ࡱ> ,  !"#$%&'()*+Root Entry( JrMatOSTMMMN0pNND ( JrMicrosoft Works MSWorksWPDoc9quS>>$?pNK..K^KKKKA.8dK?tLKKT Chapter 5 - Development Economics (Glanville pp. 454-598) compiled by Minna 250103 Growth and development - Ec. growth = increase in a countrys output over time = increase in national income; defined as the increase in real GDP per capita over a certain time period - Ec. development = non-economic improvements in the standard of living - Growth can occur without development - Trickle-down: the belief that growth always induces development Two ways in which the national income can increase: - Actual growth: From a point inside the PPF to the PPF - Potential growth: PPF shifts to the right - Growth rate; doubling time -> a variable grows 1% a year -> x2 in 72 years) - If development has happened, the graph luxury goods vs. necessities the curve favours necessities The three aims of development: 1) increase the availability of basif lifesustaining goods 2) raise the levels of living (incomes, jobs, education, humanistic values) 3) expand the range ofe conomic and social choice of individuals and nations Characteristics of economic growth Notes on measuring growth: 1) it is easier to achieve a high growth rate in a poor country 2) increase in economic growth needs to be weighed against population growth The economic structure 1) Primary sector: Raw materials 2) Secondary sector: Manufacturing 3) Tertiary sector: Services - As the level of the countrys income increases, its economic structure has shifted from 1 to 2 and/or 3 Characteristics of growth taken from the history - GDP growth & GDP per capita growth - Population growth - Productivity growth - Structural transformation - International trade - Social & ideological change How to measure economic development? (6 indicators/ways) 1. GNP/GDP per capita - Best single indicator of economic well-being; still not a satisfactory one because ceteris paribus doesnt occur in real life - The World Bank classifies countries into three groups according to GDP/cap Uses and limitations with NI accounts - Non-market output - Non-market activities are either ignored or estimated and added in - Parallel economy is not taken / cant be taken into account - Economic behaviour (lifestyle!) between countries is different - Military spending: Does the country invest on military stuff or consumer goods? - Pollution & leisure are not taken into account - Districution of income: the GDP per capita figure is an average -> growth doesnt always reduce poverty - Exchange rates: exchange rates reflect only certain goods and are often managed by governments 2. Birth rates, population growth & structure - Birth rate is the easiest way to distinguish a MDC from a LDC (much larger in the LDCs) - Rapid population growth -> poverty (can also be the other way around, but this is the general opinion!) - High population growth is a characteristic of the LDCs, and there are much young people Demographic transition in the industrialized countries (four stages) - First: High birth and high death rates - Second: Birth rate remains high, death rate falls dramatically - Third: Birth rate declines; death rate falls - Fourth: Low birth and low death rates 3. Life expectancy, health & literacy - Infant mortality rate & life expectancy - The number of live-born babies who do not survive to their first birthday - Reasons: poor quality water, poor sanitation, inadequate nutrition, diseases - Life expectancy = The average number of years new-born babies can be expected to live if health conditions stay the same - Diet (calories per day / protein per day) & health care - Calorie defiency = the body has insufficient resources to provide energy - Type of food is just as important as quantity - Lack of protein in childhood leads to inadequate development of the brain - Health care is very poor in the LDCs - Percent of illiterate adult population - Literacy is a development objective of its own right; it has strong connections with education, openness to change and labour productivity - Adult illiteracy = the proportion of the population over 15 who cannot read and write a short, simple statement about their everyday life. 4. Energy consumption, rural-urban migration and unemployment - Highly correlated to the degree of industrialization (LDCs use very little energy) - Rural-urban migration: in LDCs this happens very much (search for jobs) - Jobs are very scarce in the urban areas, but the wages are usually much larger How should jobs be created? - Correcting factor price distortions - Getting the prices right - Choosing labour-intensive technology (over capital-intensive) and expanding small scale labour-intensive industries - Reducing population growth 5. Poverty and income distribution - The poverty line moves up as societys norms move up - Relative poverty exists always when there is any degree of income inequality - Absolute poverty = no ability to meet the basic physical needs of life - Extent of poverty depends on a) level of income and b) income distribution - In