Economic Development

Unit Overview/Progression
● Sustainable Development
● Measuring Development
● Characteristics of Developing countries
● Barriers to Development
● Development and Interventions
○ Government/Public Interventions
○ Private Sector Interventions

Development Unit Reading List and Discussion Questions

Sustainable Development: Meeting present day needs without compromising the ability
of future generation to meet their needs. Long-term development

Government Economic
Institutions Institutions

Multidimensional
Nature of
Development

Social Institutions/Soft Hard

Infrastructure/Personal Infrastructure
Security
UN Sustainable Development Goals
Goals - Targets - Indicators
Sustainable Development Goals
Single Indicators - Financial
Gross Domestic Product: All economic activity within a country regardless of who
owns the asset.

Gross National Income: Total income earned by a country’s factors of production,

regardless of where the asset is located.

Purchasing Power Parity: Measure of GDP irrelevant of exchange rates - equal

purchasing power

● Significant FDI: GDP will be higher but most money will be repatriated out of
country
○ GNI a better indicator for developing countries
● Remittances: Money sent from abroad back to home country - usually by
relatives
Limitations of GDP
Single Indicators - Health
Life Expectancy at Birth: Average years a person is expected to live from birth -
often broken down between male/female

● Variables: Access to health, sanitation, food, shelter and absence of conflict.

Infant Mortality: Number of deaths of children under age 1 per 1,000 live births

● Variables: Access to health care, sanitation, food and female education

Single Indicators - Education
Adult Literacy Rate: Proportion of adults (15-64) which can read, write and
understand a short statement — Can be divided between men and women

● Variables: Access to education (usually primary)

Net Enrollment Ratio in Primary School: Students in primary school/primary school

aged students.

● Variables: Access to primary education, financial standing of family

Single Indicators - Social
Adolescent Fertility Rate: The number of births per 1,000 women ages 15-19.

● Variables: Access to contraception, sex education, equality

Net Enrollment Ratio in Primary School by Gender: Students in primary

school/primary school as a ration between girls and boys

● Variables: Access to primary education, financial standing of family, equality

Single Indicators - Energy and Environmental
Renewable Energy Consumption: Percentage of overall energy consumption
produced by renewable sources.

● Variables: Production of and access/affordability of renewable energy

CO2 Emissions: Kilotons emitted per year.

● Variables: Reliance of burning of fossil fuels for energy and production

Composite Indicators
● Human Development Index: Composite index consisting of three indicators:
○ Life Expectancy
○ Adult Literacy Rate
○ GDP PPP
○ Measures achievement
○ Supplements simply using GDP - Economic Growth ≄Economic Development
● Inequalities within indicators:
○ Rural vs. Urban
○ Gender
○ Ethnic and Religious
● Gender Development Index: HDI adjusted for gender inequality
● Gender Empowerment Measure: Female participation in society
○ % of women in leadership, managerial and parliamentary positions
● Human Poverty Index: Percentage of people living in absolute poverty
● Happiness Index: State of global happiness
○ Income, life expectancy, social support, freedom, trust, generosity.
○ Economic Growth ≄Economic Development ≄ Fulfillment
Human Development Index
Corruption Perception Index
 Economic Growth ≠ Economic Development (?)
Higher Incomes:

● More spending power will increase access to health, education, shelter, savings, etc
● Often economic growth will disproportionately favor the wealthy-Increase inequality

Improved Quality of Life (education, access to healthcare)

● High incomes = More access

● Will people spend higher incomes on necessities (women: yes; men: not always)?

