4.3.2

• Primary product dependency is over reliance on primary commodities (agriculture)
• issues with over relying on primary products:

  • vulnerable when there are natural disasters
  • low income elasticity of demand
• the prebisch singer hypothesis suggests that the long run price of primary goods declines in proportion to manufactured goods
• prebisch singer model suggests that those dependent on primary exports will see a fall in their terms of trade
• commodity prices are highly volatile due to its inelastic demand/supply
• commodity prices being highly volatile means that incomes fluctuate sharply, it is difficult to plan long term investments, and over investment during booms will lead to busts
• Zambia's economy is heavily dependent on copper exports. when the global copper price dropped, Zambia faced a fall in revenue - resulted in public spending cuts, rising debt, and slow growth
• developing countries have lower incomes and thus they save less
• a savings gap is the difference between actual savings and the level of savings needed to achieve higher growth
• Harrod-Domar model suggests that increased savings - increases investment - higher capital stock - high growth
• problem with Harrod Domar model:

  • investment may be inefficient
  • poor can't afford to save
• India's saving rate is lower than other middle-income countries - therefore they struggle with funding infrastructure without external borrowing
• foreign currency gap is caused when a country is able to finance essential imports due to insufficient exports
• effects of foreign currency gap:

  • limited industrial growth
  • countries struggle to pay foreign debt
• Ethiopia faced debt in 2018 worth 60% of its GDP - they only had enough currency reserves to pay for a month of imports
• capital flight is when large amounts of money are taken out the country, rather than being left there for people to borrow and invest
• wealth leaves the country due to:

  • lack of trust for the government
  • corruption, country avoiding tax
  • foreign firms taking money back to their domestic countries (profit repatriation)
• high population growth - pressure on jobs, education and food supply
• high population caused by high birth rates which increases the number of dependents in the country
• countries in debt suffer from high levels of interest repayments
• The Harrod-Domar model suggests savings provide the funds which are borrowed for investment purposes and that growth rates depend on the level of saving and the productivity of investment
• issue with debt is that country has less money to spend on public services - they may need to raise taxes - limits growth and development.
• Developing countries have limited access to credit and banking compared to developed countries - developing countries can't access funds for investment as they struggle to save
• loan sharks charge high interest rates and leave people permanently in debt
• In a developed country, there is a complex network of infrastructure
• Low levels of infrastructure make it hard for businesses to trade and setup within the country
• development of infrastructure can be expensive and can conflict with environmental goals
• poor education means that workers are low skilled - some can't read or write - so they have low levels of productivity
• property rights are where individuals are allowed to own and decide what happens to certain resources
• a lack of property rights means that firms cannot protect their assets - leads to reduced investments
• some countries suffer from corruption because leaders rather make decisions which benefits themselves rather than benefitting the economy
• bureaucracy - state officals control and manage the country
• high levels of bureaucracy are often linked to corruption - costly and time consuming - deterring new firms and reduces output of firms already established
• diseases have a negative impact on economic growth
• countries with poor climates and geographical areas suffer from natural disasters - difficult for farmers and businesses to set up
• civil wars - causes high levels of poverty - destroys infrastructure - hard for country to rebuild
• it's hard for landlocked countries to generate economic growth - as transportation and administrative costs are high - increases costs of production
• Advantages of managed exchange rate

  • Stability: Reduces exchange rate volatility, increases trade and investment.
  • Control: Allows governments to respond to economic shocks or imbalances.
  • Confidence: Boosts investor confidence in emerging and developing economies.
• Limitations of managed exchange rate

  • Costly interventions: Requires large foreign currency reserves.
  • Distorted signals: Market signals may be ignored, misinterpreted, or manipulated.
  • Lack of speculation: Speculators may attack the currency if they sense it’s over- or undervalued.
• Infrastructure Development

  • Infrastructure includes transport, energy, water and sanitation, and telecommunications.
  • Infrastructure gaps exist across developing countries.
  • Also supports trade, job creation, and investment.
  • Governments seek investment for development.