Domestic Factors and Economic Development€¦ · sheller – turned by hand and is used to shell nuts Solar cooker for consumers – aids development because ¾t doesn’t need i

Domestic Factors and

Economic Development

www.igcseeconomics.com - Resources, Past Papers, Notes, Exercises & Quizes

Lesson Objectives By the end of this chapter you should be able to Identify domestic factors that may contribute to economic development Explain how domestic factors may contribute to economic development


Institutional factors affecting development There are a number of domestic factors that act as sources of economic development and barriers to development What do we mean the institutional framework? Organisations, structures, rules

The main institutional factors are Education Healthcare Infrastructure Political Stability and corruption Legal system Financial system, credit and micro finance Taxation The use of appropriate technology The empowerment of women Income distribution


Group work

You will be given a factor that could contribute to economic development. In pairs…. I would like you to discuss and make notes on the following points.... Define the key term on the summary sheet Identify and explain policies to aid economic

development in relation to your given topic Find and summarise real examples from a

specific developing economy


Education

Improve the role of women in society – there are high correlations between women’s education and child survival rates and fertility rates

Sen says ‘Nothing arguably, is as important today in the political economy of development as an adequate recognition of political, economic, and social participation and leadership of women’

Improve levels of health – improving education (particularly literacy) improves the health of society. Individuals can read about and be informed about vaccines and water filtering. Also dangers such as HIV, sanitary habits, diet etc

Despite improvements around 38 million children of primary school age are still out of school in sub-Saharan Africa. In southern Asia 18 million.

Education requires vast funding Within a country there may be vast disparities between urban and rural areas Children may need to work Often if the mothers received no education the children do not either Enrolment in secondary schools is lower than primary


Healthcare

Strong correlation between health care and life expectancy - it would appear that countries that spend a high proportion of GDP on healthcare have a higher life expectancy (there are many other variables at play)

Throughout the world infant mortality rates have fallen, life expectancy has increased, more children are immunised and maternal mortality rates are falling

Progress - there has been a lot of progress in terms of training doctors and nurses, building of hospitals, and provision of immunisation and safe water

There is still a lot to do

Healthcare


Healthcare

Better roads and better public transport – allows children to get to school, adults to get to market and goods to get to potential buyers

Electricity is needed for food preservation Gas is needed for cooking

A developed radio and television network - makes it possible for people to link up with and participate in wider communities

Any improvement in infrastructure will improve the well being of the people

Infrastructure www.igcseeconomics.com - Resources, Past Papers, Notes, Exercises & Quizes

Countries that have political stability are more likely to attract FDI and Aid – may lead to growth and development

Political instability can lead to wars and complete economic breakdown - this will lead to poor economic performance, high levels of poverty and low standards of living

When there is political stability citizens are more likely to have a say – leads to higher living standards

Corruption = dishonest exploitation of power for personal gain

Political stability and lack of corruption

Corruption is prevalent when- governments are not accountable to the people Governments spend large amounts on large investment projects Accounting practices are not controlled Officials are not well paid Elections are not well controlled Legal structure is weak Freedom of speech is lacking


Corruption hinders growth and Development

Corruption leads to reduction in effectiveness of legal system (people can buy their way out)

Electoral corruption means peoples wishes are not heeded

Corruption leads to an unfair allocation of resources – contracts don’t go to most efficient bidder

Corruption

Bribes increase the costs of business leading to higher prices

Corruption reduces trust in an economy – hard to attract FDI

Increased risk that contracts are not honoured - leads to lack of investment

Officials divert funds to projects that are not in the public interest

Officials turn a blind eye to regulations – don’t care about environment

Funds leave the country – capital flight

Constant paying of small bribes reduces economic well being of ordinary citizens


No way to uphold property rights and so removes the Right to own assets Right to benefit from assets e.g. rent Right to sell assets Right to exclude others from using or taking over assets

Investment and growth will be reduced and so economic growth and development will be limited (With no property rights there is no incentive to improve that property) Legal system


Most developing countries have dual financial markets and so removes the Official (big banks that finance established large businesses) Unofficial (illegal who lend to those that are desperate)

Savings are needed for investment but saving is hard when there is poverty and no where safe to save that will give a good return People will buy assets such as livestock or send their money abroad

