56 terms

Development Economics

Learning Objectives for Development Economics
4.1.1 Distinguish between economic growth and economic development
Economic Growth: An increase in the output of goods & services in a nation between two periods of time
Economic Development: Improvements in standards of living of a nation measured by income, education and health.
4.1.2 Explain the multidimensional nature of economic development in terms of ...
- Reducing widespread poverty
- Raising living standards
- Reducing income inequalities
- Increasing employment opportunities
4.1.3 Explain that the most important sources of economic growth in economically less developed countries include...
- Increases in quantities of physical capital and human capital
- Development and use of new technologies
- Stable and efficient institutions (banking, infrastructure, legal system, education system)
4.1.4 Explain the relationship between economic growth and economic development
(Although some limited economic development is possible without economic growth, over the long-term, economic growth is necessary for economic development)
4.1.5 Explain that economically less developed countries share certain common characteristics
- Low levels of GDP per capita
- High levels of poverty
- Relatively large agricultural sectors
- Large urban informal sectors
- High birth rates
4.1.6 Explain that in some countries there may be communities caught in a poverty trap
Poverty Trap: Where poor communities are unable to invest in physical, human and natural capital due to low or no savings. Poverty is transmitted from generation to generation, and there is need for intervention to break out of cycle/
4.1.7 Explain that economically less developed countries differ enormously from each other in terms of a variety of factors such as...
- Resource endowments
- Climate
- History (colonial or otherwise)
- Political systems
- Degree of political stability
4.1.8 Outline the current status of international development goals, including the Millennium Development Goals.
1. Eradicating extreme poverty and hunger,
2. Achieving universal primary education,
3. Promoting gender equality and empowering women,
4. Reducing child mortality rates,
5. Improving maternal health,
6. Combating HIV/AIDS, malaria, and other diseases,
7. Ensuring environmental sustainability, and
8. Developing a global partnership for development
4.2.1 Distinguish between GDP per capita figures and GNI per capita figures
GDP per capita: The inflation-adjusted value of all the goods and services produced in the country in the past year divided by the population.
GNI per capita: The inflation-adjusted value of all production from factors of production owned by a country, divided by the population.
4.2.2 Compare and contrast the GDP per capita figures and the GNI per capita figures for economically more developed countries and economically less developed countries
GDP vs. GNI for MEDCs: GNI may be higher than GDP as firms in those countries have spread overseas and generate significant profits that are sent back
GDP vs. GNI for LEDCs: This differs; those who receive high FDI will have higher GDP, while those with many workers working abroad may have a higher GNI
4.2.3 Distinguish between GDP per capita figures and GDP per capita figures at purchasing power parity exchange rates
GDP per capita figures don't take into account the standard of living attained with a certain amount of money. While Norway might have a higher GDP per capita than Thailand, a Norwegian and a Thai person may have the same standard of living, while the Norwegian has more money than the Thai.
This is due to the different Purchasing power parity of the exchange rates.
Exchange rates fixed for PPP are more accurate
4.2.4 Compare and contrast GDP per capita figures and GDP per capita figures at PPP exchange rates for MEDC and LEDCs
MEDCs will have higher PPP exchange rates than LEDCs
4.2.5 Compare and contrast two health indicators for economically more developed countries and economically less developed countries
Birth Rates: MEDCs have lower birth rates than LEDCs
Female Life Expectancy: MEDCs have higher life expectancy than LEDCs
4.2.6 Compare and contrast two education indicators for economically more developed countries and economically less developed countries
Primary student to teacher ratio: Very high in LEDCs
Adult literacy rate: Very high in MEDCs
4.2.7 Explain thta composite indicators...
... include more than one measure and so are considered to be better indicators of economic development
4.2.8 Explain the measures that make up the HDI
1. Life expectancy
2. Adult literacy & combined primary, secondary & tertiary enrolment ratio
3. GDP per capita (PPP adjusted)
4.2.9 Compare and contrast the HDI figures for MEDCs and LEDCs
MEDCs: Close to 1
LEDCs: Closer to 0
4.2.10 Explain why a country's GDP/GNI per capita global ranking may be lower or higher than its HDI global ranking
As GDP is only one part of the HDI ranking, a country with a moderately high GDP may have a lower HDI than a country with a lower GDP as the education standards and life expectancy are lower.
4.3.1a Examine how education and health contribute to economic development
- Educated population is able to contribute more to economic output than uneducated population
- Strong correlation b/w education & income: As access to education increases, productivity of workers rises, allowing them to contribute to the nation's output and increase their own income

- Not only result of economic development; also contributes to areas such as income & education
- As life expectancy & infant mortality improves, the population can shift their focus on productivity and improving incomes and quality of life
4.3.1b Examine how the use of appropriate technology contributes to economic development
Better technology improves the productivity of the workforce and increases output. This in turn increases GDP per capita overall and improves the standard of living of individuals through the investment by private individuals and the government.
