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ECON Notes (Fourth Semester)

Unit 1: Measuring Development
Economic Growth
● increases in output and incomes over time that is often measured on a per capita basis
Economic Development
● process that leads to improved standards of living for a population as a whole
● increases in real per capita output and incomes are accompanied by improvements in
standards of living of the population and reductions in poverty, access to basic needs,
Measuring Development
● cannot be accurately reflected by a single measure
● economists therefore consider individual economic attributes or characteristics that
distinguish countries according to their level of economic or human development
○ individual attributes and characteristics are measured by use of indicators
○ measurable variables that indicates the state or level of something being
○ each indicator measures only one aspect of development
Income Indicator
● GDP per capita
○ indicator of the value of output produced within a country
○ affected by MNCs
GNI per capita
○ indicator of the income (or value of output) received by residents of a country
○ affected by overseas workers (e.g. OFW, expats)
differences are not that big
in developing countries, difference is bigger due to cheap labor
Purchasing Power Parities (PPP)
○ buying power equivalence
○ amount of a country's currency that is needed to buy the same quantity of local
goods and services that can be bought with US$1
Health Indicator
life expectancy at birth
○ number of years one can expect to live
infant mortality
○ number of infant deaths from the time of birth until age of one per 1000 live births
maternal mortality
○ number of women who die per year as a result of pregnancy-related issues per
100,000 live births
Education Indicator
● adult literacy rate
● primary school enrollment
● secondary school enrollment
Composite Indicators
● summary of measures than one dimension of development
● more accurate measures of development
Human Development Index (HDI)
● summary measure of human development
○ long and healthy life (life expectancy at birth), access to knowledge (mean and
expected years of schooling), decent standard of living (GNI per capita)
● expressed as a value between 0 and 1 (1 being the highest)
● average of three dimensions
● far superior to single indicators as a measure of development
○ does not provide information about income distribution, malnutrition,
demographic trends, unemployment, gender inequalities (male HDI vs female
HDI), political participation, etc.
Unit 2: Domestic and International Factors of
Domestic Factors for Development (6)
1. education and health (development of human capital)
2. appropriate technology
○ well suited to the needs of an economy
3. banking, credit, and micro-credit
○ banks often cater to large, wealthier borrowers because they earn more money
○ overwhelming majority of people rely on informal sources
○ lack of access to credit by the poor and by SMEs hinder growth and development
4. empowerment of women
○ Gender Development Index (HDI per gender)
■ perfect score = 1
■ differences are big when there is gender inequality
5. income distribution
○ increase in human capital = gov't provision of merit goods increases
○ more income = higher access to credit
6. infrastructure
International Barriers to Development (3)
1. Overspecialization on a Narrow Range of Products
○ usually involves primary goods
○ results in current account deficit
○ exposes the economy to uncertainty and vulnerability
2. Price Volatility of Primary Products
○ due to price inelasticity of demand and supply of primary goods
○ makes government planning more difficult
3. Inability to Access International Markets
○ results from protectionism due to international trade barriers
○ limits the ability of developing countries to earn foreign exchange
○ e.g. subsidies in developed countries lead to lower prices
tariff escalation - rate of tariff rises the more the goods are processed
■ reasons why tariffs are increased
● resource security
○ secures access to cheap products
● preventing competition
Trade Strategies for Development (6)
1. Import Substitution
○ focuses on the goal to produce domestically instead of importing
○ may go against the theory of comparative advantage
■ protects and promotes local employment
■ protects domestic economy from excessive influence from MNCs
■ job protection may only be on the short run
■ prone to inefficiency and misallocation of resources (not competitive for
2. Export Promotion
○ problematic if primary goods are the key exports
○ works well for manufacturing/capital-intensive exports
○ may lead to increased protectionism on the part of developed countries
Supporting Policies
■ liberalized trade
■ liberalized capital flow
■ floating exchange rate
■ infrastructure
■ government deregulation
3. Trade Liberalization
○ Supporting Policies
■ balanced budgets
■ investment on health and education
■ lower marginal tax rates
■ interest rate liberalization
■ liberalization of FDI inflows
■ privatization
● greater incentive to cut costs
■ deregulation
■ secure property rights
■ may not be feasible and sustainable in reality
■ may sway more to the favor of MNCs in terms of access to cheaper FOPs
4. Bilateral and Regional Preferential Trade Agreements
○ grants preferential access to member countries
○ aims at reduction of trade barriers
5. Diversification
○ replacement of primary goods with manufactured/semi-manufactured good for
○ shift from labor-intensive to capital-intensive production
○ may be impeded by tariff escalation
6. Fairtrade Organization
○ ensures that producers in developing countries are properly compensated for
their goods
○ aims to achieve awareness on the condition of farmers
○ aims to eliminate high profits for middle-men (those who do not produce the raw
materials), tariff escalation, and poor working condition
Unit 3: Foreign Sources of Finance
Foreign Sources of Finance
● funds that flow from overseas for purposes other than the payment of exports
Types (4)
○ Foreign Direct Investment
○ Foreign Aid
○ Multilateral Development Assistance
■ friendly lending of capital
○ Foreign Debt
Foreign Direct Investment
Foreign Direct Investment
● establishment by MNCs of direct business interests in a foreign country
● contrary: Foreign Portfolio Investment (not a type of FSF)
○ acquisition of domestic financial assets and securities by foreign investors
Why invest overseas?
