Embedded Files
Learning Outcomes:
With reference to a specific developing economy, and using appropriate diagrams where relevant, examine how the following factors contribute to economic development.
a. Education and health
b. The use of appropriate technology
c. Access to credit and micro-credit
d. The empowerment of women
e. Income distribution
Introduction and revision:
This topic looks at why some countries are developed/rich and why some remain poor. Remember that development isn’t simply a country having a high GDP per capita, but a high national income does help development occur.
Revision:
What causes a movement from inside a Production Possibility Curve, to a position on the PPC?
What causes a shift outwards in a PPC?
What relevance does this have for Development?
Now name the four Factors of Production
Assessment materials:
4.3_Domestic_factors_and_development Past paper questions.pdfa. Education and health
Obviously this improves the quality and efficiency of labour and so is essential for economic growth. With more productive workers wages can increase. Education and gender equality is important as if girls are not educated this reduces both the quantity and quality of labour.
b. The use of appropriate technology (P364 textbooks)
Investment and Technological are essential for development. Multinationals and inward investment can help here, as they can bring with them finance and new technologies. Especially important is the building of efficient communication (mobile phones are having a major effect on development – see video and handout)
Transportation as well as an effective and trusted banking system open to all. Often the lack of available finance stops growth and development. Micro credit schemes can help here (see later). Note also that increased savings may be needed for increased investment (through the banking system) but will this be at the expense of present consumption. We may have to sacrifice present consumption to concentrate on saving and investment but of course in the Long run this may boost standards of living.
Appropriate technology: Technology is appropriate when it employs methods that make the best use of available resources i.e. labour-intensive, simple techniques : low technology in under developed rural areas. However, LEDCs often prefer capital-intensive projects because, although they provide less immediate employment, they promise higher rates of growth.
A commonly used example of appropriate use of technology in developing countries is the Universal Nut Sheller. The machine requires one person to operate it (and so has a labour-to-capital ratio of 1:1) and is capable of shelling 50 kgs of peanuts per hour. In addition, the machine is cheap to make (less than $50) and has a lifetime of approximately 25 years. By using the nut sheller, local farmers are able to increase production and the value of their products, and so increase their income. In addition, there are no harmful externalities associated with the use of the nut sheller, and so, it also promotes sustainable development. The nut sheller has been used successfully for example in Ghana and Uganda.
Many EDCs are seen as having a comparative advantage in manufacturing which is labour intensive and requires low capital e.g. textiles and canning fruit are‚appropriate technology.
Mobile phones and development article.pdfc. Access to credit and micro-credit (P362-3 Dorton Textbook)
Definition of Microcredit:
Programmes extend small loans to very poor people for self-employment projects that generate income, allowing them to care for themselves and their families.
Micro-credit has an important role in breaking the poverty cycle
Absolute Poverty:
- measured in terms of the basic necessities for survival
- the amount a person needs to have in order to live
- living with less than $1 a day (take into account of cost of living)
Relative Poverty:
- poverty in relevance to specified level of income
- measures the gap between the rich and the poor
- e.g. in China, the absolute poverty is declining with economic growth, but relative poverty is increasing at the mean time.
Relative poverty is comparative. For example, a person is in relative poverty if they do not reach the average level of income in that country.
Often politics play a role in determining relative poverty. Governments may set the poverty level at 40% of average earnings, while the opposition party may set the poverty level at 60% of average earnings.
Grameen Bank was the founder of the microcredit scheme, and provides an average loan of $75 to individuals. Other organisations such as the United Nations and World Bank also support the microcredit scheme.
Much of micro lending is offered to women and they tend to spend money more carefully and productively. They are more likely to payback loans. Microcredit has helped empower women by giving them greater bargaining power, allowing them to take part in family decision-making.
The three C’s Determine Who Can Borrow Microcredit:
o Character: how a person has handled past debt obligations
o Capacity: how much debt a borrower can comfortably handle
o Capital: current available assets of the borrower
d. The empowerment of women
https://www.tutor2u.net/economics/reference/development-and-growth-constraints-gender-inequalities
e. Income Distribution
The Poverty Cycle:
A poverty trap is any linked combination of barriers to economic growth and/or development that forms a self-perpetuating circle unless the circle can be broken. This cycle is commonly known as the “Poverty Cycle” or “Development Trap”.
