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Gender inequality: How much does it affect development in Europe and Central Asia?

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Inequality between women and men has been clearly identified as one of the causes blocking development over the last two decades. It is often difficult to establish evidence based causal links between impacts of gender inequality on a country's development because of the lack of available sex-disaggregated data.

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Dilip Ratha: The hidden force in global economics: sending money home

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2.6.5 Y2 Economic growth and development.pptx

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Amartya Sen on the Sustainable Development Goals #globalgoals

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Greece has been a member of the single European currency since it was launched in 2001

2013 was the sixth year in succession that Greece has been in recession

Cumulatively the economy will have lost more than 20% of national output before a recovery starts

Private sector demand has collapsed, there have been deep falls in consumer spending on goods and services and even great reductions in real private sector capital spending

Government consumption on state-provided goods and services is now shrinking rapidly too as the fiscal austerity measures take effect.

This combination of weak private sector demand and a contracting public sector makes it inevitable that the Greek economy stays in recession

Net trade (X-M) is making a small contribution to positive growth and the current account deficit is likely to dip below 5% of GDP for the first time in several years. But this on its own is insufficient to provide Greece with the means to achieve a sustainable recovery

Greek national output is vastly below potential - there is a huge margin of spare capacity

This is one reason why the Greek economy remain at risk of price deflation - which given the scale of national and private sector debt could be catastrophic. Low positive inflation is good news for Greece if it helps to restore price competitiveness, deflation would be a different story.

Unemployment has reached historic highs, more than 25% of the working population is out of work and youth unemployment has soared to nearly 60%

Despite austerity measures the fiscal deficit remains high and national debt will move higher - towards 190% of GDP. IMF aims to bring this down to 120% of GDP in 2020 look fanciful.

The OECD estimates that the trend rate of growth for Greece is zero or perhaps slightly negative - this is highly unusual and reflects the depth of the economic and fiscal crisis facing the country. The IMF does not see Greece returning to growth until 2015 by which time its economy is forecast to be 25% smaller than at the start of the crisis.

The Greek Debt Crisis
The Greek economy became embroiled in a huge debt crisis in the aftermath of the global financial crisis from 2007 onwards. Having struggled to keep public sector spending under control and tackle widespread tax evasion, it became clear a few years ago that the annual Greek budget deficit was much higher than expected. About €30bn annually of tax revenues go uncollected in Greece.

The tipping point for Greece was the immediate and short-run fall-out from the Global Financial Crisis (GFC). Students ought to be familiar with the background here. The sub-prime mortgage crisis in the United States quickly turned into a major global financial meltdown affecting most countries but especially those with highly leveraged financial systems i.e. banking systems and other lenders that had created too much credit to private sector businesses and individuals.

The Greek economy was hit by a fierce demand-side shock and this was made worse because the economy was already suffering from structural competitiveness problems inside the single currency system.

As a direct consequence of the GFC:

1.Most of Greece's main trading partners went into a deep recession - cutting exports

2.There was a 2% fall in world output (unusual) but worse, a 12% fall in global trade

3.Greece suffered badly because her economy was heavily dependent on tourism and construction, two sectors badly hit by the sharp fall in demand and production

In 2009 Greek exports collapsed by nearly a fifth (causing a large inward shift of AD) and the Greek fiscal deficit grew from 5% of her national income in 2007 to nearly 14% in 2009. A decade of progress in reducing unemployment was reversed within the space of two harsh years.

The Greek government has run a budget deficit in every year of at least 4% of GDP. Even during the first half of the last decade there was a sizeable deficit although corruption and fraud meant that the official figures hid this. The deficit peaked at over 15% of GDP in 2009 and in 2011 the budget deficit was nearly 10%. Strong growth in Greece helped to keep the government debt to GDP ratio at or around 115% during the years from 2001 to 2008 but a combination of huge annual deficits and six years of recession has brought about a huge rise in the scale of the national debt.

The OECD is forecasting that this will reach 200% of GDP in 2014 despite attempts to cut the deficit. The reason is simple - even though the Greek budget deficit is coming down, their economy is shrinking so the base level of real GDP is falling. In December 2012, the 'troika' of the IMF, the EU and the European Central Bank reached a new funding agreement for which will cut Greece's long term debt burden. And Greece has made some progress in cutting the annual budget deficit. Greece reduced its fiscal deficit before interest payments by 13.4% of GDP between 2009 and 2012.

The European Union, International Monetary Fund and the European Central Bank are the main creditors to the Greek government. They are known as the EU-IMF-ECB troika

Fiscal austerity means contractionary fiscal policy measures in the form of higher taxes and/or cuts in planned government (public) spending. In Greece in 2010, the country was forced to agree a Euro 110bn emergency bailout and introduce an austerity budget. These measures included a VAT rise from 19% to 23%, higher duties on fuel, alcohol and cigarettes, an increase in the retirement age, a public sector pay freeze and a freeze on the size of the basic state pension.

There is a fierce debate in economics about the most effective ways to address the problems caused by high levels of government debt. Many economists including Nobel-winner Joseph Stiglitz argue that contractionary policies make the debt problem worse and that sustained growth is the best pathway out of a debt crisis.

Greece is also seeking to implement structural economic reforms as part of their bail-out package. Structural economic reforms have included:

Pension reforms including raising the official state retirement age

Privatisation of state assets both to raise revenue and to increase competition

Cuts in the national minimum wage

Measures to reduce entry barriers to certain occupations / professions including transport

Cutting taxes on employing workers to boost employment

Making the Greek judicial system more efficient

Cutting red tape for businesses to promote investment

Stronger measures to tackle tax evasion by individuals and businesses

The key issue is whether these structural supply-side reforms will be sufficient to improve competitiveness and generate the minimum growth that Greece needs to break out of their debt trap?
Recent articles and videos on the Greek Economy
BBC (Robert Peston) - UK planning for possible Greece exit from the eurozone - http://www.bbc.co.uk/news/business-31297809

See also - gloval debts rise $57trillion since the crash: http://www.bbc.co.uk/news/business-31136707

BBC: Alan Greenspan predicts Greek exit from the euro: http://www.bbc.co.uk/news/business-31249907

The futures facing Greece (Feb 2015) http://www.bbc.co.uk/news/business-31418626

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Greece - Economic Growth and Development | tutor2u Economics

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Greece has been a member of the single European currency since it was launched in 2001 2013 was the sixth year in succession that Greece has been in recession Cumulatively the economy will have lost more than 20% of national output before a recovery starts Private sector demand has collapsed, there have been deep falls in consumer spending on goods and services and even great reductions in real private sector capital spending Government consumption on state-provided goods and services is now shrinking rapidly too as the fiscal austerity measures take effect.

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

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

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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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23 Freemarket policies for development.docx

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22 Government intervention for development.docx

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Global Rankings 2016 | Logistics Performance Index

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Welcome to the 2016 LPI! The LPI is an interactive benchmarking tool created to help countries identify the challenges and opportunities they face in their performance on trade logistics and what they can do to improve their performance. The LPI 2016 allows for comparisons across 160 countries.

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Rostow - Five Stages of Economic Growth Model

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Rostow - Five Stages of Economic Growth Model

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Rostow's Five Stages of Economic Growth Model | tutor2u Economics

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The Rise of Resource Nationalism

"Resource nationalism has become a contagion impacting the mining & metals industry across the globe. The industry needs to become more engaged in the analysis and management of this risk which can place a heavy burden on existing operations and influence future decisions on where to invest."
Andy Miller, Global Tax Leader - Mining & Metals, Ernst & Young Examples of Resource Nationalism in Action
South Africa (Coal and Platinum)

*50% windfall tax on super profits

*50% capital-gains tax on sale of prospecting rights

Ghana (Diamond and Gold)

*35% company tax

*10% windfall tax on super-profits

*5% royalties on output

Australia (Iron Ore, Nickel, Coal)

*Government plan to implement a Mineral Resource Rent Tax

*(MRRT) on iron ore and coal. Set to raise $8bn a year.

Peru - Copper

*Use it or Lose it' - With a fall in commodity prices companies tend to have lower capital expenditure which can lead to a revoking of their license

Since the financial crisis of 2008 many countries have struggled to maintain manageable budget deficits as their economies contract. With revenue down from reduced economic activity and increasing expenditure on items such as social welfare, governments around the world are either tightening their belts or finding new sources of revenue. In a number of producer nations, concerns over ' Dutch disease' or two-speed economies have led to plans to tax resource extraction more heavily, and provide tax relief or subsidies to other sectors.

