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Development Economics
4
...

- The most important sources of economic growth in economically less developed
countries include increases in quantities of physical capital and human capital, the
development and use of new technologies that are appropriate to the conditions of
the economically less developed countries, and institutional changes
...


- In the short term, some limited economic development is possible in the absence of
economic growth
...

Economically Less Developed Countries (ELDCs)
- Share certain common characteristics:
o low levels of GDP per capita
o high levels of poverty
o relatively large agricultural sectors
o large urban informal sectors
o high birth rates
...
4%
81% agriculture
6% industry
13% services
46
...
6% agriculture
5
...
7% services
35
...
5%
38
...
7 years

6%
37
...
7 years

Economically less developed countries differ enormously from each other in terms of a
variety of factors, including resource endowments, climate, history (colonial or otherwise),
political systems and degree of political stability
...


Arable Land
Geographic position
Natural resources

-

Mozambique – ex
Portuguese colony
6
...
5%
Land locked
natural gas, petroleum,
coal, copper, chromite, talc,
barites, sulfur, lead, zinc,
iron ore, salt, precious and
semiprecious stones

In some countries, there may be people trapped in a cycle that prevents them from
escaping poverty
...


Millennium Development Goals (updated)

4
...

GDP per capita is a better indicator of the level of output per person produced in a
country

GDP per capita figures at purchasing power parity (PPP) exchange rates
- It is difficult to compare GDP per capita figures between countries because different
countries have different price levels
...

- It is defined as the amount of a country’s currency that is needed to buy the same
quantity of local goods and services that can be bought with US$1 in the United
States
...


GDP per capita
GNI per capita
GDP per capita at PPP
exchange rates
Literacy rate
Life expectancy
Health expenditure as % of
GDP

EDC: Sweden
54,010
50,000
51,300

LEDC: Haiti
729
...
60
1,654

99%
82
...
9%

60
...
2 years
7
...
Whereas in Sweden there
are higher price levels than the US, hence why the GDP per capita at PPP is lower than GDP
per capita
...
Low GDP per capita, lower literacy rates and lower life expectancy
...

Composite Indicators
- Economic indicators that include more than one dimension of development
...

- Eg
...
The composite index is the average of the three
...
HDI ranks and

Singapore
Sweden
Haiti
Mozambique

Rank 5
Rank 14
Rank 163
Rank 181

HDI
0
...
913
0
...
418

GNI per capita at PPP
Rank 7
85,190
Rank 26
50,030
Rank 200
1,800
Rank 210
1,190

4
...
Education and health 

Education and Health Care are considered basic human rights, something all are entitled to
have access to, according to the UN Universal Declaration of Human Rights 1948
...
They are
merit goods and have a number of positive externalities
...
As well as reducing
unemployment
...

- Increase in capital/technology requires workers to be trained in specific skills to use
them
...
Though
this is expensive and requires giving up spending on other areas
...

- Improvements in primary health care significantly improves living standards
...

- Less work days can be lost due to illness
...
Kenya
- Losing US$750,000 annually as a result of girls leaving school without completion
...

- World Bank has recognised that there is no investment more effect for achieving
development goals than educating girls
...
7% of government expenditure is for health care
- 64 years life expectancy
- 1
...
The empowerment of women 

- Education reduces the rate of violence against women and encourages them to
reject adverse cultural practises
...

Improves children’s educational attainment
...

Lower birth rates, slower population growth
...

UN Aims for women: higher incomes, better access to and control over resources
and greater security (protection from violence)

3
...

Eg
...
7 billion was given to Kenya from international community for infrastructure
development; in order to strengthen democratic institution, incur economic growth, for
peace and security
- US gave $5 million for health care; to reduce child deaths
4
...

- First introduced in Bangladesh by a professor who started Grameen Bank, with the
aim of reducing poverty by providing small loans to the countries poor
...
5 million active borrowers, at an average loan of
$114
...

Types of microcredit businesses
1
...
Not-for-profit
3
...

2
...

