# data[].attributes.body
1. More efficient use of resources - law of comparative advantage

trade liberalisation can benefit developing countries because it allows greater specialisation in areas of comparative advantage

greater efficiency, higher living standards with more goods and services

a country is said to enjoy a comparative advantage if it can produce a good or service at a lower opportunity cost than another

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The different PPF gradient indicates that rwanda has a comp adv in coffee production while the US in pharma thus each should specialise in the one they have a comp adv in.

they should agree mutually beneficial terms of trade before exporting their surpluses

greater efficiency and an increase in economic growth

increase in living standards with more goods and services available for consumption

since the genocide of 1994 Rwanda has achieved an average rate of economic growth of over 7%

1994 import tariffs were 40% now they are 11.3 on average

rwanda is a member of COMESA and EAC

in 2016 they signed a trade deal with EU

A part of the new AfCFTA - market of 1bbn people

by 2035 30 mn will be lifted out of poverty

52% increase in intraregional trade by 2035

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16.5% unemployment in Rwanda

21% youth unemployment

agriculture tends to be limited

Attracting FDI

accounts for 4.5% of GDP

VW has built Africa's first EV

Benefit for producers

lots of very small markets

allows companies to take advantage of larger markets which leads to economies of scale and lower average costs

member of COMESA (520mn) and EAC (170mn) gives it access to larger markets as well as AfCFTA (1bn)

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trade liberalisation leads to lower prices

increase in consumer surplus = P1CBP2

economic partnership with the EU eliminates tariffs on imports coming from the EU

higher rates of innovation

competition encourages firms to improve non competitiveness which consumers benefit from

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1. overspecialisation

Rwanda is highly dependent on a narrow range of primary products

Prebisch-singer hypothesis

MNC's use their monopsony power

54% of exports are commodity exports

2. infant industry argument

only 16% of GDP is manufacturing constraining economic development

3 members of EAC refused to sign the economic partnership with EU because of fears that their infant industries would be damaged

3. current account imbalances

9% of GDP

deterioration as imports coming

4. loss of tariff revenue

tariff revenue accounts for more than 20% of revenue in most SSA economies

5. geography

landlocked

trade transactions high

bad neighbours

collier's constraints

$3245 to ship a 20 foot container of dry cargo

72% of non-commodity exports

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4.5% of GDP is inward FDI

Market based strategies to attract FDI include attractive rates of corporation tax, flexible labour markets and liberalisation of product markets.

In 2018 VW opened Africa's first electric car plant in Kigali

$20 million investment was designed to create up to 1000 jobs for the country

In 2019 Pink Mango announced plans to set up a garment factory in Kigali which will provide 7500 jobs.

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World Bank's 'ease of doing business' Rwanda ranked 29th out of 190 countries.

No other African country featured in the top 100

Government incentives for international investors

In Kigali's special economic zone there are tax breaks and investment allowances

Rwanda has lead high growth rates 7% average over the last decade

low level of corruption

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22% of people are defined as deprived

Harrod-Domar model suggests that low levels of savings in developing countries lead to a lack of capital accumulation which impairs economic growth and development

Real GNI per capita is only $2003 low MPS

39% of the population are living in absolute poverty (below $1.90 a day)

8.9% savings compared to Singapore's 54%

FDI is a means of filling the savings gap

The investment that foreign MNCs bring such as VW can lead to faster rates of economic growth and provide a way out of the vicious cycle

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investment represents an injection into the circular flow of income

it boosts the level of AD and can lead to multiplier effects -> accelerator effect if the higher level of economic growth induces a proportionately larger rise in capital investment

capital accumulation increases productivity to the right

Investment in new infrastructure

Qatar Airways has invested $780 billion in the building of Rwanda's new Bugesera international airport.

Increase in employment

VW created 1000 jobs while Pink mango has a commitment for an extra 7500 workers

Human capital spill over

FDI is often linked to better training for local workers which boosts productivity

Pink Mango's investment came with a commitment to build the skills of 500 local garment workers.

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1. Profits may not be reinvested into the host country

2. Limited job creation effects

3. Increased competition for domestic producers

MNCs are often more efficient so local suppliers cannot compete.

