<5.4 DIFFERENCES IN ECO-DEVELOPMENT>

"In unit 5.1, 'living standards,' we explained the limitations of using GDP to judge a country's standard of living and identified other indicators such as education level as measured by the 'average years of schooling'. Now 

• ECONOMIC GROWTH refers to INCREASES in OUTPUT (REAL GDP) overtime and is often calculated on a PER CAPITA basis.

• ECONOMIC DEVELOPMENT refers to a PROCESS overtime which culminates in IMPROVED STANDARDS OF LIVING.

• ECONOMIC GROWTH implies greater output and income (Real GDP per capita), which allows society to better satisfy its wants and needs, likely through GREATER TAX REVENUE and LIKELY SPENDING ON MERIT GOODS however due to various factors ranging from INCORRECT POLICY to CORRUPTION these gains DO NOT GUARANTEE DEVELOPMENT as a WHOLE.

• Indeed there are numerous examples of countries with  HIGH GROWTH rates but LOW LIVING STANDARDS. 

• THE LOWER THE LEVEL OF INCOME PER HEAD, THE LOWER THE LEVEL OF DEVELOPMENT: Economic development tends to be lower in countries with low real GDP per head. In such countries, some people may struggle to afford a good standard of living. However, this does not mean that all the people in such countries are poor. In fact, some can be very rich.

• THE LOWER THE LEVEL OF SAVING, THE LOWER THE LEVEL OF DEVELOPMENT: Poor people cannot afford to save and so the savings ratio (saving as a percentage of disposable income) of a country where the average income is low, is likely to be low. If savings are low, there will be a lack of finance for investment.

• THE LOWER THE LEVEL OF CAPITAL PER HEAD, THE LOWER THE LEVEL OF DEVELOPMENT: When workers have MORE CAPITAL GOODS to use in their jobs, their PRODUCTIVITY WILL GENERALLY INCREASE. 

• MORE CAPITAL GOODS PER WORKER => MORE OUTPUT PER WORKER 

• Countries with a low value of capital goods per worker will be likely to have a low income per head.

• THE HIGHER THE LEVEL OF POPULATION GROWTH, THE LOWER THE LEVEL OF DEVELOPMENT: 

• In countries with HIGH POPULATION GROWTH there is usually a HIGH DEPENDENCY RATIO, with a high proportion of children being dependent on a small proportion of workers. 

• This means that some of the resources which could have been used to improve the quality of life of the current population have to be used to support the extra members of the population.

• THE HIGHER THE DEPENDENCY ON THE PRIMARY SECTOR, THE LOWER THE LEVEL OF DEVELOPMENT: Economic growth and the quality of people’s working conditions tend to be lower the greater the proportion of workers employed in the primary sector: Underemployment can be high in agriculture. For instance, ten persons may be doing the work of six. This, again, lowers productivity.

• THE NARROWER THE RANGE OF EXPORTS, THE LOWER THE LEVEL OF DEVELOPMENT: Countries that export a narrow range of products can be adversely affected by large decreases in demand or decreases in supply. The demand for manufactured goods and services tends to increase more than the demand for primary products as income increases.

• Countries with a low output per worker hour will tend to have low income per head and so may have, for instance, lower education and healthcare.

• A high birth rate can result in resources being used, for instance, to feed and educate children. These could instead have been used to increase the country’s productive potential and living standards.

• Many poor countries have borrowed heavily in the past. In some cases, a large proportion of the country’s income is taken up in repaying (and paying interest on) foreign loans. This means it cannot be used to spend on education, healthcare and investment. So the opportunity cost of repaying debt may be economic development.

• FALLING DEMAND OF PRIMARY GOODS: As economies develop and grow, incomes rise and the demand for primary, secondary and tertiary goods increases, HOWEVER, the rise in demand for primary goods tends to grow much slower relative to that of manufactured goods and services. This means that some poor countries receive relatively less in real terms for their exports, whilst having to pay more for their imports. 

