Development Economics Charmaine Neo Ning Fang 12Cmc

Development Economics – Charmaine Neo Ning Fang 12CMc

Economic development

Measuring development

Domestic factors and economic development

International trade and economic development

Foreign direct investment and economic development

Aid, debt and economic development

The balance between markets and intervention

Economic development

Economic growth – increase in real output of an economy over time
Sources of economic growth
Natural factors
Anything that could increase the quantity / quality of a FOP should lead to an increase in potential growth
Quality of the land may be increased by fertilization, better planning of land usage, improved agricultural methods & building upwards
Human capital factors
Could be increased by encouraging population growth / increasing immigration levels & by improving quality by improving health care, improving education, vocational training & re-training for the unemployed + provision of fresh water & sanitation.
Physical capital & technological factors
Definition of physical capital: factory buildings, machinery, shops, offices & motor vehicles
Quantity of physical capital is affected by the level of savings, domestic invesments, government involvment & foreign investment
Quality can be improved by higher education, R&D, access to foreign technology & expertise

Capital widening: when extra capital is used with an increased amount of labour but ratio of capital per worker does not change. Total production increases but productivity is likely to remain unchanged.

Capital deepening: increase in amount of capital for each worker & thus this often means there is an improvement in technology & will usually lead to improvements in labour productivity & total production

Institutional factors

E.g. adequate banking system, structured legal systems, good education system, reasonable infrastructure, political stability & good international relationships.

Does economic growth lead to economic development?
Higher incomes
It depends on the distribution of income (whether it is fair)
Improved economic indicators of welfare
Could be linked to increased average life expectancy, average years of schooling & literacy rates.
Higher govt revenues
The government will gain increased tax revenues & be in a better situation when it comes to the provision of essential services (e.g. education, health care & infrastructure)
Creation of inequality
Rich get richer & poor get poorer. Even if the poor get some money, the gap is said to grow with the rich getting the majority of the gains. It does not mean that the rich spend more & some of this goes to the poor
Negative externalities & lack of sustainability
Often leads to pollution as incomes rise, people drive cars, enjoy plane travel & buy goods that are imported across long distances. This creates negative externalities of consumption & production where market prices of goods & services do not reflect full costs to society & environment. It could also lead to problems of deforestation, soil degradation & reduction in bio-diversity
Lead to increase in burning of fossil fuels as demand for energy increases. Results in large emissions of CO2 and global warming. Forests, coral reefs & other ecological systems will be damaged as a result of their inability to adjust to changing temperature & precipitation patterns. Access to safe water will become more precarious. Tropical diseases spread further north. Droughts will become more intense & frequent, food production in middle & high latitudes becomes easier but this is no gurantee that the risk to food security will lessen. Rising sea level with floods.
Uneconomic growth – when increases in production come at an expense in resources & well being that is worth more than the items made.
Sustainability – the ability to meet the needs of the current generation without compromising the ability of the future generations to meet their needs. (compromising the living standards of future generation)
Common characteristics of developing countries
Low standards of living
Low incomes
Inequality
Poor health
Inadequate education
High infant mortality rates
High levels of malnutrition
Low levels of productivity
Due to low education standards, low level of health amongst workers, lack of investment in physical capital & lack of access to technology.
High rates of population growth & dependency burden
Definition of crude birth rate: annual numbers of live birth per 1000 of the population [crude birth rate in developing countries is high]
High dependency ratios (many young people) & thus those of working age have to support a much larger proportion of children then the work force in developed countries

High & rising levels of unemployment & underemployment
Firstly, we have to worry about those who have been unemployed for so long that they have given up searching for a job & no longer appear as unemployed.
Secondly, there are the hidden unemployed who work for a few hours on a family farm / family business / trade of some sort and do not appear as unemployed
Lastly, there are the underemployed. Those would like to work full time but are only able to get part time employment often on an informal basis.
Substantial dependence on agricultural production & primary product exports
Over dependence on primary product exports
Prevalance of imperfect markets & limited info
Developing countries lean towards more market orientated approach to growth but this can be troublesome as market based approaches may work well in economics where markets are efficiently functioning but not in developing countries faced with imperfect markets & imperfect knowledge.
Lack of functioning bank system – discourages savgins & investments
Lack of developed legal system
Lack of adequate infrastructure – for efficient & low cost transport & FDI.
Lack of accurate info – imperfect info & misallocation of resources & misinformed purchasing decisions
Dominance, dependence & vulnerability in international relations
Dominated by developed countries
Dependent on developed countries (trade, access to technology, aid & investment)
Vulnerable on international stage & are dominated and harmed by decisions of developed countries over which they have no control