● market expansion
● resource security
● prospects of increased operational efficiency
○ e.g. cheaper labor
Determinants (​what makes someone invest overseas?)​
● political stability
● macroeconomic stability
○ low inflation
○ currency stability
○ acceptable levels of foreign debt
○ absence of major balance of payments problems
● market size
● less restrictive regulations
○ less restrictions on profit repatriation
○ fluidity in forex transactions
○ lower taxes
○ less restrictions on foreign ownership of local assets
● infrastructure
○ e.g. transportation, communication
presence of an appropriately-skilled labor force
● increased levels of employment
○ assuming workers are occupationally mobile
● increased AD and AS
● multiplier effect
● capital inflows
○ mitigated by repatriated profit
● industrialization
● technological transfers
Possible Disadvantages
● collusion with corrupt governments
● compromised labor & environmental standards
● competition with local firms
● promotion of inappropriate consumption patterns
Foreign Aid
● official development assistance (ODA)
○ sponsored by foreign governments and quasi-governmental international
● private aid
○ extended by NGOs
Limiting Factors
● tied and conditional aid
● aid volatility
● lack of coordination among donors
● ODA being taken as a substitute for what would otherwise be urgently-needed economic
Advantages of an NGO
● strong poverty-alleviation orientation
● close contact with beneficiaries, which affords NGOs flexibility and accurate situation
● relative ideological and political indifference
Disadvantages of an NGO
● small size
● exposure to political and ideological influence if the NGO becomes increasingly reliant
on governmental or quasi-governmental funding
● according to repayment options
○ concessional loans
■ with more favorable terms than commercial loans
○ grant
■ gratuitously given
according to purpose
○ humanitarian aid
■ aimed at providing immediate relief from the effect of external shocks
○ developmental aid
■ aimed at supporting long-term economic growth and development
according to the conditions attached
○ tied aid
■ an agreed portion of the aid granted must be spent by the recipient in
purchasing products supplied by the donor economy
● impeded access to cheaper alternatives
● purchase of inappropriate technology
● large firms in developing economies often end up as the biggest
untied aid
■ the recipient can purchase products from any approved supplying
Motives (behind foreign aid)
● humanitarian
● political
● economic
Trade & Aid as Propellants of Economic Development
● “trade, NOT aid”
○ reasons
■ aid is often believed to be SUPPLANT government action, not
supplement them
■ corruption and mishandling COMPROMISES the effectiveness of aid
favored approaches
■ develop an economy’s RAW POTENTIAL
■ remove TRADE BARRIERS instead
“trade AND aid”
○ reasons
■ developing economies are often stuck with COMMODITY EXPORTS
■ AGRICULTURAL SUBSIDIES in developing countries put developing
economies at a disadvantage, hence the need for aid (price inelasticity)
“aid FOR trade”
○ institutional deficiencies addressed by aid
■ poor communication and transportation infrastructure
■ lack of access to credit
■ lack of technological capacity to meet technical, safety, and sanitary
standards imposed by developed economies
LIMITS of the role of trade in development
○ poverty cycle
○ insufficient factor endowments
○ geographic isolation
Multilateral Development Assistance
○ regular market rates apply
○ goal of development but earn in the process
Institutions Extending MDA
● multilateral development banks
○ World Bank
■ early years
● poverty alleviation partially achieved through infrastructural
■ 70’s and 80’s
● aims for Structural Adjustment Loans (SALs)
○ reduction of government intervention
○ market-based economic reforms
○ trade and interest rate liberalization
○ reduction of barriers to FDI
○ fiscal conservatism
○ privatization and deregulation
90’s onwards
● policy u-turn: increased emphasis on government intervention
(Millenium Development Goals)
○ human capital investments
○ land reform
○ gender equality
○ infrastructure
○ environmental protection
● SALs → tight demand-side policies → lower growth potential (due
to lower government spending and reducing Keynesian Multiplier)
● governance dominated by developed economies
○ all presidents of the World Bank have been US citizens
European Bank for Reconstruction and Development
Asian Development Bank
International Monetary Fund
○ facilitates international payments by lending to economies experiencing forex
○ conditions typically attached to IMF loans
■ contractionary demand-side policies (SALs)
■ trade and interest rate liberalization
■ currency devaluation
Structural Adjustment Loans (SALs)
○ (+) lower inflation rates
○ (-) lower capacity for economic expansion
○ (+) bigger markets, etc.
