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Contemporary global economic issues

TOPIC 5

Increasingly, the world is becoming a smaller and far more connected place. Whether we live in Australia, France, Greece, Ethiopia, Tanzania, New Zealand, China or Indonesia, the problems and opportunities we face are increasingly global in nature. Indeed, international trade and global events help determine our level of prosperity and general wellbeing, so they cannot be ignored.

As part of VCE Economics Unit 2, area of study 3, you are required to select one or more contemporary global economic issues. A number of possibilities are listed in the study design, but a selection could be made from outside that list. Because of the many choices available, this text will focus on just three possibilities that may be of interest, and can serve as the basis of your own further investigation: • Option 1 — Free trade versus protectionism as a contemporary economic issue • Option 2 — Globalisation as a contemporary economic issue • Option 3 — The challenges faced by developing nations in reducing poverty as a contemporary economic

issue.

Global economic issues such as international trade, globalisation and economic development affect all of us and greatly in�uence the wellbeing of billions of people.

OPTION 1 FREE TRADE VERSUS PROTECTIONISM AS A CONTEMPORARY ECONOMIC ISSUE

International trade involves a nation exporting and importing goods and services. It occurs because it is ben-e�cial for the countries and individuals involved. So every day, Australians conduct international transactions with people from overseas through selling and buying goods and services. There are also international capital �ows involving the movement of money capital or investments between countries.

UNCORRECTED PAGE may be of interest, and can serve as the basis of your own further investigation:

PAGE may be of interest, and can serve as the basis of your own further investigation:1 — Free trade versus protectionism as a contemporary economic issue

PAGE 1 — Free trade versus protectionism as a contemporary economic issue

The challenges faced by developing nations in reducing poverty as a contemporary economic

PAGE The challenges faced by developing nations in reducing poverty as a contemporary economic

PAGE PROOFS

PROOFSIncreasingly, the world is becoming a smaller and far more connected place. Whether we live in Australia,

PROOFSIncreasingly, the world is becoming a smaller and far more connected place. Whether we live in Australia, France, Greece, Ethiopia, Tanzania, New Zealand, China or Indonesia, the problems and opportunities we face

PROOFSFrance, Greece, Ethiopia, Tanzania, New Zealand, China or Indonesia, the problems and opportunities we face

help determine our level of

PROOFShelp determine our level of

one

PROOFSone or more

PROOFSor more contemporary

PROOFScontemporary

. A number of possibilities are listed in the study design, but a selection could be made

PROOFS

. A number of possibilities are listed in the study design, but a selection could be made from outside that list. Because of the many choices available, this text will focus on just PROOFS

from outside that list. Because of the many choices available, this text will focus on just threePROOFS

three

226 Economics Down Under 1


An important part of international trade is the export and import of goods and services between countries. In this photo, the transportation by sea represents a service, while the containers being loaded hold goods.

International trade allows you to have a watch made in Switzerland, eat lamb grown in Australia, be entertained with movies from the United States, drink coffee from Brazil, holiday in Bali (Indonesia), wear shoes made in the Philippines and T-shirts sourced from Bangladesh, drive cars made in South Korea or Germany, use a mobile phone manufactured in China and have a home loan where the money is sourced by your favourite bank from overseas. Indeed, international trade has made countries interdependent. It has allowed them to specialise in the production of those things they are best at making, sell these abroad, and then use the money gained to buy whatever else they need.

In this �rst global economic issue, we will take a look at the ways governments around the world in�uence the conditions under which international trade operates. In particular, we will come to realise that some governments use protectionist policies to shield their local business from stiff foreign competition. At the other extreme, many governments have gradually adopted policies that reduce protection levels and shift towards the idea of free trade.

5.1 The nature and effects of government policies involving protectionism as opposed to free tradeSo what exactly do we mean by the terms protectionism and free trade, and what are the effects of govern-ments adopting these policies?

What are protectionist government policies?Protectionist policies seek to restrict imports, advantage local producers and interfere with the free working of the market system in ef�ciently allocating resources. Industry protection can take many forms including tariffs, subsidies and import quotas. Now for a closer look at these policies: • Tariff barriers. Tariffs are simply an indirect tax added onto the price of selected imports. They are designed

to help make foreign goods dearer than the local substitute, so domestic consumers will be more likely to purchase Australian-made items. Tariffs may drive foreign rivals out of the market and reduce the level of competition, adding to in�ation, reducing the quality of locally produced items and narrowing consumer choice. Tariffs are often applied at different rates expressed as a percentage of the price of the item, and this then reduces the value of imports. Regrettably, however, if we increase protection, other countries may retaliate and do the same by placing tariffs on our exports, so the apparent trade gains in sales, and hence jobs locally, may be short-lived. Additionally, we will soon see that there are other costs of protection like reduced ef�ciency in the use of resources, slower economic growth, higher prices and eroded living standards.

• Producer subsidies. Subsidies are government cash payments made to local producers. They are designed to help local �rms cover some of their production costs so they can sell pro�tably both here and abroad at lower prices (perhaps below normal cost). While these are often popular among businesses and workers in affected industries, ultimately they are paid for through higher personal taxes. In addition, once given, sub-sidies are dif�cult to remove and, like tariffs, they usually lower ef�ciency in our use of resources, slow economic growth and ultimately undermine our general living standards.

UNCORRECTED those things they are best at making, sell these abroad, and then use the money gained to buy whatever else they need.

UNCORRECTED those things they are best at making, sell these abroad, and then use the money gained to buy whatever else they need.In this �rst global economic issue, we will take a look at the ways governments around the world in�uence the

UNCORRECTED In this �rst global economic issue, we will take a look at the ways governments around the world in�uence the conditions under which international trade operates. In particular, we will come to realise that some governments

UNCORRECTED conditions under which international trade operates. In particular, we will come to realise that some governments

to shield their local business from stiff foreign competition. At the other extreme, many

UNCORRECTED to shield their local business from stiff foreign competition. At the other extreme, many

governments have gradually adopted policies that reduce protection levels and shift towards the idea of

UNCORRECTED governments have gradually adopted policies that reduce protection levels and shift towards the idea of

5.1 The nature and effects of government policies

UNCORRECTED 5.1 The nature and effects of government policies involving protectionism as opposed to free trade

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involving protectionism as opposed to free trade

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So what exactly do we mean by the terms

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So what exactly do we mean by the terms ments adopting these policies?

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ments adopting these policies?

What are protectionist government policies?

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What are protectionist government policies?Protectionist policies

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Protectionist policiesof the market system in ef�ciently allocating resources. Industry protection can take many forms including

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of the market system in ef�ciently allocating resources. Industry protection can take many forms including tariffs, subsidies and import quotas. Now for a closer look at these policies:

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tariffs, subsidies and import quotas. Now for a closer look at these policies:•

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• T

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Tariff barriers.

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ariff barriers.Tariff barriers.T

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Tariff barriers.Tto help make foreign goods dearer than the local substitute, so domestic consumers will be more likely to UNCORRECTED

to help make foreign goods dearer than the local substitute, so domestic consumers will be more likely to purchase Australian-made items. Tariffs may drive foreign rivals out of the market and reduce the level of UNCORRECTED

purchase Australian-made items. Tariffs may drive foreign rivals out of the market and reduce the level of

PAGE the transportation by sea represents a service, while the containers being loaded hold goods.

PAGE the transportation by sea represents a service, while the containers being loaded hold goods.

International trade allows you to have a watch made in Switzerland, eat lamb grown in Australia, be entertained

PAGE International trade allows you to have a watch made in Switzerland, eat lamb grown in Australia, be entertained

with movies from the United States, drink coffee from Brazil, holiday in Bali (Indonesia), wear shoes made in the

PAGE with movies from the United States, drink coffee from Brazil, holiday in Bali (Indonesia), wear shoes made in the Philippines and T-shirts sourced from Bangladesh, drive cars made in South Korea or Germany, use a mobile phone

PAGE Philippines and T-shirts sourced from Bangladesh, drive cars made in South Korea or Germany, use a mobile phone manufactured in China and have a home loan where the money is sourced by your favourite bank from overseas.

PAGE manufactured in China and have a home loan where the money is sourced by your favourite bank from overseas. Indeed, international trade has made countries interdependent. It has allowed them to specialise in the production of PAGE Indeed, international trade has made countries interdependent. It has allowed them to specialise in the production of those things they are best at making, sell these abroad, and then use the money gained to buy whatever else they need.PAGE

those things they are best at making, sell these abroad, and then use the money gained to buy whatever else they need.

PROOFS

PROOFS

PROOFS

An important part of international trade is the export and import of goods and services between countries. In this photo, PROOFS

An important part of international trade is the export and import of goods and services between countries. In this photo, the transportation by sea represents a service, while the containers being loaded hold goods.PROOFS

the transportation by sea represents a service, while the containers being loaded hold goods.

TOPIC 5 Contemporary global economic issues 227


• Import quotas. Import quotas represent quantity limits imposed by the government on the importation of particular types of goods (such as cars, cheese and textiles) or services from abroad. Again, they give pref-erential treatment to local producers by restricting imports, but they lead to lower ef�ciency and economic growth, higher prices and reduced material living standards.

• Anti-dumping legislation. When excess production of particular goods is sold in overseas markets below cost (e.g. tinned tomatoes), this is called dumping. Many countries have government legislation making this activity illegal, but it has to be proved that this event has actually happened. While good for consumers (because of low prices), the problem with dumping is that it is seen as unfair for local producers and workers who may be driven out of the industry due to lower pro�ts.

• Preferential treatment and local content laws. Each year, governments award contracts to thousands of sup-pliers of goods and services. Sometimes, preferential treatment is deliberately given to local �rms, even though their prices may be higher than the overseas substitute. For example, in entertainment on radio and TV, local content laws require a percentage of programs to be sourced locally. This offers an advantage to the local pro-ducer over an overseas rival. However, it reduces imports and may result in lower quality and less competition.

• Capital or ownership restrictions. Some governments have restrictions on the level of foreign ownership, especially in sensitive industries like sea ports, electricity, telecommunications, banking, airlines and the media. Furthermore, large foreign investment projects are usually subject to approval by the Foreign Investment Review Board (FIRB). Again, this offers protection from potential foreign competitors but also lowers living standards.

What are the claimed bene�cial effects of trade protection?Supporters of tariffs and other forms of trade protection tend to focus on four main advantages: • Protection helps grow infant industries. The infant industry argument, used by some to justify protection, is

based on the assumption that new industries just getting started will have higher production costs than those that are well established. In the case of these industries, tariffs supposedly provide a helping hand for a few years, until �rms get established and become more ef�cient. While there are some success stories justifying this use of tariff protection (indeed all industry in Australia was once an infant), there are also failures where the so-called infant remains uncompetitive, even in old age! In fact, sometimes tariffs and subsidies reduce ef�ciency.

• Protection strengthens our defence capabilities. During wartime, countries are often isolated without access to imports. The use of tariffs during peacetime can help maintain inef�cient or uncompetitive indus-tries so that there is an assured supply of essential goods and services in an emergency. This argument has been used in Australia by a number of industries including the car and shipbuilding industries. However, a likely cost of this policy is lower living standards (except perhaps during war time).

• Protection improves economic stability. Some critics of free trade argue that open, exporting economies are more likely to experience booms and recessions in the level of economic activity caused by the business cycle in overseas countries. While this is partly true, the same sort of reasoning could also be used to stop or limit interstate or intrastate trade, since potentially there could be instability here as well — a suggestion that could not be taken seriously.

• Protection creates jobs and reduces unemployment. One of the most frequently heard reasons for keeping tariffs is that they help protect local jobs and employment from destruction by imports coming from low-wage countries such as Indonesia or China. While there may be some basis for this argument, several counterpoints can be made:1. Although wages are relatively expensive in Australia, this problem can often be overcome by replacing

workers with technology. The use of machines or capital equipment in our country is relatively cheap, possibly giving us the competitive advantage.

2. We cannot expect other nations to allow our exports into their country if we use tariffs to repel their com-petition. It is likely that a move by Australia to raise tariffs would cause retaliation overseas, lower our exports, and perhaps result in a loss of jobs and reduced living standards.

3. Although tariffs may help protect one industry, in so doing, they cause the production costs of others using imported materials and equipment to be higher than otherwise. This makes them less pro�table, so tariff protection of one industry can lead to businesses closing down and the destruction of jobs in others.

4. In the long-term, it is hard to see how more jobs can be created by using tariffs that are designed to encourage industries that are inef�cient and unpro�table. Logically, we should create more jobs and have higher living standards if Australia specialises in the things we make best — that is, we should concentrate on selecting areas of production where we have a comparative cost advantage (or least disadvantage).

What is free trade?Free trade is the opposite government policy to protection. It exists when no restrictions are in place to alter the international �ow or movement of goods, services and capital between countries. Put another way, free trade occurs when transactions between countries happen without: • tariffs • subsidies • import quotas • restrictions on the in�ow of money capital or overseas investment.

UNCORRECTED been used in Australia by a number of industries including the car and shipbuilding industries. However, a

UNCORRECTED been used in Australia by a number of industries including the car and shipbuilding industries. However, a likely cost of this policy is lower living standards (except perhaps during war time).

UNCORRECTED likely cost of this policy is lower living standards (except perhaps during war time). Some critics of free trade argue that open, exporting economies

UNCORRECTED Some critics of free trade argue that open, exporting economies

are more likely to experience booms and recessions in the level of economic activity caused by the business

UNCORRECTED are more likely to experience booms and recessions in the level of economic activity caused by the business cycle in overseas countries. While this is partly true, the same sort of reasoning could also be used to stop

UNCORRECTED cycle in overseas countries. While this is partly true, the same sort of reasoning could also be used to stop or limit interstate or intrastate trade, since potentially there could be instability here as well — a suggestion

UNCORRECTED or limit interstate or intrastate trade, since potentially there could be instability here as well — a suggestion

otection creates jobs and reduces unemployment.

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otection creates jobs and reduces unemployment.is that they help protect local jobs and employment from destruction by imports coming from low-wage countries

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is that they help protect local jobs and employment from destruction by imports coming from low-wage countries such as Indonesia or China. While there may be some basis for this argument, several counterpoints can be made:

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such as Indonesia or China. While there may be some basis for this argument, several counterpoints can be made:ages are relatively expensive in Australia, this problem can often be overcome by replacing

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ages are relatively expensive in Australia, this problem can often be overcome by replacing workers with technology. The use of machines or capital equipment in our country is relatively cheap,

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workers with technology. The use of machines or capital equipment in our country is relatively cheap, possibly giving us the competitive advantage.

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possibly giving us the competitive advantage.e cannot expect other nations to allow our exports into their country if we use tariffs to repel their com

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e cannot expect other nations to allow our exports into their country if we use tariffs to repel their competition. It is likely that a move by Australia to raise tariffs would cause retaliation overseas, lower our

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petition. It is likely that a move by Australia to raise tariffs would cause retaliation overseas, lower our exports, and perhaps result in a loss of jobs and reduced living standards.

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exports, and perhaps result in a loss of jobs and reduced living standards.

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Although tarif

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Although tariffs may help protect one industry, in so doing, they cause the production costs of others

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fs may help protect one industry, in so doing, they cause the production costs of others Although tariffs may help protect one industry, in so doing, they cause the production costs of others Although tarif

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Although tariffs may help protect one industry, in so doing, they cause the production costs of others Although tarif

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using imported materials and equipment to be higher than otherwise. This makes them less pro�table, so

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using imported materials and equipment to be higher than otherwise. This makes them less pro�table, so tariff protection of one industry can lead to businesses closing down and the destruction of jobs in others.UNCORRECTED

tariff protection of one industry can lead to businesses closing down and the destruction of jobs in others.UNCORRECTED

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In the long-term, it is hard to see ho

PAGE are well established. In the case of these industries, tariffs supposedly provide a helping hand for a few years,

PAGE are well established. In the case of these industries, tariffs supposedly provide a helping hand for a few years, until �rms get established and become more ef�cient. While there are some success stories justifying this use of

PAGE until �rms get established and become more ef�cient. While there are some success stories justifying this use of tariff protection (indeed all industry in Australia was once an infant), there are also failures where the so-called

PAGE tariff protection (indeed all industry in Australia was once an infant), there are also failures where the so-called infant remains uncompetitive, even in old age! In fact, sometimes tariffs and subsidies reduce ef�ciency.

PAGE infant remains uncompetitive, even in old age! In fact, sometimes tariffs and subsidies reduce ef�ciency.

During wartime, countries are often isolated without

PAGE During wartime, countries are often isolated without

access to imports. The use of tariffs during peacetime can help maintain inef�cient or uncompetitive indus

PAGE access to imports. The use of tariffs during peacetime can help maintain inef�cient or uncompetitive industries so that there is an assured supply of essential goods and services in an emergency. This argument has PAGE tries so that there is an assured supply of essential goods and services in an emergency. This argument has been used in Australia by a number of industries including the car and shipbuilding industries. However, a PAGE

been used in Australia by a number of industries including the car and shipbuilding industries. However, a likely cost of this policy is lower living standards (except perhaps during war time).PAGE

likely cost of this policy is lower living standards (except perhaps during war time).

PROOFSducer over an overseas rival. However, it reduces imports and may result in lower quality and less competition.

PROOFSducer over an overseas rival. However, it reduces imports and may result in lower quality and less competition.

Some governments have restrictions on the level of foreign ownership,

PROOFSSome governments have restrictions on the level of foreign ownership, especially in sensitive industries like sea ports, electricity, telecommunications, banking, airlines and the media.

PROOFSespecially in sensitive industries like sea ports, electricity, telecommunications, banking, airlines and the media. Furthermore, large foreign investment projects are usually subject to approval by the Foreign Investment Review

PROOFSFurthermore, large foreign investment projects are usually subject to approval by the Foreign Investment Review Board (FIRB). Again, this offers protection from potential foreign competitors but also lowers living standards.

PROOFSBoard (FIRB). Again, this offers protection from potential foreign competitors but also lowers living standards.

What are the claimed bene�cial effects of trade protection?

PROOFSWhat are the claimed bene�cial effects of trade protection?

four main advantages

PROOFSfour main advantages:

PROOFS:

, used by some to justify protection, is

PROOFS

, used by some to justify protection, is based on the assumption that new industries just getting started will have higher production costs than those that PROOFS

based on the assumption that new industries just getting started will have higher production costs than those that are well established. In the case of these industries, tariffs supposedly provide a helping hand for a few years, PROOFS

are well established. In the case of these industries, tariffs supposedly provide a helping hand for a few years,



Free trade is also advanced through the signing of multilateral (involving many countries) and bilateral (usually involving two countries) free trade agreements (abbreviated as FTAs).

Free trade involves no tariff barriers or other forms of protection for local industry. While free trade brings bene�ts such as cheaper goods, some groups including farmers and local industries see it as a threat to their survival.

What are the bene�cial effects of free trade?A free trade environment has many advantages that can help to raise our living standards.

Greater ef�ciency, economic growth and incomesWithout protection, free trade means that resources will only be allocated by market forces to areas of pro-duction where a business or a country is relatively most ef�cient and where production costs are lowest. This means that different countries are encouraged to specialise in producing particular types of goods and services where they have a cost advantage, or at least where their costs disadvantage is least. Resources will thus be put to work in their most productive use. As a result of free trade, more output (GDP) will be produced from the same inputs, and hence incomes and material living standards should be higher.

There are two types of cost advantage that may be relevant to international trade, based on specialisation in production:1. Absolute cost advantage. A country might have an absolute cost advantage where it is the cheapest or

most ef�cient producer of a particular good or service in the world. For example, if Korea is the cheapest or most ef�cient producer of cars in the world, it is said to have an absolute cost advantage over other coun-tries. It is likely that its car exports will sell very well indeed. Similarly, if Australia is the cheapest producer of iron ore and has an absolute cost advantage, Korean and other manufacturers would be keen to buy this from us. Both countries would bene�t from specialisation in international trade since each has an absolute cost advantage in different areas of production.

2. Comparative cost advantage. Some countries have no product where they have an absolute cost advantage. However, this is not a problem since all countries have areas of production where they have a comparative cost advantage. This means that they should mostly specialise in selected areas of production where their costs disadvantages are least. By focusing on the things they produce best (and stopping production of the goods they are poor at producing), countries will minimise their opportunity cost and thus maximise their production, incomes and material living standards.One important reason for international specialisation in production is that often countries have different

types of resources (that is, different natural, labour and capital resources) that are wanted by other nations. For instance, countries with warm tropical climates often produce crops such as rubber, tea, coffee, sugar or cocoa. Some of these nations also specialise in tourism. The surplus output of these items can then be exported to countries with cooler climates that cannot produce these things. Trade is mutually bene�cial.

Additionally, free trade allows nations to export more goods and services by opening up new markets abroad. In turn, this means that local businesses can produce on a bigger scale. Firms can gain economies of large-scale production where their �xed production costs — such as product design, advertising and perhaps man-agement, equipment and advertising — can be spread more thinly over greater output volumes, allowing the good or service to be sold more cheaply. As a result, some consumers at home and overseas should now prefer to purchase the local item. This leads to increased production, higher incomes and better living standards.

