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Development is about quality of life.

Amartya Sen sees development as concerned with improving the freedoms and capabilities of the disadvantages, thereby enhancing the overall quality of life.

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HDI is a composite measure consisting of:

Health

Education

Standard of living

Uses the criteria to create an overall score between 0 and 1

> 0.8 high

0.5 - 0.8 medium

< 0.5 low

Advantages

composite measure

easy to compare countries

Criticisms

reliability of the data

doesn't capture all the information relevant to economic development e.g. gender equality, human rights, environment

role of quality is ignored

wide divergence

arbitrary - all given a 1/3 weighting

IHDI - inequality - adjusted human development index

IHDI = HDI when there is no inequality

It is a broader measure of development than HDI but can still be criticised.

Multidimensional poverty index (MPI)

Uses the same 3 indicators but much broader categories

The rule - if a person is deprived in a 3rd or more of 10 weighted indicates the MPI classified as poor

1. Nutrition

2. Child mortality

3. Years of schooling

4. Intensity of poverty

5. Cooking Fuel

6. Toilet

7. Water

8. Electricity

9. Floor

10. Assets

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Diagram representing the inelastic nature of primary products.

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27% of Rwanda's exports are Coffee followed by tea which accounts for 22%

Disadvantages of Primary Product Dependency

Price Volatility

commodity prices fluctuate wildly

the inelastic nature of demand and supply

tend to be a necessity

low proportion of real disposable income spent on primary products

the time that it takes to form a crop

3-5 years to grow coffee

inelastic demand and supply curve

leads to huge volatility

arabica coffee prices have been hugely volatile over the last 25 years

10 years to create a mine

brazil is the world's biggest coffee exporter

dramatic increase from $0.50/lb to $2.50

Income volatility

small scale farmers will have a lot of volatility

significant drop in coffee prices since 2016 means that many of the 400k small farmers in Rwanda now struggle to cover operating costs as input prices continue to rise

Difficulty in planning output and investment

need to invest more in fertilisers

more in irrigation systems

climate adaptation

Foreign exchange

Rwandan's get paid in USD

if importing goods and services overseas importers required USD or Euro

Absence of foreign exchange will hinder development as firms can't make overseas capital investment into machinery

Weather issues

Low YED

Prebisch-Singer hypothesis states that countries that specialise in primary products will experience deteriorating terms of trade in the long run

the theory suggests that the price of commodities will decline relative to the price of manufactured goods over time

Monopsony power

prices go down due to purchasing power

single buyer doing much of the bulk buying

no leverage against MNCs

Resource curse

dutch disease - discovery of primary product leads to appreciation of exchange rate and make other sectors of the economy uncompetitive same happened in UK with north sea oil

Protectionism

Finite resources

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Ricardian comparative advantage principal

PPF diagram shifting out to the right

2022 - $105 mn dollars made from exporting coffee up 34%

target of $95 mn by 2024 but succeeded through the export of coffee

high price of arabica coffee soared by 42% in 2022

Employment

primary sectors tend to be labour intensive

boosts HDI more people in employment more tax

68% of jobs in Rwanda are in the agricultural sector with coffee sector alone employing more than 500k people

Depends on the YED

not all primary products have income inelastic demand such as gold, diamonds and oil which are all elastic

global YED for coffee may not be that low as demand is growing in emerging economies as incomes rise

China 2025 - AI and tech competitors despite once being textiles

During a recession low YED is beneficial as you can't be impacted that badly

Depends on the price

prebisch-singer hypothesis

first decade of the 20th century there was a commodity super cycle

Depends on other policies or instruments used to reduce price volatility

financial markets help to reduce the effects through future contracts

buffer stock schemes

fair trade schemes

Depends on the extent of primary product dependency

Rwanda (27%) is not as dependent as Zambia with 84% of total exports in copper

FDI

investors more likely to want the product

FDI has averaged 4.5% of GDP

Government policy

Examples

Qatar and oil becoming the richest in the world GDP per capita

A stepping stone towards economic development

May be no alternative / Lewis model is flawed

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this problem of the savings gap is exacerbated by the fact that poorer developing economies have relatively weak financial sectors where it is often unprofitable for banks to provide low-income households with savings account

a significant share of household savings is held in nonfinancial assets or in the informal sector

real GNI per capita is only $2003

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

Rwanda has a low level of domestic savings - 8.9% of GDP

Singapore's are 54% of GDP

Investment spending a share of GDP is only 24% which is low for a developing country which in theory should have a large number of attractive investment opportunities

