Section 14 - Economic Development

Question 1

Economic growth - definition

Answer 1

> An increase in size of a country’s GDP.

Question 2

Economic development

Answer 2

> Economic development isn’t just about economic growth.
Economic development is more complicated to define and measure, because it’s a normative concept. It involves making value judgements about what would make up a ‘more developed’ country.
Aim is to measure how living standards and people’s general welfare in a country change over time.
The size of a country’s economy is important when measuring its development, but so are things like the size and health of population and quality of life.
To some extent, measuring development means assessing not just the amount of economic growth that has occurred, but also its ‘quality’.
E.g. economic growth with lots of pollution not as good as with little pollution.

Question 3

National income data - list

Answer 3

> Real GDP/capita
Real GNI/capita
PPP

Question 4

GDP/GNI per capita

Answer 4

> Using GDP or GNI per capita it will give a better indication of people’s standards of living.
This will be very important if the size of a country’s population is changing.
Using ‘per capita’ figures also means you can compare figures between countries whose populations are different sizes.
Comparisons between different countries based on national income data make use of the principle of purchasing power parity (PPP). This is important as $1 will buy more in a less developed country than in a developed one.

Question 5

Using national income data to measure economic development

Answer 5

> Generally speaking, countries with a higher GDP or GNI per capita have higher standards of living, but national income date doesn’t tell you lots of ‘quality of life’ factors, such as the amount of leisure time people have or their health.
It also ignores economic welfare brought about by the hidden economy (which is a large chunk of some developing countries’ economies).

Question 6

GPI

Answer 6

> The Genuine Progress Indicator is an economic indicator that tries to give a fuller picture of the the effects of growth than GDP.
It uses GDP, but also takes into account the negative effects of growth (e.g. pollution), as well as things that affect quality of life but aren’t included in GDP (e.g. volunteer work).
The GPI is useful as it means policies can be aimed at increasing overall welfare, rather than just GDP.
However, it’s quite difficult to put a value or cost on things like volunteering or pollution, so these figures will be quite subjective.

Question 7

HDI

Answer 7

> The UN Human Development Index is an attempt to describe people’s welfare and a country’s economic development in a way that goes beyond just looking at national income figures.
It takes into account people’s health (measured by life expectancy), education (measured by years of schooling), and standard of living (measured by real GNI per capita, adjusted for by PPP).
It doesn’t capture all the information that’s relevant to people’s welfare or economic development, but it does place greater emphasis on quality of life of a country’s people instead of just considering economic growth.

Question 8

What can HDI be used for?

Answer 8

> Countries’ HDI figures can be used to rank those countries from most to least developed.
Or a country’s HDI figure (0-1) can be used to assess its general level of development.
Higher than 0.8 = high level of development.
Below 0.5 = low level of development.

Question 9

Inequality - info

Answer 9

> Development can help to reduce inequality between countries, but even when a country’s national income grows, inequality within that country can still cause problems.
In developing countries, those with very low wealth and incomes can suffer hardship if circumstances change (e.g. if harvest fail or demand for their goods decreases).
In developed country, those with the lowest wealth and incomes may not be in absolute poverty, but they may still be in relative poverty, or at risk of social exclusion.
Some people say that inequality is an inevitable consequence of economic development (i.e. some people will always do better than others).
Others say that some inequality is actually necessary for capitalism to function effectively, since inequality gives people an incentive to work hard and succeed.
If benefits of development go to those who are already wealthy, extreme poverty can exist alongside genuine affluence.

Question 10

Social exclusion example

Answer 10

> They may not have access to all the opportunities or resources needed to fully participate in society, such as employment opportunities and decent health care.

Question 11

Inequality and economic growth

Answer 11

> It can be argued that inequality can slow down economic development, for various reasons:
1. The poorest within a country may find it difficult to start businesses. They may not have the resources to invest, will find it difficult to save, and their lack of assets (for use as collateral) make it difficult for them to get loans. Access to credit is often particularly limited in developing countries - banking can be too expensive for people to use, and getting to bank may be difficult.
2. People on higher incomes may well spend a lot on imports. or invest their money abroad - so this money will leave the economy.
Inequality and social exclusion may also be linked to social problems in a country such as higher crime levels or health problems.

Question 12

How can inequality be measured?

Answer 12

1. Lorenz Curve

2. Gini Coefficient

Question 13

List of important factors in causing inequality

Answer 13

1. Wage and tax levels.
2. Unemployment levels.
3. Education levels.
4. Property ownership and inheritance laws.
5. Level of government benefits.

Question 14

The Lorenz Curve

Answer 14

> Perfect equality would be shown as a straight line.