The Dutch Disease refers to the fact that once countries start to export oil or other natural resources their exchange rate appreciates making other exports uncompetitive and imports cheaper. At the same time there is gravitation towards the natural resource industry which drains other sectors of the economy, including agriculture and traditional industries, as well as increasing its reliance on imports.

Those that have natural endowments such as minerals and other commodities have been continually assessing how they can acquire more revenue from these resources. This could be done by various means - taxes, royalties or full-scale state-ownership - however they need to be vigilant in that significant charges to overseas companies might inhibit foreign direct investment (FDI) which is crucial to many countries that have plentiful natural resources.

Furthermore the initial capital investment in mining, etc., is usually substantial and governments have to be careful not to implement drastic revenue-making means that curtail further investment. This is especially common when you consider the volatility of commodity prices and the cyclical nature of the mining sector.

In 2011 accountants Ernst & Young identified at least 25 countries that increased or intended to increase government revenue by taxing those companies involved in the commodity industry. On average at recent commodity prices these increases have raised the average effective tax rate by approximately 5%. According to their research, nationalism places a large cost burden on mining and metals companies and can influence the decision of where to invest in a particular country.

Today Governments are searching for new ways to extract more out of foreign-owned firms that are doing very well financially from what lies beneath the soil. Those countries that are prepared to implement higher rents and taxes on overseas mine companies run the risk of the loss or the reduction in some long-term investments. Although existing mines are not mobile the level of extraction, reinvestment, and expansions are and the temptation to divert resources to another country are highly plausible when you consider the mobility of capital resources.

A lot of this depends on high commodity prices which encourage the exploration of potential sources of commodities. However, with lower prices and increasing government fiscal demands

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Resource Nationalism and Development | tutor2u Economics

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The Rise of Resource Nationalism "Resource nationalism has become a contagion impacting the mining & metals industry across the globe. The industry needs to become more engaged in the analysis and management of this risk which can place a heavy burden on existing operations and influence future decisions on where to invest."

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Primary Product Dependence: Republic of the Congo

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Primary Product Dependence: Republic of the Congo

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Primary Product Dependence: Republic of the Congo | tutor2u Economics

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Prebisch Singer Hypothesis | tutor2u Economics

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The Prebisch-Singer Hypothesis (PSH) is more of an observation rather than a complex theory. It suggests that over the long run the price of primary goods such as coal, coffee cocoa declines in proportion to manufactured goods such as cars, washing machines and computers

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He identifies four "development traps" - they are conflict, reliance on natural resources, being landlocked with bad neighbours, and bad governance.

Land locked economies face particular challenges to integrate in global trade - without good infrastructure and efficient logistics businesses it can be difficult, costly and slow to get products to the countries of trade partners

Some landlocked countries have been doing well especially when they achieve regional economic integration with other land-locked nations
Overcoming the Natural Resource Trap
This is a crucial issue for many countries who are blessed with a strong endowment of natural resources.

The natural resource trap or resource curse can come about for a variety of reasons:

Risk of political conflict and corruption / conflict / land grabs

Vulnerability to changes in world prices which causes high levels of macro volatility

Danger of over-rapid extraction of finite and renewable resources

Rising prices can lead to a currency appreciation - damaging domestic industries

Professor Paul Collier has argued:

"Although large deposits of key resources such as oil would usually be considered a blessing for the development prospects of a country, it often turns out to be a 'resource curse'"
Which strategies might help to overcome these problems?

1. Better government - including more transparency & accountability to tax payers

2. Stabilisation Fund / Sovereign Wealth Fund - e.g. to fund human capital and critical infrastructure

3. Higher taxes of natural resource profits (extracting resource rents)

4. Diversification - investment in processing and manufacturing - giving higher value added

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Paul Collier and Development Traps | tutor2u Economics

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He identifies four "development traps" - they are conflict, reliance on natural resources, being landlocked with bad neighbours, and bad governance.

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What role can and what role should overseas aid play in promoting and sustaining economic development?

These are hugely contentious questions in the subject. Estimates vary from those which suggest that overseas development aid has added about 0.5 per year to growth in recipient countries to those which suggest that it has had no positive, or indeed negative, effect on growth.
Backgrounds statistics on overseas aid

Aid spending in real terms has increased steadily in the past 50 years, to $134.8 billion in 2013

In 2010, global military expenditure = $1630 billion versus $128 billion on development aid

The value of trade outweighs aid by a large multiple. The export earnings of all developing countries in 2010 were more than 40 times the level of official aid flows.

Denmark, Luxembourg, the Netherlands, Norway and Sweden exceed the United Nations ODA target of 0.7 per cent of gross national income (GNI)

The largest aid donors are the United States, Germany, the United Kingdom, France and Japan

South Korea, China and India now also significant donor nations

The main destinations of aid from advanced rich nations in 2010 were Sub-Saharan Africa (44%), which also received more aid per head than other regions, followed by South and Central Asia (19.5%) and Middle East and North Africa (10%)

In 2010, total UK aid was $13.1 billion. DFID is in charge of allocating overseas aid payments

Types of Aid

1. Bilateral aid: Aid on a country-to-country basis e.g. from UK to Kenya or from Brazil to Tanzania

2. Multi-lateral aid: Aid channelled through international bodies / aid agencies such as CARE

3. Project aid: Direct financing of specific projects for a donor country

4. Technical assistance: Funding of expertise of various types

5. Humanitarian aid: Emergency disaster relief, food aid, refugee relief and disaster preparedness - Humanitarian aid accounts for less than 10% of global aid flows

6. Soft loans: A loan made to a country on a concessionary basis with a lower rate of interest- for example, India has received over $2 billion in low-interest funds from the World Bank for many of its welfare schemes, these soft loans are set to stop as India heads towards middle-income status

7. Tied aid: i.e. projects tied to suppliers in the donor country - the UK abandoned tied aid in 1997

8. Debt relief - this may take the form of cancellation, rescheduling, refinancing or re-organisation of a country's external debts

Find more statistics at Statista

Financial Flows into and out of Developing Countries

Financial flows into developing countries (also known as foreign savings) can come in different forms:

Although aid is important for many of the poorest nations, exports from developing countries are now more than 40 times the level of official aid flows

Remittances for migrants are about three times as large as aid flows

Private capital inflows are 10 times aid flows

Assisting Post Conflict Nations
Examples of aid projects from the UK to help fragile countries and those in post-conflict reconstruction:

Clearing minefields in Nepal, road building in the Democratic Republic of Congo

Malaria prevention and treatment programmes in Ethiopia, Training midwives in Pakistan.

Does overseas aid help or hinder economic growth and development?

Aid has a range of economic, social, environmental and political objectives

Economic development can take place without aid - China and Vietnam have both experienced sustained and rapid growth over nearly two decades without receiving much in the way of international aid payments measured as a share of their GDP

Well directed and targeted aid can enhance a country's growth potential but the effects may not be seen for many years e.g. Aid might help finance the building of a power station contributes directly to aggregate demand and increases supply potential. Or aid that is designed to put more children through school or humanitarian aid to vaccinate kids and prevent them dying will have an impact over a longer time horizon

Different kinds of aid projects can affect growth at different times and to different degrees

Building the Case for Overseas Aid

Overcoming the savings gap: Aid provides a financial inflow for low income countries - it helps to overcome the savings gap. Also important in stabilising post-conflict environments - e.g. generate jobs to keep fighters away from conflict
Building the Capital Stock
Project aid can fast forward investment in critical infrastructure projects - an increase in the capital stock lifts a country's growth potential
Human Capital and Post Conflict Help
Long term aid for health and education projects - builds human capital and raises productivity. Aid combined with good policy can have lasting positive effects
Higher Growth and Trade Spillovers
Well targeted aid might add around 0.5% to growth rate of poorest countries - this benefits donor countries too as trade grows

Counter arguments - Limits / Disadvantages of Overseas Aid
Corruption:
In poorly governed countries much of the aid flow to politicians and relatively little may directly benefit the poorest communities in greatest need.
Ruiling Elites
Aid can act as a barrier to true democracy - politicians pay more attention to aid donors than to their citizens. Aid-dependent governments are accountable to donors, not to their population
Aid dependency
A dependency culture on aid might be generated - the aid paradox is that aid tends to be most effective where it is needed least
Market distortions
Aid for example in the form of food aid in emergencies may lead to a distortion of market forces and a loss of economic efficiency

In the "The Bottom Billion" Professor Paul Collier suggests that, ceteris paribus, overseas aid may have added around 1% per year to the growth rate of the poorest countries of the world during the past 30 years. There are few economists who argue that aid has led to a reduction in economic growth of donor countries. Most of those who are critical of overseas aid focus instead on dependency and corruption. It is possible for countries to grow quickly without aid - but equally there are countries who were initially heavy aid recipients who have grown and developed and are now aid donors themselves for example South Korea.