the LDCs the income distribution inequality is large - Income distribution ratio: bottom 40%/top 20% 6. Composite indicators - The Human Development Index (HDI; by the United Nations): life expectancy + literacy + purchasing power - Purchasing power parity (takes local buying power of the currency into account) Sources of economic development - Increasing input (land, labour, capital) increases output - Increasing the quality of output - Incerasing the quality of labour (education & training, social and cultural changes, entrepreunership) - Increasing the quality of capital (through technological process) - Why is agricultural output so low in the LDCs? - Productivity is very low - Severe droughts and famines - Large price increases in food and fertilizers after the oil crisis in the 1970s - Food supply is often precarious - Farming in the LDCs is not just an occupation, it is a way of life - Technology is not used very much, and land plots are very small - Institutional factors - Rising taxes -> government saves and invests this money - Financial institutions help the economy to function Development strategies 1. Foreign trade - LDCs trade problems are both long and short term - Long term: International trade moves away from the LDCs (they mainly export primary goods and import manufactures and services) - Slow growth of exports due to a) low YED, b) Agricultural protection, c) synthetic substitutes, d) minituarization, e) low PED for primary products - Fast growth of imports due to a) high YED for imported goods, b) low PEd for imported goods - Producers prefer rising prices; consumers prefer either price stabilization or free markets. - Stabilizing prices by a buffer stock -> if demand increases the stock will be supplied - Problems with using a buffer stock: a) some goods are too expensive to be stocked b) if the scheme fails, it results in more buying than selling c) speculative actions may dampen price fluctuations d) the beneficiaries of price stabilization are not necessarily the poor - Cartels restrict output -> quotas - Weakness of quota schemes: a) cheating by members b) increase in supply by non-members c) economizing in the use of the products d) development of substitute products 2. Aid - Most LDCs need aid to finance their balance of payments deficit - Alternative to aid: private investments from the MDCs - Aid can be transferred through public or unofficial bodies - Agencies that supply or transfer aid: the ODA, UN, World Bank, Red Cross - Aid can be given as money, technical assistance, food or work - Aid given to the LDCs has increased a lot (target: 0.7% of the GNP) - Most aid has been based upon military and political interests - Many MDCs offer aid with an agenda; they make the LDC favour their goods - Problems with aid - Maintains income inequalities - Aid can allow countries to postpone reform - Increases the power of dictators - Aid is a very poor substitute to trade 3. Foreign investment & multinational companies - MNC = (monopolistic or oligopolistic) company that owns production units in more than one country - MNCs are present in almost every LDC - Direct foreign investment increases national income - MNCs can also generate jobs, tax revenue and exports - The MNCs are anti-developmental -> the problem of economic growth vs. economic development; which one is more important? - Why are the MNCs anti-developmental? - Widen the inequality gap - Market products for elite groups - Encourage rural-urban migration - Use modern technology (when labour intensivity should be favored) - Can influence governments in an anti-developmentsl way - May inhibit the development of local enterprise 4. Export promotion vs. import substitution - EP and IS are the two methods that the LDCs can use to become industrial - Export promotion (used by ie. China & India (NICS)) - Encourages free trade and free allocation of capital and labour - Increases output and growth (via comparative advantage, economies of scale, increased competition and modern technology) - Problems: the MDCs sometimes use protectionism (they try to stop the LDC entering their markets) - Import substitution (used by ie. Argentina) - Tariffs are used to protect home markets - MNCs are restricted - Tariffs can be removed when the industry develops and firms can enter the glocal market - Problems: protected industries lack the motivation to develop -> they remain inefficient and high-cost. Protectionism also hurts industries that would benefit from low-cost imports 5. Population policy - In order to create jobs the birth rate should be lowered - People in the LDCs have so many children because they offer a) labour on the farm and b) security in old age - Main economic costs concerning children: a) feeding, clothing and education, b) mothers time in nursing the children - Ways to increase the price of children - Increase direct costs such as school fees - Rising the opportunity cost of having children (education and jobs for women) - Increasing the legal age for work (reducing the benefit of having