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Development  Economics      

4.1.  Economic  Development      Economic   growth   is   a   long-­‐term   expansion   of   the   productive   potential   of   the  economy    Trend  growth  refers  to  the  smooth  path  of  long  run  national  output    Measuring  the  trend  rate  of  growth  requires  a  long-­‐run  series  of  data  perhaps  of  20-­‐30  years  or  more   in  order   to   calculate  average   growth   rates   from  peak   to  peak  across  different  economic  cycles    The  table  below  tracks  the  growth  rates  achieved  in  the  world  economy  for  three  recent  years  and  also  for  developing  countries  excluding  China  and  India.    Real   GDP  Growth  (annual   %  change)  

2010   2011   2012  

World  economy   4.1   2.7   2.5  Developing  countries  excluding   China  and  India  

5.6   4.4   3.6  

   

 

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What  determines  the  rate  of  economic  growth?  • Every  country  is  different,  each  factor  will  vary  in  importance  for  a  country  at  a  given  point  in  time  • Remember  too  that   in  our  inter-­‐connected  globalizing  world,  growth  does  not  happen  in  isolation.  Events  in  one  country  and  region  can  have  a  significant  effect  on  growth  prospects  in  another    Growth  Drivers  Here   are   some   of   the  main   determinants   of   economic   growth   –   they   apply   for  both  developing  and  developed  countries  although  the  relative  weighting  that  we  might   attach   to   each   will   depend   on   the   individual   circumstances   facing   each  country  or  region.  • Growth   in   physical   capital   stock   -­‐   leading   to   a   rise   in   capital   per   employee  (capital  deepening)  • Growth  in  the  size  of  the  active  labour  force  available  for  production  • Growth  in  the  quality  of  labour  (human  capital)  • Technological  progress  and   innovation  driving  productivity   improvements   i.e.  higher  GDP  per  hour  worked  • Institutions   -­‐   including  maintaining   the   rule  of   law,   stable  democracy,  macro-­‐economic  stability  • Rising  demand  for  goods  and  services  -­‐  either  led  by  domestic  demand  or  from  external  trade    

 

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     The   20   countries   with   the   highest   growth   of   the   gross   domestic   product  (GDP)  in  2015  (compared  to  the  previous  year)    http://www.statista.com/statistics/273977/countries-­‐with-­‐the-­‐highest-­‐growth-­‐of-­‐the-­‐gross-­‐domestic-­‐product-­‐gdp/      Threats  /  Challenges  to  Economic  Growth  • Changes  in  the  real  exchange  rate  affecting  competitiveness  • Cyclical  fluctuations  in  national  output  and  external  trade  • Financial  instability  e.g.  unsustainable  credit  boom  and  fall  in  savings  • Volatility  in  world  prices  for  essential  imports  and  key  exports  • Political  instability  /  military  conflicts  • Natural  disasters  and  other  external  supply  shocks  • Unexpected  breakthroughs  in  the  state  of  technology            

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Economic  Development      What  is  Human  Development?    “Human  development  is  the  expansion  of  people’s  freedom  to  live  long,  healthy  and  creative   lives;   to   advance   other   goals   they   have   reason   to   value;   and   to   engage  actively   in   shaping   development   equitably   and   sustainably   on   a   shared   planet.  People   are   both   the   beneficiaries   and   the   drivers   of   human   development,   as  individuals  and  in  groups”    What  does  economic  development  mean?  Michael  Todaro  specified  three  objectives  of  development:    • Life   sustaining   goods   and   services:   To   increase   the   availability   and  widen   the  distribution  of  basic   life-­‐sustaining  goods  such  as   food,  shelter,  health  and  protection.  

 • Higher   incomes:  To  raise   levels  of   living,   including,   in  addition  to  higher  incomes,   the   provision   of   more   jobs,   better   education,   and   greater  attention  to  cultural  and  human  values,  all  of  which  will  serve  not  only  to  enhance  material  well-­‐being  but  also   to  generate  greater   individual  and  national  self-­‐esteem.  

