IB Economics Development Economics Section 5 1 Overview of Development Economics 5.1 Sources of Economics Growth and/or Development 5.2 Consequences of Growth 5.3 Barriers to Economics Growth and/or development 5.4 Growth and Development Strategies 5.5 Evaluation of Growth the Development Strategies 2 Economic growth entails an increase in a country's total output of goods and services. Economic development entails a higher standard of living. 3 Economic Growth and Economic Development 4 Commons Characteristics of Developing Economies Common Characteristics of Developing Economies Low Per Capita Income • Poverty cycle • High degree of income inequality • Widespread absolute poverty 5 High Population Growth • Large population or high growth rates • High dependency ratios High Unemployment and Underemployment • High unemployment especially season unemployment • High underemployment Over Dependence on Primary Sector • Large rural sector • Primary commodities basis of exports • Commodity concentration • Vulnerability to fluctuating commodity prices Low incomes, Low Life Expectancy & Low Education 1 0.963 0.8 0.7 0.6 HDI 0.34 0.4 0.2 6 0 Norway Chad World Averagge Common Characteristics of Developing Economics Percentage Population Growth 2.5 2 1.5 1 0.5 7 0 Norway Chad World Common Characteristics of Developing Economics: Overpopulation Investment Spending as Percentage of GDP 25% 20% 15% 10% 5% 8 0% Norway Chad World Common Characteristics of Developing Countries: Low Investment 9 Common Characteristics of Developing Economics Development Economics Section 5.1 Sources of Economics Growth and/or development 10 11 Natural Factors Physical Capital Political & Institutional Factors Sources of Growth Human Capital Natural Resources Technological Progress 12 Economic Growth and Development Institutional Framework Sources of Growth Growth in the Quantity and Quality of Labor Development Economics Section 5.3 Consequences of Growth 13 Greater inequality Negative Externalities 14 Consequences of Growth Higher incomes Higher government revenue Improved welfare Types of Growth to Avoid Jobless Growth 15 Ruthless Growth Futureless Growth Voiceless Growth Development Economics Section 5.2 Barriers to Growth 16 Poverty Cycle Low Incomes Low Investments 17 Low Savings Institutional & Political Barriers 18 Economic Growth & Development International Trade Barriers Financial Barriers Barriers to Growth & Development Social & Cultural Barriers Low levels of Foreign Direct Investment (FDI) Poverty & social conflict Low growth & taxation revenue 19 Political instability Political instability & Corruption Development Economics Section 5.4 Growth and Development Strategies 20 Growth Models Growth and Development Strategies 21 Growth Models & Growth and Development Strategies Harrod-Domar Growth Model Increased Savings Increased incomes Increased output 22 Increased Investment Larger capital stock Challenges for Developing Economies 23 Harrod-Domar Growth Model Increased Savings Increased incomes Increased output Increased Investment Larger capital stock 1. 2. 3. Very low propensity to save High levels of consumption Capital flight 24 Challenges for Developing Economies Increasing output may be hampered by: poorly skilled workforce and a brain drain poor management skills Low levels of Research and Development Harrod-Domar Growth Model Increased Savings Increased incomes Increased output Increased Investment Larger capital stock Structural Change and Dual Sector Model 25 • Surplus Labor Agricultural Sector Expanding Manufacturing Sector • Capital growth as profits invested 26 Challenges for Developing Economies Structural Change and the Two Sector Model • Surplus Labor Expanding Manufacturing Sector • Capital growth as profits invested Agricultural Sector Technology replaces labor and spare capacity in the agricultural sector not utilized Capital flight instead of investment Model assumes steady labor costs but wages may rise lowering profits and further investment Export-led Outward-looking Growth Strategies Focus on production of goods with comparative advantage exists 27 Higher incomes Growth in both domestic and exports markets 28 Necessary Conditions for Export-led Growth Strategies Liberalized trade and capital flows Floating exchange rate Investment in infrastructure Deregulation Export-led Growth Strategies Focus on production of goods with comparative advantage exists Higher incomes Growth in both domestic and exports markets Import Substitution Growth Strategies Focus on producing good domestically 29 Provide Subsidies Impose tariffs and quotas on imported goods Advantages of Export-led Strategies 30 Disadvantages of Export-led Strategies Advantages of Import Substitution Strategies 31 Disadvantages of Import Substitution Strategies 32 Growth Strategies Commercial Loans • Direct Foreign Investment • Long-term investment by MNCs 33 Advantages of FDI Disadvantages of FDI Fills domestic savings gap MNCs