17.constraints on growth and development€¦ · 17.constraints on growth and development ... •...
TRANSCRIPT
Edexcel A2 Economics Unit 4 Course Companion 2016
tutor2u www.tutor2u.net 113
17. ConstraintsonGrowthandDevelopmentEconomicgrowthandhumandevelopmentprogressisnotguaranteedandsomecountriesstruggletomaintaintheminimumgrowthrateneededtobringdownratesofextremepovertyandsustainachosendevelopmentpath.
Overviewofsomeofthekeylimitersongrowthanddevelopment
Infrastructure PrimaryExportDependency
MacroInstability ConflictandCorruption
HumanCapitalWeaknesses SavingsandForeignExchangeGap
NaturalCapitalDepletion Inequality
Edexcel A2 Economics Unit 4 Course Companion 2016
tutor2u www.tutor2u.net 114
WhatFactorsCanLimitGrowthandDevelopment?
InfrastructureGaps
• Infrastructureincludesphysicalcapitalsuchascriticalenergypowerandwatersupplies,sanitation,telecommunications&transportnetworks,schoolsandhospitals
• Evidenceshowsapositivecorrelationbetweenacountry'sdevelopmentandthequalityofitsroadnetwork• Poorinfrastructure:
o Causeshighersupplycostsanddelaysforbusinesseso Reduceslabourmobilityandhurtstheabilityofexporterstogetproductstoglobalmarkets.
• AccordingtotheWorldBank,transportcostsare25-30%ofproductcostsindevelopingcountriespartlybecauseofdeficienciesininfrastructure
Examplesofinfrastructuredeficiencies:
1. India:India’sirrigationsystemisnotproperlymanagedandthishasmadeitdifficulttosustainfoodgrainproductionwhenrainfallislessthanexpected–aswasthecasein2012.Thishasledtoasurgeinfoodprices,whichhitsthepoorestcommunitieshardest.Forafewdaysinthesummerof2012,muchofnorthernIndiawasplungedintodarkness.About700millionpeoplewereleftwithoutpower,asituationthataffectedtransport,communication,healthcare,industriesandfarming.Indianeedsanestimated$400bninvestmentinthepowersectorifitistomeettheirdevelopmentgoals.AbouthalfofIndia’sroadsarenotpaved.
2. Asia-inAsia,anestimated300mpeoplehavenoaccesstocleandrinkingwaterduetoinfrastructuregaps3. Brazil:Hostforthe2014WorldCupandthe2016Olympics.Brazil’sgrowthisconstrainedbyinfrastructure
weaknesses:In2011,only14%ofherroadswerepaved.TheWorldEconomicForumranksBrazil’squalityofinfrastructure104thoutof142countriessurveyed,behindChina(69th),India(86th)andRussia(100th).
4. Sub-SaharanAfrica:Thecombinedpowergenerationcapacityofthe48countriesofSub-SaharanAfricais68gigwatts–nomorethanSpain’s.Poorroad,railandharbourinfrastructureadds30-40%tothecostsofgoodstradedamongAfricancountries.Achronicshortageofenergy-withfirmsandpeoplefacingacuteshortagesofpower–isamajorbarriertogrowthanddevelopment.AccordingtotheAsianDevelopmentBankReportfor2013,Africacurrentlyinvestsjust4%ofitsGDPininfrastructure,comparedwithChina's14%.Sub-SaharanAfricaloses2.1%ofgrossdomesticproductfromblackoutsalone
Onelimitationtoinfrastructureinvestmentindevelopingcountriesisthattaxrevenuesareloworcomefromanarrowbaseofbusinesses.Manycountrieswillneedtoincreasetheirspendingoninfrastructureintheyearsaheadtodealwiththeconsequencesofclimatechange.AccordingtotheUnitedNations,between1901and1910therewereeighty-tworecordednaturaldisasters,butbetween2003and2012thereweremorethan4,000Examtip:Examinersreportthatstudentsarenotgoodatexplainingexactlyhowimprovedinfrastructurecanraisedevelopment.Takeastep-by-stepapproach,usinggoodappliedexamplestoimproveyourmarks.