Government Revenue - Collection of Taxes

● Government can spend money on healthcare, education, infrastructure, institutions

● Corruption
● Different priorities - Military spending, investment on pet projects for elites
 Economic Growth ≠ Economic Development
● Uneconomic Growth - Negative externalities and lack of sustainability
● Development Paradox/Curse
○ Demand for energy leads to pollution
■ Coal mining, oil/gas drilling
■ Coal & gas fired generation are the cheapest
○ Need for industrialization lead to destruction of resources
■ Forests, wildlife and oceans undermined
○ Growing middle-class
■ Demand more energy, food, larger housing, more luxuries (more airplane rides, bigger cars)
○ Water sustainability
■ Industrial, agricultural and personal consumption of water will stree resources
■ Water wars (Ethiopia, Sudan, Egypt)
○ More emissions = Global Warming
■ More droughts/hurricanes will undermine natural resources
■ Rising sea-levels
■ Movement of tropical diseases
■ Lack of resources = Potential conflict/growing instability
The Curse of Development/Development Paradox
Income Inequality in the IB Syllabus
Macroeconomics:

● Equitable distribution of income is one a government's main macroeconomic

objectives

Development:

● Income inequality is a source of underdevelopment

● Income inequality is a potential consequences of economic growth w/o
corresponding development - Uneconomic growth
Economic Growth ≠ Economic Development

Industrial Goods: Normal

manufactured and luxury goods

Merit Goods: Healthcare,

education, sanitation, clean
water, nutritious food
 Lorenz Curve & Gini Coefficient
Lorenz Curve:

● Cumulative Total Income vs. Total Population

● Line of Absolute Equality (LoAE)
○ Degree of “sag”—Distance from LoAE—indicates
level of inequality in income distribution

Gini Coefficient

● Statistic indicator of income distribution

● 0 (perfect equality) - 100 (Absolute Inequality)
● A/A+B

* Low income countries do not always have high Gini Co

*High income countries do not always have low Gini Co

Causes & Consequences
● Low incomes ● Low living standards
● Low levels of education ● Lack access to healthcare
○ Chose work/home over education ● Lack access to education
● Low levels of healthcare ● Limited participation in political and civic
○ Malnutrition/unsafe water life
● Consequently: Low levels of productivity

*Cycle of Poverty/Inequality
Cycle of Poverty - Poverty Trip
Causes of Income Inequality
Poverty Trap
 Domestic Factors
1. Education
Human Development
2. Healthcare
3. Infrastructure
4. Political Stability
5. Legal System
6. Financial System Corruption
7. Tax Collection
8. Debt
9. Technology
10. Gender Inequality
11. Income Distribution
12. Dependence on Primary Sector
13. Limited Access to International Markets
14. Geography
Institutional Factors Affecting Development
● Education
○ Ability to read/communicate improves democracy and social cohesion
○ Educated women lead to better infant health and lower fertility rates
○ Education improves health outcomes - nutrition, sanitation, reproductive health, STDs
○ Challenges:
■ High costs: School infrastructure, teacher salaries/training, materials
■ Poverty: Families prefer for children to work
■ Tradition: Many girls kept at home
■ Urban vs. Rural
● Healthcare
○ Better health = Longer life expectancy and greater workplace productivity/great earning
potential
○ Challenges:
■ High costs: School infrastructure, teacher salaries/training, materials
■ Cultural understanding
Health Care

