economic development review question

8/12/2019 economic development review question

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2/23

Explain the difference between economic growth and

economic development

Economic developmentis a normative concept i.e. itapplies in the context ofpeople'ssense of morality(rightand wrong, good and bad). The definition of economicdevelopment given by Michael Todaro is an increase inliving standards, improvement in self-esteem needs andfreedom from oppression as well as a greater choice. Themost accurate method of measuring development istheHuman Development Indexwhich takes into accountthe literacy rates & life expectancywhich affectproductivity and could lead to Economic

Growth. It also leads to the creation of more opportunitiesin the sectors of education, healthcare, employment andthe conservationof the environment.It implies an increasein the per capita incomeof every citizen.
http://www.diffen.com/difference/Category:Peoplehttp://www.diffen.com/difference/Ethics_vs_Moralshttp://www.diffen.com/difference/Category:Peoplehttp://www.diffen.com/difference/Ethics_vs_Moralshttp://en.wikipedia.org/wiki/Human_development_indexhttp://en.wikipedia.org/wiki/Human_development_indexhttp://www.diffen.com/difference/Affect_vs_Effecthttp://www.diffen.com/difference/Affect_vs_Effecthttp://www.diffen.com/difference/Income_vs_Revenuehttp://www.diffen.com/difference/Income_vs_Revenuehttp://www.diffen.com/difference/Income_vs_Revenuehttp://www.diffen.com/difference/Affect_vs_Effecthttp://en.wikipedia.org/wiki/Human_development_indexhttp://en.wikipedia.org/wiki/Human_development_indexhttp://en.wikipedia.org/wiki/Human_development_indexhttp://www.diffen.com/difference/Ethics_vs_Moralshttp://www.diffen.com/difference/Category:People


3/23

Explain the difference between economic growth and

economic development

Economic Growth does not take into account the size of theinformal economy. The informal economy is alsoknown as the blackeconomy which is unrecorded economic activity. Developmentalleviates people from low standards of living into properemployment with suitable shelter. Economic Growth does not take

into account the depletion of natural resources which might lead topollution, congestion & disease. Development however isconcerned with sustainability which means meeting the needs ofthe present without compromising future needs. Theseenvironmental effects are becoming more of a problem forGovernments now that the pressure has increased on them due to

Global warming. Economic growth is a necessary but not sufficient condition of

economic development.
http://www.diffen.com/difference/Activity_vs_Taskhttp://www.diffen.com/difference/Activity_vs_Taskhttp://www.diffen.com/difference/Activity_vs_Task


4/23

What can a government do to increase

productivity in a country?

What is productivity? The ratio of a specific measure of output to a specific

measure of input

When does productivityincrease? When the units of output is more than the units of input What factors lead to an increase in productivity?

Inventions (more and better capital)

growth in human capital

Innovations

economies of scale

mobile labor force


5/23



What is human capital? The accumulated knowledge, skill, and experience of the

labor force

What is innovation?

A new way of doing something

How does the specialization of labor increase productivity?

Takes advantage of individual natural abilities

Allows workers to develop more experience at a particular

task

Permits the introduction of labor-saving machinery

Reduces time required to shift between tasks


6/23



What does the term economies of scale mean?

A companies average costs decrease over the long run as the

company grows, growth can be global (tax reduction by

government, lower government regulations trade

restrictions) What does the housing market have to do with a mobile labor

force?

Many people are upside down on their mortgages and cannot

relocate very easily What does our growing national debt have to do with growth?

The more we pay in interest the less we have to invest,

especially when so much of the interest is paid to foreigners


7/23


productivity in a country? What does monetizing the debt have to do with growth?

Money creation leads to inflation and inflation distorts pricesignals, erodes buying power, and leads to moreunemployment

Vietnamhas benefited from a program of internal restructuring, atransition from the agricultural base toward manufacturing andservices, and a demographic dividend powered by a youthfulpopulation. The country has also prospered sincejoining the WorldTrade Organization, in 2007, normalizing trade relations with theUnited States and ensuring that the economy is consistently rankedas one of Asias most attractive destinations for foreign investors

Vietnam should increase its labor productivity growth withinsectors to achieve an economy-wide boost


8/23

What can a government do to reduce

poverty in a country?

Reduce levels of corruption: if all the states resources are

being diverted through corruption, there are no resources left

to be used for basic infrastructure, or any social programs;

Introduce education campaigns that inform citizens of their

rights and teach them job skills so they do not have to rely on

the state (where possible);

Strengthen institutions such as parliaments so they can

exercise their oversight roles more effectively;

Encourage the media and civil society to expose corruption

and educate the public and policy makers about the

socioeconomic conditions of citizens;

Strengthen labor unions to ensure worker rights and fair

wages;


9/23


10/23

Vietnam looks back to 20 years of strong

economic growth. How can you explain

this trend?

Vietnam has benefited from a program of internalrestructuring, a transition from the agriculturalbase toward manufacturing and services, and a

demographic dividend powered by a youthfulpopulation. The country has also prospered sincejoining the World Trade Organization, in 2007,normalizing trade relations with the United States

and ensuring that the economy is consistentlyranked as one of Asias most attractivedestinations for foreign investors.