4. No fiscal dividend

financial incentive such as Rwanda's 0% corporation tax

5. Negative impact on the current account of balance of payments

repatriation of profits and dividends will increase leakage of net secondary income

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64% of Rwandan's are unbanked

This is due to the high administration costs as well as lack of education

Muhammad Yunus established the idea that poor people in low income households given the chance will repay small loans

Rwandan microfinance sector consists of 460 institutions who serve nearly 4 million SMEs

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Access to credit

traditional banks won't extend loans to those with no to little collateral

3.5% of Rwandan's borrowed from a commercial bank in 2019

The microfinance sector has started to plug the gap

Rwanda's 7 year national strategy for transformation identifies the SME sector has the key to economic growth and employment.

Rwanda has a problem with high unemployment (16%) and youth unemployment (21%)

It has a target to create 1.5 million farm jobs over the course of the 7 year plan

Micro-credit helps smooth consumption

many developing countries suffer from primary product dependency (27% of Rwanda's exports are coffee)

Primary products are volatile due to the inelastic nature of demand supply

Micro credit allows the grows of coffee in Rwanda to smooth their consumption when income is volatile

Plugs the savings gap

only 21% of adults in Rwanda save in banks

8.9% of GDP is savings

93% of Rwandans are now financially included up from 48% in 2008

One of the main drivers of this has been rise in micro savings schemes

Addresses structural gender imbalances

women are more reliable

lending circles are created

jointly liable in the lending if one defaults then so does everyone as they're jointly liable

64% of microfinance customers in Rwanda are women

Female economic empowerment with 42% of businesses in Rwanda now owned by women

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Debt

microcredit loans are expensive

microfinance institutions do not provide cheap loans

interest rates on average between 24-36%

making lots of small loans creates lots of admin costs

Depends on how loans are being used

the ROI is important

in south africa 94% of all loans are used for consumption

this means borrowers aren't generating new income with the initial loan

compounds the debt-poverty cycle

Microenterprises rarely achieve sufficient scale

trade into global markets

low ULC

not good job creators

markets become saturated and prices driven down thus incomes low too

Depends on the type of microfinance

NGOs operate in the sector

funds from private banks may deliver different outcomes from those provided by NGOs

moral hazard

Microfinance is not a panacea

no clear evidence microfinance lifts people out of poverty

development is multifaceted and dimensional

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many developing economies heavily subsidise essentials such as food or fuel

developing economies spend more than $400 billion annually shielding their populations from high fuel prices

India for example spent over $20 billion annually on energy subsidies

Iran and Venezuela spend more than 10% of GDP on energy subsidies

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case for removal of government subsidies

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case for removal of government subsidies

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They undermine fiscal sustainability

too expensive

fund these subsidies requires governments to borrow money

rising budget deficits, crowding out

Opportunity cost

India spends $20 billion annually on energy subsidies

Rwanda is running a budget deficit of 6%

Could be better spent on healthcare/education

Economic inefficiency/deadweight welfare loss

leads to disequilibrium in markets

want to promote energy efficiency

distort the market and leads to overuse of energy

removing subsides would make people more efficient

negative externalities

Current account position

over 9% of Rwanda's GDP

leads to a deterioration of current account

Subsidies often do not help the poor

most fuel subsidies go to the rich

IMF research - 7% of fuel subsidies in poor countries go to the bottom 20% while 43% end up in the pockets of the richest 20%

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Impact on consumer welfare

39% absolute poverty

22% deprived according to HDI

removal of subsidies would cause this to rise and squeeze real household disposable incomes

Subsidy removal can have a regressive effect on the poor

In Indonesia fuel subsidy reform led to extra support for free healthcare, youth social programmes and even cash transfers to the poorest

Higher inflation and lower economic growth

producer cost of production rises

SRAS shifts to the left

higher prices

GDP lower

cost push inflation

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1. increases problem solving skills of the workforce

higher levels of productivity

2. technology diffusion

developing economies can implement and adopt new technology

3. increases occupational mobility of labour

less structural unemployment

lewis model as a mobility of labour can move from agriculture to manufacturing

4. FDI flows

vietnam has amazing education which acts as an attraction for FDI

5. improving health outcomes

increases gender equality

2/3 of the world's illiterate are women

more knowledge on contraception

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Rwanda is one of the top performing countries in SSA