UNCORRECTED Without protection, free trade means that resources will only be allocated by market forces to areas of pro

UNCORRECTED Without protection, free trade means that resources will only be allocated by market forces to areas of production where a business or a country is relatively most ef�cient and where production costs are lowest. This

UNCORRECTED duction where a business or a country is relatively most ef�cient and where production costs are lowest. This means that different countries are encouraged to

UNCORRECTED means that different countries are encouraged to specialise

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where they have a cost advantage, or at least where their costs disadvantage is least. Resources will thus be put

UNCORRECTED where they have a cost advantage, or at least where their costs disadvantage is least. Resources will thus be put to work in their most productive use. As a result of free trade, more output (GDP) will be produced from the

UNCORRECTED to work in their most productive use. As a result of free trade, more output (GDP) will be produced from the same inputs, and hence incomes and material living standards should be higher.

UNCORRECTED same inputs, and hence incomes and material living standards should be higher.

types of cost advantage that may be relevant to international trade, based on specialisation in

UNCORRECTED types of cost advantage that may be relevant to international trade, based on specialisation in

antage.

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antage.

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A country might have an

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A country might have an most ef�cient producer of a particular good or service in the world

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most ef�cient producer of a particular good or service in the worldmost ef�cient producer of cars in the world, it is said to have an

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most ef�cient producer of cars in the world, it is said to have an tries. It is likely that its car exports will sell very well indeed. Similarly, if Australia is the cheapest producer

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tries. It is likely that its car exports will sell very well indeed. Similarly, if Australia is the cheapest producer of iron ore and has an absolute cost advantage, Korean and other manufacturers would be keen to buy this

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of iron ore and has an absolute cost advantage, Korean and other manufacturers would be keen to buy this from us. Both countries would bene�t from specialisation in international trade since each has an absolute

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from us. Both countries would bene�t from specialisation in international trade since each has an absolute cost advantage in different areas of production.

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cost advantage in different areas of production.Comparati

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Comparati

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ve cost advantage.

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ve cost advantage.However, this is not a problem since all countries have areas of production where they have a

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However, this is not a problem since all countries have areas of production where they have a cost advantage

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cost advantagecosts disadvantages are least. By focusing on the things they produce best (and stopping production of the UNCORRECTED

costs disadvantages are least. By focusing on the things they produce best (and stopping production of the goods they are poor at producing), countries will minimise their UNCORRECTED

goods they are poor at producing), countries will minimise their

PAGE as cheaper goods, some groups including farmers and local industries see it as a threat to their survival.

PAGE as cheaper goods, some groups including farmers and local industries see it as a threat to their survival.

What are the bene�cial effects of free trade?

PAGE What are the bene�cial effects of free trade?A free trade environment has many advantages that can help to raise our living standards.

PAGE A free trade environment has many advantages that can help to raise our living standards.

Greater ef�ciency, economic growth and incomesPAGE Greater ef�ciency, economic growth and incomesWithout protection, free trade means that resources will only be allocated by market forces to areas of proPAGE

Without protection, free trade means that resources will only be allocated by market forces to areas of production where a business or a country is relatively most ef�cient and where production costs are lowest. This PAGE

duction where a business or a country is relatively most ef�cient and where production costs are lowest. This

PROOFS

PROOFS

PROOFS

Free trade involves no tariff barriers or other forms of protection for local industry. While free trade brings bene�ts such PROOFS

Free trade involves no tariff barriers or other forms of protection for local industry. While free trade brings bene�ts such as cheaper goods, some groups including farmers and local industries see it as a threat to their survival.PROOFS

as cheaper goods, some groups including farmers and local industries see it as a threat to their survival.



Increased international tradeFreer trade (involving more FTAs, lower tariffs both here and overseas, and less protection) should help to grow the markets for a country’s exports and thus boost its sales. Indeed, Australian and international experi-ence has shown that trade liberalisation has meant that our exports have increased between two and four times faster than our GDP. This has increased our export incomes and material living standards.

More jobs and employmentIf, as argued, free trade leads to greater ef�ciency, more exports, business expansion and stronger economic growth in the long run, it should also lead to the creation of more jobs. Indeed, it has been estimated that one in four Australian jobs depends directly or indirectly on export sales.

Lower in�ation and more choiceIn�ation refers to generally rising prices for consumers. Without protection and tariffs, domestic in�ation rates should be much lower due to stiffer competition from imports. Research has shown that following widespread trade liberalisation by governments, the world’s average in�ation rate has fallen from 24 per cent a year in 1990 to just 4 per cent in recent years. This impressive slowdown in prices largely re�ects the powerful effects of international competition. Free trade also means there is more consumer choice. This too can lead to more affordable and better quality goods and services.

As a result of freer trade, the purchasing power of our incomes is greater and so material living standards should be higher.

What are the disadvantages of freer trade?Despite its many advantages, freer trade (e.g. reducing tariffs and signing more free trade agreements) has its problems, especially in the short to medium terms.

Loss of some industriesWithout protection, a nation’s resources will move into areas of highest ef�ciency. This is likely to mean that the least ef�cient industries will close down because they cannot compete against cheaper imports. As previ-ously mentioned, these losses may in some ways weaken a nation’s self-suf�ciency and defence capabilities.

Possible increase in unemployment in some industriesExperience from around the world shows that when governments reduce tariff protection, unemployment may rise in the import-competing industry in the short term, as resources are reallocated away from less ef�cient industries that cannot compete (even though, in the longer term, this may be offset by the creation of more new jobs in businesses that are taking advantage of the opportunities for selling in bigger global markets).

Possible redistribution of incomeWhen industry protection is abolished, this may bring about a change in the distribution of income between individuals. Incomes may fall for those who own or work in inef�cient businesses that are forced to close, lowering their living standards. However, in the longer term it is hoped that there will be a rise in the number of better paid jobs in more ef�cient industries. Ultimately, the best way to grow incomes is to ensure that resources are used in their most ef�cient way.

Weblinks The weblinks in these activities are available in this topic’s student resources tab.

• The big ideas of trade• Foreign trade — an introduction• How bene�cial is world trade?

• Comparative advantage and terms of trade• Division of labour specialisation, trade comparative

advantage• Arguments against international trade • Why do countries restrict trade?

CHECK YOUR UNDERSTANDING

1 How is protectionism as a government policy different from that of free trade?2 Identify and explain the claimed advantages and disadvantages of free trade and protectionism.

APPLIED ECONOMIC EXERCISES

Apply your understanding of this subtopic by accessing and completing the Applied economic exercise(s).

• School-assessed tasks > Option 1 > Applied economic exercises > Question 1

UNCORRECTED Experience from around the world shows that when governments reduce tariff protection, unemployment may

UNCORRECTED Experience from around the world shows that when governments reduce tariff protection, unemployment may rise in the import-competing industry in the short term, as resources are reallocated away from less ef�cient

UNCORRECTED rise in the import-competing industry in the short term, as resources are reallocated away from less ef�cient industries that cannot compete (even though, in the longer term, this may be offset by the creation of more new

UNCORRECTED industries that cannot compete (even though, in the longer term, this may be offset by the creation of more new jobs in businesses that are taking advantage of the opportunities for selling in bigger global markets).

UNCORRECTED jobs in businesses that are taking advantage of the opportunities for selling in bigger global markets).

Possible redistribution of income

UNCORRECTED Possible redistribution of incomeWhen industry protection is abolished, this may bring about a change in the distribution of income between

UNCORRECTED When industry protection is abolished, this may bring about a change in the distribution of income between individuals. Incomes may fall for those who own or work in inef�cient businesses that are forced to close,

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individuals. Incomes may fall for those who own or work in inef�cient businesses that are forced to close, lowering their living standards. However, in the longer term it is hoped that there will be a rise in the number

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lowering their living standards. However, in the longer term it is hoped that there will be a rise in the number of better paid jobs in more ef�cient industries. Ultimately, the best way to grow incomes is to ensure that

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of better paid jobs in more ef�cient industries. Ultimately, the best way to grow incomes is to ensure that resources are used in their most ef�cient way.

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resources are used in their most ef�cient way.

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The weblinks in these activities are available in

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The weblinks in these activities are available in this topic’s student resources tab.

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this topic’s student resources tab.

The big ideas of trade

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The big ideas of tradeForeign trade — an introductionUNCORRECTED

Foreign trade — an introductionHow bene�cial is world trade?UNCORRECTED

How bene�cial is world trade?UNCORRECTED

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Without protection, a nation’s resources will move into areas of highest ef�ciency. This is likely to mean that

PAGE Without protection, a nation’s resources will move into areas of highest ef�ciency. This is likely to mean that the least ef�cient industries will close down because they cannot compete against cheaper imports. As previ

PAGE the least ef�cient industries will close down because they cannot compete against cheaper imports. As previously mentioned, these losses may in some ways weaken a nation’s self-suf�ciency and defence capabilities.

PAGE ously mentioned, these losses may in some ways weaken a nation’s self-suf�ciency and defence capabilities.

Possible increase in unemployment in some industriesPAGE Possible increase in unemployment in some industriesExperience from around the world shows that when governments reduce tariff protection, unemployment may PAGE

Experience from around the world shows that when governments reduce tariff protection, unemployment may

PROOFSshould be much lower due to stiffer competition from imports. Research has shown that following widespread

PROOFSshould be much lower due to stiffer competition from imports. Research has shown that following widespread trade liberalisation by governments, the world’s average in�ation rate has fallen from 24 per cent a year in

PROOFStrade liberalisation by governments, the world’s average in�ation rate has fallen from 24 per cent a year in 1990 to just 4 per cent in recent years. This impressive slowdown in prices largely re�ects the powerful effects

PROOFS1990 to just 4 per cent in recent years. This impressive slowdown in prices largely re�ects the powerful effects of international competition. Free trade also means there is more consumer choice. This too can lead to more

PROOFSof international competition. Free trade also means there is more consumer choice. This too can lead to more

As a result of freer trade, the purchasing power of our incomes is greater and so material living standards

PROOFSAs a result of freer trade, the purchasing power of our incomes is greater and so material living standards

(e.g. reducing tariffs and signing more free trade agreements) has its PROOFS

(e.g. reducing tariffs and signing more free trade agreements) has its



5.2 Governments have adopted the policy of trade liberalisationGovernments both here and abroad have adopted the policy of trade liberalisation involving a gradual reduc-tion in levels of protection and a move towards freer international trade.

The Australian government’s policy of trade liberalisationStarting in the early 1970s and accelerating from the early 1990s, the Australian government gradually shifted towards a policy of freer trade or, as it is also called, trade liberalisation. This entailed reducing the levels of industry protection through changes in �ve key policies:1. cutting the general rate of tariffs to just 5 per cent or less2. abolishing all import quotas3. slashing producer subsidies4. greatly easing local content laws and restrictions on foreign capital5. increasing the number of bilateral free trade agreements with particular countries.

Some of these policy changes by the Australian government are illustrated in the table and graph making up �gure 5.1.

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Rate of agricultural tariffs (percentage) 28 12 13 6 0 0

Estimated value of net subsidies and industry assistance ($billion) 25 20 18 8 11 9

FIGURE 5.1 Indicators of the Australian government’s adoption of trade liberalisation, 1970–2016

Sources: Data rounded and estimated using information derived from many sources including AGPS; Industry Commission; 2002 Trade Policy Review for Australia; Productivity Commission, Trade and Assistance Review 2015; DFAT; Budget Review 2006–07; and budget papers 2008–09 to 2015–16. *Note: Data for 2015–16 is a preliminary estimate.

From this it can be clearly seen that the Australian government accepts the principles of freer trade and largely rejects protectionism of local industry. Now for a closer look at each of these policy areas.

Lower tariff protectionTariffs are a tax added onto the price of imports to make them less attractive to local consumers. Figure 5.2 shows that the move towards lower tariffs started at different times in different industries.

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PAGE PROOFS

Some of these policy changes by the Australian government are illustrated in the table and graph making

PROOFSSome of these policy changes by the Australian government are illustrated in the table and graph making

PROOFS

PROOFS

PROOFS



Not everyone believes in the idea of free trade, where industries have to become more ef�cient to survive. This is because, especially in the shorter term, reducing protectionism may force some �rms to close, causing unemployment and hardship for some people and their families. However, most economists believe that, in the longer term, trade liberalisation will lead to higher levels of production and incomes, and hence higher material living standards.

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Agricultural tariffs (%) 32 28 12 12 13 10 6 0 0 0

FIGURE 5.2 How the Australian government has recently cut tariffs

Sources: Data rounded and estimated using information derived from many sources including AGPS; Industry Commission; 2002 Trade Policy Review for Australia; Productivity Commission, Trade and Assistance Review 2015; DFAT; Budget Review 2006–07; and budget papers 2008–09 to 2016–17.

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PROOFSNot everyone believes in the idea of free trade, where industries have to become more ef�cient to survive. This is

PROOFSNot everyone believes in the idea of free trade, where industries have to become more ef�cient to survive. This is because, especially in the shorter term, reducing protectionism may force some �rms to close, causing unemployment

PROOFSbecause, especially in the shorter term, reducing protectionism may force some �rms to close, causing unemployment and hardship for some people and their families. However, most economists believe that, in the longer term, trade

PROOFSand hardship for some people and their families. However, most economists believe that, in the longer term, trade liberalisation will lead to higher levels of production and incomes, and hence higher material living standards.

PROOFSliberalisation will lead to higher levels of production and incomes, and hence higher material living standards.

PROOFS

Clothing apparel tariffsPROOFS

Clothing apparel tariffs(percentage)PROOFS

(percentage)PROOFS



• In the case of ‘general’ tariffs on manufactured items, protection was gradually reduced from the early 1970s, from an average rate of 36 per cent to just 5 per cent from 1996.

• Special higher rates of tariff protection were given to the textile, clothing, footwear and automotive indus-tries until a few years ago.

• In 2005, car tariffs were cut to only 10 per cent (down from 125 per cent in 1985–86) and then to just 5 per cent in 2010.

• In the case of textiles, clothing and footwear, the maximum rate became 17.5 per cent in 2005 (down from 176 per cent in 1990–91), 10 per cent in 2010, and just 5 per cent since 2015.Clearly, the Australian government believes that there are great bene�ts in exposing local businesses to strong

international competition and free trade — bene�ts like greater ef�ciency, increased exports, higher incomes, faster economic growth, lower in�ation, more jobs in the long term and higher material living standards.

Reduced subsidies to local businessesSubsidies are government cash payments made to local producers to help them cover some of their production costs. They can enable Australian �rms to export at lower, more competitive prices. Figure 5.1 (earlier in this section) shows us that there was a general reduction in gross subsidies from around $25 billion in the early 1970s, down to an estimated $9 billion by 2015–16. Again, this is consistent with the federal government’s belief that trade liberalisation improves competition, ef�ciency, incomes and living standards.

Abolition of import quotas and licencesImport quotas are designed to restrict the supply or quantity of speci�c types of imports allowed into the country. In order to achieve a stated volume target, prospective importers must obtain a licence that gives them permission to bring in a certain maximum number of articles of a particular description.

Quotas were commonplace in the 1970s and early 1980s, especially on cars, textiles, footwear and clothing. However, these have been progressively abolished. The last quotas, which applied to cheese, were terminated in 2000–01. Clearly, the government believes that, in the long term, removal of import quotas results in greater ef�ciency in the allocation of resources, lower prices, improved international competitiveness, stronger econ-omic growth, and ultimately better living standards.

Increased number of free trade agreements (FTAs)As part of trade liberalisation, Australia has negotiated bilateral free trade agreements (FTAs) with two or more countries. Essentially, FTAs involve the removal of local industry protection by the countries involved. This includes abolishing most tariffs. In addition to exposing local �rms to more intense foreign competition, and forcing them to become more cost ef�cient and improve their competitiveness, FTAs help Australian producers gain access to much bigger export markets abroad. This allows our businesses to grow their export income. By mid 2016, Australia had ten FTAs in place: • Australia–New Zealand FTA (also known as Closer Economic Relations) in 1983 • Australia–Singapore FTA in 2005 • Australia–Thailand FTA in 2005 • Australia–United States FTA in 2005 • Australia–Chile FTA in 2007 • ASEAN–Australia–New Zealand FTA in 2009 • Malaysia–Australia FTA in 2012 • Korea–Australia FTA in 2014 • Japan–Australia Economic Partnership Agreement in 2014 • China–Australia FTA in 2015

Feasibility studies or negotiations are also well underway for striking bilateral FTAs with Indonesia and India.In addition, Australia is also involved in multilateral trade agreements where there are many other countries

involved. For instance: • We are part of the Asia–Paci�c Economic Cooperation (APEC). This is a regional forum aimed at promoting

freer trade among 21 member countries (see �gure 5.3 below, map 1) around the Paci�c rim, accounting for almost 60 per cent of global GDP. It includes Australia, Brunei Darussalam, Canada, Chile, Indonesia, Japan, Malaysia, Mexico, New Zealand, Papua New Guinea, the People’s Republic of China, the Philippines, Republic of Korea, Singapore, Thailand and the United States. Together, there are around 2.7 billion people in this market or over 37 per cent of the world’s population! Currently, these countries buy about 70 per cent of Australia’s exports. Clearly, what happens to our exports in this region is of national economic and political importance to Australia. In 1994, members of APEC signed an agreement that would abolish intercountry tariffs by 2020.

• The Association of South-East Asian Nations (ASEAN) brings together ten countries from the South-East Asia region — Indonesia, Cambodia, Vietnam, Laos, Burma (Myanmar), Brunei Darussalam, Malaysia, the Philippines, Singapore and Thailand (see �gure 5.3, map 2). These countries accept the principle that freer inter-national trade will help their economic development, so their governments have been gradually cutting tariffs. Although Australia is not a member of ASEAN, it is a dialogue partner, and the region has great importance to us

UNCORRECTED As part of trade liberalisation, Australia has negotiated

UNCORRECTED As part of trade liberalisation, Australia has negotiated more countries. Essentially, FTAs involve the removal of local industry protection by the countries involved.

UNCORRECTED more countries. Essentially, FTAs involve the removal of local industry protection by the countries involved. This includes abolishing most tariffs. In addition to exposing local �rms to more intense foreign competition,

UNCORRECTED This includes abolishing most tariffs. In addition to exposing local �rms to more intense foreign competition, and forcing them to become more cost ef�cient and improve their competitiveness, FTAs help Australian

UNCORRECTED and forcing them to become more cost ef�cient and improve their competitiveness, FTAs help Australian producers gain access to much bigger export markets abroad. This allows our businesses to grow their export

UNCORRECTED producers gain access to much bigger export markets abroad. This allows our businesses to grow their export income. By mid 2016, Australia had ten FTAs in place:

UNCORRECTED income. By mid 2016, Australia had ten FTAs in place:

w Zealand FTA (also known as Closer Economic Relations) in 1983

UNCORRECTED w Zealand FTA (also known as Closer Economic Relations) in 1983

apore FTA in 2005

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apore FTA in 2005FTA in 2005

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FTA in 2005States FTA in 2005

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States FTA in 2005FTA in 2007

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FTA in 2007ASEAN–Australia–Ne

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ASEAN–Australia–New Zealand FTA in 2009

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w Zealand FTA in 2009Malaysia–Australia

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Malaysia–Australia FTA in 2012

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FTA in 2012orea–Australia FTA in 2014

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orea–Australia FTA in 2014Japan–Australia

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China–Australia Feasibility studies or negotiations are also well underway for striking bilateral FTAs with Indonesia and India.

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Feasibility studies or negotiations are also well underway for striking bilateral FTAs with Indonesia and India.In addition, Australia is also involved in multilateral trade agreements where there are many other countries

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In addition, Australia is also involved in multilateral trade agreements where there are many other countries involved. For instance:UNCORRECTED

involved. For instance:•UNCORRECTED

• WUNCORRECTED

W

PAGE Quotas were commonplace in the 1970s and early 1980s, especially on cars, textiles, footwear and clothing.

PAGE Quotas were commonplace in the 1970s and early 1980s, especially on cars, textiles, footwear and clothing. However, these have been progressively abolished. The last quotas, which applied to cheese, were terminated

PAGE However, these have been progressively abolished. The last quotas, which applied to cheese, were terminated in 2000–01. Clearly, the government believes that, in the long term, removal of import quotas results in greater

PAGE in 2000–01. Clearly, the government believes that, in the long term, removal of import quotas results in greater ef�ciency in the allocation of resources, lower prices, improved international competitiveness, stronger econ

PAGE ef�ciency in the allocation of resources, lower prices, improved international competitiveness, stronger econ

Increased number of free trade agreements (FTAs)PAGE Increased number of free trade agreements (FTAs)As part of trade liberalisation, Australia has negotiated PAGE

As part of trade liberalisation, Australia has negotiated bilateral free trade agreements (FTAs)PAGE

bilateral free trade agreements (FTAs)more countries. Essentially, FTAs involve the removal of local industry protection by the countries involved. PAGE

more countries. Essentially, FTAs involve the removal of local industry protection by the countries involved.

