IB Economics SL: Development Economics

Introduction to development
1. Economics Growth
  1. Increase in GDP (quantitative measure)
    1. Limitations of GDP as measurement
      1. Shadow economy not registered
      2. Regional variations
      3. Externalities
      4. Quality change
      5. Amount of leisure time
      6. Difference in purchasing power
2. Economics Development
  1. Improvement in quality of life (qualitative measure)
  2. Reduction in poverty and unemployment, improved health care and education; distribution of income; freedom of choice; environmental protection
3. SR: each can exits without the other LR: Both need to be there, otherwise fails
4. Characteristics of Economics Growth
  1. Variations in long-run growth rates
    1. ELDC high rates due to low income EDC low rates due to high income
    2. GDP per capita
  2. Changes associated with economic growth
    1. Primary- Secondary- Tertiary (due to income elasticity of demand)
    2. Urbanization
    3. Growth in GDP per capita
    4. Increased productivity
    5. Increased international trade
  3. Pollution and environmental degradation
    1. Deforestation
    2. Loss of biodiversity
    3. Soil degradation
    4. Hazardous waste
    5. Air/ water pollution
    6. Global warming
  4. Income inequality
    1. Prioritize growth
      1. Investment from high income earners' savings
        top 10%, unequal distribution
  5. Sustainable development
    1. economic growth in the short run must not compromise the ability of an economy in the long run to meet the needs of future generations
    2. Solutions
      1. Government provision of basic sanitation and clean water
      2. Extension of property rights
      3. Prohibition of polluting activities
      4. Pollution taxes
      5. Tradable pollution permits
      6. Education of farmers and communities
      7. Family planning
      8. Removal of subsidies that encourage the use of fossil fuels
    3. Common characteristics of ELDCs
      1. Low levels of GDP per capita
      2. High level of poverty
      3. Relatively large primary sector
      4. Large informal markets
      5. High birth rates
      6. Low levels of productivity
      7. High levels of unemployment/ underemployment
      8. Dependent upon developed economics
    4. Diversity between ELDCs
      1. Historical background (colonization)
      2. Resource endowment and geographical factors
      3. Political structures
        Fiscal policies
      4. Industrial structure
      5. Ethic/religious factors
  6. Poverty Trap
    1. Low income Low saving Low investment Low econ growth
    2. Low income Low education Low human capital, Low productivity
  7. International Development Goals
    1. Eradicate extreme poverty and hunger
    2. Achieve universal primary education
    3. Promote gender equality and empower women
    4. Reduce child mortality rate
    5. Improve maternal health
    6. Combat HIV/AIDS and other diseases
    7. Ensure environmental sustainability
    8. Develop a global partnership for development
Measuring Development
1. Indicators of Development
  1. Indicators: due to vagueness of development
    1. Monetary/Financial
      1. GDP/GNP
      2. GDP/GNP per capita
        Limited to income distribution
      3. PPP with GDP/GNP per capita
    2. Health
      1. Birth rates
        High in ELDCs
      2. Life expectancy at birth
        Low in ELDCs
      3. Infant mortality rates
        High in ELDCs
      4. Population growth
        High in ELDCs
    3. Education
      1. Literacy rates
      2. Net primary education enrolment
      3. Primary teacher/pupil ratio
    4. Important: Compare and contrast figures
  2. Composite Indicator
    1. Human Development Index (HDI)
      1. GNP per capita, life expectancy and literacy rates
      2. Compare and Contrast
        Difference in HDI ranking and GNP per capita
Domestic Factors
1. Education and health
  1. Opportunity Cost from government
    1. But its merit G&S
  2. Entrepreneurs
  3. High labor supply - low GDP per capita and vice versa
2. Appropriate technology
  1. Investment
    1. the forgoing of current consumption for increased future consumption
  2. Appropriate to labor supply
    1. Capital-intensive
    2. Labor intensive
  3. Low costs to marginally increase production
    1. e.g. bikes or motorcycles
3. Credit and micro-credit
  1. Investment needs Saving, which requires surplus of income
  2. Micro-credit schemes
    1. Systems of small loans for income-generating activities which enable poor communities in ELDCs to gain some economic stability
    2. Aim to diversify skills in local communities
      1. Combat over-specialisation
    3. After some financial and skill training
4. Empowerment of women
  1. Lower birth rates
  2. Underemployment of women
  3. Reduce child malnutrition
  4. Reach few Development Goals
5. Income Distribution
  1. Unequal constrains econ. growth
    1. Low income high propensity to cosume
    2. High income high propensity to import
      1. Capital flight
6. Institutional Factor
  1. Over-regulation
  2. Property rights
  3. Lack of infrastructure
  4. Political instability
  5. Large informal economy
International Trade
1. International Trade problems
  1. Over-specialisation
    1. Short range of exports