Education
Institutional Factors Affecting Development
● Infrastructure
○ Transportation — Promotes economic activity and interaction
■ Raods, bridges, harbors, airports, public transport, sidewalks/street lights
○ Public Utilities — Promotes quality of life and health
■ Electricity, gas, water, sewers
○ Public Services — Promotes safety and human development
■ Police/fire, education, healthcare, garbage removal
○ Communications — Promotes community cohesion and democracy
■ Postal system, phones, internet, radio and cable
● Legal System
○ Factors of production must be protected/guaranteed
■ Right to own, alter and sell physical assets
■ Assets will not be efficiently used and quality improved unless owners profit is
guaranteed.
○
Institutional Factors Affecting Development
● Financial System
○ Borrowing and lending: Business need access to capital to grow and expand
○ Saving provide funds for lending - Potential depositors must feel comfortable in institution
before depositing money
○ In absence of official financial system a black market will develop
■ The poor depend on loan sharks - Excluded from official lending
○ Micro-Finance
■ Poor excluded: No credit history, no collateral, no documentation
■ Offer small loans to micro-enterprises (food cart, small farmers, weavers, mechanics)
■ Directed towards women - Empowerment and improved health/education of children
● Taxation
○ Taxes used to fund government function, public service, transportation, utilities, public saftey
○ Difficult for developing countries to collect taxes
■ Corruption - Use of cash/underreporting
■ Logistics
■ Tax breaks given to attract FDI
■ Tariffs: Extra revenue vs. higher cost of goods for consumers/industries
Institutional Factors Affecting Development
● Political Stability
○ Benefits of government stability
■ Foreign Direct Investment
■ Political participation
■ Long-term planning: Heath, education, living standards
○ Stability largely undermined by corruption
■ Use of influence to gain an unfair advantage
■ Quid Pro Quo: Bribe/payment in exchange for services/access (illegal)
■ Institutional: Using existing laws/regulations to gain an unfair advantage (legal)
■ Consequences of corruption
● Electoral integrity questioned
● Undermines legal system/justice
● Resources allocated inefficiently/unfairly
● Companies pay bribes = Higher prices
● Individuals pay bribes = Less income
● Corruption undercuts FDI/Instability
● Government funds diverted away from programs that benefit non-elite
Institutional Factors Affecting Development
● Women’s Empowerment
○ In many developing countries women maintain a lower social/political and economic status
than men
○ Greater equality considered a key development
■ Women tend to direct the health and education needs of children
■ Great education/healthcare = Better family planning and lower population growth
● Income Distribution
○ Large gaps in income distribution can slow economic development
■ Low earning = Low savings = Limited productivity
■ Wealthy tend to dominate politics and insulate their financial interests
■ Economic Growth + Income Inequality = Pro-poor growth
■ Capital Flight; Rich can repatriate money abroad (capital flight)
■ Brain Drain
Netflix: Period. End of Sentence
 Institutional Factors Affecting Development
● Reliance on Primary Sector - Single Commodity
○ Inelastic supply and demand of primary commodities =
Price volatility
■ Supply conditions — weather, bad harvest, instability
— can change quickly
■ Volatility makes it difficult for governments to make
long-term investment plans
○ Long-Term trend: Declining prices for commodities
■ Increased Supply:
● Improvements in technology — Fertilizer,
sonar, fracking
● Subsidies in US/EU
■ Less Demand — Relatively inelastic - Despite
lower prices no spike in demand
● Development of synthetic substitutes
● Miniaturisation - Smaller products require
fewer inputs
Institutional Factors Affecting Development
● Lack of manufacturing/secondary sector export.
○ Developed country protectionism prevents developing countries from gaining new markets