PROOFS are government cash payments made to local producers to help them cover some of their production

PROOFS are government cash payments made to local producers to help them cover some of their production

costs. They can enable Australian �rms to export at lower, more competitive prices. Figure 5.1 (earlier in this

PROOFScosts. They can enable Australian �rms to export at lower, more competitive prices. Figure 5.1 (earlier in this section) shows us that there was a general reduction in gross subsidies from around $25 billion in the early

PROOFSsection) shows us that there was a general reduction in gross subsidies from around $25 billion in the early 1970s, down to an estimated $9 billion by 2015–16. Again, this is consistent with the federal government’s

PROOFS1970s, down to an estimated $9 billion by 2015–16. Again, this is consistent with the federal government’s belief that trade liberalisation improves competition, ef�ciency, incomes and living standards.

PROOFSbelief that trade liberalisation improves competition, ef�ciency, incomes and living standards.

are designed to restrict the supply or quantity of speci�c types of imports allowed into the

PROOFS are designed to restrict the supply or quantity of speci�c types of imports allowed into the

country. In order to achieve a stated volume target, prospective importers must obtain a licence that gives them

PROOFS

country. In order to achieve a stated volume target, prospective importers must obtain a licence that gives them permission to bring in a certain maximum number of articles of a particular description.PROOFS

permission to bring in a certain maximum number of articles of a particular description.Quotas were commonplace in the 1970s and early 1980s, especially on cars, textiles, footwear and clothing. PROOFS

Quotas were commonplace in the 1970s and early 1980s, especially on cars, textiles, footwear and clothing. However, these have been progressively abolished. The last quotas, which applied to cheese, were terminated PROOFS

However, these have been progressively abolished. The last quotas, which applied to cheese, were terminated



(e.g. the ASEAN–Australia–New Zealand FTA was signed in 2009). For instance, the region now offers a large and growing market for Australian � rms because of its population of around 610 million (about 8 per cent of the world’s population), rising GDP (now about US$3.3 trillion per year) and the closeness or accessibility of the member countries. We export about $30 billion (2015–16), around 12 per cent of our total exports, to these countries. Collectively, the ASEAN member countries are our third biggest customer after China and Japan (which together take over 46 per cent of our total exports). In fact, our exports to ASEAN members have risen more than 40-fold since 1970, and Australian investment in the ASEAN group has also risen quickly.

A R C T I C O C E A N

A T L A N T I CO C E A N

I N D I A NO C E A N

P A C I F I CO C E A N


APEC

KeyN

Map 1 Asia–Paci�c Economic Forum (APEC) nations

ASEAN

KeyN

Map 2 Association of South-East Asian Nations (ASEAN)

FIGURE 5.3 Maps showing APEC and ASEAN nations

Sources: Maps copied from Wikipedia, the free encyclopaedia: map 1 from en.wikipedia.org/wiki/File:APECMitgliedsstaaten.png and map 2 from en.wikipedia.org/wiki/File:Association_of_Southeast_Asian_Nations_(orthographic_projection).svg.

Governments internationally have adopted the policy of trade liberalisationAround the world, most governments have adopted the policy of trade liberalisation and have been reducing protectionism. For instance, in 1990 the average global tariff rate was 34 per cent, but by 2015 this had fallen to just 8 per cent. Clearly, most governments believe that freer trade is bene� cial.

However, despite the impressive progress, the map and graph making up � gure 5.4 illustrate that in some coun-tries, particularly low-income nations in parts of Africa and the Middle-East, tariff rates are still relatively high.

Tariff rate, applied, weighted mean, allproducts (%)

0% 20%

FIGURE 5.4 Average tariff rates for all goods around the world (2011–15). Clearly, trade liberalisation is incomplete.

(continued)

UNCORRECTED Governments internationally have adopted the policy of

UNCORRECTED Governments internationally have adopted the policy of

Around the world, most governments have adopted the policy of trade liberalisation and have been reducing

UNCORRECTED Around the world, most governments have adopted the policy of trade liberalisation and have been reducing protectionism. For instance, in 1990 the average global tariff rate was 34 per cent, but by 2015 this had fallen

UNCORRECTED protectionism. For instance, in 1990 the average global tariff rate was 34 per cent, but by 2015 this had fallen to just 8 per cent. Clearly, most governments believe that freer trade is bene� cial.

UNCORRECTED to just 8 per cent. Clearly, most governments believe that freer trade is bene� cial.

However, despite the impressive progress, the map and graph making up � gure 5.4 illustrate that in some coun-

UNCORRECTED However, despite the impressive progress, the map and graph making up � gure 5.4 illustrate that in some coun-

tries, particularly low-income nations in parts of Africa and the Middle-East, tariff rates are still relatively high.

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PAGE Maps copied from Wikipedia, the free encyclopaedia: map 1 from en.wikipedia.org/wiki/File:APECMitgliedsstaaten.png and

PAGE Maps copied from Wikipedia, the free encyclopaedia: map 1 from en.wikipedia.org/wiki/File:APECMitgliedsstaaten.png and

map 2 from en.wikipedia.org/wiki/File:Association_of_Southeast_Asian_Nations_(orthographic_projection).svg.

PAGE map 2 from en.wikipedia.org/wiki/File:Association_of_Southeast_Asian_Nations_(orthographic_projection).svg.

Governments internationally have adopted the policy of PAGE Governments internationally have adopted the policy of

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FIGURE 5.4 (continued)

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Sources: Map copied from the World Bank, weighted mean tariff (all products), 2011–15 see http://data.worldbank.org/indicator/TM.TAX.MRCH.WM.AR.ZS/countries/1W?display=map; data for the graph derived from the World Bank, World Development Indicators, tariff barriers, table 6.6, see http://wdi.worldbank.org/table/6.6.


• AUSTRADE • Potential FTA with India• Video case study: Aaco Beef• Video case study: Ausab

• Video case study: ACPET• Video case study: Burch Family Wines• Video case study: Burra Foods• ECA


1 What is trade liberalisation?2 Outline the key aspects of the Australian government’s policy of trade liberalisation.3 In what ways have the policies of governments towards international trade changed in the last few decades?




5.3 Actions taken following the adoption of trade liberalisationOnce any government makes the decision to liberalise trade and reduce industry protection, there are knock-on effects — other policies must also be changed so that local industries do not just survive, but thrive and become internationally competitive. International competitiveness means that local businesses are able to sell good quality goods and services at relatively low prices overseas, without government assistance.

The response by Australian governmentsWith stronger competition from overseas imports, the Australian government used various ef�ciency- promoting supply-side policies to help local business and workers meet the challenges. We will take a quick look at just four of these policy measures to improve Australia’s international competitiveness.

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PAGE Map copied from the World Bank, weighted mean tariff (all products), 2011–15 see http://data.worldbank.org/indicator/

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Deregulation and reform of the labour marketWage and labour costs in many businesses make up 60–70 per cent of the total cost of production. So, if these costs are high, they make Australian �rms and workers less competitive and unable to survive against cheaper imports from low-wage countries. Hence, to be internationally competitive, our wage costs need to be kept down and worker ef�ciency (GDP per hour worked) raised. On this count, during the 1960s, 70 and 80s, some economists became highly critical of Australia’s centralised minimum wage �xing system where the pay and conditions of many workers was determined by the Australian Fair Work Commission (or its many pre-decessors). Here, there was little connection between worker productivity and wage rates, union pressure was considerable, and Australian labour costs rose to become some of the highest in the world.

One solution used by the government to slow wage costs was partial deregulation of the labour market by encouraging enterprise bargaining as an alternative to centralised wage �xing. Under this newer system, which now covers around 85 per cent of all workers, wages and conditions are largely set by the forces of demand and supply on a more �exible �rm-by-�rm basis. Here, wage rises are usually linked to increases in worker ef�ciency (i.e. output or GDP per hour worked) and the relative value or scarcity of each type of occupation. Despite this partial deregulation of the labour market and wages, some protection is still offered to workers on enterprise agreements, since in general these still need to meet minimum standards. This newer system has certainly helped to slow Australia’s wage costs, make local �rms more competitive, boost our export sales and incomes, and improve our material living standards.

Cuts in the company tax rateFor many years now, the Australian government has applied relatively high tax rates on company pro�ts com-pared with tax rates in some countries. The problem here is that to make reasonable returns on their invest-ment, local businesses are forced to charge higher prices for the goods and services they sell, both here and overseas — or as seen in recent times, to minimise tax by shifting their pro�ts overseas to countries with lower company tax rates. Higher prices then make local �rms less competitive when selling, both in Australia and overseas. This leads to higher imports and lower exports, discourages overseas investors, and depresses employment, incomes, GDP and material living standards.

With this problem in mind, the Australian government has attempted to cut rates of company tax, from 49 per cent in the 1988, to 30 per cent in 2002, and down to 28.5 per cent for small businesses during 2015–16. In addition, in the 2016 budget, the treasurer announced further reductions to 27.5 per cent for small to medium- sized �rms in 2016–17, with reductions to 25 per cent for all companies by 2026–27. However, the size and speed of these cuts has been less than those in many other countries. For instance, as shown in �gure 5.5, in 2016 the average rate of company tax in the OECD group of nations was only 24.8 per cent against the stan-dard rate in Australia of 30 per cent. Despite disagreement, many feel that lower company tax rates not only allow �rms to sell at a lower and more competitive price — which should boost export sales and income — but also encourage higher levels of investment, jobs, incomes and living standards.

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Standard company tax rates in different countries and areas (percentage of pro�ts), 2016

FIGURE 5.5 Comparisons of Australia’s rate of company tax against that in other countries and regions, 2016

Sources: Data derived from KPMG, corporate tax rates table, see https://home.kpmg.com/xx/en/home/services/tax/tax-tools-and-resources/tax-rates-online/corporate-tax-rates-table.html.

UNCORRECTED In addition, in the 2016 budget, the treasurer announced further reductions to 27.5 per cent for small to medium-

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UNCORRECTED sized �rms in 2016–17, with reductions to 25 per cent for all companies by 2026–27. However, the size and speed of these cuts has been less than those in many other countries. For instance, as shown in �gure 5.5, in

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UNCORRECTED 2016 the average rate of company tax in the OECD group of nations was only 24.8 per cent against the standard rate in Australia of 30 per cent. Despite disagreement, many feel that lower company tax rates not only

UNCORRECTED dard rate in Australia of 30 per cent. Despite disagreement, many feel that lower company tax rates not only allow �rms to sell at a lower and more competitive price — which should boost export sales and income —

UNCORRECTED allow �rms to sell at a lower and more competitive price — which should boost export sales and income — but also encourage higher levels of investment, jobs, incomes and living standards.

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UNCORRECTED PAGE ment, local businesses are forced to charge higher prices for the goods and services they sell, both here and

PAGE ment, local businesses are forced to charge higher prices for the goods and services they sell, both here and overseas — or as seen in recent times, to minimise tax by shifting their pro�ts overseas to countries with

PAGE overseas — or as seen in recent times, to minimise tax by shifting their pro�ts overseas to countries with lower company tax rates. Higher prices then make local �rms less competitive when selling, both in Australia

PAGE lower company tax rates. Higher prices then make local �rms less competitive when selling, both in Australia and overseas. This leads to higher imports and lower exports, discourages overseas investors, and depresses

PAGE and overseas. This leads to higher imports and lower exports, discourages overseas investors, and depresses

With this problem in mind, the Australian government has attempted to cut rates of company tax, from

PAGE With this problem in mind, the Australian government has attempted to cut rates of company tax, from

49 per cent in the 1988, to 30 per cent in 2002, and down to 28.5 per cent for small businesses during 2015–16. PAGE 49 per cent in the 1988, to 30 per cent in 2002, and down to 28.5 per cent for small businesses during 2015–16. In addition, in the 2016 budget, the treasurer announced further reductions to 27.5 per cent for small to medium-PAGE In addition, in the 2016 budget, the treasurer announced further reductions to 27.5 per cent for small to medium-sized �rms in 2016–17, with reductions to 25 per cent for all companies by 2026–27. However, the size and PAGE

sized �rms in 2016–17, with reductions to 25 per cent for all companies by 2026–27. However, the size and

PROOFSdemand and supply on a more �exible �rm-by-�rm basis. Here, wage rises are usually linked to increases

PROOFSdemand and supply on a more �exible �rm-by-�rm basis. Here, wage rises are usually linked to increases

of each type of

PROOFS of each type of occupation. Despite this partial deregulation of the labour market and wages, some protection is still offered

PROOFSoccupation. Despite this partial deregulation of the labour market and wages, some protection is still offered to workers on enterprise agreements, since in general these still need to meet minimum standards. This newer

PROOFSto workers on enterprise agreements, since in general these still need to meet minimum standards. This newer system has certainly helped to slow Australia’s wage costs, make local �rms more competitive, boost our

PROOFSsystem has certainly helped to slow Australia’s wage costs, make local �rms more competitive, boost our

For many years now, the Australian government has applied relatively high tax rates on company pro�ts com

PROOFSFor many years now, the Australian government has applied relatively high tax rates on company pro�ts compared with tax rates in some countries. The problem here is that to make reasonable returns on their investPROOFS

pared with tax rates in some countries. The problem here is that to make reasonable returns on their investment, local businesses are forced to charge higher prices for the goods and services they sell, both here and PROOFS

ment, local businesses are forced to charge higher prices for the goods and services they sell, both here and overseas — or as seen in recent times, to minimise tax by shifting their pro�ts overseas to countries with PROOFS

overseas — or as seen in recent times, to minimise tax by shifting their pro�ts overseas to countries with



National infrastructure projectsInfrastructure provides the services used by growing businesses like roads, railways, water, power and ports. With increased international competition from cheap imports, it becomes more important than ever to have an ef�cient and competitive system of national infrastructure. This grows a country’s productive capacity and keeps business costs down so their products and services can be sold competitively. Unfortunately, Australian infrastructure has been allowed to deteriorate and age. These bottlenecks place local �rms at a cost disadvan-tage. Hence, in recent times, we have seen the Australian government making more money available to invest in national road, rail and water infrastructure projects. For instance, in the 2014–15 federal budget, $50 billion was earmarked for the period 2014–19, with more funding added in 2015 and 2016.

R&D, education and training policiesFollowing trade liberalisation, exposure to international competition necessitates improving the education and skills of our labour force. More than ever, Australian workers need to be creative, innovative and ef�cient. In turn, this can help lower production costs, create new industries, build our international competitiveness, lift exports, and raise incomes and living standards. Understanding this, the Australian government has increased the overall level of its spending on education, along with other attempts (not always successful) to raise the quality of training. In addition, there has been ongoing funding of research and development (R&D) including the announcement of a $1.1 billion innovation package in the 2016–17 budget.

Some responses by businesses to the policy of trade liberalisationFollowing reductions in industry protection associated with trade liberalisation, businesses have been forced to make structural changes to the way they go about producing goods and services in Australia. To be inter-nationally competitive, �rms need to be able to sell better products at lower prices. They must innovate with new products, and continually restructure the way they produce and sell goods and services. This process of structural change is painful and often involves: • �nding ways of cutting production costs (often involving a reduction in labour costs) and minimising wage

costs by using strategies that lift worker ef�ciency and motivation (e.g. factors that affect levels of strikes, absenteeism, safety, innovation, training, skills, staf�ng and management structures, motivation)

• closing down or selling off inef�cient operations and branches of businesses • encouraging product innovation through research and development (R&D) • expanding the use of the latest technology in production to cut costs and lift ef�ciency • workers and managers using the best international production practices available • trying to grow the volume of export sales in order to gain cost savings through increased economies of

large-scale production.


• What is competitiveness? • The Global Competitiveness Report 2014–15


1 Explain what is meant by international competitiveness.2 Following trade liberalisation, how might any three of the following Australian government ef�ciency-

promoting policies help to improve the international competitiveness of local �rms?a Further deregulation and reform of the labour marketb Cuts in the rate of company taxc Increased investment in national infrastructure projectsd Government �nancing of R&D, education and training

3 Australian businesses had to restructure their operations following reductions in industry protection. What is meant by structural change, and what types of actions did this involve?




UNCORRECTED absenteeism, safety, innovation, training, skills, staf�ng and management structures, motivation)

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PAGE Following reductions in industry protection associated with trade liberalisation, businesses have been forced

PAGE Following reductions in industry protection associated with trade liberalisation, businesses have been forced to make structural changes to the way they go about producing goods and services in Australia. To be inter

PAGE to make structural changes to the way they go about producing goods and services in Australia. To be internationally competitive, �rms need to be able to sell better products at lower prices. They must innovate with

PAGE nationally competitive, �rms need to be able to sell better products at lower prices. They must innovate with new products, and continually restructure the way they produce and sell goods and services. This process of

PAGE new products, and continually restructure the way they produce and sell goods and services. This process of

(often involving a reduction in labour costs) and

PAGE (often involving a reduction in labour costs) and ef�ciency and motivation (e.g. factors that affect levels of strikes, PAGE ef�ciency and motivation (e.g. factors that affect levels of strikes,

absenteeism, safety, innovation, training, skills, staf�ng and management structures, motivation)PAGE

absenteeism, safety, innovation, training, skills, staf�ng and management structures, motivation) or selling off inef�cient operations and branches of businessesPAGE

or selling off inef�cient operations and branches of businesses

PROOFSskills of our labour force. More than ever, Australian workers need to be creative, innovative and ef�cient. In

PROOFSskills of our labour force. More than ever, Australian workers need to be creative, innovative and ef�cient. In turn, this can help lower production costs, create new industries, build our international competitiveness, lift

PROOFSturn, this can help lower production costs, create new industries, build our international competitiveness, lift exports, and raise incomes and living standards. Understanding this, the Australian government has increased

PROOFSexports, and raise incomes and living standards. Understanding this, the Australian government has increased the overall level of its spending on education, along with other attempts (not always successful) to raise the

PROOFSthe overall level of its spending on education, along with other attempts (not always successful) to raise the quality of training. In addition, there has been ongoing funding of research and development (R&D) including

PROOFSquality of training. In addition, there has been ongoing funding of research and development (R&D) including

Some responses by businesses to the policy of trade

PROOFSSome responses by businesses to the policy of trade

Following reductions in industry protection associated with trade liberalisation, businesses have been forced PROOFS

Following reductions in industry protection associated with trade liberalisation, businesses have been forced to make structural changes to the way they go about producing goods and services in Australia. To be interPROOFS

to make structural changes to the way they go about producing goods and services in Australia. To be inter



SCHOOL ASSESSMENT TASKS

Apply your understanding of this subtopic by accessing and completing the School assessment task(s).

• School-assessed tasks > Option 1 > Multiple-choice questions• School-assessed tasks > Option 1 > Terminology revision• School-assessed tasks > Option 1 > An essay• School-assessed tasks > Option 1 > A class debate• School-assessed tasks > Option 1 > A report on an investigation or inquiry• School-assessed tasks > Option 1 > Analysis of visual evidence — a cartoon

OPTION 2 GLOBALISATION AS A CONTEMPORARY ECONOMIC ISSUE

Take a look inside your pantry and you will see globalisation in action. Read the labels and you will most likely � nd that your food comes from a variety of countries. That Chinese-made T-shirt in your wardrobe may also be a clue that we live in a globalised economy, along with the movie you watched last night or the car in the garage. So what is globalisation?

5.4 De� nition and nature of economic globalisationThere are many different de� nitions of economic globalisation, but an important aspect of most is the reduc-tion or removal of barriers limiting the free movement across national borders of business, trade (exports and imports), investment and even labour. Globalisation is therefore the economic uni� cation or joining together of the world’s economies and its various commercial and � nancial markets.

Globalisation requires that nations see themselves as belonging to a single, large, integrated economy. So, when we buy goods and services as consumers, our supermarket is the world. Globalisation can be seen as the opposite of localisation or regionalisation, which involves local producers in smaller markets selling to consumers who live in the same area.

5.5 The acceleration of economic globalisationGlobalisation is not a new development. It can be traced back perhaps 2000 years. However, in the last 200–300 years, it has gained greater signi� cance. During this time, there was a massive acceleration of inter-nationalisation, specialisation in production and interdependence of many economies, including Australia. However, through history, its speed of progress has not been constant. The most recent wave of globalisation started in the 1970s and continues to the present day. The various phases or waves of economic globalisation are summarised in table 5.1.

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Globalisation requires that nations see themselves as belonging to a single, large, integrated economy. So, when we

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PAGE tion or removal of barriers limiting the free movement across national borders of business, trade (exports and imports), investment and even labour. Globalisation is therefore the economic uni� cation or joining together of

PAGE imports), investment and even labour. Globalisation is therefore the economic uni� cation or joining together of the world’s economies and its various commercial and � nancial markets.

PAGE the world’s economies and its various commercial and � nancial markets.

