Developing and emerging economies

Emerging and developing countries

Economic Growth and Development

Economic growth is a sustained increase in a country's productive potential, real GDP/GNI and productivity within the form of the factors of production. Economic development - progress in expanding economic freedom, sustained improvement in economic and social opportunities and growth in national and personal capabilities. Features of emerging economies include Rapid industrialisation - making the transition from primary product dependency to high skilled manufacturingFaster long term economic growthSome people are still in absolute poverty but economic growth is taking them out of this. Businesses still do not remain a part of global markets. How does economic growth increase development? Increases incomes per capita and so lifts people out of povertyIncreased GDP gives people greater financial resourcesCreates new jobs due to the increase in incomeSupernormal profit can be invested.

However, there are risks to economic growthDemand-pull and cost-push inflation, which will lead to higher interest rates which could lead to a downturn in investment - there is a conflict between macroeconomic objectives.Environmental effects - increased pollution, increased negative externalities, unsustainable extraction of resources Inequalities of income and wealth - increases in national income may lead to higher income for those at the top and so increased social divisions.

LEDCS and measures of development

There are 10 frequent characteristics of less economically developed countries Lower incomes per capita meaning that there is a low savings rate. Lower absolute levels of productivity (both in labour and capital) Higher dependency on export incomes from primary product dependency. Due income only made from primary product dependency, this means that a large proportion of the population work in the agricultural sector and in rural areas. Limited scope and support by the welfare system due to corruption put in by Western governments. Fast population growth, due to the lack of education, so a faster growing population with rapid urbanisation. Weakness in infrastructure due to corruption Weakness in institutions e.g. government + civil service Protectionist measures Closed capital markets

There are 3 measures of development that are you required to know. Human Development Index (HDI) . This is made up of Schooling - the mean years of schooling compared with the expected years of schooling Life expectancy - minimum and maximum value of life expectancy Standard of living - this is measured by GNI per capita as it takes into account inflation and remittances. There are limitations to this though. For example, measuring the number of years of schooling does not take into account the quality of education, HDI does not take into account qualitative measures (E.g. human rights) and GNI per capita does not take into account inequality.Gender inequality adjusted HDI - range that takes into account the extent to which women face inequalityMultinational Poverty Index (MPI) - possession of some assets, child mortality etc.

What influences growth and development?

1. Infrastructure gaps - corruption within a government means that infrastructure (which is a public good) limits development because it increases supply-costs for businesses, increases geographical immobility and reduces competitiveness making a country less attractive for FDI2. Primary product dependency - next slide3. Conflict and corruption - corruption causes a government failure because there is a lack of transparency of how tax revenue is gained and how it is spent. This may lead to a lack of efficient investment and can inhibit FDI too.4. Human capital weakness - corruption within the government leads to a lack of education (which is a public good). This results in a decrease in secondary + tertiary education as well as low teaching quality. For some middle income families, they may migrate to a country with a better education system leading to a brain drain. 5. Capital flight - this is the uncertain movement of capital out of a country. This can cause an increase in hot money outflows and so cause the currency to depreciate or a lack of funds for backs to lend out for investment.

6. Macroeconomic instability7. Savings and currency gap - using the Harrod-Domar, the rate of growth is dependent on the savings with a country and the productivity depends on the capital-output ratio. Savings lead to increased lending by the banks so an increase in investment which should increase GDP and capital stock. In low-income countries there are unstable financial institutions as well as a low education quality meaning that savings are low. 8. Natural Capital Depletion9. Lack of competition within markets - within some markets firms have monopsony power over labour, leading to lower wages, and monopoly power leading to X inefficiency which leads to an increase in inflation.11. Landlocked - due to the lack of infrastructure it can become expensive for firms to export goods to global markets. 12. Gender inequality - lack of education for girls means a loss of skills and productivity. 13. Malnutrition - malnutrition impairs brain development as well as causing child deaths. It can cause children to drop out of school and so a reduction in median incomes.

Primary product dependency and trade

Why is trade positive for a developing country?1. Acts as a source for foreign currency to help fund a balance of payments deficit and build up foreign reserves which can help to manipulate the currency, finance imports and capital investment 2. Acts as an injection info the circular flow of income. This can create positive multiplier effects. 3. Increased employment in export industries which leads to greater per capita incomes and employment. 4. Falling prices caused by the theory of comparative advantage and trade creation leads to an increase in real incomes due to falling prices, Why is trade bad for a developing country?1. In some industries, such as the agricultural industry, there are volatile global prices due to an inelastic PES leading to volatile incomes. 2. Exports can be affected by geopolitical uncertainties and shifts in demand. 3. Capital flows into developing nations can be volatile, due to unstable financial institutions, and so leads to a lower incentive for FDI

4. Opening up trade and investment may cause structural unemployment in some industries. 5. Countries that specialise in natural resources may suffer from the natural resources trap The Natural Resources Trap Developing countries may export a narrow range of goods and services - mainly agricultural goods. These are at a higher risk of volatile global prices, because of an inelastic price elasticity of supply. This creates many problems. Firstly, there will be a decrease in the education level as workers are attracted to the agricultural industry which has a low level of productivity and skill level. Secondly, when prices are low, then firms are likely to shed workers, or decrease wages, leading to an increase in poverty. Thirdly, workers will be stuck in structural unemployment because they do not have any transferrable skills from the agricultural industry. Natural resources can also fuel corruption as well as inequality as only a few people have access to the natural resources.

What are the strategies to improve primary product dependency and price volatility 1. Better government - many Western countries have installed corrupt governments that have a lack of transparency so that they can exploit natural resources. A more transparent government can give a better idea of what is happening to natural resources. 2. Sovereign Wealth Funds - these are used to fund human capital and infrastructure when there is a decrease in aggregate demand. Used for diversification.3. Higher taxes on natural resource profits - extracting resource rents and then reinvesting them in the domestic economy to improve diversification and supply-side policy. This depends on corruption.Diversification should make the economy less vulnerable to external shocks.

Primary Product Dependency solutions

Buffer stock schemes (see Theme 1) aim to stabilise the market price of agricultural goods by buying up excess stock when the price is low and selling them off when the price is high due to decreased stock. They only work for storable commodities but most buffer stock schemes are loss making and have collapsed in the past. More effect methods may be 1. Mobile technology2. Encouraging farmers / branding my farmers3. Improved storage facilites / irrigation 4. Policies for poorer farmers.

Foreign Direct Investment

A multinational company is a business that has significant operations in more than one country. They try to exploit economies of scale by concentrating production within a few international locations. Benefits1. Provide significant employment and training to labour force in the host country as well as skills and expertise which helps to increase productivity and employment. 2. Help to increase GDP of the host country by spending on domestic goods and services on investment etc. 3. Improve competitiveness due to an increase in competition. 4. Increased consumer and business choice 5. Profitable MNCs act as a source of tax revenue. Costs1. Domestic businesses may not be able to cope with large MNCs2. May not act in a responsible or ethical way e.g. imposing their culture on the host country, low wages, working conditions3. Capital flight from moving profits back to host country

4. MNCs may use schemes such as tax avoidance and transfer pricing in order to avoid paying tax. Many MNCs are willing to set up within emerging economies because there is a growing middle-class of consumers who are willing to spend on luxuries and cultural shifts meaning there is an increase for more 'Western' types of goods. MNCs may also decide to move to a country due to good infrastructure and high-skilled but low paid labour. MNCs, however, are less willing to set up in developing economies due to the political instability, cultural differences and lack of productivity. Governments may use polices such as low corporation tax, trade and investment deals, flexible working conditions and high quality infrastructure to attract this.