Mohamed Leach – Student No. 35651539
ECS207G - Development Economics
Study Guide Questions
Development and development economics – 1
Answer the following questions. Note: Hints on answering the questions marked with an asterisk are
provided at the back of this study guide.
(a) The World Bank classifies all the countries of the world into four categories based on their gross
national income (GNI) per capita: low income countries, lower middle income countries, upper middle
income countries and high income countries.
Table 1.1 lists the per capita incomes of selected countries from each group in 2005.
Use the information in Table 1.1 to answer the following questions:
(i) What was South Africa's GNI per capita in US dollars in 2005?
(ii)* In which group of countries did the World Bank rank South Africa on the basis of its GNI per capita in 2005?
(ii) In 2005, the World Bank ranked South Africa as an upper middle income country. The Bank has ranked South
Africa as a lower-middle-income country in some years and as an upper middle income country in others,
depending on how South Africa’s GNI per capita grew relative to those of other middle income countries.
(iii)* Was South Africa's GNI per capita in 2005 the highest of all African countries?
Explain your answer. (1 paragraph)
(iii) The answer is no, because Table 1.1 shows that Botswana has a higher GNI per capita than South Africa.
Two other African countries that are not shown in Table 1.1 (Gabon and Libya) are also richer than South
Africa in per capita income terms. Mauritius and Seychelles, which are also sometimes considered to be part
of Africa, also have higher GNI per capita figures than South Africa.
(iv)* Do you agree with the following statement: “A comparison of per capita incomes suggests that South
Africa has sufficient resources to spend as much money on sports academies and other initiatives to
develop sport stars as Australia”? Substantiate your answer. (1 paragraph)
(iv) Australia’s sports academies are often viewed as major reasons for the country’s success in a number of
sports, and South African sports administrators have claimed that our teams would fare better against
Australia in sports such as rugby, soccer, cricket and netball if we had similar facilities. The fact that
Australia’s per capita income is almost eight times that of South Africa suggests that South Africa has much
less money to spend on sport than Australia.
(b) Table 1.2 lists the per capita incomes and some other economic and social indicators, for the same
countries. The GDP share of industry and services is an indicator of structural change. The traditional
economic view of development suggests that industrialisation is a key aspect of economic development,
and one would therefore expect the GDP share of industry and services to be higher in more developed
than in less developed countries. The Gini index is a summary measure of the distribution of income
ranging from 0 (a perfectly equal distribution) to 1 (a perfectly unequal distribution).
The fourth column of figures in Table 1.2 shows the extent of poverty in each country, defined as the
percentage of the population living on US$2 or less per day (at the time of writing this study guide, US$2
roughly equalled R15). As suggested by Todaro and Smith, economic development that truly improves
people’s standard of living should include narrowing of income differentials and a reduction in poverty.
Use the information in Table 1.2 to answer the following questions:
(i)* Scan the data in the table and summarise your initial conclusions about the relationships between per
capita income and each of the other three indicators. Does the GDP share of industry and services
increase or decrease as per capita income increases? Do countries with higher per capita incomes have
lower or higher Gini coefficients (ie less or more inequality) than poorer countries? Do countries with
higher per capita incomes have lower or higher levels of poverty than countries with lower per capita
incomes? (1 paragraph)
(i) In general, higher per capita incomes seem to be associated with higher GDP shares of industry and
services, lower Gini coefficients (less income inequality) and less poverty. This suggests that per capita
income correlates quite well with other measures of economic development and therefore is a useful
summary indicator of the level of development.
(ii) Now take a closer look at the relationship between the levels of per capita income and poverty. What was
the latest estimate of the extent of poverty in South Africa, measured in terms of the international
poverty line of US$2 per person per day? Which countries in Table 1.2 have lower poverty rates than
South Africa despite having lower per capita incomes? And which countries with higher per capita
incomes than South Africa have higher poverty rates? (You can investigate the relationships between per
capita incomes and the indicators of structural change and income inequality in the same way by
comparing South Africa to the other countries listed in the table.)
(iii) The exercise required to answer Question (ii) shows that there are many exceptions to the patterns
identified in response to Question (i). The answers to the two questions seem to contradict each other. Per
capita income correlates reasonably well with other indicators of economic development when we look at
the averages for large groups of countries, but not necessarily when we look at individual countries. We
should therefore consider more indicators than just per capita income if we want to get a good sense of the
level of economic development in a specific country.
(iii)* Compare your answers to questions b(i) and b(ii) to see whether they reinforce or contradict each
other. Now formulate an overall conclusion about the nature and strength of the relationships between
per capita incomes and other indicators of economic development. Can we get a good sense of the
levels of economic development in different countries by looking at per capita incomes only or should
we consider other indicators as well? (½ page)
(iii) The exercise required to answer Question (ii) shows that there are many exceptions to the patterns
identified in response to Question (i). The answers to the two questions seem to contradict each other. Per
capita income correlates reasonably well with other indicators of economic development when we look at
the averages for large groups of countries, but not necessarily when we look at individual countries. We
should therefore consider more indicators than just per capita income if we want to get a good sense of the
level of economic development in a specific country.
