Growth and Development–Summary Notes
Human Development Index:
1. Longevity–life expectancy at birth
2. Knowledge–adult literacy + number of children enrolled in school
3. Standard of living–real GDP per capita at PPP–econ growth= prerequisite for
development
→ More useful than GDP per capita and other measures of development, as it
is too narrow an indicator and fails to indicate other aspects
HDI Evaluation:
● Does Not distinguish between different rates of development within a country (rural &
urban)
● Equal weight between 3 components= arbitrary
● development= freedom BUT: HDI gives no political info
● No indication of income distribution in GDP per capita– BUT: Inequality-adjusted HDI
● Excludes many socio-economic aspects of development, e.g. crime, corruption, poverty,
negative externalities
● GDP calculated in terms of PPP and value can change
Other measures of development:
1. % of adult male labour in agriculture // Lewis Model
2. Access to clean water
3. Energy consumption per capita
4. Access to internet and mobile phones per 1000 of population
5. Access to doctors per 1000 of population
6. CO2 emissions per capita
DEVELOPING ECONOMIES: CHARACTERISTICS
● Primary sector dependency + commodity overdependence
● Low living standards
● Low labour productivity
● Lack of power in international markets + dependence
● High degree of market failure + bad governance
● Persistent + unsustainable current account deficit → problem of international
competitiveness
DEVELOPING ECONOMIES: WHAT THEY NEED
● Greater trade in goods and services
● Greater transfer of financial capital
● FDI–inward investment
● Technology transfers
● Higher GDP/ economic growth/ employment
● Reduced poverty (especially absolute poverty)
*Constraints on growth & development*
1. Primary product dependency
● Problems for growth: substitutes found, no diversification and spread risk,
demand for product constant, so not leap in development + inelastic demand,
uncertainty of commodity price volatility, food dependent on external factors like
weather; DUTCH DISEASE; few oligarchs/ corrupt govts benefit, e.g. exploitative
TNCs’ bribes
● PREBISCH-SINGER HYPOTHESIS– the relative price of primary
commodities in terms of manufactures (higher added value) shows a
downward trend → ToT deteriorates as P of X (commodities for
developing countries) goes down and P of M (manufactured goods from
developed countries) goes up
● EV: poor harvest= higher prices, same with scarcity of commodities, like oil (SR),
many tech-based products get cheaper over time// globalisation + economy of
scale
2. Volatility of commodity prices
● Homogenous goods → D likely inelastic/ supply likely to be inelastic;
people/speculators purchase commodities as investments/ short term
profit motive → thus: uncertainty for investment + infrastructure may
not be improved and it’s difficult to plan for the future
3. Savings gap –HARROD-DOMAR MODEL
● Savings= investment bc banks use savings to provide loans to help
businesses invest → savings gap= amount of savings required
compared to the savings that accumulate
● Model: increased savings→ increased savings → higher capital stock →
higher economic growth and the cycle repeats itself (and vice versa
with decreased savings)
4. Foreign currency gap
● When country has a deficit on the current account + not finance via
borrowing through financial account (or FDI) → problem: countries stop
trading with you + country can’t purchase essential imported raw
materials/ capital equipment
5. Capital flight
● Movement of money out of the country → banks don't have anymore to
lend to consumers/ businesses // savings gap
6. Demographic factors
● Structure of a population, e.g. ageing population= less growth →
retirement, low productivity, pensions
7. Debt
● NOT attractive for investment, e.g. FDI → less likely to get future loans,
poor credit rating and loan repayment and interest rates mean govts
can spend less on infrastructure + invest in human and physical capital
8. Access to credit and banking
● Link with savings gap and capital flight → if firms don't have access to
loans, cannot invest in capital equipment
9. Poor infrastructure
● Cannot transport X or M, holds back LRAS (need supply-side policies), time
delays + inefficiencies
10. Education and skills
● Human capital – productivity, innovation, FDI
11. Absence of property rights
● Legal system that facilitates buying and owning of land/
buildings/capital, etc. → if missing= lack of an incentive to invest
12. Non-economic factors–politics & government; climate/weather issues; war; illness
*Strategies influencing development and growth *
MARKET-ORIENTED STRATEGIES –
● Trade liberalisation, export-led growth, lowering/removing trade barriers, exploit gains
from trade// comparative advantage, sustainable growth + increased FDI
● BENEFITS:
➢ Consumers: lower prices, more choice, better quality
➢ Firms: risk diversification (less dependence on national economy), economies of
scale (access to global markets= increased output and lower LRAC)
➢ National economy: more competition, investment, improved productivity
● DRAWBACKS:
➢ Negative effect on particular industries + potential job losses, e.g. infant
industries
➢ Environmental negative externalities
1. Promotion of FDI
● Injection in circular flow of income
● Higher employment
● PPF shifts outwards
Policies to attract FDI:
➢ Tax connectives
➢ Grants/ subsidies
➢ Deregulation, reduce red tape + bureaucracy