○ No industries/stable business lowers potential FDI
■ FDI Targets: 1)Resources; 2) Markets; 3) Labor
○ No trade limits developing countries from gaining foreign currency/convertible currency
● Tariffs/Quotes
○ Prevent developing countries from exporting to developed country
○ Tariff Escalations (Developed Countries)
■ Lower tariffs on imports of raw materials
■ Higher tariffs on imports of finished goods
■ Prevents developing countries from moving to manufacturing - Keeps in primary sector
● Subsidies
○ Developed countries subsidize domestic industry and agriculture
○ Developing countries cannot compete with low cost goods
○ Surplus products (agriculture goods) from developed countries exported to developing
countries - Undermined domestic production more
Cocoa: Resources and Production
Netflix: Rotten - Bittersweet Chocolate
Trade Strategies for Economic Growth and Development
1. Import Substitution
2. Export Promotion
3. Trade Liberalization
4. Bilateral Agreements & Diversification
5. Fairtrade Organizations
6. Foreign Direct Investment
Import Substitution Industrialization
● Domestic strategy that prioritizes domestic production and limited importation
of manufactured goods.
● Domestic success should lead to growth and eventual global competitiveness
● Encourages domestic employment and skill generation
● ISI Policy Requires:
○ Government control and organization of economy/industry
○ Subsidies to grow early stage industries
○ Tariffs to protect domestic producers and keep out cheap imports
● ISI was a popular economic strategy in Latin America during the 1960s -
Allowed countries to avoid Cold War alliances and overcome legacy of
colonialism
○ Ovall policy was unsuccessful as countries borrowed heavily to fund industrialization
ISI: Advantages & Disadvantages
● Creates and protects domestic jobs ● Short-term vs. long-term economic growth
● Isolation of economy can preserve unique ● Avoidance of trade prevents country from
culture - No imports of foreign benefiting from specialization or
goods/influence comparative advantage.
● Avoids international entanglements ● Tariffs impact consumer and capital goods
○ Political alliances ● Protectionism and lack of competition lead
○ Multilateral agreements to inefficiencies and deadweight loss
○ Influence of powerful MNCs ● ISI tends to produce few goods - fewer
goods lead to more demand and higher
rates of inflation
● Protectionist policies will be retaliated
against
 Export Promotion
● Strategy that promotes export -
● More exports lead to higher GDP which will grow incomes and consumption
● Export promotion policy requires:
○ Free trade and openness to foreign direct investment
○ Floating exchange rate
○ Supply Side policies
■ Infrastructure
■ Deregulation of employment and safety/environmental standards
● Export promotion more successful when based on manufactured as opposed to
primary goods
○ Primary commodities have low prices and are volatile
○ Asian Tigers (HK, Taiwan, Singapore & Korea)
■ Trend: Low cost and low skilled labor — High skilled labor and capital intensive
● Limitations
○ Comparative advantage erased by tariffs - Developed countries react (Trade unions)
○ Government intervention is hard to balance
○ Potential interference/influence by MNC and increased income inequality
Export Promotion and Diversification
● Maintain a focus on commodities but begin to support value-added
industrialization of commodities
● Diversification protects against the price volatility of commodities - Risk
management
● Grow and stabilize employment - More high-skilled and technical jobs
● Challenges
○ Must improve education and infrastructure for manufacturing
○ Developed countries can undermine using tariff escalation
 Trade Liberalization
● Elimination or significant reduction of protectionist measures such as tariffs,
subsidies, quotas and other restrictions
● Increase in overall trade will allow developing countries to take advantage of
comparative advantage and trade more - Especially in multi/bilateral agreements