PrimaryProductDependency
• Manynationsstillrelyingonspecializinginandexportinglowvalueaddedprimarycommodities• Thepricesofthesegoodscanbevolatileonworldmarkets• Whenpricesfall,aneconomywillseeasharpreductioninexportincomes,anadversemovementintheir
termsoftrade,risksofahighertradedeficitandadangerthatanationwillnotbeabletofinancestate-ledinvestmentineducation,healthcareandcoreinfrastructure
• Despitebeingrichinnaturalresources,formanycountriesthisisacurseratherthanablessing
Sub-SaharanAfrica(SSA)isoftencitedasaregionwhereprimarysectordependenceishigh.SSA’sshareinglobalmanufacturingtraderemainsextremelylow.PrimaryDependencyandExternalEconomicShocks
• Eventsinonepartoftheworldcanquicklyaffectmanyothercountries• Forexample,theglobalfinancialcrisis(GFC)broughtaboutrecessioninmanycountriesandfinancialdistress
inmanyregions.ItalsoledtoafallinFDIflowsintomanypoorercountriesandpressureongovernmentsinrichnationstocutoverseasaidbudgets.
Edexcel A2 Economics Unit 4 Course Companion 2016
tutor2u www.tutor2u.net 115
• Ifaresourcerichcountryexportstheresource,itexposesitselftodamagingvolatilityofitsexportearnings• In2010,economistsBrucknerandCicconefoundthata10%fallinincomeduetofallingcommodityprices
raisesthelikelihoodofcivilwarinsub-SaharanAfricabyaround12%.
LandLockedCountries
• Landlockedeconomiesfacechallengestointegrateinglobaltrade–withoutgoodinfrastructureandefficientlogisticsbusinessesitcanbecostlyandslowtogetproductstothecountriesoftradepartners
• Somelandlockedcountrieshavebeendoingwellespeciallywhentheyachieveregionaleconomicintegrationwithotherland-lockednations.Investmentinairtransportlinkshelpstoovercomethisdevelopmenttrap
TheSavingsGap
• Savingsareneededtoprovidefinanceforcapitalinvestment.Inmanysmallerlow-incomecountries,highlevelsofpovertymakeitalmostimpossibletogeneratesufficientsavingstoprovidethefundsneededtofundinvestmentprojects.Thisincreasesrelianceontiedaid.
• Thisproblemisknownasthesavingsgap.InAfricaforexample,savingsratesofaround17percentofGDPcompareto31percentonaverageformiddle-incomecountries.LowsavingsratesandpoorlydevelopedormalfunctioningfinancialmarketsmakeitmoreexpensiveforAfricanpublicandprivatesectorstogetfundsforinvestment.Higherborrowingcostsimpedecapitalinvestment
VolatileIncomesandVulnerableEmployment
• Volatilitycanbedisruptivetoeconomichealth.Itincreasestherisksforbusinessesconsideringcapitalinvestment,itraisesthechancesofpeoplefallingintoextremepovertyanditmakesanation’sfinancesmorefragileperhapsloweringthescopeforimportantinvestmentinpublicgoods.
Thereisanincreasingtrendtowardstemporarycontractsandinsecureworkacrosstheworld,accordingtotheInternationalLabourOrganization(ILO).Infact,onlyaquarterofglobalworkersareonpermanentcontractswhiletherestareunpaidathome,self-employed,workinginformallyoremployedonatemporarycontract
Edexcel A2 Economics Unit 4 Course Companion 2016
tutor2u www.tutor2u.net 116
WeaknessesinManagement
• Fewtextbooksgiveemphasistothequalityofbusinessmanagementasaconstraintongrowthandsubsequentdevelopment.Afundamentalcauseofpovertyislowwagesandpovertypayislinkedtorelativelylowproductivity(measuredindifferentwayssuchasthevalueofoutputperpersonemployed).
• EconomistssuchasNicholasBloomfromStanfordUniversityintheUSAhavebeenstudyingtheimpactofweakmanagementinsomedevelopingcountriesincludingIndia.Bloomhasarguedforexamplethat“InIndiaarebadlymanaged:equipmentisnotlookedafter,materialsarewasted,andtheftiscommonbecauseinventoryisnotmonitored,defectskeepoccurring.InarecentprojectwiththeWorldBank,wefoundthatgivingmanagementadvicetoIndianfactoriesincreasedproductivityby20%.”