>A ‘saggier’ curve means a greater share of the country’s overall income goes to a relatively small number of people.

Question 15

The Gini Coefficient

Answer 15

> The Gini coefficient is always between 0 (everyone earns the same) and 1 (one person gets all the country’s income).
G = A/ (A+B).

Question 16

Limits to growth and development - list

Answer 16

1. Poor infrastructure
2. Availability of natural resources
3. Disease
4. Lack of education
5. Limited investment
6. Primary product dependency
7. Corruprion
8. Civil wars

Question 17

Limits to growth and development - poor infrastructure

Answer 17

> Poor infrastructure makes it difficult for a country’s economy to grow or be internationally competitive. For example:
-if energy supplies are unreliable, then firms and factories won’t be able to operate efficiently.
-if transport links are poor, it can be difficult to move goods around or out of the country.
-if telephone and internet services are scarce, then businesses will find it difficult to coordinate their operations and communicate with customers.
Poor infrastructure also makes it very difficult to attract FDI.
Foreign aid is often used to improve or maintain infrastructure, but developing nations can sometimes persuade foreign investors to help improve their infrastructure - perhaps because these nations have important raw materials or because they would become attractive new markets for foreign firms.
E.g. Chile has large mineral reserves and has attracted large amounts of FDI in various parts of its economy, such as in its energy and communications industry.

Question 18

Infrastructure - definition

Answer 18

> The basic facilities and services needed for a country and its economy to function.

Question 19

Limits to growth and development - lack of education

Answer 19

> If a country’s population grows faster than its economy, then this will lead to a fall in GNI per capita (an probably a fall in people’s standards of living).
Developing nations, such as those in certain parts of Africa, have some of the fastest growing populations in the world.
A fast-growing population means there’ll be lots of children, which can put pressure on a country’s education system.
However, household poverty is a major factor in keeping children out of school, and if children don’t go to school, this can lead to further problems.
Low educational standards are likely to mean a workforce that’s less productive, as they have less human capital.
A less productive workforce will make it difficult to attract FDI.
It can also be difficult for people to access professional training in developing countries, which causes similar problems.

Question 20

Limits to growth and development - disease

Answer 20

> Disease can also affect a country’s economy - e.g. it can result in low productivity is people are unable to work, and put a strain on the country’s health care system.
Over the last few decades, AIDS has also led to a huge number of children being orphaned - it’s common for them to miss out on going to school, with long-term consequences for both them and the economy.

Question 21

Limits to growth and development - limited investment - savings gap

Answer 21

> The ‘savings gap’ can be a problem when incomes are low - it’s the gap between the level of domestic savings in an economy and the investment needed to grow that economy.
This lack of investment in capital means incomes are likely to remain low.

Question 22

Limits to growth and development - limited investment - capital flight

Answer 22

> Capital flight is when people start holding their savings abroad (often as a result of high tax rates or political instability).
The lack of domestic investment makes economic growth more difficult to achieve.
It also means that less tax is collected (since the government won’t receive taxes due on those savings).

Question 23

Limits to growth and development - limited investment -debt

Answer 23

> Many developing countries borrowed heavily in the past.
Just servicing these debts can be vastly expensive, leaving less money available for health and education, for example, or investment in capital.

Question 24

Limits to growth and development - limited investment - foreign exchange gap

Answer 24

> A foreign exchange gap means capital outflows from a country are greater than capital inflows.
This is more likely when a country:
a) is dependent on exports of primary products, or imports of manufactured goods.
b) has to spend a lot of money servicing debt.

Question 25

Limits to growth and development - limited investment - absence of property rights

Answer 25

> An absence of property rights can also cause problems - if people aren’t sure they’ll be able to keep the land they have, then they may not invest in improvements to their homes, or in setting up businesses.
This can harm development.
This may be because the rule of law is weak.

Question 26

Limits to growth and development - primary product dependency

Answer 26

> Many countries depend on primary products (commodities), where the ‘value added’ is low.
Demand for primary products is usually price inelastic - this means that a change in demand will have a large effect on the price.
Supply of some primary products (e.g. agricultural products) will be price inelastic in the short term, since supplies can’t quickly increase or decrease. Agricultural products are also easily damaged by natural disasters and extreme weather events.
This volatility of commodity prices means that producers’ incomes and earnings from exports can change quickly. If supply and demand are both price inelastic then slight changes in either will cause big fluctuations in price. The uncertainty this creates makes it very difficult to plan, and attract investment.
Developing countries may use protectionist policies to protect their own primary industries - e.g. EU policies such as the Common Agricultural Policy (CAP) make it difficult for farmers in developing countries to compete on equal terms.
The Prebisch-Singer hypothesis.