Financial System

In developing countries poor people find it almost impossible to access traditional banking systems No collateral Often unemployed Lack savings

Even if there is entrepreneurial spirit they cannot borrow to start up

Micro-Finance may be the answer

Micro finance videos Insert links


Very difficult for governments to collect 3% in developing countries 60-80% in developed countries

There is little corporate activity Often low tax incentives to encourage FDI

Taxation

Main source is exports, imports and customs duties – country needs to be heavily involved in foreign trade Being part of the WTO reduces tariffs

Large informal markets in developing countries If incomes are not recorded how can you collect tax?

Problems with administration – inefficiency, lack of information and corruption

If a government finds it difficult to collect taxes it will have less to spend on growth and development objectives


Technology needs to be appropriate for large labour surplus Cheap to make and needs labour Provides greater employment than automated systems

Appropriate Technology

Universal nut sheller – turned by hand and is used to shell nuts

Solar cooker for consumers – aids development because it doesn’t need wood

no loss of trees Don’t need to look for fire wood – more time for other activities (improves the position of the woman)


Well being of families is improved Better informed about health care, hygiene and diet Healthier children lead to healthier adults and a better future workforce

Empowerment of Women

Increasing income levels for women – leads to increases in family welfare (more than an increase in men’s incomes)

The education of the children in the family group improves – pass on their own education Value education Educated children have better life opportunities Leads to a better quality future workforce

More control over contraception, marry later and have smaller families – lowers population growth


Low levels of income leads to low levels of savings leads to low levels of investment leads to low growth

Income Distribution

The rich dominate politics policies favour the well off No pro-poor growth

No agreed measures of poverty

The rich consumer foreign goods – does not help domestic economy

Capital flight – rich send their money abroad

Income inequality leads to both poor growth and poor development


International Trade and Economic Development


International barriers to development Over-specialisation If a country is dependent on a narrow range of exports

they face great vulnerability and uncertainty If a tropical country that is reliant on tourism revenues

will be limited if the global tourist trade is damaged as a result of a global slowdown in economic growth

Countries that were dependent on the export of a small range of low-skill manufactured goods such as textiles were damaged when China joined the WTO and increased their supply of textiles on world markets driving down prices

Price volatility of primary products Many developed countries focus on exporting primary

commodities which are price inelastic (D&S) Any change in supply or demand can lead to large price

fluctuations This will have a marked impact on the export revenues This makes it difficult for producers and governments

to plan ahead This means investment is less likely Less investment means less growth Less growth may mean less development


International barriers to development Inability to access international markets Protectionism by developed countries to developing

countries means that they cannot use their comparative advantage and export to developed countries

They will have limited ability to earn foreign exchange This is especially the case in primary product markets The US pays over $3 billion in subsidies to American cotton

farmers They produce more and push the world price down They export their surplus to developing countries who

don’t benefit from subsidies This damages the developing country’s producers The US does the same with maize, rice and dairy products The same happens in the EU with the CAP where they

overproduce and export sugar, cereals and dairy produce Small scale farmers in developing countries are effectively

deprived of the ability to earn a living Developed countries also use tariff escalation whereby

they put higher tariffs on finished goods so that developed countries become trapped as suppliers of raw materials www.igcseeconomics.com - Resources, Past Papers, Notes, Exercises & Quizes

International barriers to development Inability to access international market

continued… A final factor that prevents countries from

accessing international markets is non convertible currency

Any currency that is used primarily for domestic transactions and is not openly traded on a forex market.

This usually is a result of government restrictions, which prevent it from being exchanged for foreign currencies

Most operate a fixed exchange rate where the domestic currency is pegged to the US Dollar

Long term changes in the terms of trade Changes in the relative prices of exports and

imports have a marked effect upon the ability of developing countries to trade internationally

If commodity prices fall over time the revenues fall and so does their ability to buy imports


Trade Strategies for economic growth and development Import substitution Remember that growth is not development but

if it can generate income it may lead to development

Import substitution is a strategy to produce as many products domestically rather than import

This means less leakages from the economy To do this the government will need to

Decide what to produce domestically – probably labour intensive, low skill manufactured goods such as clothes and shoes

Subsidise domestic industries Implement a protectionist system with high

import tariffs This will protect jobs in the domestic industries,

protect the local culture and protect the economy from the power of multinational corporations.


