Notesale: Turn your study into money

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Economic development
Amartya Sen
“The process of improving people’s wellbeing and quality of life, involving improvement in standard of
living, reduction in poverty, improved healthcare and education along with increased freedom and
economic choice
...
Availability and distribution of life-sustaining goods food, shelter, health
2
...
Expansion and economic and social choices
Economic growth and development
Growth
1
...
Jobs, quality of life, improved standard of living
b
...
Reduction in poverty
d
...
Higher profits
a
...
Jobs – more people needed to satisfy high demand in the economy
3
...
Health
b
...
Infrastructure
d
...
No guarantee that income will be evenly distributed – income inequality
a
...
Even if there is growth, income inequality will hinder development
2
...
Pollution – reducing health in economy – not improving people’s living standards – even
if high growth, development is hindered
b
...
Resource degradation

3
...
Growth in one dominant sector is not necessarily going to lead to development or
growth in other sectors
b
...
g
...
Low standards of living
a
...
Poor job creation
c
...
Low levels of productivity
a
...
Lack of availability of capital
3
...
Trapped in poorly payed jobs
b
...
Incomes are low – difficult to save
d
...
High population growth
a
...
Primary sector dominance (agriculture)
a
...
Incomplete markets
a
...
Lack of property rights
7
...
Production is dominated by agriculture
b
...
Low economic power on the international stage
a
...
Can’t manipulate situations in globalized world to suit them
c
...
Reduce tariffs
ii
...
GDP/capita (GNI/capita)
a
...
Lots of limitations
c
...
GDP doesn’t tell us about income inequality, pollution, externalities negative
externalities etc…
e
...
GDP is just a measure of how much production is taking place in a country,
regardless of who is producing
ii
...
g
...
GDP counts output of foreign companies that is repatriated back to the
advanced economies, rather than entering the developing economy
iv
...
Income converted into a worldwide currency (e
...
us dollars)
2
...
g
...
Health measures
a
...
If going up, means health institutions are of good quality
ii
...
= jobs out there
iv
...
= other parts of economy might also be doing well e
...
sanitation facilities
vi
...
Education of how to stay away from diseases is strong
viii
...
Infant mortality
3
...
Adult literacy
i
...
Education institutions are strong
iii
...
Potential for getting higher skilled jobs improves
v
...
Unemployment will fall
vii
...
Education measure s can thus be kindov a good indication
b
...
Longevity (Life expectancy of birth)
2
...
Standard of living (GDP or GNI /capita, PPP)

0 – 0
...
5 – 0
...
7 – 0
...
8

Low development

Medium development

High development

Very high development

1
...
Focus on development outcomes
3
...
Attention focus on those with low development – Aid diverted to those countries
BUT
1
...
Arbitrary weighting (all 3 things are weighted equally) – allocation of resources

a
...
Freedom and choice not included
4
...
However, since considers 3 of the most important development outcomes, makes it
such a good measure – encompassing indicator

Measuring income inequality – Lorenz curve and Gini coefficient
Gini coefficient between 0 and 1 (0 = perfect equality, 1 = perfect inequality)
𝐺𝑖𝑛𝑖 𝑐𝑜𝑒𝑓𝑓𝑖𝑐𝑖𝑒𝑛𝑡 =

𝑆𝑒𝑐𝑡𝑖𝑜𝑛 𝐴
𝑆𝑒𝑐𝑡𝑖𝑜𝑛 𝐴 + 𝐵

Domestic factors and development
Institutional factors
1
...
Productivity
i
...
Jobs increase choice
i
...
Gender equality

i
...

d
...
Educate people as to the problems of malaria, HIV etc…
ii
...
Contraception to control birth rates
e
...
People have skills and know how to pursue these new technologies
f
...
Financing
1
...
If privatised – is it right to charge people and cause greater income
inequality?
ii
...
E
...
as soon as children hit an age they are seen as workers – a lot of
enrolment in primary but not secondary education so benefits of
education not enjoyed
2
...
Productivity
i
...
Jobs
i
...
Standard of living – happiness
i
...
Drinking water
iii
...
Sanitation
d
...
BUT
i
...
If government cannot fund it, how can we ensure everyone has access
to healthcare
ii
...
If privatised because pf lack of government funds, is it right to exclude
people from healthcare based on price
3
...
Access to markets
i
...
Countries can become more competitive
b
...
FDI
i
...
BUT
i
...
Bridges, airports, roads, etc… very expensive
Institutional factors
4
...
Education
b
...
Infrastructure
d
...
Corruption and tax exemption
1
...
Tax exemptions when they shouldn’t have been given
ii
...
Informal markets
iv
...
Tariffs falling
5
...
E
...
Solar cooker
i
...
Weather based technology
i
...
– improving productivity
and maximising harvest
6
...
Children’s health
i
...
High health standards at house
b
...
Make sure children are educated if they are educated as they understand
importance of education
c
...
Smaller families (higher incomes)
i
...
Understand that contraception is available
iii
...
Income distribution
a
...
Rich dominating politics – won’t understand the needs of the poor and will make
policies to benefit themselves
c
...
g
...
g
...
g
...

