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Unit 4 SL
The key sources of economic growth in
developing countries are:
- Increases/improvement in natural factors
- Increases/improvement in human capital
- Physical capital (factories, machinery etc)
and technological factors
- Strong institutional (schools, law, banks etc)
Development can then be seen as a
multidimensional process involving:
- the reduction of widespread poverty
- increasing living standards
- reducing income inequality
- creating employment opportunities
...
Higher incomes
Higher levels of economic growth leads to higher
GDP per capita, which should improve the living
standards of the population
...


Economic Development
A multidimensional concept involving
improvements in standards of living, reduction in
poverty, improved health and education along with
freedom and economic choice
...
Higher government revenues
If growth increases so should a government’s tax
revenue as:
- More people are employed and therefore
paying income tax
- More people are spending and therefore
paying indirect tax
This increases the amount of money a government
has to spend on healthcare, education, infrastructure
etc and therefore this will increase development
...
Creation of inequality
Before countries begin developing there is little
inequality as everyone is poor
...
The rich get richer quicker
than the poor become better off and therefore there is
a widening gap in incomes between the rich and the
poor
...
Negative externalities
Economic growth may bring with it an increase in
the standard of living of a nation, however, it may
also bring negative externalities and health problems
...

5
...
Imperfect markets and limited information
7
...
Low Standard of Living, Low incomes,
inequality, poor access to health care and education
2
...
High population growth (birth rate), high
dependency ratios (ratio of working population to
population)
4
...

1
...
Improved economic indicators on welfare
3
...
Improved economic indicators on welfare
Higher growth usually translate to improved average
life expectancy, average years in school and literacy
rates as increased government revenue brought about
by growth allows a country to spend more on
healthcare and education
...
E
...

Low incomes = low savings = low investment = low
productivity = low incomes
The poverty trap illustrates the inability to invest in
capital (physical, human etc) due to low savings
form a self perpetuating cycle
...
Higher rates of economic growth are
needed so that incomes and savings can increase,
thus providing a pool of saving for entrepreneurs to
withdraw and invest in capital equipment etc
Absolute poverty
A situation where a household’s income is less than
$1
...


Significant differences between Developing
countries:
 Differences in size and availability of natural
resources
 Climate
 Political stability
 Historical background
 Education
 Investment
 Population
 Finance
Real GDP per capita
This is GDP adjusted for inflation calculated per
person
...

Single Indicators (of economic development)
1
...

2
...
Education Indicators

Low development trap
A circular chain trapping individuals/societies in to
low development E
...

Low incomes = low levels of education and
healthcare = low human capital = low productivity =
low incomes

Relative poverty
When a household’s income is insufficient to allow
its member to participate in the normal social life of
the country
...
Relative
poverty exists in all countries
...

1
...
Achieve universal primary education
3
...
Reduce child mortality
5
...
Combat HIV/AIDS, malaria and other diseases
7
...
Develop a Global Partnership for Development
Real GNI per capita
...

Purchasing power parity
Income per capita at PPP shows the level of
consumption available to an average citizen of the
country
...
As a result income figures at PPP
tend to reduce the gap between richer and poorer
countries
...


Human Development Index (HDI)
A composite indicator of the level of a country’s
development, reflecting GDP (measured by GDP in
PPP$), education (measured by literacy and school
enrolment) and healthcare (measured by life
expectancy)
...


Uses:
1
...
Measures how developed a country is now and its
likely future development i
...
high score on
education would indicate a more developed country
in the future
Limitations:
GDP ranking higher than HDI ranking because:
1
...

2
...

war and/or AIDS may drag down life expectancy
...

Domestic Factors and Economic Development
1
...
Education
How it aids development:
2
...
The use of appropriate technology
factors of production)
4
...
The empowerment of women
modern technology
6
...
Should
lead to less corrupt government
...
Healthcare
3
...

from education is decreased and as a consequence
an individual will choose a lower amount of
education therefore decreasing productivity
-people presently suffering from/have after effects
of diseases are less productive
4
...
Solves savings gap problem
collateral to start a business
...
Empowers women
The savings and investment gap experienced by
3
...

