10.5 economic growth and development

economic growth is

the increase in a country’s real notation output caused by increases in the quality or quantity of factors of production, which cause an outward shift of the PPF

economic development

refers to living standards, freedom (from oppression) and life expectancy it covers a more moral side to economic growth and is normative, it is also concerned with how sustainable the economy is and whether the needs of future generations can be met

economic development can be measured by

a general improvement in living standards which reduces poverty and human suffering, access to resources such as food and housing that are required to satisfy basic human needs, access to opportunities for human development, sustainability nad regeneration, through reducing resource depletion and degradation, access to decent healthcare

characteristics of LEDCs are

low life expectancies, high mortality rates, high dependence ration, low GDP, fast population growth, low levels of education, poor standard of living, poor nutrition, lack of access to clean and safe drinking water, lack of sanitation, poor or absent health care provision

indicators of development include

GDP per capita, information on the distribution of income, mortality rates and health statistics, HDI, HPI, GDI

in developing countries, GDP is often higher than GNI because

high profit outflows and interest payments out of developing economies to developed economies

HDI is

the human development index, the components are education, life expectancy and standard of living

the SOL in HDI is measured by

GNI per capita at purchasing power parity (PPP), it used to be GDP but to account for remittances and foreign aid, GNI is now used since it reflects average income per person

the education part of HDI

combines the statistics of the mean number of years of schooling and the expected years of schooling

HDI measures

economic and social welfare of countries over time

the average world HDI rose from

0.48 in 1970 to 0.68 in 2010 mainly due to growth of East Asia, the Pacific and South Asia

a HDI value close to is indicative of

a high level of economic development and vice versa

the advantages of using HDI to compare levels of development over time are

allows for comparisons between countries to be made, provides a much broader comparison between countries than GDP, education and health are important development factors to consider and it can provide information about he country’s infrastructure and opportunities and also shows how successful government policies have been

the disadvantages of using HDI are

it doesn’t consider how free people are politically, their human rights, gender equality or peoples cultural identity, it doesn’t not take the environment into account, it could be argued that this should be included, it doesn’t consider the distribution of income, a country could have a high HDI but be unequal

the tiers of HDI are

very high human development, high human development, medium human development, low human development

HPI is

the human poverty index and measures the life expectancy, education and the ability of citizens to meet basic needs and there are two types, HPI1 and HPI2

HPI1 is

used for measuring poverty in developing country, life expectancy measures the probability of living to age of 40, education component considers adult literacy rate, the ability of citizens to meet basic needs is measured by the percentage of underweight children and the percentage of people not using improved water sources

HPI2 is

the measurement for poverty in developed countries, probability of living to age of 60, the percentage of adults who do not have literacy skills is calculated, poverty is calculated by those living below the poverty line which is below 50% of median income

GDI is

gender related development index and measures the relative inequality between men and women, it combines HDI with consideration of gender

factors affecting growth and development are

market orientated strategies, interventionist strategies, other strategies

market-orientated strategies are

measures which makes the economy more free, with minimum government intervention

examples of market orientated strategies are

trade liberalisation, promotion of FDI, removal of government subsidies, floating exchange rate systems, microfinance schemes, privatisation

interventionist strategies are

when the government intervenes in the market to try and influence growth and development

examples of interventionist strategies are

development of human capital, investment in education and training, protectionism, managed exchange rates, infrastructure development, promoting joint ventures with global companies, buffer stock schemes

other strategies to promote growth and development include

industrialisation (lewis model), development of tourism, development of primary industries, fair trade schemes, aid, debt relief

barriers to growth and development include

primary product dependency, savings gap, foreign currency gap, capital flight, demographic factors, debt, access to credit and banking, infrastructure, education and skills, absence of property rights, poor governance/civil war, vulnerability to external shocks, institutional factors

primary product dependancy is a barrier to growth and development because

there is high volatility of commoditity prices making it hard for workers to plan for the future, primary produces are often raw materials with little differentiation and specialisation so not worth much so it can be hard to fund infrastructure and education, unsustainable as they can be extracted and run out

the savings gap is a barrier to growth and development because

in many developing countries there is limited wealth meaning money cannot be set aside for the future and can only be used for short-run needs, therefore there is inadequate capital accumulation impeding capital investment. harrod damar model

the savings rate

in africa is around 17% whilst the average in middle income countries is around 31%, therefore its more expensive for african public and private sectors to get funds since they have higher borrowing costs, impeding capital investment

the harrod domar model states

investment, savings and technological change are required in an economy for economic growth, the rate of growth increases if the savings ration increases as it leads to increased investment and technological progress, leading to higher productivity

in harrod domar model, the rate of growth is calculated by

the savings ratio/ capital output ratio, therefore growth increases with more saving or smaller capital output ratio

limitations of the harrod damar model are

there is a low marginal propensity to save in some countries, there could be a poor financial system, funds might not lead to borrowing and investment, could be inefficiencies in the workforce, paradox of thrift

the paradox of thrift is

an increase in savings could lead to an increase in investment however an increase in savings means there is a reduction in spending which leads to a fall in AD