The left circle is a classic poverty cycle demonstrating how low incomes perpetuates low incomes. When an individual receives a low income, he/she will spend most if not all of this income on necessities to live. By spending a large proportion of one’s disposable income, less money is spared as savings. Low levels of savings then lead to low levels of investment. An increase in a county’s aggregate demand results in economic growth. In the equation: AD=C+I+G+(X-M), component “I” stands for gross capital investment. Investment also shifts the LRAS curve to the right. Therefore as a consequence of lower levels of investment, there's low economic growth, which ultimately causes low incomes, completing the cycle.
The right circle illustrates a different cycle where low incomes perpetuate low incomes but harming economic development rather than economic growth. Families with low incomes are unable to support full education for children or afford advanced medical care causes low levels of education and health care. With the death rate and infant mortality rate increasing, the quantity and quality of human capital decreases. A small labor force achieves low productivity, which eventually links back to low incomes.
Economic Growth poverty cycle
Economic Development poverty cycle
Natural Resources:
These can certainly help growth and development, but there are examples of countries with huge resources that are still poor (Nigeria) and other countries who are rich, but have few natural resources (Japan).
Human Factors
The quantity and Quality of labour: In theory an increase in the population should aid growth as it has an effect on both AS and AD. However we should also note that increases can reduce standards of living. Why?
Culture
Culture affects what is of value in a society and influences how individuals, communities and organisations respond to change. Culture can make economic growth easy or hard.
For example: Entrepreneurship is seen as essential for development, but if there is no culture of this then there may be a problem.
•Western and native cultures may have different views on women and class e.g. In some Islam countries women are not allowed to drive cars or even work- this would reduce their productivity
•Capitalist notions of meritocracy (appointing the best qualified person to a job) may clash with traditional loyalty to family or kinship group.
Education and training are essential for development, but if certain groups are excluded (eg women) then this may pose a problem
Now think of your own examples:
What are social cohesion, social capital and social inclusion?
(Look up the meaning of cohesion and inclusion-do you understand what these words mean?)
Development economics emphasis the role of social capital, cohesion and inclusion in the process of development:
•Social cohesion
is about how well people and groups get on with each other in a country. Social cohesion needs tolerance for cultural differences. Switzerland has a culturally diverse population and social cohesion; the former Yugoslavia lost all social cohesion and dissolved into war. Standards of living collapsed. Will the present problems in the S of Thailand have a bad effect on growth and development ?
•Social inclusion means the whole of society enjoys the benefits of economic activity and have full access to education and jobs.
Institutional Factors:
non-government organisation (NGOs) like trade unions, universities, professional associations, cultural and religious groups. These groups are stakeholders in the development process and as pressure groups they help to hold the government accountable for its policies including development Encouraging broad-based participation in the development process by consulting with civic society on problems and polices means the development programme is owned and not external-ie development is hopefully benefiting everyone. The King in Thailand and the Buddhist faith may be seen as important factors in pressurizing governments to provide policies that benefit all groups within society
•International agencies such as Oxfam and the IMF
Institutions cannot operate effectively, without good governance. Strengthening civil society non-government organisations means the stateand has to justify actions to citizens.
political stability is important to economic growth and development.
This is particularly important in raising business confidence and investment within countries. If due to instability people lack confidence in a country savings and investment will leave the country and businesses that have stayed, may find it difficult to raise finance. Thailand has recently seen conflict between the “Reds” and “Yellows” and this has reduced economic grow.
The type of Economic System (See separate section)
What domestic factors may be hindering development?
Lack of infrastructure:
Watch this video and try and remember the key points it makes
STUDENT TASK: Split into groups and do some further research on these (one per group, teacher to assign task ). You'll need to "teach" these to your fellow students. Please add to the shared google doc.......