➢ Flexible labour markets
➢ Trade barriers removed
2. Abolition of subsidies
● Subsidies= market distortions + affects price mechanism’s ability to produce
productively + allocatively efficient outcomes
3. Floating ER system
● May lead to a depreciation of the currency → boost in international
(PRICE) competitiveness → boost in FDI, as assets of a country become
for attractive to foreign investors
4. Microfinance schemes
● Providing credit for extremely poor households– small loans for involvement in
production activities + small bus expansion
● BUT: interest rates charged, debt collection practices akin to that of loan sharks,
problematic accounting methods; microfiancing as a way to fight poverty may
undermine development assistance on the macro level/ aid from NGOs
5. Privatisation
● Competition + profit motive incentive= increased efficiency
INTERVENTIONIST STRATEGIES–
● Emphasis on the state’s role → objective: to influence the allocation of
resources towards increased productive capability of the domestic economy
1. Development of human capital
● Higher education and quality education= higher productivity → LRAS
shifts outwards + attracts FDI from MNCs and global investors
2. Protectionism
● Import controls, promotion of IMPORT SUBSTITUTION (inward-looking
strategy) // XED, diversify in a planned way + build significant
domestic capacity + effective where domestic markets are large
enough to allow for economies of scale and growth → at some point
domestic industry ⇒ strong enough to compete globally
❖ BUT: distorts comparative advantage + allocative and productive
inefficiency
3. Managed ER system
● Artificially maintain over/undervalued ER → trying to either keep down
the cost of raw materials and capital equipment to facilitate the
expansion of productive capacity OR gain a competitive advantage in
international markets via price competitiveness ⇒ Marshall-Lerner
Condition
4. Infrastructure development
● Physical + organisational structures/ facilities → transportation/
telecommunications/ refineries/ hydroelectric + nuclear power plant
● Expansion of LRAS + AD
5. Promotion of joint ventures
● Businesses combine, share resources/ risk/ profit, economies of scale
(and scope), greater comparative advantage → to implement a specific
project
● Transfers of technology + know-how and increased FDI
6. Buffer stock schemes
● Methods to reduce commodity price volatility→ determines price ceiling
and floor + buying and selling of stocks to maintain the commodity
price within the limits, e.g. by the government
● Method: buy when there is a surplus to push prices up, shifting D1 upwards/
outwards to D2 ; sell when there is a shortage to pulled own prices, shifting S1
downwards/ upwards to S2
EV:
➢ Cost of buying excess supply can cause the scheme to run out of cash
➢ Requires significant amount of startup capital, as monet is needed to buy
up the product when prices are low
➢ Guaranteed minimum price might cause over-production + rising surplus
which has economic and environmental costs
➢ High administrative + storage costs to be considered and some
goods are perishable → wasteful
OTHER METHODS–
1. Lewis Model (of Industrialisation and Development) → model of structural
change
● Dualistic economy: rural agricultural & urban manufacturing sectors
● Initially majority of labour employed upon land = fixed resource; labour =
variable resource → as more labour put on land = diminishing marginal
returns → Thus: reduced marginal product and underemployment
● Urban workers + manufacturing = higher value of output // higher wages →
tempts surplus agricultural workers to migrate to urban areas → high urban
profits, firms encouraged to expand, so: further rural to urban migration with
labour attracted to secondary sector (as opposed to primary)
EV:
➢ Profits might be retained by entrepreneurs and not invested back into the
business and country
➢ Urban expansion might be driven by capital over labour → capital
intensive
➢ Surplus labour as likely in manufacturing as in agriculture
➢ Migrating workers= insufficient info about job vacancies, pay, working
conditions → higher unemployment levels in towns and cities (e.g.
favelas) + *GEOGRAPHICAL AND OCCUPATIONAL IMMOBILITY*
➢ Towson + cities= fixed in size + unable to accommodate large
numbers of immigrants ⇒ slums + shanty towns, often illegal, built on
floodplains or areas vulnerable to landslides and without sanitation or
clean water
2. Tourism–some countries have a comparative advantage in tourism and use it as a
development strategy
Benefits:
➢ Source of foreign currency
➢ FDI from hospitality MNCs, e.g. Hilton, Intercontinental → positive multiplier
effects, like infrastructure improvements (road networks, etc.)
➢ Employment → incomes → tax revenues could increase → development
➢ Can help preserve the national heritage
Drawbacks:
➢ Dramatically increases need for imports of capital + consumer goods ⇒
negative effect on current account of the BoP
➢ MNCs will repatriate profits– negative effect on BoP, current account–primary/
investment income
➢ Tourism- income elastic + sensitive to changes in fashion – in times of global economic
downturn, demand hit badly
➢ Seasonality = seasonal unemployment
➢ Labour intensive industry, BUT: low skills jobs for local workers, MNCs provide own
managerial + professional staff
➢ Significant negative externalities –air, noise, light pollution, depletion of resources, etc.
