Development Economics

Market Led Strategies

+ Growth through FDI, export-led growth, privatization, deregulation, IMF's Structural Adjustment Policies etc

Interventionist strategies

+ Import substitution, protectionism, regulations, nationalization of industries, manipulation of exchange rates, etc.

Credit and Micro-Credit

- A financial system is vital to development but it is often lacking in developing countries. - Most developing countries have dual financial markets. + An official market - usually small and dominated by foreign banks. + An unofficial market - illegal; money is lent at high interest rates. - People have great difficulties to access credit (since most have no assets to use as collateral and are unemployed). + A solution to this is micro-financing - the provision of small loans for small projects → women are the main recipients of these credits (they are perceived as less risky borrowers) → this has positive effects on their children.

Export Promotion

- A growth strategy based on increased international trade → exports are the main driver of the increase in Aggregate Demand. - Policies needed to achieve export-led growth: + liberalized trade + liberalized capital flows + floating exchange rate + investment in infrastructure + deregulation - minimum government intervention

Import Substitution

- A strategy that requires a developing country to produce goods domestically rather than import them. * This goes against the idea of free trade. - Government needs to do these for this to work: + Decide which products are going to be produced domestically. + Support producers by giving subsidies. + Use protectionist measures to protect domestic markets.

Single Indicator - Education

- Adult literacy rate = number of literate adults / total number of adults. - Net enrollment ratio in primary education = number of children of primary school age enrolled in primary school / total number of children of primary school age.

Debt

- Banks didn't monitor how the funds had been used in the developing countries. + Funds went into weapons, failed infrastructure projects, private bank accounts of corrupt leaders, etc. + In 1979 (the Iranian revolution) oil prices spiked again → start of a world recession → commodities prices collapsed.

Problems with Price Volatility of Primary Sector Products

- Both demand and supply of commodities tend to be price inelastic → any changes in supply will lead to large changes in price. - For countries that reply on primary commodities, it it very difficult to plan ahead against events (usually weather) that could cause prices to change. - This lack of ability to predict the future is perceived by foreign investors as instability → they are reluctant to invest in these countries → economic growth is affected → often this means that development is affected.

Health Care

- Countries that spend a lot on healthcare tend to have a higher life expectancy. - Developing countries have made progress: + Mortality rate has decreased. + Better access to safe water. + More trained doctors and nurses. + More hospitals and clinics. + Immunization programs.

Long Term Changes in the Terms of Trade

- Developing countries receive low revenue from exporting if commodities prices stay low for a long time → have difficulties in buying imports. → low transfer of technology. → low access to capital. → low access to foreign consumer goods. => Contribute to long term negative effects. on growth and development.

Domestic (Internal) Factors in Economic Development

- Education. - Health care. - Technology. - Credit and micro-credit. - Empowerment of women. - Income distribution.

International Development Goals

- Eradicate extreme poverty and hunger. - Achieve universal primary education. - Promote gender equality and empower women. - Reduce child mortality. - Improve maternal health. - Combat HIV/AIDS, malaria and other diseases. - Ensure environmental sustainability. - Develop a Global Partnership for Development. => Each goal had a number of targets that were measured by using a range of indicators. Most of these goals have not been achieved.

Problems of Interventionism

- Excessively large public sector → bureaucracy, over-staffing, inefficiency. - Nationalization of industries → inefficiency hidden unemployment (people who were formally employed but didn't have any work to do and were paid subsistence wages). - Excessive government spending → large deficits → large borrowing. - Increase in the money supply (to cover the excessive spending) → Inflation. - Huge spending on large infrastructure projects that were not economically sound.

Concerns about MNCs

- Exploitation of workers. - Use of child labor. - Anti-union practices. - Business practices that cause environmental damage.

Advantages with FDI

- FDIs can provide resources for growth + People in many developing countries have low savings → less resources for investment → lower economic growth. - MNCs provide employment, education and training. - MNCs allow greater access to technology and new research → can help the industrialization process in developing countries. - Increased employment → increased earnings → growth. - Governments gain more tax revenue. - MNCs improve infrastructure. - More choices and lower prices for consumers. - MNC + liberalized trade → more efficient allocation of world resources.

