Economic Development and Growth

Why Some Countries Are Poor and Others Rich?

This video looks at the quality of institutions, culture and resources that a country has its affect on wealth.

Distinguish between economic development and economic growth

Economic development: is defined as an increase in the level of income standard of living / output / GNP per person accompanied by a change in the structure of society. Eg, improvement in education, income person or health care.
Economic growth: is defined as an increase in output per person and does not involve a change in structure in society.

Characteristics which indicate that a country is a LDC.

High rate of population growth: Rates are very high resulting in economic problems which the government finds hard to resolve. Famine. Too frequently famine occurs in LDCs resulting in disease; deaths at early age; high medical costs.
Foreign Debts: These are very high. Their repayment uses up government revenue and their repayments can cripple the economy. Uneven distribution of wealth. In some LDCs, a minority may control a large part of the country’s wealth resulting in widespread poverty.
Over-dependence on one crop: Some LDCs are over-dependent on one crop. The country may be subject to crop failure and/or a wide variation in export prices .
High percentage of the population engaged in extractive/primary industries: This results in not enough workers in secondary & tertiary sectors, resulting in low standards of living.
Poor Terms of Trade: LDCs may suffer from low export prices and high import prices and hence the gains from trade are reduced.
Poor living conditions / Inadequate infrastructure: A large percentage of the population live in shanty towns with no water and poor sanitation.
Lack of capital: LDCs may lack the capital which is essential for economic development & employment generation.
Low per capita income for the majority of the population: This results in a poor standard of living and a consequent low demand for goods and services.
Poor levels of education/literacy: This will act as an impediment to economic development, resulting in high unemployment.
Political corruption: Some LDCs spend a lot on bureaucratic administration / military spending which can result in civil unrest.
Exploitation by multinationals of LDCs / Economic Dualism: This may take the form of low wage rates; lack of care for the environment; control over key exports etc.

Describe the main differences between a developed country and a developing country.

High population growth rates in less developed countries LDCs: Rates of population growth are highest in developing countries (LDCs) resulting in economic problems which governments find hard to resolve.
Famine in LDCs: Too frequently famine occurs in LDCs resulting in disease and death at early age.
High foreign debts: These are higher in LDCs relative to national income and their repayment uses up government revenue which could have used for more productive uses.
More uneven distribution of wealth in LDCs: In some LDCs, a minority of the population may control a large part of the country’s wealth resulting in poverty for the vast majority of the population.
Over-dependence on one crop in LDCs: Some LDCs are over-dependent on one crop. The country is therefore subject to crop failure and/or a wide variation in export prices.
High percentage of the population engaged in extractive/primary industries in LDCs: This results in not enough workers in secondary & tertiary sectors, resulting in an overall low standard of living. Undeveloped industrial base.
Unfavourable Terms of Trade for LDCs: LDCs may suffer from low export prices and high import prices and hence the gains from trade are reduced for these countries in comparison with developed nations.
Poor infrastructure in LDCs: A large proportion of the population may live in poor conditions with no water or dirty water and poor sanitation.
Lack of capital / Low levels of investment in LDCs: LDCs lack the capital essential for economic development & employment generation. Limited access to technological advances.
Low per capita incomes in LDCs: This results in a poor standard of living and a consequent low demand for goods and services relative to developed countries
Poor levels of education/literacy in LDCs: Educational opportunities are very limited. This acts as an impediment to economic development and contributes to continuing high unemployment.
Political corruption / less stable political institutions: Some LDCs spend a lot on bureaucratic administration / military spending which results in civil unrest. In some the political institutions are unstable and this hinders investment.
Exploitation by multinationals of LDCs: May take the form of low wage rates; lack of care for the environment; control over key exports.

Benefits of economic growth for developing countries (LDCs).

Increased standard of living: Higher incomes will enable people buy more goods and services and so their standard of living will increase.
Better services: Better education, improved health services, better housing should mean increased life expectancy.
Employment / less reliance on primary sector: Increased opportunities for employment through increased demand. Less reliance on agriculture / the primary sector to create jobs.
Resources available to the government: Increased tax revenues will allow the government scope for further investment in the country.
Alleviation of poverty: More schools and houses and other essentials services will help reduce poverty.
Investment in Research & Development: More monies should become available for investment in R & D which will increase economic growth.
Reduced reliance on foreign aid / borrowing: With economic growth LDCs will need less foreign aid / may be able to reduce foreign borrowing.

Measures which the governments of developed countries could take to promote economic development in developing countries

Assist foreign aid programmes / capital provision: Governments can continue with aid to help in emergency situations. They can also provide more long term aid to help with the development of infrastructure/provision of education, health programmes etc.
Restructure their national debts: If the national debts were cancelled then these funds would become available for the country to use for economic development.
Improve trading opportunities: Improve access to markets in the developed world/outlet for their exports. Improve the terms of trade available/higher prices for their exports.
Encourage multinationals to set up firms there: These could provide the workers with skills. The fair wages received could help boost domestic demand and provide tax revenue for the state.
Assist LDCs with skills / technologies: The provision of skills / technologies to the LDCs would help with improving standard of living, increase productive capacity.
Assist peace measures and promote political stability: Economic development requires a peaceful environment. Foreign countries could provide peacekeeping troops and encourage the movement towards political stability.

Economic effects a reduction in financial aid may have for citizens in LDCs

Reduced standard of living: With less money coming into the economy the average standard of living will fall.
Deterioration in infrastructure: Reduced aid will mean that the government / voluntary organisations will spend less on infrastructure and citizens will suffer the consequences.
Increased poverty: Those people who rely on the financial aid are generally the poorest and so these people will suffer most leading to increased poverty within the LDCs.
Increased death rates: If the financial aid was used to buy food then some people in the LDCs may be deprived of food.
Decline in provision of services: Those services relying on financial aid may now lack finance which results in their closure or contraction e.g. schools; health care provision etc.

