4.2/4.3 Poverty and Inequality/Emerging and Developing Economies

Absolute poverty

When a household does not have sufficient income to sustain even a basic acceptable standard of living and can’t afford basic needs e.g. food, shelter, clothing and access to basic healthcare and education

Countries with lowest GDP per capita

Burundi, South Sudan, Central African Republic

Measures of absolute poverty

Basic income thresholds

e.g. world bank → $2.15 a day (PPP adjusted) using 2017 prices

Relative poverty

When a household income is considerably lower than the median income, usually when disposable income is less than 60% of median income

Difference between wealth and income

Wealth - assets

Income - flow of earnings

Causes of poverty

Level of indebtedness (debt → compound interest)

Health issues

Relatively low wages (least resilient to increase inflation)

Unemployment

Little access to education (public services)

Welfare system is very limited

Regressive taxation - increase income inequality e.g. VAT

Wealth inequality

The difference in the value of stocks and assets held by individual

Income inequality

Occurs when the distribution of income is unequal

Measures of income inequality

Lorenz curve

Gini coefficient

Lorenz curve

Graphical representation of the distribution of income or wealth in society

The curve plots the proportion of total income or wealth that is held by each percentile of the population from the poorest to the richest

How is the gini coefficent measured from the Lorenz curve

Area A divided by (area A + B)

Gini coefficent

Condense the entire distribution of income in a country into a number between 0 (everyone has the same income) and 1 (single individual receives all the income)

The higher the number, the greater the degree of income inequality

Above 0.4 is often seen as an important point. Inequality above this level is frequently associated with political instability and growing social tensions

Causes of income and wealth inequality within countries

Globalisation

Education and skills

Wage rates in different occupation

Strength in trade union

Degree of employment protection

Level of welfare benefits

Progressiveness of tax system

Cause of income and wealth inequality between countries

Natural resources → S.Arabia, although not a guarantee → e.g Venezuela

Geography e.g whether a country is and locked or close to large markets

History e.g. impact of colonialism on a country’s economic growth

Degree of political stability

Macroeconomics policies

Amount of FDI attracted by different countries

Degree of trade liberalisation e.g North Korea - virtually closed → low econ growth, contrast with Singapore → very open and market orientated

Degree of technological change

Investment in education + training e.g. good governance

Impact of econ change + development on inequality on developing countries

Econ change + development- a country moving from “developing” to “developed”

Developing countries e.g. Mexico → initially low levels of inequality

During development → inequality rises (incentives due to capitalism)

However, the extent of the increase depends on government

Capitalist economies

Generally more inequality than no-capitalist

Significance of capitalism for inequality

Owners of production resources → see income and wealth rise faster than non-owners

Capitalism facilitate greater private ownership → e.g. privatisation etc

Returns on wealth greater than increase in income + increase wealth increase income inequality e.g. buy land generate rent

However, capitalism - increase productivity - increase competitiveness - increase GDP, “rising tide floats all boats”

Some countries harness capitalism + focus on decreasing inequality

Measures of development

Human development index

Human poverty index

Gender related development index → Afghanistan

Access to social justice → N.Korea

Environment → happy planet index → Costa Rica

Human development index

Used by UN and based on:

Real GDP per capita (PPP adjusted)

Health - based on life expectancy

Education - based on mean expected school years

Advantages of HDI

Broader measure than GDP - more useful

Income health + education are good indicators of development

Measures are quantifiable therefore useful to compare between countries

Disadvantages of HDI

Still a narrow measure → gender? inequality? Poverty?

Quality of education not measured - Afghanistan etc

Social justice?