Problems with Market Led Strategies

- Free markets are unlikely to provide public goods (e.g. infrastructure). Developing countries cannot develop without infrastructure → there is a place for government intervention in this area. - Protectionism in developed countries → undermines developing countries competitiveness. - The Asian Tigers' success was due in part to government intervention (protectionism of infant industries, education, healthcare). - Free market approach has significant short-run costs on poor people → high unemployment, low provision of public services, etc. - Tend to focus in urban areas → greater divide between urban and rural areas. - Political instability prevents FDI from entering the country even though the government implements market-led strategies.

Single Indicator - Financial

- GDP per capita: Total economic activity in a country, regardless of who owns the assets. - GNI per capita: Total income earned by a country regardless of where assets are located. - Per capita GDP and GNI calculated at PPP (Purchasing Power Parity): Exchange rate between two currencies that would make a good cost the same in both countries, usually different from actual exchange rate.

Income Distribution

- High income inequality means + Low savings (poor cannot save much) → lower investments → lower growth. + Part of the rich people's consumption goes towards foreign goods → discourages domestic production → leads to lower economic growth. + The rich dominate society → policies are created that favor them → inequality is perpetuated (there is no pro-poor growth). *Pro-poor growth is the kind of economic growth that improves some measures of poverty.

Composite Indicator - HDI

- Human Development Index + Long and healthy life → measured by life expectancy at birth. + Improved education → measured by the adult literacy rate. + Decent standard of living → measured by GDP/capita (in PPP values). - Takes values between 0 (low development) - 1 (high development). + Very high human development: > 0.9 + High human development: 0.8 - 0.899 + Medium human development: 0.5 - 0.799 + Low human development: < 0.5

Categories of Aid

- Humanitarian aid → given to alleviate short term suffering. + In the form of a grant which doesn't need to be repaid such as good aid, medical aid, emergency aid (tents, clothing, fuel, etc.) - Development aid → given to alleviate poverty in the long run and promote development. + Referred as ODA since its main objective is to promote development and contains a grant element of at least 25%.

Effects of IMF Funding

- IMF requirements were perceived as too costly to implement. - These costs fell mainly on the poor: + Increased unemployment + Lower real wages + Lower access to free education and healthcare. + Increased prices of essential products (because subsidies were removed) => As a result many countries experienced de-development

Preferential Trade Agreements

- If they are set up between 2 countries they are called ''BILATERAL''. - If they are set up between a number of countries, they are ''REGIONAL''. *Developing countries engaged in such agreements have more chances to engage in trade and therefore achieve growth and development

Trade Strategies for Development

- Import substitution. - Export promotion. - Trade liberalization. - Preferential Trade Agreements. - Diversification.

Education

- Improved role of women in society: leads a number of social benefits. - Improved levels of health: educated people are better informed. - One of the Millennium Development Goals is to ensure primary education for all children → 90% achieved in most areas of the world. + Primary enrollment still a problem in sub-Saharan Africa (70%) and South Asia (18 million children out of school). * Access to education is ultimately a funding problem → urban areas are in a better position than rural ones. Many children don't go to school because they need to work for their family.

Technology

- In a country that has abundant labor, it would not be appropriate to introduce technology that replaces labor but technology that makes better use of it.

Poverty

- It is a most necessary and indispensable ingredient in society, without which nations and communities could not exist in a state of civilization. - It is the lot of man. It is the source of wealth, since without poverty, there could be no labor; there could be no riches, no refinement, no comfort, and no benefit to those who may be possessed of wealth.

Trade Liberalization

- It's about reduction or removal to trade. It is the goal of WTO. - A list of reforms that developing countries need to implement: + Fiscal discipline → A balanced budget. + Redirect spending from things like subsidies to things like health and education. + Lower taxes on a broader tax base. + Interest rates liberalization. + Competitive exchange rate. + Trade liberalization. + Liberalization of foreign direct investment (FDI) inflows. + Privatization. + Deregulation. + Secure property rights.