foreign currency gap is a barrier to growth and development because

it exists when a country is not attracting sufficient capital flows to make up for a deficit in the capital account on the balance of payment, so the value of the current account deficit is larger than the value of capital inflows

capital flight is a barrier to growth and development because

when capital and money leave the economy through investment in foreign economies, which is triggered by an economic threat like hyperinflation or rising tax rates, it can worsen the economic crisis and cause a currency to depreciate

demographic factors are a barrier to growth and development because

there is a link between keeping birth rates down and fighting hunger, poverty and environmental damage, rapid population growth has complicated efforts to reduce poverty and eliminate hunger in Africa, the current population of 1.1 bil in africa is expected to double by 2050 which isn’t sustainable

debt is a barrier to growth and development because

the debt crisis emerging threatens the fight against poverty and inequality as any extra capital gained goes towards paying off debts

infrastructure is a barrier to growth and development because

poor infrastructure discourages MNCs from operating in the country, because cop increase where basic infastructure such as continuous supply of electricity and transport is not available

education and skills is a barrier to growth and development because

it is important for developing human capital, adequate human capital ensures the economic can be productive and produce goods and services of high quality and helps generate employment and raise standards of living

absence of property rights is a barrier to growth and development because

weak or absent property rights means entrepreneurs cannot protect their ideas, so do not have an incentive to innovate

corruption is a barrier to growth and development because

money lost to corruption could be invested elsewhere, for example in sub-Saharan Africa the money lost from corruption could pay for the education of 10 million children per year in developing countries

corruption is

a barrier holding back economic growth and development, especially in less developed economies, it diverts scarce resources away from more productive uses to protect less efficient resource use

poor governance and civil war is a barrier to growth and development because

it can hold back infrastructure development and is a constrain on future economic development, it can destroy current infrastructure and force people into poverty

vulnerability to external shocks is a barrier to growth and development because

at any point people can be pushed back into poverty and inhibits incentives for investment, e.g natural barriers such as earthquake prone countries finding it hard to develop infastructure. the Nepal earthquake in 2015 pushed more people into poverty

institutional factors are a barrier to growth and development because

the is high uncertainty and less incentive of entrepreneurship due to less enforced laws and high risks

institutional factors are

rules, laws, constitutions, the financial system, defined property rights

aid is

money, goods and services and ‘soft’ loans given by the government of one country or multilateral institution such as the world bank to help another country.

various forms of aid include

military aid, ‘hard’ loans, ‘soft’ loans, disaster relief, ‘tied’ aid, lending experts

hard loans are

often argued whether to qualify as aid, usually given in a hard currency and has to be paid back a market rate of interest

soft loans

have a below market rate of interest and may even be free in the sense that although he loan must be paid, little or no interest is charged by the donor country

disaster relief

often comes from NGOs, and is sometimes matched by government funded relief e.g in Nepal in 2015 government matched money raised by NGOs, however, disaster relief is most band aid relief and contributes little or nothing to economic development and sometimes can build a state of dependency on aid

tied aid is

either a soft loan of a gift on money that has to be spend on the exports of the country granting the aid, arguably benefits donor country more than recipient

lending expertise is

offering advice on matters such as improving the countries governance, method of production and how to use advanced technology and maintain transport links and other forms of infrastructure. recently china have gone one step further by using chinese workers to manage road sand other infrastructure in African developing countries in return for agreeing to sell their exports to china rather than competition countries

the strategic trade theory argument against free trade is that

government in developed countries are fully in favour of free trade only if their countries face little or no competition from developing countries, as soon as this competition energies they argue protectionism is necessary to protect themselves from unfair competition coming from cheap labour countries so free trade will not benefit the developing countries for long, also argue that they steal their technology and clone products partly ignoring international patent and copyright laws- but transfers of technology can be an important mechanisms for stimulating the development of economies

argument for free trade is

the growth of free trade has improved transport links, such as containerisation of cargo. argue for trade vs aid not only considers free trade as developing countries can benefit from preferential trading arrangements with each other and richer developed countries. trade allows countries to build its own industries and encourages investment in other activities that promote development such as good governance, property rights, infrastructure and investment in human capital

ineffective aid can stems from the fact

trade and aid are often skewed and the export of high technology capital goods in foreign aid programmes, equipping less developed countries with the wrong sort of technology as they lack people with sufficient expertise to repair the technology, spare parts if broken have to e bought on using up foreign exchange which is in short supply. its been argued that it is far better to provide with less capital intensive technology rather than advanced tech as it is more suited to cheap and plentiful about in developing countries.