98% of Rwandan children are enrolled in primary school

73% literacy rate (average SSA is 64%)

National strategy for transformation seeks to prioritise STEM

160th on HDI Index in 2022

Rwanda scored only 0.38 on the World's bank's human capital index

Vietnam spends 5.8% of GDP on education compared to Rwanda's 3.2%

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2022 - 160th on HDI ranking

Rwanda productivity score of 0.38

1. long time lags

2. expensive to implement

budget deficit of 5.2%

3. requires other interventions

healthcare

poverty

malnutrition

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1. The infant industry argument

Ha-Joon Chang argues protectionism should be a key component of a country's development strategy

27% of exports are coffee due to a primary product dependency

only 16% of GDP is manufacturing

Made in Rwanda applies 25% tariff

Tariff increased from £0.15 to £1.90 per kg on used clothes imports in hope that it creates more than 25000 jobs

In 2016 3 member of the EAC refused to sign European economic partnership agreement

2. Employment

16.5% unemployment even higher youth unemployment (21.5%)

3. Increase in producer surplus

4. Tariff revenue

21% of Rwanda's total fiscal revenue

5. Improve the current account balance of payments

Evaluation

1. Distortion of comparative advantage

2. Bad for consumers

3. Bad for producers

4. Protectionism may not be possible

Rwanda is a member of 3 RTAs

EAC is a free trade area which prevents Rwanda imposing protectionism measure

In 2016 Rwanda entered the European committee

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China held down the external value of their currencies in the early 2000s

Helped to deliver 10% growth per annum

2020 investigation by the US into Vietnam currency manipulation

6,2% of GDP surplus

An aim of the EAC is to establish a currency union by 2023

Advantages

1. Export led growth

2. International trade

3. Capital investment

4. Low inflation

Evaluation

1. A loss of control over monetary policy

Mundell-Fleming model argues that an economy cannot simultaneously maintain a fixed exchange rate, free capital movement and an independent monetary policy (the Impossible Trinity)

2. Problems with capital controls

3. They need for currency reserves

4. Retaliation

5. It depends on the PED for imports and exports

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1. Can boost level of AD

spending on infrastructure projects as investment

leads to a multiplier effect

employment and job creation

accelerator effect - may induce higher levels of private sector capital accumulation

crowding-in effects

boost real GDP per capita

makes up a third of HDI

2. Geographical mobility of labour

lewis model

16% of GDP is manufacturing

3. Reduces business cost of production

lower transport costs

energy costs

unreliable and expensive energy in Africa

4. Trade transition costs

5. Boosts competitiveness

Rwanda ranked 111th out of 140th in global competitiveness report

landlocked

electricity issue

2018 - $2.5bn Railway project connecting kigali to dar es salam

Evaluation

1. time lags

dar es salam train won't be complete until 2030

2. Debt traps

National strategy for Transformation

Public debt-GDP ratio

2019 - 53% now 64% pandemic induced

China lends to LICs who don't have a realistic opportunity to repay the debt

3. Investing into the right kind of infrastructure is crucial

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Promoting joint ventures with global companies

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Promoting joint ventures with global companies

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An international joint venture is where companies in two or more countries enter into an alliance to do business.

China does a lot of joint ventures with overseas companies

Ford entered into a joint venture with Changan automobile

Rwandair set up a joint venture with Qatar to operature the Bugesera airports

1. Higher levels of capital investment

Harrod Domar model

Plugging the savings gap through inflows of foreign capital

LRAS will shift outwards increasing potential productivity of the economy

2. Technology spillover from the foreign country firms

Insufficient R&D funding

Lack of R&D budgets can act as a drag on economic growth

3. Export growth

Allows local businesses to benefit from the economies of scale

Lends to lower costs of production and export prices

Rwandair will have access to Qatar airways logistics and customer base

4. Employment

will bring jobs

investment in human capital

Bugesera airport will be the biggest employer in Rwanda

Evaluation

3. Depends on the extent of technology transfer

4. Depends on the absorption capacity

Brought financing and R&D

this does not mean that overnight the productivity growth rate is transferred

issue is that in a developing country there is a skill issue

5. Depends on the number and size of the joint ventures

China has been very successful in promoting economic development through joint ventures

6. Diseconomies of scale

7. Conflicting business interest

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Many developing countries suffer from primary product dependency.

