contract was expired in 2011, the government did not extend it. Water quality improved but reliability did not. There had been increased revenue and efficiency and improved customer service.

Answer 34

-However, if the firm is privatised as a monopoly there will be no competition within the market. -Can be associated with corruption where politicians or officials sell the company at below market price to a friend or family member or receive bribes to accept one company’s bid. -Economies of scale may be lost - In developing countries most skilled workers work for the public sector, so privatisation may reduce quality and efficiency.

Answer 35

-Development of human capital -Protectionism -Managed exchange rates -Infrastructure developments -Buffer stock schemes -Promoting joint ventures with TNCs

Answer 36

● This would provide workers with skills and training and thus help them to be more efficient and improve productivity. Businesses struggle to expand where there are skills shortages and it also limits innovation. ● Human capital could be developed through schools or vocational training, whether this be apprenticeships or simply classes provided for business people. ● Higher skills would allow the country to develop from the primary sector to a manufacturing sector, overcoming primary product dependency. ● Better education and healthcare also improves quality of life, and is under provided by the free market.

Answer 37

-Overspecialisation could cause structural unemployment/limit long term growth -Risk of a brain drain -Irrationality due to uneducated parents in developing countries may mean young women aren’t sent to school.

Answer 38

-Protectionism allows domestic industries to grow by keeping foreign goods out and protects them from strong competition. They can use a policy of import substitution, where they deliberately attempt to replace imported goods with domestically produced goods by adopting protectionist measures. ● This will create jobs in the short run and will allow the industry to develop, perhaps to the extent where the barriers can be removed, and the industry can compete globally.

Answer 39

● However, it means countries lose out from the benefits of specialisation and comparative advantage and could cause inefficiency, since domestic producers suffer from a lack of competition. Other countries are likely to retaliate. -Consumers will lose out due to higher prices.

Answer 40

-A country can fix its exchange rate in relation to another countries in order to maintain the competitiveness of its exports. (E.g with Senegal matching it’s exchange rate to the euro so raw material exports remained competitive).

Answer 41

-Encourages exports at the expense of domestic consumption. -Interest rates cannot be used to achieve other macroeconomic objectives. -Black markets in foreign exchange can develop. -Long-term speculation can make the rate difficult to sustain indefinitely.

Answer 42

● Infrastructure is essential for development; a country needs roads, airports, schools, hospitals, railways etc. ● Interventionists believe the government should provide these systems whilst a market-based system would be for the private sector to provide them. Infrastructure tends to suffer from the free rider problem and has very high capital costs, making it unlikely the private sector will develop it. Moreover, it has many positive social benefits which suggests the government should provide it.

Answer 43

● One problem of this is that the government may not have the funds to provide the infrastructure and it is argued that they may be inefficient. -Infrastructure projects are often associated with bribery and corruption, cause environmental damage and may be poorly built and maintained. ● Some argue that intermediate technology, which uses local materials and can be fixed locally, is better than large scale infrastructure.

Answer 44

● One way to reduce the exploitation of countries as a result of FDI would be to set up a joint venture. The government may insist that firms setting up production plants in their country find a local partner to create a jointly owned company with. This will help to keep some of the profits generated within the country, which can be used in investment. ● Tata Starbucks Pvt.Ltd is a joint venture company with Starbucks in India

Answer 45

-TNCs will often hold a dominant position in the partnership, and may use asymmetric information to get more from the government then they actually need, increasing their profits. -Partnership could also cause costs to rise through administration costs.

Answer 46

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

Answer 47

-It requires prices to fluctuate; if they keep falling, then the scheme will run out of money and if they keep rising, the scheme will run out of stocks. -They require huge start-up costs, as well as administration costs and problems of storage. ● Other countries may benefit from a buffer stock system since it keeps global prices fairly stable when undertaken by a group of countries, and so they can be seen as free riders of the system. This may mean that some countries will not want to introduce the system. ● The biggest issue is that minimum prices may be set too high, encouraging producers to become inefficient. They will produce as much as they like at low qualities knowing the government will buy excess.