the gini index is

a statistical measure that measures income (or wealth) distribution, ranging from 0 (prefect equality) to 1 (perfect inequality)

a diagram for the gini coefficient is

the lorenz curve, which shows the cumulative share of income from different deciles of the population

the lozernz curve is drawn by

x axis is households by income (%), y axis cumulative income, line of perfect equality is perfect 45 angle, lorenz curve looks like exponential

gini coefficient is calculated using lorenz curve by

area a (area between lorenz and perfect equality)/ area a+ area B

the gini coefficient being taken by income rather that wealth may pose issues as

many people inherit houses, leads to idea of inheritocracy

inheritocracy suggests

a system where inherited wealth, rather than person effort and determines economic success, leading to rising wealth inequality

inheritances have been rising as a share of

national income according to the IFS, research indicated inheritances account for 9% of household lifetime income for those born in 1960s, compared to 16% in 1980s- widen wealth gap

important things to aid developing economics are

education and training, infrastructure, healthcare, technology innovation and diffusion, empowerment of women, political and property rights, fair taxation and distribution of income

education and healthcare is important in developing countries because

shifts LRAS right and AD right as improves skills and efficiency of workforces, building up human capital and higher-skilled workers creating greater productive power and better jobs meaning incomes rise and better conditions. access to education also lowers healthcare needs as people are educated on basic health

infrastructure is important in developing economies because

is allows access to markets, external economies of scale for an industry, lower geographical immobility of labour. it increases AS as COP is lower and increases ADS

however, education and training in developing countries can

require high levels of funding with little impact due to time lags and brain drain

however, funding infrastructure development

has huge initial and ongoing costs

healthcare is important in developing countries because

a healthy population is more productive, it can increase AD as it raises human capital and creates advanced jobs and FDI

however, healthcare in developing countries

requires high levels of funding with time lags, it can also be difficult to develop long term healthcare in developing countries as they rely on aid for it, therefore they have no incentive to create their own healthcare system

technology and innovation diffusion is good for developing countries because

it helps the country catch up to developed economies, increasing efficiency and helping to expand industries helping to improve competitiveness of exports. tech also improves livelihood giving better access to capital

the empowerment of women is important in developing countries because

double the size of the labour force, higher household incomes, educated and empowered women tend to have smaller, stabler and higher income families

however the empowerment of women is

hard for developing countries because they often have strong religious ideologies, also disaffected young men cause extremist groups

political and property rights are good for developing countries because

it encourages innovation and provides stability for the future which encourages investment and entrepreneurship.however hard for developing countries as governments have less control and often corrupt

fair taxation and distribution of income is good for developing economies as

provides the government with revenue and reduces extreme inequality however, its harder for developing economies to impose taxes and ensure there is no tax evasion aswell as it being difficult to distribute

brain drain is

the emigration of highly trained or qualified people from a particular country

capital flight is

when assets or money rapidly flow out of a country, can be exacerbated by concept of prices law and pareto principle

the pareto principle states

that for many outcomes roughly 80% of the consequences come from 20% of the cause

pareto improvement and efficiency can be shown on

a macro PPF with capital and consumer goods, a shift from productively inefficient to productively efficient is improvement, efficiency is when moving will cause an opportunity cost

prices law states

50% of all outcomes are generated by square toot of the numbers who contribute to it

a positive/ less negative of brain drain is that

remittances can make up for it

the growth poverty cycle is

where low economic growth leads to low incomes, low levels of saving, low levels of investment, leading to low levels of economic growth

low levels of economic growth leads to low incomes because

factor incomes are low, less stable economy, less confidence, redundancies

low incomes lead to low levels of saving because

there a low levels of disposable income

low levels of saving means low levels of investment because

assets cannot be bought as there is no savings to invest, more short term focus over long term

low levels of investment leads to low economic growth because

n to shift

development poverty cycle is

low productivity, low incomes, low levels of education and healthcare, low levels of human capital

developing national can promote economic development two ways

interventionists or marked base policies

interventionist policies include

ISI and protectionism, exchange rate intervention, regulation, increased gov spending

market based policies include

promoting FDI, privatisation, deregulation, trade liberalisation, smaller state

ISI is

import substitution industrialisation and its tariffs imposed on imported manufactured goods to allow domestic industries to grow either from primary into secondary or from low to high value manufacturing (still secondary)

positives of ISI are

development of domestic industries, reduction in foreign dependence, job creation, protection of sunrise and sunset industries

negatives of ISI are

inefficiency and low production, burden on consumers, fiscal strain, limited market size, retaliatory protectionism

positives of interventionist policies

corrects market failures, reduced inequality, economic stability, support for infant industries, government major employer of human capital

-ives of interventionist policies are

government failure which is exacerbated by corruption, reduced efficiency, high fiscal cost leading to indebtedness, distorted market signals, loss making and inefficient

positives of market based policies

increased efficiency, lower prices for consumers, greater innovation, less burden on government, more efficient resource allocation, encourages FDI, avoids problem of corruption, incentives from competition and profit

-ives of market based policies are

increased inequality, MF’s no addressed, less public services, jo insecurity, short term focus

sustainability is

the meeting of needs of the present without reducing the ability of future generations to meet their own needs

example of unsustainable use of fossils fuels is

china make up for 27% of the worlds greenhouse gas emissions, however it can be argued that the rest of the world just exported their green gas emmissions

a long term study since the 1980s suggests that interventionist and free market cause

1.5% growth and 5% growth per year respecively