Lower FDI
o If politicians acting against their word for example
Inefficient regulation
o If politicians need to enforce regulations, they turn a blind eye to them instead –
massive inefficiency
Thus we can question the efficiency of governments as a result of their corruption + =
misallocation of resources and government failure

Poverty cycle
Growth Poverty Cycle
Low economic
growth
Low levels of
investment

Low incomes

Low levels of
savings






Low incomes
Low levels of savings
o Because of low incomes
o Lack of financial institutions available
o No education as to how many can be saved
Low levels of investment
Low economic growth
o Investment is a key part of growth – part of AD

Relative poverty – income is less than a given average in an economy
Absolute poverty – income below a certain threshold determined by a major development organisation
– cannot afford necessities
Why in poverty





Lack of skills
Lack of education
Lack of opportunities for jobs in an economy
Born into a poor household

Development poverty cycle
Low
productivity
Low levels of
human capital

Low incomes

Low levels of
education and
health







Low incomes
Low levels of education and health
o If hard for government to fund these sectors, private sector will have a heavy role in
allocating resources to this sector – people have to pay for education and health –
unaffordable for people with low income
Low levels of human capital
o People lack the skills to gain jobs
Low productivity
o Major problem to earning high incomes
Microfinance (microcredit)

The distribution of small loans to individual entrepreneurs or groups to stimulate business activity,
profits and incomes
...
Fills savings gap – may break poverty cycle
a
...
Can relieve poverty
a
...
Source of finance without huge interest
a
...
Can empower women
a
...
More likely to pay the loans back
c
...
In doing so, more likely to benefit from it
BUT
1
...
Most fail – how do loans get repaid
2
...
As scheme got bigger, organisations and institutions with profit maximising motives
charge high interest rates – loan sharks
b
...
Promotes misery
d
...
Loans are not big enough to alleviate poverty
a
...
Most money actually spent on consumption
c
...
Natural factors (land)
a
...
Better agricultural methods – to get as much as possible out of soil
c
...
Human capital factor
a
...
Improve health and education – education = skills health = productivity
c
...
Capital and technology factors
a
...
Vehicles, factory buildings, machinery
ii
...
Funding
2
...
Improving productivity
i
...
Institutional factors
a
...
Global legal systems
c
...
Exploit comparative advantage natural resources
a
...
Growth link to higher incomes etc  development outcomes
2
...
Political e
...
subsaharian african countries and china
3
...
Increase in output lowers costs
b
...
Technological transfer and growth of secondary industries, breaking dualistic structures
a
...
If firms make more profits, they can reinvest in company – reinvest in technology –
improves technology – break away from primary sector dependence (dualistic structure)
Trade problems (international barrier to trade)
1
...
Primary commodity dependence
i
...
Depletion of resources – unsustainable way of pursuing development
iii
...
g
...
Price fluctuations
a
...
g
...
Reduces incentive to invest
c
...
Access to international markets limited for developing countries
a
...
g
...
g
...
Tariff escalation – tariffs on manufactured goods are much higher than on primary
goods – reduces developing countries’ incentive to produce manufactured goods
c
...
Long term decline in terms of trade – export prices, relative to import prices fall – become
trapped in primary goods dependence because of falling revenues

Prebisch-singer hypothesis
𝑇𝑒𝑟𝑚𝑠 𝑜𝑓 𝑡𝑟𝑎𝑑𝑒 =





𝐼𝑛𝑑𝑒𝑥 𝑜𝑓 𝑒𝑥𝑝𝑜𝑟𝑡 𝑝𝑟𝑖𝑐𝑒𝑠
× 100
𝐼𝑛𝑑𝑒𝑥 𝑜𝑓 𝑖𝑚𝑝𝑜𝑟𝑡 𝑝𝑟𝑖𝑐𝑒𝑠

Long run decline in the terms of trade for countries that depend on natural resource exports
o YED for exports and imports driven by wealth effect – primary goods not highly
demanded as they are necessities
...
So in long term,
import prices will increase relative to revenues from exports
Exports must increase to fund same quantity of imports
Advice – in short term improvement of terms of trade, use revenue from exports to promote
diversification
Trade policies and economic development

