IB Economics 1 Development Economics Section 5

IB Economics
Development Economics
Section 5
1
Overview of
Development
Economics
5.1 Sources of Economics
Growth and/or Development
5.2 Consequences of Growth
5.3 Barriers to Economics
Growth and/or development
5.4 Growth and Development
Strategies
5.5 Evaluation of Growth the
Development Strategies
2
Economic
growth entails
an increase in
a country's
total output of
goods and
services.
Economic
development
entails a
higher
standard of
living.
3
Economic Growth and Economic
Development
4
Commons
Characteristics of
Developing Economies
Common Characteristics of Developing
Economies
Low Per Capita
Income
• Poverty cycle
• High degree of
income inequality
• Widespread
absolute poverty
5
High Population
Growth
• Large population
or high growth
rates
• High dependency
ratios
High Unemployment
and
Underemployment
• High
unemployment
especially season
unemployment
• High
underemployment
Over Dependence
on Primary Sector
• Large rural sector
• Primary
commodities basis
of exports
• Commodity
concentration
• Vulnerability to
fluctuating
commodity prices
Low incomes, Low Life Expectancy &
Low Education
1
0.963
0.8
0.7
0.6
HDI
0.34
0.4
0.2
6
0
Norway
Chad
World Averagge
Common Characteristics of
Developing Economics
Percentage Population Growth
2.5
2
1.5
1
0.5
7
0
Norway
Chad
World
Common Characteristics of Developing
Economics: Overpopulation
Investment Spending as Percentage of GDP
25%
20%
15%
10%
5%
8
0%
Norway
Chad
World
Common Characteristics of Developing
Countries: Low Investment
9
Common
Characteristics of
Developing Economics
Development
Economics
Section 5.1
Sources of
Economics Growth
and/or development
10
11
Natural
Factors
Physical
Capital
Political &
Institutional
Factors
Sources of Growth
Human
Capital
Natural
Resources
Technological
Progress
12
Economic Growth and Development
Institutional
Framework
Sources of Growth
Growth in the
Quantity and
Quality of
Labor
Development
Economics
Section 5.3
Consequences of
Growth
13
Greater inequality
Negative
Externalities
14
Consequences of Growth
Higher incomes
Higher government
revenue
Improved welfare
Types of Growth
to Avoid
Jobless
Growth
15
Ruthless
Growth
Futureless
Growth
Voiceless
Growth
Development
Economics
Section 5.2
Barriers to Growth
16
Poverty Cycle
Low
Incomes
Low
Investments
17
Low
Savings
Institutional
& Political
Barriers
18
Economic
Growth &
Development
International
Trade
Barriers
Financial
Barriers
Barriers to Growth &
Development
Social &
Cultural
Barriers
Low levels of
Foreign Direct
Investment
(FDI)
Poverty &
social conflict
Low growth &
taxation
revenue
19
Political instability
Political
instability &
Corruption
Development
Economics
Section 5.4
Growth and
Development
Strategies
20
Growth
Models
Growth and
Development
Strategies
21
Growth Models & Growth and
Development Strategies
Harrod-Domar Growth Model
Increased
Savings
Increased
incomes
Increased output
22
Increased
Investment
Larger capital
stock
Challenges for Developing Economies
23
Harrod-Domar Growth Model
Increased
Savings
Increased
incomes
Increased
output
Increased
Investment
Larger
capital stock
1.
2.
3.
Very low propensity to save
High levels of consumption
Capital flight
24
Challenges for Developing Economies
Increasing output may be
hampered by:
poorly skilled workforce
and a brain drain
poor management skills
Low levels of Research
and Development
Harrod-Domar Growth Model
Increased
Savings
Increased
incomes
Increased
output
Increased
Investment
Larger
capital stock
Structural Change and Dual Sector
Model
25
• Surplus
Labor
Agricultural Sector
Expanding
Manufacturing
Sector
• Capital
growth as
profits
invested
26
Challenges for Developing
Economies
Structural Change and the Two
Sector Model
• Surplus Labor
Expanding
Manufacturing
Sector
• Capital growth
as profits
invested
Agricultural Sector

Technology replaces labor
and spare capacity in the
agricultural sector not utilized

Capital flight instead of
investment

Model assumes steady labor
costs but wages may rise
lowering profits and further
investment
Export-led Outward-looking Growth Strategies
Focus on
production of
goods with
comparative
advantage exists
27
Higher incomes
Growth in both
domestic and
exports markets
28
Necessary Conditions for Export-led
Growth Strategies