4.3.1c Examine how access to credit and micro-credit contributes to economic development
Credit & micro-credit:
- Provides entrepreneurs with capital to create start-up companies and spur economic growth
4.3.1d Examine how the empowerment of women contributes to economic development
Reduced Fertility Rates:
- The more educated women are, the fewer children they have
- This is important as it reduces dependency ratios and increases probability that the children women have are better nourished and educated, which improves the productivity of the workforce
- Slower population growth increases the per capita income of a nation over time, improving standards of living

Women in the work force:
- Once women are allowed into the workforce, the productive capacity of the nation is instantly increased.
- Women tend to be equally as productive as men in poor countries
4.3.1e Examine how income distribution contributes to economic development
Improved income distribution raises the average standard of living in a nation, with better access to education and healthcare.
4.4.1a Explain how the over-specialization on a narrow range of products acts as a barrier for development for LEDCs
By over-specializing on a narrow range of exports, the country provides itself with little opportunity to acquire foreign currency, needed to buy imports.
4.4.1b Explain how the price volatility of primary products acts as a barrier for development for LEDCs
Specializing in a primary product (coffee, oil or copper) is risky because while there is almost always steady demand, there is often a great deal of price fluctuation on global commodity markets. Thus, a heavy decrease in demand when specialized in a commodity can have devastating effects.
4.4.1c Explain how the inability to access international markets acts as a barrier for development for LEDCs
Being unable to access international markets is problematic for LEDCs as it deprives them of a larger consumer base which could generate more output for their goods.
4.4.2a Evaluate import substitution as a means of achieving economic growth and development
Import substitution is the setting of strict tariffs and quotas on the import of certain goods to promote development of domestic industries.
- First glance: promotes development by eliminating/weakening foreign competition
- Can lead to retaliatory tariffs, which would lead to reduced levels of domestic income & output
4.4.2b Evaluate export promotion as a means of achieving economic growth and development
Export promotions is when subsidies, tariffs and exchange rates controls are used to allow domestic producers to excel in foreign markets.
- Can be highly effective in increasing output
- Threat is that resources allocated to producing goods for the foreign market might have been more efficiently allocated by the free market
4.4.2c Evaluate trade liberalization as a means of achieving economic growth and development
Trade liberalization is simply the removal of all protectionist measures
- Could possibly make imports cheaper for a nation's residents and make the country's products more attractive to foreign consumers
- May destroy domestic producers in certain industries
4.4.2d Evaluate the role of the WTO as a means of achieving economic growth and development
WTO aims to liberalize trade and reduce the predatory aspect of trade policies by richer nations in regards to poorer nations
- Encourages the spread of free trade in the world
- WTO may pressure a developing country to remove necessary tariffs/protectionist subsidies
4.4.2e Evaluate bilateral and regional preferential trade agreements as a means of achieving economic growth and development
Trade agreements are agreements that reduce protectionism and to some extent easen the flow of factors of production between nations.
- This helps countries work to their comparative advantages and increase their output
- The removal of protectionism from a select number of other countries may lead to the purchase of goods from less efficient producers
4.4.2f Evaluate diversification as a means of achieving economic growth and development
Diversification is the idea of diversifying the composition of a nation's output.
- By embracing the production of more goods and services, allows more opportunities to grow output and provide employment opportunities
Diversification is best achieved by investing in human capital, which attracts FDI from MNCs, which creates new employment opportunities in new industries
4.5.1 Describe the nature of FDI and MNCs
Foreign Direct Investment: Investment in factors of production abroad by MNCs
Multi-National Corporations: A firm which operates in more than one country
4.5.2 Explain the reasons why MNCs expand into LEDCs
To expand the market for the goods of the MNC and to produce at lower costs.
4.5.3 Describe the characteristics of LEDCs that attract FDI.
- Low cost labor
- Natural Resources
- Political Stability
- Large domestic market
- Relaxed regulatory environment
- Liberalized free market conditions
4.5.4 Evaluate the impact of FDI for LEDCs
- Capital Improvements
- Income, employment & training
- Market efficiency & choice
- Muted effects on employment
- Limited income benefits (profits sent home/taxes avoid through accounting methods)