What can governments of LDCs could take to increase the standard of living of its citizens.

Promote population control: Governments could encourage a reduction in population by various measures which would improve the welfare of its citizens.
Improve basic infrastructure: Provision of clean water & proper sanitation will help improve the standard of living. Provision of basic housing and the development of roads, power supplies etc. These improvements may help attract MNCs to the country and help create jobs.
Promote land / agricultural reform: By spreading the ownership of land more people will benefit. Improved production methods will modernise the agricultural industry. By reducing the emphasis on one crop / diversifying production may help increase incomes.
Improve education: A basic literacy programme to improve literacy skills. Provide primary education. Develop the secondary sector and initiate further education programmes. Provide technical skills for the population.
Provide better services: The government could provide services for its citizens e.g. health care provision; social services etc.
State bureaucracy / corruption / spending on arms: Reduce bureaucracy within state institutions. Eliminate corruption so that aid flows to those who it was intended for. Divert funds from arms spending to more urgent current requirements.

Aid

Describe three types of foreign aid available to LDCs

Direct financial aid by governments: This is also known as official development assistance, grants and loans. Governments may provide aid to help in emergency situations. They can also assist with the development of infrastructure and the provision of education, health programmes etc.
Financial aid through voluntary agencies: Various international voluntary agencies provide direct aid to LDCs on a permanent basis or in times of emergency.
Restructuring of national debts: If national debts of LDCs are cancelled or re-structured more funds would become available for the LDCs to use for economic development in their countries.
Multinationals setting up in LDCs: Multinationals, by providing employment opportunities, provide workers with skills. The fair wages received could help boost domestic demand, provide tax revenue for the state and boost employment.
Improve trade terms with LDCs: Most LDCs suffer from unfavourable terms of trade. If access to markets in the developed world was improved and /or the terms of trade available were more favourable then LDCs could increase exports and/or obtain higher prices for their exports boosting their national incomes.
Assist LDCs with skills and technologies: Governments or voluntary agencies could provide skills and technologies to the LDCs so that living standards could improve and this could boost their productive capacity.

Benefits of aid

Lives saved
Helps builds infrastructure (which promotes industrial development)
Improvement in health services
Aid for agriculture · Clean water and sanitation
Support education / training
Reduction in poverty levels etc.

Challenges of aid

Aid may not ‘trickle down’: The increased wealth may not trickle down to the people who need it most and economic growth may not result. In the case of some LDCs, the provision of foreign aid may end up in the hands of a ruling elite and not result in economic growth as the money doesn’t trickle down to the people who really need it.
Develop a culture of dependency: In some LDCs a culture of dependency may exist, and this aid may re-enforce this dependency. This may limit economic growth and development
High profile projects / control of projects: In some LDCs, instead of using the aid provided for the provision of adequate infrastructure it is used for ‘high profile’ projects. Governments need to prioritise those projects which will ultimately lead to economic self-sufficiency and increase the productive capacity of the LDC. Some projects may be controlled by foreign countries or a proportion of the profits made may have to be sent abroad.
Implications of aid: Difficulty may arise when the aid must be repaid. Will the aid add to some LDCs already high national debt and result in difficulties when repaying, thereby hindering economic growth? Have conditions been attached to the aid which may limit the economic choices of future governments?
Political Corruption / poor governance: Some of the aid may be spent on military regimes which can lead to civil unrest, restricting economic growth and discouraging FDI. Corruption may occur with some governments using the aid for own means rather than promoting economic growth.
Type / use of aid: The projects may focus exclusively on food aid. In order for economic growth to be sustained, economic projects must be undertaken that focus on developing the secondary and tertiary sectors so as to aid economic growth. Maybe countries should consider trade as a better way to promote economic growth.

Discuss why foreign aid may not always result in economic growth in LDCs.

Unfair distribution of benefits / Widening poverty gap / trickle down effects: The increased wealth may not trickle down to the people who most need it and economic growth may not result. Any wealth that exists in the poorest countries is often concentrated in the hands of a small ruling elite. In many cases military dictatorships are the norm and they wish to maintain the status quo. The money may be used for the purchase of armaments and other non-essential projects.
Costs to the environment: Increased pollution, disfigurement of the landscape/environment, large scale urban sprawl may negate any positive effects from the foreign aid.
Rapid population growth / standard of living: In LDCs there are rapidly rising populations and the implications of such population growth is that any economic growth is completely outweighed by an increase in population. The impact of the foreign aid may be hard to discern as it may not improve the standard of living.
Culture of dependency rather than improvement of local economy: In some LDCs, a culture of dependency may exist and this may prove to be a major barrier to promoting economic growth and development. Entrepreneurship demands ingenuity and inventiveness. A culture of dependency reduces the desire for risk taking ventures and ultimately profit making.
Food aid dependency/ reduced incentive for production / growth: In order for economic growth to be sustained, economic projects must be undertaken and the focus on provision of food aid exclusively must be reduced. The whole notion of subsistence must be replaced by a desire for excess production and a move away from the primary production area. Secondary and tertiary sectors should be encouraged.
High profile projects: In some LDCs, the provision of adequate infrastructure together with land drainage and irrigation schemes, roads, housing, factories and communication facilities are bypassed in favour of ‘high profile’ projects. Governments need to prioritise those projects which will ultimately lead to economic self-sufficiency and increase the productive capacity of LDCs. The provision of skills and technologies will ultimately help with improving standards of living and increasing productive capacity.

Practice these Exam Questions:

Short Q: 2019 Q3

Long Qs:

2018 Q6 c
2014 Q7
2012 Q 5B
2010 Q7B

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