The ceteris paribus assumption is important. Aid can provide a much needed injection of funds for some of the world's poorest countries and communities - but everything else is not equal. Many external factors may reduce or enhance the impact of aid on economic growth, for example the quality of government, the efficiency of financial systems and also the absence of conflict.
Key point: The contribution aid makes to growth differs sharply in countries at peace and countries in conflict

Aid Graduates - Countries whose overseas aid as a share of GDP has declined over the years

Source: World Bank, Global Development Finance

Critics of much of the aid that has gone to Africa in recent decades argue that a high proportion of aid has gone to low-income countries with poor institutional regimes. The UK government has a target of allocating 0.7% of GDP to overseas development assistance (ODA) - this target came into being in 1970 and has never been revised! But is it right to stick rigidly to such a target independent of what else is happening in both the domestic and the global economy? 0.7% of UK GDP is forecast to equate to around £15 billion in 2015. In 2012 the UK announced it would end aid to India in 2015, to focus on trade links. It has also suspended aid support to Rwanda over its alleged funding of rebels in the Democratic Republic of the Congo, and to Uganda over alleged corruption

In a world of increasing resource scarcity, aid can also help to

Overcome skills shortages

Funding for infrastructure

Deliver projects to help the poorest countries become more resilient to climate change

Smart Aid

There is increasing interest in the use of "smart aid" - aid programmes that use experimentation and focus on bottom-up projects in order to increase the effectiveness of each £ or $ given in aid.

The work of Esther DuFlo, the author of "Poor Economics" and professor of development economics at the Massachusetts Institute of Technology, has been influential in shaping ideas about smart aid and the importance of randomized trials to improve the effectiveness of aid.

Oral rehydration therapy, vaccines and the spread of bed nets to reduce malaria in Africa are examples of where randomised testing has had an effect to give aid projects more positive impact.

An annual assessment of overseas development assistance from the Organisation for Economic Cooperation and Development in Paris found that aid to the least developed nations stood at $25bn (£16.7bn) last year - a 16% drop from 2013 Denmark, Luxembourg, Norway, Sweden and the UK spent more than 0.7% of their gross national income (GNI) on ODA, exceeding the UN's suggested level of aid spending for rich countries. Last month, the UK became the first country to enshrine in law its commitment to spending 0.7% of GNI on overseas aid
The Guardian (April 2014)

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Overseas Aid and Economic Development | tutor2u Economics

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What role can and what role should overseas aid play in promoting and sustaining economic development? These are hugely contentious questions in the subject. Estimates vary from those which suggest that overseas development aid has added about 0.5 per year to growth in recipient countries to those which suggest that it has had no positive, or indeed negative, effect on growth.

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The world's poor are exposed to irregular income flows, and their needs are irregular too - ranging from unforeseen medical bills to having to pay more when food prices rise unexpectedly.

Microfinance refers to a large number of different financial products, including but not exclusive to

Micro-credit - the provision of small-scale loans to the poor for example by credit unions

Micro-savings - for example, voluntary local savings clubs provided by charities

Micro-insurance- especially for people and businesses not traditionally served by commercial insurance businesses - a safety net to prevent people from falling back into extreme poverty

Remittance management - managing remittance payments sent from one country to another including for example transfer payments made through mobile phone solutions

The concept of microcredit was first introduced in Bangladesh by Professor Muhammad Yunus who started the Grameen Bank (GB) more than 30 years ago with the aim of reducing poverty by providing small loans to the country's rural poor. At the end of 2009 in Bangladesh, there were 20.5 million active borrowers and the average loan per borrower was $114. Global funding for microfinance reached $25 billion in 2011. Microfinance institutions (MFIs) had extended loans to more than 200 million clients by the end of 2010.

A key feature of micro-finance has been the targeting of women on the grounds that compared to men, they perform better as clients of micro finance institutions and that their participation has more desirable long-term development outcomes. The Grameen Bank approach initially focused on small groups 'lending circles' of largely female entrepreneurs from the poorest level in the society. This became the widely accepted view of what micro finance is. In reality there are thousands of commercial microfinance institutions (MFIs) including some large international operators. Micro finance programmes also exist in advanced countries, such as Germany, the USA and also in Scotland in the United Kingdom.

1.Commercial micro-credit businesses - profit seeking

2.Not-for-profit micro-credit businesses - social enterprises, reinvesting profits for social purposes

3.Donor-supported micro-credit businesses - perhaps targeted at supporting the very poorest - an example being the savings schemes established by CARE international

Evaluation: Criticisms of Micro-Credit
Micro-finance has come under close scrutiny in recent years and there are many who argue that the positive effects of micro-finance have been exaggerated and that the rapid expansion of micro-credit has caused unintended consequences and limited benefits in reducing extreme poverty. Some of the criticisms are as follows:
Debt

Many borrowers have been allowed to take on multiple loans - sub-prime style lending in poor countries - and charged exhorbitant rates of interest for these loans

There is also evidence of coercive collection practices by some lenders

Savings

Credit can help people in difficult times but sustainable saving from in-work income is more important in long run

For this to happen, real incomes need to rise - this requires higher productivity

Cash

Direct cash transfers and direct funding of skills training might have bigger effect than micro-loans to entrepreneurs setting up fledgling businesses

Randomnised control trials by Banerjee and Duflo: Microcredit may not be the miracle claimed on it's behalf but it does allow households to borrow to help fund businesses

Risks

The poorest countries are vulnerable to external shocks including extreme climate

When natural disasters happen, interest on debt still needs to be paid

Focus might need to shift towards micro-insurance rather than micro-credit schemes

Investment

Credit is often used to finance consumption - the flipside of micro credit is micro debt

Micro-finance cannot compensate for inadequate healthcare, education or hard and soft infrastructure in promoting sustainable development and poverty reduction

SKS Microfinance in India
In India the commercial business SKS microfinance was floated on the Indian stock exchange in 2010 but their share price has fallen by more than 90% since then. The Indian government responded to criticisms of alleged harassment of borrowers by SKS agents by introducing stricter controls on micro-credit. Several reported suicides of people in multiple and heavy debt to lenders had a damaging effect on the reputation of SKS. It made a loss of 13.61bn rupees for the year ending March 2012, compared with a profit of 1.12bn rupees in the previous year.
Micro-Insurance
This is a growing sector within developing country finance. The number of people covered by micro-insurance has increased almost 6.5 fold in five years, reaching nearly 500 million worldwide, with China and India leading the charge

Micro-insurance attempts to protect poor people against risks arising from accidents, illness, and a death in the family or the damage caused by natural disasters - in exchange for insurance premium payments tailored to their needs, income and level of risk.
Examples of micro-insurance include:

An Indian fertiliser company providing free insurance with each bag of fertiliser bought

Cattle insurance policies - small scale insurance policies that cover the death of animals due to accident, disease, foods, drought and other events

Life insurance and accident cover bundled with farmers or other business people buying new trucks

Pay-as-you-plant insurance for Kenyan farmers to insure inputs against drought and excess rain

In South Africa, HIV patients can get life insurance providing they sign up to regular medical check-ups and adherence to taking courses of freely available antiretroviral treatments

Micro-insurance schemes can dove-tail with mobile money transfer systems such as M-PESA - for example farmers can have their insurance pay-outs sent directly through to them without having to trek into the nearest town or city.
Benefits from effective and affordable micro-insurance projects Risk-taking behaviour

Safety net will envourage less risk averse behaviour

Insurance can be a spring-board as well as a safety net

Insurance can help smooth volatility in income and spending

Schooling, Death and Saving

More children from poorer families will be able to continue their education

Many of the poorest spend large sums of funerals - insurance reduces this burden

Life insurance schemes promote small scale saving

Risks and limitations of micro-insurance
Naturally there are problems with building insurance schemes for many of the world's poorest communities - some are standard economic arguments:

1. Moral hazard - insured people and businesses may take less steps to protect themselves against risks because they know they have the safety net of insurance

2. Adverse selection - the highest risk agents will tend to be those who bid for insurance products increasing the pooled risks of insurance everyone

3. Asymmetric information - often times, those seeking insurance have more information about their conditions than agents selling the insurance

4. Inertia and information gaps - until recently, the vast majority of people in developing countries had no access at all to formal insurance schemes, and those that were available could not be afforded save for the wealthy few. Many need to be educated about the basics of insurance and the costs and benefits of getting involved.

