Download Topic 4.3.2 Factors influencing growth and development student

Emerging and developing economies:
factors influencing growth and development
4.3.2 Unit content
Students should be able to:
• Evaluate the impact of economic factors in different
countries: primary product dependence, volatility of
commodity prices; savings gap: Harrod-Domar model;
foreign currency gap, capital flight, demographic
factors, debt, access to credit and banking,
infrastructure, education/skills, absence of property
rights
• Evaluate the impact of non-economic factors in
different countries
What is economic growth? Economic development?
• What is economic growth?
• What is economic development?
• Which is subjective? Which is objective?
Draw economic growth on a PPF diagram
Developed and Developing Country Growth
Source: IMF
% growth in real GDP
10
8
6
4
2
0
-2
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
-4
Short run or long run economic growth?
• Changes in AD (C+I+G+X-M)
• Changes in short run AS
• Changes in the labour force
• Cyclical changes in real GDP
• Investment rates
• Potential output / trend growth
• Productivity of labour & capital
• Short term external shocks to both demand and
supply
• Short term policy changes e.g. changes in interest
rates
• Technological progress and strength of enterprise
Do these factors affect short run or long run economic growth?
• Commodity prices such as oil, gas and foodstuffs
• Confidence of businesses and households
• Enterprise
• Exchange rates
• Fiscal policy - government spending and taxation
• Innovation
• Interest rates set by the central bank
• Investment
• Labour supply
• Productivity
• Research
• Trading conditions in other countries
Benefits of economic growth?
Drawbacks of economic growth?
Analysing Causes of Economic Growth in Africa
1. Improvement in the terms of trade: higher commodity prices have
boosted revenues for countries who rely on _________ exports
2. Improved governance: wider spread of democratic governments &
improved institutions so more __________ are able to issue bonds
3. Strongly increasing foreign _______ investment: especially in
agriculture, mining, oil and gas, infrastructure, hotels/restaurants
4. Increasing trade including _________ goods with emergence of
key African regional trade hubs bolstered by infrastructure spend
5. Improved macroeconomic management: lower_________, more
credible central banks and improved fiscal balances
6. Rising per capita ________: growth of consumer markets,
extreme poverty rates continue to fall but social progress has been
uneven
7. Growing number of African countries less _________ on primary
commodities & now more diversified services/manufacturing.
countries, dependent, direct, incomes, inflation, manufactured, primary
What economic factors influence growth and development?
i.
primary product dependence and volatility of
commodity prices
ii. savings gap: Harrod-Domar model
iii. foreign currency gap
iv. capital flight
v. demographic factors
vi. debt
vii. access to credit and banking
viii. infrastructure
ix. education/skills
x. absence of property rights
(i) Primary product dependence and volatility in commodity prices
What is primary product dependence?
• When an economy depends on:
(i) Why might primary product dependence be undesirable?
(i) Primary product dependence and volatility in commodity prices
Demand for primary products is often income inelastic.
What does this mean?
• This is the Prebisch-Singer hypothesis.
(i) Volatility in commodity prices
• What type of elasticity do commodities have (PES and
PED)?
• What will this do to the revenue of producers and
foreign currency earnings of the country?
• What might this uncertainty deter?
(i) Selected nations with highest employment in farming
Employment in Agriculture in 2012
HDI rank
183
180
154
174
163
151
139
181
163
145
153
143
142
116
130
147
152
140
93
73
90
Country
Burkina Faso
Mozambique
Madagascar
Ethiopia
Rwanda
Tanzania
Zambia
Sierra Leone
Uganda
Kenya
Cameroon
Cambodia
Bangladesh
Vietnam
India
Pakistan
Nigeria
Ghana
Thailand
Sri Lanka
China
% of total employment
84.8
80.5
80.4
79.3
78.8
76.5
72.2
68.5
65.6
61.1
53.3
51.0
48.1
47.4
47.2
44.7
44.6
41.5
39.6
39.4
34.8
Employment in Services in 2012
% of total employment
12.2
16.1
15.8
13.0
16.6
19.2
20.6
25.0
28.4
32.2
34.1
30.4
37.4
31.5
28.1
35.2
41.7
43.1
39.4
41.5
35.7
Source: HDI report 2015, UNDP
(i) Understanding the Prebisch Singer Hypothesis
• The Prebisch-Singer Hypothesis suggests that, over
the long run, prices of primary goods such as ______
________ in proportion to prices of manufactured
goods such as ______________
• The basic idea: long term _________ in real
commodity prices. ___________ terms of trade for
primary exporters.
The modern reality: labour intensive manufactured
goods are now _________. Strong rise in global
commodity prices until recently. World commodity prices
have started falling again in the last 2 years. Many
commodity exporters have seen terms of trade rise
(ii) Levels of savings and investment
• Why are savings important?
• Savings are needed to:
• Why is this a problem in many poorer countries?
• What does this lead to?
• Increases reliance on :
• This problem is known as the savings gap.
• In Africa for example, savings rates of around 17% of
GDP compare to 31% for middle-income countries.
(ii) Levels of savings and investment
• The Harrod-Domar model suggests that __________
savings lead to _____ investment. This means that
capital accumulation will be low, resulting in ________
economic _______
growth, inadequate, low, slow
(ii) Deriving the savings gap and foreign exchange gaps
• The Harrod-Domar model states that investment,
saving and technological change are the key variables
in determining __________ growth.
