64 terms

IB Economics Section 5: Development Economics

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MDC
More developed country: Low population growth/birth rate, high income per capita, high HDI ranking, high degree of industrialisation, tend to produce secondary and tertiary goods
LDC
Less developed country: Little or no build-up of agriculture, low energy production/consumption, large quantity of subsistence farming, large percentage of the population under 15, high infant mortality rate, high illiteracy and unemployment levels, poor medical facilities, GNP/capita less than $3000 per year
NIC
Newly industrialised country: Many Asian nations who have industrialised in recent years (Hong Kong, Taiwan, South Korea)
Subsistence
For survival
Natural Factors of Production
A country's endowments in natural resources- land- such as minerals, forests, arable land for agriculture, plant and animal diversity etc
How can the quality/and/or quantity of natural factors affect economic growth?
Quality: Soil that's not productive can't grow crops. Better quality can produce more goods and services. Quantity: if you have no usable land, you can't produce anything.
Abundant quality Natural Factors of Production yet low HDI
You need money to extract/farm natural factors of production. Many developing countries cannot afford to extract their resources. Corrupt governments often do not allow money to reach the people.
Why is farming in LDCs different from first world countries?
Farming in LDCs unlikely to fuel development in the long run: just subsistence farming. There is also a lack of farming capital: irrigation, fertilisers, tractors.
Human Factors
Labour and the skills and knowledge labour brings with it.
An increase in human factors can lead to an increase in _____ output
Potential
Increasing human capital or social investment
When the quality of human factors is increased through knowledge, skills and education.
Economic benefits of investing in human resources
If you invest in people, you will have an increase in productivity, increased labor mobility, entrepreneurs.
Social benefits of inesting in human resources
People are more healthy, they live longer, given better opportunities for life (females especially).
Physical Capital
Man-made factors of production such as machinery, factories, roads, etc.
How can physical capital increase output?
New production techniques through technological improvement can increase output per unit of input, increasing overall output and causing economic growth. Physical capital may also be more productive than humans in producing goods and services.
Negative impact of new technology of development
Using technology may result in workers losing their jobs as eg robotic manufacturing, tractors etc lessens the need for workers. Job losses result in no incomes being earnt which has negative flow-on effects.
What does the banking system do?
Provides money to those who want to borrow and offers a return to depositors. Provides a system for payment between individuals and firms. Provides venture capital (money for establishing a business)
What do development banks do?
Provide less developed countries with long term loans especially for small to medium firms
Group Lending Schemes
Lending of very small loans eg $200 to people. Groups borrow money and each group member is responsible to pay it back. Internal pressure from within the group. Money borrowed is used to generate income. Eg Grameen Bank, Banco Sol
Social Benefits of Education
More employment leads to increased tax revenue for the government and economic growth. Incerased tax revenue allows greater spending on citizens eg healthcare, education, merit goods. Less demand on the health sector and moeny spent on it due to improved healthcare knowledge of citizens. Increased political stability as residents can participate in politics. Population control as women are provided with more opportunities
Private Benefits of Education
Increased lifetime earnings due to higher productivity and better jobs. Increased quality of life as the ability to read and write allows greater participation in society. Increased health as improved knowledge of disease, sanitation, etc. Empowers women.
Many people in developing countries die of
Malaria, HIV/AIDS, Hepatitis B (causes liver failure), Tuberculosis (respiratory)
Infrastructure in a country includes
Roading networks, telecommunications, sewerage, water, electricity, ports and harbours, public transportation, education, healthcare, financial institutions.
How good infrastructure helps economic development
Lowers transportation times and costs which increase national income and decreases poverty. Good roading allows goods to be transported easily such as food, people for education, assets for building capital. Clean water and basic sewerage systems improve health and reduce death rates, especially for children. Good infrastructure attracts foreign direct investment FDI who then go on to employ local citizens. This has positive flow on effects for the rest of the economy eg people are employed who then spend on other goods and services in the economy.
Political Stability allows
The implementation of policies and long term goals to occur as govts have time to carry out promised policies.
Laws to be set and upheld which allows firms to operate with confidence in a safe environment.
Foreign firms to be attracted into FDI in the country.
Externalities
Unintended Side-Effects
Economic Growth negative effect on the environment
The production of goods and services can be negative: pollution into air, water supply and land therefore negative externalities.
Economic Growth positive effects on environment
Growth provides a tax base for the government. This money can be spent on enhancing the environment or repairing damage that has previously occured.
People in wealthy countries tend to demand better living conditions (reductions in pollution) and care for the environment.
Higher incomes tend to result in lower population growth rates. Lower growth rates result in less depletion of natural resources.
Economic Growth effect on Income Distribution
Opinions differ on whether economic growth increases or reduces inequality of income. It may increase inequality if the benefits of growth are only seen by a select few. It may decrease inequality if the benefits of economic growth accrue to all the population.
Economic Growth effect on Poverty
Increasing national income decreases poverty in 'absolute terms'. The proportion of absolute poor in the world is falling but actual numbers may not be.
Economic Growth- Sustainability
Any economic growth will place pressures on environment. It may reduce or accelerate the environmental burden in developing countries. There are various views of what is best ie grow now, environment later or the view that developed coutnries will have to lower the consumption of natural resources in order to allow developing countries to grow.