4
...

Drawbacks of micro-credit
5
...
Small projects may mean a great deal to one
-Educated women who are employed add to the
participant, but development is a huge project
...

2
...

as they are more informed about health care,
3
...
The “upper -An educated woman is likely to marry later and
poor” are more likely to repay, and have the skills
have fewer children
and contacts to make the most of the microfinance

loan
6
...

-High income inequality leads to low levels of
savings
...

In the long run: declining terms of trade

1
...


Disadvantages of ISI
-Country does not benefit from international tradegoods could be sourced at lower cost from abroad
(domestic consumers may have to pay a higher
price)
...
Increases exports and therefore improves the
Current Account
...
Trade liberalisation is required and therefore
countries that adopt ELG are forced to be
competitive
...
Trade Liberalisation
Trade liberalisation is the removal of trade barriers
such as:
 Tariffs
 Quotas
 Export subsidies
 Administrative legislation

Barriers developing countries face from
international trading system:
1
...
Primary product dependency (volatile price and
declining terms of trade)
3
...
Import Substitution Industrialisation (ISI)
2
...
Trade Liberalisation
4
...
Regional trade agreement
6
...

2
...
Growth is achieved by
focussing on exports and increasing export revenue,
and hence aggregate demand – (X-M) increases,
therefore AD increases
...
Tends to increase income inequality, therefore
causing social problems
2
...
Successful export-led growth will disgruntle
developed trading partner countries and lead to them
using protectionism
...

4
...

5
...


6
...


Why MNCs attracted to developing countries:
 Access to natural resources
...
Apple in China
 Large and growing markets
...

 Government regulation may be less strict,
 Ability to repatriate profits
...


Foreign Direct Investment (FDI)
The purchase of productive assets (factories,
machinery etc ) by a multinational corporation in
another country
Advantages for developing countries of FDI:
1
...
Provide employment (evaluate using 1, 2
and 6 below)
3
...
Increased tax revenue (evaluate using 3
below)
5
...
Employment created tends to be low paid and low
skill
...
MNCs may lead to the closure of domestic firms
who cannot compete
...
MNCs may have too much power, securing large
tax concessions or subsidies reducing the tax
revenue often cited as an advantage
4
...
MNCs will strip natural resources and then leave
6
...
MNCs repatriate their profits
Types of Development Aid:
1
...
Grants
Money given with no repayment required
...
Project Aid
Aid given for a particular project – build school
...
Aid programmes
Aid given for sector such as education in general
5
...
g
...

Arguments against AID
- Aid supplants rather than supplements domestic
savings
...
g
...
For a loan to qualify as Aid,
the interest rate must be at least 25% below the
market interest rate
...

NGOs goal is to provide Aid to achieve small scale
development objectives (important)
...

- The moral argument
...

- Aid can provide an injection of resources to
supplement scarce foreign exchange
...


Evaluation (important):
If global trading rules are reformed, foreign Aid can
be reduced as developing countries make faster
progress and become able to trade to end their
dependence on donor nations
...

- If Aid is spent on labour-saving capital, this will
neither increase employment or increase wages
...
Its main roles are:
 Ensure the stability of the international
monetary system
 Promote international monetary cooperation
 Lend money to help members in balance of
payments difficulties
Benefits of SAPs
-Decreasing inflation, usually due to recession – AD
down, therefore inflation down
...

- High interest payments means countries will never
be able pay off their debt and debt levels increase
...
Reform of global trading rules are complex
and could take generations to change
...

Debt Cancellation
The act of eliminating the debt owed by a developing
country government in order to allow it to achieve
development objectives
...
Involved increasing tax and
decreasing govt spending
...

- Removal of subsidies and price controls, which
meant that essential products such as rice and
kerosene becomes expensive
- Devaluation of currency
Drawbacks of SAPs
- A reduction in govt provided services (education
and healthcare) diminishes a country’s human capital
and therefore its ability to compete internationally
...
When government money is
being spent in large amount it often leads to
corruption
Poor planning

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