A good case study of the expansion of micro-insurance is the success of the financial inclusion fund set up by Leapfrog backed by JP Morgan and the George Soros Foundation.

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Micro Finance and Development | tutor2u Economics

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Although many of the broad approaches to economic growth and development are "top-down" in nature - for example an ambitious government strategy to increase productivity or attract foreign direct investment projects - there has been growing interest and investment in a bottom-up or grassroots approach to enterprise and innovation supported by the micro-finance industry

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Lewis Model of Structural Economic Growth

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Lewis Model of Structural Economic Growth

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What is the Lewis Model of Structural Economic Growth and Development?

Arthur Lewis put forward a development model of a dualistic economy, consisting of rural agricultural and urban manufacturing sectors

Initially, the majority of labour is employed upon the land, which is a fixed resource. Labour is a variable resource and, as more labour is put to work on the land, diminishing marginal returns eventually set in: there may be insufficient tasks for the marginal worker to undertake, resulting in reduced marginal product (output produced by an additional worker) and underemployment.

Urban workers, engaged in manufacturing, tend to produce a higher value of output than their agricultural counterparts. The resultant higher urban wages (Lewis stated that a 30% premium was required) might therefore tempt surplus agricultural workers to migrate to cities and engage in manufacturing activity. High urban profits would encourage firms to expand and hence result in further rural-urban migration.

The Lewis model is a model of STRUCTURAL CHANGE since it outlines the development from a traditional economy to an industrialized one.

Evaluation:

1. China provides a good example: official Chinese statistics place the number of internal migrants over the past 20 years at over 10% of the 1.3bn population. 45% were aged 16-25 and two-thirds were male. Urban incomes are around 3.5 times those of rural workers.

2. A Marxist criticism states that profits will be retained by the capitalist entrepreneur, at the expense of workers. In addition, urban expansion might be driven by increases in capital rather than labour.

3. Evidence suggests that surplus labour is as likely in the urban sector as in the agricultural sector. Migrating workers may possess insufficient information about job vacancies, pay and working conditions. This results in high unemployment levels in towns and cities.

4. Towns and cities may also be fixed in size and unable to accommodate large numbers of immigrants. This gives rise to slums and shanty towns, which are often illegal, built on flood planes or areas vulnerable to landslides and without sanitation or clean water. Cape Town provides a good example. Globally 1bn people live in slums.

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Lewis Model of Structural Economic Growth and Development | tutor2u Economics

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What is the Lewis Model of Structural Economic Growth and Development? Arthur Lewis put forward a development model of a dualistic economy, consisting of rural agricultural and urban manufacturing sectors Initially, the majority of labour is employed upon the land, which is a fixed resource.

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Fledging industry argument: Certain industries possess a possible comparative advantage but have not yet exploited enough economies of scale. Short-term protection allows the infant industry to develop its advantage at which point protection could be relaxed, leaving an industry to trade more freely on the international market.

Externalities and market failure: Protectionism can be used to internalize the social costs of de-merit goods. Or to correct for wider environmental market failures

Protection of jobs in home industries and an improvement in a country's balance of payments

Protection of strategic industries: A government may wish to protect employment in strategic industries, although value judgments are involved in determining what constitutes a strategic sector.

Anti-dumping duties: Dumping is a type of predatory pricing behaviour and a form of price discrimination. Goods are dumped when they are sold for export at less than their normal value. The normal value is usually defined as the price for the like goods in the exporter's home market. In the short term, consumers benefit from the lower prices of the foreign goods, but in the longer-term, persistent undercutting of domestic prices can force a domestic industry out of business and allow the foreign firm to establish itself as a monopoly. Once this is achieved the foreign owned monopoly is free to increase prices and exploit the consumer. Therefore protection, via tariffs on 'dumped' goods can be justified to prevent the long-term exploitation of the consumer.
Anti-dumping duties and the World Trade Organisation
The World Trade Organisation allows a national government to act against dumping where there is genuine 'material' injury to the competing domestic industry.

In order to do that the government has to be able to show that dumping is taking place, calculate the extent of dumping (how much lower the export price is compared to the exporter's home market price), and show that the dumping is causing injury.

Usually an 'anti-dumping action' means charging extra import duty on the particular product from the particular exporting country in order to bring its price closer to the "normal value".

Import tariffs are not normally a major source of tax revenue for the Government that imposes them. In the UK for example, tariffs are estimated to be worth only £2 billion to the Treasury, equivalent to only 0.5% of the total tax take. Developing countries tend to be more reliant on import tariffs for extra tax revenues.

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Justifications for Protectionism | tutor2u Economics

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Fledging industry argument: Certain industries possess a possible comparative advantage but have not yet exploited enough economies of scale. Short-term protection allows the infant industry to develop its advantage at which point protection could be relaxed, leaving an industry to trade more freely on the international market.

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The role of the state: Throughout much of the 1960s and 1970s, traditional development thinking had been that government/state control and economic planning, high levels of public investment and protection from the volatility of the world market using protectionism was the best recipe for promoting development.

Self-sufficiency was the main goal including investment in import-substitution industries - overseas trade was seen as a hindrance and therefore a tax opportunity to raise revenues for the government.

In the 1980s and 1990s a new pro-market doctrine gained momentum supported by the work of institutions such as the World Bank and the International Monetary Fund (IMF). This approach advocated market-friendly and open-border policies including cuts in import tariffs and increasing cross-border flows of financial capital and people.

The core idea behind increasing openness in the world economy was that developing countries stronger engagement with the developed world allows them to mimic and develop the technologies of the West, raise productivity and drive per capita incomes higher.
Overview of different growth and development strategies
Be able to evaluate each of these policies - picking out advantages and disadvantages of each

There are many ways that growth and development can be promoted in developing countries:

Rapid industrialisation

Investment in tourism and other services

Trade liberalisation

Removal of subsidies

Policies to attract inward investment

Greater role for the price mechanism in allocating resources

Measures to increase incomes and savings

Improving institutions

Overseas aid

Debt cancellation

Infrastructure investment

State investment in welfare systems

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Development Strategies and Policies | tutor2u Economics

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The role of the state: Throughout much of the 1960s and 1970s, traditional development thinking had been that government/state control and economic planning, high levels of public investment and protection from the volatility of the world market using protectionism was the best recipe for promoting development.

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Development and Growth Constraints - Trade Deficits | tutor2u Economics

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What is a savings gap?

In many smaller low-income countries, high levels of poverty make it almost impossible to generate sufficient savings to provide the funds needed to fund investment projects. This increases reliance on tied aid.

This problem is known as the savings gap. In Africa for example, savings rates of around 17 percent of GDP compare to 31 percent on average for middle income countries. Low savings rates and poorly developed or malfunctioning financial markets make it more expensive for African public and private sectors to get funds for investment. Higher borrowing costs impede capital investment.

The saving gap and the foreign exchange gap

i) Many poorer countries do not have sufficient domestic savings to be able to finance the required rate of capital investment to promote economic growth

ii) Many developing countries suffer from a shortage of foreign exchange that can be used to finance imports of consumer goods and services, raw materials and components and new capital inputs

Deriving the savings gap and the foreign exchange gaps

Thinking back to introductory national income accounting

Y is total output produced in a given year (GDP)

C is private consumption

I stand for total investment

G is government consumption

X denotes exports

M represents imports

S is savings

T stands for total government tax revenue

We know that

Y (GDP) = C+I+G+X-M

Y is also the sum of C + S + T

Rearranging

C+I+G+X-M = C+ S + T

Therefore

S-I = (X-M) + (G-T)

This gives us an equation explaining the total resource gap of an economy into internal balance (i.e. the government budget) and external gap (balance of trade)

Limited Scale and Efficiency of Financial Markets

Many of the least developed countries have limited financial markets such as banking, money and credit systems, insurance markets and stock markets.

Worldwide, approximately 2.5 billion people do not have a formal account at a financial institution. Access to affordable financial services is linked to overcoming poverty, reducing income disparities, and increasing economic growth

These are essential for providing long term capital for the private sector and helping to channel savings and provide funds for investment projects.

