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A2/IB 2) Economic Growth vs Development - An understanding of the relationship between economic growth and development, realising that growth is a necessary but not sufficient condition for development to be achieved

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9 TED Talks to help you understand world economics

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Clear, compelling talks on big issues facing the global economy.

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Summarise this

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Economic development - Economics Online Notes

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History Debunks the Free Trade Myth

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You are visiting a developing country as a policy analyst. It has the highest average tariff rate in the world. Most of the population cannot vote, and vote buying and electoral fraud are widespread.

The country has never recruited a single civil servant through an open process. Its public finances are precarious, with loan defaults that worry investors. It has no competition law, has abolished its shambolic bankruptcy law, and does not acknowledge foreigners' copyrights. In short, it is doing everything against the advice of the IMF, the World Bank, the WTO and the international investment community.

Sounds like a recipe for development disaster? But no. The country is the US - only that the time is around 1880, when its income level was similar to that of Morocco and Indonesia today. Despite wrong policies and sub-standard institutions, it was then one of the fastest-growing - and rapidly becoming one of the richest - countries in the world.

Especially in relation to trade policy. Many top economists, including Adam Smith, had been telling Americans for over a century that they should not protect their industries - exactly what today's development orthodoxy tells developing countries.

But the Americans knew exactly what the game was. Many knew all too clearly that Britain, which was preaching free trade to their country, became rich on the basis of protectionism and subsidies. Ulysses Grant, the Civil war hero and US president between 1868 and 1876, remarked that "within 200 years, when America has gotten out of protection all that it can offer, it too will adopt free trade". How prescient - except that his country did rather better than his prediction.

The fact is that rich countries did not develop on the basis of the policies and institutions they now recommend to developing countries. Virtually all of them used tariff protection and subsidies to develop their industries. In the earlier stages of their development, they did not even have basic institutions such as democracy, a central bank and a professional civil service.

There were exceptions, such as Switzerland and the Netherlands, which always maintained free trade. But even these do not conform to today's development orthodoxy. Above all, they did not protect patents and so freely took technologies from abroad.

Once they became rich, these countries started demanding that the poorer countries practise free trade and introduce "advanced" institutions - if necessary through colonialism and unequal treaties. Friedrich List, the leading German economist of the mid-19th century, argued that in this way the more developed countries wanted to "kick away the ladder" with which they climbed to the top and so deny poorer countries the chance to develop.

After the second world war, thanks to post-colonial guilt and cold war politics, developing countries were allowed substantial policy autonomy. For a few decades "ladder-kicking" was at low ebb.

But it has been resumed with renewed vigour in the last two decades, when developed countries have exerted enormous pressures on developing countries to adopt free trade, deregulate their economies, open their capital markets, and adopt "best-practice" institutions such as strong patent laws.

During this period, a marked slowdown has occurred in the growth of the developing countries. The average annual per capita income growth rate in the developing countries has basically been halved, from 3% to 1.5%, between the 1960-80 period and 1980-2000. During the latter period, growth has evaporated in Latin America while the African and most ex-communist economies have been shrinking. Growth has also slowed down in the developed countries but less markedly - from 3.2% to 2.2% - thereby resulting in a growing income gap between the rich and the poor nations.

How do we address this failure? First, the conditions attached to bilateral and multilateral financial assistance to developing countries should be radically changed. It should be accepted that the orthodox recipe is not working, and also that there can be no "best-practice" policies that everyone should use.

Second, the WTO rules should be rewritten so that the developing countries can more actively use tariffs and subsidies for industrial development.

Third, improvements in institutions should be encouraged, but this should not be equated with imposing a fixed set of - in practice, today's, not even yesterday's - Anglo-American institutions on all countries, nor should it be attempted in haste, as institutional development is a lengthy and costly process.

By being allowed to adopt policies and institutions that are more suitable to their conditions, the developing countries will be able to develop faster. This will also benefit the developed countries in the long run, as it will increase their trade and investment opportunities. That the developed countries cannot see this is the tragedy of our time.