4
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Poverty reduction
Funding essential spending
Protection against income volatility
Sustainable finance without the need for collateral
Gender empowerment

Negatives:
- Debt (multiple loans, higher interest rates)
- Savings are needed to generate long run development (generated by productivity)
- Direct funding of skills training may be more beneficial
- Risks: climate shocks, natural disasters; interest still needs to be paid
- Investment: credit is often used to fund consumption instead, microfinance cannot
compensate for inadequate health care/ education/ infrastructure in promoting
sustainable development and poverty reduction
Eg
...
5 billion
- 50,000 loans per day
- 7
...

Remittance Management: managing remittance payments from one country to another
(including transfer payments)
Micro-insurance: a safety net to prevent people from falling back into extreme poverty
Micro-savings: voluntary local savings clubs provided by charities (eg
...
Income distribution 

If a county experiences economic growth it only constitutes economic development if the
national income is being distributed
...
Or it could be better paying jobs and distributing the share of increasing national
income
...

Factors such as Gini Coefficient and the Lorenz Curve can be used to determine this
...
Kenya
- Increasing GDP/GNI/GDP per capita
- Gross enrolment has decreased since 2011

4
...

1
...
As a country develops the proportion of GDP that agriculture
contributes shrinks, being replaced by industrial/manufacturing output then by services
...

Risks of dependence on commodity exports
- Value added
o At each stage in the production chain, there is value added to the good,
meaning it increases in price
...
Cocoa beans à cleaned, roasted, shelled à cocoa liquor à cocoa butter
à chocolate (vertical diversification, which is relatively easy for a country to
achieve compared to other forms of diversification)
o At the agricultural level, the product is worth the least, hence as a country
expands into manufacturing it’s potential revenue rises
...

o Moreover, it adds employment opportunities as new firms are introduced
...


Agriculture as % of GDP
Industry as % of GDP
Services as % of GDP

EDC - Singapore
0%
26%
74%

ELDC - Haiti
38
...
5%
50
...
Price volatility of primary products 

Primary products have low PED and PES, meaning the prices of these products fluctuate
greatly, they are highly volatile
...

Moreover, if the good is exported, it can lead to a volatile balance of payments, impacting
the government’s ability to plan for development and make investments
...


3
...

- Low income countries face on average higher tariffs imposed by developed
countries
...

o Hence why membership to the WTO can be particularly beneficial to
developing nations
- Developed nations prevent ELDCs from vertical diversification
o Vertical diversification is a great way for developing countries to expand their
economy from one that is over-specialized agriculturally based to one
predominantly based on manufacturing
...

o Low tariffs are imposed on raw materials (so domestic producers can have
access to cheap raw materials, particularly those that aren’t available locally)
and high tariffs are imposed on manufactured goods (to protect domestic
manufacturers and discourage competition)
...

- Developing countries impose high barriers to trade on each other
o Often the highest in the world, particularly in Sub-Saharan Africa and South
Asia
...

o E
...

o It also subsidizes production of certain goods as well
...

§ It leads to global inefficiency as developed nations produce goods at a
far higher cost than developing nations, yet due to subsidies and
protectionism they are able to operate
...

- Because of these reasons developing nations suffer reduced export incomes which
can lead to government debt and balance of payment deficit
...

In the early 2000s, developed countries were spending just over $1 billion a year on aid to
developing country agriculture, and they were also spending just under $1 billion a day in
supporting their own farmers

4
...

ELDCs often gain most of their export revenue from commodities
...

Thus the terms of trade of developing countries is likely to deteriorate over the long
term
...

More recently, in the period 1980–2000, the prices of key agricultural commodities
fell on average by roughly 50%
...

A relatively small increase in demand is accompanied by a relatively larger increase
in supply due to technological change, resulting in a fall in price
...
Import substitution 

Import Substitution: a growth and trade strategy where a country manufactures certain
consumer goods for the domestic market to promote its domestic industry
...
) preventing the entry of imports that compete with domestic
producers
...
Export promotion 

Export promotion: the emphasis on exporting industries
...

