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Section 4: Development
Economic growth and economic development
Economic growth: Increases in output and incomes over time, often measured on a per capita
basis
Economic development: A process that leads to improved standards of living for a population
as a whole
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Increasing levels of output and incomes → Society can better satisfy the needs and wants of the
populations and secure improvements in living standards, but this is NOT guaranteed
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Dimensions of economic development:
Life sustenance: Access to basic services (Education, health, food, clothing, shelter)
Self-esteem: Having the feeling of self-respect, dignity, honor and independence
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Freedom: Freedom from want, ignorance and squalor
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Sources of economic growth in LEDCs
Increases in the quantity of physical capital
Makes possible increases in labor productivity
Because developing countries have limited amounts of capital
Increases in the quantity of human capital
Will make significant difference to productivity, employment opportunities, output growth and
development prospects
Development and use of new appropriate technologies
Improves the quality of physical capital
Institutional Changes
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Low levels of productivity
● Low levels of health and education
● Low levels of advanced technology
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Large urban informal sector
● Informal sector refers to economic activities that are unregistered and legally unregulated
● Urban informal sectors: barbers, carpenters, garbage collectors, small shop owners and street
vendors etc
● It’s a large share for urban employment in LEDCs, especially during economic recession
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Poverty Cycle
When conditions of poverty feed on themselves and create more poverty
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increases local employment and the use of local skills and materials,
increase incomes and poverty alleviation
save on the use of scarce foreign exchange
Capital-using technologies – use more capital in relation to labor
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Provide businesses and farmers with credit
Increased borrowing → greater investment → increased output and growth
Provide consumers with credit can be used for investments in human capital (education and
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Also contribute to improving distribution of income
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Interest rates in micro-credit schemes are too high
Higher than the market rates of interest
Costs of providing very many, very small loans are higher than the costs of providing fewer large
loans
Poor people will have a hard time repaying
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The empowerment of women in development
Consequences of gender inequality
Health (neglecting girls when under financial difficulties)
Education and training (boys are more useful in the future)
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In the labor market → lower overall productivity
In inheritance rights and property rights (women don't have access to land)
In access to credit
In income, wealth, and poverty (women are paid less for the same job)
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Positive externalities of women empowerment
Improvements in child health and nutrition and lower child mortality
Improvements in educational attainment of children (mothers become influential)
Quality of human resources
Lower fertility rates (better knowledge on high births consequences, and less time to conceive
because too busy working)
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Income distribution
Improved income distribution → increase in demand for locally produced goods and services →
encourage local production and promote local employment and investment
Unequal distribution of income → social dissatisfaction, unrest, political instability → less growth
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Infrastructure
Type of physical capital
Major contribution to economic growth and development and poverty alleviation
Increases productivity and lowers costs of production
Facilitates modernization and diversification of economy
Provides services central to maintain basic standard of living (safe water supplies, sanitation,
and sewage systems)
Transportation influences health and education by increasing access
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Problems with infrastructure
Problems of financing
Inadequate maintenance and poor quality
Limited access by the poor
Misallocation of resources
Neglect of the environment
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The role of international trade barriers
Over-specialization on a narrow range of products: missing out on the benefits of diversification
Developing countries tend to focus on the production and export of a few goods, usually primary
commodities that generate relatively low earnings
Missing out on the benefits of diversification and expansion into higher value-added production
(more employment opportunities, engage in more varied production activities…)
Inability to access international markets: trade protection
Developed countries impose higher tariffs on imports from developing countries
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Overvalued exchange rates make importing
capital inputs cheaper and lead to capital
intensive production methods that increase
unemployment and growth of urban informal
sector
Neglect of agriculture
Limited possibilities for growth over long term
(country never “grew up” to become efficient, lowcost producers)
Negative impacts on employment and income
distribution (reliance on capital-intensive
technologies that neglect small producers in
agricultural and urban sectors)
Export promotion
Refers to growth and trade strategy where a country attempts to achieve economic growth by
expanding its exports
Targets industries for export
Use industrial policies to support export industries
Some protection of domestic industries
Requirements imposed on MNCs
Large public investments in key areas
Provision of incentives for private sector R&D for high technology products
Factors behind the success of export promotion over import substitution
Expansion into foreign markets
Benefits of diversification into higher value-added manufacturing based on increasing skill and
technology levels
Major investments in human capital (education, training and skills)
Appropriate technologies for local conditions
Increased employment (use of labor intensive technologies)
Avoids balance of payments
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Consequences of export promotion:
Pros
Cons
No limitations (World market is very large)
Real cost of production (Subsidies and
incentives reduce the cost of production)
Cost effciency (Organized along lines of
competitive advantage)
Lack of competition (Low prices can force
competitors out of the market)
Increased domestic production
Increased tariffs and quotas (Overseas
competitors may retaliate)
Exchange rates (Realistic, no need to
exchange controls)
Protection of labor-intensive industries
Dumping
Trade liberalization
Elimination of trade barriers to achieve free trade
WTO (Check International Trade notes)
Preferential trade agreements (Check International Trade notes)
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Trade good or bad?
