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Edexcel A2 Economics Unit 4 Course Companion 2016

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17. ConstraintsonGrowthandDevelopmentEconomicgrowthandhumandevelopmentprogressisnotguaranteedandsomecountriesstruggletomaintaintheminimumgrowthrateneededtobringdownratesofextremepovertyandsustainachosendevelopmentpath.

Overviewofsomeofthekeylimitersongrowthanddevelopment

Infrastructure PrimaryExportDependency

MacroInstability ConflictandCorruption

HumanCapitalWeaknesses SavingsandForeignExchangeGap

NaturalCapitalDepletion Inequality



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.



• 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



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



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



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



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.



• 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



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.”



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.



• 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.



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.

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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

Download - 17.Constraints on Growth and Development€¦ · 17.Constraints on Growth and Development ... • Few textbooks give emphasis to the quality of business management as a constraint

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