• Weakermanagementmayalsohelptoexplainwhymanypoorercountrieshavenotfullyandintensivelyadoptednewtechnologies.Manyoftheleastdevelopedcountriestendtousetechnologieslessintensively-fewerpeopleuselessadvancedcomputerslessoften.
CapitalFlight
• Capitalflightistheuncertainandrapidmovementoflargesumsofmoneyoutofacountry• Therecouldbeseveralreasons-lackofconfidenceinacountry'seconomyand/oritscurrency,political
turmoilorfearsthatagovernmentplanstotakeprivately-ownedassetsunderstatecontrol• Capitalflightcanleadtoalossofforeigncurrencyreservesandputdownwardpressureonanexchangerate
–drivingthepricesofessentialimportsofgoodsandserviceshigher.• Developingcountriesareestimatedtohavelost$5.86trillionin2001-2010toillicitfinancialflows
Conflicts,CorruptionandPoorGovernance
• Governancereferstohowacountryisrunandwhethertheexerciseofauthoritymanagesscarceresourceswellimprovingeconomicoutcomesandthequalityoflifeforacountry’speople.
• Highlevelsofcorruptionandbureaucraticdelayscanharmgrowthbyinhibitinginwardinvestment• Corruptionmakesitlikelythatdomesticbusinesseswillinvestoverseasratherthanathome.• AccordingtotheUnitedNations,“Corruptionundermineshumandevelopmentanddemocracy.Itreduces
accesstopublicservicesbydivertingpublicresourcesforprivategain.”
Governmentsneedastableandeffectivelegalframeworktocollecttaxestopayforpublicservices.InIndiaforexample,thereare15timesmorephonesubscribersthantaxpayers.Ifalegalsystemcannotprotectprivatepropertyrightsthentherewillbelessresearchanddevelopment&innovation.Conflicts–therehavebeenanestimated150conflictssince1945with28milliondeaths(thisistwicethetollofWW1).Conflictshavehugecollateraldamageeffects–forexample,Angolahaslost80%ofitsfarmlandbecauseof
Keepingtrackofelectionpromises
Lowtransparencyofwheretaxrevenuescomefrom
Howisstatemoneyspentandonwhom?
Corruption
Isthegovernmentdeliveringkeypublicservices?
Howisthismoneyspent?Doesitdelivergoodoutcomesper$spent?
Isspendingeffectiveinpromotinglongrungrowth?
Impact
Canpeopletrustgovernmentandinstitutions?
Howfreeofcorruptionisthegovernment?
Isthedistributionofspendingequitable?
Fairness
Edexcel A2 Economics Unit 4 Course Companion 2016
tutor2u www.tutor2u.net 117
landmines.Mostconflictsareintra-statei.e.civilwarandreconstructioncantakedecadesandmanycountriesremainaid-dependent.About1.5billionpeopleliveincountriessufferingwavesofpoliticalandcriminalviolence.ArecentexampleofthecostofconflictcomesfromtheIvoryCoast.Afteradisputedpresidentialelectioninlate2010violenceeruptedandthecountrydescendedintoafour-monthcivilwarthatkilledanestimated3000anddisplacedaroundamillionpeople.ThewarcouldonlybeendedbyaFrenchinterventioninApril2011.Sincethen,anewgovernmentunderPresidentOuattarahasstruggledtore-establishsecuritybutraidsagainstarmyandpolicyinstallationsstillthreatenstability.CorruptionhaslongbeenabarriertosustainedgrowthanddevelopmentinAfrica.Conflicthashadterribleconsequences;overonethirdofeconomiesinAfricahavesufferedsomekindofwarfarefromRwanda,SierraLeone,Eritrea,Uganda,andSomalia.Corruptioncancostacountryupto17%ofitsGDPaccordingtotheUnitedNations.ThatsaidencouragingprogresshasbeenmadeinbuildingdemocraticinstitutionsinmanyAfricancountries.Economicgrowthcancollapseandgointoreversewhenstatesfail–therearenumerousreasonswhychronicgovernmentfailurecanhampergrowthanddevelopment:
• Failurestoprotectpropertyrightsandprovidesufficientincentivesfornewbusinessestoflourish• Forcedlabour,castelabourandotherformsofdiscrimination–allofwhichwastescarcehumanresources
notleastlimitingtherolesthatwomencanplayinlabourmarketsand–overthelongterm-holdingbackinnovationandtechnologicalprogress(twokeydriversofgrowth)
• Powerelitescontrollinganeconomy-usingtheirpowertocreatemonopoliesthatkeepconsumerpriceshighandblockingsociallyusefulnewtechnologies
• Statelessareas-largepartsoftheworldarestilldominatedbystatelesssocietieswheretheruleoflawbarelyexists
• Publicgoods-chronicfailurestoprovidebasicandeffectivepublicservicessuchaseducation,healthandtransport.Manyoftheworld’sleastdevelopedcountrieshavenotbuilteffectivetaxsystemsandsotheirrevenuebaseisinadequateformuchneededcapitalinvestmentandtheannualrevenuesrequiredtoprovidepublichealthandeducationprogrammes
PopulationDecline,BrainDrainsand/oranAgeingPopulation
• Afallingpopulationcanusuallybeattributedtoemigrationand/ordeathratesexceedingbirthrates.• Ifanationlosesyoungerworkers,thiscanhaveadamagingeffectoncompetitivenessandgrowth• Thechangingage-structureofapopulationalsomatters,leadingtoafallintheratioofworkersto
dependantsi.e.ariseintheage-dependencyratio
DemographicchangeisimportanttomanyofthefastgrowingcountriesinAsia.