Market-Based & Supply-Side Reforms — “Washington Consensus”

● Lower taxes and lower interest rates

● Balanced budgets - Little Debt
● Floating currency
● Privatization of firms
● Deregulation of domestic firms and liberalization of trade and investment
● Strengthen property rights
● Fewer domestic subsidies
● Spending on health and education
 Limitations to Liberalization and “Washington
Consensus”
● Create environment beneficial to MNC
○ Access to cheap labor in developing countries
○ Access the developing country markets
● Impact on developing countries
○ Increased income inequalities - Economic growth not economic development
○ Workers exploited
○ Increased FDI = Increased debt
○ Resources and nature undermined
Foreign Direct Investment
● Long-term investments by private multinational corporations (MNCs)
○ Build new facilities or plants (Greenfield)
○ Buy existing firms and their assets in country
● FDI has played a key role in promoting economic integration and
globalizations
● US, UK, France and China are main targets of FDI
● FDI in developing countries:
○ MNCs have technology to better extract and process raw materials
○ MNCs attracted by domestic markets in developing countries — China, India, Brazil, Nigeria
○ MNCs take advantage of low labor costs and limited regulations - Lower costs
○ Developing countries will often provide MNCs tax incentives as a way to attract investment -
Tax reductions
FDI & Corporate Social Responsibility
● Programs and policies that are aimed at promoting a positive image of the company
● Policies that promote environmental, ethical and sustainable practices
● CSR Targets:
○ Human rights
○ Employees rights
○ Environmental protections
○ Women’s empowerment
○ Youth and education
 FDI: Advantages and Disadvantages
● FDI can promote savings in developing countries ● Limited high-level job growth as MNCs
- Savings are key to economic growth bring in their own talent — Locals never
● Increased employment – Job training and more learn to use technology
educational opportunities — Increase overall skill ● MNCs use their power to leverage deals
levels and managerial skills with local government — Gain tax, subsidy
● Increased employment/wages led to and regulatory considerations — Local
consumption government, tax base and workers suffer
● More access to technology and expertise ● Tax advantage of weak environmental
● Increased tax base & government revenue regulations - Negative externalities
● Buying existing infrastructure (railways, airports, ● Resource extraction - Neo-imperialism
bridges/tunnels) ● MNCs repatriate profits - Buy local
● More goods and more consumer choice companies/subsidiaries with stock options
● Liberalized trade leads to more efficiency
Privatization/Foreign Investment
Aid - Overview
● Non-market financial assistance given to a country
● Aid can be provided for the following reasons:
○ Natural disaster (hurricane, flood, earthquake, famine)
○ War or instability caused by conflict - Refugee crisis
○ Strengthen political systems and market economies - Geostrategic considerations
○ Assist with economic development
○ Address limitations of human development - Health and education
○ Specific projects - Technology and infrastructure projects
● Aid originates from two sources
○ ODA: Official Development Assistance from a country or governmental organization
○ Unofficial Aid: Programs run by non-governmental organizations
Type of Aid
● Humanitarian Aid: Aid to address short-term suffering
○ Food Aid: Direct food stuffs and money for storage and transport of food
○ Medical Aid: Medical equipment, supplies and care
○ Emergency Aid: Shelter, clothes, fuel
● Development Aid: Aid to address weak institutions causing long-term suffering
○ Long-Term Loans: Low interest rate, payable in foreign and local currencies - Relatively “soft”
○ Tied Aid: Loans that can only be used to by goods/services from donor country
○ Project Aid: Transfer (not always loan) to complete specific project - Infrastructure/Energy
○ Technical Assistance: Increase technology and human capital - Often included with project aid
○ Commodity Aid: Loans/grants to buy raw materials for use in manufacturing sector
○ Bilateral Aid: Aid from one country to another (USAID)
○ Multilateral Aid: Aid from an international aid agency - World Bank, UN, IMF
 Fair Trade Organizations
● Challenges of small farmers:
○ Globalization has largely lead to a system where primary commodities are on the bottom of the value
chain — Money is made in marketing, distribution and manufacturing and services.
○ Farmers kept away from markets by middlemen, MNCs and lack of information (market failure)
○ Low prices, manipulation by MNC and limited government support prevent farmers from improving
stations
● Fair Trade Organizations
○ Ensure higher prices for certain goods by making consumers aware of the challenges farmers face
■ Shifting consumer preference for “fair trade” items - Despite higher prices
○ Criteria
■ Trade as directly with farmer as possible
■ Purchase at a fair price — Covers costs and provides a “living wage”
■ Trader must have a long-term contract with farmer - Farmer must be given access to credit
(micro-credit)
■ Adhere to environmental and labor standards
Cocoa: Resources and Production
Non-Governmental Organizations
● Goals: Economic development, humanitarian ideals, sustainable development
● Areas of Work: Education, workers rights, environment, health, poverty