Goals:



Increase growth, incomes, job creation – from that, increase development
Long term – break away from over dependence on primary products – move into manufacturing
and higher tech industries – more advanced technological ways of growing and producing

1
...
Tariffs (and quotas) on imported manufactured goods to allow domestic industries to
grow
b
...
Protects domestic jobs – allow industry to grow – allow and sustain job creation
ii
...
Problems
i
...
In long term, restricting avenues of growth – restricting import of
important capital goods and size of market to trade with
ii
...
Retaliatory protectionism
1
...
Export promotion – remove protectionism, encourage trade higher GDP, higher incomes,
higher development
a
...
Primary product dependence of developing countries
1
...
Potential technological advancements
1
...
Problems
i
...
If you remove your protectionist measures, it doesn’t mean other
countries will do it too, which will be detrimental to you
ii
...
Allowing industries that trade to grow, however cannot guarantee that
these benefits will be spread throughout the whole economy – may
promote income inequality (however trickledown effect can be used as
a counter)
iii
...
Way MNCs produce may also harm domestic economy (e
...
?)
3
...
Washington concensus
i
...
Promotes fiscal discipline, market liberalisation, trade liberalisation
c
...
Sustainable growth and development, reducing market failures and promoting
allocative efficiency – due to lack of government intervention
ii
...
If markets are not manipulated by governments – promotes investment
– people are more confident about the future
2
...
Trickledown effect  benefits to all
1
...
Problems
i
...
Exploited workers, poor working conditions – more income inequality +
creates more pollution
ii
...
Fiscal cuts in key areas like healthcare and education
4
...
Benefits
i
...
More trade encourages more growth, higher incomes, growth etc…
ii
...
Problems
i
...
Some countries export the same things and wouldn’t benefit from FTAs
ii
...
Trade barriers in other countries
5
...
Moving away from primary product dependence – trying to advance technology, to
ensure that greater avenues of growth can be generated
b
...
Protect against resource curse and volatile prices of primary products
ii
...
Problems
i
...
To be competitive even though manufactured products have higher
tariffs is very difficult
ii
...
Need good education system etc…
FDI (Foreign Direct Investment) and development
When a foreign firm sets up part of its business in a foreign (usually developing) country because:




Developing countries can be abundant in natural resources, which can be very useful for a firm
Markets where the business sets up can be huge, potentially increasing the firm’s profits greatly
Cost of labour is much lower in developing countries because regulations and standards are
lower

1
...
Increase in LRAS
2
...
Injection of income can be used to invest or for the provision of capital goods

3
...
Improvement in capital account
4
...
E
...
Chinese firms set up their businesses in Africa and there, they build dams, roads,
railway tracks, bridges etc…
5
...
Local producers have to compete with local MNCs – have to be more efficient – will
benefit them in the long run
6
...
MNCs are more likely to invest money in R&D – developing countries can benefit from
that
7
...
More jobs = more income tax
b
...
Goods sold are subject to VATs
However
1
...
No guarantee that MNCs will maintain operations in the developing countries for a long
period of time – may come, make profits and leave quickly – any employment gains will
be short term + MNCs may bring workers from their country instead of using local
workers, which will not benefit the developing country’s economy
2
...
Use their power to negotiate their tax position
b
...
MNCs may invest in labour saving technology – capital intensive production – not beneficial for
local workforce
4
...
Environmental costs
a
...
Profit maximising = no environmental considerations – loss of biodiversity, soil
degradation, deforestation etc…

6
...
Governments can heavily subsidise foreign firms to settle in their country – subsidy may
be greater than tax revenue
b
...

Growth can lead to sustainable development
...
Resource depletion and resource degradation
a
...
In long term, resources will be depleted – growth avenues
disappear, future generations cannot benefit
b
...
These things harm welfare and promote misery
2
...
Creates major negative externalities like
i
...
Loss of biodiversity
iii
...
The over-use and burning of fossil fuels
a
...