· Ha-Joon Chang teaches at the Faculty of Economics, University of Cambridge. This article is based on his book, Kicking Away the Ladder - Development Strategy in Historical Perspective, published by Anthem Press, London

hjc1001@econ.cam.ac.uk
Topics

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You are visiting a developing country as a policy analyst. It has the highest average tariff rate in the world. Most of the population cannot vote, and vote buying and electoral fraud are widespread. The country has never recruited a single civil servant through an open process.

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Measures of Development -  General Outline

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With World Bank Group support, millions of Rwandans are on their way to integrating to regional power and transport networks, boosting their agricultural productivity, and delivering results for their families.

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Teaching Development Economics | The Economics Network

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Welcome to the TRUE wiki for development economics. This site is led by Peter Smith at the University of Southampton. Contents Recent changes Course outlines Reading lists Audio-visual resources Lecture notes & handouts

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Why has overseas aid been so ineffective

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Why has overseas aid been so ineffective

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Economic Growth & Development Revision Quiz | tutor2u Economics

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Aid & Development - Revision Presentation | tutor2u Economics

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Debt Relief for Poorer Countries - Revision Presentation | tutor2u Economics

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Micro Finance and Economic Development - Revision Presentation | tutor2u Economics

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Aid has been declining recently, falling "by 4% in real terms in 2012, following a 2% fall in 2011". Debt Relief is "A partial or total remission of debts, especially those owed by developing countries to external creditors". Developing countries owed almost $5 trillion, leading to repayments in excess of $1.5 billion per day. Economic development is a process of structural change in the pattern of output, trade and employment as well as an evolution of living standards. According to Amartya Sen, it involves the creation of economic freedoms through the expansion of capabilities and the reduction of extreme poverty. Development is influenced, to a certain extent, by aid and debt relief among other factors.

Aid can be a barrier to development due to the presence of corruption. Aid projects are often criticised for perpetuating ruling elites.

Countries, such as Liberia, Malawi, and Niger, despite receiving large amount of aid, continue to have very low HDI ratings as this money is lost due to corruption (measured by the corruption perception index) and low levels of democracy.

Aid economists, Dierk Herzer and Oliver Morrissey, explain that "aid has, on average, a negative long-run effect on output", meaning long-run aggregate supply decreases as a result of aid, lowering the country's productive potential". This they argue is not due to the "quality of economic policy" but rather "law and order, religious tensions and government size".

These factors are important as: law and order protects private property, large governments suggest both high bureaucracy and corruption, and religious tensions results in militaristic governance and an allocation of aid to sustain war. However, Herzer does admit that "there are large differences across countries (in about a third of cases the effect is positive)" but is adamant that the extent to which aid hinders or facilitates development is dictated by those three factors.

Furthermore, aid organisations can influence the effectiveness of their projects by circumnavigating corrupt governments and directing aid directly to the people who need it. In practice, as a recent inquiry suggests, "The Department for International Development 'has little understanding of what is and is not working' in its anti-corruption efforts". DFID has been given "an 'amber-red' rating - the second lowest, indicating 'significant improvements' were required. The main issue was that DFID had not "'developed an approach equal to the challenge' and is not focusing enough on the poor".

The report concluded that perhaps "the general principle that aid should first 'do no harm' had been breached".

However, pioneering economists, Banerjee and Duflo, offer a solution to this in the form of targeted bottom up projects. They argue "that so much of anti-poverty policy has failed over the years because of an inadequate understanding of poverty." After significant practical experimentation, they advocate bottom up projects, such as providing de-worming tablets so that children can concentrate and so go to school, rather than top down projects, such as education subsidies. This is because the latter involve government failure from ideology, asymmetric information, and inflexibility that reduces aid effectiveness as experienced by DFID.

Aid can also hinder economic development by fostering dependency and market distortion. Dambisa Moyo, in Dead Aid, highlights a "contrast between African countries that have rejected the aid route and prospered [particularly South Africa and Botswana] and others that have become aid-dependent and seen poverty increase. Moyo suggest that aid has "trapped developing nations in a vicious circle of aid dependency, corruption, market distortion, and further poverty, leaving them with nothing but the 'need' for more aid".