• MostcountriesinEastAsiaareexpectedtoexperienceadeclinetheportionoftheirworkingagepopulation(15-64years)tototalpopulationfromnowuntil2025
• Sevencountriesareexpectedtoseedeclinesof10percentormore(includingChina,Japan,ThailandandVietnam)whilethreewillseedeclinesofover20percent(HongKongSARChina,KoreaandSingapore)
• CountriessuchasIndonesia,Mongolia,MyanmarandVietnamareforecasttoseeadeclineintheirpopulationsizeduetoacombinationofemigrationanddemographics
Edexcel A2 Economics Unit 4 Course Companion 2016
tutor2u www.tutor2u.net 118
DecliningpopulationsinEasternEurope
• ManycountriesinEasternEuropefacethechallengeofcontinuedpopulationdecline.Onlytwooutoftwelvecountrieswillexperiencepopulationgrowthaccordingtorecentestimates.
• Therelationshipbetweendemographictrends,per-capitaincomeandeconomicgrowthiscomplex.• Lowerper-capitaincomeshouldleadtohighergrowth,butithasanegativeimpactonthelaboursupply.• ManycountriesinEasternEuropewillhavetorelyoncapitalaccumulationandproductivitygrowthrather
thanlabourforcegrowthtogeneratefutureeconomicgrowth.
Russia–isexperiencingasustaineddeclineintheirpopulationandtheiractivelabourforce.Highlevelsofnetmigration,risingdeathrateslinkedtoexceptionallyhighaccidentratesandtheeffectsofalcoholabusehaveallcontributedtoafallinpopulationtobelow150million.Globallytheworld’spopulationisageing.Withinnext10years,therewillbe1billionolderpeopleworldwide.By2050nearlyoneinfivepeopleindevelopingcountrieswillbeover60Countrieswiththelowestfertilityratein2014Thefertilityrateistheaveragenumberofchildrenbornperwomanofchildbearingageinacountry.Usually,awomanagedbetween15and45isconsideredtobeinherchildbearingyearsSingapore 0.80Macau 0.93Taiwan 1.11HongKong 1.17SouthKorea 1.25Lithuania 1.29Ukraine 1.30Romania 1.32Poland 1.33Slovenia 1.33
Edexcel A2 Economics Unit 4 Course Companion 2016
tutor2u www.tutor2u.net 119
HighrateofInflationandtradedeficitsHighInflation
• Fastergrowingcountriesmayexperiencehighinflationwhichcanhavedamagingeconomicconsequences• Developingcountriestypicallyhavehigheraverageinflationratesthanadvanced,richnations• Theseeffectsofhighinflationinparticularcanhitgrowth
o Fallingrealincomesandprofitstogetherwithhighercostso Thethreatofariseinextremepovertyforthemostvulnerableinanation’spopulationo Reducedplannedinvestmentbybusinesseso Negativeeffectsfromhigherinterestratesusedtocombatinflationproblemso Reducedcompetitivenessininternationalmarketsleadingtoalossofexportsales
PersistentTradeDeficits
• Somecountriesmayexperiencelargedeficitsonthecurrentaccountoftheirbalanceofpayments.Thismeansthatthevalueofimportedgoodsandservicesisgreaterthanthevalueofexportsandnetinvestmentincomesleadingtoanoutflowofmoneyfromtheireconomy.