Answer 48

● The Ivory Coast and Ghana implemented a buffer stock scheme for cocoa in 2017 due to low prices

Answer 49

-Industrialisation -Development of tourism -Development of primary industries -Fairtrade schemes -Aid -Debt relief

Answer 50

● The Lewis model assumed that developing countries had dual economies with a traditional agricultural sector, which had low wages, low productivity, underemployment and low savings, and a modern industrial sector, with high levels of investment and urbanisation. ● It suggested that the modern industrial sector would attract workers from rural areas by offering higher wages. Lewis believed that labour productivity was so low in agricultural areas that people leaving the area would have no impact on output and would in fact mean there was a surplus of food, since the same amount was being shared amongst less people. Those who moved to the urban areas would have higher incomes and thus more savings for investment. ● He believed savings and investment were the key to growth and thus growth could be achieved through rural-to-urban migration.

Answer 51

-There are significant costs in educating and training workers with the industrial skills they require. ● However, although labour productivity is low for some parts of the year, during planting and harvesting vast amounts of labour is needed. Also, it is not necessarily true that those with higher wages will save and invest their money. ● Recently, migration has led to urban poverty replacing rural poverty as the industrial sector is unable to provide jobs for all those who have moved. Improvements in technology will lead to a reduced demand for labour. ● It can be argued that industrialisation is a result of development, rather than a cause.

Answer 52

● It is possible for the government to build factories and plants to encourage the transition to industrialisation. This has been successful in countries such as South Korea, but in many countries the industry fails and so there is just a waste of scarce resources. ● Instead of industrialising, India went from agriculture to services as this is where they had a comparative advantage. This shows that not all countries will develop in the same way.

Answer 53

-Developing countries can take advantage of their climates and geography to develop through tourism. -Holidays are income elastic, so their demand will only grow and global wealth increases. ● Tourists represent a source of foreign currency, which will fill the currency gap. so countries will be able to fund their imports without negative consequences. ● Jobs are created locally since the tourism industry relies on low skilled workers who know the local area, rather than to high skilled workers which may be sourced from abroad. It is very labour intensive. ● The government will see higher tax revenues due to higher income and higher profits. It can provide funds to allow countries to diversify. -Tourism TNCs can fund infrastructure developments.

Answer 54

-Income elasticity means that the industries will suffer in global recessions. -Holidaymakers’ demands for products from their home countries mean that the tourism industry is associated with an increase in imports and so may not help the foreign currency gap at all. ● However, the industry is seasonal and involves low skilled, low paid jobs which means the effect of the multiplier is limited. Tourism destinations can go in and out of fashion, meaning some areas will see a loss of employment and that investment may only receive a short-term return. ● A large amount of wealth created will be withdrawn as TNCs repatriate their profits, causing problems involving capital flight. ● On top of this, the country can suffer from a large number of externalities, including pollution, waste, environmental damage and impact on culture.

Answer 55

● Some countries, such as Saudi Arabia, Norway and Australia, were able to develop because of an abundance in natural resources. The development of a primary industry provides funds to allow a country to diversify as well as allowing infrastructure development and better education.

Answer 56

● However, primary products are volatile and primary product dependency causes many issues. -Primary industries also suffer from corruption. ● The government can address the Dutch Disease, for example in Norway the government uses some of its oil revenues to invest overseas and this increases supply of their currency, depreciating it and helping other industries to compete overseas.

Answer 57

-There are a number of organisations which monitor that what is being sold under the Fairtrade label conforms to a number of key principles: a fair price, community development, fair working conditions and protecting the environment. ● A fair price typically means that agreements are made to buy a guaranteed amount of produce over a period of time at a price which is above the market price when the agreement was made. This gives producers stability and raises their income. ● The system means that child labour is not used and that production is sustainable and does not take place at the expense of environmental degradation.

Answer 58

● A study carried out in Sri Lanka showed that those under fair trade had higher income and satisfaction, a greater understanding of the market and a more optimistic view of the future than those not under fair trade. They were able to save for the future and invest or provide financial support for their children. However, they still did not feel their income was sufficient.

