More efficient use of resources - law of comparative advantage

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

• greater efficiency, higher living standards with more goods and services

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

16.5% unemployment in Rwanda

21% youth unemployment

agriculture tends to be limited

trade liberalisation leads to lower prices

increase in consumer surplus = P1CBP2

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

higher rates of innovation

competition encourages firms to improve non competitiveness which consumers benefit from

overspecialisation

• Rwanda is highly dependent on a narrow range of primary products

• Prebisch-singer hypothesis

• MNC's use their monopsony power

• 54% of exports are commodity exports

infant industry argument

• only 16% of GDP is manufacturing constraining economic development

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

current account imbalances

• 9% of GDP

• deterioration as imports coming

loss of tariff revenue

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

geography

• landlocked

• trade transactions high

• bad neighbours

• collier's constraints

• $3245 to ship a 20 foot container of dry cargo

• 72% of non-commodity exports

4.5% of GDP is inward FDI

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

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

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

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

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

No other African country featured in the top 100

22% of people are defined as deprived

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

Real GNI per capita is only $2003 low MPS

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

8.9% savings compared to Singapore's 54%

FDI is a means of filling the savings gap

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

investment represents an injection into the circular flow of income

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

capital accumulation increases productivity to the right

Profits may not be reinvested into the host country

Limited job creation effects

Increased competition for domestic producers

• MNCs are often more efficient so local suppliers cannot compete.

No fiscal dividend

• financial incentive such as Rwanda's 0% corporation tax

Negative impact on the current account of balance of payments

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

64% of Rwandan's are unbanked

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

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

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

many developing economies heavily subsidise essentials such as food or fuel

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

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

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

increases problem solving skills of the workforce

• higher levels of productivity

technology diffusion

• developing economies can implement and adopt new technology

increases occupational mobility of labour

• less structural unemployment

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

FDI flows

• vietnam has amazing education which acts as an attraction for FDI

improving health outcomes

• increases gender equality

• 2/3 of the world's illiterate are women

• more knowledge on contraception

Rwanda is one of the top performing countries in SSA

98% of Rwandan children are enrolled in primary school

73% literacy rate (average SSA is 64%)

National strategy for transformation seeks to prioritise STEM

160th on HDI Index in 2022

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

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

The infant industry argument

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

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

• only 16% of GDP is manufacturing

• Made in Rwanda applies 25% tariff

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

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

Employment

• 16.5% unemployment even higher youth unemployment (21.5%)

Increase in producer surplus

Tariff revenue

• 21% of Rwanda's total fiscal revenue

Improve the current account balance of payments

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

Helped to deliver 10% growth per annum

2020 investigation by the US into Vietnam currency manipulation

6,2% of GDP surplus

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

Can boost level of AD

• spending on infrastructure projects as investment

• leads to a multiplier effect

• employment and job creation

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

• crowding-in effects

• boost real GDP per capita

• makes up a third of HDI

Geographical mobility of labour

• lewis model

• 16% of GDP is manufacturing

Reduces business cost of production

• lower transport costs

• energy costs

• unreliable and expensive energy in Africa

Trade transition costs

Boosts competitiveness

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

• landlocked

• electricity issue

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

Many developing countries suffer from primary product dependency.

Price volatility

Aim is price stabilisation

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

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

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

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

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

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

Lewis model

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

• The economy is divided into two sectors

• Agriculture and manufacturing

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

PP dependency

• allows countries to get away from primary product dependency

• Prebisch-Singer hypothesis

Savings gap

• Harrod-Domar model

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

Employment opportunites

• Poor rates of employment

• 2023 - unemployment in Vietnam 1.92%

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

• more people at work boosts RDI and GDP

• reduce child mortality rate

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

Consumer welfare gains

• manufacturing increase leads to textile goods

• more choice of goods

Tourism is a key industry for Rwanda

Specifically high end tourism

Home to half of the world mountain gorilla population

Costs $1500 for a gorilla tracking permit

£30m sponsorship deal with Arsenal

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

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

High income elasticity of demand

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

Source of foreign exchange gap

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

Economic growth

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

• Increases net exports leading to arise in AD

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

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

• Rwanda 7% GDP growth is widely attributed to tourism

Increased employment opportunities

• Unemployment is 16.5% and youth unemployment is 21%

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

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

The environment

• Incentives to conserve areas of the environment that attract tourists

• Provides the stream of income required to promote environmental schemes

• 10% of tourism income goes towards the environment

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

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

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

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

Guarantee a higher price to producers

• Primary products are volatile

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

• An average coffee farmer lives on just £1.37 a day

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

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

• Since 2016 prices have fallen 30% below the average

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

Greater price stability

• prices are volatile

• incomes and earnings from exports can change rapidly

• guarantee a minimum price

Improved production standards

The fairtrade premium

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

Restricts economic development

Distortion of market forces

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

Difficulty in setting fair trade price

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

Fairtrade premium is often wasted

Who captures the gains?

Does not address the fundamental cause of poverty

• greater investment needed to raise farm productivity

• multi-lateral trade agreemenets

• reduce vulnerability to climate change

• reduce import tariffs

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

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

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

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

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

Bi-lateral

Multi-lateral

Project aid

Technical assistance

Humanitarian aid

soft loans

tied aid

debt relief

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

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

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

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

The big push argument

• Harrod-domar model

• insufficient finances to fund investment projects

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

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

• South Korea is a classic example of a big push story

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

• Rwanda's GNI per capita is still only $2003

• 39% of population in absolute poverty

Provide funding for infrastructure

• fund industrialisation (lewis model) - only 18% urbanisation

• private sector more likely to invest FDI

lead improvements in health and education

• life expectancy has increased frmo 26 to 69 today

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

Corruption issues

• many developing countries suffer from poor governance

• Aid may therefore not reach those for whom it is intented

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

• Rwanda is one of the least corrupt countries in Africa

Dependency

• countries become excessively dependent on external aid

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

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

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

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

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

• This puts the local supplier out of business

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

Aid and dutch disease

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

• lewis model bad for economic development as manufacturing stifled

Aid may be wasted

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

Depends on the country

Depends on the aid given

Development in poor countries has been hampered by debt.

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

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

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

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

2000 - Rwanda entered HIPCI

$1.4 bn debt was cancelled upon HIPC completion in 2005

Rwanda pays $48mn annually

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

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

Opportunity cost

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

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

• Since 2005 economic growth has averaged 7%

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

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

• Life expectancy has increased from 47 to 69

Economic growth

• debt payments are a withdrawal

• cancellation can stimulate short run economic growth

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

• reduce taxes

• cut corporation tax

• incentivise work

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

Savings gap

• helps them out of poverty trap and harrod domar model

Fill in foreign exchange gap

May damage developing countries access to financial markets in the future

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

moral hazard

• developing economies may pursue macroeconomic policies which are unsound

depends on conditions attached

• abolishing inefficient subsidy regimes is growth enhancing

• washington consensus

Depends on the country

• governance matters / government intervention

Depends on the magnitude

Time period - 8/10 markers