 • Freedom  to  make  economic  and  social  choices:  To  expand  the  range  of  economic  and  social  choices  available  to  individuals  and  nations  by  freeing  them  from  servitude  and  dependence  not  only   in  relation  to  other  people  and  nation-­‐states  but  also  to  the  forces  of  ignorance  and  human  misery.  

 Note   the   emphasis   placed   on   cultural   and   human   values,   self-­‐esteem   and  freedom   from   ignorance;   it   is   important   to   remember   that   development   is  about   more   than   advancing   economic   growth.   Many   economists   believe  development  should  be  less  about  growth,  more  about  inclusive  well-­‐being  and  about  building   capacities   and   resilience   in  a   fast-­‐changing  and  unpredictable  world.    The   most   common   measurement   of   development   is   the   Human   Development  Index   published   each   year   by   the   United   Nations   Development   Programme  Dudley   Sears   has   defined   development   as   “the   reduction   and   elimination   of  poverty,  inequality  and  unemployment  within  a  growing  economy”.      Nobel   Economist   Amartya   Sen   writing   in   “Development   as   Freedom”,   sees  development  as  being  concerned  with  improving  the  freedoms  and  capabilities  of  

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the   disadvantaged,   thereby   enhancing   the   overall   quality   of   life   -­‐   what   really  matters  are  the  capabilities  of  people,  that  is,  the  extent  of  their  opportunity  set  and  of  their  freedom  to  choose  among  this  set,  the  life  they  value.    Amartya   Sen   pursues   the   idea   that   development   provides   an   opportunity   to  people  to  free  themselves  from  deep  suffering  caused  by  • Early  mortality  • Persecution  • Starvation  /  malnutrition  • Illiteracy    For  many,  economic  development  should  be  about   increasing  political   freedom,  cultural  and  social  freedom  and  not  just  about  raising  incomes    Amartya  Sen  on  India  In  An  Uncertain  Glory,   Sen   argues   that   India’s  main   problems   lie   in   the   lack   of  attention  paid  to  the  essential  needs  of  the  people,  especially  the  poor  Despite  considerable  economic  growth  and  increasing  self-­‐confidence  as  a  major  global   player,   modern   India   is   a   disaster   zone   in   which   millions   of   lives   are  wrecked  by  hunger  and  by  pitiable  investment  in  health  and  education  services.  Economic  growth  without  investment  in  human  development  is  unsustainable  –  and  unethical.    Developing  Countries:  similarities  and  differences      There  are  many  indicators  that  can  be  used  to  compare  and  contrast  developing  countries  World  Bank  Income  Classification  (2013)  As  of  July  2013,  the  World  Bank  income  classifications  by  GNI  per  capita  are  as  follows:  • Low  income:  $1,025  or  less  • Lower  middle  income:  $1,026  to  $4,035  • Upper  middle  income:  $4,036  to  $12,475  • High  income:  $12,476  or  more  

Low-­‐   and   middle-­‐income   economies   are   sometimes   referred   to   as   developing  economies.  Please  remember  that  this  term  is  used  for  convenience.    Fall  in  Extreme  Poverty  The  number  of  people  living  on  less  than  US$1.25  a  day  is  projected  to  be  883  million  in  2015,  compared  with  1.4  billion  in  2005  and  1.8  billion  in  1990.  However,  much  of  this  progress  reflects  rapid  growth   in  China  and  India,  while  many  African  countries  lag  behind  

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Diversity  between  developing  countries  • No   two   developing   countries   are   the   same!   There   is   a   huge   diversity  between  them  

• There  are  many  key  structural   economic  differences  between  nations  –  for  example:  