Some progress is being made in Sub-Saharan Africa - there are now 19 stock markets in operation - but most of these are small by international standards. The Nigerian stock market accounts for only 3% of Brazil's or India's stock market capitalization.

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Development and Growth Constraints - Savings Gaps | tutor2u Economics

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In many smaller low-income countries, high levels of poverty make it almost impossible to generate sufficient savings to provide the funds needed to fund investment projects. This increases reliance on tied aid. This problem is known as the savings gap.

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The prices of these goods can be volatile on world markets

When prices fall, an economy will see a sharp reduction in export incomes, an adverse movement in their terms of trade, risks of a higher trade deficit and a danger that a nation will not be able to finance state-led investment in education, healthcare and core infrastructure

Despite being rich in natural resources, for many countries this is a curse rather than a blessing

Here are some examples of export dependence for a selection of countries in Sub-Saharan Africa: The data shows the % of total exports in 2010:

Angola: 97% oil

Ghana: 39% gold, 26% oil, 17% cocoa

Kenya: 19% tea, 12% horticulture

Senegal: 11% fish, 11% phosphate

Zambia: 84% copper

Sub-Saharan Africa (SSA) is often cited as a region where primary sector dependence is high. SSA's share in global manufacturing trade remains extremely low.

This chart from the Economist (published in December 2014) illustrates clearly the countries that are most heavily dependent on primary commodities either as a net exporter or a net importer:
http://www.economist.com/blogs/graphicdetail/2014/...

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Development and Growth Constraints - Primary Product Dependency | tutor2u Economics

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The prices of these goods can be volatile on world markets When prices fall, an economy will see a sharp reduction in export incomes, an adverse movement in their terms of trade, risks of a higher trade deficit and a danger that a nation will not be able to finance

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Development and Growth Constraints - Malnutrition | tutor2u Economics

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Infrastructure includes physical capital such as critical energy power and water supplies, sanitation, telecommunications & transport networks, schools and hospitals

Evidence shows that there is a strong positive correlation between a country's development stage and the quality of its road network

Poor infrastructure causes higher supply costs and delays for businesses. It reduces labour mobility and hurts the ability of exporters to get products to global markets.

According to the World Bank, transport costs are 25-30% of product costs in developing countries partly because of deficiencies in infrastructure

Examples of infrastructure deficiencies

India: India's irrigation system is deficient and not properly managed and this has made it difficult to sustain food grain production when rainfall is less than expected - as was the case in 2012. This has led to a surge in food prices which hits the poorest communities hardest. For a few days in the summer of 2012, much of northern India was plunged into darkness. About 700 million people were left without power, a situation that affected transport, communication, healthcare, industries and farming. India needs an estimated $400bn investment in the power sector if it is to meet their development goals. About half of India's roads are not paved.

Brazil: Host for the 2014 World Cup and the 2016 Olympics. Brazil's growth is constrained by infrastructure weaknesses: In 2011, only 14% of her roads were paved. The World Economic Forum ranks Brazil's quality of infrastructure 104th out of 142 countries surveyed, behind China (69th), India (86th) and Russia (100th).

Sub-Saharan Africa: The combined power generation capacity of the 48 countries of Sub-Saharan Africa is 68 gig watts - no more than Spain's. Excluding South Africa, this figure falls to 28 GW, equivalent to the capacity of Argentina (except Argentina has a population of 40 million and Africa has 770 million!) Poor road, rail and harbour infrastructure adds 30-40% to the costs of goods traded among African countries. A chronic shortage of energy - with firms and people facing acute shortages of power - is a major barrier to growth and development. According to the Asian Development Bank Report for 2013, Africa currently invests just 4% of its GDP in infrastructure, compared with China's 14%

Find more statistics at Statista

One limitation to infrastructure investment in developing countries is that tax revenues are low or come from a narrow base of businesses. For example, East African Breweries accounts for nearly 10% of the direct and indirect tax revenues going to the Kenyan government.

Many countries will need to increase their spending on infrastructure in the years ahead to deal with the consequences of climate change. According to the United Nations, between 1901 and 1910 there were eighty two recorded natural disasters, but between 2003 and 2012 there were more than 4,000

Exam tip: Examiners report that students are not good at explaining exactly how improved infrastructure can boost development. Take a step-by-step approach, using good applied examples.

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Development and Growth Constraints - Infrastructure | tutor2u Economics

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Infrastructure includes physical capital such as critical energy power and water supplies, sanitation, telecommunications & transport networks, schools and hospitals Evidence shows that there is a strong positive correlation between a country's development stage and the quality of its road network Poor infrastructure causes higher supply costs and delays for businesses.

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Barriers to Growth and Development and Growth

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Barriers to Growth and Development and Growth

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No society can achieve its potential without the full and equal participation of women and men
62 million girls are not in school. Pregnancy/poverty/early marriage are the main reasons for girls dropping out of school
Over 150 countries have at least one law that acts as a barrier to female participation in the labour market.
Across the globe women occupy, on average, 23% of parliamentary seats in 2016, up from 12% in 1997

According to the UN Human Development Report:

"All too often, women and girls are discriminated against in health, education, political representation, labour market, etc. - with negative repercussions for development of their capabilities and their freedom of choice."
Background

Just over half of the world's female population aged 15-64 is in employment, compared to more than 8 out of 10 men. But the proportion of economically active women has declined in the last 20 years

In many countries women are subject to cultural norms preventing them playing a full and active role

According to the World Bank, 232 million women live in economies where they can't get a job without their husband's permission

Only 1 in 4 women in the Arab world participate in the labour force

Less than 10% of credit for small farmers in Africa is directed to women

Women make up 70% of Africa's farmers but the majority are locked out of land ownership

In only two countries, Cuba and Rwanda, does the share of women in parliament match or exceed their share in the population

Some progress is being made, from 2009 to 2011, 39 developing countries made legal changes towards gender parity - but only 38 out of 141 nations set the same legal rights for men and women

Women in many countries have a substantial role in the informal economy, working in family businesses, doing domestic work and producing goods for self-consumption. This type of work generally offers low, irregular or no pay and little or no access to social security or legal protection.

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Development and Growth Constraints - Gender Inequalities | tutor2u Economics

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The unequal opportunities available to hundreds of millions of women around the world represent one of the biggest barriers to growth and development. This study note draws on a range of data on aspects of gender inequality made available by Our World In Data.

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For example, the global financial crisis (GFC) of 2007-2010 brought about recession in many countries and financial distress in many regions. It also led to a fall in FDI flows into many poorer countries and pressure on governments in rich nations to cut overseas aid budgets.

If a resource rich country exports the resource, then it exposes itself to damaging volatility of its export earnings

In 2010, economists Bruckner and Ciccone found that a 10% fall in income due to falling commodity prices raises the likelihood of civil war in sub-Saharan Africa by around 12%.
Volatile Incomes and Employment

Poor countries specialize in fewer and more volatile sectors

They tend to be smaller economies who cannot influence world prices

Poor countries tend to experience more frequent external shocks

These external shocks tend to be severe and affect millions

Fewer countries have extensive social security safety nets

Volatility can be disruptive to economic health. It increases the risks for businesses considering capital investment, it raises the chances of people falling into extreme poverty and it makes a nation's finances more fragile perhaps lowering the scope for important investment in public goods.

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Development and Growth Constraints - External Shocks | tutor2u Economics

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For example, the global financial crisis (GFC) of 2007-2010 brought about recession in many countries and financial distress in many regions. It also led to a fall in FDI flows into many poorer countries and pressure on governments in rich nations to cut overseas aid budgets.

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Conflict, corruption and poor governance can have hugely damaging effects on a country's growth rate and development potential
What is governance?

Governance refers to how a country is run and whether the exercise of authority manages scarce resources well improving economic outcomes and the quality of life for a country's people.

High levels of corruption and bureaucratic delays can harm growth by inhibiting inward investment

Corruption makes it likely that domestic businesses will invest overseas rather than at home.

According to the United Nations, "Corruption undermines human development and democracy. It reduces access to public services by diverting public resources for private gain."

Corruption

Keeping track of election promises

Low transparency of where tax revenues come from

How is state money spent and on whom?

Impact

Is the government delivering key public services?

How is this money spent? Does it deliver good outcomes per $ spent?

Is spending effective in promoting long run growth?

Fairness

Can people trust government and institutions?

How free of corruption is the government?