○ (-) less protection for infant industries
○ (+) greater competition over access to credit
■ higher earning firms have a greater propensity to pay debts, thus
encouraging efficiency
○ (-) less access to credit for smaller players
○ (+) greater export competitiveness
○ (-) less access to imported capital
Foreign Debt
Sample Causes of Foreign Debt
● budget deficit
○ government spending > government revenue
● current account deficit
○ imports > exports
● stagflation
○ high inflation combined with high levels of unemployment
● corruption
Mitigating the Effects of Foreign Debt
● debt relief
○ debt cancellation
○ debt rescheduling/restructuring
■ longer time period or lower interest rate
● equity-debt swaps
○ repayment with properties instead of money
● SALs (from the IMF and the World Bank)
● austerity (strict) measures
○ increased tax rates
○ decreased government spending
○ increased interest rates
■ less debt-fuelled government spending
■ increased interest rates discourages private sector debt
■ increased taxes gives the government higher revenues
■ decreased profligate spending by households and firms
■ contractionary effect on the economy (overall production, and hence
employment decreases) due to less access to credit
Sample Effects of Unsustainable Debt
● debt trap
diversion of funds towards debt servicing
○ instead of financing public goods, funds go to debt-servicing
lower levels of FDI
lower rates of economic growth
lower levels of social welfare
Unit 4: Balance Between Markets and Intervention
Market-oriented Policies
● market-based supply side policy
○ policies encouraging competition (deregulation, privatization, and anti-monopoly
○ labor market reforms
○ incentive-related policies
● trade liberalization
● freely floating exchange rates
● liberalized capital flows
○ greater efficiency in production, lower prices and improved quality and better
allocation of resources
○ larger market and larger competition
○ more efficient global allocation of savings (due to liberalized capital flows &
exchange rate liberalization)
■ i.e. capital is spent/invested where it produces the highest amount of
profit (even overseas)
○ Market Failures
■ cannot deal with the issue of market failures
■ Market failure​ - allocative efficiency
● output - amount produced with respect to demand
● production - cost
more important for developing countries since market failures are far
more widespread
● negative environmental externalities and problems of common
access resources
● insufficient provision for merit goods
● failure to provide public goods
● abuse of monopoly power
● information asymmetries
Coordination Failures
Weak or Missing Market Institutions
■ inadequate legal systems
Development of Dual Economies
■ e.g. existence of two opposite sectors side-by-side (good service sector
accompanied by agricultural sector)
Income Inequalities
Insufficient Credit for Poor People
Interventionist Policies
● government intervention that is used to correct the economy
○ correcting market failures
○ investment in human capital
○ provision of infrastructure
○ provision of a stable macroeconomic environment (includes stable increases in
price, full employment, reasonable budget deficit, avoidance of large trade, and
current account deficit)
○ provision of a social safety net (system of government transfers of cash or goods
to vulnerable groups)
○ redistribution of income
○ industrial policies (tariffs or subsidies, appropriate technology transfer)
○ Excessive Bureaucracy
■ administrative structure of an organization involving rules for the
organization’s functions
○ Poor Planning
○ Corruption