Eg
...
Through R&D, transfer of technologies into
domestic market, training of domestic workers, use of local inputs
...
Trade liberalization 

Trade liberalisation: The free trade approach to growth and development, by the
elimination of trade barriers and free market approach in the domestic economy
...

The main policies recommended by the Washington Consensus included:
- Trade liberalisation
o lowering and eliminating tariff and other barriers to trade
- Interest rate liberalisation
o freeing up of interest rates
- Moving toward freely floating exchange rates
- Privatisation
- Deregulation
- Lifting restrictions to foreign direct investments by multinational corporations
- Limiting borrowing by the government
o keeping budget deficits under control
- Maintaining some government spending for health, education and infrastructure
...
They were based on the idea that reliance on market forces and free trade
improves efficiency and the domestic and global allocation of resources, and increases
economic growth
...
intervention in the market)
Effects:
- Limited effect on export growth and diversification for developing countries
- Limited economic growth
- Increased income inequality and poverty
Economic and trade liberalisation creates ‘winners’ and ‘losers’
...

- However, there will also be those who will become worse off as a result of the
changes introduced by liberalisation and free (or freer) trade
...
)
People who are forced from the formal into the informal sector, where wages are
lower and social protection is non-existent,
o due to removal of trade protection leading to the closure of formal sector
firms that can no longer compete
o in Zambia, for example, formal employment fell by 15% in the decade of the
1990s

4
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‘The system helps to keep the peace
...
By encouraging the smooth flow of trade and helping to resolve trade
disputes, the WTO helps promote peace between countries
...
The WTO helps countries settle their disputes in a constructive way
...
Decisions are made by consensus,
a
...
All countries have the right to challenge each other
3
...
Greater consumer choice, and a
a
...
More international trade made possible by lower trade barriers
5
...
Increased growth,
a
...

7
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Cuts costs
b
...


8
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Defend themselves against narrow interests
b
...

c
...
Trade liberalisation means more discipline for the government and improved
governance
...
Health standards (EU policies)
- Agricultural subsidies in developed nations
o Despite agreements in the Uruguay rounds to reduce subsidies, developed
countries have not, due to political opposition and there has not been any
move to enforce their reduction
...
Bilateral and regional preferential trade agreements 

Bilateral agreements: preferential trade agreements between two countries
Regional agreements:
Regional agreements: preferential trade agreements between countries of geographical
closeness
Preferential trade agreements work best if they involve:
- Regional agreements
- Geographical closeness
- A similar level of development and technological ability
- Similar market sizes
- Shared commitment to co-operation
Benefits:
- Members can expand their markets

-

o Achieve economies of scale
Diversify production and exports
Increased domestic and foreign investment
Fair increase in competition which is easier to deal with
o If countries have similar development/technology
Joint ventures/policies
o Eg
...

Risks of bilateral free trade agreements:
1
...
Can destroy local firms (even efficient ones)
2
...
If multiple developing countries join an FTA with the same developed country it does
not give them an advantage as they must still compete with each other
4
...
Creation of govt
...
Unemployment
c
...
Poverty
5
...
Eg
...
Must agree to other requirements which may not be in their best interest
Diversification 

Diversification: a reallocation of resources into new activities that broaden the range of
goods or services produced
...
5 The Role of Foreign Direct Investment
Foreign direct investment (FDI):
- Investment by firms based in one (home) country in productive activities in another
(host) country
Multinational Corporations (MNCs)
- A firm that undertakes foreign direct investment is referred to as a multinational
corporation (MNC)
- It operates in more than one country
...

- Multinational corporations run business operations in both the home country and in
other (host) countries
...