Despite receiving large amounts of aid, countries, such as Ethiopia, Rwanda, and Haiti, have seen stunted improvement in infrastructure and in health conditions (measured by infant mortality rate). Moyo suggests that the main issue is that aid "hinders the emergence of an essential entrepreneurial class". Instead of politically motivated long-term aid commitments, Moyo calls for a sharp focus on developing a private sector. With FDI making up 43.5% of capital flows into developing countries in 2010 compared to only 10.9% for aid, aid should focus on reforms to attract FDI not try to replace it.

Paul Collier also suggests that currently aid does not help reform. He reported that "the actual allocation of aid is radically different from the poverty efficient allocation. In the efficient allocation, for a given level of poverty, aid tapers-in with policy reform. In the actual allocation aid tapers-out with reform."

Aid does not seem to facilitate long-term structural change nor does it even seem to target development at all because aid is not allocated efficiently to the poorest countries. In the efficient model, "aid is targeted disproportionately on countries with severe poverty and adequate policies: a category of country in which 74% of the world's poor people live. In the actual allocation such countries receive a much lower share of aid (56%) than their share of the world's poor". However, if aid were more efficient it could lead to significant benefits to development. Currently, aid is "lifting around 30 million people per annum sustainably out of absolute poverty. With a poverty-efficient allocation this would increase to around 80 million people." Reduced poverty could even develop into improved savings. This would enable Sub-Saharan Africa to lower its savings gap. According to the Harrod-Domar model of growth, this should increase investment and thus economic growth. In turn, this could provide funds for further development.
Debt relief
Debt relief also poses a barrier to economic development due to potential for moral hazard to occur. Some argue that countries will take larger risks if debts they know their debts will be lessened. There is particular concern surrounding 'unjust debt'. This is "often 'dictator debt' - money lent by rich countries to poor countries ruled by strongmen, who commonly used it to finance military ventures or vast follies. It is estimated at US$735bn and makes up almost one fifth of the total debt owed by the developing world." By providing debt relief, countries are encouraging these dictators to take more money away from the country as the debt will be cancelled in the future. This relief does nothing to address the structural issue.

A report by the UN in 2012, suggested the promising alternative of introducing "indexed loan repayments", tying interest rates to growth. This would enable risks to be balanced more fairly between creditors and debtors. It should also reduce the need for debt relief and provide interest rates conducive to consistent economic development.

Debt relief allows poor governance and economic policy to continue. It is myopic and fosters dependency. This short-run approach forgoes progress in economic policy, which could lead to lower interest rates when issuing debt in future.

However, debt relief can encourage improved policy through reform agendas. For example, as part of the HIPCI, the IMF required Comoros to maintain "macroeconomic stability", reform "telecommunications and energy", carry out "a national measles vaccination campaign for children to achieve 90 percent coverage nation-wide", and improve "debt management".

Furthermore, "The UN Development Programme (UNDP) is working on an initiative that would see rich countries write off debt owed to them by Small Island Developing States (Sids) in exchange for the money being spent on climate change adaptation". However, the agenda behind these top-down reforms may not always be appropriate and effective for the country but rather reflect the interests of the international body. For example, the IMF, under Strauss-Kahn, had a heavily free market focus.

The debt overhang hypothesis also states that debt relief can help improve the economic situation. "An excessive debt burden can provoke a series of actions by the government, creating a vicious circle that can be stopped only by reducing debt to a sustainable level (in a broad sense)." The debt service incurred may "severely crowd-out spending on development priorities" and "provoke sub-optimal fiscal and other government behavior (e.g. excessive domestic borrowing, excessive inflationary financing, excessive taxation of some sectors in the economy) and lessen incentives for economic reform". This may discourage domestic and foreign investment, damaging growth and development.

However, a Stanford research paper argues that "debt relief is unlikely to stimulate investment and growth in the nations being considered for debt relief under the highly indebted poor countries (HIPCs) initiative" as "the HIPCs do not suffer from debt overhang". The paper highlights "a lack of the basic infrastructure that forms the foundation for profitable economic activity-property rights, roads, schools, hospitals, and clean water" as the key constraints on development. These may be more effectively addressed by direct foreign aid rather than debt relief.

There are some developing economies that experience significant crowding-out due to debt servicing. For example, Armenia, Hungary, and Jamaica experience debt service as a percentage of exports of 30.9%, 84.6%, and 38.2% respectively.