Barriers to Economic Development
Poverty Cycle, Institutional and Political Factors, Unequal Distribution of Income, Formal and Informal Markets, Infrastructure, Trade Barriers, Financial Barriers, Social and Cultural Factors.
Poverty Cycle
Low incomes -> Low consumption -> Low savings -> Low investment -> Low incomes.
Institutional and Political Factors
Ineffective Tax system, Lack of Property Rights, Political Instability, Corruption.
Formal markets
Markets that operate within the laws, tax regulations, employment laws etc and operate in a competitive environment.
Informal markets
Comprise of subsistence agriculture and parallel markets.
Terms of trade
A price index which looks at the price changes of exports compared with the price changes of imports. Formula : (Export price index)÷(Import price index) x1000.
Examples of protectionism policies
Tariffs, quotas, subsidies.
Non convertible currency
A currency that cannot be exchanged for another currency.
Capital flight
When money is transferred to deposits and other assets overseas, rather than domestically. This avoids currency risks and low returns on savings and investments.
Social and cultural barriers
Religion, culture, tradition, gender issues.
Assumptions of the Harrod-Domar Growth Model
There is a closed economy and no government sector i.e. no exports, imports, government spending, taxes. There is no deprecation of existing capital so any investment is net (actual) investment - i.e. it is for increasing the amount of capital, not just replacing worn out capital.
Harrod-Domar model
Helps explain long run economic growth. Formula: g= s ÷ k, s= savings ration, k= capital/output ratio, g= growth rate.
Assumptions of the lewis model
There are two sectors of the economy - traditional sector (agriculture) and the
modern sector (industry/manufacturing). Productivity in the traditional sector is low and additional labour adds very little or nothing to output. Therefore if people leave the 'land', output will not fall as there is an abundance of labour available. Productivity in the modern sector is growing and so is the demand for labour.
Why do people move from the rural to the urban sector (Todaro model)
People move as they expect the wages in urban areas to be higher than in the rural sector... the gains of moving are greater than the costs of leaving. People move for not only higher wages but also the benefits that urban areas bring e.g. healthcare and education.
Bilateral aid
Aid from one country to another in the form of money, food and tools.
Multilateral aid
Aid from manny countries/organisations which goes to another country. For example the World Bank gives funds that come from many countries.
Grant aid
A 'gift' of money, goods, capital with no strings attached.
Soft loans
Money lent to a country at an interest rate lower than market rates.
Official Aid (Official Development Assistance)
The sum of Bilateral and Multilateral aid - does not include aid coming from charities (grant aid) such as oxfam, world vision
Tied Aid (plus criticism of Tied Aid)
Money lent with conditions attached. - Money is lent if the recipient uses the money to purchase exports from the donor country.- There is criticism that the exports received may not always be the cheapest, but
recipient country is obliged to purchase them from the donor country.
Export-led growth (Outward orientated strategies)
Economic growth can occur by countries focussing on exporting goods and moving towards free trade and allowing capital flows into the country from overseas.
Main characteristics of export-led growth strategies
Trade barriers are lowered on goods and services. Foreign investment is allowed by foreign firms in the country, often by multinational corporations. There is a focus on labour intensive production. There is government involvement to support investment and industries. Support can come in the form of export subsidies, soft loans, tax write-offs ( not having to pay tax).
Import-substitution/inward-orientated strategy/protectionism
If a country has this policy it implements barriers to imports (tariffs) and encourages domestic producers by providing them with subsidies.
Micro-credit schemes
A micro-credit scheme is aimed at providing people with small loans (e.g. $100) to many people. The money is lent at an interest rate higher then the market rate (e.g. from banks) but less than the interest rate than loan sharks charge. The aim of the loan is to provide the person with money that can be used to purchase capital - something that can used to generate income. Often money is lent to a group, which then relies on group pressure on each individual to repay the money, Examples include the Grameen Bank in Bangladesh and Banco Sol in Bolivia.
Aims of fair trade organisations
To give producers fair prices for their products, cutting out the 'middleman' so the producers receive higher proportions of the final price and encourage goods being produced in an environmentally sustainable way and focusses on labour rights for workers.
What is a multinational company?
A company that produces goods in several different countries e.g. MacDonalds.
Explain why there can be a conflict with sustainable development and economic growth
Economic growth can result in the greater use of scarce resources. The uses of the scarce resources. The use of these resources could create negative externalities such as pollution, destruction of the natural environment, which may not be sustainable in the long run. Poor people also may not have any alternative and have to use natural resources rather than alternatives.
What is the IMF? (International Monetary Fund)
A group of member countries whose focus is to help countries keep their currency stable and supervise government policies in countries they lend money to.
What is the World Bank?
A developmental organisation which provides funds for social and economic government and long term economic growth.
The World Bank is divided into two institutions. Explain the role of each
IBRD - (International Bank for Reconstruction and Development). The IBRD sells bonds on world markets and re-lends money received to developing countries on commercial/ near-commercial terms. The IBRD demands that countries implement structural adjustment. IDA - (International Development Association). The lending part of the World Bank that lends to the very very poor who can't afford to borrow at IBRD lending rates. The interest rates tend to be '0' and longer repayment terms are offered. The IDA gets its money from donor contributions of members.
What are NGO's?
Voluntary organisations funded by contributions which have a wide range of special intents e.g. WWF, Greenpeace, Red Cross, Oxfam.