Economic development

Fundamentally about peoples development over time

Factors influencing growth and development

Primary product dependency

Prebisch-Singer hypothesis

Dutch disease

Harrod-Domar model

Capital flight

Primary product dependancy

When countries export a narrow range of products

Many developing countries have high dependence on extraction and exportation of primary commodities, vulnerable to volatile prices and terms of trade

how to reduce PPD

Diversification

Agricultural and rural development

Export diversification

Human capital development

Add value to products

Export commodity dependant

When a country is more than 60% of its total merchandise exports are primary commodities

commodities

products stemming from agricultural or mining production that have not yet been transformed e.g ivory coast - cocoa beans 27.8% 2018

prebisch singer hypothesis

suggests that over the long run, real prices of primary commodities (such as coffee and cocoas) decline relative to prices for manufactured goods (sucha as cars and washing machines)

because YED for commodities is lower than manufactured goods

falling prices then worsen the terms of trade for countries that are primary product exporters, worsening development

solutions to prebisch singer hypothesis

Diversify your exports

Develop a manufacturing base

counters to prebisch singer hypothesis

labour intensive manufactured goods are now cheaper because of globalisation

rising global population and increasing per capita incomes - sizable increase in the price of commodities

prices of rare earths

TOT improve due to increasing world commodity prices

dutch disease

the adverse impact of discovery of natural resources on the economy e.g oil → appreciates real ER and worserns current account

Harrod-Domar model

shows the importance in fostering growth, particularly with developing countries

assumes a closed economy(no international trade) and that investment is entirely financed by savings (increase in I = increase in S)

model suggests a higher S ratio lead to an increased rate of I → increasing capital stock → increase output

savings gap

refernce to the Harrod-Domar model

countries with low GDP per capita → low stock and savings to fund investments → low I→ low capital stock, low productivity →low GDP per capita …

increases reliance on foreign aid and borrowing

Sub Saharan Africa - savings rate of around 17% of GDP compared to 31% on average middle income countries.

capital flight

Rapid outflow of capital from one country to another, often as a response to instability in a country.

can include the trasnfer of funds to foreign bank accounts, the sale of assets, or the conversion of domestic currency into a more stable foreign currency

access to credit + banking

economy needs credible financial system (confidence and cash)

banks facilitate savings + loans

problem:

lack of income → lack of savings → lack of loans

therefore business activity held back by lack of access to credit/loans

infrastructure

Physical, financial and legal systems required for businesss activity

e.g

energy, transport, communication - physical

patents - IPR - legal

N.B patents provide incentive to invest → R+D plus increase ER

drug co’s - V.expensive to develop… need monopoly tyre profit

education + skills

literacy + numeracy → key to worker productivity

increase labour occupational mobility

skilled workforce → attract FDI

problem:

developing economies struggle to finance this

foreign currency gaps

dependancy on primary product exports lead to lower export earnings

leads to foreign currency shortages, countries unable to pay imports i.e medicine

problem: debt interest is often required to be paid in foreign currency

absence of property rights (legal systems)

property rights → essential for business activity

enforcement of laws + contracts are essential to maintain business C+I

debt

debt interest represents → significant opportunity cost

issue due to low foreign currency earnings(diffcult to repay) and if loans spent innapropriately

N.B however if spent on health + ED + infrastructure → beneficial

demographic factors

developing countries → rising population → increase GDP → reduce GDP per capita

also increase labour supply → wages? comparitive advantage?

ageing population → increase D for public services, fewer taxpayers

barriers to development and poverty reduction

infrastructure gaps

primary export dependancy

conflict and corruption

human capital weakness

savings and foreign exchange gaps

natural capital depletion

high inequality of income and wealth

lack of competition in markets

non-economic factors

• civil unrest

• political instability

• corruption

• cliamte issues e.g floods worsen due to poor infrastructure

• cultural factor → empowerment of women e.g Afghanistan

2 types of strategies that influence growth and development

market orientated strategies

interventionist strategies

market orientated strategies

• trade liberisation

• promotions of FDI

• removal of govt subsidies

• floating exchange rates

• microfinance schemes

• privatisation

trade liberisation

remove trade barriers e.g tariffs, quotas

encourage competition, increase access to foreign markets

promotions of FDI

foreign entities investing in countries economy

brings in capital

creates jobs

removal of govt subsidies

leads to more efficient allocation of resources

reduces market distortion

improve fiscal sustainability

floating exchange rates

allows currency value to fluctuate based on market forces,

natural mechanism for trade balance adjustment,

reduce need for govt intervention

microfinance schemes

proving small loans and financial services to low income individuals and businesses