Problems of Export Promotion

- Liberalized trade → most developing countries rely on exporting primary commodities, trade liberalization is unlikely to achieve export-led growth (because supply is increasing, demand is relatively stable → prices are decreasing) + Developing countries use protectionism (tariff escalation) to eliminate the competitive advantage that developing countries possess - Liberalized capital flows - Deregulation - minimum government intervention + When developing countries open their economies to foreign companies, these multinational corporations (MNCs) could gain excessive power/influence in the economy. - Export-led growth can lead to income inequality → doesn't lead to development.

Single Indicator - Health

- Life expectancy at birth influenced by + The healthcare system. + Access to clean water. + Education. + Food. + Diet. + Lack of conflicts (civil wars). - Infant mortality rate = number of deaths of babies under the age of 1 / 1000 live births.

Problems of Import Substitution

- Long run economic growth can be slower because of the lack of interaction with the world. - Country loses benefits of comparative advantage → produces inefficiently instead of importing. - Lack of competition leads to inefficiency and low technological progress. - May cause retaliation from other countries.

Types of Development Aid

- Long term loans: very low interest rate; repayable in 10-20 years. + Also called as soft loans. - Tied aid: given under condition that the money is used to buy goods from the donor country. - Project aid: given for specific projects. + Main providers is the World Bank and usually doesn't need to be repaid. - Technical assistance aid: often combined with project aid. + Raise the level of technology in the developing country. + Raise the level of human capital → training, mentoring. - Commodity aid: given to increase productivity in certain industries which are seeds, fertilizers, cement, steel, chemicals.

Effects of High Income Inequality

- Low savings (the poor cannot save much) → lower investments → lower growth. - Part of the rich people's consumption goes towards foreign goods → discourages domestic production → lower economic growth. - The rich dominate society → policies are created that favor them → inequality is perpetuated (there is no pro-poor growth).

Similarities of Developing Countries

- Low standards of living: low income, poor health, low education, inequality, high infant mortality rate. - Low levels of productivity: caused by low education, lack of technology, lack of physical capital, poor health. - High rates of population growth: high child dependency ratio. - High and rising levels of unemployment. - Dependency on agriculture and primary sector exports. - Imperfect markets and limited information: factors that make markets efficient (lack of functional banking system, legal system, infrastructure, an accurate information system that allows prices to reflect real demand and supply at all times). - Dependence and vulnerability in international relations: depend on developed countries for technology and investment. - Low power in trade negotiations.

Problems with FDI

- MNCs provide employment but seek cheap labor and bring their own management teams → provide little education and training. - MNCs have too much power and influence over governments. - MNCs practice transfer pricing → they sell goods between different divisions of the company so they can gain advantages from different profit tax rates in different developing countries. - MNCs strip natural resources from developing countries and then leave. - MNCs settle in countries where legislation on pollution is relaxed → they generate significant negative externalities. - MNCs use capital intensive production methods → little effect on employment in developing countries. - MNCs can repatriate their profit → money flows out of developing countries.

Diversification

- Many developing countries want to move from exporting commodities to exporting manufactured goods. The effects of this: + Domestic producers are better protected against price fluctuations + More stable export revenue + Increased use of technology + More skilled labor force

Approaches to Development

- Market-Led Strategies . - Interventionist Strategies

Sources of economic growth

- Natural factors (increase in quantity or quality of factors of production) + Since the quantity of these factors (especially land) is difficult to increase, most countries aim to increase quality → using fertilizers, better land planning, building upwards, etc. - Human capital factors (more labors, increased education, increased healthcare). - Physical capital and technology factors (quantity of physical capital depends on investment, savings, government expenditure). - Institutional factors (adequate banking system, legal system, political stability, education, infrastructure). Those factors are also sources of economic development.