Trade Strategies for economic growth and development Import substitution The disadvantages of import substitution are

It may only protect jobs in the short run; if there is little growth there will not be much job creation

The country does not enjoy the advantages of comparative advantage and specialisation and will produce inefficiently

The lack of competition may drive domestic industries to be inefficient and not invest in R&D

Domestic supply constraints may lead to inflation Other countries may take retaliatory protectionist

measures The main countries to adopt this strategy were in Latin

America Former colonies also gained their independence by

doing this The problem was that government overspending lead to

debt crisis and countries had to go to the IMF for help


Trade Strategies for economic growth and development Export promotion Often called export led growth Growth is achieved by concentrating on increasing

exports and export revenue The country will need to adopt some of the following

policies Liberalised trade – open up markets to foreign

competition Liberalised capital flows – reduce restrictions on FDI A floating exchange rate Investment in infrastructure that allows trade to take

place Minimal government intervention

Export growth based on primary products is unlikely due to falling commodity prices and protectionism from developed countries

It is usually focused on manufactured products The Asian tigers started by manufacturing labour

intensive products and eventually moved onto more sophisticated capital intensive products www.igcseeconomics.com - Resources, Past Papers, Notes, Exercises & Quizes

Trade Strategies for economic growth and development Export promotion - evaluation There are a number of problems with export led growth With the success of the Asian Tigers developed

countries lobbied their governments to place tariffs on developing countries which removed their comparative advantage

Developed countries used tariff escalation to put higher tariffs on processed goods and assembled products pushing the developing countries back to primary products

In the assumptions required for export led growth it mentions ‘little government intervention’ however the Asian Tigers succeeded because their governments intervened arguing the infant industries needed protection

If countries attract MNCs they may become powerful and lead to problems (next chapter)

Export promotion could lead to more income inequality giving growth but not necessarily economic development www.igcseeconomics.com - Resources, Past Papers, Notes, Exercises & Quizes

Trade Strategies for economic growth and development Trade Liberalisation The WTO attempts to promote trade liberalisation (removal of

protectionism) to try to help developing countries and allow them to benefit from their comparative advantage

The World Bank, the IMF and the US Treasury department, in return for financial help, insists that developing countries follow the Washington Consensus A balanced budget (fiscal) Spending priorities must be basic health and education Interest rate liberalisation A competitive exchange rate Trade liberalisation Liberalisation of FDI flows Privatisation Deregulation Secure property rights

There has been a lot of criticism of this and some argue that these conditions are only set so that MNCs can get access to low cost labour

Many Latin American countries have been successfully moving to an inward policy


Trade Strategies for economic growth and development Bilateral and regional trade agreements The more agreements that are made the

greater will be the ability of developing countries to trade and so gain growth and eventually development

Diversification Many developing countries are now pursuing

export diversification to gain growth The aim is to move away from just primary

products to manufactured and semi-manufactured goods

This helps to protect themselves from volatile price changes

There will also be increased use of technology and increased demand for skilled workers

The problem of tariff escalation still exists Plus a more highly qualified workforce is

required www.igcseeconomics.com - Resources, Past Papers, Notes, Exercises & Quizes

Development Strategies Fair Trade Organisations Fair Trade organisations ensure that farmers in developing

countries get a fair price and earn a decent income Consumers will pay a higher price for goods that have the

fair trade mark because they want to contribute to better conditions for producers

A trading company wishing to qualify for the International Fairtrade Certification Mark must meet the following criteria Product must reach trader as directly as possible with

few, if any, intermediaries Product must be purchased at minimum price Producer receives a premium for goods that are

certified as organic The trader must be committed to a long term contract Producer has access to credit from trader Producers must be managed democratically – no use of

child labour Sustainable farming methods must be used The fairtrade premium must be used to aid local

community development

Watch Fair Trade Video Watch Chocolate Slavery Video


FDI and economic development


What do you need to know?

• Describe FDI and MNC

• Explain why MNCs what to expand into less developed countries

• Describe the characteristics of a LDC

• Evaluate the impact of foreign direct investment for economically less developed countries.