children) - Reducing need of children by setting up old-age pension and sickness schemes 6. Agricultural policy - The gap in productivity of farms in LDCs and MDCs is enormous - LDCs agriculture is also a way of life -> policies to change it have to concern also social, political and institutional things - Risk of switching from subsistence to cash crops a) dependance upon other people b) price fluctuations of inputs and outputs c) transports of inputs and outputs) -> the poor continue with traditional low-risk methods even though they result in lower output - An intermediate form = diversified farming; aims: surplus to sell, raise the standard of living, allow investments in the farm - Rural poverty causes also the growth of slums and unemployment, and therefore it needs to be focused on 7. Demand vs. supply & markets vs. planning - LDCs face mainly supply-side related problems - LDC governments should use fiscal policies to induce development - Example: very low taxation -> attracting foreign investment - Planning - Much used in 1950-1980 in the LDCs - Aim of planning: increasing economic growth and raise standard of living - Now overall planning has been abandoned in most LDCs - Why should planning be used in LDCs? - Poor market structure -> incorrect price signals (the free market guide to resource allocation) -> resources used non-optimally - Planning can adjust economics decisions -> externalities - Planning helps to focuse attention to problems - Why is planning being abandoned? - Data that has been used in planning is inaccurate - Shocks cant be planned for (ie. the rise in the price of oil) - Institutional weaknesses - Planning has failed to encourage the use of labour -> Not enough jobs - Urban areas have grown while rural areas have remained poor - Planning policies have over-protected inefficient industries - The pre-conditions for a market economy - Institutional: 1) Trust, 2) Law and order, 3) Security of persons and property rights, 4) Stable currency - Cultural: 1) Rationality (as against tradition), 2) Freedom in the availability of information, 3) A social safety net - Difficulties in the transformation: lack of the pre-conditions, corruption, monopolies are a norm in many LDCs, differences in the provision of health and education 8. The role of financial institutions - LDCs lack capital. (Low income -> low taxes -> no capital) - Solution: relying on financial institutions through which capital is attained with a reasonable interest - IMF - For: international monetary cooperation, exchange stability, economic growth, high levels of employment - Successes: Has helped to relieve poverty in many countries - Failures: Common exchange rate system collapsed in 1971; moderate repayment successes; focuses on growth - World Bank - Function: Loans money to the governments of the LDCs to promote agriculture; especially versatile in the field of HIV/AIDS, health programs, poverty, biodiversity, fighting against corruption - Successes: Reconstruction of Europe after WWII; Indias Green revolution - Failures: Focuses on microeconomical issues; increases poverty in the LDCs, focuses on growth - Grameen Banks - Function: functions as a real bank, supplies loans with minimal (or no) interest to small businesses and individuals, especially women - Successes: Has helped poor women to entrepeun in the LDCs; 98% repay ratio - Failures: can only help a small amount of people with small loans; is dependant on grants and public funding; some of the loaned money goes to wrong targets (ie. husbands) Barriers to economic development 1) Attitudes & institutional resistance - Political stability is not present in most LDCs - Tension -> political instability -> wars - Many LDCs have been independent for only a short while -> no national identity 2) Differences between the LDCs and the MDCs during the pre-industrial period - Physical differences: LDCs are often poorly endowed with natural resources - Population differences: The population & population growth in the LDCs are larger than they ever were in the MDCs - Economic differences: income per capita in pre-industrial MDCs was larger than it is now in LDCs (the situation is the same with education) - Nowadays terms of trade have moved against LDCs - Science and technology are dominated by the MDCs - LDCs have a comparative advantage in many fields of secondary production, but MDCs resort to protectionism - The MDCs were scientifically and technologically ahead the rest of the world when they developed International trade barriers - Financial barriers: The LDCs have a huge debt problem (caused partly by the soaring of the interest rates after the second oil shock in 1979) -> IMF-stabilization policies: supply-side measures are used to increase output and investment; government deficits, inflation and interest rates are reduced through tight monetary and fiscal policies - Non-convertible currencies: Most LDCs use fixed exchange rates -> they are not freely convertible through a market. 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