PAGE PROOFS

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PROOFSTake a look inside your pantry and you will see globalisation in action. Read the labels and you will most

PROOFSTake a look inside your pantry and you will see globalisation in action. Read the labels and you will most likely � nd that your food comes from a variety of countries. That Chinese-made T-shirt in your wardrobe may

PROOFSlikely � nd that your food comes from a variety of countries. That Chinese-made T-shirt in your wardrobe may also be a clue that we live in a globalised economy, along with the movie you watched last night or the car in

PROOFSalso be a clue that we live in a globalised economy, along with the movie you watched last night or the car in

5.4 De� nition and nature of economic globalisation

PROOFS5.4 De� nition and nature of economic globalisation

, but an important aspect of most is the reduc-PROOFS

, but an important aspect of most is the reduc-tion or removal of barriers limiting the free movement across national borders of business, trade (exports and PROOFS

tion or removal of barriers limiting the free movement across national borders of business, trade (exports and imports), investment and even labour. Globalisation is therefore the economic uni� cation or joining together of PROOFS

imports), investment and even labour. Globalisation is therefore the economic uni� cation or joining together of



TABLE 5.1 The waves of economic globalisation

Period Description

The late 1700s to the early 1900s — one of the early waves of globalisation

The seeds of economic globalisation actually date back to the Roman Empire (and its many conquests), the Han Dynasty in China (and the famous ‘Silk Road’) and the Islamic Golden Age (with Muslim traders and explorers). However, in more recent times during the 1700s until World War I, the �rst big wave of globalisation gathered momentum. During these years, there were many examples of nations’ economies being linked to the global economy as suppliers of resources, manufactured goods, services, and even money capital or investment. Colonisation by Europeans (e.g. the Spanish, British, Portuguese and French) of Australia, parts of Asia (e.g. Vietnam, Malaysia, Indonesia), India, North America (e.g. the United States, Canada), South America (e.g. Cuba, Brazil, Argentina), the Paci�c and Africa encouraged production with a focus on exports of commodities such as wool, wheat, sugar, spices, cotton, tea, rubber and minerals. In some cases, production costs were kept low by exploiting workers and by the use of slave labour. Indeed, European entrepreneurs had investments in colonies around the world to take full advantage of the resources available. The cheap commodities produced by the colonies were then converted into value-added manufactured items back in countries such as Britain, Spain, Portugal, Holland, Germany and France. Finished goods were then re-exported at much higher prices. The 1800s thus saw the dramatic explosion of international trade and partial globalisation of capital on a scale not seen before. It was made possible by improvements in transport, industrialisation, rising incomes and technology.

1915 to 1947 — the slowdown in globalisation

The period including the two world wars, 1915 to 1945, saw less enthusiasm for internationalisation or globalisation. Faced with massive disruption to international trade due to war, rising foreign debt and a period of global depression in the 1930s, many countries including Australia used high tariffs to try and repel imports and protect their local workers and businesses.

1947 to 1970 — reassessment of change

Just after the end of World War II in 1947, the situation started to change slowly. The hope was for a new era of global prosperity and trade. With this in mind, the General Agreement on Tariffs and Trade (GATT) was signed. Its aim was to gradually reduce high tariffs which were an obstacle to international trade and global economic development. Between 1947 and 1970, world tariffs on manufactured goods fell from an average of 37.5 per cent to only 9 per cent. (Australia did not immediately follow the trend, choosing to maintain high rates of protection until a few years later.) Again, large amounts of foreign investment and multinationals took off, and free trade blocs (e.g. the European Economic Community or European Union as it is now known) started to emerge. Through the uni�cation of national markets, these encouraged globalisation.

1970 to 2017 — the most recent wave of globalisation

Starting in the early to mid 1970s with Labor Prime Minister Whitlam’s 25 per cent tariff cuts, the Australian government gradually began dismantling our system of protection. Accelerated microeconomic reforms, including the encouragement of industry restructuring and ongoing tariff cuts, all followed during the 1980s and 1990s. More recently, there were further tariff cuts by Australia in 2005, 2010 and 2015, along with many free trade agreements. In addition, the labour market has been partly deregulated. This has involved the use of enterprise bargaining or agreements on a �rm-by-�rm basis, and the adoption of a productivity-based pay system. Elsewhere in the world, there were also other important developments that helped globalisation, including the establishment of new trading blocs (e.g. APEC, NAFTA, CER and the expanded EU) that were committed to tariff reductions and the idea of free trade. This was reinforced by the creation of the World Trade Organization (WTO). Most of these multinationals originate in the US, Germany, the United Kingdom and Japan.

Speculation about the future beyond 2017

Despite the acceleration of globalisation, some people feel that the current wave may be coming to an end. For example, uncertainty was generated by the global �nancial crisis (GFC) in 2008–09 and the ensuing uncertainties. Indeed, free market economics associated with globalisation is partly blamed for the recent economic problems. As a result, there have been calls for greater government regulation of global markets, and as unemployment rises, even demands from some for increased protection of local industry using tariffs and other devices. For example, in 2016, the UK voted to leave the European Union (Brexit). However, other commentators view globalisation as unstoppable and see a new era of globalisation involving unprecedented collaboration between governments to tackle pressing global issues including the management of scarce resources (water, oceans and air), pollution and climate change, and large population shifts (e.g. the recent in�ux of refugees into Europe).

The acceleration of economic globalisation and the spread of multinational businesses (�rms that produce and operate in more than one country and sell their goods and services in global markets) have been enabled by several developments.

Relaxation of government controls in most economies around the worldThere has been a general relaxation of government controls (deregulation) in most economies, to be replaced by the forces of freer markets (demand and supply) and capitalism. The policy of trade liberalisation has been especially important in encouraging globalisation. Most governments around the world have been reducing their protection of local industry by: • cutting tariffs on imports • abolishing quotas or quantity controls on particular types of imports • lowering the payment of subsidies to local �rms.

This freedom enables the spread of business internationally and the exploitation of global markets.

UNCORRECTED all followed during the 1980s and 1990s. More recently, there were further tariff cuts by Australia in 2005,

UNCORRECTED all followed during the 1980s and 1990s. More recently, there were further tariff cuts by Australia in 2005, 2010 and 2015, along with many free trade agreements. In addition, the labour market has been partly

UNCORRECTED 2010 and 2015, along with many free trade agreements. In addition, the labour market has been partly deregulated. This has involved the use of enterprise bargaining or agreements on a �rm-by-�rm basis,

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UNCORRECTED and the adoption of a productivity-based pay system. Elsewhere in the world, there were also other important developments that helped globalisation, including the establishment of new trading blocs

UNCORRECTED important developments that helped globalisation, including the establishment of new trading blocs (e.g. APEC, NAFTA, CER and the expanded EU) that were committed to tariff reductions and the idea

UNCORRECTED (e.g. APEC, NAFTA, CER and the expanded EU) that were committed to tariff reductions and the idea of free trade. This was reinforced by the creation of the World Trade Organization (WTO). Most of these

UNCORRECTED of free trade. This was reinforced by the creation of the World Trade Organization (WTO). Most of these multinationals originate in the US, Germany, the United Kingdom and Japan.

UNCORRECTED multinationals originate in the US, Germany, the United Kingdom and Japan.

Despite the acceleration of globalisation, some people feel that the current wave may be coming to an

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Despite the acceleration of globalisation, some people feel that the current wave may be coming to an end. For example, uncertainty was generated by the global �nancial crisis (GFC) in 2008–09 and the

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end. For example, uncertainty was generated by the global �nancial crisis (GFC) in 2008–09 and the ensuing uncertainties. Indeed, free market economics associated with globalisation is partly blamed for

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ensuing uncertainties. Indeed, free market economics associated with globalisation is partly blamed for the recent economic problems. As a result, there have been calls for greater government regulation of

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the recent economic problems. As a result, there have been calls for greater government regulation of global markets, and as unemployment rises, even demands from some for increased protection of local

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global markets, and as unemployment rises, even demands from some for increased protection of local industry using tariffs and other devices. For example, in 2016, the UK voted to leave the European Union

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industry using tariffs and other devices. For example, in 2016, the UK voted to leave the European Union (Brexit). However, other commentators view globalisation as unstoppable and see a new era of globalisation

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(Brexit). However, other commentators view globalisation as unstoppable and see a new era of globalisation involving unprecedented collaboration between governments to tackle pressing global issues including

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involving unprecedented collaboration between governments to tackle pressing global issues including the management of scarce resources (water, oceans and air), pollution and climate change, and large

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the management of scarce resources (water, oceans and air), pollution and climate change, and large

The acceleration of economic globalisation and the spread of multinational businesses (�rms that produce

UNCORRECTED

The acceleration of economic globalisation and the spread of multinational businesses (�rms that produce and operate in more than one country and sell their goods and services in global markets) have been enabled UNCORRECTED

and operate in more than one country and sell their goods and services in global markets) have been enabled by several developments.UNCORRECTED

by several developments.

PAGE

PAGE economic development. Between 1947 and 1970, world tariffs on manufactured goods fell from an average

PAGE economic development. Between 1947 and 1970, world tariffs on manufactured goods fell from an average of 37.5 per cent to only 9 per cent. (Australia did not immediately follow the trend, choosing to maintain high

PAGE of 37.5 per cent to only 9 per cent. (Australia did not immediately follow the trend, choosing to maintain high rates of protection until a few years later.) Again, large amounts of foreign investment and multinationals

PAGE rates of protection until a few years later.) Again, large amounts of foreign investment and multinationals took off, and free trade blocs (e.g. the European Economic Community or European Union as it is now

PAGE took off, and free trade blocs (e.g. the European Economic Community or European Union as it is now known) started to emerge. Through the uni�cation of national markets, these encouraged globalisation.

PAGE known) started to emerge. Through the uni�cation of national markets, these encouraged globalisation.

Starting in the early to mid 1970s with Labor Prime Minister Whitlam’s 25 per cent tariff cuts,

PAGE Starting in the early to mid 1970s with Labor Prime Minister Whitlam’s 25 per cent tariff cuts, the Australian government gradually began dismantling our system of protection. Accelerated

PAGE the Australian government gradually began dismantling our system of protection. Accelerated microeconomic reforms, including the encouragement of industry restructuring and ongoing tariff cuts, PAGE microeconomic reforms, including the encouragement of industry restructuring and ongoing tariff cuts, all followed during the 1980s and 1990s. More recently, there were further tariff cuts by Australia in 2005, PAGE

all followed during the 1980s and 1990s. More recently, there were further tariff cuts by Australia in 2005, 2010 and 2015, along with many free trade agreements. In addition, the labour market has been partly PAGE

2010 and 2015, along with many free trade agreements. In addition, the labour market has been partly

PROOFS

PROOFSof the resources available. The cheap commodities produced by the colonies were then converted into

PROOFSof the resources available. The cheap commodities produced by the colonies were then converted into value-added manufactured items back in countries such as Britain, Spain, Portugal, Holland, Germany and

PROOFSvalue-added manufactured items back in countries such as Britain, Spain, Portugal, Holland, Germany and France. Finished goods were then re-exported at much higher prices. The 1800s thus saw the dramatic

PROOFSFrance. Finished goods were then re-exported at much higher prices. The 1800s thus saw the dramatic explosion of international trade and partial globalisation of capital on a scale not seen before. It was made

PROOFSexplosion of international trade and partial globalisation of capital on a scale not seen before. It was made possible by improvements in transport, industrialisation, rising incomes and technology.

PROOFSpossible by improvements in transport, industrialisation, rising incomes and technology.

The period including the two world wars, 1915 to 1945, saw less enthusiasm for internationalisation

PROOFSThe period including the two world wars, 1915 to 1945, saw less enthusiasm for internationalisation or globalisation. Faced with massive disruption to international trade due to war, rising foreign debt

PROOFSor globalisation. Faced with massive disruption to international trade due to war, rising foreign debt and a period of global depression in the 1930s, many countries including Australia used high tariffs

PROOFSand a period of global depression in the 1930s, many countries including Australia used high tariffs to try and repel imports and protect their local workers and businesses.

PROOFSto try and repel imports and protect their local workers and businesses.

Just after the end of World War II in 1947, the situation started to change slowly. The hope was for a new era

PROOFSJust after the end of World War II in 1947, the situation started to change slowly. The hope was for a new era of global prosperity and trade. With this in mind, the General Agreement on Tariffs and Trade (GATT) was

PROOFS

of global prosperity and trade. With this in mind, the General Agreement on Tariffs and Trade (GATT) was signed. Its aim was to gradually reduce high tariffs which were an obstacle to international trade and global PROOFS

signed. Its aim was to gradually reduce high tariffs which were an obstacle to international trade and global economic development. Between 1947 and 1970, world tariffs on manufactured goods fell from an average PROOFS

economic development. Between 1947 and 1970, world tariffs on manufactured goods fell from an average of 37.5 per cent to only 9 per cent. (Australia did not immediately follow the trend, choosing to maintain high PROOFS

of 37.5 per cent to only 9 per cent. (Australia did not immediately follow the trend, choosing to maintain high



Development of better transport and communications systemsDuring the last 25 years, sea freight costs have fallen by 70 per cent and air freight by 3–4 per cent per year. This means that transport costs associated with buying or selling goods abroad are becoming less important as a proportion of their price. In turn, faster transport and lower costs cause businesses to be more aware of pro�t opportunities and able to move resources and production between countries. This enables nations to specialise in production, encouraging the expansion of global businesses and international trade.

Availability of new technologyThere have been huge leaps in technology which permit even unskilled workers with low levels of education to be involved in modern production. This means that it can be attractive for multinationals to manufacture goods, even in low-income countries where education standards are low.

We might also think about how computers, and especially the evolution of a superfast and affordable internet, have not only enabled businesses to advertise and have a visible presence in markets around the world, but have allowed consumers to shop globally at the click of a mouse from the comfort of their own lounge room, at any time of day or night. Over 80 per cent of households in Australia have access to the Internet, and the �gure in China is well over 30 per cent. Amazon.com generated US$27.75 billion in mobile commerce revenues in 2015. Moreover, new technology has also enabled the explosion of electronic banking and investment, further encouraging international trade and global �nan-cial transactions.

Mobility of investment internationallyAlthough natural and labour resources can be dif�cult to move between countries, money capital or investment resources are not. Being able to move investments in and out of countries gives businesses far more �exibility in their decision making. It allows them to change and restructure their operations as conditions change in particular countries.

A general belief that material living standards will improveAnother enabler of globalisation is a widespread belief by many (especially those living in rich nations) that it will help to make people better off, even in Third World nations. The simple explanation runs something like this. Globalisation, fostered by the removal of tariff protection, encourages countries to specialise in particular areas of production where they have a comparative cost advantage over other countries (or put another way, only produce those things where they have the lowest cost disadvantage). This improves ef�ciency in the way nations use their limited resources, lowers the cost and price of goods and services, expands the volume of world trade between countries, raises GDP levels for those involved, increases employment opportunities, lifts incomes, and ultimately strengthens material living standards. This explanation was �rst suggested in 1817 by the well-known British economist, David Ricardo (1772–1823).


• Globalisation I — The upside: crash course world history• What is globalisation?• The New Rulers of the World (2001)


1 De�ne what is meant by economic globalisation.2 Suggest three important developments that acted as a catalyst to accelerate globalisation.




UNCORRECTED Another enabler of globalisation is a widespread belief by many (especially those living in rich nations) that it

UNCORRECTED Another enabler of globalisation is a widespread belief by many (especially those living in rich nations) that it will help to make people better off, even in Third World nations. The simple explanation runs something like

UNCORRECTED will help to make people better off, even in Third World nations. The simple explanation runs something like this. Globalisation, fostered by the removal of tariff protection, encourages countries to

UNCORRECTED this. Globalisation, fostered by the removal of tariff protection, encourages countries to areas of production where they have a comparative cost advantage over other countries (or put another way,

UNCORRECTED areas of production where they have a comparative cost advantage over other countries (or put another way, only produce those things where they have the lowest cost disadvantage). This improves ef�ciency in the way

UNCORRECTED only produce those things where they have the lowest cost disadvantage). This improves ef�ciency in the way nations use their limited resources, lowers the cost and price of goods and services, expands the volume of

UNCORRECTED nations use their limited resources, lowers the cost and price of goods and services, expands the volume of world trade between countries, raises GDP levels for those involved, increases employment opportunities, lifts

UNCORRECTED world trade between countries, raises GDP levels for those involved, increases employment opportunities, lifts incomes, and ultimately strengthens material living standards. This explanation was �rst suggested in 1817 by

UNCORRECTED

incomes, and ultimately strengthens material living standards. This explanation was �rst suggested in 1817 by the well-known British economist, David Ricardo (1772–1823).

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the well-known British economist, David Ricardo (1772–1823).

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Globalisation I — The upside: crash course world history

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Globalisation I — The upside: crash course world historyWhat is globalisation?

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What is globalisation?The New Rulers of the World (2001)

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The New Rulers of the World (2001)

UNCORRECTED PAGE Although natural and labour resources can be dif�cult to move between countries, money capital or investment

PAGE Although natural and labour resources can be dif�cult to move between countries, money capital or investment resources are not. Being able to move investments in and out of countries gives businesses far more �exibility

PAGE resources are not. Being able to move investments in and out of countries gives businesses far more �exibility in their decision making. It allows them to change and restructure their operations as conditions change in

PAGE in their decision making. It allows them to change and restructure their operations as conditions change in

A general belief that material living standards will improvePAGE A general belief that material living standards will improveAnother enabler of globalisation is a widespread belief by many (especially those living in rich nations) that it PAGE

Another enabler of globalisation is a widespread belief by many (especially those living in rich nations) that it

PROOFSWe might also think about how computers, and especially the evolution of a superfast and affordable

PROOFSWe might also think about how computers, and especially the evolution of a superfast and affordable

internet, have not only enabled businesses to advertise and have a visible presence in markets around

PROOFSinternet, have not only enabled businesses to advertise and have a visible presence in markets around the world, but have allowed consumers to shop globally at the click of a mouse from the comfort

PROOFSthe world, but have allowed consumers to shop globally at the click of a mouse from the comfort of their own lounge room, at any time of day or night. Over 80 per cent of households in Australia

PROOFSof their own lounge room, at any time of day or night. Over 80 per cent of households in Australia have access to the Internet, and the �gure in China is well over 30 per cent. Amazon.com generated

PROOFShave access to the Internet, and the �gure in China is well over 30 per cent. Amazon.com generated US$27.75 billion in mobile commerce revenues in 2015. Moreover, new technology has also enabled the

PROOFSUS$27.75 billion in mobile commerce revenues in 2015. Moreover, new technology has also enabled the explosion of electronic banking and investment, further encouraging international trade and global �nan

PROOFSexplosion of electronic banking and investment, further encouraging international trade and global �nan

Although natural and labour resources can be dif�cult to move between countries, money capital or investment PROOFS

Although natural and labour resources can be dif�cult to move between countries, money capital or investment



5.6 Reasons for the growth of global businessAt the centre of globalisation, and leading the charge, are multinational businesses (also called trans-nationals). These �rms undertake production in more than one country, and operate across national borders as they grow their operations and markets. Additionally, globalisation allows �rms to produce on a larger scale, primarily for the global market rather than locally, just for domestic consumption.

To give you an idea of the massive scale of some global businesses, let us take a look at just a few statistics. In 2016, for instance, it was estimated that: • multinational corporations accounted for around 35 per cent of the world’s GDP • about 26 per cent of global economic activity was created by the largest 200 companies (including Wal-Mart

Stores, Microsoft, McDonald’s, IBM, General Electric, Royal Dutch Shell, Exxon, BP, Toyota, Ford, Gen-eral Motors, JPMorgan, Nestle), with many individual �rms adding more value annually to production than the entire GDPs of some countries

• the top 200 corporations had total sales greater in value than the combined GDPs of all countries, excluding the nine biggest economies in the world.The staggering importance of multinational businesses is partly illustrated in �gure 5.6. Clearly, global busi-

ness is now of huge signi�cance for the world’s living standards.

0

Toyota

Exxon-Mobil

BP

Apple

Samsung

General Motors

Ethiopia

Bulgaria

General Electric

Honda

Amazon.com

BMW

Boeing

Nestle

Bank of America

Microsoft

Wesfarmers

Coca-Cola

Estonia

Commonwealth Bank

McDonald’s

BHP-Billiton

Papua New Guinea

Shell

Morocco

Greece

Ukraine

Austria

Singapore

Wal-Mart Stores

Vietnam

Australia

400200 600

Value of a country’s GDP or multinational’s total annual sales ($ billions)

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ntry

or

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tina

tion

al c

orpo

rati

on

Comparing the GDPs of selected countries with the annual value added of sales byselected multinational businesses (US $ billions)

140012001000800

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United Kingdom

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Country of origin

Number of multinationalsin largest 50 publiccompanies by sales

FIGURE 5.6 Comparing the annual size of GDP in selected countries with the annual value of sales of large multinationals ($ billions)

Source: Company data derived from Forbes, foreignpolicy.com, statista.com and fortune.com; and GDP data from World Bank, Gross domestic product 2015, PPP, see http://databank.worldbank.org/data/download/GDP_PPP.pdf.

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PAGE United States

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PAGE Germany

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alue than the combined GDPs of all countries, excluding

PROOFSalue than the combined GDPs of all countries, excluding

The staggering importance of multinational businesses is partly illustrated in �gure 5.6. Clearly, global busi

PROOFSThe staggering importance of multinational businesses is partly illustrated in �gure 5.6. Clearly, global busi

PROOFSComparing the GDPs of selected countries with the annual value added of sales by

PROOFSComparing the GDPs of selected countries with the annual value added of sales by

selected multinational businesses (US $ billions)

PROOFSselected multinational businesses (US $ billions)

PROOFS

PROOFS

Number of multinationals

PROOFS

Number of multinationals

PROOFS

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There are many reasons that may help to explain why some businesses have found it attractive to expand across national borders and operate in global markets. However, most of them stem from the desire to maxi-mise pro�ts by increasing ef�ciency and cutting their production costs.