reduction, and youth.
● NGOs undertake two main activities:
○ Plan and implements specific projects
○ Lobby governments to address policy issues
● Most NGOs are local or work locally to develop technical skills and expertise
among target populations - Sustainability
The World Bank
● Established in 1945 - Promote economic stability (political stability) and
economic development
● “The World Bank” has five independent organizations
○ International Bank of Reconstruction and Development (IBRD) - Use bonds to grant soft loans to
developing countries - Loans funded by selling bonds on international financial markets.
○ International Finance Corporation - Offer financing to the private sector in developing countries
○ International Development Association - Interest free loans to the poorest countries - Funded by
contributions
○ Multilateral Investment Guarantee - Sells insurance to MNCs who invest in developing countries
○ International Centre for Settlement of Investment Disputes - Settles disputes between
developing countries and investors
IMF Intervention
● IMF made “soft” loans to developing countries which allowed them to pay off
market loans and avoid default - Global debt crisis
● Vicious cycle of debt :Borrow money to pay existing debt/interest
● IMF Loan Conditionality/Washington Consensus:
○ Trade liberalization - No protectionism
■ End subsidies to local industries
○ Focus on commodity export
○ Let currency freely float
○ Encourage FDI
○ Privatization
○ Reduce government expenditure - Balance budgets
■ Charge for some government services - Health and education
International Monetary Fund
● Created with World Bank as part of the post-war global financial system
● Responsibilities
○ Promote monetary and exchange rate stability
○ Facilitate international trade
○ Provide technical assistance
● Actions
○ Surveillance
■ Conduct economic surveys of each member country - Discuss results with country
representatives
○ Technical Assistance
■ Consulting in areas of fiscal/monetary policy, exchange policy and banking sectors
■ Emphasis on collecting/using data
○ Financial Assistance
■ Offer loans - Loans funded by donations/quotas from members
Criticism of the “Washington Consensus”
● Government services—healthcare & education—reduced
● Unemployment — Local industries cannot compete in free markets
● Real wages fall — Higher prices on goods (Imports and MNCs)
● Environment and resources undermined by exports and MNCs
● “Modern Day Imperialism” - Developed economies have power
● Poor impacted the most
● While there are long-term benefits the short-term impacts are severe
Washington Consensus and Disaster Capitalism
Limitations of Aid
● Aid is shown to be effective in the short-term but long-term studies are
inconclusive
● Corruption and weak institutions in developing countries undermine
effectiveness
● Geopolitical considerations (alliances/strategy) often drive aid decisions rather
than need
● Tied aid undermines local markets:
○ No competition (inefficiencies in developed country markets) - Higher prices
○ No domestic purchase - No local employment
○ Food aid undermines local farmers
● Dependency on aid - Increased level of debt (Vicious Cycle)
● Conditional aid/Washington consensus is controversial - Benefits for
developed world/markets and MNCs
Amazon Prime: Poverty Inc.
 Indebtedness & Third World Debt Crisis
● 1973 OPEC raises oil prices - Experience record revenues
● OPEC nations deposit profits in Western banks - Bank lower interest rates to
increase lending
● Developing countries took large loans - Loans misused
○ As loans come from private banks they are repayable in foreign currency & have higher rates
○ Infrastructure projects fail - Not development loans so no experts associated with projects
○ Much money spent on arms - Arms do not facilitate development/revenues
○ Corruption
● 1979 Oil Crisis and Recession
○ Fall in commodity prices undermines the developed world’s ability to repay loans
○ 1982 Mexico defaults - Fear others would follow examples
○ Mass defaults = International Credit Crisis
○ No credit = No investment = No economic growth
Debt Relief
Theory: The debt of developing countries should be reduced or eliminated

● Break the vicious cycle of debt

● Debt that is not paid back — or only interest paid — grows
● Developing countries service debt instead of investing in education, healthcare and infrastructure —
Opportunity Cost
● Debt = Profit for global financial institutions - Based in developed world

Odious Debt: Debt used for nefarious/irresponsible purposes

● Debt given to dictators or regimes known to be corrupt

● Spent on corruption but populations are saddled with repaying debt
● OK to default as banks were equally at fault - No due diligence

Heavily Indebted Poor Countries

● WB/IMF program to administer debt relief to the 40 poorest and heavily indebted nations
● Conditional relief - Commitment to financial and political reforms
 Micro-Finance
Advantages:

1. Fills the savings/income gap — Addresses vicious cycle of poverty/poverty trap

2. Leverages advantages of credit to the “unbankable” — Avoids blackmarket lenders
3. Reduces poverty — Improves human development
4. Empowers women

Shortcomings:

1. Loans are small and interests is still charged

2. Poor communities lack the entrepreneurial skills to manage loan/business
3. Money spent on non-market purchases (ie dowry, weddings, consumer goods)
History of Microfinance
Pros and Cons of MicroFinance