(c)* Outline the traditional and the new economic views of development. Your answer should clearly indicate
the main differences between these two views of the nature of economic development. (2 pages)
(c) This question is very important. A good answer should include the following elements:
· an indication of the relationship between economic growth and economic development in the traditional
economic view of development
· a listing of the development indicators used by adherents to the traditional view
· an explanation of the role of the trickle-down mechanism in the traditional view
· an indication that growth does not necessarily translate into development in practice
· the elements of economic development stressed by the new economic view, and how the new economic
view defines development
· a brief explanation of how Sen’s human development approach changes the focus of development thinking
from means to ends
· a listing of the three core values and the objectives of economic development
(d) In your view, which of the traditional or the new economic view is most prevalent in South Africa? Explain
your answer. (½ page)
Answer the following questions. Note: Hints on answering the questions marked with an
asterisk are provided at the back of this study guide.
(a) Table 1.3 contains human development indicators for the same 26 countries included in Tables 1.1 and
1.2.
The first two data columns in Table 1.3 show the HDI values and ranks for 2004 of each country. The third
column contains the countries’ ranks for the income index component of the HDI, based on GDP per capita in
purchasing-power parity US dollars in 2004. (The ranks differ from those in Table 1.1, which are based on
GNI per capita in US dollars in 2005, calculated at conventional exchange rates.) The fourth data column in
Table 1.3 shows the difference between each country’s per capita income and overall HDI ranks. A positive
difference means that the country in question ranks lower on the HDI scale than on the per capita income
scale. This implies that the country is doing better as far as human development is concerned than one
would have expected on the basis of its level of per capita income. The obverse is true of countries with
negative differences: one would have expected them to have higher levels of human development given
their per capita incomes. The illustration below table 1.3 shows the trend in South Africa’s development path
compared with other parts of the world.
Use the information in Table 1.3 and the illustration to answer the following questions:
(i)* Use the information in the fourth data column of Table 1.3 to divide the 26 countries into two groups.
The first group should include all the countries that have achieved better levels of human development than
one would have expected on the basis of their per capita incomes. The remaining countries, whose levels of
human development are disappointing in view of their per capita incomes, should form the second group.
(i) The first group should contain the countries that have positive values in the fourth column of Table 1.3 (eg
Tanzania, Sri Lanka, the Czech Republic and the Republic of Korea). The second group should contain the
countries that have negative values, such as India, Namibia, South Africa, Botswana and the United States.
(ii)* Briefly comment on the level of human development in South Africa. Use South Africa's per capita
income and the levels of human development in countries with roughly comparable per capita incomes as
yardsticks. (1 page)
(ii) Your answer should show that the level of human development in South Africa is lower than one would
expect. This is indicated by the fact that South Africa’s HDI is lower than those of the majority of upper
middle income countries in Table 1.3. South Africa also has a high negative value in the fourth column of
Table 1.3. This means that the country ranks much higher in an international comparison of per capita
income than in one of HDIs — an indication that it should have done better in promoting human
development than it did, given its per capita income. The illustration shows that South Africa’s HDI has been
decreasing since 1995 significantly in contrast with the rest of the world where the HDI is increasing. The
drop in South Africa’s HDI is even more pronounced than the decline in the average HDI for the Sub-Saharan
countries.
(b) Write brief notes on the HDI. Your answer should refer to the three components of the index, the
indicators used to measure each component, and the value of the HDI as an indicator of economic
development. (1 page)
The economics of Growth – 2
Answer the following questions. Note: Hints on answering the questions marked with an asterisk are
provided at the back of this study guide.
(a) Assume a two-good economy that uses a relatively labour-intensive process to produce food and a
relatively capital-intensive process to extract copper. Draw rough sketches of the production possibilities
frontier (PPF) to show how the following phenomena would affect the level and composition of total
output:
(i) an increase in the physical capital stock
(ii) technological progress in the agricultural sector
(iii) labour force growth
(b)* Discuss the implications for economic growth of capital accumulation, population and labour force
growth, and technological progress. (2 pages)
(b) A good answer to this question should include the following elements:
· an explanation of the different forms of capital accumulation (investments in the physical capital stock,
infrastructure and human capital stock)
· an indication that capital accumulation includes new investments and quality upgrades
· an explanation of how population and labour force growth could contribute to economic growth
· a graphical illustration of the growth impact of increases in physical and human resources (based on Figure
A2.1 in the textbook) with an accompanying discussion in words
· an explanation of the concept of technological progress, including definitions of the forms that it can take
(neutral technological progress, labour-saving technological progress, capital-augmenting technological
progress, etc)
· graphical illustrations of the growth impact of increases in physical and human resources (based on Figures
A2.3 and A2.4 in the textbook) with accompanying written discussions
(c) Indicate whether or not you agree with the following statement: “In developing countries such as South
Africa, some forms of technological progress are more desirable than others.” Explain your answer. (½page)
Answer the following questions. Note: Hints on answering the questions marked with an asterisk are
provided at the back of this study guide.
(a)* In 2003, South Africa's gross savings ratio was 16 percent and the average capital-output ratio 2. What
was the growth potential of the South African economy according to the Harrod-Domar growth
equation?