      1. Deterioration of Term of Trade
  2. Primary product price volatility
    1. Hard to plan and invest
      1. Oil and gas
  3. Inability to access international markets
    1. "Free Trade" EDCs subsidize commodities
      1. ELDCs can't compete
        Unable to export
2. Trade Strategies
  1. Open, outward-orientated (export promotion)
    1. Free Trade
      1. Specialize in manufactured goods rather than primary goods which ELDCs have comparative advantage
        Commodities have low YED
        E.g. China and India
  2. Closed, inward-orientation (import substitution)
    1. Protectionism: Tariff, Quotas and substitutes
      1. Low growth due to lack of movement of resources
        e.g. Ghana and South American countries
  3. Trade liberalisation
    1. Movement towards free trade, specialise in G &S with comparative advantages
  4. WTO
  5. Diversification
    1. Aim to gain stable revenue from manufactured goods
    2. Capital investment and technology
  6. Bilateral and regional preferential trade agreements
  7. Fair trade organization
    1. Beneficial contracts and fair prices for producers in ELDCs
      1. Training for long term stability
Foreign Direct Investment
1. Activities of MNCs
  1. Potential Adv.
    1. Investments helping to overcome saving "gap"
    2. Employment
    3. Training and education, expertise and R&D
    4. Improvements to local infrastructure
    5. Tax Revenue
    6. Local multiplier effects
    7. Competitive benefits
    8. Wider choice and lower prices for ELDC consumers
  2. Potential Dis.
    1. MNCs don't use local employees for high income positions
    2. Profits repatriated and taxes avoided
    3. Crowding out
    4. Political Influences
    5. Take advantage in different tax rates
    6. Use then leave
    7. Take advantage of "relaxed" labor and environmental regulations
Aid and Multilateral Assistence
1. Sources of Aid
  1. Donor government ODA
  2. NGOs
2. Types of Aid
  1. humanitarian (food, medical and emergency relief in short term)
  2. Development (grants, long-term loans, project and tied aids and technical assistance for long term development goals)
  3. Bilateral (individual governments) and Multilateral (e.g. World Bank)
3. Evaluation
  1. Adv
    1. Fills saving and foreign exchange gaps
    2. Funds health/education/infrastructure
    3. Aids recovery from disaster
  2. Dis
    1. Does not reach those most in need
    2. ELDCs lack skills to carry out projects effectively
    3. Food aid causes dependency
    4. Dependency culture develops
    5. Aid strengthens government control
    6. Corruption
    7. Unsustainable industrilaisation
4. Trade vs. Aid
  1. Free Trade Arguments
  2. Protectionism Arguments
5. The IMF
  1. Promote stabilization polices
    1. Sharp shocks on ELDCs due to fiscal reforms
      1. Ineffective
  2. Dominated by rich countries
  3. Sustainable econ. Growth
6. The World Bank
  1. Breaking poverty cycles
    1. Healthcare/education provision
    2. Access to credit
    3. Effective tax system
    4. Property right
    5. Empowerment of women
    6. Reduced corruption
    7. Infrastructure
    8. Innovation
  2. Dominated by rich countries
    1. Scope leads to widening income distribution
International Debt
1. International finance
  1. Debt hampers Growth and Development
  2. Structural Reforms
    1. Pays debt, but widens income distribution and loss of welfare
  3. Capital Flight
  4. Non-converertible currency
  5. Debt relief Funds with strict policies to aid ELDCs with high debts
Markets vs. Intervention
1. Market-oriented Policies
  1. Policies
    1. Free Trade
    2. Floating exchange rate
    3. Labor market reforms
    4. Deregulation and privatisation
    5. Liberalised flows of capital, goods and services
  2. Strengths
    1. Reduced incidence of government failure
    2. Efficient working of the price mechanism
    3. Competition and efficiency
    4. Allocative and productive efficiency from reduced barriers to entry and the movements of resources
  3. Weaknesses
    1. Market failure
    2. Asymmetric info in market
    3. Weak institutions needed for effective markets
    4. Income/access to resource and credit inequality
    5. Development of dual economy
2. Interventionist Policies
  1. Policies
    1. Provision of infrastructure
    2. State provided/subsidized education and healthcare
    3. Welfare safety nets (basic levels of welfare)
    4. Demand-side policies to maintain macro stability
  2. Strengths
    1. Correction of market failures
    2. Stable macro objectives
    3. Reduced income inequality and safety nets provided
    4. Infrastructure provision
  3. Weaknesses
    1. Government failures
    2. red tape, bureaucracy and corruption
    3. Planning problems through lack of information and time-lags
3. Market with government intervention
  1. Good governance
    1. 'How' rather than 'what'
  2. Interventionism good at education/healthcare
  3. Market good at export promotion, privatization and less barrier to trade
  4. However, every countries is unique, thus no "blue print"
  5. Start with interventionism then gradually move to market-based is ideal

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IB Economics SL: Development Economics

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