• Hightradedeficitsmighthavetobecoveredbyforeignborrowing(increasingexternaldebt)orarelianceoninflowsofcapitalinvestmentfromoverseasmultinationals
• Largetradegapscaneventuallyleadtoacurrencycrisisandpossiblelossofinvestorconfidence.
Over-extractionoftheNaturalResourceBase
• Despitebeingheavilyendowednaturalresources,Africahasthehighestpovertyrateintheworld• Naturalresourcesprovideasourceofwealthformanylower-incomecountriesandwhenworldpricesare
high,thereisanincentivetoincreaseextractionratestoraiseshort-termexportearnings.Thismightleadtoahighrateofextractionthatdamagesgrowthpotential
• Deforestationandrapidextractionofoceanicfishstocksthreatendevelopment.TheWorldBankfindsthat350millionjobsarelinkedtothehealthoftheoceansand1billionofthepoorestpeopleintheworlddependonfishastheirmajorsourceofprotein
• Criticalwaterscarcityinagricultureisamajorproblem.TheMDGfordrinkingwaterwasmetin2010,yet1billionstilllackaccesstocleanwater.Thenumbersufferingwithwaterscarcityisexpectedtoriseto2.8billionby2025
• Extremeweathereventsarebecomingmorefrequent.Thedamagingeffectsoftheseextremeclimaticeventsfallmostheavilyonthepoorestandmostvulnerablecommunitiesindevelopedanddevelopingcountries.
LowLevelofInvestmentinHumanCapital
• Tosustaingrowthrequiresimprovementsinproductivity,research&developmentandinnovation.Whilstphysicalcapitalsuchastechnologyplaysarole,sotoodoesthequalityofthehumaninputintoproduction.
• Growthmightbelimitedbyskillsshortagesasbusinessesseektoexpandwhichforcesuplabourcosts.• Highlevelskillsandqualificationsarealsoneededtohelpbusinessestomoveupthevaluechainandsupply
productsthatwillgethigherpricesintheworldeconomy.• Inmanycountriesthereareacuteshortagesofhumancapital.Althoughprimaryenrolmentrateshaverisen,
secondaryenrolmentandteacherqualityispoorandthetertiaryeducationsectoristinyandlowquality.• Highereducationisalsohighlyimportant.Forexample,universityenrolmentinAfricaisonly7%ofthe
relevantagegroupversusaworldaverageof30%• Somecountrieslosesomeofitslimitedskilledworkforcetoothercountriesthroughabraindrain
InequalityofIncomeandWealthAlthoughtwodecadesormoreofglobalisationhasstrengthenedgrowthratesinmanylowerandmiddle-incomecountries,ithasbroughtanincreaseininequalitiesofincomeandwealth.
Edexcel A2 Economics Unit 4 Course Companion 2016
tutor2u www.tutor2u.net 120
• Therearemanypossibledangersofthisnotleastthecostsofsocialtensionandconflictandincreasingspendingoninsurance,lawandordersystemsandgovernmentwelfarebills.
• Recenttheoreticalworkfindsanegativecorrelationbetweenincomeinequalityandeconomicgrowth.Onebook-TheSpiritLevel(KatePickettandRichardWilkinson)findsevidencethatunequalsocietiesmaybecomelesscompetitiveovertime.
• AnIMFpaperpublishedin2013economistsclaimedthat“inequalitycanundermineprogressinhealthandeducation,causeinvestment-reducingpoliticalandeconomicinstability,andundercutthesocialconsensusrequiredinthefaceofshocks,andthustendstoreducethepaceorgrowth.”
EconomicandHumanCostofMalnutritionHighratesofmalnutritioncanseverelyimpairdevelopmentandbringuntoldhumanmisery.Poornutritioncanhaveseriousnegativeeffectsondevelopmentprospects.