Is the distribution of spending equitable?

Governments need a stable and effective legal framework to collect taxes to pay for public services. In India for example, there are 15 times more phone subscribers than taxpayers. If a legal system cannot protect private property rights then there will be less research and development & innovation.

Conflicts - there have been an estimated 150 conflicts since 1945 with 28 million deaths (this is twice the toll of WW1). Conflicts have huge collateral damage effects - for example, Angola has lost 80% of its farmland because of landmines. Most conflicts are intra-state i.e. civil war and reconstruction can take decades and many countries remain aid-dependent. About 1.5 billion people live in countries suffering repeated waves of political and criminal violence.

A recent example of the cost of conflict comes from the Ivory Coast. After a disputed presidential election in late 2010 violence erupted and the country descended into a four-month civil war that killed an estimated 3000 and displaced around a million people. The war could only be ended by a French intervention in April 2011. Since then, a new government under President Ouattara has struggled to re-establish security but raids against army and policy installations still threaten stability.

Explain how high rates of corruption can damage economic growth and development
High levels of corruption damage growth & development:

1. They inhibit direct foreign investment into an economy

2. It leads to allocative inefficiency / diverting public resources for private gain

3. Contributes to persistent income & wealth inequality and reduced progress in cutting rates of extreme poverty

4. Causes a loss of trust - a breakdown of social capital

5. Leads to substantially poorer human development outcomes because governments are not collecting in enough tax revenues

Conflict has had terrible consequences; over one third of economies in Africa have suffered some kind of warfare from Rwanda, Sierra Leone, Eritrea, Uganda, and Somalia.

That said encouraging progress has been made in building democratic institutions in many African countries.

Economic growth can collapse and go into reverse when states fail - there are numerous reasons why chronic government failure can hamper growth and development:

Failures to protect property rights and provide sufficient incentives for new businesses to flourish

Forced labour, caste labour and other forms of discrimination - all of which waste scarce human resources not least limiting the roles that women can play in labour markets and - over the long term - holding back innovation and technological progress (two key drivers of growth)

Power elites controlling an economy - using their power to create monopolies that keep consumer prices high and blocking socially useful new technologies

Stateless areas - large parts of the world are still dominated by stateless societies where the rule of law barely exists

Public goods - chronic failures to provide basic and effective public services such as education, health and transport. Many of the world's least developed countries have not built effective tax systems and so their revenue base is inadequate for much needed capital investment and the annual revenues required to provide public health and education programmes

For survey evidence on perceptions of corruption worldwide, the annual report from Transparency International is recommended reading.

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Barriers to Growth and Development - Corruption and Conflict | tutor2u Economics

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Conflict, corruption and poor governance can have hugely damaging effects on a country's growth rate and development potential What is governance? Governance refers to how a country is run and whether the exercise of authority manages scarce resources well improving economic outcomes and the quality of life for a country's people.

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Developing Countries - Similarities and Differences

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Developing Countries - Similarities and Differences

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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

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)

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

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Developing Countries - Similarities and Differences | tutor2u Economics

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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.

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Key Macroeconomic Indicators for China

China has achieved an average growth rate of over 9% pa since 1978 - the year that effectively was the start of the market based reforms in the Chinese economy

Rapid, sustained growth in China has lifted over 700 million people (or one-tenth of the world's population) out of extreme poverty

All of the Millennium Development Goals have been reached or are within reach

Growth in China is now slowing down and a lower target rate of growth of 7% has been set

Capital investment (I) and exports (X) have been the foundations for Chinese growth and development but the Chinese economy has now reached an important turning point.

For growth to be sustained China needs to achieve a re-balancing of her economy

Relying less on exports of low to medium value manufactured products and moving up value chains to produce and sell products with a high-knowledge and high-technology component

Driving more growth from household spending (consumption) on goods and services

Sustainability has become an essential part of China's development strategy

Addressing the pressures that come from rising inequalities of income and wealth.

Success in improving sustainability through low carbon innovation and other technological breakthroughs can provide China with new sources of external demand as Chinese businesses export products and licence technology in green industries

China remains a Communist state dominated by the Chinese Communist Party but it is also an increasingly open economy where trade accounts for over seventy per cent of GDP

In 2000, China's accounted for 7.1% of the world's total GDP (in PPP terms)

By 2015 China will have a 19% share of global GDP - higher than any of the other BRIC nations

Per capita incomes are rising though still low by advanced-nation levels

The share of GDP (by valued-added) from Chinese industry has been close to 50% for more than 30 years, but since 1980 the share contributed by service industries grown from 30% to 43%. This is below the norm in advanced countries where services account for more than 70% of GDP.

Agriculture's share of Chinese GDP has fallen from 30% of GDP in 1980 to less than 10% in 2009. There has also been a mass movement of millions of people away from rural areas into urban centres of population but agriculture still accounts for around 40% of total employment

The latest Economic Plan is centred on developing the services sector, increasing urbanization and improving incomes - there are big opportunities here for UK service multinationals

Progressing towards 2030

China should complete its transition to a market economy -- through enterprise, land, labor, and financial sector reforms -- strengthen its private sector, open its markets to greater competition and innovation, and ensure equality of opportunity to help achieve its goal of a new structure for economic growth.

These are some of the key findings of a joint research report by a team from the World Bank and the Development Research Center of China's State Council, which lays out the case for a new development strategy for China to rebalance the role of government and market, private sector and society, to reach the goal of a high income country by 2030
Source: World Bank Report 2012

Chinese Development Strategies

China is a unique blend of market and command economy, but the market is gaining importance

For many years China has practiced export-led growth with exports exceeding 40% of GDP

Investment has been a huge growth driver - it was 46% of GDP in 2010. By comparison, Japan in its 1970s boom topped out at 36%, while Korea's share peaked at 39% in the 1990s.

The surplus on the balance of payments current account has fallen from over 10% of GDP in 2007 to less than 6% in 2011

Korea, Japan, Germany and Switzerland run trade surpluses with China because they are able to export the high-value manufactured items, particularly investment goods, China needs

The emphasis of China's growth policy is changing. A quote from Premier Wen Jiabao is central to this - 'China's economy needs to be put on the path of endogenous growth driven by innovation'

Foreign Direct Investment and Chinese Growth
Outward FDI from China

Partly because of trade surpluses, China has accumulated foreign-exchange reserves in excess of $3 trillion. These surpluses allow for outward overseas direct investment - much of the current focus is on China's investments in many African and Latin American countries.

China is estimated to earn around $1bn per day interest income from their FX reserves

In recent years China has given more loans to poor countries than the World Bank. In African countries such as Nigeria and Zambia, amounts from China of over US$100 million per year have been common. In Zambia, for instance, this has represented 1-1½ percent of GDP

Chinese companies are preparing for investments in Western and Eastern Europe in engineering and technology as part of an effort to find new markets and gain greater control of global supply chains. In 2010 Geely (a Chinese car maker) purchased Volvo (Sweden). Lenovo (the world's largest manufacturer of personal computers) bought IBM's PC business

Large scale investments by China in mining capacity is helping propel Peru into the world's second largest copper mining nation

FDI into China

China continues to attract high levels of inward foreign direct investment

China aims to lure more FDI in advanced manufacturing, as well as services including logistics, research and development, higher education and vocational training. This part of her aim to boost the service-side of the economy and to lift per capita incomes.

The Changing Pattern of Chinese Exports

For much of the last twenty years China's export industries have been dominated by manufacturing and selling consumer goods to rich advanced countries

But now China is shifting the emphasis of exports towards selling heavy industry products to developed and developing countries - for example overseas sales of giant earth movers, telecoms network gear and construction materials. Many of these are high-value and higher profit products which will make it easier for Chinese companies to pay higher wages to their employees.

Much low-valued added production such as cheap textiles and household goods is shifting to countries such as Vietnam and Bangladesh.

The other big change in the pattern of Chinese exports is a shift away from selling to rich, advanced, developed country markets towards fast-growing developing nations including Africa

Sovereign Wealth Funds:

China has a sovereign wealth fund known as the China Investment Corp (CIC) charged with making portfolio investment overseas

In 2011, Cheung Kong Infrastructure Holdings Ltd bought Northumbrian Water Group and the CIC acquired an 8.68% stake in Thames Water Utilities

China has encouraged many businesses to make big capital investments in other emerging countries many on an African continent rich in natural resources.

