Growth and development


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edexcel Economics Unit 4

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Growth and development

  1. 1. By Patrick, Brandon and Liam
  2. 2. LIMITS TO GROWTH &DEVELOPMENT Economic Growth: measured in terms of changes in real GDP Economic Development: multidimensional conceptwhich refers to changes in living standards and welfare over time. Unlikeeconomic growth, economic development is a normative concept dependenton value judgements. In order to provide some measure of development,various composite measures are used, such as HDI While all countries face constraints on their growth anddevelopment, there is an enormous difference in the scaleon the constraints affecting developed and developingcountries.
  3. 3. Problems facing developingcountries …Poor Infrastructure• If there is poor infrastructure then it leaves the country, for example countries on the African continent,increasing cost as they find alternatives in transport and other ways of keeping a reliable power supply.• Between Tanzania – Zambia the railway (Tazara) is prone to derailments and breakdowns – despitebeing in operation for almost four decades. Less than 2% of the rails cargo capacity is being used asheavy goods are transported by more expensive ways. This increases the total cost of a good, makingthe price level increase and eventually making it less price competitive across the world. This leads toless profit made and also because of this less taxation is received back to the government and so theydon’t have the ability to increase Government Spending in which they can improve the standard of therailway to improve efficiency of the Tazara.• With an unreliable power source companies have turned to diesel-operated power generators – this notonly increases cost in production, resulting in the similar consequences of the increased transport costs– it also leads to externalities. Social Externalities such as air pollution and noise pollution will besuffered due to the diesel powered engines, this decreases the standard of living developing countrieshave. It could also damage the health of many of the population in which this could lead to anunhealthy and less productive workforce. But the main problem with poor power source, which in Africa,as many as 30 countries suffer from regular power outages, is that poor productivity occurs.
  4. 4. Human Capital Inadequacies What is meant by human capital inadequacies is the lack of education andtraining that a workforce has received. This means they are not specializedor informed of ways to do different jobs. The result of this is that the labourforce is not very productive in comparison to other countries. This impacts the growth of the countries effected. Workers cannot be utilizedto their full potential. Innovation may be lacking which results in a long termhindrance to economic growth. Businesses will be reluctant to invest as theymay fear full productivity will not be reached, and they are unwilling to payfor training. The same applies to the government, costs are high to educateand the results are long term, which may conflict with short term interests. An example of this is Ethiopia, where the adult literacy rate was 36%between 2005-2008. There are educational institutions, however, childrenare often unable to benefit from these because parents are unable to providefor their large families, meaning the children must also go out and work tohelp. This leaves them with limited to no time for education and keeps theamount of illiterate people high
  5. 5. Population issues Population growth is particularly rapid in some of the poorest countries of the worldsuch as Malawi and Mozambique. Meanwhile, population is falling in some developedcountries such as Italy and Germany. Population growth can be analysed in relation to the views of Thomas Malthus, whopredicted at the end of the 18th century that famine was inevitable becausepopulation grows in geometric progression, whereas food production grows in theform of an arithmetic progression. Although his predictions were proved to be incorrect for Britain in the nineteenthcentury, some economists believe that they are still relevant for some of the poorestdeveloping countries. In these countries the growth of population is greater than thegrowth in GDP, with the result that GDP per capita is falling. The size, growth, age structure and rural-urban distribution of a countrys populationhave a critical impact on its development prospects and on the living standards of thepoor. Poverty means that people are deprived of services, resources andopportunities, as well as income. A smaller population contributes to upward mobility and helps to stimulatedevelopment. Also smaller families share income among fewer people, average per-capita income increases.
  6. 6.  The rapid population growth in the African countryof Zambia is so quick that it could perpetuate deeppoverty in the country despite relatively fast growthin recent years. In Zambia, the UN predicts that thepopulation could triple by 2050, reaching 100million by the end of the century.
  7. 7. Debt Debt provides several problems for developing one the primaryone being financing the debt and debt interest. They borrow attimes of low interest to find that some years down the line theinterest has increased significantly. The other issues whichbranch of the problem of debt include, not making as muchmoney as projected governments may have invested the moneyinto a type of export which at that time was a high earned whichby the time the moneys impact can be seen that export is nownot worth much, increase in oil prices, fall in the value ofcurrency making imports expensive and exports cheap totrading partners hence unable to source funding for debt anddebt from money. This impacts growth in several ways, the first is AD is affectedbecause government spending falls, investment falls as there isless trust in the government and as the result of the first twoconsumption falls. FDI too falls and if tax is increased to raisefunds for debt then short run AS falls. Obviously, no need toexpound on this but with debt