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this trend? The McKinsey Global Institute (MGI) estimates that an

expanding labor pool and the structural shift away fromagriculture contributed two-thirds of Vietnams 7 percentannual GDP growth from 2005 to 2010.1The other thirdcame from improving productivity within sectors. But the

first two forces have less and less power to drive furtherexpansion. According to official Vietnam statistics, growthin the countrys labor force will probably decline to about0.6 percent a year over the next decade, down from 2.8percent between 2000 and 2010. Given the past decades

rapid rate of migration from farm to factory, it seemsunlikely that the pace can accelerate further to raiseproductivity enough to offset the slowing growth of thelabor force.
http://www.mckinsey.com/insights/economic_studies/taking_vietnams_economy_to_the_next_levelhttp://www.mckinsey.com/insights/economic_studies/taking_vietnams_economy_to_the_next_level


12/23



this trend?

http://www.mckinsey.com/insights/asia-

pacific/sustaining_growth_in_vietnam


13/23

How does the lack of formal institutions hamper economic

growth and development? What can individuals do to cope with

this situation? Give 3 examples

Economic maturity and the growth of markets require aninstitutional framework that allows transactions to takeplace in an orderly manner and in which agents know thatthe decisions they take and the contracts they make will beprotected by law, and enforced. Savers, investors,

consumers, entrepreneurs, workers and risk-takers of allkinds need a framework of rules if rational, optimizingdecisions are to be made. They also need some guaranteeof economic stability and certainty, which can be providedonly by good governance and sound economic policy-

making. The alternative to a lack of property rights, law andorder and political stability is economic anarchyand failedstates


14/23




D. North said that the inability of societies todevelop effective low-cost enforcement ofcontracts is the most important source of both

historical stagnation and contemporaryunderdevelopment in the Third World, becausethe absence of secure property and contractualrights discourages investment and specialization.

Mancur Olson (1982) makes the same point in hisclassic book The Rise and Decline of Nations(1992)


15/23




Rodrik (2000) highlights the following institutionalarrangements that are conspicuously absent in poorcountries:

a clearly defined system of property rights

a regulatory apparatus curbing the worst forms offraud, anti-competitive behaviour and moral hazard

a moderately cohesive society exhibiting trust andsocial cooperation social and political institutions thatmitigate risk and manage social conflict

the rule of law and clean government


16/23




These five main prerequisites of a sound institutional structure for

economic development are described briefly below.

Property rights and legally binding contracts. These are important

because agents lack the incentive to invest and innovate if they do not

have control over the return on the assets they accumulate.

Intellectual property rights are particularly important to encourage

invention. Control is more important than ownership. Formal property

rights do not mean very much if there are not control rights; but

control rights can spur entrepreneurial activity without clearly defined

property rights


17/23




These five main prerequisites of a sound institutional structure

for economic development are described briefly below.

Regulatory institutions. Markets fail if there is fraud or anti-

competitive behavior. Regulatory institutions are needed if

markets are to function properly. When markets are

liberalized, a regulatory framework is also required to avoid

the consequences of risky behavior, such as financial crises if

the banking system is not properly regulated (as the world

economy witnessed in 2008).


18/23




These five main prerequisites of a sound institutional structure

for economic development are described briefly below.

Institutions for macroeconomic stability. Monetary and fiscal

policy institutions are necessary

to provide an enabling environment in which private

investment can flourish. Market economies are not self-

regulating, and macroeconomic instability creates risk and

uncertainty.


19/23




Social insurance institutions. These are necessary if

individuals are to accept change. In rural, peasant societies

on the margins of subsistence, change may spell disaster, but

progress (particularly in agriculture) requires willingness to

take risks. Insurance against unemployment, crop failures andprice fluctuations for agricultural commodities are all

important if traditional agriculture is to be transformed.


20/23




Institutions of conflict management. Many developing

countries have deep ethnic, tribal and religious divisions.

Social conflict damages economies because it diverts

resources from directly productive activities, and creates

uncertainty, which deters investment. To minimize conflict

requires a full range of institutionsthe rule of law, a fair

legal system, a political voice for minority groups


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22/23

A country has a large informal economy (accounting for 60% of

the private economy). What is the impact on economic

development?

The informal economy refers to activities and income that are partially orfully outside government regulation, taxation, and observation. The mainattraction of the undeclared economy is financial. This type of activityallows employers, paid employees, and the self-employed to increasetheir take-home earnings or reduce their costs by evading taxation and

social contributions. On the one hand, informal employment can providea cushion for workers who cannot find a job in the formal sector. But, onthe other hand, it entails a loss in budget revenues by reducing taxes andsocial security contributions paid and therefore the availability of fundsto improve infrastructure and other public goods and services. Itinvariably leads to a high tax burden on registered labor.

A high level of informality also can undermine the rule of law andgovernance. The fact that a large share of the population is openlyignoring laws, regulations and taxes can weaken the respect citizenshave for the state.


23/23

A country has a large informal economy (accounting for 60% of

the private economy). What is the impact on economic

development?

There are various reasons why governments may be concerned about

large informal sectors. These include potentially negative consequences

for competitiveness and growth, incomplete coverage of formal social

programs, undermining social cohesion and law and order, and fiscal

losses due to undeclared economic activity. For most governments, these

concerns outweigh any advantages that the informal sector offers as asource of job creation and as a safety net for the poor.

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