3. Development of primary industries
● Some countries = strong comparative advantage in production of hard
commodities + agriculture → more efficient to develop by exploiting these
industries
● Tax revenues can be then used to improve education and healthcare systems
⇒ highly skilled labour force + create a new comparative advantage →
diversify economy in LR
4. Fair Trade schemes
● Better prices, decent working conditions, local sustainability and fair terms of trade for
farmers + workers in developing countries
● Sustainable prices = higher than AC, allowing for a reasonable profit margin
→ FT addresses conventional trade injustices which traditionally discriminate
against poorest/ weakest producers
Benefits:
➢ Guaranteed higher/ premium price to certified producers
➢ Greater price stability for growers
➢ Improve production standards –a grower can receive FT licence if it can improve working
conditions, better pay, guarantees of environmental sustainability
➢ FT premium price might be offered for direct investment in improving businesses +
communities
Drawbacks:
➢ For non-participating farmers → claims that by encouraging consumers to buy
products from FT sources, cuts demand for farmers in poorest regions not
covered by FT label → worsens risk of extreme poverty
➢ Large amounts of premium processors goes to processors + distributors, rather than
farmers
➢ Fundamental causes of poverty not really addressed by FT → greater
investment needs to be made to raise farm productivity, reducing
vulnerability to climate change, reaching multilateral trade agreement
between countries to reduce import tariffs + improve access for poor
countries into markets of rich advanced nations
➢ Free-market think tanks (e.g. adam Smith institute), think FT causes excess production
of coffee, driving down world price of coffee
5. Debt relief
● Many poorest countries burdened with high external debt owed to govts/ IMF/ WB/
foreign companies/ banks/ individuals worth around $5tn ; conditional loans form INF +
WB = no need to pay interest rates which would be many times higher on private sector
loans
● Some chose to borrow from other emerging economies, e.g BRICS to avoid
conditionality
● Poorest= limited access to international capital markets + sovereign debt = no official
credit rating
● Countries with persistent trade deficits = large external debts, esp with
G>Tax revenue → fiscal deficits ⇒ TWIN DEFICITS + if country defaults, more
difficult and expensive to attract future loans
● Interest payments on public sector debt = large % of country’s export
revenue/ annual tax revenue → debt repayments = OPPORTUNITY COST for
investment in education + healthcare (human capital)
Arguments for relief:
➢ Helps reduce absolute poverty and govt= more resources to improve living standards
➢ Reduced foreign currency gap → more current to import capital goods →
growth
➢ ‘R’ payments exceed value of original debt → unfair to make countries pay
➢ Why should people today pay for the actions of a corrupt/foolish/ pressured government
long ago
Arguments against relief:
➢ Moral hazard → irresponsible borrowing, countries expecting debt relief on
every loan taken out
➢ Reduces pressure on weak gifts to adopt good/ appropriate economic policies
6. International aid
● Bilateral aid: country-to-country basis
● Multilateral aid: channelled through international bodies/ aid agencies, e.g. WB
encourage debt relief for poorest countries via its Heavily Indebted Poor Countries
Initiative
● Tied aid: aid on the condition that it is used to buy good/ services from the provider of
the aid
● Project aid: direct financing of specific projects for a donor country
● Technical assistance: funding of expertise of various types
● Humanitarian aid: emergency disaster relief, food aid, refugee relief, disaster
preparedness– example of a GRANT
● Soft loans: loan made to a country on a concessionary basis with lower interest rate
Arguments for aid:
➢ Help reduce absolute poverty + increase living standards (health, education, etc.)
➢ Fill a savings gap → INVESTMENT + HarrodDomar Model → positive multiplier
effect
➢ Fill foreign exchange gap → help finance M of capital goods or pay interest on
debt owed to foreign investors
➢ BUT: LR not SR methods for g+d → different kidneys of aid projects affect
growth at different times and to different degrees ⇒ longer time horizons of
education, healthcare, etc. BUT: can lead to brain drain
Arguments against aid:
➢ Governments may not want to maximise economic welfare of citizens and
serve interest of a narrow range of groups in society which is where aid will
be diverted, not development → corruption
➢ Western aid agencies unaware of sort of projects which will promote development– BUT:
WB: community-driven development (CDD), from 2010-2015, IDA completed 90
projects, responsible for 164,000 local projects reaching 176 million people
➢ Tied aid, especially in form of loans, may result in countries getting a worse ‘buy’ than if
they shopped internationally for cheapest product
➢ Loans= interest =problems + opportunity costs
➢ Can promote a dependency culture, with gifts not actively improving policies to promote
g+d
➢ Economic development can take place without aid, e.g. China, Vietnam’s raid +
sustained growth without much aid payments as a measure of their GDP
● Aid is important but: exports from developing countries now more than 40X level
of official aid flows ; remittances for migrants about 3X as large as aid ‘ private
capital inflows are 10X aid flows