Domestic investment and rural development and green technologies

The Chinese government has used some of the currency reserves to fund increased investment in rural areas of China to support living standards and development in some of the poorest parts of this vast country. Chinese farm subsidies have grown, as a share of total farm incomes, subsidies in China have jumped from 6% in 1995 to 17% in 2010

The 12th Five Year Plan allocates more resources to green investments in traditional sectors, for example infrastructure spending and innovation to improve water and energy efficiency in farming in a bid to lift agricultural productivity and profits.

Key Growth and Development Challenges for China

Enormous attention is paid to economic, social and political developments in China

Sustained growth and development is not inevitable even if the key macro indicators suggest that China is on a firm path towards becoming the world's biggest economy.

There are numerous challenges to overcome in the near and medium term.

The key point is that China is switching to a less capital-intensive development model.

Key challenges include the following:

Environmental challenges

Growing inequality of income & wealth

Threat from high inflation

Global trade tensions

Demographic challenges

Lowering reliance on exports and trade surpluses

Re-balancing away from huge investment towards consumption

Wage Inflation in the Chinese Economy
Wages are rising fast in China - many economists believe that China has hit a stage in its development at which demand for labour starts to grow faster than supply, creating labour shortages and pushing up salaries. This is known as a Lewis Turning Point.
Why are wages rising so quickly?
The main reason for the acceleration in wages is that China is ceasing to be a labour surplus country - here are some explanations for the pick-up in wages. Keep in mind however that wages in China remain low compared to richer advanced countries and many other emerging nations. Recent data suggests they are typically around $300 a month in the manufacturing heartlands, lower in rural areas.

1.Demographics:

a.The median age in China's 35.2 years and it is rising

b.To some commentators, China is getting older before she has got rich. Life expectancy has soared, while fertility has plummeted due to strict birth control policies.

c.In 2009 there were 167 million over-60s in China, about an eighth of the population. By 2050 there will be 480 million, while the number of young people will have fallen. In 2000 there were six workers for every over-60. By 2030, there will be barely two.

d.Under the "one child policy" the fertility rate dropped to between 1.5 and 1.8, well below the 2.1 figure required to keep the population stable. This policy has now been changed

e.The old age dependency ratio will double in the next two decades, and the size of China's labour force is projected to start shrinking as soon as 2015.

2.Social pressures:

a.Wages are rising because of growing concerns among the Chinese authorities about the consequences for income inequality of rapid growth. Tens of millions of workers have migrated to the Chinese cities where average wages are higher but creating a deeper imbalance in rural areas which already suffer low incomes and low quality public services.

b.Labour shortages and worker unrest have prompted sizeable increases in the minimum wage in many Chinese regions

c.The government's latest five year plan states that firms must increase wages by at least 13% every year but in certain areas the local authorities mandate much higher rises.

3.Multinationals under the microscope:

a.There has been international pressure on foreign multinationals operating in China to lift wages for their workers. Many media reports have highlighted factories with miserably low wages and appalling working conditions.

b.Organisations such as the Fair Labour Organisation have been active in raising concerns about low wages and possible exploitation by monopsony employers.

c.Foxconn Technology Group (official name: Hon Hai Precision Industry) is a Taiwan-based company and also China's largest private-sector employer and was heavily criticised after fourteen worker suicides at one of its main land Chinese plants over a 10-month period in 2010, prompting local protests.

What might be some of the consequences of a lengthy period of rapid wage inflation in China?

1. Costs and profits: A short-term squeeze on profits for manufacturers such as FoxConn and Nike

2. FDI shift: There might be a shift of FDI away from China to lower-cost countries such as Vietnam and Bangladesh. But many experts argue that the relocation of manufacturing and FDI will be small because of factors unique to China - for example, high manufacturing reliability, close access to growing Chinese domestic markets, excellent supply chains built up over twenty years, the existence of external economies of scale in China and commitments to raising productivity and product quality - which makes the wage rate less important. Relocation of manufacturing is more likely to happen China to lower cost interior regions with excellent transport and communication links.

3. Income and consumption: China is a middle-income country but it is well positioned to join the ranks of the world's high-income countries if growth can be sustained. Rising wages will help to boost demand for consumer durables, leisure activities and housing - providing a new source of demand as China looks to wean itself off resource heavy investment and export-led growth

4. Trade balances: Higher wages and incomes may lead to a rise in demand for imports into China - providing an opportunity for advanced countries - and might stimulate FDI for consumer-facing businesses such as retailers and financial services companies

5. Productivity and innovation: A decade or more of high wage growth will fast-forward the drive by Chinese producers to raise total factor productivity by investing in human capital and technology to lift output per worker. Annual labour productivity growth in China from 2010-2015 is forecast to be 8,3% which means that 10% annual growth in real wages will have little effect on unit labour costs

Demographic challenges: China's declining labour force
This is an important longer-term trend for the Chinese economy

The size of the Chinese population is forecast to peak around 2025-2030 and then start to decline

The labour force may contract by around 20% in the next forty years

During the years 2001-10, China's population rose at just 0.57% annually - half the level of the previous decade

China's working-age population declined by almost 3.5 million people in 2012

Although per capita income is only around 1/5th of incomes in rich nations, the fertility rate in China is on par with those of Russia, South Korea, Japan, Germany and Italy

As China grows old, dependency ratios will rise - this will put upward pressure on government spending and an aging workforce will be less mobile and probably demand higher wages

By 2010, nearly 14% of Chinese citizens were over 60, and nearly one in 10 were over 65 - this will continued to rise in the years ahead

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China - Economic Growth and Development | tutor2u Economics

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Key Macroeconomic Indicators for China China has achieved an average growth rate of over 9% pa since 1978 - the year that effectively was the start of the market based reforms in the Chinese economy Rapid, sustained growth in China has lifted over 700 million people (or one-tenth of the

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Brazil - Economic Growth and Development

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Brazil - Economic Growth and Development

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Brazil is an upper middle income country in South America with a population of 195 million people

Gross National Income (GNI) per capita in 2010 was $9,390 - this was well above the upper middle income average of $5,884 - can Brazil (one of the BRIC countries) escape the middle-income trap?

Brazil has one of the highest rates of urbanisation in the world with 87% of the total population living in urban areas compared to a 57% average for upper middle nations

Life expectancy at birth is 73 years, 91% of the population aged 15 and over is literate

Brazil hosted the 2014 soccer World Cup and the 2016 Olympic Games - both events have required a huge rise in investment spending to boost Brazilian infrastructure and tourist facilities

Brazil's main trading partners are China (15%), the USA (10% of exports) and Argentina (9%)

Brazilian transnational corporations are becoming increasingly prominent in the world economy. In 2011, Petrobas was ranked 5th in the world by market capitalisation

Agriculture contributed heavily to Brazilian growth - the value of output in Brazil's agricultural industry, nearly quadrupled between 1996 and 2006, and the country is now one of the world's largest net exporters of grain, soybeans, beef, oil and iron ore.

Brazil is the world's biggest exporter of chicken, orange juice, coffee and sugar! It runs a trade surplus in farm output with China and India.

Brazil's agriculture sector is one of the world's biggest users of GM technologies

The country runs a current account deficit, largely because Brazil is a heavy importer of consumer goods especially from China and the United States

Progress in improving human development in Brazil
Since the mid-1990s, social progress has been steady, with a fall in extreme poverty and income and wealth inequality. Brazil has been one of the few fast-growing countries to have seen the Gini coefficient decline in the last fifteen years. That said the scale of inequality in Brazil is enormous.

Despite progress, the poorest 10% of the Brazilian population take a tiny share of national income
Structural change in the Brazilian economy
During the last twenty years, the share of GDP from agriculture has fallen from 8.1% in 1990 to 5.8% in 2010. Manufacturing has just 16% of Brazilian GDP.

Brazil has been called by some economists a "commodity country" vulnerable to the effects of a natural resource curse, but now Brazil is attempting to build competitive advantage in high value-added manufacturing, tourism and other service industries.

Brazil's future progress is constrained by a number of weaknesses including high taxes, a tendency towards import protectionism, weak infrastructure, corruption, crime, and dominant monopolies. In Rio, the public transport network is the city's most serious infrastructure problem. The city and its 6.1 million populations have just one underground train line.
Poverty Reduction Policies in Brazil
The Brazilian government has invested heavily in anti-poverty programmes over the last ten to fifteen years and has lauded as an example of a country where a well-designed combination of policies can have a significant effect. The percentage of the Brazilian population in extreme poverty has fallen from 23% in 1993 to 8.3% in 2009, and Brazil has achieved its own Millennium Development Goal to cut back extreme poverty in 2015 to ¼ of the level experienced in 1990 - this target was achieved in 2007.