Price volatility

Aim is price stabilisation

Government buys up supplies when harvests are plentiful and sells them onto markets when stocks are low.

The buffer stock agency attempts to fix a target price that balances demand supply over the long term.

If there is a good harvest supply increases to S2 and price falls to P2.

To maintain this price government buys surplus to reduce supply on the market and keep prices at the target price.

Bad harvest fall in supply and price rises to P2 government sells good from buffer stock to increase supply back to S1.

Ghana and Ivory coast have combined cocoa market share of 60%.

1. More stable prices

2. More stable incomes and prices for farmers

since 2016 prices are 30% below the average of the last 10 years meaning Rwanda's 400000 small farmers are now struggling to cover operating costs

3. Encourage investment and productivity improvements

4. Create employment

5. A source of export earnings

6. Lower risk of food poverty for poorest consumers

price rises to P2

39% of Rwandan's live in absolute poverty

22% deprived as defined by MPI

Evaluation

2011 Thai government made a rice buffer stock scheme

Scheme was severely critcised by IMF for its expensve

Scheme was ended in 2014 because the government couldn't afford the $4 bn in finance costs

1. High intervention price leads to rising supply surpluses.

2. Free riding

Rwanda is so insignificant that it has very little influence over price - it is a price taker

International cooperation required to make a buffer stock scheme work however some countries may free ride on their efforts to keep prices high

1970s buffer stock scheme for tin

Aim was to deliver price stability

No country can unilaterally establish a buffer stock scheme

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1. Lewis model

Industrialisation is about moving away from agriculture to a rich diverse industrial base

The economy is divided into two sectors

Agriculture and manufacturing

The Economist argues 'few countries have escaped poverty without putting a lot of workers through factory gates'

Benefits

At early stages of development the rural subsistence is very large

Marginal productivity is zero

One additional worker to agricultural sector delivers no productivity/output gains

Lewis model argues that it is virtually zero

According to Lewis, developing countries which focus on just agriculture are doomed to low savings, low productivity and low growth.

Wage rates in urban, industrialising areas will be higher due to the greater profitability as productivity is greater

Lewis turning point - when the abundant supply of labour from the agricultural sector becomes exhausted

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Vietnam has gone through rapid urbanisation.

29.8% to almost 37%

Manufacturing makes up 25% of the economy

per capita income has gone from $100 to $2540 (PPP = $5000)

In 2014 the value of Vietnam's manufacturing exports was $107.9bn equivalent to 72% of total Vietnamese exports

Vietnam is now the world's 21st largest manufacturing exporter

Average GDP per capita in manufacturing is $8935 compared to $5000 for the rest of its economy

Vietnam has an ageing population

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1. PP dependency

allows countries to get away from primary product dependency

Prebisch-Singer hypothesis

2. Savings gap

Harrod-Domar model

If an economy remains focused on a small range of primary products this will lead to low GDP per capita growth

3. Employment opportunites

Poor rates of employment

2023 - unemployment in Vietnam 1.92%

Industrialisation has allowed vietnam to make the transition from LIC to MC

more people at work boosts RDI and GDP

reduce child mortality rate

The numbers living in absolute poverty has fallen from 58% to 3% today in Vietnam

4. Consumer welfare gains

manufacturing increase leads to textile goods

more choice of goods

Evaluation

1. Difficult for developing countries to develop their manufacturing sectors

This is due to:

lack of access to skilled labour

low rates of capital investment due to savings gap

weak infrastructure

a lack of comparative advantage

16% manufacturing

urbanisation only 18%

Made in Rwanda iams to accelerate urbanisation from 18% to 35% and create more than 25000 jobs

2. Premature deindustrialisation

reshoring

countries are running out of industralisation opportunities sooner

the rise of automation

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Tourism is a key industry for Rwanda

Specifically high end tourism

Home to half of the world mountain gorilla population

Costs $1500 for a gorilla tracking permit

£30m sponsorship deal with Arsenal

Expansion of Rwandair means the country is easy to get to now

Travel and tourism in 2019 accounted for 15.1% of GDP up from 4.7% in 2000

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1. High income elasticity of demand

luxury tourism has a YED greater than one therefore as income rises the percentage increase in QD will rise by even more

2. Source of foreign exchange gap

Tourists will spend foreign currency leading to a reduction in the foreign exchange gap. Brings in $498mn in forex each year.