(a) The Harrod-Domar growth equation states that ΔY = s / k. It therefore predicts that the growth potential
of South Africa is 16 / 2 = 8%.
(b)* In actual fact, South Africa's GDP grew by just 1,9 percent in 2003. Explain in two or three sentences why
the Harrod-Domar growth equation yielded such a poor prediction of the rate of economic growth in
South Africa in 2003.
(b) Briefly, the reason is that the equation focuses on only two determinants of growth (the extent and
productivity of capital investments) while ignoring many others (the extent and productivity of labour,
technological progress, etc).
(c)* According to the Harrod-Domar growth equation, how quickly would the South African economy have
grown in 2004 if the gross savings ratio increased to 18 percent and the average capital-output ratio to 3?
(c) According to the equation ΔY = s / k. the growth rate would be 18 / 3 = 6%.
(d) Explain why the Harrod-Domar growth model is sometimes cited as an example of an approach to
economic development known as “capital fundamentalism”. (1 paragraph)
Answer the following questions. Note: Hints on answering the questions marked with an
asterisk are provided at the back of this study guide.
(a)* Briefly outline the traditional neoclassical view of the contributions to economic growth made by the
three sets of supply-side factors. What are the major weaknesses of traditional neoclassical growth theory?
(1 page)
(a) In such models, increases in the quantity or quality of all three supply-side factors initially contribute to
economic growth. The contributions of capital and labour fizzle out over time because of diminishing returns,
however, leaving technological progress as the determinant of the steady-state rate of economic growth.
Answer the following questions. Note: Hints on answering the questions marked with an asterisk are provided
at the back of this study guide.
(a) Outline the way in which new or endogenous growth theory explains technological progress. (1 page)
(b)* Do you agree with the following statement: “New or endogenous growth theory suggests that the South
African government can do a lot to promote economic growth”? Substantiate your answer. (1 page)
(b) The statement is true. To substantiate your answer, you should refer to the complementary investments
and other measures that government can take to improve the efficiency of resource allocation, including
investments in education, infrastructure, and knowledge-intensive industries (Todaro & Smith, 2006: 143).
Theories of development: a comparative analysis – 3
Answer the following questions. Note: Hints on answering the questions marked with an asterisk are provided
at the back of this study guide.
(a)* Complete the following table:
(a)
Key features of linear-stages models of economic development
What is the major problem facing developing countries?
The achievement of rapid, aggregate economic growth.
What is required to overcome this problem?
The mobilisation of domestic and foreign saving to finance investment and growth.
What is the major policy implication of linear-stages models?
Developing countries should increase their saving and investment rates to stimulate
economic growth.
What is the major weakness of linear-stages models?
Such models are mechanical in nature and ignore country-specific factors and the impact
on individual developing countries of external forces.
(b) A friend of yours makes the following statement: “Surely it cannot be that difficult to solve development
problems such as unemployment, poverty and income inequality. Many countries have done so. South
Africa should just study their experience and implement the same policies they used.” How would you
respond to this statement? (½ to 1 page)
Answer the following questions. Note: Hints on answering the questions marked with an asterisk are provided
at the back of this study guide.
(a)* Complete the following table:
(a)
Key features of structural-change models of economic development
What is the major problem facing developing countries?
The achievement of rapid, aggregate economic growth.
What is required to overcome this problem?
Developing countries should undergo structural change.
What is the major policy implication of structural-change models?
Developing countries should pursue industrialisation and other structural changes
identified by patterns-of-development analysis.
What is the major weakness of structural-change models?
Such models are excessively optimistic about the ease with which “correct” economic policies can overcome
obstacles to faster economic growth.
(b)* Describe the process of development in the modern sector of the Lewis model and discuss major
criticisms of the model. (2 pages) Do you think that the process described by Lewis has occurred in South
Africa as well? Substantiate your answer. (½ page)
(b) This is a very important question. To answer it well, you should provide the following:
· an explanation of the two sectors of the Lewis model
· a definition of surplus labour
· the two diagrams from Figure 3.1 in the textbook which depict the modern sector
· a careful description of the initial equilibrium and how reinvestment of profits enables the modern sector to
expand, draw more labour from the traditional sector and generate high profits for further reinvestment
(largely because modern-sector wages remain constant as long as there is surplus labour in the traditional
sector)
· an explanation of why the process comes to an end when the surplus labour in the traditional sector is
exhausted
· brief criticisms of four important assumptions of the Lewis model
As far as South Africa is concerned, there can be no doubt that the initial development of the modern mining,
industrial and service sectors in the first half of the 20th century depended on labour released by the
traditional (subsistence agricultural) sector. However, the criticisms highlighted by Todaro and Smith would
apply to any attempt to explain the development of the South African economy in terms of the Lewis model: it
would, for example, be wrong to describe the modern sector as competitive, especially in view of the labour
market distortions caused by apartheid legislation.
(c)* List five structural changes that often accompany economic development. (½ page) Do you think that these
changes have already occurred in South Africa, or must they still happen? Substantiate your answer.(1 page)
(c) Such changes are listed in the last paragraph of Todaro and Smith’s discussion of patterns-of-development
analysis. They include a shift from agricultural to industrial production, the accumulation of physical and human
capital, urbanisation, and so on.