Diversity among developing countries
Resource endowment
It is common for human resources to be undernourished & poorly educated and low skilled however endowment in terms of physical resources can vary immensely between developing countries.
They could be poorly endowed with physical resources but have abundances of natural resources / synthetic resources
Historical background
Colonization
Depends on the length of time that the countries were colonized & whether the eventual independence was given freely / it had to be fought for.
Historical diff – set countries apart culturally, socially, politically and economically.
Geographic & demographic factors
Diff geographical & population size
Not all developing countries have large populations
Ethnic & religious breakdown
High levels of ethnic & religious diversity could increase the chances of political unrest & internal conflict
Structure of industry
It is widely assumed that all developing countries depend upon the production & exportation of primary products but some may depend on exportation of manufactured products and some are mainly exporters of service (in the form of tourism)
Per capita income levels
Marked diff in per capita income from developing country to developing country
Political structure
Varying political structure

Democracies

Monarchies

Military rule

Single party states

Theocracies

Transitional political systems – country is in transition  conflict & civil war

MDG (millenium development goals)
Eradicate extreme poverty & hunger
Achieve universal primary education
Promote gender equality & empower woman
Reduce child mortality
Improve maternal health
Combat HIV / AIS, malaria & other diseases
Ensure environmental sustainability
Global partnership for development

Measuring development

Poverty traps / poverty cycles
Relative poverty – comparative level of poverty  if they do not reach a specific level of income
Depends upon where the specific level of income is set
Absolute poverty – measured in terms of the basic necessities for survival  level of income needed to buy items such as basic clothing, food & shelter
If they are below a certain level (e.g. 1.25)
Poverty cycle – development traps

Single indicators – solidarity measures that may be used to access development
Financial measures

1. GDP & GNI per capita

GDP per capita – total of all economic activity in a country regardless of who owns the productive assets, divided by the number of people in the population (e.g income of foreign companies producing within a country would be included in the national income of that country but activity of its own companies producing outside the country would not)
GNI per capita – total income that is earned by a country’s FOP regardless of where the asset is located divided by the number of people in the population. (e.g income of foreign countries producing within a country would not be included in the national income of the country but the activities of its own companies producing outside of the country would)
If there is large amounts of FDI then GDP figures will be higher than GNI since they will include profits that may well have been repatriated. Thus, GNI figures tend to be used to measure the status of developing countries

2. GDP per capita & GDP per capita at PPP (purchasing power parity)

G&S don’t cost the same amount in diff countries and thus purchasing power of a person’s income will be diff in diff countries
Therefore the PPP exchange rate is used as it attempts to equate the purchasing power of currencies in diff countries by comparing the prices of identical G&S in diff countries

Health measures

Life expectancy by birth
Average number of years that a person may be expected to live from the time that they are born.
Factors: level of health care & health care services; provision of clean water supplies & sanitation; provision of nationwide education; supplies of food; diets & lifestyles; levels of poverty; level of conflict.
Infant mortality rate
Measure of the number of deaths of babies under the age of 1 year per thousand live births in a given year

Education measures

Adult literacy rate
Measure of the proportion of the adult population, aged 15 or over, which is literate expressed as a percentage of the whole adult population for a country at a specific point of time
Influenced by the above factors + distribution of income within the country
Net enrolment ratio in primary education
Measure of the ratio of the number of children of primary school age who are enrolled in primary school, to the total number of children who are of primary school age in the country

Composite measures

HDI
Life expectancy at birth - Long and healthy life
Education – adult literacy rate combined with a measure of primary, secondary and tertiary school enrolment
Decent standard of living – GDP per capita

HDI comparing with GDP per capita, we can make conclusions about the country’s success in translating the benefits of national income into achieving economic development.
We cannot use only GDP per capita to measure development
HDI is to reemphasize that people and their capabilities should be the ultimate criteria for assessing the development of a country not economic growth
Other indicators of development
HDI is still an average figure that can mask inequalities within the country (e.g. inequalities between rural and urban citizens, between men and women, between diff ethnic groups)
Gender related development index (GDI)
Same indicators as HDI but takes into account the inequalities in these indicators for women and men.
Gender empowerment measure (GEM)
One aspect of development takes into account developing self esteem & creating opportunities & freedom for all people therefore it is valuable to measure whether development in a country is helping to create such freedoms and opportunities for women.
Measures the extent to which women are able to actively participate in economic & political life + number & percentage of women in leadership, managerial & parliamentary positions & in technical & professional jobs. It examines the participation in the labour force & share of national income
Human poverty index (HPI)
Measure the level of deprivation & poverty
Looks at the proportion of the people who are deprived of the opp to reach a basic level in each area
Looks at indicators that are comparable with the HDI
HPI is useful for observing how evenly the benefits of development are spread within the cotunry and is expressed as a percentage
Genuine progress indicator (GPI)
Measure whether a country’s growth (an increase in the output of G&S) has actually lead to an improvement in the welfare of the people
To the GDP figures, it adds a non-monetary benefits such as the benefits of household work, parenting & volunteering work
Given that economic growth generates many costs an indicator of GPI will deduct such costs:

Environmental costs

Resouces depletion

Social costs – loss of leisure time, crime etc

Commuting costs

Costs of automobile accidents

Domestic factors and economic development

Institutional factors affecting development

Education
External benefits
More efficient work force
More discussions and debates thus leading to social changes.
Improve the role of women in society

Recognise political, economic and social participation and leadership of women

Improve levels of health

People especially women are able to communicate more fully and become aware of some of the hazards that face them & the opp that exist. They are able to read about & be informed about dangers such as HIV / AIDS, poor sanitary habits and poor dietary habits. They are also able to find out about things such as innoculations & water filtering

Large funds are required & there may be large disparities in the provision of education with urban areas receiving more funding then rural areas and there are family economic conditions that prevent children from entering school

Health care
Training
Health facilities
Provision
Availability of immunisations
Infrastructure
Essential facilities & services such as roads, airports, sewage treatments, water systems, railways, telephone & other utilities that are necessary for economic activity
Political stability & lack of corruption
Citizens are more likely to have an input in running the country
The government’s planning is likely to be more structured & long term and the law is easier to enforce.
When there is corruption ( the dishonest exploitation of power for personal gain)
Government spend large amounts on large scale capital investment projects
Official accounting practises are not well formulated / controlled
Political elections are not well controlled (no democracy)
Weak legal structure & lack of freedom of speech
Forms of corruption & effect
Electoral corruption – government is not voted for by the majority & they will not put into place policies that are for the benefit for the electorate
Unfair allocation of resources – market failure & resources are misallocated. It often sustains inefficient producers, shielding them from competition
Bribes increase cost of business thus higher prices
Reduces trust in economy – harder to attract FDI
Increases risk of contracts not being honoured thus deterrent to investment both internal & external
Reduces quality of government services to people as they divert public investment into capital projects where bribes are more likely.
Turn blind eye to regulation
Capital flight – monetary gains from corruption are moved out of the country & reduces capital available for internal investment
Constant paying of small bribes reduces economic well being of an ordinary citizen
Legal system
To enforce contracts
To uphold property rights
Right to own assets (buildings)
Right to establish the use of our assets (e.g. adding to the building – sanitation)
Right to benefit from our assets
Right to sell
Rights to exclude others from using / taking over
If they are not guranteed the ownership, they will not improve the property & there is reduction in investment & growth and economic growth
Financial system, credit & micro-finance
Savings is necessary for funds to be available for investment. If the financial institutions are weak & untrustworthy, people tend to buy assets / invest their money outside of the country
Financial systems are necessary if low income people are to be able to manage their assets & to allow them to increase in value thus enabling them to invest in things (helath care, shelter & education)
Saving & borrowing money is the breakout point of the poverty cycle
It is difficult to start a business due to the lack of funding.
Micro-finance is the provision of financial services (small loans, savings accounts, insurance & cheque books) geared specifically to the poor
Taxation
Difficult for governments to collect tax revenue in developing countries – lack of inefficiency, information and pure corruption
Corporate taxes tend to be low since there are relatively little corporate activity in developing countries & they offer large tax incentives in order to encourage domestic corporate activity & to attract FDI
Export, import and excise (customs) duties – relatively easy to collect since they are paid when the goods goes through the country’s border posts. But only significant if the country is heavily involved in foreign trade.
Size of informal markets – lower tax revenue and if incomes are not recorded, tax is not collected thus making it difficult for govt.
Use of appropriate technology
Technology that’s appropriate for use with existing factor endowments
There is often a surplus of labour & thus it would be appropriate to make use of the abundant labour supply
Giving workers capital equipment that are cheap to make and requires labour to make use of it.
Empowerment of women
Improve through education and improved social standing
Well being of family is improved (health of children as women are better informed)
Education of children in family improve
Quality of workforce in the country improves
More control over contraception, marry later and tend to have smaller families thus reducing population growth
Income distribution
Income inequality
Low levels of savings
Low investmet
Rich dominate politics & economy thus we do not have pro-poor growth (economic growth leads to a fall in some agreed measure of poverty thus benefitting the poor)
Rich move large amounts of funds out of the economy in the form of capital flight.
Large proportion of goods purchase by rich are foreign produced & consumption does not really help the domestic economy

International trade and economic development

International barriers to development

Over specialization on a narrow range of products
Many developing countries are dependent on primary commodities for their export revenues and rising commodity prices will be beneficial to these countries as it increases their rate of economic growth & could start a positive cycle.