Ineffective Taxation Structure
Hard for governments to collect tax in developing countries because
- Less than 3% of the population in developing countries pay income taxes
- There’s little corporate activity therefore corporate tax revenue is low
- Governments offer large incentives to domestic firms and to facilitate inflows of FDI
- Main tax revenue of developing countries come from exports/imports/excise duties, but only if they rely heavily on foreign trade
Problems with administration of tax systems
- Inefficiency
- Lack of information
- Corruption
Informal markets
- Greater in developing countries than developed countries
- Large informal markets lead to low tax revenue because people don’t have to pay income tax that’s gained from informal markets
- Workers in informal markets are usually low-skilled, low-educated and are working under a poor working condition with low protection, low salary unprotected, poorly paid, and no social care. Hence low productivity.
Low Tax collection
In countries that are poor ( i.e. people have low incomes), there is a low tax base and hence a low tax collection. This is because most people have incomes that are below the first tax bracket, which means their incomes are not taxed. Therefore, the low tax tax revenues means that governments cannot create public goods and merit goods. The infrastructure of the country will continue to remain poor.
In other cases where corruption is rampant, there is an ineffective taxation system that also results in poor infrastructure.
There are four categories of infrastructure:
1. Transport -> roads, railways, seaports, airports, public transport, pavements
2. Public utilities -> electricity, gas, water supply, sewers
3. Public services -> police service, fire service, education service, health service, waste management
4. Communication services -> Postal system, telecommunications, radio and television.
Lack of infrastructure decreases chance for economic growth
If goods cannot be transported from one area to another because of poor roads, then trade & economic growth is restricted.
If power supplies are unreliable, then production is harmed.
Bad communication channels = poor ability to coordinate economic activity
Lack of infrastructure also hinders development prospects:
Poor roads = difficult to get to school to obtain education
Underdeveloped radio & television network = difficult for people to find and participate in wider communities.
The availability of gas and electricity is important to house holds for cooking and food preservation.
Sanitation and safe water are vital for health to improve.
lack of property rights
Main thesis
• No nation can have a strong market economy with out adequate participation in an information framework that records ownership of property and other economic information.
• Unreported, unrecorded economic activity results in many small entrepreneurs who lack legal ownership of property making it difficult for them to obtain credit, sell the business, or expand.
Property rights
The right to use the good
The right to earn income from the good
The right to transfer the good to others
The right to enforcement of property rights.
Untitled assets held by the world’s poor add up to at least $9.3 trillion, which is more than the foreign aid given to the developing world since 1945.
Example used
• Since the fall of the USSR, responsible nations around the developing world have worked hard to make the transition to a market economy, but have in general failed.• Hernando believes that the real enemy is, rather than the failure of the free market system, within the flawed legal systems of developing nations that make it virtually impossible for the majority of their people to gain a stake in the market.
source:
“Destruction of economic facts” by Hernando de Soto
Over regulation, bribery and corruption, political instability and conflict:
Angola- It takes an average of 123 days to set up a company, and the cost of setting up is 5 times the average salary. There are 17 procedures needed- over regulation is repelling multinationals and therefore reducing foreign direct investment
Ranks 172/183 in the ease of doing business index
Corruption in Kenya-
Corruption reduces the effectiveness of the legal system, leads to a reduced "trust" in an economy. Furthermore, it leads to the risk of contracts not being honored and is therefore a deterrent to investment. An average urban Kenya pays 16 bribes per month.
1 billion pound transferred out of Kenya by family and associates of former Kenya leader.
Corruption in India
55% of Indians had first hand experience of paying bribes to get jobs done in public offices.
Ranked 87th out of 178 in transparency index
Has the most black money in the entire world with almost $1.5 trillion in Swiss banks. 13 times the national debt.
In 2008 120 of indias 522 parliament members were facing corruption charges.
Government officials award contracts to people who bribe, officials often steal state property and sell the land they stole in illegal ways.
Pay bribes to tax officials to pay less tax.
Political instability and conflict-Sudan with civil wars from 1955 to 1972, then from 1983 to 2005, together with a new civil war in Darfur, has displaced the population. Chad also declared war on Sudan in December 2005. This results in low standards of living and the likelihood of foreign investment coming in is low. Wars will often result in damage to infrastructure, loss of investment and sometimes aid.
LECD Debt: we'll look at this as a separate topic as it is a big topic.
Page updated
Google Sites
Report abuse