Globalisation helps minimise labour costsIn some labour-intensive industries (e.g. where more labour rather than machinery or capital equip-ment is used, as in clothing, aspects of car manufacture, rubber production, toy making), wages rep-resent the largest input cost for businesses. Because wage rates vary greatly between countries, some �rms go hunting the world in search of cheap workers. Figure 5.7, for instance, compares average hourly minimum wages in different nations. From this, it is hardly surprising that some local �rms take their operations overseas to low-wage countries. Currently, for example, many labour-intensive (as opposed to capital-intensive) areas of manufacturing and other types of production are located in countries such as India, Sri Lanka, Vietnam, Mexico, Bangladesh, the Philippines and Indonesia, where hourly pay rates are between $0.25 and $2 (in international dollars or purchasing power parity, called PPP). These levels contrast sharply with high labour costs in countries like Australia, France, Luxembourg and New Zealand, where minimum wage rates can exceed $11 per hour (PPP). In addition, wages over the past decade have actually fallen in some countries, causing companies to review their location strategy. Given that foreign investment or money capital is quite mobile, setting up a factory overseas, where labour is cheap, can help boost the pro�ts of multinationals.

11.4311.1411.08

9.81

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0 2 4 6 8 10 12 14

LuxembourgAustralia

France

9.76New ZealandNetherlands

IrelandUnited Kingdom

TaiwanCanada

United StatesGreece

South KoreaJapanSpain

Hong KongIran

ThailandBrazil

MalaysiaUkraineRussia

FijiVietnamKuwait

IndonesiaPhilippines

Papua New GuineaChinaIndia

MexicoCuba

Sri LankaBangladesh

Uganda

Minimum hourly wage rate (international dollars or PPP)

Cou

ntry

FIGURE 5.7 Where in the world can �rms �nd low wages and minimise labour costs?

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PAGE PROOFS

India, Sri Lanka, Vietnam, Mexico, Bangladesh, the Philippines and Indonesia, where hourly pay rates

PROOFSIndia, Sri Lanka, Vietnam, Mexico, Bangladesh, the Philippines and Indonesia, where hourly pay rates are between $0.25 and $2 (in international dollars or purchasing power parity, called PPP). These levels

PROOFSare between $0.25 and $2 (in international dollars or purchasing power parity, called PPP). These levels contrast sharply with high labour costs in countries like Australia, France, Luxembourg and New Zealand,

PROOFScontrast sharply with high labour costs in countries like Australia, France, Luxembourg and New Zealand, where minimum wage rates can exceed $11 per hour (PPP). In addition, wages over the past decade have

PROOFSwhere minimum wage rates can exceed $11 per hour (PPP). In addition, wages over the past decade have actually fallen in some countries, causing companies to review their location strategy. Given that foreign

PROOFSactually fallen in some countries, causing companies to review their location strategy. Given that foreign investment or money capital is quite mobile, setting up a factory overseas, where labour is cheap, can help

PROOFSinvestment or money capital is quite mobile, setting up a factory overseas, where labour is cheap, can help

PROOFS

PROOFS

PROOFS

PROOFS



Globalisation increases access to natural resourcesSome countries have very limited access to cheap natural resources (e.g. minerals and agricultural land). Here we think of Singapore, Britain, Taiwan and Switzerland. This can become an incentive for some of their com-panies to become multinationals. Their overseas operations can give them access to cheaper natural and labour resources so they can make even larger pro�ts.

Globalisation helps �rms gain economies of large-scale productionGlobalisation can help companies to grow bigger by opening up new markets overseas. For some �rms, this allows for large-scale production, which is cheaper than small production runs. This is because �xed production costs (i.e. costs that do not rise much as output increases including research, advertising, product development, some aspects of management and, up to a point, equipment) can be spread more thinly over a greater volume of sales. In cases where the size of the local market is small, �rms that expand their oper-ations overseas can often lower their costs, improve ef�ciency and raise pro�tability. The spreading of a �rm’s �xed costs over higher annual levels of output to gain economies of large-scale production is illustrated in �gure 5.8. Sometimes, economies of large-scale are possible because of the international integration of �rms. This may be achieved by horizontal integration. Here, �rms are joined together in the same industry (e.g. a beer company overseas with a beer company at home). At other times, �rms are joined through vertical integration downward or upward in different but perhaps related industries (e.g. an iron ore �rm overseas combining with a steel producer in the home country).

00

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ual �

xed

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uced

($

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A firm’s annual level of production/sales

High perunit cost

Low perunit cost

Maximum economies of large scaleFew economies of scale

Fixedcostcurve

A

B

Notice that the per unit cost of each extra unit of production by this �rm falls from $3.00 (at point A) to only $1.00(at point B) as the company raises its annual production and sales from 1000 units to 5000 units. At higher levels of output, �xed costs can be spread more thinly. Exporting can help local �rms justify higher output levels and can enable them to move from point A to point B on the �xed cost curve. This helps increase pro�ts and competitiveness.

FIGURE 5.8 Globalisation can increase economies of large-scale production for businesses (i.e. reduce their �xed costs of production per unit of output).

Globalisation takes advantage of government policiesGlobalisation of companies enables �rms to take advantage of government policies in both their home country and in the country they visit. With great competition between nations to attract foreign business investment, some governments are willing, for instance, to: • pay generous subsidies (cash payments) to visiting multinationals • provide lower tax rates (or even tax holidays) and other concessions (e.g. cheap power, water, transport) to

transnational businesses • ignore their concerns or dilute their environmental standards • use tariffs to protect visiting �rms from import competition.

All these aspects can help to seduce overseas companies to relocate offshore in search of lower costs and improved pro�ts. Some well-known multinational chemical, car and electronic companies have acted for these sorts of reasons. In one instance, a French multinational rubber product manufacturer did not like its govern-ment’s decision to introduce indicative economic planning many years back, so it set up three plants overseas for every factory it built at home.

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FIGURE 5

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5.8

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.8 Globalisation can increase economies of large-scale production for businesses (i.e. reduce their �xed

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Globalisation can increase economies of large-scale production for businesses (i.e. reduce their �xed

Globalisation takes advantage of government policiesUNCORRECTED

Globalisation takes advantage of government policiesGlobalisation of companies enables �rms to take advantage of government policies in both their home country UNCORRECTED

Globalisation of companies enables �rms to take advantage of government policies in both their home country

PAGE

PAGE

PAGE

PAGE Notice that the per unit cost of each extra unit of production

PAGE Notice that the per unit cost of each extra unit of production by this �rm falls from $3.00 (at point A) to only $1.00

PAGE by this �rm falls from $3.00 (at point A) to only $1.00(at point B) as the company raises its annual production and

PAGE (at point B) as the company raises its annual production and sales from 1000 units to 5000 units. At higher levels of

PAGE sales from 1000 units to 5000 units. At higher levels of output, �xed costs can be spread more thinly. Exporting can

PAGE output, �xed costs can be spread more thinly. Exporting can help local �rms justify higher output levels and can enable

PAGE help local �rms justify higher output levels and can enable them to move from point A to point B on the �xed cost curve. PAGE them to move from point A to point B on the �xed cost curve. This helps increase pro�ts and competitiveness.PAGE This helps increase pro�ts and competitiveness.

PROOFSdevelopment, some aspects of management and, up to a point, equipment) can be spread more thinly over

PROOFSdevelopment, some aspects of management and, up to a point, equipment) can be spread more thinly over a greater volume of sales. In cases where the size of the local market is small, �rms that expand their oper

PROOFSa greater volume of sales. In cases where the size of the local market is small, �rms that expand their operverseas can often lower their costs, improve ef�ciency and raise pro�tability. The spreading of a �rm’s

PROOFSverseas can often lower their costs, improve ef�ciency and raise pro�tability. The spreading of a �rm’s economies of large-scale production

PROOFSeconomies of large-scale production is illustrated in

PROOFS is illustrated in

�gure 5.8. Sometimes, economies of large-scale are possible because of the international integration of �rms.

PROOFS�gure 5.8. Sometimes, economies of large-scale are possible because of the international integration of �rms.

. Here, �rms are joined together in the same industry (e.g.

PROOFS. Here, �rms are joined together in the same industry (e.g.

a beer company overseas with a beer company at home). At other times, �rms are joined through

PROOFSa beer company overseas with a beer company at home). At other times, �rms are joined through

downward or upward in different but perhaps related industries (e.g. an iron ore �rm overseas

PROOFS downward or upward in different but perhaps related industries (e.g. an iron ore �rm overseas

PROOFS

PROOFS

PROOFS



Globalisation helps to minimise transport costsTo help minimise shipping and other transport costs and maximise pro�ts, some multinationals will set up sub-sidiary plants in the centre of populated markets, wherever these may be located.

Globalisation increases �exibility in business decision makingSometimes, companies become globalised to improve the �exibility or choices they have in decision making about production and investment. For instance, multinational corporations such as Michelin, Alcoa, Toyota, Ford and Fiat have operations located around the world. In the case of car makers, it is claimed by some that globalisation gives them advantages because they can move or source aspects of production (e.g. engine assembly, car panels, leather and tyres) wherever the overall costs of speci�c operations are lowest.


• The age of uncertainty — the big corporation• The Impact Of Globalisation series• Multinationals and the developing world• Stealing Africa — why poverty?

• Ethics of consumption — cultural capitalism• Globalisation — trade and transnational corporations• Multinational • Corporations 101: The ABCs of the international economy


1 What are multinationals? Give three important examples.2 How does each of the following factors help to explain the expansion of multinational business around

the world?a Differences in wage costs between countriesb Differences in the natural resources of countriesc Economies of large-scale productiond Favourable government policies operating in some countriese Flexibility in decision making by companies




5.7 The effects of globalisation on stakeholders and the overall economySome years back at the World Economic Forum, Nelson Mandela posed the question: ‘Is globalisation only to bene�t the powerful and the �nanciers, speculators, investors and traders? Does it offer nothing to men, women and children who are ravaged by the violence of poverty?’

Indeed, globalisation has become a hotly debated issue in recent times. Is it a good or bad thing for the world economy generally, and individual economies in particular? Before looking at the costs and bene�ts for Australia, it is worth remembering that globalisation has meant dramatic structural change including: • reducing tariffs, necessitating cost cutting and greater international competitiveness among local producers • increasing specialisation of local production in areas of comparative cost advantage • lifting ef�ciency in resource allocation, usually involving less government regulation and a greater reliance

on market forces • deregulating the labour, capital, �nancial, communications, agricultural, transport and other markets to

improve ef�ciency by encouraging stiffer competition in these markets • improving ef�ciency and cost cutting through the restructuring of private and government businesses

(e.g. privatisation) • widely applying new technology to cut costs • allowing the growth of globalised multinational businesses where production is sourced from the cheapest

supplier in the world.Unfortunately, when it comes to judging the effects of globalisation, opinion is divided and conclusive

evidence in some areas is thin. To some it is a panacea, while for others it is a catastrophe. Perhaps this re�ects the fact that globalisation impacts on particular groups and countries in different ways. However, for a moment, let us take a look at some of the good and bad effects on Australia’s consumers, businesses, workers, governments and environment.

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UNCORRECTED Apply your understanding of this subtopic by accessing and completing the Applied economic exercise(s).

UNCORRECTED Apply your understanding of this subtopic by accessing and completing the Applied economic exercise(s).

Option 2 > Applied economic exercises

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5.7 The effects of globalisation on stakeholders and

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5.7 The effects of globalisation on stakeholders and the overall economy

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the overall economy

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Some years back at the World Economic Forum, Nelson Mandela posed the question: ‘Is globalisation only

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Some years back at the World Economic Forum, Nelson Mandela posed the question: ‘Is globalisation only to bene�t the powerful and the �nanciers, speculators, investors and traders? Does it offer nothing to men,

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to bene�t the powerful and the �nanciers, speculators, investors and traders? Does it offer nothing to men, women and children who are ravaged by the violence of poverty?’

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women and children who are ravaged by the violence of poverty?’Indeed, globalisation has become a hotly debated issue in recent times. Is it a good or bad thing for the

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Indeed, globalisation has become a hotly debated issue in recent times. Is it a good or bad thing for the world economy generally, and individual economies in particular? Before looking at the costs and bene�ts for

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world economy generally, and individual economies in particular? Before looking at the costs and bene�ts for Australia, it is worth remembering that globalisation has meant dramatic structural change including:

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Australia, it is worth remembering that globalisation has meant dramatic structural change including:reducing

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reducing tariffs, necessitating cost cutting and greater

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tariffs, necessitating cost cutting and greater

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increasing

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increasing specialisation of local production in areas of

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specialisation of local production in areas of lifting ef�ciencUNCORRECTED

lifting ef�ciencon market forcesUNCORRECTED

on market forces

PAGE

PAGE

PAGE How does each of the following factors help to explain the expansion of multinational business ar

PAGE How does each of the following factors help to explain the expansion of multinational business ar

nment policies operating in some countries

PAGE nment policies operating in some countries

PROOFS

PROOFSGlobalisation — trade and transnational corporations

PROOFSGlobalisation — trade and transnational corporations

Corporations 101: The ABCs of the international economy

PROOFSCorporations 101: The ABCs of the international economy

PROOFS

PROOFS

PROOFS

How does each of the following factors help to explain the expansion of multinational business arPROOFS

How does each of the following factors help to explain the expansion of multinational business ar



Lower consumer prices and slower in�ation ratesOne of the main bene�ts of the most recent wave of globalisation since 1990 is that Australian consumers have been able to buy better quality goods and services at much lower prices. It meant that the purchasing power of household incomes rose, lifting our living standards. Figure 5.9 shows the spectacular 70 per cent fall in the in�ation rate during the period 1990–91 to 2015–16 (i.e. the years covering the most recent wave of globalisation), as against the high levels during the period 1970–71 to 1989–90 (i.e. before the last wave of globalisation). While lower in�ation was not solely the result of changes in government policies that helped to globalise the Australian economy (including tariff cuts to promote more competition, labour market reforms involving the use of enterprise bargaining and performance-based pay, the privatisation of government busi-nesses, stronger competition policy involving the ACCC, deregulation of the capital market, and tax reform involving lower tax rates), these measures certainly helped depress consumer prices.

10 9.3

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on r

ate

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(1970–71/1989–90)

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(1990–91/2015–16)

0

Period of time

Australia’s average in�ation rate (annual percentage change in consumer prices)

FIGURE 5.9 The recent wave of globalisation may have helped to slow in�ation and improve the purchasing power of consumers

Sources: Data derived from ABS 1350.0, 6401.0.

Additionally, it is likely that exposing Australia’s local and foreign-owned �rms to greater global compe-tition forced them to not just cut their costs and prices, but also improve their product quality.

Greater consumer choice and improved satisfaction of wantsGlobalisation has expanded consumer choice when Australians buy goods and services. This is because house-holds and businesses are freer to purchase whatever they like in markets around the world. The surge of e-commerce via the internet makes shopping and banking as easy as a click of a mouse, provided there is the know-how and ownership of computers. In fact, it was claimed that over 60 per cent of new Ford sales in the US were made via the internet. Similarly, online shopping for books, clothes, appliances and entertainment by Australian consumers during the past ten years is believed to have contributed to the slower growth in retail sales for bricks-and-mortar stores such as Harvey Norman, Myer and David Jones. Despite the convenience of e-commerce, this raises the questions of both equity and quality in making choices. In addition, there are con-cerns about whether, eventually, choice will be diminished as more ef�cient multinational companies come in and destroy local competitors and their product uniqueness.

Are we more ethical consumers?Another development is that globalisation of communications may have gradually helped to make some Australian consumers more aware of the ethical issues involved in their choice of goods and services. Indeed, the concept of Fair Trade is now important in some markets (e.g. cocoa, coffee). Consumers have boycotted prod-ucts grown or made in substandard conditions, or where there is worker exploitation or environmental damage. Here, we might think of examples such as clothing produced in sweatshops by child labour, and coffee purchased by multinationals at unfairly low prices that force hardworking farmers and their families to live in poverty.

How globalisation has affected Australian workers and the labour marketEspecially during the recent surge in globalisation (i.e. the period from the early 1990s to today), Australia has progressively become a far more open economy exposed to global competition. This has had signi�cant impacts on our labour market.

UNCORRECTED Additionally, it is likely that exposing Australia’s local and foreign-owned �rms to greater global compe

UNCORRECTED Additionally, it is likely that exposing Australia’s local and foreign-owned �rms to greater global compe

tition forced them to not just cut their costs and prices, but also improve their product quality.

UNCORRECTED tition forced them to not just cut their costs and prices, but also improve their product quality.

Greater consumer choice and improved satisfaction of wants

UNCORRECTED Greater consumer choice and improved satisfaction of wants

consumer choice

UNCORRECTED

consumer choiceholds and businesses are freer to purchase whatever they like in markets around the world. The surge of

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holds and businesses are freer to purchase whatever they like in markets around the world. The surge of e-commerce via the internet makes shopping and banking as easy as a click of a mouse, provided there is the

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e-commerce via the internet makes shopping and banking as easy as a click of a mouse, provided there is the know-how and ownership of computers. In fact, it was claimed that over 60 per cent of new Ford sales in the

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know-how and ownership of computers. In fact, it was claimed that over 60 per cent of new Ford sales in the US were made via the internet. Similarly, online shopping for books, clothes, appliances and entertainment by

UNCORRECTED

US were made via the internet. Similarly, online shopping for books, clothes, appliances and entertainment by Australian consumers during the past ten years is believed to have contributed to the slower growth in retail

UNCORRECTED

Australian consumers during the past ten years is believed to have contributed to the slower growth in retail sales for bricks-and-mortar stores such as Harvey Norman, Myer and David Jones. Despite the convenience of

UNCORRECTED

sales for bricks-and-mortar stores such as Harvey Norman, Myer and David Jones. Despite the convenience of e-commerce, this raises the questions of both equity and quality in making choices. In addition, there are con

UNCORRECTED

e-commerce, this raises the questions of both equity and quality in making choices. In addition, there are concerns about whether, eventually, choice will be diminished as more ef�cient multinational companies come in

UNCORRECTED

cerns about whether, eventually, choice will be diminished as more ef�cient multinational companies come in and destroy local competitors and their product uniqueness.

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and destroy local competitors and their product uniqueness.

Are we more ethical consumers?UNCORRECTED

Are we more ethical consumers?Another development is that globalisation of communications may have gradually helped to make some UNCORRECTED

Another development is that globalisation of communications may have gradually helped to make some

PAGE

PAGE

PAGE

PAGE

PAGE Period of time

PAGE Period of time

PAGE ecent wave of globalisation may have helped to slow in�ation and improve the purchasing power PAGE ecent wave of globalisation may have helped to slow in�ation and improve the purchasing power

PROOFS

PROOFS

PROOFS

PROOFS

PROOFS

PROOFS

2.74

PROOFS

2.74

PROOFS



Changes to the wage systemAs noted already, wages are normally the biggest production cost for most businesses. During the 1970s and 80s, it became clear that Australian workers would not be able to enjoy continued high wages unless these were matched by strong productivity (indicated by GDP per worker per hour worked). To help deal with this problem, and avoid business closures and further rises in unemployment, the Australian government decided to partly deregulate the labour market to improve our international competitiveness. These changes involved: • the spread of enterprise bargaining and productivity-based agreements negotiated on a more �exible �rm-

by-�rm basis, so that these now cover around 85 per cent of all employees • the simpli�cation and scaling back of workers covered under the old centralised, complex and in�exible

minimum wage system • the promotion of union amalgamation and the erosion of union in�uence in wage negotiations • some relaxation of the unfair dismissal laws so �rms could get rid of unproductive or unnecessary workers.

Some of the effects of partly deregulating the labour market are summarised in table 5.2.

TABLE 5.2 Some effects of globalisation on Australia’s labour market

Effect Description

Widening income gap

There is a widening gap overall in private or market incomes and pay, between those unskilled workers on minimum wages and those on enterprise agreements. Between 1990 and 2016, the latter group of workers have gained average rises almost two times greater than those on minimum wages. In addition, Australia’s Gini coef�cient for disposable income has increased by 10 per cent, suggesting growing inequality in income distribution.

Increasing number of part-time jobs

There are growing numbers of part-time jobs relative to full-time jobs because employers seek greater �exibility in staf�ng. This adds to income inequality.

Disadvantaged workers

Some groups of workers are disadvantaged in wage negotiations in the workplace (e.g. often female, non–English-speaking, part-time workers, the inarticulate and uneducated), increasing inequality.

Decline in unionism There has been a dramatic decline in unionism in Australia (to only 13 per cent in 2015 for the private sector) and around the world. This means that unions are less able to take action to protect wages from being driven downwards towards the levels existing in poorer countries.

Rise in working hours

As in many other industrialised Western nations, there has been a signi�cant rise in the number of hours worked and, as a consequence, a reduction in the amount of leisure time.