Similarly, the UK decision to cancel Sudan's debt was to free up "money that can then be spent tackling poverty and providing essential services such as schools and hospitals to their people". However, theory suggests that "fiscal response effects may not be so considerable in practice" as the degree to which "debt relief mobilizes resources for other uses, is only valid to the extent that, in the absence of debt relief, debt would have been (fully) serviced. If this is not the case, the resource effect of debt reduction will be less than expected."

In conclusion, debt relief and overseas aid have varying effects on development due to a number of country specific parameters.

Some organisations, such as the Jubilee Debt Campaign, argue that "Failure to cancel unjust and unsustainable debts continues to increase poverty and inequality around the world." They explain that "Debt crises in the 1980s, 1990s and 2000s caused two or more 'lost decades of development'. In sub-Saharan Africa, the number of people living in extreme poverty (on less than $1.25 a day) increased from 205 million in 1981 to 330 million by 1993."

However, "the HIPC has "led to millions more people having access to healthcare and education". However, debt relief is not currently the solution to most countries' development issues. In the future, this may change with a new, post-crisis "boom in lending to developing countries", causing "External loans to low income countries" to increase "by 75 per cent between 2008 and 2012" and "Loans to sub-Saharan African governments more than doubled over the same period of time".

The report also suggests "government revenues are not rising to keep pace with repayments". UNCTAD Secretary-General Mukhisa Kituyi has attributed stagnation in advanced economies, causing reduced export growth and capital development in developing economies, to the worsening of "the debt-to-GDP ratio...for the first time in more than a decade, to an average of about 22 per cent". Joseph Stiglitz also argues that "The growing complexity of the market makes it harder for developing nations to free themselves of debt, increasing inequality worldwide". Although "Such restructurings are necessary for the market economy to work", "while we have a system to deal with private bankruptcy, we have no system for sovereign debt restructuring".

This highlights the need for improved institutions globally and particularly in developing economies. Similarly, the M-PESA project has revealed "the need for a low-cost transactional platform that enables low-income customers to meet a range of payment needs". Regarding aid, I agree with Angus Deaton that the "central dilemma" is that when "the conditions for development are present, aid is not required. When they do not exist, aid is not useful and probably damaging". However, this does not mean developed countries do nothing to help developing ones. Deaton sights pushing "drug companies to tackle diseases that threaten poorer countries", supporting "the free flow of information about inventions and new management techniques", relaxing "trade barriers", providing "poor countries with expert advice at the bargaining table", and easing "immigration restraints" as options.

One particularly exciting opportunity is the implementation of "service-performance guarantees (SPGs)", which "are a type of insurance against a variety of risks". For example, an SPG could be a "guarantee that the business would be compensated for lost output if power supplies failed. (As the chart below shows, faulty supplies wreak economic havoc in many SSA countries: 9 of the 15 worst-performing countries are in SSA.)"

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Essay: Aid and Debt Relief - what is the impact on development? | tutor2u Economics

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Aid has been declining recently, falling "by 4% in real terms in 2012, following a 2% fall in 2011". Debt Relief is "A partial or total remission of debts, especially those owed by developing countries to external creditors". Developing countries owed almost $5 trillion, leading to repayments in excess of $1.5 billion per day.

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Primary Product Dependence: Republic of the Congo | tutor2u Economics

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Barriers to Economic Growth and Development | tutor2u Economics

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Migrant Remittances and Economic Development | tutor2u Economics

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Remittances are monies sent by people living and working overseas back to their country of origin - usually sent back to their families. To what extent are remittance inflows an important / significant contributor to economic growth and development in lower and middle income developing countries?

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Foreign Direct Investment and Economic Development | tutor2u Economics

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Need for Peace

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Uploaded by International Growth Centre on 2016-06-15.

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Savings

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Uploaded by International Growth Centre on 2016-06-02.

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Evaluate Tourism as a Strategy to help Economic Development

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Evaluate Tourism as a Strategy to help Economic Development

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​This short revision video provides overview of some of the arguments for and against tourism as a key driver of growth and development especially in lower and middle income countries. ​The travel and tourism industry is one of the world's largest industries with a global economic contribution (direct, indirect and induced) of almost seven trillion U.S.

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Homework - watch and summarise the videos

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Economic Development | tutor2u Economics

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