1. The  size  of  an  economy  (i.e.  population  size,  basic  geography,  annual  level  of  national  income)  

2. Historical   background   including   years   since   independence   from   colonial  rule  

3. Natural   resource   endowment   such   as   access   to   mineral   deposits   and   a  favourable  climate  

4. The  age  structure  of  the  population,  natural  rates  of  population  growth  5. Ethnic  and  religious  composition  6. Relative  size  /  importance  of  public  and  private  sectors  of  the  economy  7. Structure   of   national   output   (e.g.   primary,   secondary,   tertiary   and  quaternary  sectors)  

8. Structure   of   international   trade   (both   geographical   and   the   commodity  pattern  of  trade)  

9. Political   stability,   strength   of   democratic   institutions,   transparency   of  government,  level  of  corruption  and  ease  of  doing  business  

10. Ethnic  and  gender  equality,  opportunity  and  tolerance  11. The  ease  with  which  new  businesses  can  be  created  and  sustained  12. Other   competitiveness   indicators   (see   the   chapter   on   competitiveness,  trade  and  growth)  

     

   

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What  are  some  of  the  Common  Characteristics  of  Developing  Countries?  These  characteristics  might  include:  • Relatively  low  incomes  per  capita  and  a  low  level  of  absolute  savings  • Lower  absolute  levels  of  productivity  (labour  and  capital)  • Often  endowed  with  rich  natural  resources  • A  higher   dependency   on   export   incomes   from  primary   commodities   /  low  export  diversification  

• They   have   a   large   share   of   the   population   living   in   rural   areas   and  employed  in  agriculture  

• Limited  scope  and  support  provided  by  a  welfare  system  • A  higher  informal  sector  for  example  in  partial  subsistence  farming  • Many   industries   in   low-­‐income  countries   tend   to  be   some  distance   from  technological  frontiers  

• Relatively  fast  growth  of  population  and  a  younger  average  age  • Rapid  urbanisation  and  large-­‐scale  rural-­‐urban  migration  • Weaknesses   in   infrastructure   such   as   telecommunications,   transport,  ports,  water  and  sanitation  

• Weaknesses   in   institutions   such   as   stable   government,   civil   service  money  and  capital  markets  

• Relatively  higher  tariffs  and  other  import  controls  • Tendency  to  have  capital  controls  /  relatively  closed  capital  markets  • Lower  access  to  advanced  country  markets  

   Poverty  Cycle      The  poverty  cycle   is  a  seemingly  endless  continuation  of  poverty.   It   is  a  vicious  positive  feedback  loop.  However,  it  can  also  be  a  negative  feedback  loop.  Once  a  person   or   community   falls   below   a   certain   level   of   resourcefulness,   a   chain   of  events  starts  to  occur  that  tends  to  perpetuate  the  situation:  progressively  lower  levels   of   education   and   training   leading   to   lack   of   employment   opportunities,  leading   to   criminal   activity   (such   as   sale   of   illegal   drugs)   for   survival,   looting  (another   form   of   crime   and   a   way   of   survival),   leading   to   addiction,   shattered  health,  early  death,  and  breakup  of  family,  leading  to  even  bleaker  future  for  the  next   generation   ...   and   so   on.  This   cycle   continues  until   someone   intervenes  by  providing   worthwhile   means   (not   handouts)   for   people   to   climb   out   of  destitution,   and   by   ensuring   children's   health   and   education.   With   help   the  poverty  or  vicious  cycle  can  be   turned   into  a  virtuous  one.  The  poverty  cycle   is  also  a  great  example  of  a  negative  feedback  loop.  This  is  an  extremely  hard  cycle  to  break  internally  it  is  almost  impossible  so  the  external  sources  must  help  the  people  suffering  from  this  cycle  to  become  productive  members  of  society.    