Effects on jobs and unemploymentThe partial deregulation of Australia’s labour market, which followed trade liberalisation and increased global competition, was intended to more closely link wage rises to productivity or ef�ciency. In turn, it was hoped that slower rises in wage costs would help make local �rms more internationally competitive so they would expand their sales locally and abroad, rather than close down and leave workers unemployed. Overall, it seems that the most recent wave of globalisation (from 1990) may have contributed to an overall fall in Australia’s average unemployment rate. This is shown in �gure 5.10.

7.2

7.34

6.74

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7.6

7.8

7

Ave

rage

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thly

une

mpl

oym

ent

rate

(per

cent

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of la

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ce)

6.8

6.6

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Before the last wave of globalisation(1974–75/1989–90)

During the last wave of globalisation(1990–91/2015–16)

6.2

Period of time

Australia’s average monthly unemployment rate (percentage of labour force)

FIGURE 5.10 Globalisation may have helped to reduce Australia’s unemployment rate

Sources: Data derived from ABS 6202.0; RBA Statistics, Occasional Paper 8A.

UNCORRECTED

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UNCORRECTED The partial deregulation of Australia’s labour market, which followed trade liberalisation and increased global

UNCORRECTED The partial deregulation of Australia’s labour market, which followed trade liberalisation and increased global competition, was intended to more closely link wage rises to productivity or ef�ciency. In turn, it was hoped

UNCORRECTED competition, was intended to more closely link wage rises to productivity or ef�ciency. In turn, it was hoped that slower rises in wage costs would help make local �rms more internationally competitive so they would

UNCORRECTED that slower rises in wage costs would help make local �rms more internationally competitive so they would expand their sales locally and abroad, rather than close down and leave workers unemployed. Overall, it seems

UNCORRECTED expand their sales locally and abroad, rather than close down and leave workers unemployed. Overall, it seems that the most recent wave of globalisation (from 1990) may have contributed to an overall fall in Australia’s

UNCORRECTED

that the most recent wave of globalisation (from 1990) may have contributed to an overall fall in Australia’s average unemployment rate. This is shown in �gure 5.10.

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average unemployment rate. This is shown in �gure 5.10.

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PAGE

PAGE

PAGE Some groups of workers are disadvantaged in wage negotiations in the workplace (e.g. often female,

PAGE Some groups of workers are disadvantaged in wage negotiations in the workplace (e.g. often female, non–English-speaking, part-time workers, the inarticulate and uneducated), increasing inequality.

PAGE non–English-speaking, part-time workers, the inarticulate and uneducated), increasing inequality.

There has been a dramatic decline in unionism in Australia (to only 13 per cent in 2015 for the

PAGE There has been a dramatic decline in unionism in Australia (to only 13 per cent in 2015 for the private sector) and around the world. This means that unions are less able to take action to

PAGE private sector) and around the world. This means that unions are less able to take action to protect wages from being driven downwards towards the levels existing in poorer countries.

PAGE protect wages from being driven downwards towards the levels existing in poorer countries.

As in many other industrialised Western nations, there has been a signi�cant rise in the number

PAGE As in many other industrialised Western nations, there has been a signi�cant rise in the number of hours worked and, as a consequence, a reduction in the amount of leisure time.PAGE of hours worked and, as a consequence, a reduction in the amount of leisure time.

PROOFS

PROOFS

PROOFSThere is a widening gap overall in private or market incomes and pay, between those unskilled

PROOFSThere is a widening gap overall in private or market incomes and pay, between those unskilled workers on minimum wages and those on enterprise agreements. Between 1990 and 2016,

PROOFSworkers on minimum wages and those on enterprise agreements. Between 1990 and 2016, the latter group of workers have gained average rises almost two times greater than those on

PROOFSthe latter group of workers have gained average rises almost two times greater than those on minimum wages. In addition, Australia’s Gini coef�cient for disposable income has increased by

PROOFSminimum wages. In addition, Australia’s Gini coef�cient for disposable income has increased by

There are growing numbers of part-time jobs relative to full-time jobs because employers seek PROOFS

There are growing numbers of part-time jobs relative to full-time jobs because employers seek

Some groups of workers are disadvantaged in wage negotiations in the workplace (e.g. often female, PROOFS

Some groups of workers are disadvantaged in wage negotiations in the workplace (e.g. often female,



After all, globalisation (encouraged by lower tariffs and the rise in free trade agreements) has allowed Australian businesses to increase their exports and produce on a far larger scale than would otherwise have been the case. This creates jobs and incomes.

However, the effects of globalisation and openness on employment and unemployment vary greatly between industries. Workers in competitive and ef�cient �rms and industries (e.g. mining, �nance, health), where the growth in sales and pro�ts have been relatively strong, have gained better incomes and career paths.

By contrast, those employed in internationally uncompetitive parts of the economy (e.g. aspects of manufac-turing including the car industry, and parts of the textile, clothing and footwear sector) have suffered greatly as businesses closed or relocated production overseas. This caused a rise in structural unemployment. For example, some workers lost their job as companies downsized, relocated or closed. Here we might think of employees at Arnott’s (2001), Heinz (2000), Bonlac (2000), Dye Works in Coburg, Qenos Plastics in Altona, Email oven and dishwasher appliances (2000), BAE systems (2000), Blundstone Boots, Feltex Carpets (2007), Brinton’s Carpets (2007), Mitsubishi car plant (2008), Paci�c Brands (in 2009, including Bonds underwear), BHP Billiton operations at Newcastle, Telstra and Qantas (some operations shifted offshore), Blue Scope Steel and Shell’s Clyde re�nery (2011), Alcoa (2014), Qantas Avalon (2014), BP Re�nery (2014), Boeing (2014), Philip Morris (2014), Ford (2016), General Motors Holden (2017) and Toyota (2017).

Globalisation has led to business rationalisation and cost cutting. Some �rms, such as Telstra and Qantas, have outsourced some of their operations overseas to take advantage of lower wages in other countries, enabling them to maximise pro�ts. Others like Ford, General Motors Holden, and Toyota, have relocated overseas.

How globalisation has affected Australia’s rate of economic growthAmong other things, tariff cuts, the adoption of freer trade, and the general easing of restrictions on foreign investment by the Australian government since the late 1980s, increased our economy’s exposure to the forces of globalisation. Supporters of globalisation claim that the widespread use of these policies has helped to lift our rate of economic growth (GDP). Their reasoning goes something like this: • Better ef�ciency. Greater openness involving lower tariffs and less protection under globalisation has forced

Australia to allocate resources more ef�ciently into areas of production where we have a comparative cost advantage. Greater ef�ciency lifts economic growth because more output is produced from fewer inputs of resources.

• Cost cutting. Lower tariffs force Australian �rms to cut production costs and lift ef�ciency in order to survive and compete against imports. Some �rms may even be able to grow by earning more income from rising exports sales. This helps to boost economic growth.

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Globalisation has led to business rationalisation and cost cutting. Some �rms, such as Telstra and Qantas, have

UNCORRECTED

Globalisation has led to business rationalisation and cost cutting. Some �rms, such as Telstra and Qantas, have outsourced some of their operations overseas to take advantage of lower wages in other countries, enabling them to

UNCORRECTED

outsourced some of their operations overseas to take advantage of lower wages in other countries, enabling them to maximise pro�ts. Others like Ford, General Motors Holden, and Toyota, have relocated overseas.

UNCORRECTED

maximise pro�ts. Others like Ford, General Motors Holden, and Toyota, have relocated overseas.

How globalisation has affected Australia’s rate of UNCORRECTED

How globalisation has affected Australia’s rate of economic growthUNCORRECTED

economic growth

PAGE PROOFS

Brinton’s Carpets (2007), Mitsubishi car plant (2008), Paci�c Brands (in 2009, including Bonds underwear),

PROOFSBrinton’s Carpets (2007), Mitsubishi car plant (2008), Paci�c Brands (in 2009, including Bonds underwear), BHP Billiton operations at Newcastle, Telstra and Qantas (some operations shifted offshore), Blue Scope Steel

PROOFSBHP Billiton operations at Newcastle, Telstra and Qantas (some operations shifted offshore), Blue Scope Steel and Shell’s Clyde re�nery (2011), Alcoa (2014), Qantas Avalon (2014), BP Re�nery (2014), Boeing (2014),

PROOFSand Shell’s Clyde re�nery (2011), Alcoa (2014), Qantas Avalon (2014), BP Re�nery (2014), Boeing (2014),

PROOFS



• Lower production costs. Lower tariffs make it cheaper for Australian �rms to import new equipment, and use more up-to-date and ef�cient technology in their production. This improves our competitiveness and sales, lifting GDP.

• Expansion of export markets. Lower tariffs (resulting from cuts by most governments here and around the world) have caused our exports to grow much faster than otherwise. For Australia between 1984–85 and 2015–16, exported production rose from only 14 per cent of GDP to over 25 per cent of GDP. Indeed, exported GDP has grown about 60 per cent faster than the rest of the economy.

• More foreign investment. The encouragement of foreign investment (by mostly easing restrictions on the international movement of money capital) has helped to lift the total level of business investment in Australia. This boosts our ef�ciency and productive capacity, and increases economic growth (GDP).By boosting Australia’s ef�ciency, competitiveness and exports, increased exposure to globalisation since

1990 has probably lifted our growth rate for GDP. For instance, �gure 5.11 shows that during the 1980s (prior to the recent increase in globalisation), our productivity was miserable and GDP grew by a slow 2.8 per cent per year. By contrast (although this may be a coincidence), between 1992–93 and 2015–16 (during the last wave of globalisation), the average annual rise in labour productivity or ef�ciency was almost 30 per cent, and our annual average GDP growth was about 20 per cent stronger.

Ann

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erce

ntag

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Period of time

0Before the last wave

of globalisation(1982–83/1991–92)

During the last waveof globalisation

(1992–93/2015–16)

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Labour productivity (annualaverage percentage change inGDP per hour worked)

Rate of economic growth(annual average percentagechange in GDP)

Linear — economic growth(annual average percentagechange in GDP)

Linear — labour productivity(annual average percentagechange in GDP per hour worked)

Australia’s labour productivity and economic growth rates(annual average percentage change)

1.1

2.8

FIGURE 5.11 The recent wave of globalisation may have strengthened Australia’s productivity and accelerated economic growth.

Sources: Data derived from ABS 1350.0, 5206.0 (Table 3); and RBA Statistics, Occasional Paper 8A.

Although globalisation may have accelerated Australia’s economic growth, it may also have exposed our economy to external shocks and disasters originating overseas. This was clearly demonstrated in the recent global �nancial crisis (GFC) that started in the US and then spread through complex international �nancial markets to Europe, Asia and Australia during 2008–09–10.

How globalisation has affected Australia’s incomes and material living standardsAs a nation, our average income per head of population depends on how much each of us produces (i.e. the size of our GDP per person). If globalisation has helped Australia to grow its production faster than our population, then we would expect average incomes to be higher than otherwise. In fact, this seems to have occurred. For instance, in the period from 1982 to 1992 (before the main wave of globalisation in Australia), average incomes per person grew slowly by only 1.5 per cent per year. By contrast, �gure 5.12 shows that between 1992–93 and 2015–16 (following increased exposure to global in�uences), real house-hold disposable incomes in Australia grew by around 1.7 per cent per year around 13 per cent faster! By mid 2016, real average incomes were nearly $69 000 per person per year. With increased purchasing power due to higher incomes and lower prices, average material living standards rose more quickly than before.

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Period of time

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Period of time

During the last wave

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of globalisation

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(1992–93/2015–16)

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The recent wave of globalisation may have strengthened Australia’s productivity and accelerated

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The recent wave of globalisation may have strengthened Australia’s productivity and accelerated economic growth.

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economic growth.

Data derived from ABS 1350.0, 5206.0 (Table 3); and RBA Statistics, Occasional Paper 8A.

UNCORRECTED

Data derived from ABS 1350.0, 5206.0 (Table 3); and RBA Statistics, Occasional Paper 8A.

Although globalisation may have accelerated Australia’s economic growth, it may also have exposed our

UNCORRECTED

Although globalisation may have accelerated Australia’s economic growth, it may also have exposed our economy to external shocks and disasters originating overseas. This was clearly demonstrated in the recent

UNCORRECTED

economy to external shocks and disasters originating overseas. This was clearly demonstrated in the recent global �nancial crisis (GFC) that started in the US and then spread through complex international �nancial

UNCORRECTED

global �nancial crisis (GFC) that started in the US and then spread through complex international �nancial

UNCORRECTED

markets to Europe, Asia and Australia during 2008–09–10.

UNCORRECTED

markets to Europe, Asia and Australia during 2008–09–10.

How globalisation has affected Australia’s incomes and material UNCORRECTED

How globalisation has affected Australia’s incomes and material

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PAGE 1.4 PAGE 1.4

Labour productivity (annual

PAGE Labour productivity (annualaverage percentage change in

PAGE average percentage change inGDP per hour worked)

PAGE GDP per hour worked)

PAGE

PAGE

PAGE

PAGE

PAGE PROOFS

to the recent increase in globalisation), our productivity was miserable and GDP grew by a slow 2.8 per cent

PROOFSto the recent increase in globalisation), our productivity was miserable and GDP grew by a slow 2.8 per cent per year. By contrast (although this may be a coincidence), between 1992–93 and 2015–16 (during the last

PROOFSper year. By contrast (although this may be a coincidence), between 1992–93 and 2015–16 (during the last wave of globalisation), the average annual rise in labour productivity or ef�ciency was almost 30 per cent, and

PROOFSwave of globalisation), the average annual rise in labour productivity or ef�ciency was almost 30 per cent, and

PROOFS

Labour productivity (annualPROOFS

Labour productivity (annual

Rate of economic growth

PROOFSRate of economic growth(annual average percentage

PROOFS

(annual average percentagechange in GDP)PROOFS

change in GDP)



Ann

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Period of time

1.4Before the last wave of globalisation

(1979–80/1992–93)During the last wave of globalisation

(1992–93/2015–16)

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1.5

1.55

1.6

1.75

1.7

1.65

Australia’s rate of increase (%) in average real income per person per year(material living standards)

1.7

1.5

FIGURE 5.12 Globalisation (1992–93 to 2015–16) may have helped to increase the growth in Australia’s level of average real incomes per person per year.

Sources: Data derived from ABS 1350.0, 5206.0, RBA Occasional Paper no. 8A and RBA Statistics.

Additionally, globalisation and higher personal incomes have helped to raise more tax revenue. This then made the Australian government’s provision of welfare payments and community services (e.g. public education and health) more affordable and generous than otherwise, therefore supporting better living standards.

How globalisation has affected the governmentSome mention has already been made about the impact of globalisation on the Australian government’s decision to partly deregulate the labour market to make wage costs and labour more internationally com-petitive. However, globalisation has also pressured the government into other aggregate supply, ef�ciency- promoting policies such as: • reducing the rate of company tax so �rms can strengthen their pro�ts and international competitiveness • building more ef�cient national infrastructure • promoting competition through strengthening the Australian Competition and Consumer Act (ACCA) that is

enforced through the Australian Competition and Consumer Commission (ACCC) to conduct price surveil-lance and watch out for �rms that are involved in anti-competitive behaviour including price �xing.

Has globalisation undermined our national sovereignty and created other problems?Another consequence of globalisation, increased foreign investment and visits by multinational companies is the possible decline in national sovereignty. Foreign investors including overseas government-owned business have been buying up Australian assets including mineral resources, rural and urban property, utilities including power and ports.

In addition, formerly locally-owned company icons that were household names to older generations (e.g. Aeroplane Jelly, Bonds, Vegemite and Arnott’s) are now foreign owned and the after-tax pro�ts shifted overseas. In the case of property, prices are now so expensive that many young families are �nding home ownership unaffordable. Furthermore, some writers argue that these worries have made government policy more complicated and may present a problem for future resource security, during periods of international con�ict.

Finally, globalisation and the freer movement of people, goods, services and capital, has pre-sented the government with some other very dif�cult issues — how to control the spread of terrorism (e.g. 11 September 2001; and the Bali, London, Jakarta, Spanish, Paris, German and Moscow bombings 2002–17) and the spread of weapons of mass destruction, illegal hard drugs, crime, worsening global pollution and warming, disease (e.g. SARS, Ebola and swine in�uenza) and massive shifts of illegal immigrants that could swamp an economy’s resources and infrastructure (as seen in Europe in 2015–16). Without effective government regulation, all these things could seriously undermine our non-economic living standards or quality of life.

UNCORRECTED Some mention has already been made about the impact of globalisation on the Australian government’s

UNCORRECTED Some mention has already been made about the impact of globalisation on the Australian government’s decision to partly deregulate the labour market to make wage costs and labour more internationally com

UNCORRECTED decision to partly deregulate the labour market to make wage costs and labour more internationally com

UNCORRECTED petitive. However, globalisation has also pressured the government into other aggregate supply, ef�ciency-

UNCORRECTED petitive. However, globalisation has also pressured the government into other aggregate supply, ef�ciency-

the rate of company tax so �rms can strengthen their pro�ts and international competitiveness

UNCORRECTED the rate of company tax so �rms can strengthen their pro�ts and international competitiveness

uilding more ef�cient national infrastructure

UNCORRECTED uilding more ef�cient national infrastructure

promoting competition through strengthening the

UNCORRECTED promoting competition through strengthening the enforced through the Australian Competition and Consumer Commission (ACCC) to conduct price surveil

UNCORRECTED

enforced through the Australian Competition and Consumer Commission (ACCC) to conduct price surveillance and watch out for �rms that are involved in anti-competitive behaviour including price �xing.

UNCORRECTED

lance and watch out for �rms that are involved in anti-competitive behaviour including price �xing.

Has globalisation undermined our national sovereignty and

UNCORRECTED

Has globalisation undermined our national sovereignty and created other problems?

UNCORRECTED

created other problems?

UNCORRECTED

Another consequence of globalisation, increased foreign investment and visits by multinational companies is

UNCORRECTED

Another consequence of globalisation, increased foreign investment and visits by multinational companies is the possible decline in

UNCORRECTED

the possible decline in have been buying up Australian assets including mineral resources, rural and urban property, utilities including

UNCORRECTED

have been buying up Australian assets including mineral resources, rural and urban property, utilities including power and ports.

UNCORRECTED

power and ports.

UNCORRECTED

In addition, formerly locally-owned company icons that were household names to older generations UNCORRECTED

In addition, formerly locally-owned company icons that were household names to older generations (e.g. Aeroplane Jelly, Bonds, Vegemite and Arnott’s) are now foreign owned and the after-tax pro�ts shifted UNCORRECTED

(e.g. Aeroplane Jelly, Bonds, Vegemite and Arnott’s) are now foreign owned and the after-tax pro�ts shifted

PAGE Additionally, globalisation and higher personal incomes have helped to raise more tax revenue. This

PAGE Additionally, globalisation and higher personal incomes have helped to raise more tax revenue. This then made the Australian government’s provision of welfare payments and community services (e.g. public

PAGE then made the Australian government’s provision of welfare payments and community services (e.g. public education and health) more affordable and generous than otherwise, therefore supporting better living

PAGE education and health) more affordable and generous than otherwise, therefore supporting better living

How globalisation has affected the governmentPAGE How globalisation has affected the governmentSome mention has already been made about the impact of globalisation on the Australian government’s PAGE

Some mention has already been made about the impact of globalisation on the Australian government’s

PROOFS

PROOFS

PROOFSDuring the last wave of globalisation

PROOFSDuring the last wave of globalisation(1992–93/2015–16)

PROOFS(1992–93/2015–16)

PROOFSGlobalisation (1992–93 to 2015–16) may have helped to increase the growth in Australia’s level of

PROOFSGlobalisation (1992–93 to 2015–16) may have helped to increase the growth in Australia’s level of

Data derived from ABS 1350.0, 5206.0, RBA Occasional Paper no. 8A and RBA Statistics.

PROOFS

Data derived from ABS 1350.0, 5206.0, RBA Occasional Paper no. 8A and RBA Statistics.

Additionally, globalisation and higher personal incomes have helped to raise more tax revenue. This PROOFS

Additionally, globalisation and higher personal incomes have helped to raise more tax revenue. This



How globalisation has affected the environmentLittle statistical data is available about the effects of globalisation and multinational companies on Australia’s environment. Even so, several points can be made:

Environmental effects of increased transportation of goodsGlobalisation, with its emphasis on international specialisation in production and the growth of trade vol-umes (i.e. exports and imports), means there will be a rise in long-distance shipping and air cargo. Already transport generates about 25 per cent of Australia’s air pollution. This is because the burning of fossil fuels such as oil for transport involves the creation of greenhouse gases like carbon dioxide (CO2). This contri-butes to global warming. Indeed, greenhouse gas emissions from international transport between Australia and overseas have increased by almost 70 per cent over the past ten years. It is reasonable to conclude that globalisation has worsened this problem and that localisation (i.e. the opposite of globalisation) may have produced less environmental harm. Next time you have bottled water from Switzerland, prawn cutlets from Thailand, navel oranges from the US, feta cheese from Greece and olives from Spain, think of the environ-mental impacts.