  • • WHY? Reasons include

      • • • Dietary changes / health awareness have made demand fall e.g. Tobacco

          • Synthetic substitutes have been developed e.g. Bamboo

          • Miniaturisation has resulted in less quantity needed e.g. mobile phones

• UNFAIR BUYING POWER OF MAJOR CONSUMER: A number of primary markets are dominated by the consuming countries and these rich countries use their buying power to keep down the prices of primary products (e.g. Tariff escalation)

• PRICE VOLATILITY: There have also been significant fluctuations in the price of some primary products due to climate changes and other factors affecting natural resources as such incomes are HIGHLY UNPREDICTABLE for both farmers and the government, which prevents them from spending on development projects

• Lack of expenditure on education, training and capital goods holds back increases in productivity, introduction of new technology and international competitiveness.

• This development strategy involves the government RAISING TRADE BARRIERS TO PROTECT THE DEVELOPMENT OF DOMESTIC INDUSTRIES BY MAKING IMPORTS UNCOMPETITIVE to ALLOW THEM TO GROW, and as they do so, IMPORTS CAN BE REPLACED by domestic products. 

• If successful, the strategy can increase domestic output, raise employment and improve the country’s trade in goods and services balance. 

• There are risks, however, with this strategy. In the short term, at least, it may raise prices and reduce choice and hence lower economic welfare. 

• Other countries may also retaliate and the domestic industries may become reliant on protection without seeking to increase their efficiency and competitiveness.

• An alternative strategy is to try to promote exports by exposing domestic firms to market forces. The idea is that, without government support, firms will be forced to become efficient. The success of this policy, however, depends on the firms being able to compete with foreign firms, some of which may have been established for some time (and as a result may have built up consumer loyalty) and may be taking advantage of economies of scale.

• Another strategy is to improve the country’s infrastructure, capital stock, education, training and healthcare systems. As the country may lack the tax revenue to do this, WHERE DOES IT GET THE MONEY TO DO THIS?

• It may seek to attract multinational companies (MNCs), loans from abroad or foreign aid. 

INVITING MULTINATIONAL COMPANIES TO INVEST:

• (+) They can increase employment and wages, 

• (+) Train and educate workers, 

• (+) Bring in new technology and 

• (+) Improve infrastructure, for example, by building roads and improving dock facilities. 

• (-) MNCs may deplete non-renewable resources, 

• (-) Cause pollution 

• (-) Put pressure on host governments to pursue policies which have a detrimental effect on development such as reducing health and safety regulations.

BORROWING FROM ABROAD: 

• (+) Borrowing from abroad can work, if the funds are used in a way which raises productivity and generates enough income to repay the loans, and make a contribution to higher living standards.

• (-) However, the interest charged on loans can be high which makes some projects unviable. Also, there is the risk that projects may not be as successful as expected. If this is the case, the countries will accrue debt. Some of the money raised may be used for unprofitable prestigious projects, or on the military or may be lost due to corruption.

RECEIVING FOREIGN AID TO PAY FOR INFRASTRUCTURE:

• (+) More GENEROUS TERMS (Free, or very low-interest rates) than borrowing on commercial terms. 

• (-) Can create economic and political DEPENDENCY, postpone necessary reforms, as countries will become over-reliant and not strive as hard to be independent.

• (-) Can bring in INAPPROPRIATE TECHNOLOGY. For example, a gift of complex capital equipment may not be that useful for a country with a high level of unemployed workers who lack education and training.

• (-) there is a risk that any financial foreign aid may be used for NON-PROFITABLE projects and there may be CORRUPTION in its use. 

• (-) Foreign aid may be given out of a desire to help people, win political support and gain commercial advantage. In the last case, the aid is likely to be in the form of 'TIED-AID'. This means that conditions are placed on what the recipients can spend the aid on. Often the requirement is that it has to be spent on products produced by the donor countries. 

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• Foreign aid can be bilateral or multilateral. Bilateral aid is aid is from one government to another, whereas multilateral aid is channelled through international organisations to developing countries. Such organisations include the United Nations, the World Bank, the International Monetary Fund (IMF), the EU and non-government organisations including charities such as Oxfam. Foreign aid can come in a variety of forms including grants, which do not require repayment, loans charged on favourable terms and the supply of goods, services, technical assistance and guidance. The IMF and World Bank have been criticised for attaching conditions to some of the loans they make. They often require governments to follow what are known as structural adjustment programmes. These are designed to increase the quality and quantity of resources but they may, at least in the short term, reduce economic growth and development. For instance, a government may be required to cut its expenditure and this may reduce the provision of education and healthcare. It is thought that foreign aid is more likely to promote development if it is more generous, multilateral, untied and is geared towards the needs of the recipients.