• Increased investment in the economy shifts the PPF
__________
• Savings is approximately _______ to investment
• So to increase economic ______ either savings need
to be increased (to fund investment) or technology
needs to improve (so more can be produced)
economic, equal, growth, outwards
(ii) How does investment lead to growth?
1. Injection of demand for capital ___________
benefits those industries
2. ______________ effects
3. More _____________ lifts productivity and hence
incomes
4. Economies of ___________ improves
competitiveness
capital, goods, multiplier, scale
(ii) What are the constraints on the Harrod-Domar model?
(iii) Foreign currency gap
• Why do some developing and emerging economies
face a shortage of foreign currency?
(iii) The foreign currency gap summary
• Many developing countries often face an imbalance
between inflows and outflows of foreign currencies
• A foreign exchange gap occurs when currency outflows
persistently exceed currency inflows for example when:
1. A country is running a persistent ________ account
_________________
2. There is an outflow of capital from investors in money
and capital markets (known as capital ________)
3. There is a _______ in the value of inflows of
remittances from nationals living and working
overseas
(iv) Capital flight
• Capital flight is the uncertain and rapid movement of
large sums of money ______ of a country
• Owners of extra income that could be saved and so
used for investment, often withdraw their money from
the country in search of _________ returns abroad
• Why does it matter?
(iv) Why might capital flight occur (why are investors unconfident)?
• E.g. many Chinese leaders have relatives with offshore
companies and so money is taken abroad
(iv) Capital Flight from China
Capital Outflows from China US$, billions
1000
US$, billions
FX reserves-12 month change
4500
FX reserves (RHS)
2000
-200
1500
-400
1000
-600
500
-800
0
2016
0
2014
2500
2012
200
2010
3000
2008
400
2006
3500
2004
600
2002
4000
2000
800
(v) Demographic factors
• Many developing and emerging countries are
characterised by high birth and death rates. Why does
this matter?
• Some countries face an ageing population which
means that there are _________ workers. This may be
as a result of policies followed in the past; for example,
___________ one child policy.
(v) Malnutrition as a Barrier to Development
• Why do high rates of malnutrition act as a barrier to
development?
(v) Gender inequality as barrier to growth & development:
10, 50, 70, 80, 232
• ____% of the world’s female population aged 15-64 is in work
versus more than ___% men. Proportion of economically active
women has declined in the last 20 years
• Cultural norms: _____ million women live in economies where
they can't get a job without their husband's permission
• Less than ____% of credit for small farmers in Africa is directed
to women. Without ID, women can’t access a bank account,
vote, claim entitlements or inherit property
• Women make up ____% of Africa’s farmers but the majority are
locked out of land ownership
• ______ and Rwanda are the only countries where the share of
women in parliament match or exceed their population share
• Women often work in the informal economy, working in family
businesses, or producing goods for self-consumption. This has
irregular/no pay & little access to social security/legal protection
(vi) Debt
• In the 1970s governments were encouraged to borrow
($) at ______ interest rates to ______ growth.
• In the 1980s interest rates rose and the dollar
_____________ so countries struggled to repay the
interest.
• Mexico defaulted in 1982 and banks ________ lending
• Poorer countries paid more in ________ than they
received in aid.
• Some debt was written off or reduced but then the
financial ______ exacerbated the problem
• Corrupt governments squandered or ______ the
money
appreciated, crisis, fund, interest, kept, low, stopped
(vii) Access to credit and banking
• Why does it matter if individuals cannot access credit
and banking services?
• Who night they turn to and why does this matter?
(vii) Inadequate access to basic financial services
• According to the World Bank, some 2 billion workingage adults globally do not use formal financial
services
• These services include:
1. Access to a _______ account for formal savings
2. Access to ________ finance from recognised
lenders
3. Access to basic _________ services
• Women in developing countries are 20% less likely
than men to have an account and 17% less likely to
have borrowed from a formal financial institution
(viii) Why does poor infrastructure limit economic growth & human development?
Why does it matter if infrastructure is inadequate?
(ix) Education
• Countries which place an emphasis on education and
provide some state funding are more likely to:
• This improves human capital and shifts the _____
outwards.
• What is human capital?
(ix) Human Capital Inadequacies
• In many countries secondary school enrolment is low
and teaching quality / attendance is ______
• There is a _____ gap between expected years of
schooling and mean (actual) years of schooling
• Lower and middle-income countries may suffer from
______ drains of their younger, more skilled workers
• Weak human ________ constrains labour
productivity and ability to harness new technologies
• Human capital deficiencies are often linked to
__________________. Better basic health care and
nutrition often improves human capital by avoiding
brain impairment
big, brain, capital, malnutrition, poor
(x) Absence of property rights
• Why does absence of property rights matter?
Non-economic factors
• Non-economic factors include the impact of:
corruption, poor governance, wars, political
instability and geography.
Challenges Facing Landlocked Countries
• Land locked economies:
without good infrastructure
and efficient logistics, it
can be _________ and
slow to get products to the
countries of trade partners
• Some landlocked
countries such as Ethiopia
have been doing _______
especially when they
achieve regional economic
integration with other landlocked nations. Investment
in _____ transport links
helps to overcome this
development trap
Importance of Institutions for Development
• What are some of the key institutions that need to
function well for development progress to happen?
Why is corruption a barrier to growth & development?
Brain Drains as a barrier to development
• Disadvantages
• Advantages