Environmental effects of increased production of goodsProduction of all goods and services involves the use of natural and environmental resources (e.g. soils, air, climate, minerals, forests and the biosphere). It stands to reason that if Australia’s output or GDP rises as a result of globalisation, then there may be more environmental damage. Interestingly, in a report into the Australian–US free trade agreement (which commenced in 2005 and was designed to increase the volume of trade between these countries), various environmental problems were raised. These and others are listed below: • Increased agricultural production in Australia (dairy and sugar especially) would mean more use of chemical

fertilisers and pesticides that poison soils and cause blue-green algae blooms on rivers and lakes. • Using irrigation to increase crop and meat production for export, leads to soil salinity problems. • Increased logging of native forests, mostly for the export of woodchips, causes environmental damage. • Increased water use for growing agricultural exports (that make up only 3 per cent of our GDP), means we

are exporting water from the world’s driest continent, when many of our cities have recently been on stage 3–4 water restrictions.

• Growing more exports has required increased land clearing. This, in turn, destroys the native habitat of local animals, biodiversity and recreation spaces.

• Increased mining of uranium for export raises serious ethical and environmental issues. For instance, how might this material be used and who is responsible for the safe disposal and storage of the radioactive waste?

• Mining permanently scars and pollutes the environment. This is especially the case with gold mining (which uses poisons for leaching), uranium mining (which discharges tainted water), and copper and other ore mining (which use much water to extract the ore). Here we think of the well documented case of an Australian mining company that jointly operated the Ok Tedi mine in Papua New Guinea. This activity and the discharge of waste poisoned the land, water, �sh and livelihoods of the many indigenous people depen-dant on the river.

• At the end of the day, everything produced and consumed becomes waste. By accelerating this, global-isation has added to our environmental problems.

• Foreign multinational corporations operating as guests in Australia or our multinationals producing overseas are basically pro�t-seekers. Wherever possible, they usually try to minimise costs by using free resources like air and the environment, especially if there is no cost of pollution or government policy to limit emis-sions (e.g. a carbon tax or an emissions trading scheme).

Increased environmental accountability by some multinational �rmsHaving focused on negative environmental impacts of globalisation, there are some hopeful signs. Some busi-nesses, including multinational corporations, are becoming better global citizens. Increasingly, �rms incor-porate social and environmental reporting into their investor publications because at least some believe they have wider responsibilities than just making money for shareholders, no matter what the cost. This may be driven by: • fear that their poor reputation may result in consumer boycotts, and decreased sales and pro�ts • bad publicity in the media, perhaps driven by journalists and environmental groups such as Greenpeace or

Friends of the Earth • a backlash by shareholders that is re�ected in a fall in the company’s share price • fear that government will pass very strict new legislation that may limit the company’s operations • prosecution under environmental laws (including the proposed scheme to place a tax on CO2 emissions) • the desire by, and need for, �rms to retain competent and ethical staff.

UNCORRECTED wing more exports has required increased land clearing. This, in turn, destroys the native habitat of local

UNCORRECTED wing more exports has required increased land clearing. This, in turn, destroys the native habitat of local

mining of uranium for export raises serious ethical and environmental issues. For instance, how

UNCORRECTED mining of uranium for export raises serious ethical and environmental issues. For instance, how

UNCORRECTED might this material be used and who is responsible for the safe disposal and storage of the radioactive waste?

UNCORRECTED might this material be used and who is responsible for the safe disposal and storage of the radioactive waste?

permanently scars and pollutes the environment. This is especially the case with gold mining

UNCORRECTED permanently scars and pollutes the environment. This is especially the case with gold mining

(which uses poisons for leaching), uranium mining (which discharges tainted water), and copper and other

UNCORRECTED (which uses poisons for leaching), uranium mining (which discharges tainted water), and copper and other ore mining (which use much water to extract the ore). Here we think of the well documented case of an

UNCORRECTED

ore mining (which use much water to extract the ore). Here we think of the well documented case of an Australian mining company that jointly operated the Ok Tedi mine in Papua New Guinea. This activity and

UNCORRECTED

Australian mining company that jointly operated the Ok Tedi mine in Papua New Guinea. This activity and the discharge of waste poisoned the land, water, �sh and livelihoods of the many indigenous people depen

UNCORRECTED

the discharge of waste poisoned the land, water, �sh and livelihoods of the many indigenous people depen

At the end of the day

UNCORRECTED

At the end of the day, everything produced and consumed becomes waste. By accelerating this, global

UNCORRECTED

, everything produced and consumed becomes waste. By accelerating this, global

UNCORRECTED

isation has added to our environmental problems.

UNCORRECTED

isation has added to our environmental problems.oreign multinational corporations operating as guests in Australia or our multinationals producing overseas

UNCORRECTED

oreign multinational corporations operating as guests in Australia or our multinationals producing overseas are basically pro�t-seekers. Wherever possible, they usually try to minimise costs by using free resources

UNCORRECTED

are basically pro�t-seekers. Wherever possible, they usually try to minimise costs by using free resources like air and the environment, especially if there is no cost of pollution or government policy to limit emis

UNCORRECTED

like air and the environment, especially if there is no cost of pollution or government policy to limit emis

UNCORRECTED

sions (e.g. a carbon tax or an emissions trading scheme).

UNCORRECTED

sions (e.g. a carbon tax or an emissions trading scheme).

Increased environmental accountability by some multinational �rmsUNCORRECTED

Increased environmental accountability by some multinational �rms

PAGE Australia (dairy and sugar especially) would mean more use of chemical

PAGE Australia (dairy and sugar especially) would mean more use of chemical fertilisers and pesticides that poison soils and cause blue-green algae blooms on rivers and lakes.

PAGE fertilisers and pesticides that poison soils and cause blue-green algae blooms on rivers and lakes.

irrigation to increase crop and meat production for export, leads to soil salinity problems.

PAGE irrigation to increase crop and meat production for export, leads to soil salinity problems.

logging of native forests, mostly for the export of woodchips, causes environmental damage.

PAGE logging of native forests, mostly for the export of woodchips, causes environmental damage.

ater use for growing agricultural exports (that make up only 3 per cent of our GDP), means we

PAGE ater use for growing agricultural exports (that make up only 3 per cent of our GDP), means we

are exporting water from the world’s driest continent, when many of our cities have recently been on stage PAGE are exporting water from the world’s driest continent, when many of our cities have recently been on stage

PROOFSproduced less environmental harm. Next time you have bottled water from Switzerland, prawn cutlets from

PROOFSproduced less environmental harm. Next time you have bottled water from Switzerland, prawn cutlets from Thailand, navel oranges from the US, feta cheese from Greece and olives from Spain, think of the environ

PROOFSThailand, navel oranges from the US, feta cheese from Greece and olives from Spain, think of the environ-

PROOFS-Production of all goods and services involves the use of natural and environmental resources (e.g. soils, air,

PROOFSProduction of all goods and services involves the use of natural and environmental resources (e.g. soils, air, climate, minerals, forests and the biosphere). It stands to reason that if Australia’s output or GDP rises as

PROOFSclimate, minerals, forests and the biosphere). It stands to reason that if Australia’s output or GDP rises as a result of globalisation, then there may be more environmental damage. Interestingly, in a report into the

PROOFSa result of globalisation, then there may be more environmental damage. Interestingly, in a report into the Australian–US free trade agreement (which commenced in 2005 and was designed to increase the volume

PROOFS

Australian–US free trade agreement (which commenced in 2005 and was designed to increase the volume of trade between these countries), various environmental problems were raised. These and others are listed PROOFS

of trade between these countries), various environmental problems were raised. These and others are listed




• Globalisation easily explained• Globalisation• Who really wins from globalisation?


1 Globalisation has brought costs and bene�ts for Australia. Explain how globalisation is likely to have affected each of the following:a consumers and the in�ation rateb the labour market and unemploymentc Australia’s rate of economic growthd incomes and material living standards of Australianse government policiesf national sovereigntyg the environment.




5.8 The impacts of globalisation on China’s economyThe past 30–40 years have seen a remarkable transformation of China, from a closed to a more open economy, integrated with global markets. Not only has this reshaped daily life for millions of Chinese by raising living standards and reducing poverty, but it has also become a factory for the world and an Asian engine room for other economies like Australia. As such, it offers an interesting case study of the effects of globalisation in a region that has become increasingly important in the global economy.

Since Chinese government reforms that encouraged greater openness and globalisation in the 1980s and 1990s, China has become very competitive and able to export around the world. This has helped to accelerate its rate of economic growth and raise incomes, thereby allowing many millions of people to escape poverty and enjoy better material living standards. However, there have been costs, including those involving the environment.

Effect of globalisation on the policies of the Chinese governmentThere are several ways in which globalisation has required a big change in Chinese government policies:

Policy on foreign investmentFor globalisation to occur, China’s economy had to become far more open. It had to allow the in�ow of foreigners and large amounts of international investment capital supplied by multinational companies that were eager to take advantage of cheap labour and a potentially large domestic market. Most of this overseas

UNCORRECTED integrated with global markets. Not only has this reshaped daily life for millions of Chinese by raising living

UNCORRECTED integrated with global markets. Not only has this reshaped daily life for millions of Chinese by raising living standards and reducing poverty, but it has also become a factory for the world and an Asian engine room for

UNCORRECTED standards and reducing poverty, but it has also become a factory for the world and an Asian engine room for other economies like Australia. As such, it offers an interesting case study of the effects of globalisation in a

UNCORRECTED other economies like Australia. As such, it offers an interesting case study of the effects of globalisation in a region that has become increasingly important in the global economy.

UNCORRECTED region that has become increasingly important in the global economy.

UNCORRECTED

UNCORRECTED

Since Chinese government reforms that encouraged greater openness and globalisation in the 1980s and 1990s, China UNCORRECTED

Since Chinese government reforms that encouraged greater openness and globalisation in the 1980s and 1990s, China

PAGE

PAGE

PAGE Apply your understanding of this subtopic by accessing and completing the Applied economic exercise(s).


School-assessed tasks > Option 2 > Applied economic exercises >

PAGE School-assessed tasks > Option 2 > Applied economic exercises > Question 3

PAGE Question 3

5.8 The impacts of globalisation on China’s economy

PAGE 5.8 The impacts of globalisation on China’s economyThe past 30–40 years have seen a remarkable transformation of China, from a closed to a more open economy, PAGE The past 30–40 years have seen a remarkable transformation of China, from a closed to a more open economy, integrated with global markets. Not only has this reshaped daily life for millions of Chinese by raising living PAGE

integrated with global markets. Not only has this reshaped daily life for millions of Chinese by raising living

PROOFS

PROOFS

PROOFS

PROOFS

PROOFS

Apply your understanding of this subtopic by accessing and completing the Applied economic exercise(s).PROOFS




capital went into direct investment to start up and expand businesses, particularly in the populated provinces and cities near the eastern seaboard including Hong Kong. It helped to grow China’s productive capacity and shift the production possibility frontier (PPF) outwards. This in�ux would not have happened had the Chinese government not relaxed its controls on trade, capital and the economy. Figure 5.13 below shows the growth in foreign direct investment into China.

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New bigger PPF and productive capacity are due partly to increased foreign investment

China’s production possibility diagram

Goodsproduced

FIGURE 5.13 The growth in foreign direct investment in China helped to provide the means for growing GDP.

Sources: Data for the FDI graph was derived from Ministry of Commerce of the People’s Republic of China, and see http://www.chinability.com/FDI.htm.

The values and principles underpinning the economic systemThe Chinese government had to give up or modify some of its rigid socialist principles including the idea of state ownership of nearly all the means of production including farms, mines, factories and services. Indeed, following the �ood of foreign-owned �rms and the increased adoption of trade liberalisation (involving gradual cuts in tariffs and subsidies), nearly two-thirds of government business enterprises have been closed down because they used backward technology, had high costs, could not compete internationally and were unpro�table. Capitalist principles of pro�t as the guide to how resources are used, and what goods and services are produced, had to be incorporated into the Chinese economic model. It also meant that the socialist ideal of equality in income had to be largely abandoned.

The policy on freedomWhile there is still the huge issue of limited social and political freedom and the lack of human rights in some areas, the regime has gradually become more open and transparent than previously.

Policies related to poverty and urbanisationAs we shall see, globalisation sharpened inequality in living standards between rural areas and cities. This encouraged a huge in�ux of people into the cities. Policies were then needed to attack all the problems associ-ated with increasing urbanisation and industrialisation (e.g. housing, education, health, water and sewerage, power, transport, pollution and waste disposal), and to deal with poverty and growing inequality.

Legal policiesTo promote an environment where foreign investors are con�dent, laws relating to the ownership of property (including intellectual property, patents and copyright) and the conduct of business had to be modi�ed.

UNCORRECTED

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The growth in foreign direct investment in China helped to provide the means for growing GDP.

UNCORRECTED The growth in foreign direct investment in China helped to provide the means for growing GDP.

Data for the FDI graph was derived from Ministry of Commerce of the People’s Republic of China, and see http://www.

UNCORRECTED Data for the FDI graph was derived from Ministry of Commerce of the People’s Republic of China, and see http://www.

The values and principles underpinning the economic system

UNCORRECTED

The values and principles underpinning the economic systemThe Chinese government had to give up or modify some of its rigid socialist principles including the idea of

UNCORRECTED

The Chinese government had to give up or modify some of its rigid socialist principles including the idea of state ownership of nearly all the means of production including farms, mines, factories and services. Indeed,

UNCORRECTED

state ownership of nearly all the means of production including farms, mines, factories and services. Indeed, following the �ood of foreign-owned �rms and the increased adoption of trade liberalisation (involving

UNCORRECTED

following the �ood of foreign-owned �rms and the increased adoption of trade liberalisation (involving gradual cuts in tariffs and subsidies), nearly two-thirds of government business enterprises have been closed

UNCORRECTED

gradual cuts in tariffs and subsidies), nearly two-thirds of government business enterprises have been closed down because they used backward technology, had high costs, could not compete internationally and were

UNCORRECTED

down because they used backward technology, had high costs, could not compete internationally and were unpro�table. Capitalist principles of pro�t as the guide to how resources are used, and what goods and services

UNCORRECTED

unpro�table. Capitalist principles of pro�t as the guide to how resources are used, and what goods and services are produced, had to be incorporated into the Chinese economic model. It also meant that the socialist ideal of

UNCORRECTED

are produced, had to be incorporated into the Chinese economic model. It also meant that the socialist ideal of equality in income had to be largely abandoned.

UNCORRECTED

equality in income had to be largely abandoned.

UNCORRECTED

The policy on freedomUNCORRECTED

The policy on freedomWhile there is still the huge issue of limited social and political freedom and the lack of human rights in some UNCORRECTED

While there is still the huge issue of limited social and political freedom and the lack of human rights in some

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Membership of the WTOIn 2001, China became a member of the World Trade Organization (WTO), which is committed to free trade and the orderly conduct of international transactions between countries. This imposed requirements or obligations that had to be met (e.g. lowering tariffs, cutting producer subsidies, relaxing quotas on imports, improved government transparency in decision making, and freeing or deregulating key markets from govern-ment interference), and involved a change in government policies.

Effect of globalisation on China’s export income and capital in�owGlobalisation and the associated huge in�ux of money capital from abroad, have contributed to a spec-tacular increase in the volume of trade (i.e. both exports and imports) between China and the rest of the world. As shown in �gure 5.14, this is now partly re�ected in China’s massive balance of payments current account surplus in recent times (during the last wave of globalisation, as opposed to some de�cits in earlier years).

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Sources: Data derived from Ministry of Commerce of the People’s Republic of China, www.chinability.com/CurrentAccount.htm and other sources.

Effect of globalisation on China’s GDP and on the material living standards of householdsGlobalisation has helped increase China’s export income, greatly boosting aggregate demand and the level of national production or GDP. Because China’s population has only grown slowly, at around 0.7 per cent in recent years (partly due to the government’s one-child policy for families that was enforced till the last few years), there has been a signi�cant rise in average GDP and income per person. This is shown in �gure 5.15. In addition, high levels of investment, much of it from overseas, along with improvements in education, have also helped to increase ef�ciency, especially in manufacturing. This, too, has helped to increase GDP, average income per person and material living standards.

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.14 With globalisation, increased exports and capital �ows have strengthened China’s balance of payments

UNCORRECTED

With globalisation, increased exports and capital �ows have strengthened China’s balance of payments current account, 1982–83 to 2014–15 (US$ billions).

UNCORRECTED

current account, 1982–83 to 2014–15 (US$ billions).

Sources:

UNCORRECTED

Sources: Data derived from Ministry of Commerce of the People’s Republic of China, www.chinability.com/CurrentAccount.htm and

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Data derived from Ministry of Commerce of the People’s Republic of China, www.chinability.com/CurrentAccount.htm and other sources.

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other sources.

Effect of globalisation on China’s GDP and on the material living UNCORRECTED

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standards of households

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world. As shown in �gure 5.14, this is now partly re�ected in China’s massive balance of payments current

PROOFSworld. As shown in �gure 5.14, this is now partly re�ected in China’s massive balance of payments current

in recent times (during the last wave of globalisation, as opposed to some de�cits in earlier

PROOFS in recent times (during the last wave of globalisation, as opposed to some de�cits in earlier

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PROOFSChina’s balance of payments current account, 1982–83 to 2014–15

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FIGURE 5.15 The growth in China’s average living standards indicated by the accelerated rise in GDP per head (in Chinese yuan renminbi, currently equal to a bit less than A$0.2) during the latest wave of globalisation.

Source: National Bureau of Statistics, China Statistical Yearbook; National Bureau of Statistics plan report.

Effect of globalisation on China’s economic stabilityGlobalisation has meant that China now feels global instabilities more than previously. During the GFC in 2008–09, China’s exports to the world slowed, causing its growth rate in GDP for 2009 to be down from over 13 per cent to around 8 per cent. This meant rising unemployment, falling incomes and lower material living standards. The impact of the 2008–10 GFC on China’s exports and GDP can be seen in � gure 5.16. However, despite the negative impact of instability, globalisation has also made it possible for China to grow its pro-duction and GDP, lifting millions of people out of poverty.

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FIGURE 5.16 The global recession with falling exports caused China’s rate of economic growth to slow.

Sources: Data reproduced from the Chinability website, see http://www.chinability.com/Trade.htm; and statistics supplied by the Ministry of Commerce of the People’s Republic of China.

Effect of globalisation on China’s income distributionGlobalisation has helped to increase the incomes of workers in the manufacturing cities of China’s eastern seaboard. However, because agriculture has not enjoyed the same spurt in ef� ciency as the manufacturing industry (with 30 per cent of the population living in rural areas), there is much income inequality and rural unemployment and poverty are still quite high. Figure 5.17 below shows the overall rise in income inequality since the early 1980s. Notice the clear upward trend line for China’s Gini coef� cient (where a coef� cient of 0.0 is total equality and a Gini of 1.0 is total inequality) from 0.249 in 1982–83 to a high of 0.491 in

UNCORRECTED despite the negative impact of instability, globalisation has also made it possible for China to grow its pro-

UNCORRECTED despite the negative impact of instability, globalisation has also made it possible for China to grow its pro-duction and GDP, lifting millions of people out of poverty.

UNCORRECTED duction and GDP, lifting millions of people out of poverty.

Changes in China’s exports, imports and trade balance

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UNCORRECTED PAGE National Bureau of Statistics, China Statistical Yearbook; National Bureau of Statistics plan report.

PAGE National Bureau of Statistics, China Statistical Yearbook; National Bureau of Statistics plan report.

Effect of globalisation on China’s economic stability

PAGE Effect of globalisation on China’s economic stabilityGlobalisation has meant that China now feels global instabilities more than previously. During the GFC in

PAGE Globalisation has meant that China now feels global instabilities more than previously. During the GFC in 2008–09, China’s exports to the world slowed, causing its growth rate in GDP for 2009 to be down from over

PAGE 2008–09, China’s exports to the world slowed, causing its growth rate in GDP for 2009 to be down from over 13 per cent to around 8 per cent. This meant rising unemployment, falling incomes and lower material living

PAGE 13 per cent to around 8 per cent. This meant rising unemployment, falling incomes and lower material living standards. The impact of the 2008–10 GFC on China’s exports and GDP can be seen in � gure 5.16. However, PAGE standards. The impact of the 2008–10 GFC on China’s exports and GDP can be seen in � gure 5.16. However, despite the negative impact of instability, globalisation has also made it possible for China to grow its pro-PAGE

despite the negative impact of instability, globalisation has also made it possible for China to grow its pro-

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PROOFSThe growth in China’s average living standards indicated by the accelerated rise in GDP per head

PROOFSThe growth in China’s average living standards indicated by the accelerated rise in GDP per head (in Chinese yuan renminbi, currently equal to a bit less than A$0.2) during the latest wave of

PROOFS(in Chinese yuan renminbi, currently equal to a bit less than A$0.2) during the latest wave of

National Bureau of Statistics, China Statistical Yearbook; National Bureau of Statistics plan report.PROOFS

National Bureau of Statistics, China Statistical Yearbook; National Bureau of Statistics plan report.