• Itimpairsbraindevelopment–nearlyoneinfiveunder-5childreninthedevelopingworldareunder-weight.165millionchildrenunder-5sufferfromstunting
• Itisresponsibleforhalfofallchilddeaths–38%ofunder-fivechildreninthepoorest20%offamiliesindevelopingcountriesareunderweightcomparedto14%ofunder-fivesinthewealthiest20%
• Undernutritioncauses45%ofchilddeathsinsub-SaharanAfrica• Of44countriesinsub-SaharanAfrica,allbuttwohavechildstuntinglevels>20%• ItincreasestherisksofHIVinfectionandcutsthenumberswhosurviveoutbreaksofmalaria• Malnourishedchildrenaremorelikelytodropoutofschoolandsufferreductionsintheirlifetimeincomes• AccordingtotheWorldBank,“theeffectsofthisearlydamageonhealth,braindevelopment,educability,and
productivitycausedbymalnutritionarelargelyirreversible.”
• Lowincomefamiliesspendahigher%oftheirincomes- inequalitiesdepressconsumerdemand• Investmentskewedtowardspreferencesoftherich
Consumptionandmis-allocationofresources
• Incentivesareundoubtedlyneededforenterprise• Butexcessivecompensationcanencouragetoomuchrisk-takingespeciallyinfinancialmarkets
Risk-taking
• Highinequalitydeprivesmanypeopleofaccesstoeducationlimitinghumancapitalgrowth• Manyofthepoorestpaymorefortheirdebt
Marketfailures
• Structuralunemploymentandvulnerableemploymentincreasestheburdenonthestate• Lowemploymentdamagessocialcapital
Unemploymentandsocialcohesion/upheaval
Edexcel A2 Economics Unit 4 Course Companion 2016
tutor2u www.tutor2u.net 121
Therehasbeenprogressinreducingmalnutritiongloballybuthighpricesforbasicfoodsinrecentyearshavebecomeamajorprobleminthefightagainstendemicmalnutrition.Anothereffectisthathighfoodpricesmakesubstitutionofunhealthycaloriesmorelikely,contributingtoglobalobesitylevel.Policiestoreducemalnutrition
1. Spendingonnutritioneducationplusdirectprovisionofmicro-nutrientsupplementsandfortifiedfoods2. Growthmonitoringschemesforthenewlybornandinfantssupplementedwithvitaminprovisionfrom
communityorganisations3. Targetingculturalnorms–insomecountries,girlsareoftenallowedtoeatonlyaftertheirbrothers4. Cashtransfers–i.e.consumersubsidiesthatcanbespentoncertainfoods5. Governmentsubsidiesforgrainpricesandexportbansondomesticallyproducedfoods6. Highermarketpricespaidtosmall-scalefarmers7. Openingupretailmarketstointernationalsupermarketswherefoodpricesmightcomedownthrough
economiesofscaleandincreasedcompetition8. Infrastructurespendingtoimproveaccesstoandqualityofsanitationandcleanwatersupplies
GenderInequalitiesandDiscriminationTheunequalopportunitiesavailabletohundredsofmillionsofwomenaroundtheworldrepresentoneofthebiggestbarrierstogrowthanddevelopment.AccordingtotheUNHumanDevelopmentReport:“Alltoooften,womenandgirlsarediscriminatedagainstinhealth,education,politicalrepresentation,labourmarket,etc.—withnegativerepercussionsfordevelopmentoftheircapabilitiesandtheirfreedomofchoice.”
Edexcel A2 Economics Unit 4 Course Companion 2016
tutor2u www.tutor2u.net 122
1) Justoverhalfoftheworld’sfemalepopulationaged15-64isinemployment,comparedtomorethan8outof
10men.Buttheproportionofeconomicallyactivewomenhasdeclinedinthelast20years2) Inmanycountrieswomenaresubjecttoculturalnormspreventingthemplayingafullandactiverole
a. AccordingtotheWorldBank,232millionwomenliveineconomieswheretheycan'tgetajobwithouttheirhusband'spermission
b. Only1in4womenintheArabworldparticipateinthelabourforcec. Lessthan10%ofcreditforsmallfarmersinAfricaisdirectedtowomend. WithoutID,womencan’taccessabankaccount,vote,claimentitlementsorinheritpropertye. Womenmakeup70%ofAfrica’sfarmersbutthemajorityarelockedoutoflandownershipf. Inonlytwocountries,CubaandRwanda,doestheshareofwomeninparliamentmatchorexceed
theirshareinthepopulation3) Someprogressisbeingmade,from2009to2011,39developingcountriesmadelegalchangestowards
genderparity–butonly38outof141nationssetthesamelegalrightsformenandwomen4) Womeninmanycountrieshaveasubstantialroleintheinformaleconomy,workinginfamilybusinesses,
doingdomesticworkandproducinggoodsforself-consumption.Thistypeofworkgenerallyofferslow,irregularornopayandlittleornoaccesstosocialsecurityorlegalprotection
SavingsGapandForeignExchangeGapLimitedScalesandEfficiencyofFinancialMarkets
• Manyoftheleastdevelopedcountrieshavelimitedfinancialmarketssuchasbanking,moneyandcreditsystems,insurancemarketsandstockmarkets.