Rwanda 7 year national strategy for transformation

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It depends on whether the savings gap can be filled

MPS - is really low as they're too poor

Poor people still have a capacity to save

These economies do not have a sophisticated financial sector

Uneconomical to deposit administration costs much higher

Rwanda lacks banking services

Banks are financial intermediator leads money out

savings not rooted in financial productive capital investment

real GNI in Rwanda only $2003

39% absolute poverty

Not all developing countries suffer from a savings gap

vietnam savings rates are above 20%

rwandan's are trying to lift to over 20% in next 3 years

finance security claims no savings = no investment

Criticisms of the Harrod-Domar model

plug savings gap through FDI, foreign aid and loans from the world bank

without foreign aid Rwandan economy would collapse

lack of savings = lack of investment

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A foreign currency gap and capital flight

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A foreign currency gap and capital flight

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For a lot of developing economies there is a currency gap

currency outflow is greater than inflow

many developing economies run a current account deficit

Capital flight is when investors put savings into a foreign bank account

due to no trust

corruption

fear of currency crash

overseas remittances

Rwanda has a large current account deficit

in 2016 lower prices for commodity exports led the current account deficit to peak at -15.9%

16.% current account deficit

2022 deficit was 9.5% of GDP

Import cover measures how many months a country will be able to finance based on its foreign reserves

4-5 months of imports is the amount developing economists must have to be able to finance imports

Rwanda received a $110 million loan from the IMF in 2020 to prevent the depletion of its foreign currency reserves

limits vital imports

may lead to default on foreign debts

famine

developing countries with high levels of corruption see billions of $ taken out of the country illegally

harrod domar model - poor development progress is often a byproduct of low capital investments

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Demographics refers to population growth rates.

Fertility rate in Rwanda is 4.1

In 1968 it was 8

Lift expectancy at birth rose from 58 to 67 from 2007-2010

2022 population grew by 2.3%

13 million population expected to grow to 33mn

20% under 15m, 33% 15-29 - high dependency ratio

1. population grow higher than gdp will cause per capita incomes to fall

2. savings gap

expensive to have children so MPS is low

harrod-domar model mobile domestic savings to finance capital accumulation

drag down savings ratio - 8.9%

3. unemployment/underemployment

16.5% unemployment

youth unemployment 21.5%

4. additional pressure on public services and infrastructure

budget deficit was only 6.5% in 2022

5. starvation, poverty and hunger

22% of Rwanda's population classified as poor on MPI

38% of under 5s suffer from malnutrition

6. negative externalities

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rapid population growth can be beneficial

greater supply of labour so greater potential output with growth rising

40% aged 0-15

boosts number of working people

government intervention

rwandan government has made sure people are educated around family planning

birth rates trajected downwards

not all developing countries experience rapid population growth

vietnam growth rate is 0.9%

population aging

population forecast to decline after 2050

vietnam is in a golden age right now

25% of the population is aged between 10 and 24

dependency ratio is only 44 compared to 78 in rwanda

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1. rapid increase in interest rates in the US

developing economies impacted as they have to pay interest

dollar was extremely strong

much of the debt was dollar denominated debt which led to local currency weakness

2. period of commodity softness

3. corruption

Rwanda has a 7 year national strategy for transformation plan. This requires a lot of borrowing to finance infrastructure projects.

opportunity cost of making debt repayments

repayments are a withdrawal

foreign currency gap

Evaluation

debt can be good for growth and development

1. Kigali convention centre

2. expansion of national airline

3. savings only 8.9% so borrowing plugs the gap

depends on interest rates

88% of Rwanda's loans are made on a concessionary basis

paying below market rate loan from world bank

domestic vs external

don't have to pay back in foreign currency

lack of liquidity means that interest rates tend to be higher

Rwanda doesn't have a sophisticated financial system

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Harrod-Domar model

66% of sub-saharans don't have access (64% Rwanda) to bank accounts

8.9% of GDP is savings compared to Singapore of which it is 54%

Lack of capital accumulation can negatively impact productivity and lead to low GDP growth