Types of Aid

- Official Development Assistance (ODA): aid organized by a government - Unofficial aid: organized by a non-governmental organization (NGO)

International Barriers to Development

- Over-specialization. - Price volatility of primary sector products. - Inability to access international markets. - Long-term changes in the Terms of Trade.

Advantages of Import Substitution

- Projects jobs in domestic markets. - Protects local culture from negative external influences. - Protects the economy from the influence of multinational corporations.

Role of NGOs

- Provide disaster relief and promote development. + NGOs: Oxfam, Greenpeace, CARE. - Act as lobbyists to influence governments in developed countries. - Work in areas where officials cannot reach → have a better understanding of the needs in developing countries. - Improve human capital → health education, literacy programs, AIDS prevention, immunization, vocational training, micro-credit programs. - Focuses on women as the main factor of development in many developing countries.

IMF Funding

- Provide funds to countries that could not service their debt. - Funds were on policies like: + Promoting trade liberalization. + Encouraging exports of primary commodities. + Devaluating their currency (to promote exports) + Encouraging FDIs. + Privatization of state owned companies. + Maintaining a balanced budget. + Reduce social expenditures. + Removing subsidies and price controls. + Charging for basic services like education and healthcare. + Reducing corruption.

Foreign Aid

- Refers to assistance received by a country outside the workings of normal market forces. - Provide aid because: + Help in case of natural disasters. + Improve political strategic relations. + Fill the savings gap and encourage investment. + Improve technology. + Fund specific projects.

Differences of Developing Countries

- Resource endowment (a lack of resources doesn't necessarily mean a country cannot become developed: Japan, Singapore) - Historical background. + Singapore and Hong Kong seem to have benefited from colonialism. + Vietnam and Angola seem to have benefited less. - Geography and demography. - Ethnicity and religion → higher chances of political unrest. - Structure of industry: Bangladesh and Nepal export manufactured goods; Cape Verde and the Maldives export services (tourism). - Income per capita: 2009 Malaysia: had a GDP/capita of 13000 USD and Sierra Leone just 679 USD. - Political structure: Brazil, Indonesia, Mexico are democracies; Brunei, Tonga are monarchies; others are party states (China, Cuba), etc.

Why FDIs target Developing Countries

- Some of these countries are rich in natural resources. - Some developing countries are big growing markets → FDI give access to a lot of potential customers. - Cost of labor is much lower than in developed countries. - Government regulations are less severe than in developed countries → lower setup and production costs. + Many developing countries intentionally lower taxes and relax regulations to attract FDI.

Barriers to diversification

- Tariff escalation - Lack of skilled workers → prevents production of complex manufactured goods

Other Composite Indicators

- The Gender Related Development Index (GDI) → looks at the same variables as GDI but takes into account inequalities between women and men. - The Gender Empowerment Measure (GEM) → measures women' participation in economic and political life. + If a country has a high GDI but low GEM → development is not offering the needed opportunities for women. - The Human Poverty Index (HPI) → looks at the % of people who don't have the opportunity to reach a basic level in each of the 3 areas measured by HDI. + HPI looks at the % of disadvantaged people. + A country can have a high HDI but if the HPI is also high that suggests that the benefits of development are not shared equally.

Economic Growth

- The increase in real output of an economy over time. + One-dimensional concept + Quantitative measure

Concerns about aid

- There is no correlation between the level of aid given and the level of development. - Aid is often used in the interest of a small minority that the government protects. - Aid is often given for political reasons, not where it is most needed. - Tied aid does not create employment; can purchase products that replace domestic ones. - Long term provision of food aid can lower domestic prices → affects producers. - DEPENDENCY ON AID → no incentive to innovate; welfare mentality. - Aid is usually focused on industrial sector → increased gap between this and agricultural sector. - Aid is often conditional upon the country implementing certain policies.

Empowerment of Women

- Women are more empowered: + Wellbeing of families improves. + Education of children improves → the quality of the country's workforce improves → leads to higher incomes for women → brings more benefits to families than a similar increase in men's income. + Women have control over contraception, marry later → smaller families → slower population growth.