Question 27

Primary products - definition

Answer 27

> Products taken directly from the earth.

>E.g. minerals, plants, where ‘value added’ is low.

Question 28

Value added - definition

Answer 28

> ‘Value added’ describes how much a firm increases what a product is worth.
Many primary products are ‘low value added’ -this means they won’t generate huge profits.

Question 29

The Prebisch-Singer hypothesis - quick definition

Answer 29

> The Prebisch-Singer hypothesis describes how countries that rely on exporting primary products and importing manufactured goods may become steadily worse off over term, as there’ll be a decline in the terms of trade.

Question 30

The Prebisch-Singer hypothesis says that…

Answer 30

> Demand for primary products is income inelastic - as incomes rise, demand changes very little.
However, demand for manufactured products is more income elastic - as incomes rise, demand for these goods rises quickly. This will usually then lead to large increases in price.
As the price of manufactured goods increases, countries exporting mainly primary products will find they’re able to import fewer manufactured goods for a given level of exports.

Question 31

The Prebisch-Singer hypothesis suggests that…

Answer 31

> The Prebisch-Singer hypothesis suggests that overreliance on, say, cash crops is not an effective long-term development strategy.

Question 32

The Prebisch-Singer hypothesis - criticisms

Answer 32

> As the world’s population grows, greater demand for agricultural products to eat may push prices up.
Demand for some primary products (e.g. gold, oil) is income elastic - as incomes rise, demand rises even quicker.
If a country has a comparative advantage in producing primary products, then it makes sense to use that country’s resources for this purpose.

Question 33

Limits to growth and development - corruption

Answer 33

> Corruption occurs when power is abused for personal gain (e.g. by government officials accepting bribes). The result is often that the country’s resources are diverted away from their most productive use, so governments and private firms become less efficient.
The effects of corruption can be even worse. For example, if the police expect to be paid the same bribe by people whether or not they’ve broken the law, there’s little incentive for people to act honestly. The effect is that the legal system, and eventually the even the government, stop working properly.
Even if there’s little corruption, an unreliable bureaucracy in a country (e.g. a tax office that’s unable to collect the taxes that are due) can also make development difficult to achieve.
Makes it hard to attract FDI.

Question 34

Limits to growth and development - civil wars

Answer 34

> Civil wars are also a disaster for a country’s economy, and are more likely in less developed nations.
Large numbers of people are killed or become refugees, absolute poverty generally increases and infrastructure is damaged.
Even after the war ends, capital flight and military spending usually remain high.
All these effects make it very difficult to compete internationally and attract FDI.

Question 35

Different strategies used in international development - list

Answer 35

> The policies based on one of the following strategies help countries to develop:
-aid and debt relief
-structural change (e.g. development of the agricultural, industrial or tourism sectors)
-policies favouring either an interventionist approach or a market-orientated approach.
Since all developing countries are different, each will need a particular mix of strategies and policies, probably involving both markets and the state.
But there’s no guarantee that what’s worked in one country will be successful in another.

Question 36

Aid - definition

Answer 36

> In economics, aid means the transfer of resources from one country to another. There are various types:

1. Bilateral aid: when a donor country ends aid directly to the recipient country.
2. Multilateral aid: when donor countries pass the aid to an intermediate agency (e.g. World Bank), which then distributes the aid to recipient countries.
3. Tied aid - aid sent on condition that the money is spent in a particular way (e.g. on imports from the donor country.)

Question 37

Aid

Answer 37

Aid can be used as emergency relief, but it is also used to promote development - this is known as development aid, or Overseas Development Assistance (ODA).
>There are arguments for and against using aid to assist in development.
>Emergency relief = uncontroversial.

Question 38

Arguments in favour of development aid

Answer 38

> It reduces absolute poverty.
If it leads to improvements in health and education, this will improve a country’s human capital.
It helps to fill the savings gap (Harrod-Domar model) and foreign exchange gap.
There fan be ‘multiplier effects’. E.g. if aid is used to improve a country’s infrastructure, there will be a direct increase in AD. An increase in AD will mean more people will have jobs (and money to spend), and this will lead to further increases in AD.

Question 39

Harrod-Domar model

Answer 39

> The Harrod-Domar model says that the growth rate of an economy is directly linked to:
-the level of saving in the economy,
-the efficiency with which the capital in the economy can be used.
If either of these factors can increased, then the economic growth should be faster.

Question 40

Arguments against development aid

Answer 40

> Some people claim that aid leads to a dependency culture, meaning that countries start to count on receiving aid indefinitely, instead of developing their own economies.
Aid can be misused by corrupt governments, meaning the money doesn’t help the people it was meant to help.
Some say aid is aimed more at securing ‘favours’ for the donor country than helping the recipient countries.