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Another   cycle   consists   of   the   fact   that   low   income   leads   to   low   savings,  which  leads  to  low  investment,  which  leads  to  low  income  again.      Source:  http://centralecon.wikia.com/wiki/Barriers_to_Growth_and_Development,  accessed  Monday,  9  November  2015        Example  of  Poverty  Cycle  Diagram      Economists   generally   assume   that   people's   willingness   to   save   for   future  consumption  grows  with  their  incomes.  The  poorer  people  are,  the  less  they  can  afford  to  plan  for  the   future  and  save.  The  same  logic  applies  to  businesses  and  governments.  Thus   in  poor   countries,  where  most   incomes  have   to  be   spent   to  meet   current-­‐   often   urgent-­‐needs,   national   saving   tends   to   be   low.   Low   saving  hinders   desperately   needed   domestic   investment   in   both   physical   capital   and  human   capital.   Without   new   investment,   an   economy's   productivity   cannot   be  increased  and  incomes  cannot  be  raised.  That  closes  the  vicious  circle  of  poverty  (Figure  6.2)  So  are  poor  countries  doomed  to  remain  poor?      

     Recent  data  on  gross  domestic  investment  in  East  Asia  suggest  that  the  answer  is  no.  Despite  low  initial  GNP  per  capita,  gross  domestic  saving  and  gross  domestic  investment   in   the   region  were   high   and   growing   until   the   1998   financial   crisis  (Figure   6.3).   Experts   are   still   trying   to   explain   this   phenomenon.   Generally  

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speaking,  however,  many  of  the  factors  that  encourage  people  to  save  and  invest  are   well   known,   including   political   and   economic   stability,   a   reliable   banking  system,  and  favorable  government  policy.    

   In   addition   to   domestic   investment,   foreign   investment   can   help   developing  countries   break   out   of   the   vicious   circle   of   poverty,   particularly   if   such  investment  is  accompanied  by  transfers  of  advanced  technology  from  developed  countries.  The  opportunity  to  benefit  from  foreign  investment  and  technology  is  sometimes   referred   to   as   the   "advantage   of   backwardness,"   which   should   (at  least   theoretically)   enable   poor   countries   to   develop   faster   than   did   today's  industrial   countries.  However,  many  of   the  conditions  needed   to  attract   foreign  investment   to   a   country   are   the   same   as   those   needed   to   stimulate   domestic  investment.    Source:   http://www.worldbank.org/depweb/beyond/global/chapter6.html,  accessed  Tuesday  5th  of  January  2016                    

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Poverty  Cycle  when  applied  to  both  Growth  and  Development        

     Millennium  Development  Goals    In  September  2000,  building  upon  a  decade  of  major  United  Nations  conferences  and  summits,  world  leaders  came  together  at  the  United  Nations  Headquarters  in  New  York  to  adopt  the  United  Nations  Millennium  Declaration.  The   Declaration   committed   nations   to   a   new   global   partnership   to   reduce  extreme   poverty,   and   set   out   a   series   of   eight   time-­‐bound   targets   -­‐   with   a  deadline   of   2015   -­‐   that   have   become  known   as   the  Millennium   Development  Goals  (MDGs).  The   final   MDG   Report   found   that   the   15-­‐year   effort   has   produced   the   most  successful  anti-­‐poverty  movement  in  history:  • Since  1990,  the  number  of  people  living  in  extreme  poverty  has  declined  by  more  than  half.  

• The  proportion  of  undernourished  people   in  the  developing  regions  has  fallen  by  almost  half.  

• The   primary   school   enrolment   rate   in   the   developing   regions   has  reached  91  percent,  and  many  more  girls  are  now  in  school  compared  to  15  years  ago.  

• Remarkable   gains   have   also   been   made   in   the   fight   against   HIV/AIDS,  malaria  and  tuberculosis.  

• The   under-­‐five   mortality   rate   has   declined   by   more   than   half,   and  maternal  mortality  is  down  45  percent  worldwide.  

• The   target   of   halving   the   proportion   of   people   who   lack   access   to  improved  sources  of  water  was  also  met.  