What is FDI? Foreign Direct Investment is

long term investment by private multi national corporations (MNCs) in countries overseas This can be building new

factories or buying existing companies


What are the characteristics of a LDC? • low levels of GDP per capita, • high levels of poverty • relatively large agricultural sectors • large urban informal sectors • high birth rates • Shortage of capital (savings gap) • Mass unemployment • Lack of productivity


Why are MNCs attracted to foreign countries Rich in natural resources

such as oil and minerals Huge and growing

markets – if they locate there they have better access to more customers and growing incomes lead to more demand

Costs of labour tend to be much lower in developing countries

Government regulations tend to be less – cost of doing business is less


Advantages associated with FDI Developing countries tend to have

large savings gaps which FDI can fill MNCs can provide employment and

improve the workforce with education and training

Give access to research and development

Multiplier effect of increased employment

Tax revenue from the corporate profits which can be used to help build better infrastructure

MNCs may prompt countries to build infrastructure so that they can operate there

May give consumers more choice and lower prices

A significant proportion of China’s exports are produced by foreign firms. Through joint ventures with foreign firms Chinese firms have grown rapidly


Disadvantages associated with FDI Often bring their own management and

only used low skilled workers limiting the host country’s ability to acquire new technologies

Some MNCs will be offered subsidies to locate in a developing country which reduces government revenue available for development

MNCs practice transfer pricing so that they make the least profit in the low tax areas meaning there is very little corporate tax advantage and profits are repatriated to home country

Negative externalities and exploitation of workers due to low levels of regulation

MNCs may strip country of resources and then leave

If they are there for the natural resources they may use capital intensive methods which create little employment


Investment in Africa

First we will look at investment by Indian companies and then Chinese companies. I have used videos for the Indian example as there is a recent news article on the Industrial park mentioned.


Aid, debt and economic development


What is Aid? Foreign Aid is any assistance that is given to a country that

would not have been provided through normal market forces – What does this mean?

Aid can be given by government agencies or NGO’s (non government organisations)

There are two main types of aid depending on their purpose Humanitarian Aid and Development Aid

What do you think the difference is between these types? In pairs discuss the reasons for the need for aid After a natural disaster or war To help achieve economic development To strengthen or create strategic alliances To fill the savings gap and encourage investment To improve the quality of human resources To improve levels of technology To fund specific development projects


Humanitarian Aid This is aid given to

alleviate short term suffering due to droughts, wars, or natural disasters

It can be described as grant aid; it is short term provided as a gift and does not have to be paid back

The three main forms are Food aid Medical aid Emergency aid e.g.

temporary shelters, tents, clothing, fuel, heating and lighting

Looking at these points can you develop them by highlighting the positive impact and limitations of this type of aid


Development Aid This type of aid is given in order

to alleviate poverty in the long run and improve the welfare of individuals

It is sometime referred to as ODA – Official Development Assistance

There is a committee called the Development Assistance Committee (DAC) which organises development aid for the OECD countries

In the 1970s the UN general assembly agreed that developed nations would aim to spend 0.7% of GNI on development aid although many are still far from this target

Bilateral aid is aid given directly by one country to another Multilateral aid is aid given by rich countries to international aid agencies who then decide where the aid is most needed

Aid could be Bilateral or Multilateral…. What do you think the difference is?


Of the 15 only Denmark, Luxembourg, Netherlands, Norway and Sweden have hit the target The US is one of the worst at 0.2%

Do you remember what the letters in DAC and ODA stand for?


Motivations of EMDC giving aid Develop these points further

Political and Strategic

Economic

Humanitarian


Types of Development Aid Long term loans

Payable over 10 to 20 years Very low interest rate

Tied aid Grants or loans given on the condition that funds are used to buy goods

and services from the donor country Project aid

Given for a specific project Often given as grant aid (no repayment necessary) Projects are often to improve infrastructure The World Bank is one of the main suppliers of project aid

Technical Assistance Aid Aims to raise the level of technology (foreign technology and technicians

are sent to developing country) Aims also to raise quality of human capital Foreign scholarships may be given too

Commodity Aid E.g. edible oils, seeds, fertiliser, chemicals, cement, steel, pumps and other

equipment


NGOs – Non Government Organisations The priority for most is to promote

economic development, humanitarian ideals and sustainable development

Their work might be to provide emergency relief or provide long term development assistance

They plan and implement specific projects and lobby government to influence public policy

They often work in areas where official aid does not reach

Examples are working directly with poor people such as literacy programmes, health education, AIDs prevention projects, micro credit schemes, immunization etc.