(d) Comment on the following statement: “Patterns-of-development analysis identifies the components of an
ideal development process.” (1 page)
Answer the following questions. Note: Hints on answering the questions marked with an
asterisk are provided at the back of this study guide.
(a)* Complete the following table:
(a)
Key features of international-dependence models of economic development
What is the major problem facing developing countries?
Developing countries are riddled with many rigidities, and dependent upon and dominated
by rich countries.
What is required to overcome this problem?
Developing countries need to break free from their dependent and dominance relationships
with rich countries.
What is the major policy implication of international-dependence models?
Domestic and international political and economic reform is required to end these
relationships and make developing countries more self-reliant.
What is the major weakness of international-dependence models?
Such models cannot explain how countries initiate and sustain development, and the
socialist countries who have followed their interventionist prescriptions have not been
successful.
(b) Distinguish between the three major strands of the international dependence revolution. (½ to 1 page)
(c)* Discuss the following statement: “International-dependence models offer useful policy prescriptions for
meeting the development challenges facing South Africa”. (1 page)
(c) The statement is at best half true. International-dependence models have some value as tools to analyse
the relationships between developed and developing countries, but have failed to provide useful policy
prescriptions for initiating and sustaining development.
Answer the following questions. Note: Hints on answering the questions marked with an
asterisk are provided at the back of this study guide.
(a)* Complete the following table:
(a)
Key features of neoclassical models of economic development
What is the major problem facing developing countries?
Excessive government intervention has led to price distortions and distortions in the
allocation of resources.
What is required to overcome this problem?
Developing countries should return to scarcity pricing to ensure efficient allocation of
resources.
What is the major policy implication of neoclassical models?
Developing countries need to undertake market reforms, including privatisation of
government enterprises and trade and price liberalisation.
What is the major weakness of neoclassical models?
Neoclassical models tend to neglect how the institutional, political and other characteristics
of developing countries affect the ability of free markets to operate efficiently and
effectively.
(b) Distinguish between the three major strands of the neoclassical counterrevolution in development
economics. (½ to 1 page)
(c)* Discuss the relevance of the neoclassical counterrevolution for the formulation of development policy in
South Africa today. (1 to 1½ pages)
(c) To answer this question well, you would first have to outline the neoclassical “diagnosis” of the problems of
developing countries and the resulting policy prescriptions. Against this backdrop, you could then show that
the neoclassical emphasis on resource allocation and scarcity pricing has much to offer developing countries,
provided that the institutional, political and other characteristics of developing countries are properly
taken into account.
ACTIVITY 6
Answer the following question.
(a) Discuss the following statement: “The different theoretical approaches to economic development are such
poles apart that South Africa and other developing countries have no choice but to pick one approach and
discard all the others”. (1 page)
Poverty, inequality and development – 4
ACTIVITY 1
Answer the following questions. Note: Hints on answering the questions marked with an asterisk are provided
at the back of this study guide.
(a) Table 4.1 contains recent estimates of the distribution of income in South Africa, Honduras (a lower middle
income country in Central America) and Mozambique. For each country, the table shows the income or
consumption shares by quintiles of the population.
Use the information in Table 4.1 to answer the following questions:
(i) Does Table 4.1 summarise the size distribution of income or the functional distribution of income in these
countries? Explain your answer in one sentence.
(ii)* To construct Lorenz curves it is necessary to calculate cumulative distributions of income.
Complete Table 4.2 to obtain the cumulative distributions of income implied by the data in Table 4.1.
(iii) Draw Lorenz curves for the three countries in Figure 4.1. (Remember to use the cumulative distributions in
Table 4.2, not the absolute distributions in Table 4.1.)
(iv) Rank the three countries in terms of the extent of income inequality and explain your answer with
reference to Figure 4.1. (1 paragraph)
(iv) Mozambique has the least income inequality, because its Lorenz curve lies closest to the 45o line depicting
perfect equality in the distribution of income. South Africa and Honduras have more income inequality than
Mozambique, but the fact that their Lorenz curves cross means that we cannot determine which of the two
has more and which has less inequality.
(b) The Gini coefficients of the three countries are as follows: South Africa — 0,578; Honduras — 0,52; and
Mozambique — 0,396. Rank the three countries in terms of the extent of income inequality and briefly
explain your answer. (1 paragraph)
(c) Table 4.3 contains indicators of poverty in South Africa and Panama (an upper middle income country in
Central America). For each country, the table shows two headcount indices (the percentages of the
population living on less than US$1 and less than US$2 per day) and two associated poverty gap measures
(the poverty gaps at poverty lines of US$1 and US$2 per day).
Use the information in Table 4.3 to answer the following questions:
(i)* In 2000 (the year to which these poverty indicators for South Africa apply), the South African population
was estimated at 43,4 million. Calculate poverty headcounts in South Africa for poverty lines of US$1 and
US$2 per day.
(i) Headcount for the poverty line of US$1 per day: 12% * 43,4 million = 5,2 million. Headcount for poverty line
of US$2 per day: 36% * 43,4 million = 15,6 million.
(ii)* Comment on the following statement: “South Africa has a more acute poverty problem than Panama.”