3. Economic growth

Travel and tourism in Rwanda in 2019 accounted for 15.1% of GDP up from 4.7% in 2000

Increases net exports leading to arise in AD

The benefits can be increased via the multi0plier and accelerator leading to an increase in both AD and LRAS

Tourism may lead to an increase in FDI in order to invest in infrastructure

Rwanda 7% GDP growth is widely attributed to tourism

4. Increased employment opportunities

Unemployment is 16.5% and youth unemployment is 21%

Jobs can be created by tourism and needed to absorb the population boom

In 2019 travel and tourism accounted for 13.2% of employment in Rwanda

5. The environment

Incentives to conserve areas of the environment that attract tourists

Provides the stream of income required to promote environmental schemes

10% of tourism income goes towards the environment

Evaluation

1. COVID 19

led to a huge fall in demand due to fall in income and lack of travel ability

This is due to the YED of tourism being less than 1

2. Deterioration in current account of balance of payments

3. Employment

4. Negative externalities

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The aim of fair trade schemes is to offer producers in developing countries a guaranteed minimum price for their goods

This fair price will be over and above the ruling market price

Producers are only granted a fair trade license if they meet a certain minimum standard.

Roughly $9bn worth of fairtrade products were sold in 2017, their raw material sourced from 1.66 million farmers.

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1. Guarantee a higher price to producers

Primary products are volatile

Producers in the world's poorest countries often receive a low price due to monopsony powers in developed countries

An average coffee farmer lives on just £1.37 a day

Fair trade increases the prices received by some of the world's poorest producers

More than 14000 small coffee farmers in Rwanda are protected by the fairtrade scheme

Since 2016 prices have fallen 30% below the average

39% of Rwandans live on less than $1.90/day (ab pov)

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2. Greater price stability

prices are volatile

incomes and earnings from exports can change rapidly

guarantee a minimum price

3. Improved production standards

4. The fairtrade premium

Additional sum of money paid on top of the fair trade minimum prices which goes into a communal fund for farmers to invest

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1. Restricts economic development

2. Distortion of market forces

only 14,000 out of 400,000 small coffee growers are fairtrade members raising inequality

3. Difficulty in setting fair trade price

2016 only 34% of coffee grown as fairtrade could be sold at minimum price

4. Fairtrade premium is often wasted

5. Who captures the gains?

6. Does not address the fundamental cause of poverty

greater investment needed to raise farm productivity

multi-lateral trade agreemenets

reduce vulnerability to climate change

reduce import tariffs

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1. A likely impact of a Fairtrade scheme on agricultural communities is that a fairtrade premium paid to producers guarantees a minimum price for primary products such as cocoa which are price volatile. This provides a stabile form of income, 44% of which is used to improve infrastructure and 45% on farm equipment in the form of capital investment thus supporting farmers in developing countries.

2. A way in which cocoa farmers could boost their incomes despite the falling price in cocoa is through investment into capital equipment such as farm equipment. This is already being seen by the 45% of invested revenue which can help increase productivity and efficiency allowing farmers to increase output which can reduce costs of production.

However, opportunity cost as it is expensive for farmers whose incomes are already falling.

Another way is diversifying crops and produce so that they can reduce impacts of volatile prices caused by the price elasticity of demand and supply of primary products which will help lower the risk they face of fluctuating world cocoa prices. When world prices of cocoa fall e.g. in 2017 by more than a third, farmers would be able to resort to producing their other crops, which would boost their incomes, higher than if they were to only farm cocoa.

However, alternative methods would need to be found over the long run as they need to tackle the fundamental issues of their poverty.