• Worldwide,approximately2.5billionpeopledonothaveaformalaccountatafinancialinstitution.Accesstofinancialservicesislinkedtoovercomingpoverty,reducingincomedisparities,andincreasinggrowth
• Theseareessentialforprovidinglongtermcapitalfortheprivatesectorandhelpingtochannelsavingsandprovidefundsforinvestmentprojects.
Edexcel A2 Economics Unit 4 Course Companion 2016
tutor2u www.tutor2u.net 123
• SomeprogressisbeingmadeinSub-SaharanAfrica–therearenow19stockmarketsinoperation–butmostofthesearesmallbyinternationalstandards.TheNigerianstockmarketaccountsforonly3%ofBrazilorIndia’sstockmarketcapitalization.
SavingsGaps
• Manypoorercountriesdonothavesufficientdomesticsavingstobeabletofinancetherequiredrateofcapitalinvestmenttopromoteeconomicgrowth
• Manydevelopingcountriesalsosufferfromashortageofforeignexchangethatcanbeusedtofinanceimportsofconsumergoodsandservices,rawmaterialsandcomponentsandnewcapitalinputs
DerivingthesavingsgapandtheforeignexchangegapsThinkingbacktointroductorynationalincomeaccounting
• Yistotaloutputproducedinagivenyear(GDP)• Cisprivateconsumption• Istandfortotalinvestment• Gisgovernmentconsumption• Xdenotesexports• Mrepresentsimports• Sissavings• Tstandsfortotalgovernmenttaxrevenue
Weknowthat
• Y(GDP)=C+I+G+X-M• YisalsothesumofC+S+T
Rearranging
• C+I+G+X-M=C+S+T
Therefore
• S-I=(X-M)+(G-T)
Thisgivesusanequationexplainingthetotalresourcegapofaneconomyintointernalbalance(i.e.thegovernmentbudget)andalsotheexternalgap(balanceoftrade)OverviewofFinancingforDevelopmentThemainsourcesoffinancefordevelopmentare:
• Savingsfromthedomesticprivatesector• Revenuesofdevelopingcountrygovernmentsthemselves• Overseasdevelopmentassistance(otherwiseknownasoverseasaid)• Loanstakenoutby(orguaranteedby)developingcountrygovernments,frominternationalfinancial
institutionsorprivatesources• Privateexternalfinance,intheformofforeigndirectinvestment(FDI)andotherportfolioflowse.g.into
bondandstockmarkets
Withoutquestion,privatesectorfinancingnowdominatesthefinancialflowsthatarefundingdevelopmentprojectsinmostoftheworld’slowerandmiddle-incomecountries.
Edexcel A2 Economics Unit 4 Course Companion 2016
tutor2u www.tutor2u.net 124
18. CommodityDependenceandthePrebisch-SingerHypothesis
WhatisthePrebisch-SingerHypothesis?
• ThePrebisch-SingerHypothesis(PSH)ismoreofanobservationratherthanacomplextheory.Itsuggeststhatoverthelongrunthepriceofprimarygoodssuchascoal,coffeecocoadeclinesinproportiontomanufacturedgoodssuchascars,washingmachinesandcomputers.
• IfthePSHholdstruethencountrieswithahighexportdependenceonprimaryproductsmayeventuallyloseoutfromaworseningofthetermsoftrade.Theywillhavetoimportagreatervolumeofexportstopayforessentialimportssuchasrawmaterials,consumergoodsandcapitaltechnology.