  8. 8. Ways of promoting growth anddevelopment … A range of strategies may be used to promote growth anddevelopment but there is no one simple prescription; eachcountry is individual, having a different history, geographyand natural resources. Therefore, policies which may appear to have worked in onecountry will not be successful in another country. It is likely that a combination of strategies may be required,with the particular blend being dependent on thecharacteristics and needs of that country.
  9. 9. Aid Aid is given to help countries and people who are in need of supplies,mostly in developing countries. It is used in order to improve the way oflife. A way in which aid helps a countries development, in terms of monetary,is allowing the opportunity to invest to increase. If money is given to acountry, then the government will have more money to invest intoprojects, which will lead to less unemployment and more people onsustainable incomes. There are a few problems with aid however. If the country does developand investment is apparent, then it may increase demand due to anincrease of people on sustainable wages. They will spend more money,which may lead to an increase in inflation. Moreover, the amount of aidgiven is also a factor. If it’s just small amounts, it may not be enough tochange much. Finally, aid dependence is thought to underminegovernments in some cases, leading to corruption and conflict over theaid funds that have been given.
  10. 10. Debt relief The burden of debt bears heavily on some countries, such as Gambia, Mali, Malawi. The debt is usually owed to all or some of the following; The IMF, the World Bank,governments and banks in the developed countries. The problem is that servicing the debtmay account for a disproportionate amount of public expenditure, to the extent thatresources available for expenditure on health and education are severely limited. As a result, pressure to cancel the debts of the poorest countries has increased, as a wayof promoting growth and development. Under the Heavily Indebted Poor Countries (HIPC) initiative and the Multilateral DebtRelief Initiative (MDRI), the World Bank provides debt relief to the poorest countries of theworld. The HIPC initiative was started in 1996 by the IMF and World Bank with the aim ofreducing the external debts of the poorest and most heavily indebted countries of theworld to sustainable levels. Changes were made in 1999 to make the process quicker anddeeper, and to strengthen the links between debt relief poverty reduction and socialpolicies. In 2005, the HIPC initiative was enhanced by the MDRI in order to speed up progresstowards meeting the United Nations Millennium Development Goals (MDGs).
  11. 11.  41 countries were identified as being eligible for HIPC initiative assistance andby the end of March 2009, 35 countries had benefited from HIPC debt relief. Debt relief means that developing countries would have more foreign currencywith which to buy imported capital and consumer goods from the developedcountries. To the extent that the money released from debt cancellation is usedfor the purchase of capital goods, then there is the prospect of higher economicgrowth in the future. In turn, this means that developing countries would be able to buy more goodsfrom richer countries. It would help to reduce absolute poverty, and both thesavings gap and foreign exchange gap. Also it might help to conserve theenvironment. However, in comparison with aid, it is likely to take much longer to agree a debtcancellation programme. Unless conditions are attached to debt cancellation,there is no guarantee that the governments of these countries will pursuesound macroeconomic policies as there is a moral hazard problem. Furthermore corruption might mean that the benefits of debt cancellation arechannelled to government officials rather than to the poor. Shareholders of banks in the developed world may bear some of the burden ofdebt cancellation. Finally it may be much less effective than the introduction of policies to reduceprotectionism in developed countries.
  12. 12. Microfinance Microfinance is a means of providing small families withsmall loans to help them engage in productive activities orhelp grow their tiny businesses. It helps these small business owners invest to increasetheir overall income to improve the way of life they have. Itis an alternative to raise finance as getting a loan isalmost impossible on the small incomes people have indeveloping countries. The problem is that there is a repayment rate which cancause problems for the holder of the loan. Moreover, therehas been questionable collection methods and accountingpractices.
  13. 13. Fair trade schemes Fair trade schemes help developing countries by moving AD to theright. This is due to the fact that if the developing countries receive ahigher wage for the goods they are producing then they can buildwealth, pay taxes which the government will re-invest throughgovernment spending on infrastructure. This will eventually increasethe standard of living of people in developing countries. The Lewis 2 sector model will believe that due to the increased demandfor goods, entrepreneurs will employ more people on a fixed wage andre-invest profits he makes on goods back into the company throughfixed capital. However this doesn’t take into account pressure on wagesfrom trade unions. It also doesn’t take into account the fact that inAfrican countries there may not be a surplus in labour for agriculturesector jobs. Also the extra money the producers received are re-invested back intothe product to improve the quality of the good. But Fair trade schemesare seen as an insufficient way to get money to poor producers. Asconsumers pay a large premium for the goods and most of the profitsgo to supermarkets in profits.