global econ - development economics - lecture
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8/9/2019 Global Econ - Development Economics - lecture
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Development Issues
Dr. Katherine Sauer
Global Economic Issues
ECON 241
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Most of the people in the world do not have an acceptablestandard of living. - access to food
- access to clean water
- adequate housing
- job opportunities
- access to health care
- education
Why should you care?
Countries are linked together by trade, finance, the environment,
migration, disease, etc
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Poverty
The Cycle ofPoverty:
Low Income
Low Savings
Low InvestmentLow Consumption
Low Productivity
Where could the cycle be broken?
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Hunger
Hunger is an extreme manifestation of poverty.
There are 842 million undernourished people in the world.
The vast majority live in developing nations.
3/4 live in rural areas.
The majority are women.
The suffering of 800 million hungry people represents athreat to economic growth and political stability on a global
scale. - FAO Director-General Jaques Diouf
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hunger
low availability
of food
low access to
food (economic
or physical)
low food
production
low imports
of food
poverty
interrupted
access to markets
The Relationship Between Poverty and Hunger:
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Globally, there is more than enough food produced to nourish
everyone.
There is an unequal distribution of food within and across
countries.
Most food emergencies are caused by natural disasters, conflicts,
or economic crisis.
Poverty makes people more vulnerable to any emergency.
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What can be done?
Short Run:- public food distribution
- food-for-work programs
Long Run:
- irrigation projects (prevent consequences of drought)
- improve rural roads (improve access to markets)
- government policies to decrease unemployment
- government policies to grant land ownership
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Example: Vietnams economic reforms (1986)
- farmers received legal control of their land- farmers were allowed to sell as much as they wanted
- taxes on agricultural goods were lowered
- rural infrastructure was built
As a result of the reforms, per capita food production doubled
and agricultural exports increased.
Over the 1990s, the percent of undernourished people fell from
27% to 19%.
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There is no formula for making poor countries rich.
We do have an understanding of some key things that rich
countries have in common.
- stages of economic development
- human capital- health
- property rights
- effective government institutions
- openness to trade
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1. Stages of Economic Development
Pre-Industrial
leading sector
production process
consumer products
major factor that
influences
economic growth
- agriculture
- human-nature interaction
- labor and natural resource intensive
- food
- handmade clothing
- natures productivity
(fertile soil, rainfall, etc)
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Industrial
leading sector
production process
consumer products
major factor that
influences
economic growth
- industry
- human-machine interaction
- capital intensive
- manufactured goods
- labor productivity
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Post-Industrial
leading sector
production process
consumer products
major factor that
influences
economic growth
- services
- human-human interaction
- knowledge intensive
- information / knowledge services
- innovation / intellectual property
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Three Broad Objectives of Sustainable Development
Social- full employment
- equity
- security
- education
- health
Economic- economic growth
- efficiency
- stability
Environmental- healthy environment
to live in
- rational use of non-
renewable resources
- conservation ofrenewable resources
The challenge is to balance all three at once.
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2. Human Capital
H
uman capital encompasses a persons knowledge, ability, andskills.
Most human capital is built through education and training.
Governments fund public education because a bettereducated population contributes to faster and sustainable
development.
Firms invest in employee training because they expect to
cover the costs through higher profits from higher worker
productivity.
Individuals spend time and money on higher education
because they expect to earn higher wages.14
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But, there may not be a return on education if
- it is of low quality
- the knowledge/skills learned dont match market demand- there is slow economic growth (low demand for new
workers)
- workers are paid the same regardless of skill (centrally
planned economies)
Ex: Philippines and Vietnam
- both had higher adult literacy than neighboring countries
- until recently, each was growing slowly
- Vietnam was centrally planned
- Philippines were isolated economically
- Vietnam adopted market based reforms
- Philippines exported skilled workers and imported their
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Even when primary schooling is available, many poor childrenwork instead of going to school.