- Limited capital injections
- MNC power
4.6.1 Explain that aid is extended to LEDCs either by...
1. Governments of donor countries (called official development assistance)
2. Non-Governmental Organizations (NGOs)
4.6.2 Explain that humanitarian aid consists of
1. Food Aid
2. Medical Aid
3. Emergency Relief Aid
4.6.3 Explain that development aid consists of
1. Grants
2. Concessional long-term loans
3. Project aid (including support for schools/hospitals)
4. Programme aid that includes support for sectors such as education and finance
4.6.4 Explain that, for the most part, the priority of NGOs is...
... to provide aid on a small scale to achieve development objectives
4.6.5 Explain that aid might also come in the form of...
... tied aid (foreign aid that must be spent in the country giving the aid)
4.6.6 Explain the motivations of MEDCs giving aid
Political and strategic reasons:
- Previous colonial power might provide aid to former colonies in part due to past business and political relationships
- Sometimes in an attempt to strengthen political ties and maintain a strategic ally
- Sometimes as a result of special economic ties two countries have
- Tied aid has the effect of stimulating both the economy that is given aid, and the one giving aid (although not as effective as simple monetary aid)
- After a disaster of some sort aid is sent to LEDCs
- If the country is seen to be unbelievably poor
4.6.7 Compare and contrast the extent, nature and sources of ODA to two LEDCs
4.6.8 Evaluate the effectiveness of foreign aid in contributing to economic developement
- Aid is inefficient (at times used for large-scale projects that are unnecessary to embellish reputations of project administrators/donors)
- Corruption squanders aid
- Aid rarely gets to those who need it
- Aid displaces local investment and markets (discourages tax collection)
- Aid fosters dependency
Arguments for:
- Delivery of aid is the problem
- Aid addresses areas where growth alone will not (income inequality for example)
- Successes not celebrated because the need is still great
4.6.9 Compare and contrast the roles of aid and trade in economic development
- Larger export markets could create conomies of scale
- More efficient and mature agricultural sectors earn more foreign exchange for the country
- In turns allows diversification; reducing dependency
- Reduces dependence on foreign aid and stimulate more savings and investment
Limitations of trade:
- Cutting rich-country agricultural subsidies could cause a rise in food prices, causing instability
4.6.10 Examine the current roles of the IMG & World Bank in promoting economic development
World Bank:
- World Bank emphasizes sustainable development methods as opposed to economic growth. Supports poverty alleviation & debt relief as well.
- World bank loans have conditions that reduce a country's economic sovereignty
- World Bank voting procedures have heavy weight for MEDCs, who arguably don't fully understand the needs of poor countries
- While World bank focuses on development through water-sanitation initiatives and anti-corruption campaigns, in the past the conditions of loans have caused cuts in social spending that have lowered countries' performance on the HDI and worsened the quality of life
- IMF aims to foster global monetary cooperation, secure financial stability, promoting high employment & sustainable economic growth and facilitating international trade
- IMF can enforce measures such as budget austerity, supply-side policies, inflation control, currency floating & trade liberalization
- IMF is dominated by rich countries and the lending from the IMF frees countries from fiscal responsibility and at times can impose unpopular policies that reduce social welfare and HDI
4.7.1 Outline the meaning of foreign debt and explain why countries borrow from foreign creditors.
Foreign debt is the money one nation owes to another nation. Countries borrow from other countries as it is an important source of investment income.
4.7.2 Explain that in some cases, countries have become ...
... heavily indebted, requiring rescheduling of the debt payments and/or conditional assistance from international organizations including the IMF & World Bank
4.7.3 Explain why the servicing of international debt causes BoP problems and has an opportunity cost in terms of foregone spending on development objectives.
By taking huge loans, developing countries accrue heavy debt, which in turn results in lower credit ratings and fewer loans with higher interest rates, crowding out public & private investment. This in turn reduces economic growth through reduced consumption/investment and government expenditure; meaning lower development overall in all three areas.
4.7.4 Explain that the burden of debt has led to...
... pressure to cancel the debt of heavily indebted countries
4.8.1 Discuss the positive outcomes of market-oriented policies (such as liberalized trade and capital flows, privatization and deregulation)
Market-oriented policies cause a more efficient allocation of resources and economic growth
4.8.2 Discuss thenegative outcomes of marekt-orient strategies
Market-oriented strategies can lead to market failure, the development of a dual economy and income inequalities
4.8.3 Discuss the strengths of interventionist policies, including the...
Provision of infrastructure
Investment in human capital
Provision of a stable macroeconomic economy
Provision of a social safety net
4.8.4 Discuss the limitations of interventionist policies
Excessive bureaucracy
Poor planning
4.8.5 Explain the importance of good governance in the development process
While the free market tends to be the most allocatively efficient manner to control the distribution of goods in a country, good governance is also necessary. This means to support the production of merit goods through subsidies and the provision of public goods to allow the development of human capital while still maintaining an effective, free market economy
4.8.6 Discuss the view that economic development may best be achieved through a complementary approach, involving a balance of market oriented policies and government intervention.
- People are provided with merit goods such as education, social safety nets and general infrastructure
- Enables government tax revenues to increase in taxing demerit goods --> in turn leads to better infrastructure and merit goods
- Can create dead weight loss