(1 page)
(ii) There is no definite answer to this question. South Africa has a lower headcount index than Panama at the
poverty line of US$1 per day, but a higher index at the poverty line of US$2 per day. We cannot use these
indices to compare the number of poor people in each country unless we also know the populations of both.
However, we can make an interesting inference from a comparison of the poverty gaps. Note that Panama has
higher poverty gaps than South Africa at both poverty lines. This implies that the poor in Panama are poorer in
absolute terms than their counterparts in South Africa — on average, slightly more money would be required
to lift the average poor person in Panama out of poverty than would be the case in South Africa.
Answer the following questions. Note: Hints on answering the questions marked with an asterisk are provided
at the back of this study guide.
(a) State the economic case for reducing income inequality. (1 page)
(b) State the Kuznets hypothesis. Use a diagram to show why the hypothesis is also known as the inverted-U
hypothesis. (½ to 1 page)
(c)* Discuss the following statement: “Although there is theoretical justification for income redistribution,
developing countries such as South Africa should rather not attempt to reduce income inequality.
Empirical evidence suggests that a high level of income inequality is a 'natural' feature of developing
countries, and may even be a requirement for economic development.” (1½ pages)
(c) The statement is false. It is true that there is theoretical justification for income redistribution, but income
inequality is neither natural for developing countries nor a requirement for economic development. To answer
the question, you should first summarise the theoretical case for redistribution (Todaro and Smith, 2006: 207209). You should then outline the Kuznets hypothesis and the empirical evidence against it - (Todaro and
Smith, 2006: 212-218) to show that the relationship between the level of per capita and the extent of income
inequality postulated by Kuznets is by no means inevitable. Finally, you should argue that inequality is not a
requirement for growth, because it is the character of growth (rather than its rate) that determines how the
distribution of income evolves.
Answer the following questions. Note: Hints on answering the questions marked with an asterisk are provided
at the back of this study guide.
(a) Discuss the following statement: South Africa cannot have its cake and eat it as far as the objectives of
economic growth and poverty alleviation are concerned. Economic theory and empirical evidence show that
a strong focus on poverty reduction would reduce personal saving and harm economic growth, while rapid
economic growth only benefits the rich. (1½ to 2 pages)
ACTIVITY 4
Answer the following question.
(a) List the groups that are most likely to be poor in South Africa. How well do the
“markers” of poverty in South Africa correspond to those in other developing countries? (1 page)
Answer the following questions. Note: Hints on answering the questions marked with an
asterisk are provided at the back of this study guide.
(a) Outline the major policy options available to the governments of developing countries that wish to modify
the functional and size distributions of income. (1½ to 2 pages)
(b)* In your opinion, which of the sets of policies for income redistribution discussed by Todaro and Smith are
used extensively in South Africa and which are underutilised? (1 to 1½ pages)
(b) All four sets of policies are used in South Africa. The tax system is quite progressive and redistributive social
spending on items such as education, health care, social pensions, child grants and housing amount to about
40 percent of total government spending. Efforts to redistribute assets range from the land reform programme
to black economic empowerment. From the 1980s onwards, the maintenance of positive real interest rates,
a more market-related exchange rate and the removal of various tax incentives for investment have brought
the price of capital closer to its scarcity value, thus reducing the incentive to use capital rather than labour.
Critics on both sides of government nonetheless argue that certain instruments could be used more
intensively. Economically more conservative critics often claim that the government’s labour-market
policies have distorted relative factor prices by making labour too expensive. This, it is argued, hampers job
creation, which is a powerful force for reducing poverty and income inequality. Critics to the left of
government feel that the redistribution of assets should be accelerated by more aggressive land reform
(among other measures), and that there is scope for further increasing social spending and the progressivity of
the tax system.
Population growth and economic development – 5
Answer the following questions. Note: Hints on answering the questions marked with an asterisk are provided
at the back of this study guide.
(a) Draw a rough diagram to depict the three stages of the demographic transition experienced by developed
countries. State in words what happened to birth-rates and death rates during each stage and explain these
trends. (½ to 1 page)
(b) Draw a rough diagram to highlight the differences between the demographic transition experienced by
developed countries and that is now underway in developing countries. Also state and explain this
difference in words. (½ page)
(c)* There are strong indications that South Africa is now in stage 2 of the demographic transition. In your
view, how will the HIV/Aids pandemic affect future trends in birth rates and death rates in South Africa? (½ page)
(c) The fall in the birth rate is being accentuated as many people of child-bearing age contract the virus. At the
same time, the decrease in the death rate has been interrupted and partly reversed. Taken together, the two
effects are slowing down the increase in the South African population, and will continue to do so for quite a while
longer.
Answer the following questions. Note: Hints on answering the questions marked with an asterisk are provided at
the back of this study guide.