- as poverty is eliminated, child labor declines
There exists a gender gap in education.M
any girls do not go toschool because of cultural norms, early childbearing, and limited
employment opportunities for women.
- as poverty is eliminated, the gender gap remains
- national policies are needed to close the gap
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3. Health Issues
Communicable and largely preventable diseases kill millions ofpeople in developing countries each year.
(HIV/AIDS, malaria, tuberculosis)
4. Property Rights
In the developed world, property rights are clearly defined. In the
developing world, property rights are often informal.
Ex: In Malawi, homes are built on community land. They are
passed down to children from their parents. The local chief
settles any boundary disputes. Even though youve owned the
home and land for many years, technically you dont own it
because you have no formal property right for it.17
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Millions of people in developing nations dont own their land,
homes, or other assets because of a lack of formal property rights.
In developed nations, people can use their assets as collateral to
obtain a loan. Without formal property rights, people in
developing nations often cannot get loans from banks.
dead capital: assets that cant be used to borrow against
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5. Effective Government Institutions
Countries need effective governments in order to develop
economically.
- laws / law enforcement / courts
- basic infrastructure
- ability to collect taxes
- low corruption- no excessive regulation
- responsible fiscal and monetary policy
- chronic deficit spending can lead to:
higher taxes
inflation
default
- loose monetary policy leads to inflation
- tight monetary policy can lead to a recession19
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Cycle ofPolitical Instability
poverty and social
conflict
political instability
and threat of a
property rights
violation
low domestic and
foreign investment
low economic
growth
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6. Openness to Trade
Among the poor countries in the 1970s and 1980s,closed grew 0.7% per capita annually
open grew 4.5% per capita annually
Trade-Not-Aid: If developing nations were able to trade morefreely with wealthy countries, their incomes would increase and
they would likely need less foreign aid.
- Bangladesh faces an average tariff amount of 14% on
exports to the US.
- France faces an average tariff of 1%.
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Foreign Aid: (humanitarian or development)
- 2 types of sources- government
- private
Government- national government bilateral aid programs
(ex: US Agency for International Development or
the OECDs Development Assistance Committee)
- international institutions
(ex: World Bank or IMF)
Private
- charitable organizations
- nongovernment organizations (NGOs)22
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Common aid-related terms:
grant transfer made in cash, goods, or services for which no
payment is required
loan (aka credit) a transfer for which repayment is required
grant element a measure of the concessionality of a loan,
determined by the difference between the interest rate on the loan
and the market interest rate
official development assistance (ODA) grants or loans provided
on concessional financial terms (with a grant element of at least
25%) by the official sector with promotion of economicdevelopment and welfare as the objective
tied aid ODA that is used by the donating country to build
infrastructure or buy goods/services23
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2007 ODA
(millions ofUS dollars)
Source: OECD
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In 1970, at the UN General Assembly, rich nations pledged to
spend 0.7% of their GNI on ODA.
2007 ODA
as a share of
GNI
Source: OECD 25
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Source: OECD
Recently, the EU has pledged to spend 0.56% of GNI on poverty
reduction by 2010 and 0.7% by 2015.
Other OECD countries are targeting 0.35
% of GNI.
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Source: OECD27
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Does aid make a difference in development?
- 4 views on the link between aid and economic growth
1. It has been argued that aid is needed to break poor countries out
of the poverty trap.
- Developing nations often lack a minimum amount of
capital (infrastructure, human capital, public administration)to support modern economic activity.
Key to breaking the poverty trap is investment in physical and
human capital.
Funds for investment have to come from external sources.
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2. There is a positive relationship between economic growth and
aid, but the returns to aid are diminishing.
- limits to absorptive capacity and other constraints- type of aid matters
3. The effect of aid depends on
- quality of policies and institutions- country characteristics
4. There is no effect of aid on growth (or negative effect).
- unproductive projects
- graft / corruption
- pressure on currency to appreciate
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