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The  concerted  efforts  of  national  governments,  the  international  community,  civil  society   and   the   private   sector   have   helped   expand   hope   and   opportunity   for  people  around  the  world.  Yet   the   job   is  unfinished   for  millions  of  people—we  need   to  go   the   last  mile  on  ending   hunger,   achieving   full   gender   equality,   improving   health   services   and  getting  every  child   into  school.  Now  we  must  shift   the  world  onto  a  sustainable  path.  The   global  Sustainable   Development   Goals  (SDGs),   or   Global   Goals,   will   guide  policy  and  funding  for  the  next  15  years,  beginning  with  a  historic  pledge  on  25  September  2015,  to  end  poverty.  Everywhere.  Permanently.      The  8  MDG  Goals  

 

   Information  on  goals  and  level  of  achievement      http://www.un.org/millenniumgoals/reports.shtml                    

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Questions  –  Case  study  on  Malawi    Rapid  Development  in  Malawi  Item  1:  Poverty  in  Malawi:  Malawi     is   one   of   the  world’s   poorest   countries,   ranking   160th   out   of   182   countries   on   the  Human  Development  Index.    Progress  towards  reaching  the  Millennium  Development  Goal  of  eradicating  extreme  poverty  has  been   limited.  According   to   the  United  Nations  Development  Programme’s  Human  Development  Report   for  2009,  about  74  per  cent  of   the  population  still  lives  below  the   income  poverty   line  of  US$1.25  a  day  and  90  per  cent  below  the  US$2  a  day  threshold.  The  proportion  of  poor  and  ultra-­‐poor  is  highest  in  rural  areas  of  the  southern  and  northern  parts  of  the  country.  http://www.ruralpovertyportal.org/country/home/tags/malawi    

   The  above  data  is  from  2014,  MDG  Country  Progress  Snapshot:  Malawi.    Item  2:  Exports  in  Malawi:  https://www.youtube.com/watch?v=WGPvFUmCVBM    

Watch  at  00:40  seconds.      

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Item  3:  World  Development  Indicators:  

   Item  4:  FDI  into  Malawi:  In   2012,   Malawi   managed   to   attract   Foreign   Direct   Investment   worth   US$1.2   billion  representing   22   percent   of   the   FDI   flows   to   Southern   Africa.   With   reference   to   Malawi  Investment   and   Trade   Centre   records   for   investment   pledges   for   the   year   2012,   FDI  significantly  rose  by  18  percent  from  US$987,458,231  recorded  for  2011  to  US$1,161,432,000.  This  is  a  reflection  of  the  improved  business  environment  which  attracted  more  investors  from  within  and  outside  Africa.  This  upward  trend  commencing  from  2011  was  a  diversion  from  the  collapsing   investment   figures   traced   from   2008   to   2010.   Infrastructure   and   Energy   sectors  shared   62   percent   and   33   percent   of   the   2012   total   investment   respectively   with   tourism,  services  and  agro-­‐processing  having  minimal  contribution.      Source:  Malawi  Investment  and  Trade  Center  http://www.mitc.mw/index.php?Itemid=648      Item  5:  

 Source:   Drivers   of   Economic   Growth   in   Malawi,   By   Dr   Naomi   Ngwira   Deputy   Governor  (Economics),  Reserve  Bank  of  Malawi.  Page  number  11.  https://www.rbm.mw/documents/governor_statements/ECAMA_Conference_Presentation.pdf      

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Item  6    

http://countryeconomy.com/hdi/malawi    Item  7    Diversifying  Away  from  Tobacco  The  video  says  that  forex  market  influences  the  domestic  firms  a  lot  due  to  electricity  supply.    Therefore,   the   industries   can   be   unstable   and   heavily   relying   on   to   the   foreign   investors.  Because  Malawi  has  large  bodies  of  water,  the  solution  to  create  electricity  is  the  hydropower.  So   the  government   is   trying   to  alleviate   the  pressure  of   forex  market  by  producing  Malawi’s  own  electricity.    Item  8  Prevalence  of  HIV,  total  (%  of  population  ages  15-­‐49)  