(a) Explain the essence of the low-level equilibrium population trap. What are the most important criticisms of
this model? (1 page)
(b)* Explain the microeconomic household theory of fertility. Use a diagrammatic presentation of the theory to
explain why a combination of increases in family income and job opportunities for women may lead to a
reduction in the demand for children. (2 pages)
(b) This question is very important. A good answer should include the following elements:
· a brief explanation that the theory uses the principles of economy and optimisation to explain family-size
decisions
· an overview of indifference-curve analysis, explaining indifference curves and budget lines
· a diagram with an initial equilibrium showing a particular combination of children and goods
· an explanation (using a diagram and in words) of what would happen when family income increases
· an explanation (on the diagram and in words) of what would happen when more job opportunities for women
raise the price of children
· an explanation (on the diagram and in words) of what would happen when both family income and the
availability of jobs for women increase
· an explanation that the demand for children decreases if the negative effect of the availability of more jobs for
women overshadows the positive effects of higher family income
(c)* Indicate whether or not you agree with the following statement: The microeconomic household theory of
fertility implies a broader 'menu' of policy options for reducing population growth than Malthus’s model.
Explain your answer by outlining the policy implications of each model. (1 to 1½ pages)
(c) The statement is true. To substantiate it, you should indicate that Malthus offered no policy prescription
beyond public calls for “moral restraint” (voluntary birth control). You can then show that the microeconomic
theory implies that government can use any measures that change the incentives to have small or large children
to affect fertility. Todaro and Smith’s discussion of the demand for children in developing countries
provides several examples, including the availability of educational and job opportunities for women, the
availability of social-security assistance in old age, and so on.
(d) In the April 16 to 22 (2004) issue of the Mail & Guardian, reporter Nawaal Deane asked poor people in the
rural areas of the Eastern Cape how their lives had changed during the first decade of democracy. One woman
responded as follows: “My life has gotten better since I get R170 for the three children ... I see more women
having babies because they know they can get this childcare grant.” Is having more children to get childcare
grants in line with the predictions of the microeconomic theory of fertility?Briefly explain your answer. (1 page)
(e)* Indicate whether or not you agree with the following statement: The microeconomic household theory of
fertility implies that the abolition of apartheid would have contributed to the recent decrease in the rate of
population growth in South Africa. Substantiate your answer. (1 to 1½ pages)
(e) Apartheid limited the availability of educational and job opportunities for blacks (especially women). It also
restricted black urbanisation and left many blacks without old-age support from government, while the poor
quality of health services in areas heavily populated by blacks contributed to high infant mortality rates. The
circumstances into which apartheid forced blacks are therefore very similar to those which the microeconomic
household theory of fertility highlight as particularly conducive to high fertility. It is therefore very likely that the
abolition of apartheid would have contributed to the recent decrease in the rate of population growth in South
Africa by removing strong incentives for having large families.
Answer the following questions. Note: Hints on answering the questions marked with an asterisk are provided at
the back of this study guide.
(a) Summarise the most important arguments underlying the view that population growth is not a real problem.
(1½ pages)
(b) Summarise the basic theoretical argument (the population-poverty cycle theory) and the empirical argument
about the negative consequences of rapid population growth in developing countries. (1½ pages)
(b) To answer this question, you should discuss five sets of policies: general development policies (eg measures
aimed at reducing poverty and inequality), persuasion, family-planning programmes, economic incentives and
disincentives, coercion, and the empowerment of women. In each case, you should explain clearly what the policy
entails, mention one or two countries that use them and comment on their effectiveness. In the final analysis, the
family-size decision is a deeply personal one, and couples’ right to choose the number of children they want
should be respected as far as possible. Viewed from this perspective, measures that facilitate responsible choices
(e.g. general development policies, family-planning programmes, empowerment of women and, to a lesser
extent, persuasion) are ethically preferable to more forceful measures such as creating economic incentives and
disincentives and, especially, coercion.
Answer the following questions. Note: Hints on answering the questions marked with an asterisk are provided at
the back of this study guide.
(a)* Discuss policies that the governments of developing countries could use to try to reduce population growth.
Also comment briefly on the ethical acceptability of such policies. (1½ to 2 pages)
(b) Outline what the developed countries should do with regard to world population growth. (1 page)
Human capital: education and health in economic development – 6
ACTIVITY 1
(a) Explain the two reasons why education and health are so important for economic development. (½ page)
ACTIVITY 2
Answer the following question.
(a) Indicate whether or not you agree with the following statement: “The developmental impact of investments in
education cannot be maximised unless complemented by sufficient investment in the health system, and vice
versa.” Explain your answer. (1 page)
ACTIVITY 3
Answer the following questions. Note: Hints on answering the questions marked with an asterisk are provided at
the back of this study guide.
(a) Explain the financial trade-offs involved in the choice whether or not to receive education beyond the
secondary level. Use a diagram to illustrate your answer. (1 to 1½ pages)
(b)* In South Africa, it is not uncommon for people with a secondary-school education to suffer long periods of
unemployment. How would this reality affect the choice whether or not to continue in school beyond the
primary level? (1 page)
(b) Various effects are possible. Assume that people think that more schooling will not improve their chances of
finding employment. A high risk of being unemployed after completing secondary school therefore means that
the benefits of further education are uncertain. Poor people especially may be unwilling to pay for education
unless they are fairly certain of reaping the rewards in future; if the benefits are too uncertain, they have
a strong incentive to drop out of school try to find employment immediately. Assume, on the other hand, that
people regard more schooling as an advantage when seeking a job. In their view, more schooling reduces
uncertainty about the future benefits of education, making it more worthwhile to pay (in money and time) for
further learning. The threat of unemployment could therefore motivate people to seek jobs before finishing
secondary school or to persevere with their studies, depending on whether they regard more schooling as helpful
for obtaining a job or not.