Foreign aid and development
Aim of foreign aid is to fill the savings gap in developing countries and promote economic development
...
Official Development Assistance (ODA)
2
...
g
...
Humanitarian aid – e
...
in times of war or conflict or natural disaster
a
...
Food aid
ii
...
Emergency aid – e
...
emergency lighting, electricity, cooking facilities, etc…
2
...
Long term loans
i
...
Low interest rates
iii
...
Tied aid
i
...


c
...
Money is given to developing country specifically for the development of key
infrastructure projects such as roads and bridges
d
...
Development and advancement in technology of a developing country
1
...
g
...
E
...
sending technology
experts to promote the development of technologies in the developing
country
e
...
Countries looking to improve their productivity- looking to regain
competitiveness, can gain commodity aid, where money is used to buy
commodities, lowering cost of production, aiding competitiveness, aiding future
growth and productivity
Classifying aid
1
...
When aid is given from one government to another – from a donor country to a
developing country
2
...
When aid is diverted through a multinational organisation, like World bank and IMF,
they decide who needs aid the most and distribute the aid accordingly
Foreign aid and development concerns
1
...
Depending on aid can provide little incentive to innovate – a welfare mentality can develop
a
...
E
...
in Ghana, there were Ghanaian firms competing to get a project from the
government, European firms were also competing with them and the EU was a big
provider of aid
...
Aid ‘weariness’ in developed countries
a
...
Loan repayments can lead to indebtedness problems

5
...
Often argued that donor countries give aid to countries of economic/political interest to them
...


7
...
E
...
liberalising trade, adopting fiscal or monetary policies that benefit the donor
country
Indebtedness
1
...
3rd world debt crisis – lots of oil exporting countries benefited from booms because of exporting
oils
...
Inflation problems caused interest rates to rise greatly,
and global recession caused a lot of countries to ask for their money back, to deal with their
own debts and on top of that commodity prices were falling, meaning a major avenue of
revenues for developing countries was being restricted
...

Help provided by the IMF but with strict conditions ‘de-development’


‘Structural adjustment policies’ – a lot of economies found these policies not to be in the best
interest of developing countries and that they actually led to ‘de-development’
...

o More free market policies like deregulating and privatising industries, reducing
protectionist measures and taking away government intervention to promote more
efficient resource allocation – but developing countries need to protect their industries
(infant industry argument) in order to develop, so this harms them
o A lot of government spending was cut in major areas that promote development like
education and healthcare, not in the interest of developing countries – as a result,
development was restricted
o By opening up markets and trade, a lot of developing countries could not compete with
more advanced economies, reducing major avenues for growth and development

Solutions:
1
...
Advanced economies ease off on debt being paid back to them, as long as money that is
not being repaid is used to promote development outcomes – promoting and
developing healthcare, education, building roads and bridges etc…
2
...
Allow developing economies to repay the debt over a longer period of time
3
...
Transfer debt to non-government organisations who can redistribute this money
...
g
...
Western banks get tax breaks in return
...
Cancel the debts
a
...

b
...
If the underlying weakness is that developing countries can’t
earn enough revenues to repay debts, deal with that issue first instead of just cancelling
the debt
Role of markets in promoting development
Examples: Promoting FDI, privatisation, deregulation, trade liberalisation, smaller state – reduced
government spending
Benefits
1
...
Allow free market mechanism to work on its own – positive outcomes for consumers
and producers, overall sustainable development
b
...
Incentives from competition and profit maximisation
a
...
If profits are made, may be reinvested back in business to innovate, to produce new
products that satisfy consumer wants – allocative efficiency
...
E
...
manufacturing
c
...
Encourages FDI
a
...
Infrastructure? – will there be infrastructure development to a level that promotes development
– private sector less likely to develop infrastructure as much as government would
2
...
Market failures  environmental – burning of fossil fuels etc… lead to welfare losses – need
government to tax and regulate etc…
4
...
Protectionism in advanced economies – if can’t compete with foreign countries – major issue +
if other countries put trade barriers on your exports
6
...
How can savings, investment and sustainable development be promoted?
Role of government in promoting development
Examples: import substitution, protectionism, exchange rate intervention, regulation, nationalisation,
increased government spending – increases size of state
...
Infrastructure development (through increased government spending) overcome public goods
issue – roads, bridges, dams, education, healthcare etc…
2
...
Also through training workers
3
...
If government is large enough – adopting fiscal and monetary policies

4
...
Not just rich people benefit
Problems: (too much government intervention)
1
...
Motives of government may not be to cut costs – inefficiency
2
...
State run companies very inefficient – lack of profit incentive = no incentive to cut down
costs, pursue lower prices, maximise profit – consumers face higher prices, industries
may be loss making and need heavy subsidies = more costly than if ran by private firms
3
...
Large budget deficits
b
...
Similarly, if we can allow governments to run where the limitations of the
government can be looked at, e
...
government running with a majority private system to make sure that
inefficiencies from government do not take place, or hold government accountable to prevent
corruption, then again, having a strong government will be beneficial

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