• ThePSHsuggeststhatrevenuewindfallgainsfromhighworldcommoditypricesmaytobetemporaryandthreatenthemacroeconomicstabilityofsuchcountries–forexampleafallinworlddemandandpricesforaprimarycommoditywillcauseariseinthetradedeficitandthefiscaldeficitforanexportingcountry
• ThosewhobelieveinthePSHtendtobe“exportpessimists”arguingthatexportinglowvalue-addedproductswillnotgenerateenoughforeignexchangecurrencytopayformuchneededexports
• BasedonthePSH,theadviceforthesecountriesistouserevenuesfromprimarycommodityexportstofundeducationandskills.Developingmanufacturingcapacityandgreaterdiversityofoutputisalsoimportant.
Example:ZambiaandNaturalResourceDependence“Zambiaachievedstronggrowthandmacroeconomicstabilityovermostofthelastdecade.However,inthelasttwoyears,theZambianeconomyhasbeenfacingstrongheadwindsfromlargefiscalimbalances,lowercopperprices,andpolicyuncertainties.Thecurrentaccountofthebalanceofpaymentshasdeteriorated,internationalreserveshavefallen,andtheexchangeratehasbeenunderdownwardpressure.”(Source:IMFReport,2015)FinancialFlowsforZambiain2014
• InternationalTrade(%ofGDP) 83%• Foreigndirectinvestment,netinflows(%ofGDP) 10%• Privatecapitalflows(%ofGDP) -8.23%• Netofficialdevelopmentassistancereceived(%ofGNI) 6.1%• Remittances,inflows(%ofGDP) 0.24%• Totalforeigncurrencyreservesminusgold(%ofGDP) 2.51%
ZambiaisarelativelyopeneconomywithatradetoGDPratioexceeding80%.Thecountryscoreslowlyoneconomiccomplexitywiththebulkoftheirexportscomingfromprimarycommoditiesespeciallycopper.FDIinflowsintoZambiahavebeenasignificantpercentageofannualDPbuttheeconomyhasalsoseenastrongnetoutflowofprivatecapital–inpartbecauseofchangingtaxregimesforforeigninvestorsandalsoaweakandvolatileexchangeratethathasledtosomecapitalflight.RemittanceinflowsforZambiaarelowcomparedtomanyotherlowandmiddle-incomecountries.Thecountry’soverseasaiddependencyisalsolow.Zambia’stermsortradeandbalanceoftradebenefittedgreatlyfromthesurgeintheworldpriceofcopperuntil2012.Butsincethen,copperpriceshavebeenfallingsteeply.
82.2 71.6 70.7 80.7
130168.8
304.9 322.8 315.5
233.6
341.7
399.8360.6
332.3 315
0
50
100
150
200
250
300
350
400
450
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014**
PriceinU.S.cen
tsperpou
nd
Edexcel A2 Economics Unit 4 Course Companion 2016
tutor2u www.tutor2u.net 125
OvercomingtheNaturalResourceTrapThisisacrucialissueformanycountrieswhoareblessedwithastrongendowmentofnaturalresources.Thenaturalresourcetraporresourcecursecancomeaboutforavarietyofreasons:
• Riskofpoliticalconflictandcorruption/conflict/landgrabs• Vulnerabilitytochangesinworldpriceswhichcauseshighlevelsofmacrovolatility• Dangerofover-rapidextractionoffiniteandrenewableresources• Risingpricescanleadtoacurrencyappreciation–damagingdomesticindustries
ProfessorPaulCollierhasargued:“Althoughlargedepositsofkeyresourcessuchasoilwouldusuallybeconsideredablessingforthedevelopmentprospectsofacountry,itoftenturnsouttobea‘resourcecurse’”ProfessorJosephStiglitzhasargued:“Resource-richcountriesoftendonotpursuesustainablegrowthstrategies.Theyfailtorecognisethatiftheydonotreinvesttheirresourcewealthintoproductiveinvestmentsaboveground,theyarebecomingpoorer.Conflictoveraccesstoresourcerentsgivesrisetocorruptandundemocraticgovernments.”Whichstrategiesmighthelptoovercomethenaturalresourcecurse?
Bettergovernment– includingmoretransparency&accountabilitytotaxpayers
StabilisationFund/SovereignWealthFund– e.g.tofundhumancapitalandcriticalinfrastructure
Highertaxesofnaturalresourceprofits(extractingresourcerents)
Diversification – investmentinprocessingandmanufacturing– givinghighervalueadded