Positive
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Creates jobs
Greater choice for consumers
Domestic prices will decrease
higher standard of living
Increased efficiency and competition
higher quality
comparative advantage
More access to resources
Transfer technology and managerial skills
Negative
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May cause income disparity/inequality
Volatile commodities markets → unstable
Damaging infant industries
○ Especially emerging manufacturing
sector
Reliance on commodity exports
Loss of sovereignty
Profits leave the country
Over-specialization
Foreign sources of finance and foreign debt
Refer to funds that flow into a country from abroad, other than payments received for exports of
goods and services
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MNCs and FDI
Foreign direct investment (FDI): investment by firms based in one country (the home country)
in productive activities in another country (the host country)
A firm that undertakes FDI is called MNC
Reasons why multinational corporations expand into new countries:
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Investors gain access to cheap or skilled labour and local knowledge and expertise
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- spreading fixed management costs between territories,
-plant in one territory can be used to produce output for many territories
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Environmentally
Pepsico in India (2007)
Company exploits 30 million liters of groundwater
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friendly (recyclable packaging)
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(2004) → contributes to water scarcity
Volkswagen - improve technology by
teaching locals how to make the cars
Foreign aid
The transfer of funds or goods and services to developing countries with the main objective to
bring about improvements in their economic, social and political conditions
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Humanitarian Aid: Aid extended in regions where there are emergencies caused by violent
conflicts or natural disasters
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Save the Children 2013 Typhoon Haiyan Philippines
● Providing temporary shelter supplies (blankets, water-proof sheeting, tents etc), four mobile
clinics with all necessary medical equipments, and 500 newborn kits (diapers, lotions, baby
clothes)
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May take the form of:
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(2009-2011)
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Their aim is that they want to educate young Palestinians to stop hating their Jewish
neighbors
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Doctors Without Borders, or Medicines Sans Frontieres
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A cargo (44 tons) of high energy biscuits (HEB) arrived in
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Tacloban on November 12 which is enough to feed 120,000 people in a day
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(2009)
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Provides commodities they do not
have for consumption or production
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Aid in the form of commodities, such as vegetables, baskets,
cookings gas, etc
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Tied Aid: Aid that forces recipient country to purchase goods or services from donor country
using a portion of the received aid
The US often gives food aid to countries in Africa, such as Nigeria (2012), but require them to
purchase US goods and have them transport it using US companies
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ODA funds in 3 ways:
Bilateral: Aid directly from donor government to the other
Multilateral aid: Aid given indirectly from donor government → international organizations
(ADB, World Bank, etc) → recipient government
NGOs: Donor government gives ODA funds to NGOs
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AID good or bad?
Positive
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Negative
Provides humanitarian relief in an emergency
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○ famine, drought, war, natural
disaster
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Helps LDCs out of poverty cycle
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Does not hinder the recipient country from
own savings (and investment)
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Project assistance helps manage much●
needed infrastructure
Contributes to personal training and builds
technical expertise
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Provides for investment finance to countries
with low savings rates or when local banks ●
may not lend (microfinance)
Fills Resource gaps
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Emergency aid and does not address longterm problems
Funds environmentally unsound projects
Food aid depresses agricultural markets and
makes them reliant
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Often accused by LDCs as being interfering in their internal affairs as credit provided often
comes with stringent conditions, which have political and social consequences for borrowing
governments
Stabilization policies (policies that a country must adopt as a condition for receiving the loan)
Increase in use of market mechanism
Devaluation of exchange rates
Deflation of economy
The role of international debt
Foreign debt includes all financial obligations by residents of a country to residents or
institutions of other countries
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Why borrow:
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It is cheaper or easier to obtain funds abroad than at home
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● To buy commodities they do not produce, such as oil or certain types of food
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The burden of debt
Balance of payment problems: when a country borrows from foreign institutions, its debt
servicing obligations must be paid in foreign exchange
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However, as it borrows borrows more, its debt servicing
obligations increase
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Opportunity costs: debt alleviation VS invest social services and infrastructure
Lower private investment: uncertainty from fears that government may be unable to service its
debt → scarce away private investors (foreign and domestic)
Lower economic growth → caused by the above
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Consequences of economic growth
Higher incomes
Leads to higher GDP per capita
However there may not be fair distribution of income
Improved economic indicators of welfare
There are higher life expectancy, average years of schooling, literacy rates
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May lead to higher levels of output (economic
growth) and higher standards of living
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Policies encouraging competition:
deregulation, privatization, anti-monopoly ●
regulation, which free market forces make
markets more competitive, thus resulting in: ●
Greater efficiency in production
Lower prices
Improved quality
Better allocation of resources
Increased levels of output
Income inequalities
Loss of protection for workers because of
labor market reforms
Increase in unemployment because of trade
liberalization
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Labor market reforms
Promote free market forces in labor markets
Insufficient credit for lower class
Lower class do not have access to credit, this
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with no intervention, it does not allow them
with no collateral and weeking very small
loans to acquire the credit they need
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Freely floating exchange rates
(A price mechanism of free markets)
A market-determined exchange rate reflects
the forces of supply and demand for a
currency thus can be a signal and incentive
function of prices
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Questionable effects on economic growth
and development
Does not always work
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*LEDCs perform worst because they cannot
compete with larger, more mature foreign
firms → weakens industry, increased
unemployment
Liberalized capital flows (absence of
exchange controls)
allows domestic residents to purchase any
amount of foreign exchange without
restrictions, whether for imports, or travel,
investment abroad
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Provision of infrastructure (Water suppliers,
Corruption
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sanitation, sewerage, power, communication,
transportation, and roads
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Bribery, procurement fraud, extortion, false
certification, nepotism
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Provision of stable macroeconomic
environment
Price stability, full employment, and reasonable
budget deficit and balance of trade
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