Answer the following questions. Note: Hints on answering the questions marked with an asterisk are provided at
the back of this study guide.
(a) Explain the policy dilemma posed by child labour in developing countries. (1 page)
(b)* How relevant are the four approaches to the issue of child labour outlined by Todaro and Smith to the South
African case, given that Aids orphans are likely to seek work in the informal sector of the South African
economy? Explain your answer. (1 page)
(b) To answer this question, you should first outline the four approaches and mention their major sponsors.
Coming to their relevance, you should point out that the informal sector is by definition unregulated. Efforts to
regulate or ban child labour in the informal sector are therefore unlikely to achieve much. Efforts aimed at
ameliorating the hardships of Aids orphans and, where possible, to get them back in school are likely to yield
better results.
ACTIVITY 5
Answer the following question.
(a) Define the educational gender gap and explain why it is so important for developing countries to close it.
(1 page)
Answer the following questions. Note: Hints on answering the questions marked with an asterisk are provided at
the back of this study guide.
(a) Discuss the following statement: “In developing countries, the amount of education provided tends to be
determined by demand factors. Too much education may be provided, leading to various forms of efficiency.”
(2 pages)
(b)* Discuss the following statement with the aid of diagrams: The optimal private and social strategies for
investment in education often diverge in developing countries. (1½ pages)
(b) This question is very important. A good answer should contain the following elements:
· brief explanations of the four certain concepts: private costs of education, private benefits of education, social
costs of education, social benefits of education
· the two diagrams in Figure 8.5 in the textbook, showing the relationships between years of schooling and the
costs and returns to education, with written explanations
· a summary of the problem depicted in the diagrams: divergence between the optimal private and social
strategies for investment in education
· a brief discussion of the economic effects of such divergence (eg overinvestment in public education)
(c) Comment on the following three questions related to education in South Africa: Is there a risk that the
prevailing demand and supply factors, and private and social costs and benefits, will lead to the overexpansion
of the education system in South Africa? How is the education system affecting the distribution of income in
South Africa? Is education contributing to a “brain drain” from South Africa? (2 pages)
ACTIVITY 7
Answer the following questions.
(a) State the definition of health used by the World Health Organisation, and outline some difficulties in
measuring the health status of countries and communities. (1 page)
(b) Explain how health and nutrition affect employment, productivity and wages. (½ page)
(c) List the performance indicators used by the World Health Organisation to rank health systems. Which policies
are highlighted by this ranking as particularly important for improving health systems? (1 page)
ACTIVITY 8
Answer the following question.
(a) Briefly outline some international examples of integrated programmes to promote education, health and
other developmental objectives in developing countries. Are you aware of similar programmes in South
Africa? (1 page)
The trade policy debate: export promotion, import substitution and economic integration – 7
Answer the following questions. Note: Hints on answering the questions marked with an asterisk are provided at
the back of this study guide.
(a) Distinguish between import substitution and export promotion. (½ page)
(a) To answer this question well, you need to do the following:
· state that many developing countries remain very dependent on primary exports
· list the five demand-side factors working against the rapid expansion of developing country exports of primary
products
· list a few of the supply-side factors preventing rapid growth in primary product exports
· refer to the successful application of export promotion in some developing countries
· outline the demand problems faced by developing countries as far as stimulating manufactured exports are
concerned (notably protectionism in the rich countries)
· indicate the scope for trade in manufactured goods among developing countries
(b)* Discuss the prospects for expanding developing country exports of primary and manufactured goods to
developed countries. (1½ pages)
(c) Indicate whether or not you agree with the following statement: “There is a strong theoretical argument for
import substitution, but such strategies have seldom been successful in developing countries.” Give reasons
for your answer. (1½ pages)
(d) Summarise the evolution of trade policy in South Africa. Are you aware of sectors in the South African
economy that have become major exporters in recent years? (1 page)
ACTIVITY 2
Answer the following question:
(a) Outline the most important arguments of trade optimists and trade pessimists. (1½ pages)
ACTIVITY 3
Answer the following questions. Note: Hints on answering the questions marked with an asterisk are provided at
the back of this study guide.
(a) Discuss the following statement: The empirical evidence suggests that the arguments of trade optimists are
always correct. (1 page)
ACTIVITY 4
Answer the following questions. Note: Hints on answering the questions marked with an asterisk are provided at
the back of this study guide.
(a)* In 1996, the member states of SADC signed a protocol that committed them to economic integration. Outline
the forms that such integration could take and its potential benefits. Can you think of potential dangers of and
barriers to economic integration in the Southern African region? (2 pages)
(a) A good answer to this question should contain the following elements:
· a discussion of the forms that economic integration in the SADC region can take, consisting of clear definitions
that distinguish among customs unions, free-trade areas and common markets
· an outline of the static and dynamic benefits of economic integration
Arguably the biggest threats to economic integration in Southern Africa are the dominant position of South Africa
in the regional economy (smaller states may feel that the benefits will accrue disproportionately to the largest
member state) and the heavy reliance of some of the smaller states on revenue from customs duties (which
means that they literally cannot afford to liberalise their trade regimes).