Many focus their attention of women in particular as they recognize the value of raising women’s incomes and status in achieving overall economic development


Concerns about Aid (Evaluation) While it is generally agreed that humanitarian aid is

necessary to relieve short term suffering there is a question mark over development aid and there seems to be no significant correlation between aid and development

Corruption may mean that aid does not reach those that need it

It is often argued that developed countries give aid to those of political or economic interest to them Japan gave 617 million yen to St Kitts and Nevis

and US$17 million to Nicaragua Both voted with Japan to end the whaling ban

It is generally agreed that tied aid is not as effective as untied aid The developing country may have to buy more

expensive goods and services from the donor country

It creates no employment or extra output in the developing country

Imports may replace domestic goods and further damage employment

The UK made tied aid illegal in June 2002


Concerns about Aid (Evaluation) Continued dependency on aid may mean

that there is little incentive to be innovative and people may develop a welfare mentality

Some believe that aid is focused too heavily on the industrialised sector which cause an income gap between those in that sector and the traditional agricultural sector

Aid is often only available if the country agree to certain economic policies which emphasise free market principles which might be not be in the best interest of the developing country

People in developed countries (particularly in times of recession) are beginning to suffer from aid weariness They think that their economic problems are

more important than aiding developing countries which leads to a reduction in the flows of aid


The role of international debt


Focus for today

Meaning of foreign debt Why countries borrow from creditors Why do some countries become indebted? Role of IMF Role of World bank Problems of servicing the debt - effect on

development Cancelling of the debt – outcome of this


Indebtedness overview One of the major drawback to growth and development in developing

countries is the level of debt repayments that these countries have to make on money previously borrowed

The value of the commodities that a Third World country exports can go down by large amounts. This makes it much more difficult for the country to repay its loans. In Latin America, for example, debt is growing faster than

earnings from exports. Most loans to the Third World have to be repaid in hard currencies.

Hard currencies are stable currencies; that means their value does not change very much. The Japanese yen, the American dollar and the Swiss franc are examples of hard currencies.

Developing countries have soft currencies - they go down in value. Therefore, when the value of a developing country's money goes down (as it often does), the cost of its debt rises. It takes more of the country's own currency to pay back the same amount of hard currency.

Many developing countries have very large debts, and the amount of money they owe is quickly increasing. Trying to pay off the debt (debt service) has become a serious

problem for these countries, and it causes great hardship for their people.

Sub-Saharan Africa pays $10 billion every year in debt service. That is about 4 times as much money as the countries in the region spend on health care and education.

In addition, many of these loans are made by governments or organisations like the IMF. These loans often carry strict conditions with them, like cuts in spending on health care, education and food subsidies. This makes life even worse for people in the indebted countries.


Domestic Factors� and� Economic Development�Slide Number 2Slide Number 3Group workSlide Number 5Slide Number 6Slide Number 7Slide Number 8Slide Number 9Slide Number 10Slide Number 11Slide Number 12Slide Number 13Slide Number 14Slide Number 15International Trade and Economic DevelopmentSlide Number 17Slide Number 18Slide Number 19Slide Number 20Slide Number 21Slide Number 22Slide Number 23Slide Number 24Slide Number 25Slide Number 26Slide Number 27FDI and economic developmentWhat do you need to know?Slide Number 30Slide Number 31Slide Number 32Slide Number 33Slide Number 34Investment in AfricaAid, debt and economic developmentSlide Number 37Slide Number 38Slide Number 39Slide Number 40Slide Number 41Slide Number 42Slide Number 43Slide Number 44Slide Number 45The role of international debtFocus for todaySlide Number 48

Documents

Domestic Factors and Economic Development€¦ · sheller – turned by hand and is used to shell nuts Solar cooker for consumers – aids development because ¾t doesn’t need i