Much remains to be done for despite sustained economic growth, Brazil remains a highly unequal country and sixteen million people continue to experience extreme poverty living below the $1.25 per day UN benchmark. That said Brazil has seen their Gini coefficient fall by 9% between 2011 and 2009.

The poverty-reduction programme has been built around focusing on:

1.Increasing the percentage of adults in formal work

2.Raising school enrolment rates

3.Raising incomes for people in work (targeting the working poor)

4.Boosting the non-labour income of Brazil's poorest through an ambitious income transfer scheme known as Bolsa Familia

Bolsa Familia - conditional cash benefits targeting the poorest families
Bolsa Familia is an income transfer (or Family Benefit) programme established in 2003 which in 2011 reached more than a quarter of Brazil's 190 million population. It provides small conditional cash transfers to families, the payments are conditional on families sending their children to school, completing immunization schemes and attending post-natal care services. Total benefits amount to slightly more than 0.4 per cent of Brazil's GDP and slightly less than 0.7 per cent of household income. This is a key point; the benefits paid are small which makes them less open to fraud. In addition to cash, in-kind benefits such as nutritional supplements can supplied.

Bolsa Familia targets poorer families, provides transfer payments for older people and has been extended to paying rural pensions. This programme is an example of targeting cash transfers to those in greatest need, but linking payments to families engaging with educational and other social policies. Mexico is another country that has used conditional cash transfers. Chile and Columbia have used this strategy too.
Tackling Poverty: Productive Inclusion of the Poor
A third key part of the poverty-reduction policy in Brazil is to invest in education and training to build up human capital. Secondly to offer guaranteed minimum working conditions for people who work in formal labour markets. The government also provides subsidies to certain groups, for example subsidies to rural farmers to encourage production and exporting their surplus production to Brazilian urban areas.

Lifting educational outcomes is crucial to this long term anti-poverty strategy and some progress is being made. Illiteracy rates within young people aged 15-24 has fallen from 7.1% in 1995 to 1.9% in 2009. Attendance rates for children aged 6-14 years have grown from 88.7% in 1995 to 97.6% in 2009, and 85.2% of youths aged 15-17 remain in education. 62% of children complete primary education, 44% finishes their secondary schooling and 10% get through tertiary courses

According to the World Bank
"Between 2001 and 2009, the income growth rate of the poorest 10% of the population was 7% per year, while that of the richest 10% was 1.7%. This helped decrease income inequality (measured by the Gini index) to reach a 50-year low of 0.519 in 2011."
Ultimately the success of poverty-reduction programmes depends on an economy continuing to grow and create enough new jobs to meet the demands and expectations of an expanding labour force. Fears that cash transfers might create disincentives for people to look for work appear to be unfounded, indeed there is some evidence that the Brazilian benefit programme has boosted self-employment.

The Brazilian President Dilma Rousseff has launched a plan to eliminate dire poverty in Brazil within four years by lifting more than 16 million people from conditions of "misery. Bolsa Familia is being extended - cash transfers will be increased to poor rural farmers who benefit from government food purchases and payments of up to 2,400 reais every six months to improve their productivity.

A separate Bolsa Verde (Green Stipend) program will hand out 300 reais every three months to families who help to preserve forests where they live - an example of using conditional cash transfers to address the critical environmental and economic issue of deforestation.
The 2013 Protests in Brazil
In June and July 2013 Brazil was rocked by protests by hundreds of thousands of people. Some of the protests were organised by trade unions lobbying for improved working conditions and better public services. Others demonstrated against transport fare rises, the soaring cost of staging the 2014 World Cup and endemic corruption.

The protests took place against a weakening economic background for Brazil.

In recent times, the economic growth rate has slowed; their currency has depreciated against the US dollar contributing to a surge in food and fuel prices which hits the poorest communities hardest.

The protests, some of which turned violent, are a reminder that development (even in one of the much feted BRIC countries) is not an inevitable process. And social and political challenges have to be met when the expectations and aspirations of millions of people come under threat from high inflation and a slowing economy.

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The Exam Performance Specialists | tutor2u Economics

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Brazil is an upper middle income country in South America with a population of 195 million people Gross National Income (GNI) per capita in 2010 was $9,390 - this was well above the upper middle income average of $5,884 - can Brazil (one of the BRIC countries) escape the middle-income trap?

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Asian Infrastructure Investment Bank (AIIB)

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Asian Infrastructure Investment Bank (AIIB)

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The Chinese-led Asian Infrastructure Investment Bank (AIIB) is designed to raise hundreds of billions of dollars to finance railways, ports and other key development projects. AIIB will also play a growing role in fostering regional economic integration including a rise in intra-regional trade and investment.

Initially there will be around one hundred billion dollars of capital which might provide financing of 12-15 times this amount as the capital of the bank is leveraged.

There will be around forty founder members including Russia, Taiwan, South Korea, Germany, Brazil, Australia and the United Kingdom, but with no official representation from the USA who are suspicious that the AIB will be a vehicle for increasing Chinese dominance in the Asian continent.

Japan is another noticeable absentee (for the moment) from the list of founding member nations although it is expected to join within a matter of months.

China set about building its own development bank largely because it was frustrated by a relative lack of influence at the World Bank (a U.S.-based institution) and the Asian Development Bank (where Japan is a major force).

China is planning to build new maritime and land routes between China and Asia - known more commonly as their new Silk Road

The AIIB might in time threaten the influence of the World Bank and the International Monetary Fund (IMF).

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Asian Infrastructure Investment Bank (AIIB) | tutor2u Economics

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The Chinese-led Asian Infrastructure Investment Bank (AIIB) is designed to raise hundreds of billions of dollars to finance railways, ports and other key development projects. AIIB will also play a growing role in fostering regional economic integration including a rise in intra-regional trade and investment.

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The ASEAN trading bloc's diversity - ranging from advanced economies like Singapore to developing countries like Myanmar is an interesting and important feature - who will be the winners and losers from deeper economic integration in the region?

Current members;

Association of Southeast Asian Nations (Brunei Darussalam, Cambodia, Indonesia, Lao P.D.R., Malaysia, Myanmar, Philippines, Singapore, Thailand, Vietnam)

Economic Background to ASEAN

ASEAN is a middle-income region but with big differences in per capita incomes

Countries such as Singapore and Brunei enjoy a very high GDP per capita at around $49,000 and $39,000, respectively, on par with the top tier of developed-market economies.

In contrast, Myanmar and Cambodia have a GDP per capita (PPP adjusted) of just below $900.

The ASEAN region has a population of over 600 million, roughly half that of China's or India's and around 9% of the world's total

ASEAN's combined GDP of USD 2.3 trillion in 2012 is around 30% the size of China's, roughly the same size as that of the UK and 25% larger than India's. ASEAN GDP =3% of the world's total

25% of ASEAN trade is intra-regional trade - the aim is to increase this as economic ties deepen and also for a rise in intra-regional FDI flows

China has emerged as the No. 1 trading partner for ASEAN

5 "ASEAN+1" free-trade agreements have been signed, with China, Japan, Korea, India and Australia/New Zealand respectively

The basics of a single market / economic community

As part of the ASEAN integration plans, barriers to trade in goods and services will be brought down or kept to a minimum.

Flows of investment, capital and skilled labour will be facilitated and co-operation in sectors designated as priority integration sectors will be promoted.

Free flow of goods and services

Freer flow of capital and the Free flow of skilled labour

Priority integration sectors

Food, agriculture and forestry

This will be added to by establishing regional standards for competition policy, Consumer protection, Intellectual property rights, taxation and e-commerce

The ASEAN Infrastructure Fund was established with the Asian Development Bank to fund physical infrastructure projects in ASEAN. An example is the building of a new high speed railway between Malaysia and Singapore.

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The ASEAN trading bloc's diversity - ranging from advanced economies like Singapore to developing countries like Myanmar is an interesting and important feature - who will be the winners and losers from deeper economic integration in the region?

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Articles on the Chinese Economy | tutor2u Economics

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Arguments against Protectionism | tutor2u Economics

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We've just flicked the switch on moving all our digital resources to instant digital download - via our new subject stores. For every subject you can now access each digital resource as soon as it is ordered. This will always be the latest edition of each resource too (and we'll update you automatically if there is an upgraded version to use).