Reasons why MNCs expand into economically less developed countries:
1
...
Lower costs
3
...
More consumers/demand
4
...
Eg
...
Access to raw materials
6
...
Ireland has low taxes in so google + facebook have their EU HQs there
(Ireland not ELDC though)
Advantages and disadvantages of FDI for an ELDC
Advantages
Disadvantages
Employment
Firms can gain political influence
Investment
Exchange rate rise (export prices increase)
Training/Education
Pollution
Tax revenue
Negative externalities
Economic growth
Firms evade laws/rules
Breaks poverty cycle
Generate imports
Increase productivity
Loss of local jobs
Positive BoP impact (surplus/reduce deficit)
Lower prices
Lower costs

4
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Long term loans
a
...
Tied aid
a
...
Project aid
a
...
Schools and hospitals
4
...
Support for sectors such as education and finance
5
...
Commodity aid
a
...
Bilateral aid
a
...
Multilateral aid
a
...
Grants
Aims of NGO: to provide aid on a small scale to achieve development objectives
Motivations of a DC giving aid:
- Political/strategic
- Humanitarian/moral
- Economic
Evaluate the effectiveness of foreign aid:
Strengths:
- Break the poverty cycle IF used effectively by govt
...
funds
Aid does not reach those in need
Poverty alleviation

The IMF and World Bank

Aid
Trade only works if the DCs abandon their
protectionist policies
Can target specific areas/those in need
Exports of agricultural goods are very price
volatile
Trade cannot be used to escape poverty
cycle
Countries may have little to export
Trade excludes geographically
isolated/disadvantaged countires

The IMF – International Monetary Fund
- A multilateral financial institution established jointly with the World Bank in 1944
- The original purpose was giving loans to countries that were experiencing balance of
payments deficits
- Encouraged floating exchange rates
o US most stable in 1944
o UK was very popular but over printing of money lead to inflation
- In order to receive these loans, countries would have to agree to structural
adjustment / stabilisation policies
Stabilization Policies included:
- Contractionary monetary policy
o High interest rates to discourage AD
o Lower imports
o Encouraging FDI/inflows of financial capital
o Helping reduce balance of payments deficit
- Tight fiscal policy
o Lower AD
o Cuts in government spending
§ Cuts in areas of welfare spending; health care, education,
infrastructure
§ Removal of subsidization including food
§ Increase in taxes
§ Introduction of school fees and health care costs
- Currency depreciation/devaluation
o Cheaper exports, more expensive imports
o Help the BoP
- Cuts in real wages
o To reduce AD
- Liberalization policies
o Removal of price controls
o Interest rates, imports, foreign exchange
o To encourage a freer market and free trade environment
Criticism:
It has a highly negative impact of countries due to stabilization policies:
1
...
As voting power is determined by the size of their economy
b
...
Excessive interference in domestic affairs
a
...
Conditional lending
a
...
Damaging effects on developing countries

a
...
The impact of wage cuts, reduced spending, costs on health care/education
in developing nations can be disasterous
...
IMF policies do not help
a
...
The impact it has on their growth rates means the government cannot afford
to grow out of the difficult situations
Eg
...
Spending cuts were on areas such as health care,
welfare and education, not on other areas like the military, so it significantly hurt the poor
...


The World Bank
-

A development assistance organisation that extends long-term loans to developing
country governments
The aim is the promotion of economic development and structural change
It was established in 1944, at the end of the Second World War, as part of an effort
to help reconstruct Europe
...
e
...
Critics argue that decisions are
made without due regard for the needs and wishes of developing countries,
which, being the poorest, have the least representation in decision-making
- Interference in domestic affairs
- Conditional lending
o Deprives developing countries control over their domestic economic
activities
- Damaging effects of structural adjustments
o Increase income inequalities, poverty, unemployment, govt
...
7 The Role of International Debt
International Debt
A countries level of external debt, the total amount of debt (public and private) incurred by
borrowing from foreign creditors (lenders)
...

Borrowing has major costs, which take the form of ‘debt servicing’;
- Payment of the principal (the amount of the loan) plus interest
...

Under favourable circumstances, debt service payments are made possible by greater
economic growth and increased export earnings
...
This deficit must be funded for by
loans from other countries, the huge problems of debt arise from the fact that developing
countries suffer from low growth, export earnings, high import costs, low/negative
economic growth and increasing interest rates
...

Eg
...

- These two events resulted in larger trade and current account deficits in developing
countries, creating a need for increased foreign borrowing that would provide the
foreign exchange needed to cover their deficits
...


Commercial banks and the international community suddenly woke up to the possibility of a
banking collapse and a major global financial crisis, should countries default on their loans
...

