4.3

• Economic development

  Improvements in living standards, not just economic growth
• Human Development Index (HDI)


  Composite index based on health, education, and income, calculated by the UN
• HDI


  • Measures health by life expectancy at birth
  • Measures education by mean years of schooling and expected years of schooling
  • Measures income by real GNI per capita at purchasing power parity
  • Each indicator is given equal weighting and a mean is taken to give a figure between 0 and 1, with higher numbers indicating greater development
• Advantages of HDI

  • Takes into account three key factors important for development
  • Relatively easy to calculate as governments collect the statistics
• Disadvantages of HDI


  • Health takes no notice of quality of life
  • Education doesn't consider quality and success
  • No consideration for income equality
  • Doesn't account for other factors like freedom from corruption or the environment
• Inequality-adjusted Human Development Index (IHDI)


  Adjustment of HDI that includes a fourth indicator of inequality
• Multidimensional Poverty Index (MPI)


  Measures the percentage of the population that is multidimensionally poor, using a broader range of indicators for health, education, and standard of living
• Genuine Progress Indicator


  Calculated from 26 different indicators grouped into economic, environmental, and social categories to measure economic sustainability
• Figures like changes in electricity production or mobile phone ownership can also show development levels, and are easier to calculate than indexes
• Primary product dependency


  When a large amount of a developing country's economic activity is based on a primary product like agriculture or mining
• Primary products have low-income elasticity of demand


  As people get wealthier, they don't continue to increase their demand for primary products as much as for manufactured goods
• Prebisch-Singer Hypothesis


  The long-run price of primary goods declines in proportion to manufactured goods, meaning countries dependent on primary exports see a fall in their terms of trade
• Dutch disease


  When a country becomes a significant commodity producer, causing an increase in demand for its currency which pushes up its value, reducing competitiveness of the non-commodity sectors
• Ghana's exports are 75% gold, cocoa, and oil, making it vulnerable to the issues of primary product dependency
• Volatility of commodity prices

  Primary products have inelastic demand and supply, so small changes in demand or supply lead to large price fluctuations
• Volatile commodity prices


  Make it difficult for producers to plan and invest, and can cause poverty when prices fall rapidly
• Savings gap


  The difference between actual savings and the level of savings needed to achieve higher growth
• The Harrod-Domar model suggests economic growth depends on the amount of labour and capital, and that developing countries' problems are caused by lack of capital, which requires investment funded by savings
• Foreign currency gap


  When a developing country's exports are too low compared to imports to finance the purchase of investment or other goods from overseas required for faster growth
• Capital flight


  Large amounts of money being taken out of a country rather than being left for borrowing and investment
• High population growth in developing countries


  Limits development as the economy needs to grow at the same rate as population just to maintain living standards
• Developing countries' high population growth is caused by high birth rates, increasing the number of dependents
• Developing countries' high debt levels, sometimes even higher than loans and aid received, mean less money for public services and can limit growth
• Access to credit and banking


  Developing countries have limited access compared to developed countries, making it hard for individuals and businesses to access funds for investment and saving
• Infrastructure


  The complex network of buildings, roads, ports, utilities etc. that enables businesses to operate effectively
• Poor infrastructure in developing countries, like India's lack of paved roads and power blackouts, damages their economic potential
• Education/skills


  Low levels of education and skills in developing countries lead to low worker productivity
• Property rights


  Where individuals are allowed to own and decide what happens to certain resources - a lack of rights reduces investment
• Corruption in developing countries, where leaders make decisions to maximize bribes rather than development, is very damaging
• Diseases like HIV/AIDS and malaria, and natural disasters, have a negative impact on economic growth in developing countries
• Civil wars in countries like Syria and Iraq destroy infrastructure and make rebuilding very difficult
• Trade liberalisation


  Removing trade barriers to allow export-led growth and resource allocation to comparative advantage
• Promotion of FDI


  Investment by one private sector company in another private sector company in a different country
• Countries with poor climates and geographical terrain may suffer from natural disasters and it may be difficult for farmers or to set up businesses
• Many countries suffer from civil wars, for example Syria and Iraq. This causes high levels of poverty and destroys infrastructure, making it very difficult for the country to rebuild even after the war has ended
• Trade liberalisation


  Removing trade barriers will mean that domestic industries either close or are forced to become as efficient as other world producers. Resources will be allocated to their best use where the country has a comparative advantage
• Countries/regions that have benefitted from trade liberalisation


  • Singapore
  • South Korea
  • Hong Kong
• FDI (Foreign Direct Investment)


  Investment by one private sector company in one country into another private sector company in another. It includes direct acquisition of a foreign firm, construction of a facility, investment in a joint venture with a local firm or licensing of intellectual property
• Reasons firms undertake FDI

  • Production costs are lower in developing countries
  • Enables them access to a new market
• Differences between FDI and a loan


  • If the investment fails, it is the company who has to deal with it and the country does not owe money to foreigners