Main market-led measures

1)Elimination of subsidies and price controls 2) Reduction in protectionist measures 3)Privatization of industries 4)Reducing government expenditure → reducing the budget deficit

Economic Development

A multi-dimensional qualitative concept that refers to an improvement in living standards in an economy encompassing many other aspects like material consumption, education, health, income distribution, etc.

Large FDI in relation to GDP and GNI

GDP > GNI - In this case GDP would not be a very relevant to keasure of development since a lot of the profits from those FDIs will be returned to the countries where FDIs originated. - In some rare cases developing countries (e.g. India) have GDP < GNI → India made investments abroad that bring more money into the country than the profits sent home by the FDIs in India.

Foreign Direct Investments (FDIs)

Long term investments made by multinational corporations in overseas countries. It can take place in two forms: building new facilities or merging or acquiring local companies.

Problems with Over-Specialization

Many developing countries are too dependent on primary commodities - When commodities prices rise + These countries benefit in terms of economic growth. + If the revenues are used to improve education, health, infrastructure, etc. → development - When commodities prices decrease + These countries experience a deterioration of their Terms of Trade. + Their Current Account Deficit increases. * This logic applies regardless of the product or service on which the country is too reliant → For example it works the same way for countries that reply too much on ... tourism or something else.

Gross National Income (GNI)

Measures the same thing but looks at incomes rather than quantities.

Does Growth lead to Development?

Need to consider consequences of economic growth and analyse if they have an impact on development - Higher incomes: higher GDP/capita → improve people's standard of living if there is a fair distribution of income. - Improved economic indicators of welfare (life expectancy, years of schooling, literacy rates, etc.): only creates development if effects extend over all population groups. + Human Development Index (HDI): an indicator that measures inequality according to a set of statistics → can be used to rank countries according to the welfare level they offer their citizens → a usual consequence of economic growth is an improvement in the HDI index. - Higher government revenues: tax revenues should increase with economic growth (even in developing countries where collection is not efficient) → government should be in a better position to improve people's lives. - Creation of inequality: economic growth generally increases inequality even though the trickle down effect is supposed to help redistribute some income towards the poor... doesn't seem to work in most developing countries. - Negative externalities and lack of sustainability (deforestation, soil degradation, loss of bio-diversity, etc.): greenhouse gases resulted from burning fossil fuels → global warming and severe consequences. + Economic growth based on current patterns is not sustainable → it is uneconomic growth (it costs more to create than it is worth) - called ''impoverishing growth''.

Arguments for debt relief

Reasons for requesting debt relief (reduction or cancellation of these debts) + Forgiveness of debt. - Countries can barely pay the interest on their debt → The principal remains unpaid and continues to generate interest indefinitely. - Governments are unable to spend in areas that would actually help development. - Economic growth is also slower. - The existence of odious debt: debt that has been incurred by corrupt governments and used for purposes that did not serve the interests of the people. - Boomerang effects of debt: these are effects that come back to hit developed countries: environmental damage, drug usage, terrorism, increased immigration, increased levels of conflict

MNCs

They will provide benefits to developing countries if: - The local governments have the strength to regulate them. - The type of investment they offer is beneficial to the developing country's economy.

Inability to Access International Markets

This is caused by protectionist measures (tariffs, quotas, subsidies, non-tariff barriers) → the competitive advantage of developing countries is cancelled. - Tariff escalation: the practice of imposing a low tariff on imports of primary goods but increase tariffs on imports of processed goods. - Many developing countries have non-convertible currencies → trade is less likely. + If trade happens, it usually involves an intermediary currency (USD, Euro) → exchange rate losses.

Tariff Escalation

the practice of imposing a low tariff on imports of primary goods but=> increase tariffs on imports of processed goods Trapping developing countries in the role of suppliers of commodities → prevents them from developing manufacturing industries that could export products of higher value and more profitable