Question 41

Debt relief - definition

Answer 41

> Debt relief means not expecting existing debts to be repaid.
Debt relief means cancelling some of the debts owed by developing countries.

Question 42

Debt relief - general info

Answer 42

> A country with large debts has to spend a large amount of its income on servicing those debts (i.e. paying the interest).
For low-income countries, debt servicing can use up a large proportion of their total income. This leaves less money available for other services, such as health care or education.
Pros and cons.

Question 43

Debt relief - advantages

Answer 43

> Arguments in favour of debt relief:

• it frees up money for public services, such as health care and education.
• the money saved by the developing country can be invested in capital goods to help grow its economy.

Question 44

Debt relief - disadvantages

Answer 44

> Arguments against debt relief:

• some people claim that cancelling debt creates a risk of moral hazard and a dependency culture. E.g. countries may feel that future debts will also be cancelled, so they may just morrow more.
• cancelling the debt of countries run by corrupt governments may mean more money is misused. E.g. for personal gain or to buy weapons for internal repression.
• debt cancellation can be used by a donor country as a way to secure influence in the recipient country.

Question 45

Ways of promoting growth and development - list

Answer 45

>Develop agricultural sector
>Tourist industry
>Industrial sector.
>Aid
>Debt relief
>Market-orientated approach
>Interventionist approach
>Microfinance
>Fair trade schemes
>Financial sector
>Foreign capital

Question 46

Ways of promoting growth and development - developing the agricultural sector

Answer 46

> The agricultural sector is often seen as a low-productivity sector (i.e. the output is low compared to the inputs required) where it’s difficult to add value.
Although there are potential problems for a country if it depends too much on primary products, it can be worth a country developing its agricultural sector if that’s where it has a comparative advantage.
Developments in the agricultural sector can be seen as a stepping stone to developing other sectors. For example, if improvements in the agricultural sector lead to increases in national income, other sectors can then be invested in.

Question 47

Ways of promoting growth and development - developing the industrial sector

Answer 47

> The Lewis Model describes the development of the industrial sector.
The Lewis model has been used to argue that increasing an economy’s industrial sector is the key to development. It says growth in industry and manufacturing can be achieved without reducing agricultural output or increasing inflation.

Question 48

Ways of promoting growth and development - Lewis Model - developing the industrial sector

Answer 48

> The Lewis model assumes that there’s excess labour in the agricultural sector (i.e. the same amount of agricultural output could be produced by fewer people). This means that there’s no opportunity cost if agricultural workers transfer to industry to take advantage of higher wages available.
So industry develops without reducing agricultural output. And while there’s excess labour in agriculture, wages in industry don’t rise - i.e. a country can industrialise without causing inflation.
Profits from industry can be reinvested in capital goods, leading to greater productivity gains.
The reduction in excess labour in agriculture will also mean agricultural productivity increases.
Eventually, an equilibrium will be reached where everyone is better off than they were, and profits (and savings) are increased, leading to even more investment and growth.

Question 49

Lewis model - comments

Answer 49

> Like all models, the Lewis model involves a lot of simplifications. In practice, things often work out differently.
It may not be easy to transfer labour to industry - workers migrating from the countryside will leave fewer people to do physically demanding agricultural labour, while at harvest times there may be no ‘spare workers’ at all. Investment in education and training is also needed to develop the human capital needed to expand industrial output.
Also, profits aren’t always reinvested locally - they may be invested abroad or used for consumption.
And if industrial production is capital intensive and involves little human labour, economic growth may not provide many additional jobs.

Question 50

Ways of promoting growth and development - developing tourism industry

Answer 50

> Developing a country’s tourism industry can improve a country’s economy, though it’s not without problems.
Increasing tourism will mean that a country earns foreign currency from tourists. It also means it’s likely to attract foreign investment (e.g. from multinational hotel chains).
Employment should also increase. However, employment in the tourism industry may be seasonal, and multinational companies may want to bring in their own management, meaning that local jobs created will be low-skilled.
An increase in tourism is likely to mean that more goods are imported (either capital goods to build facilities or goods demanded by tourists on holiday.) This will be bad for the country’s balance of payments.
Extra tourism may lead to environmental damage or inconvenience for the locals, as tourists’ needs are prioritised.
Also, demand in the tourism industry is likely to be income elastic - it will increase quickly as people’s incomes increase. The disadvantage is that during economic downturns, demand is likely to fall quickly too. And tourist destinations aren’t guaranteed to remain popular forever - tourists’ tastes can change quickly.