ACTIVITY 5
(a)* Summarise the major aspects of the Uruguay Round agreement of the General Agreement on Tariffs and
Trade (GATT) that was signed in April 1994 and highlight the implications of this agreement for South Africa.
(1½ pages)
(b) Discuss the need for and some implications of reforming the trade policies of developed countries. (1½ pages)
Foreign finance, investment and aid: controversies and opportunities – 8
Answer the following questions. Note: Hints on answering the questions marked with an asterisk are provided at
the back of this study guide.
(a)* Discuss the following statement: The debate about the advantages and disadvantages of private foreign
investment in developing countries suggests that policymakers are unnecessarily worried about the fact that
South Africa attracts so little foreign direct investment. Such investment usually does more harm than good.
(2 pages)
(a) This is a very important question. A good answer should contain the following elements:
· a summary of the four “gap-filling” arguments for private foreign investment
· statements of the four counterarguments and the six other arguments against private foreign investment
· a discussion of the issues drawing on Todaro and Smith's attempt to reconcile the pros and cons, including the
conclusion that private foreign investment can be an important stimulus for growth under certain circumstances
· it follows that South Africa stands to benefit from attracting more foreign investment, and that it would be
short-sighted not to consider means to make the investment climate more attractive for prospective investors
ACTIVITY 3
(a) Discuss the advantages and disadvantages of foreign portfolio investment for emerging markets such as South
Africa. (1 page)
ACTIVITY 4
Answer the following questions. Note: Hints on answering this question are provided at the back of this study
guide.
(a)* Explain why donor countries give and why developing countries accept aid. (1 page)
Development policymaking and the role of the state – 9
ACTIVITY 1
Answer the following questions. Note: Hints on answering the questions marked with an asterisk are provided at
the back of this study guide.
(a) Define the concepts “economic planning” and “economic plan” and distinguish between the two principal
components of development planning. (½ page)
Answer the following questions. Note: Hints on answering the questions marked with an asterisk are provided at
the back of this study guide.
(a) Discuss the rationale for development planning in developing countries. (1½ to 2 pages)
ACTIVITY 3
Answer the following question.
(a)* Indicate whether or not you agree with the following statement: “On the whole, the experience of
developing countries suggests that South Africa should not even consider introducing comprehensive
development planning.” Substantiate your answer. (1½ to 2 pages)
(a) The discussion of the failure of planning by Todaro and Smith provides strong arguments for agreeing with this
statement. To substantiate your answer, you should summarise each of the implementation and plan failures
outlined in the textbook. Note that the question is formulated in such a way that it is does not explicitly require
you to say much about South Africa. When answering questions like this one, you will get credit for mentioning
South African examples or for applying principles to South Africa, but the main challenge is to present the general
arguments in the textbook.
ACTIVITY 4
(a)* Explain how the danger of government failure affects the traditional market failure argument for government
intervention in developing countries. (½ page)
(a) In the past, the existence of market failure was regarded as a sufficient reason for government intervention.
The danger of government failure complicates the issue. In the case of market failures, we should first try to
determine just how significant the risk of government failure is. We may sometimes conclude that the distortions
that result from the market failure would be overshadowed by those of government failure that are likely to
result from intervention, in which case is would be better to live with market failure than to try to rectify it.
(b) Box 11.1 on page 533 of the textbook lists eleven problems of government intervention in developing
countries. Have such problems also jeopardised government intervention in South Africa? If so, provide
relevant examples. (1 page)
ACTIVITY 5
Answer the following questions.
(a) Choose any five requirements for the efficient operation of private markets and any five market-facilitating
legal and economic practices and indicate whether they are met or exist in South Africa. Substantiate each of
your conclusions in one sentence. (1 page)
(b) Discuss the role and limitations of markets in developing countries. (1 page)
ACTIVITY 6
Answer the following question.
(a) Compare the most important elements and prescriptions of the Washington Consensus and the Santiago
Consensus. In your view, which of these two frameworks provides the best statement of the nature of and policy
priorities for economic development? (2 pages)
(a) The elements of the Washington Consensus are summarised in the left-hand column of Table 11.1 and those
of the Santiago Consensus in Box 11.2. Todaro and Smith’s discussion provides information about the policy
prescriptions of each Consensus. The Santiago Consensus appears to be the better framework of the two,
although it should not be forgotten that no such list of priorities of policies can encapsulate all the
requirements for the achievement of economic development.
(b) In your view, are the development policies of the South African government broadly in line with those
suggested by the Santiago Consensus or not? Substantiate your answer. (1 to 1½ pages)
ACTIVITY 7
Answer the following questions.
(a) Discuss the impact of corruption in developing countries and outline strategies to reduce it. (1 to 1½ pages)
(b) Do you agree with Transparency International's assessment of the extent of corruption in South Africa?
Explain your answer. (1 page)
(c) Discuss the following statement: “Decentralisation of decision making and popular participation in
development policymaking and implementation facilitate real development.” (1 page)