Source:  http://data.worldbank.org/indicator/SH.DYN.AIDS.ZS/countries/1W-­‐MW?display=graph    Item  9  http://www.osisa.org/sites/default/files/sup_files/chapter_2_-­‐_malawi.pdf    

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   Video  Notes  -­‐  Doing  Business  in  Africa    1. Economic  Miracle  

Agricultural  subsidy  program,  →  increase  in  average  GDP  rate  7.5%  in  5  years.      80%  of  nation   is   involved   in   agriculture.   2%   involved   in  production  of   tobacco  and  they  look  for  more  types  of  production..    2. Diversifying  Away  from  Tobacco  

Main   productions   :   cotton   tea,   sugar.   Sugar   is   the   biggest   taxpayer   in   Malawi.  Duty  free  deal  with  EU  →    more  expectation  since  ⅔  of  the  products  are  exported.  Good  distribution:  subsidies   transport  costs;   thus,   local  sugar  price  down.   forex  market   influence   a   lot   due   to   electricity   supply.   Government’s   idea:   Power  generation   (hydropower   since   there   are   lots   of   water).   Trying   to   alleviate   the  pressure   of   forex   by   producing   own   electricity;   increase   in   income;   reduce  poverty;  plenty  of  raw  materials.  Desire  more  investment  from  China.  3. Growing  Financial  Sector  

Malawi   became   democracy   in   1994.   Their   investment   have   increased   by   other  African  banks.  3  new  banks  have  entered  the  banking  sector  in  4  month  time.  One  major  bank  out  of  this  3  is  the  Ecobank.  Ecobank  is  the  largest  bank  in  Africa  and  

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it   is   geographically   spread.   This   bank   is   also   ranked  number   9   as  well   as   their  goal  is  to  be  in  top  3  banks.    Although   Malawi   is   developing,   it   is   still   closed   country.   More   than   half   of  Malawi’s  population  is  under  the  age  of  18  and  about  2  and  a  half  million  people  have  cellphones,  which  provides  the  perfect  combination  for  value  edition  mobile  phone   technology   and   this   is   the   key   to   TNM’s   (Telecom   company)   growth  strategy.  4. Surviving  the  Tough  Times  

They  have  started  crocodile  farming,  using  crocodile  skin  to  make  luxurious  bags.  Even   though   there   is  a  big  demand   for   crocodile   skin  products,   it  only   lasts   for  about  a  year  or  year  and  half.  Within  5  years,  Malawi  had  to  make  tough  decisions  about  their   future  but  they  have  seen  the  rewards  of  their  efforts  to  make  their  country   more   developed.   Huge   number   of   Malawians   were   living   below   the  poverty   line   but   it   has   dropped   by   12%.   Due   to   this,   their   government   is  confident   that   it   will   achieve   the   UN’s   Malawian   development   goals.   Although  their   focus   must   stay   on   developing   country’s   rural   areas.   They   also   think  reducing   poverty   is   the   first   thing   to   do.    By  2015  they  think  they  can  meet  their  objectives.            Questions:      

a. Define/state   the   following   term   (two   marks   each).   You   can   use   the   items   given   to  support  your  definition.  

i. FDI  (  Foreign  direct  investment)                                          ii. Economic  Development        

 b. Malawi’s  main  export  is  tobacco,  explain  how  the  Malawian  government  would  benefit  

from  diversifying  their  exports.    

c. Using  a  poverty  cycle,  explain  the  effects  of  the  FDI  into  Malawi  and  why  the  Malawian  government  is  keen  to  attract  more  investors.                                                

d. Malawi   was   quite   successful   in   achieving   the   first   Millennium   Development   Goal,  eradicating   extreme   poverty.   Using   the   information   from   the   text/data   and   your  knowledge   of   economics,     explain   and   evaluate   some   measures   that   the   Malawian  government  might  have  taken  to  do  so.  

           

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Examination  questions      1:      

     

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2:      

       

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 3:    

     

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