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A problem for the Ivory Coast of dependency on cocoa for a large proportion of their exports is that they become primary product reliant. An issue with primary product dependency on commodities such as cocoa which make up 54% of Ivory Coast's exports is the effect on the current account of the balance of payments. According to the Prebisch-singer hypothesis countries that specialise in primary products will experience deteriorating terms of trade in the long run thus as incomes rise demands for primary commodities such as cocoa do not so net trade worsens for primary exporters.

However, Ivory coast specialises in cocoa production due to the significant comparative advantage that it has thus through the exploitation of CA this may lead to efficiency and productivity gains thus increasing GDP and higher living standards.

Another problem for the Ivory coast of dependency on cocoa for a large proportion of their exports is the income volatility caused by the volatility of the cocoa prices meaning incomes can change rapidly as seen by cocoa prices falling by more than a third in 2017, this results in less revenue being invested into capital equipment to produce more cocoa and diversify thus making it hard to plan ahead for the future.

However, the fairtrade premium and guaranteed minimum prices has supported farmers in guaranteeing a more stable income for them to invest into improving their farms despite the fluctuating prices.

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A policy that the Nigerian government could use are demand side fiscal policies such as cutting tax for corporations in order to incentivise businesses to invest more and to attract FDI thus increasing the competitiveness for Nigerian businesses to continue competing as a result of lower prices which can be passed onto consumers and increase market share as they no longer have tariff barriers with neighbouring countries who they can now export their goods and services to thus boosting AD.

However, a cut in tax will lead to a fall in tax revenue and may not incentivise businesses as confidence may be low thus worsening of the balance of payments.

Another policy is supply side policies which could be used are supply side policies such as investment into education and training to boost the complex problem solving skills of the average Nigerian worker and their marginal revenue productivity. This will thus lead to lower unit labour costs and increased efficiency allowing them to compete with the lower labour costs from other African countries. This will reduce the concerns of Nigeria's manufacturers and trade unions as there will be a decrease in structural unemployment and occupational immobility of labour as higher paying job opportunites are created thus shifting LRAS outwards and AD.

However, supply side policies such as infrastructure and education may have long time lags which won't allow Nigeria to catch up in the short term as students won't enter work force and employment immediately.

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A likely benefit of increased economic integration is the trade creation effects. This is the transfer of production from inefficient high cost domestic producers to low cost efficient producers within the RTA. This agreement can be seen as the removal of tariffs on 90% of goods and liberalising services. Nigeria will be able to increase its trade to a bloc of 1.2 billion people as exports begin to increase from productivity and efficiency gains as well as lower unit labour costs due to the exploitation of economies of scale and comparative advantage which is when a country is able to produce a good or a service at a lower opportunity cost than another thus boosting exports resulting in an outwards shift of AD and SRAS as cost of production falls. Furthermore, allowing sub-saharan Africa to recover overall as a result of the collapse in commodity prices as they can now trade freely with one another.

However, there may be trade diverting effects as a result of the increased integration into the RTA for sub saharan african countries in particular the smaller nations as there is a transfer of production from efficient low cost producers to less efficient high cost producers within the RTA as a result of the imposition of a common external tariff on non-member countries thus resulting thus resulting in a loss of efficiency.

Another likely benefit is an increase in consumer welfare caused by a greater amount of choice as tariff barriers are removed allowing countries to freely trade with one another within the RTA as there is an expansion of the market bringing about an increase in consumer surplus meaning consumers can benefit from access to a variety of products thus improving living standards and competition due to firms taking advantage of economies of scale. This improvement in living standards and increase in real disposable incomes will be able to help the high number of sub saharan africans living in poverty as they can prosper economically from the falls in living standards and improvements in quality caused by increased competitiveness. This can be seen by the fall in P1 to P2 and increase in consumer surplus from P1AB TO P2AC.

However, producer surplus may fall as a result of increased competition causing lower prices as more firms take advantage of economies of scale and the larger supply of labour pushing down unit labour costs while increasing productivity thus in order to compete with one another the prices fall. Inefficient domestic producers particularly in smaller economies will struggle to compete as the markets are now liberalised and open to trade against larger firms thus a fall in producer surplus can be seen as inefficient producers are left behind.