may provide their own labor Multiplier effect May exploit the environment Revenue for government May exploit domestic labor Provides employment and training May expatriate profits and avoid taxes 34 Development Strategies Microcredit • Capital to small scale business projects Fair Trade • FairTrade bodies allow farmers and small businesses to use an internationally recognized logo that certain standards of fairness are met Development Economics Section 5.5 Evaluation of Growth and Development Strategies 35 36 Aid Aid Types of Aid 37 Humanitarian Development Food, medicine emergency relief Improve human resources, technology and fund specific projects Classifying Aid Bilateral and Multilateral Commodity Aid Long Term loans Technical Assistance Aid Tied Aid Project Aid 38 Advantages of Aid 39 Disadvantages of Aid Market-led Versus Interventionist Growth Strategies Market-led Strategies Establish Free Markets 40 Interventionist Strategies Active Government manipulation of markets • Export-led growth • FDI • privatization • • • • Import Substitution protectionism nationalization exchange rate manipulation 41 A New Consensus about Growth and Development Free markets Debt Relief Trade Justic e Political stability Effectiv e targeted aid 42 Resources Gapminder is an excellent resource that present statistics in an attention grabbing way. A provocative article by New Internationalist. John McMurty argues that free markets are often presented as the sole solution to poverty and human development when the global market is inefficient and life-destructive. Mailer, M. H. & Nelson, J. A., (2007) Introducing Economics: A Critical Guide for Teaching, M.E. Sharp Armonk. Jeffry Sachs author of The End of Poverty: Economic Possibilities for Our Time presents his views in a lecture at Columbia University. 43 Resources The Girl Effect explain how the quantity and quality of labor can be improved by focusing on girls. PBS also provided a lesson plan based on “Global Women and Poverty”. This video exposes Nike to criticisms of exploitation. 44 Suggested Activities 1. Students undertake in-depth research of an undeveloped economy of their choice. They present information to the class using the section headings as a way of organizing their information. 2. Student convince others of the worth of a microcredit loans which is extended through the Kiva organization. See details here. Assessment 45 As a major section of the course and one that so well fits IB Learner Profile, Section 5 is a popular choice for examiners devising questions to test your understanding of the course. Only Section 1 and 5 are identical for both SL and HL students. Development Economics can be asked in conjunction with questions about Macroeconomics and International Trade. It is also a popular topic of data response questions. Typical Questions 46 Questions that ask you to explore the relationship between growth and development: 1 Evaluate the view that economic growth will lead to economic development and associated improvements in welfare. 2 Explain the differences between economic growth and economic development. 3 Explain what is meant by sustainable development. Typical Questions 47 Questions that focus on barriers to growth and development: 4 Explain the main barriers to development. 5 Explain how overdependence on primary products may act as a barrier to economic development. Typical Questions 48 Questions that ask you to evaluate developmental strategies. 6 Evaluate the view that interventionist strategies are more effective than market orientated strategies. 7 Evaluate the effectiveness of aid in achieving economic growth and development 8 Evaluate the role of MNCs and FDI in achieving economic growth and development. Typical Questions 49 9 10 11 Explain the difference between inward looking growth strategies and outward looking growth strategies. Evaluate the strategies that can be used to achieve economic development Explain how an increase in the quantity and quality of a nation's factors of production can promote economic development. Typical Questions 50 ⑫ Explain the role of fair trade organizations and microcredit schemes in promoting economic development. ⑬ Evaluate the role of MNCs in economic growth and development. ⑭ Evaluate trade and aid as means of achieving economic growth and development. Typical Questions 51 Questions that focus on how development is measured: ⑮ Explain how development might be measured. Questions that link to other sections of the course. ⑯ Evaluate the impact of globalization on the economic development of developing countries. ⑰ Evaluate the role of the World Bank and the IMF in economic growth and development. Diagrams 52 Section 5 does not have a great number of associated diagrams. However you should know the following: 1. PPCs curves that can distinguish between growth and development. 2. Poverty Cycle. 3. Macroeconomic and International Trade diagrams as they relate to development issues.