Question 51

Ways of promoting growth and development - inward-looking examples

Answer 51

> Inward-looking strategies seek to ‘protect’ domestic industries until they’re ready to compete internationally.
Protectionism is inward-looking.
The main policy adopted is one of import substitution. Goods that were previously imported are replaced by domestically made goods. This is achieved by imposing tariffs and quotas on imported goods.
Subsidies might be provided either to domestic producers to allow them to sell their goods at competitive prices, or on certain necessary products that everyone will need (even if they’re imported from abroad).
A currency might be maintained at an artificially high exchange rate, allowing the country to import selected goods from abroad cheaply - e.g. raw materials in order to reduce production costs for domestic firms.

Question 52

Ways of promoting growth and development - inward-looking policies info

Answer 52

> The aim in the short term is to create jobs, reduce poverty and improve the country’s balance of payments.
In the long term, the idea is that domestic industries will grow, benefit from economies of scale, and gain the necessary knowledge to compete on equal terms with firms from other countries.
However, being protected from international competition can result in inefficiency. And it can lead to a country’s resources being misallocated - a country’s comparative advantage may not be exploited as fully as it could be.

Question 53

Ways of promoting growth and development - outward-looking strategies

Answer 53

> Free trade is outward-looking.
Outward-looking strategies, on the other hand, emphasise free trade, deregulation and the promotion of foreign investment.
Firms are encouraged to invest and seek new export markets.
The benefits and costs of outward-looking strategies are what you might expect from greater free trade - increased efficiency and competitiveness, but more economic dependency between countries.
China and India have used outward-looking policies to great effect in recent decades.

Question 54

Interventionist vs free-market strategies

Answer 54

> Interventionist strategies used to be popular, but now free-market strategies are more common.

Question 55

Ways of promoting growth and development- Interventionist strategies

Answer 55

> Interventionist strategies are similar to inward-looking strategies - e.g. they often involve import substitution, subsidies and high exchange rates. They may also involve industries being nationalised, and policies forcing producers to sell their goods to government-run distributors to keep prices low.
They were popular in the past and were based on ‘dependency theory’, a theory that claims developing countries are still held back economically because of the way they were previously exploited by richer ones (e.g. by being forced to specialise in primary products.
In practice these interventionist strategies were associated with low rates of economic growth, balance of payments problems, government deficits, corruption and general inefficiency.
Some interventionist strategies may be more successful, and are still popular. For example, investing in developing human capital through the education system or encouraging joint ventures between global companies and local companies or government.

Question 56

Ways of promoting growth and development- free-market strategies

Answer 56

> From about the 1980s, free-market strategies (market-orientated strategies) have been more popular.
Free-market strategies recommend less government intervention, and place a much greater emphasis on free trade.
These are very similar to the outward-looking strategies - they aim to increase efficiency by freeing the market, e.g. by removing subsidies.
Floating exchange rate systems are an example of a market-orientated strategy. Allowing exchange rates to be set by the market means exporting firms aren’t protected against currency fluctuations, but it may improve efficiency and productivity because it helps the market to react easily to international demand.

Question 57

Ways of promoting growth and development- microfinance

Answer 57

> Microfinance means providing loans to small businesses and low-income individuals who may not be able to get loans from traditional banks.
The aim is for people in developing countries to use the loans to become more financially independent - either by developing businesses or investing in education.
Although microfinance works for some people, it’s not clear that microfinance can reduce poverty on a large scale.

Question 58

Ways of promoting growth and development - fair trade schemes

Answer 58

> Fair trade schemes aim to offer individual farmers (or groups of small producers) in developing countries a guaranteed minimum price for their goods.
In return, the producers usually have to accept certain conditions e.g. agree to inspections, use approved farming techniques and treat employees fairly.
The guaranteed price makes long-term planning easier for producers - they’re not subject to the large fluctuations in price that are often associated with primary products.
However, the distortion of market price can lead to overproduction - farmers may not realise that a low price is a sign that they should grow a different crop. So when prices are low, farmers may flood the market and drive the price down further - affecting producers who aren’t in the fair trade scheme.
These schemes rely on buyers being willing and able to pay above the market price, which may not be the case.

Question 59

Ways of promoting growth and development - efficient financial sector

Answer 59

> The financial sector is important in promoting economic development in developing and emerging economies - financial markets support trade, and allow savings to be converted into investment.
The development of the financial sector in emerging economies (such as India) is one of the reasons for their growth.
Many developing countries’ financial markets are undeveloped, which restricts economic growth. A weak financial sector especially limits development through structural change - investment funds are needed to buy capital equipment when expanding new sectors.