Answer 59

-It won’t be possible to the potentially unlimited supply of agriculture to all be on the Fairtrade scheme, so nations who aren’t will become even worse off as demand falls for their produce. -In the long term, the higher price for Fairtrade goods will increase supply and thus this could bring price back down, but this will depend on the price elasticity of supply. Another issue is that higher incomes reduces the incentive to diversify and keeps farmers engaged in low profit activities.

Answer 60

● This is when a country voluntarily transfers resources to another or gives loans on concessionary terms. The UN asked developed countries to give 0.7% of GNI as development aid annually, but only few countries actually achieved this. There are different types of aid: -tied aid is aid with conditions attached, such as economic or political reforms or a commitment to buy goods from the donor country -bilateral aid or multilateral (through IGOs) -concessional loans are loans given on lower, or no, interest rates

Answer 61

● Aid is good as it is able to reduce absolute poverty, particularly emergency relief provided after disasters such as the Haiti earthquake (2010). However, it is unclear whether the money really reduces absolute poverty, as improving infrastructure does little to help those who suffering most. ● It can fill the savings gap, as outlined by Harrod-Domar, and thus provides funds for investment, whether this be in infrastructure or in human capital. Both of these often have to be done by the government because they can be seen as public goods and suffer from the free rider problem. It also provides foreign exchange to fill the foreign currency gap. ● It can contribute to increased globalisation and trade as well as reducing world inequality.

Answer 62

● However, some argue it results in a dependency culture where countries are unconcerned by their finances as they know they can receive aid from another country. ● Corruption means that money does not always go to where it is meant to. In the long term, tied aid and concessional loans may mean that the country loses out. Since concessional loans still have to be repaid, this may limit where the money is spent; countries may only spend money on things they know will see a return in the short term. -Can reduce national sovereignty ● It is difficult to know the best way to develop a country and therefore it is difficult to know the best place to spend the aid. -Can result in Dutch Disease if all aid goes towards one industry

Answer 63

● Many countries suffer greatly from the high interest repayments to loans they have taken out. It limits the growth of some of the poorest countries, whilst being relatively small for the countries and agencies that are owed the money. Therefore, it seems reasonable for the debt of developing countries to be written off. ● It will ease government finances and allow more money to be spent on provision of services and infrastructure to aid development. ● However, it causes moral hazard because it creates a precedent: every poor country may now expect to receive debt relief. It also eases pressure on weak governments to adopt reforms and good economic policies.

Answer 64

● It is made up of: -International Bank for Reconstruction and Development (IBRD) -International Development Association (IDA) -International Finance Corporation (IFC) -Multilateral Investment Guarantee Agency (MIGA) -International Court for Settling of Investment Disputes (ICSID).

Answer 65

● The World Bank has funded over 12,000 development projects since 1947 through interest free loans and grants and supports long term human and social development. -They provide financing, policy advice and technical assistance -Strengthen the private sector in developing countries -Provide finance, technical assistance political risk insurance and settlement of disputes.

Answer 66

● They provide loans to help countries when there are international exchange rate crises or when they cannot afford to pay off their international debt. ● When providing loans, the IMF insists that countries make macroeconomic reforms to resolve the problems. The IMF has received criticism for this because it causes problems for countries. Usually, it involves reducing imports and increasing exports. It can also be in the form of lower government spending. -Allow countries to overcome issues which should allow long-term development -They also provide advice on economic stability and raising living standards.

Answer 67

-These a not-for-profit organisations (such as OXFAM and MSF) who work independently from government. -They can provide direct assistance to countries such as through education or healthcare, either in crisis response or long-term, and may use more bottom-up strategies than TNCs. -They can provide donations and help fund development schemes. -They can also act as pressure groups (e.g Amnesty International) to lobby controversial decisions made by governments and large TNCs.

Answer 68

An initiative launched by the world bank and UN 1995 to provide debt relief for countries in large debt. Those countries who has met the policy package and qualified for the initiative had their debts cancelled in 2005. However, some say that this scheme reduced the chance of these countries acting responsibly with debt in the future, and not all countries facing heavy debts were included (e.g Bangladesh)

Theme 4.3 Flashcards

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