Situation where countries become heavily indebted
Debt rescheduling
New loans by commercial banks to developing country debtors, but on better terms
...

The loans were used to pay off some of the old loans, and therefore ease the pain of having
to service the debts
...

The loans were conditional in that they were made only if the borrowing country
government agreed to pursue stabilisation policies prescribed by the IMF
...
These
forced the borrowing country government to pursue economic and trade liberalisation
policies to qualify for receiving a loan
...

- If its export earnings are not enough to cover its foreign exchange needs for debt
servicing, it can borrow more from abroad to acquire the needed foreign exchange
...
This means that
there will be continuous pressure on the balance of payments and a constant need
for foreign exchange to service the debt
...

Many countries, particularly in Latin America and Sub-Saharan Africa, were caught in
a debt trap during the 1980s
...
) and
infrastructure, all necessary for poverty alleviation, economic growth and
development
...

- Even if investment does take place, it is more likely to involve short-term investment
projects with quick returns, rather than longer-term ones with greater potentials to
support economic growth
...

- This in turn translates into a reduced ability to service debts
...

Eg
...

Eg
...

To qualify for debt cancellation, countries must:
- have a per capita GNI below a particular level
- have a debt level that cannot be sustained
o i
...
they must be in a debt trap
- show evidence that they are following certain elements of IMF and World Bank
policies
o such as cutting government expenditures and liberalising their markets
- commit themselves to pursuing a poverty reduction strategy
...

The HICP Initiative is considered to be a welcome step in the direction of solving the debt
problem, but has been criticised for several reasons:
- The level of debt reduction which the programme makes possible
o level of debt is to be reduced to 150% of exports
o This is considered insufficient;
o If a country’s export earnings fall for whatever reason, it risks sliding back
towards a debt trap
- The programme takes effect too slowly
o risking that the benefits of debt relief may follow too slowly to be of much
use to the countries
- Some measures that are imposed as conditions for a country to qualify are too
severe
o Eg
...

- There are many other countries that are highly indebted but which have not been
included in the HIPC Initiative
o these countries, whose debt situation is considered to be more manageable,
are still suffering the consequences of high levels of debt, yet are unable to
benefit from debt relief
...
8 The Balance Between Market and Intervention
Market-oriented Policies
Strengths

Weaknesses

Liberalized trade (removing trade barriers)

Market failure

Capital flows à attract MNC

Environmental impact

Privatization/deregulation à competition
Incentives for R&D, risk-taking, investments
Higher output levels
More efficient allocation of resources
Economic growth

Abuse of monopoly power
Insufficient provision of merit goods
Co-ordination failures (between firm and
worker)
Weak or missing market institutions à loss
of effectivity
Dual economies

Dual economy

Income inequalities

Income inequalities

Insufficient credit for the poor à lower
investment possibilities, higher poverty
Could not result in economic
growth/development

Increase choice
Decrease foreign debt
Improved trade/political relations
Balance of payments

Interventionist Policies
Strengths

Weaknesses

Provision of infrastructure à productivity

Excessive bureaucracy à inefficient

Investment in human capital
à increased
consumption, productivity and economic
development
Provision of a stable macroeconomic
economy à use of fiscal and monetary
policies
Provision of a social safety net à guarantee
the poor access to basic human needs
Correcting market failures

Poor planning à inefficient, wasted
resources

Redistributing income

Corruption à stunt development,
misallocation of resources

Industrial policies
Market with government intervention
Governance
- The manner in which power is exercised in the management of a country’s economic
and social resources for development
...
’
6 Principles of Good Governance
1
...
Fairness
3
...
Accountability
5
...
Efficiency
The view that economic development may best be achieved through a complementary
approach, involving a balance of market oriented policies and government intervention, is
important because it eradicates the weaknesses of one form in singularity
...
”
“A market-led economic development strategy with a minimum amount of government
intervention, such as is represented by the Washington Consensus, does not take into
account the special set of circumstances faced by developing countries
...

Each country is unique, and should be able to tailor its strategies to its own particular needs
and conditions
...




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