Loans being taken out allow businesses to grow

Those who can't access banks rely on informal sectors such as money lenders who charge punitive rates

only 17% of adults in Rwanda have insurance products for their crops

Evaluation

1. access to banking is growing

36% now banked compared to 26% in 2016, 23% in 2012 and 14% in 2008

Increased 1.1mn since 2016

87% of adults have access to a phone

2. the rise of microfinance

growth of microfinances has helped to solve the problem of a lack of access to credit

microfinance however is still small scale in Rwanda

3. lack of financial literacy may limit potential

80% of unbanked adults in Rwanda have the perception that they don't need a bank account because they earn insufficient money to justify opening one

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Infrastructure is physical capital

Developing economies such as Rwanda suffer an infrastructure gap

high energy and transport costs (SRAS to the left)

labour markets less efficient

Rwanda is landlocked

$3245 to ship a 20 foot container

Ranked 111/140 in terms of the quality of its infrastructure

high energy costs $0.25per kw hour

4.5% of GDP is FDI which is crucial for plugging the savings g ap

Need more people out of rural area to manufacturing (Lewis model)

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Using GDP figures as a measure of economic developemnt

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One important measure of economic development is real GDP per capita.

Express GDP in terms of PPP

cost of living adjustment

equalise similar baskets of goods and services

adjust for cost of living differently

Reasons why GDP per capita is a good measurement

it is internationally comparable

fairly simple to measure - low opportunity cost

requires less data than some more sophisticated measures

However

informal sector

inequality

different costs of living (unless PPP adjusted)

does not include much in determining living standards

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1. Low productivity growth

improves the economic capabilities of the population

acts as a drag on productivity growth rates

slower productivity impairs GDP growth

2. technology stifles innovation

the speed at which new technology is implemented

education gap stifles innovation and undermines technological difference

3. structural unemployment

reduce occupational mobility of labour

according to the lewis model the key to development is industrialisation

4. FDI

plug the savings gap

want to make yourself more attractive to FDI flows

5. other development indicators

if citizens are educated they'll know more about health

people who haven't been to school don't have awareness

women tend to have less educational opportunities

19% of Rwandan's have no formal education

98 of children go to primary school

literacy rate is 73%

expected years of schooling is 11.2

mean years is 4.4

pupil to teacher ratio is 58%

38% in secondary

67% of teachers are adequately qualified

7 year national strategy for transformation plans greater investment in human capital with focus on stem

Evaluation

1. long time lags

2. expensive to implement

3. education and health go hand in hand

38% of Rwandan children under 5 are malnourished

children fall ill

family are ill so children need to look after

4. poverty and education are inextricably linked

39% of Rwanda's population live in absolute poverty

67% of the population are employed in agriculture

children often have to stay home and work the fields

5. impact of covid 19

6. not all developing countries suffer from poor educational performance

vietnam has seen a stunning rise in school standards

21% of all government expenditure to education

expected years have risen from 7.8 to 12.6 from 1990-2015

mean years have doubled from 3.9 to 8.0

high PISA scores

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Hernando de Soto 'mystery of capital' argued that developing countries are not as poor as they seem.

people have assets that they can't prove belong to them so this is dead capital

estimates that $9.3trn in 2000 (13.5 trn now) is informally owned land

only 30% of the world's people have formal titles to their property

90% of rural land in Africa is not documented

4% of African countries have mapped and titled the private land in their capital cities

1. An inability to grow

lewis model

2. no incentive to invest in assets

fear of land grab

3. drag on productivity growth

lack of secure property discourages migration from the countryside to the city

4. barrier to innovation

5. tax base erosion

informal land means governments miss out on tax

In 2 years tax revenue jumped up 500% in Rwanda as a result of the governments programme to map and title all of its land

6. environmental degradation

7. land disputes are a common cause of conflict

8. gender inequality

Evaluation

1. not all countries suffer from insecure property rights

in 2012 Rwanda completed its land map programme funded by British government

Registered 11mn parcels of land

$7 per parcel

Genocide resulted in 800000 dying in 1994 civil war

more than 2 million were forced t o flee

2. title deed not enough

only a small difference in confidence between those with and without titles in SSA

87% of rural transactions remain informal because cost of registration is too high

3. Covid 19 is making everything harder