promotes entrepreneurship and alleviates poverty

privatisation

assets are transferred from public sector to private sector,

increases efficiency and competitiveness,

generates revenue for govt

interventionist strategies

government takes an active role

• development of human capital

• protectionism

• managed exchange rates

• infrastructure development

• promoting joint ventures with global companies

• buffer stock schemes

development of human capital

investment into developing skills in the economy

improve productivity and innovation

improves quality of life

alleviates poverty

protectionism

helps reduce trade deficit

protect infant industries

higher prices and less variety

managed exchange rates

combines fixed and float

ER floats on the market but central bank buys and sells currencies to influence exchange rates,

stability for international trade,

prevent currency rises

infrastructure development

lower costs and increase labour mobility

positive social benefits

may cause environmental damage,

increase productivity and investment

Promoting joint ventures with global companies

partnership is formed with 2 or more firms based in multiple countries,

new markets,

spreads risk,

transfer of knowledge and skills

buffer stock schemes

price ceiling and price floor

• Price of commodity falls too low -> government or buffer stock authority purchase large amounts to decrease supply therefore raising price

• Price of commodity rises too high -> government or buffer stock authority releases amounts of good into the market bringing price down

• Problems : storage and transport is expensive

other strategies

• industrialisation - the Lewis model

• development of tourism

• development of primary industries

industrialisation - the Lewis model

• increase wages in industrial urban sector -> increase migration of workers to urban sector from rural primary sector -> increase savings and investment → increase growth

• Problem for emerging economies were high unemployment in urban sector

• assumes labour productivity is so low that people leaving the rural sector wouldnt change output,

• however although is low for some parts of the year, during planting and harvesting, requires high labour

 

development of tourism

• LDCs are highly dependant on tourism from the developed world as incomes rise

• Increases foreign currency earnings

• create jobs

• May be some significant negative externalities e.g clean water for tourists not locals, pollution

development of primary industries

Develop using comparative advantage on primary products e.g. chile benefitted from high copper prices and other high YED products

Saudi Arabia, Norway and Australia developed due to natural resources

provides funds

address the dutch disease - Norway invest overseas - depreciation - helps industries overseas competitiveness

fairtrade schemes

fair price, community development, fair working conditions and protecting the environment

agreements to buy guaranteed amount above market price - gives producers stability and income

higher income and satisfaction

Problem:

makes non-fair trade producers worse off

Higher incomes reduce the incentive to diversify And keep farmers in low profit activities

aid

When a country voluntarily transfers resources to another or give loans on concessionary terms

UN - 0.7% GDP -> aid

tier aid

aid with conditions attached, such as economic, political reforms or commitments to buy goods from donor country

bilateral aid

assistance, such as money, loans, or resources, given directly from one government to another, often influenced by political, strategic, or economic interests

directly between donor country and recipient country

Multilateral aid

when countries give aid to an international organisation which then distributes with other countries

concession loans

loans given with little or no interest

debt relief

Renegotiate debt payments - decrease IRs -> decrease repayments -> Increase funding of public services and infrastructure

Debt cancellation

why can debt relief cause problems

creates a precedent that poor countries expect to receive debt relief

Eases pressure for weak governments to improve policies

role of the world bank

provides financing, policy advice, and technical assistance to developing countries to reduce poverty, foster sustainable growth, and invest in projects like education, health, and infrastructure

role of the IMF

international monetary fund

Ensure the exchange rates systems works well

Provide loans during international exchange rate crisis

why do countries join the IMF

• May need loan

• Ensure more stable global macro environment

• Increase certainty globally

why is following IMF advice better than defaulting

IMF asks for macroeconomic reforms to resolve problems when providing loans, e.g. reduce imports or cut Govt spending

Alternative is defaulting on loans rather than conforming to policy reforms

But defaulting is more damaging than reforms which help the country to overcome issues

NGOs

Non-profit organisation that are run independently from the government that focus on community based projects

Water, healthcare, schools

Direct assistance to countries e.g. Oxfam or CAFOD

problem of NGOs

limited to HDI,

Seen as anti-capitalists who blames problems on the World Bank, IMF and WTO