4.5- Developing Economies

• Define Economic Development

  The sustainable increase in living standards for a country
• What's the difference between single and composite indicators?

  Composite indicators use multiple factors combined into a single index
• What is the HDI

  Human Development Index

  • Created by the UN as a combination of three indicators: Health, Education, and Income.
  • Each indicator is given equal weighting in the index
  • The index ranks countries from a scale of 0-1
• How are the index scores on the HDI defined?

  • <0.550 is Low Development
  • 0.550-0.699 is Medium Development
  • 0.700-0.799 is High Development
  • >0.800 is Very High Development
• Advantages of using the HDI?

  • Incorporates three of the most important metrics for households
  • Enables meaningful comparisons as its used all over the world
  • Provides governments with a goal when developing their policies
• What are the disadvantages of using the HDI?

  • Does not measure/compare absolute or relative poverty
  • Using mean GNI/capita limits the measurement of inequality
• HDI: How is Health individually measured?

  Life expectancy
• HDI: How is Education individually measured?

  Combination of mean years of schooling that 25 year old's have received, together with the expected years of schooling for a pre-school child
• HDI: How is Income individually measured?

  GNI per capita at PPP
• What are the purposes of single indicators?

  • Compare the relative standing of countries at any point in time
  • Provide targets for improving the lives of citizens
• What are the measures of single indicators?

  • Access to clean water
  • Energy consumption per capita
  • Access to internet per thousand of population
  • Access to mobile phones per thousand of population
  • Access to doctors per thousand of population.
• What is a common misconception about growth and development?

  Growth precedes development
• What happens in developing economies?

  Economic growth is tied to one industry, leading to negative externalities of production forming and decreasing standard of living.
• Economic factors that influence growth and development

  • Primary product deficiency
  • Volatility of commodity prices
  • Capital flight
  • Savings gap
  • Foreign currency gaps
  • Access to credit and banking
  • Infrastructure
  • Education
  • Absence of property rights
• How does primary product dependency influence growth and development?

  • Primary products are in excess due to a country over-specialising
  • Primary products have a very low YED: as income rises, there is a less than proportional increase in demand
  • Primary products have very little added value
• How does volatility of commodity prices influence growth and development?

  • Commodities are inelastic in demand and supply, making any small change leading to a large change in price
  • Diversified range of exports prevents this
• How is economic growth and development achieved acc to the Harrod-Domar model?

  Any intervention to increase capital stock will lead to economic growth

  • Increased savings= increased investment= higher capital stock= higher econ growth= increased savings
• What is the savings gap?

  Occurs in low-income countries when extreme poverty prevents individuals to access funds for investments
• What is the Foreign Currency gap?

  When currency outflows are higher than foreign currency inflows
• How does a foreign currency gap influence economic growth?

  Central banks are forced to use their reserves to buy vital imports
• What is a capital flight? How does it influence growth?

  When assets rapidly leave a country

  It reduces the money available for investment
• What is a dependency ratio?

  Ratio of the number of dependents to the total working age population
• How does access to banking influence development?

  A lack of financial institutions prevent firms from borrowing money which can be used for investment
• How does infrastructure influence development?

  • Good infrastructure reduces business costs and attracts foreign investment
  • China has invested in African infrastructure because it unlocks economic potential
• How does education and skills influence development?

  • Its a supply-side policy which increases the potential output of the country
• How does the absence of property rights influence development?

  Prevents the securing of loans or generation of income
• Non-economic factors that influence development

  • Corruption
  • Poor governance
  • Wars
  • Political instability
  • Geography
• How does corruption influence development?

  • Diverts funds to certain groups which make projects deliver a low level of growth and development
• How does poor governance influence development?

  Leads to inefficient useage of resources and poor-decision making

  Results in laws which prevent growth
• How do wars influence development?

  • Destroys infrastructure
  • Disrupts supply chains
  • Reduces post war supply of labour
• How does political instability influence development?

  Results in changing policies and priorities

  Reduces confidence in the economy

  Leads to international investors being cautious
• How does geography influence development?

  If transportation costs are high, it discourages investment
• What are market-oriented strategies?

  Strategies that create the conditions for private individuals and firms to pursue economic activity with the aim of maximising profit
• Identify the market-oriented strategies

  • Trade Liberalisation
  • FDI
  • Subsidy Removal
  • Microfinance
  • Privatisation
  • Floating Exchange Rate systems
• What is Trade Liberalisation?

  Removing the barriers to trade
• FDI

  Foreign Direct Investment: 10% share of ownership of domestic firms
• What is Floating Exchange Rate systems?

  A system in which demand and supply determines the rate at which one currency exchanges for another
• What is microfinance?

  Small loans made to low-income household whom otherwise wouldn't have access to credit
• How can each market-oriented strategy maximise profits?

  Trade Liberalisation, FDI: Increases output, employment and income

  Subsidy removal, Privatisation: Increases competition, efficiency, profits and income

  Microfinance: Breaks the poverty cycle

  Floating Exchange Rate systems: Appreciation can generate higher incomes as imports are cheap
• What are Interventionist strategies?

  Government action towards correcting failures of the free market and promote welfare