Liberalized trade and capital
flows




Floating exchange rate
Investment in
infrastructure
Deregulation
Export-led Growth Strategies
Focus on
production of
goods with
comparative
advantage exists
Higher incomes
Growth in both
domestic and
exports markets
Import Substitution Growth Strategies
Focus on
producing good
domestically
29
Provide Subsidies
Impose tariffs and
quotas on
imported goods
Advantages of
Export-led
Strategies
30
Disadvantages
of Export-led
Strategies
Advantages of
Import
Substitution
Strategies
31
Disadvantages of
Import
Substitution
Strategies
32
Growth Strategies
Commercial Loans
• Direct Foreign Investment
• Long-term investment by
MNCs
33
Advantages of
FDI
Disadvantages
of FDI
Fills domestic savings
gap
MNCs may provide
their own labor
Multiplier effect
May exploit the
environment
Revenue for
government
May exploit domestic
labor
Provides employment
and training
May expatriate profits
and avoid taxes
34
Development Strategies
Microcredit
• Capital to small
scale business
projects
Fair Trade
• FairTrade bodies
allow farmers and
small businesses
to use an
internationally
recognized logo
that certain
standards of
fairness are met
Development
Economics
Section 5.5
Evaluation of Growth
and Development
Strategies
35
36
Aid
Aid
Types of Aid
37
Humanitarian
Development
Food, medicine
emergency relief
Improve human
resources,
technology and
fund specific
projects
Classifying Aid

Bilateral and Multilateral
Commodity
Aid
Long Term
loans
Technical
Assistance
Aid
Tied Aid
Project Aid
38
Advantages of
Aid
39
Disadvantages
of Aid
Market-led Versus Interventionist
Growth Strategies
Market-led
Strategies
Establish Free
Markets
40
Interventionist
Strategies
Active
Government
manipulation of
markets
• Export-led growth
• FDI
• privatization
•
•
•
•
Import Substitution
protectionism
nationalization
exchange rate
manipulation
41
A New Consensus about Growth and
Development
Free
markets
Debt
Relief
Trade
Justic
e
Political
stability
Effectiv
e
targeted
aid
42
Resources
Gapminder is an excellent resource that present statistics in an
attention grabbing way.
A provocative article by New Internationalist. John McMurty argues
that free markets are often presented as the sole solution to
poverty and human development when the global market is
inefficient and life-destructive.
Mailer, M. H. & Nelson, J. A., (2007) Introducing Economics: A
Critical Guide for Teaching, M.E. Sharp Armonk.
Jeffry Sachs author of The End of Poverty: Economic Possibilities
for Our Time presents his views in a lecture at Columbia University.
43
Resources
The Girl Effect explain how the quantity and quality of
labor can be improved by focusing on girls.
 PBS also provided a lesson plan based on “Global
Women and Poverty”.
 This video exposes Nike to criticisms of exploitation.
44
Suggested Activities
1. Students undertake in-depth research of an
undeveloped economy of their choice. They present
information to the class using the section headings as
a way of organizing their information.
2. Student convince others of the worth of a microcredit
loans which is extended through the Kiva
organization. See details here.
Assessment
45
As a major section of the course and one that so well fits
IB Learner Profile, Section 5 is a popular choice for
examiners devising questions to test your understanding
of the course. Only Section 1 and 5 are identical for both
SL and HL students.
Development Economics can be asked in conjunction
with questions about Macroeconomics and International
Trade. It is also a popular topic of data response
questions.
Typical Questions
46
Questions that ask you to explore the relationship
between growth and development:
1 Evaluate the view that economic growth will lead
to economic development and associated
improvements in welfare.
2 Explain the differences between economic growth
and economic development.
3 Explain what is meant by sustainable
development.
Typical Questions
47
Questions that focus on barriers to growth and
development:
4 Explain the main barriers to development.
5 Explain how overdependence on primary
products may act as a barrier to economic
development.
Typical Questions
48
Questions that ask you to evaluate developmental
strategies.
6 Evaluate the view that interventionist strategies
are more effective than market orientated
strategies.
7 Evaluate the effectiveness of aid in achieving
economic growth and development
8 Evaluate the role of MNCs and FDI in achieving
economic growth and development.
Typical Questions
49
9
10
11
Explain the difference between inward looking growth
strategies and outward looking growth strategies.
Evaluate the strategies that can be used to achieve
economic development
Explain how an increase in the quantity and quality of
a nation's factors of production can promote economic
development.
Typical Questions
50
⑫ Explain the role of fair trade organizations and microcredit schemes in promoting economic development.
⑬ Evaluate the role of MNCs in economic growth and
development.
⑭ Evaluate trade and aid as means of achieving
economic growth and development.
Typical Questions
51
Questions that focus on how development is measured:
⑮ Explain how development might be measured.
Questions that link to other sections of the course.
⑯ Evaluate the impact of globalization on the
economic development of developing countries.
⑰ Evaluate the role of the World Bank and the IMF in
economic growth and development.
Diagrams
52
Section 5 does not have a great number of associated
diagrams.
However you should know the following:
1. PPCs curves that can distinguish between growth and
development.
2. Poverty Cycle.
3. Macroeconomic and International Trade diagrams as
they relate to development issues.