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1. Bi-lateral

2. Multi-lateral

3. Project aid

4. Technical assistance

5. Humanitarian aid

6. soft loans

7. tied aid

8. debt relief

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Since the 1994 genocide Rwanda has enjoyed exceptional relations with aid donors due to genocide guilt

In 1995 alone more than $2 bn was given in the form of grants and assistance

In 2016-17 Rwanda still received $1.22 billion in development aid (13.7% of GDP)

30-40% of Rwanda's national budget is supported by foreign aid.

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1. The big push argument

Harrod-domar model

insufficient finances to fund investment projects

Aid can help developing countries by closing this gap that otherwise leaves them stuck in a poverty trap

Jeffrey Sachs 'The End of Poverty' argues for package of massive aid transfers the big push to ensure capital accumulation

South Korea is a classic example of a big push story

Aid rose sharply for South Korea in the late 1950s peaking at 20% of GDP

Rwanda's GNI per capita is still only $2003

39% of population in absolute poverty

2. Provide funding for infrastructure

fund industrialisation (lewis model) - only 18% urbanisation

private sector more likely to invest FDI

3. lead improvements in health and education

life expectancy has increased frmo 26 to 69 today

infant mortality rate has fallen from 196 deaths per 1000 births to 26 deaths per 1000 births

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1. Corruption issues

many developing countries suffer from poor governance

Aid may therefore not reach those for whom it is intented

A report in 2020 indicated that $19 billion in aid to Afghanistan had been lost

Rwanda is one of the least corrupt countries in Africa

2. Dependency

countries become excessively dependent on external aid

30-40% of Rwanda's national budget is supported by foreign aid

World Bank - Rwanda's economy is vulnerable to fluctuations in foreign aid

Growth fell to only 4.7% in 2013 after major donors like the UK withheld aid

Dambisa Moyo in 'Dead Aid' explains how dependency can be created

Aid donors decide to flood an affected area with free foreign nets

This puts the local supplier out of business

According to moyo: the long term effect of the aid injection has been to decimate the local economy and make the local population dependent on foreign aid from abroad

3. Aid and dutch disease

Another argument by Dambisa Moyo is that foreign aid can lead to an appreciation of the real exchange rate which can kill off exports

lewis model bad for economic development as manufacturing stifled

4. Aid may be wasted

5. Aid which finances capital spending may lead to current spending commitments that a country cannot afford such as schools and hospital workers wages

6. Depends on the country

7. Depends on the aid given

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Development in poor countries has been hampered by debt.

Debt crisis in the 1980s and 1990s as couldn't pay interest on large debts to international finance institutions.

Under the heavily indebted poor countries initiative the IMF and World Bank have granted debt relief to the world's poorest.

36 countries have gone through the process ($116 bn cost)

After 1994 genocide Rwanda had a debt burden equivalent to 126% of GDP

2000 - Rwanda entered HIPCI

$1.4 bn debt was cancelled upon HIPC completion in 2005

Rwanda pays $48mn annually

In 2020 Rwanda received over $16 mn from the IMF for an initial period of 6 months

By not servicing debt they have more capital which can be spent on financing health and infrastructure

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1. Opportunity cost

Debt servicing costs developing countries more than $1.5bn a day

1990s debt interest charges were costing Rwanda $48mn annually more than its entire education budget

Since 2005 economic growth has averaged 7%

Percentage of population living in absolute poverty has fallen from 60% to 39%

Proportion of children in primary school has gone from a third to over 98%

Life expectancy has increased from 47 to 69

2. Economic growth

debt payments are a withdrawal

cancellation can stimulate short run economic growth

can free up resources for investment - multiplier effect - accelerator effect - increased mobility

reduce taxes

cut corporation tax

incentivise work

could be spent on education/health care LRAS increases - productivity gains

3. Savings gap

helps them out of poverty trap and harrod domar model

4. Fill in foreign exchange gap

# data[].attributes.body
1. May damage developing countries access to financial markets in the future

downgrades credit ratings making it more expensive to borrow in the future

2. moral hazard

developing economies may pursue macroeconomic policies which are unsound

3. depends on conditions attached

abolishing inefficient subsidy regimes is growth enhancing

washington consensus

4. Depends on the country

governance matters / government intervention

5. Depends on the magnitude

6. Time period - 8/10 markers