2008–09. However, since then, there has been a steady decline to 0.462 in 2014–15. Even so, income distri-bution is far more uneven than in Australia where the Gini is 0.333. In addition, China has 213 billionaires, 2.4 million millionaires (in US$ terms) and yet 8 per cent of the population is living in severe poverty on less than US$1.25 per day.

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FIGURE 5.17 Globalisation has contributed to growing income inequality (measured by the Gini coef� cient where 0.0 = equal and 1.0 = unequal).

Sources: Data derived from various sources including Zen Gu’an and Hu Jinjing, ‘On the income gap between urban and rural residents since the end of the 1970s and its impacts on rural consumption’, Economic Review, no. 1, 2008; the UN Human Development Reports 2007–08 to 2014–15 and other sources.

Despite this growing income gap between rich urbanised Chinese and rural communities, there has been a strong decline in overall poverty thanks to the efforts of the government and the extra revenues generated by greater business activity, driven largely by globalisation and rising exports. Indeed, between 1986 and 2014, poverty numbers fell in rural areas by over 100 million. However, this still leaves about 11 million people in absolute poverty. Additionally, in rural villages there are now around 80 per cent with made roads, 96 per cent with electric power, 75 per cent with telephones, 95 per cent primary school attendance, 75 per cent with hos-pitals and quali� ed doctors and 90 per cent with TV cables.

While parts of China are still very poor, it is highly unlikely that the same progress would have been made without globalisation.

Effect of globalisation on China’s environment and non-material living standardsOne of the great costs of the Chinese globalisation that has accelerated export production, increased incomes and reduced poverty in rural areas, is the extensive damage that has been in� icted on the natural environment. In other words, there is a trade-off between the pursuit of material progress and protecting non-material well-being. One issue for China is the huge rise in the demand for electricity that results from industrial growth. It has meant that, on average, two new coal-� red power stations have been built each week in recent years, spewing out high levels of emissions. Indeed, recently China was reported as having 7 of the 10 most polluted cities in the world for air quality. It has also been claimed that only 1 per cent of China’s 560 million city dwellers breathe air that is considered safe! CO2 emissions now almost equal those of the US and together these economies produce about 40 per cent of the world’s total CO2 emissions. In turn, these and other toxic wastes released into rivers, soils and air contribute to global warming, climate change, severe weather events and serious health problems. In China, there are reports of cities with unusually high cancer rates, and of tainted food resulting from environmental pollution, slack standards of quality control and unethical behaviour by some companies. These outcomes erode the quality of life for the Chinese and lower their non-material living standards. Having said this, the government has begun to accelerate its efforts to clean up the environ-ment, by tightening laws and improving enforcement.


• China — trade liberalisation and investment reform• Chimerica

UNCORRECTED poverty numbers fell in rural areas by over 100 million. However, this still leaves about 11 million people in

UNCORRECTED poverty numbers fell in rural areas by over 100 million. However, this still leaves about 11 million people in absolute poverty. Additionally, in rural villages there are now around 80 per cent with made roads, 96 per cent

UNCORRECTED absolute poverty. Additionally, in rural villages there are now around 80 per cent with made roads, 96 per cent

UNCORRECTED with electric power, 75 per cent with telephones, 95 per cent primary school attendance, 75 per cent with hos-

UNCORRECTED with electric power, 75 per cent with telephones, 95 per cent primary school attendance, 75 per cent with hos-pitals and quali� ed doctors and 90 per cent with TV cables.

UNCORRECTED pitals and quali� ed doctors and 90 per cent with TV cables.

While parts of China are still very poor, it is highly unlikely that the same progress would have been made

UNCORRECTED While parts of China are still very poor, it is highly unlikely that the same progress would have been made

Effect of globalisation on China’s environment and non-material

UNCORRECTED

Effect of globalisation on China’s environment and non-material living standards

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living standardsOne of the great costs of the Chinese globalisation that has accelerated export production, increased incomes

UNCORRECTED

One of the great costs of the Chinese globalisation that has accelerated export production, increased incomes and reduced poverty in rural areas, is the extensive damage that has been in� icted on the natural environment.

UNCORRECTED

and reduced poverty in rural areas, is the extensive damage that has been in� icted on the natural environment. In other words, there is a

UNCORRECTED

In other words, there is a

UNCORRECTED

being. One issue for China is the huge rise in the demand for electricity that results from industrial growth.

UNCORRECTED

being. One issue for China is the huge rise in the demand for electricity that results from industrial growth. It has meant that, on average, two new coal-� red power stations have been built each week in recent years,

UNCORRECTED

It has meant that, on average, two new coal-� red power stations have been built each week in recent years, spewing out high levels of emissions. Indeed, recently China was reported as having 7 of the 10 most polluted

UNCORRECTED

spewing out high levels of emissions. Indeed, recently China was reported as having 7 of the 10 most polluted cities in the world for air quality. It has also been claimed that only 1 per cent of China’s 560 million city

UNCORRECTED

cities in the world for air quality. It has also been claimed that only 1 per cent of China’s 560 million city dwellers breathe air that is considered safe! COUNCORRECTED

dwellers breathe air that is considered safe! COthese economies produce about 40 per cent of the world’s total COUNCORRECTED

these economies produce about 40 per cent of the world’s total COwastes released into rivers, soils and air contribute to global warming, climate change, severe weather events UNCORRECTED

wastes released into rivers, soils and air contribute to global warming, climate change, severe weather events

PAGE Data derived from various sources including Zen Gu’an and Hu Jinjing, ‘On the income gap between urban and rural residents

PAGE Data derived from various sources including Zen Gu’an and Hu Jinjing, ‘On the income gap between urban and rural residents Economic Review

PAGE Economic Review, no. 1, 2008; the UN Human Development Reports

PAGE , no. 1, 2008; the UN Human Development Reports

Despite this growing income gap between rich urbanised Chinese and rural communities, there has been a

PAGE Despite this growing income gap between rich urbanised Chinese and rural communities, there has been a

strong decline in overall poverty thanks to the efforts of the government and the extra revenues generated by

PAGE strong decline in overall poverty thanks to the efforts of the government and the extra revenues generated by greater business activity, driven largely by globalisation and rising exports. Indeed, between 1986 and 2014, PAGE greater business activity, driven largely by globalisation and rising exports. Indeed, between 1986 and 2014, poverty numbers fell in rural areas by over 100 million. However, this still leaves about 11 million people in PAGE

poverty numbers fell in rural areas by over 100 million. However, this still leaves about 11 million people in

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Globalisation has contributed to growing income inequality (measured by the Gini coef� cient where PROOFS

Globalisation has contributed to growing income inequality (measured by the Gini coef� cient where

Data derived from various sources including Zen Gu’an and Hu Jinjing, ‘On the income gap between urban and rural residents PROOFS

Data derived from various sources including Zen Gu’an and Hu Jinjing, ‘On the income gap between urban and rural residents




1 Identify and explain the key changes in Chinese government policies that helped to accelerate globalisation in China.

2 Explain how globalisation in China has affected each of the following:a the value of exportsb the level of GDPc economic instabilityd inequality in the distribution of income.




5.9 International responses to globalisationTo some extent, globalisation has been encouraged by the existence of three important international insti-tutions — the World Trade Organization (WTO), the World Bank and the International Monetary Fund (IMF). While supporters of these institutions claim they have helped to reduce world poverty and increase living standards in low-income nations by growing international trade, there are many vocal critics who believe that these organisations exist for the bene�t of rich nations (e.g. the US) and greedy transnational businesses. More extreme elements say they should be abolished because they have done more harm than good in Third World nations. Indeed, recent meetings held by these and other af�liated organisations have often drawn violent and angry protests.

The World Trade Organization (WTO)The World Trade Organization (WTO) is an international institution set up to: • encourage the expansion of global trade as a means of accelerating economic growth • establish and enforce rules for the conduct of trade between member countries • settle trade disputes between countries.

The WTO came into existence in 1994. It was designed to carry on the multilateral (i.e. many nations) trade negotiations of its predecessor, the General Agreement on Tariffs and Trade (GATT) that was set up in 1948 after the end of World War II. Under this treaty, member nations organised what was called the Uruguay rounds of trade talks. These were aimed at reducing tariffs and other trade barriers such as agricultural sub-sidies that protected local producers of services, and manufactured and agricultural goods. Other rounds of negotiation followed including the Kennedy round, Tokyo round and the Doha round. Today, GATT is the central treaty on which the WTO is established. It is broken into agreements involving trade in goods and services, movements of capital or investment, intellectual property rights and the trading policies of member governments.

Critics of the WTO believe that free trade widens rather than narrows the income differences between rich and poor countries. Some claim that the organisation is managed in a way that allows rich nations to manipu-late the rules of trade to suit their commercial interests. It is noted that only a few of the WTO’s stated aims have actually been realised. Regrettably there are still massive agricultural subsidies provided to European and US farmers (but not Australian farmers) that have not been abolished, even though such a move may bene�t poorer, less in�uential developing countries.

The World BankThe World Bank was established in 1944 and now involves 184 countries. It is an international �nancial institution set up to provide technical and �nancial help in the form of �nancial loans and grants to member nations. The money may be used for numerous purposes, such as to build schools to improve literacy, roads and bridges to develop transport, and water, gas and electricity infrastructure to assist growth in national pro-duction (GDP) and improve living standards. Initially the World Bank provided loans to help rebuild some European countries such as France after World War II. However, the emphasis soon shifted away from Europe to helping economic development in poorer countries, with the aim of reducing global poverty and improving people’s living standards. One consequence of this lending was that Third World debt ballooned by around 20 per cent a year in the late 1970s and early 1980s. Servicing this debt required even more lending and, until

UNCORRECTED The World Trade Organization (WTO)

UNCORRECTED The World Trade Organization (WTO)The World Trade Organization (WTO) is an international institution set up to:

UNCORRECTED The World Trade Organization (WTO) is an international institution set up to:the expansion of global trade as a means of accelerating economic growth

UNCORRECTED the expansion of global trade as a means of accelerating economic growth

UNCORRECTED and enforce rules for the conduct of trade between member countries

UNCORRECTED and enforce rules for the conduct of trade between member countries

The WTO came into existence in 1994. It was designed to carry on the multilateral (i.e. many nations)

UNCORRECTED The WTO came into existence in 1994. It was designed to carry on the multilateral (i.e. many nations)

trade negotiations of its predecessor, the General Agreement on Tariffs and Trade (GATT) that was set up in

UNCORRECTED trade negotiations of its predecessor, the General Agreement on Tariffs and Trade (GATT) that was set up in 1948 after the end of World War II. Under this treaty, member nations organised what was called the

UNCORRECTED

1948 after the end of World War II. Under this treaty, member nations organised what was called the rounds of trade talks. These were aimed at reducing tariffs and other trade barriers such as agricultural sub

UNCORRECTED

rounds of trade talks. These were aimed at reducing tariffs and other trade barriers such as agricultural subsidies that protected local producers of services, and manufactured and agricultural goods. Other rounds of

UNCORRECTED

sidies that protected local producers of services, and manufactured and agricultural goods. Other rounds of negotiation followed including the Kennedy round, Tokyo round and the Doha round. Today, GATT is the

UNCORRECTED

negotiation followed including the Kennedy round, Tokyo round and the Doha round. Today, GATT is the central treaty on which the WTO is established. It is broken into agreements involving trade in goods and

UNCORRECTED

central treaty on which the WTO is established. It is broken into agreements involving trade in goods and

UNCORRECTED

services, movements of capital or investment, intellectual property rights and the trading policies of member

UNCORRECTED

services, movements of capital or investment, intellectual property rights and the trading policies of member

Critics of the WTO believe that free trade widens rather than narrows the income differences between rich

UNCORRECTED

Critics of the WTO believe that free trade widens rather than narrows the income differences between rich and poor countries. Some claim that the organisation is managed in a way that allows rich nations to manipu

UNCORRECTED

and poor countries. Some claim that the organisation is managed in a way that allows rich nations to manipulate the rules of trade to suit their commercial interests. It is noted that only a few of the WTO’s stated aims

UNCORRECTED

late the rules of trade to suit their commercial interests. It is noted that only a few of the WTO’s stated aims

UNCORRECTED

have actually been realised. Regrettably there are still massive agricultural subsidies provided to European and UNCORRECTED

have actually been realised. Regrettably there are still massive agricultural subsidies provided to European and US farmers (but not Australian farmers) that have not been abolished, even though such a move may bene�t UNCORRECTED

US farmers (but not Australian farmers) that have not been abolished, even though such a move may bene�t poorer, less in�uential developing countries.UNCORRECTED

poorer, less in�uential developing countries.

PAGE standards in low-income nations by growing international trade, there are many vocal critics who believe that

PAGE standards in low-income nations by growing international trade, there are many vocal critics who believe that these organisations exist for the bene�t of rich nations (e.g. the US) and greedy transnational businesses. More

PAGE these organisations exist for the bene�t of rich nations (e.g. the US) and greedy transnational businesses. More extreme elements say they should be abolished because they have done more harm than good in Third World

PAGE extreme elements say they should be abolished because they have done more harm than good in Third World nations. Indeed, recent meetings held by these and other af�liated organisations have often drawn violent and

PAGE nations. Indeed, recent meetings held by these and other af�liated organisations have often drawn violent and

The World Trade Organization (WTO) PAGE The World Trade Organization (WTO)The World Trade Organization (WTO) is an international institution set up to:PAGE

The World Trade Organization (WTO) is an international institution set up to:

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PROOFSApply your understanding of this subtopic by accessing and completing the Applied economic exercise(s).


important international insti

PROOFS important international insti

tutions — the World Trade Organization (WTO), the World Bank and the International Monetary Fund (IMF).

PROOFS

tutions — the World Trade Organization (WTO), the World Bank and the International Monetary Fund (IMF). While supporters of these institutions claim they have helped to reduce world poverty and increase living PROOFS

While supporters of these institutions claim they have helped to reduce world poverty and increase living standards in low-income nations by growing international trade, there are many vocal critics who believe that PROOFS

standards in low-income nations by growing international trade, there are many vocal critics who believe that



more recent times, the problem just grew larger. After signi�cant debt forgiveness, and attempts to improve the ef�ciency of Third World governments and economies who borrowed credit, the recent focus to 2015 has been on promoting the United Nation’s Millennium Development Goals that sought to improve the daily lives of people in low-income countries.

Critics argue that the underlying free market approach for economies pushed by the World Bank (i.e. involving reforms such as lower tariffs, market deregulation, privatisation, downsizing government) actu-ally harms uncompetitive countries, especially if things are changed too quickly. Others say it is controlled by a few in�uential rich countries who manipulate lending to suit their international business and strategic aims.

The International Monetary Fund (IMF)The International Monetary Fund (IMF) is a global organisation with headquarters in Washington. It keeps an eye on the world’s �nancial system. It was set up in 1944 to help stabilise international exchange rates, promote economic development, provide technical assistance and act as a lender of last resort to governments. Nearly all United Nations countries contribute to a pool of money from which members can borrow on a temporary basis in times of crisis (e.g. 2008–09 to 2016–17) following government expensive �nancial rescue packages to boost con�dence in the banking system). However, certain preconditions must be met by borrowers, perhaps including the privatisation of government businesses, the sale of public assets and running budget surpluses.

Again this globalised organisation has its critics who often claim that it serves the interests of multinationals. For instance, it allowed mostly Western �rms to buy up good privatised government monopoly businesses in poor countries and other assets at low �re-sale prices. In addition, in some countries including Eastern Europe, Argen-tina and Kenya, IMF policies have been seen as a cause of economic crises, suffering and lower living standards.


• 20 years of trade liberalisation


1 How has globalisation been encouraged by international organisations including the World Bank, the International Monetary Fund (IMF) and World Trade Organization (WTO)?

2 Why are some groups hostile towards the work of international organisations such as the IMF and WTO?



• School-assessed tasks > Option 2 > Multiple-choice questions• School-assessed tasks > Option 2 > Terminology revision• School-assessed tasks > Option 2 > An essay• School-assessed tasks > Option 2 > A class debate• School-assessed tasks > Option 2 > A report on an investigation or inquiry• School-assessed tasks > Option 2 > A blog of media commentaries• School-assessed tasks > Option 2 > Analysis of visual evidence — a cartoon

OPTION 3 THE CHALLENGES FACED BY DEVELOPING NATIONS IN REDUCING POVERTY AS A CONTEMPORARY ECONOMIC ISSUE

It is a sad fact that for around 60 per cent of the world’s 7.4 billion people living in low-income countries, life is a real struggle and living standards are low. In addition, over 900 million of these people try to sur-vive on incomes below the severe poverty line. Here there is great physical deprivation, hunger, inequality, insecurity, poor health, illiteracy, persecution, and the absence of hope and opportunity. In contrast, it is surely a great obscenity that many people in high-income nations grow obese from endless consumption, waste enough food each year to feed over 220 million starving people, and spend so much time at work that they are unhappy, stressed and have little time for relationships. With this in mind, the causes of low incomes, and lack of economic development in some countries, surely deserves our close attention as an important contemporary economic issue. In particular, we will examine the general causes of low-income in Third World nations and the challenges they face in accelerating development designed to alleviate poverty and improve living standards.

UNCORRECTED

UNCORRECTED

UNCORRECTED How has globalisation been encouraged by inter

UNCORRECTED How has globalisation been encouraged by international organisations including the World Bank, the

UNCORRECTED national organisations including the World Bank, the International Monetary Fund (IMF) and World Trade Organization (WTO)?

UNCORRECTED International Monetary Fund (IMF) and World Trade Organization (WTO)?e some groups hostile towards the work of international organisations such as the IMF and WTO?

UNCORRECTED e some groups hostile towards the work of international organisations such as the IMF and WTO?

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national organisations including the World Bank, the PAGE

national organisations including the World Bank, the

PROOFSeconomic development, provide technical assistance and act as a lender of last resort to governments. Nearly all

PROOFSeconomic development, provide technical assistance and act as a lender of last resort to governments. Nearly all United Nations countries contribute to a pool of money from which members can borrow on a temporary basis

PROOFSUnited Nations countries contribute to a pool of money from which members can borrow on a temporary basis in times of crisis (e.g. 2008–09 to 2016–17) following government expensive �nancial rescue packages to boost

PROOFSin times of crisis (e.g. 2008–09 to 2016–17) following government expensive �nancial rescue packages to boost con�dence in the banking system). However, certain preconditions must be met by borrowers, perhaps including

PROOFScon�dence in the banking system). However, certain preconditions must be met by borrowers, perhaps including the privatisation of government businesses, the sale of public assets and running budget surpluses.

PROOFSthe privatisation of government businesses, the sale of public assets and running budget surpluses.

Again this globalised organisation has its critics who often claim that it serves the interests of multinationals.

PROOFSAgain this globalised organisation has its critics who often claim that it serves the interests of multinationals.

For instance, it allowed mostly Western �rms to buy up good privatised government monopoly businesses in poor

PROOFSFor instance, it allowed mostly Western �rms to buy up good privatised government monopoly businesses in poor countries and other assets at low �re-sale prices. In addition, in some countries including Eastern Europe, Argen

PROOFScountries and other assets at low �re-sale prices. In addition, in some countries including Eastern Europe, Argentina and Kenya, IMF policies have been seen as a cause of economic crises, suffering and lower living standards.

PROOFStina and Kenya, IMF policies have been seen as a cause of economic crises, suffering and lower living standards.

PROOFS

PROOFS



more recent times, the problem just grew larger. After signi�cant debt forgiveness, and attempts to improve the ef�ciency of Third World governments and economies who borrowed credit, the recent focus to 2015 has been on promoting the United Nation’s Millennium Development Goals that sought to improve the daily lives of people in low-income countries.

Critics argue that the underlying free market approach for economies pushed by the World Bank (i.e. involving reforms such as lower tariffs, market deregulation, privatisation, downsizing government) actu-ally harms uncompetitive countries, especially if things are changed too quickly. Others say it is controlled by a few in�uential rich countries who manipulate lending to suit their international business and strategic aims.

The International Monetary Fund (IMF)The International Monetary Fund (IMF) is a global organisation with headquarters in Washington. It keeps an eye on the world’s �nancial system. It was set up in 1944 to help stabilise international exchange rates, promote economic development, provide technical assistance and act as a lender of last resort to governments. Nearly all United Nations countries contribute to a pool of money from which members can borrow on a temporary basis in times of crisis (e.g. 2008–09 to 2016–17) following government expensive �nancial rescue packages to boost con�dence in the banking system). However, certain preconditions must be met by borrowers, perhaps including the privatisation of government businesses, the sale of public assets and running budget surpluses.

Again this globalised organisation has its critics who often claim that it serves the interests of multinationals. For instance, it allowed mostly Western �rms to buy up good privatised government monopoly businesses in poor countries and other assets at low �re-sale prices. In addition, in some countries including Eastern Europe, Argen-tina and Kenya, IMF policies have been seen as a cause of economic crises, suffering and lower living standards.


• 20 years of trade liberalisation


1 How has globalisation been encouraged by international organisations including the World Bank, the International Monetary Fund (IMF) and World Trade Organization (WTO)?

2 Why are some groups hostile towards the work of international organisations such as the IMF and WTO?





It is a sad fact that for around 60 per cent of the world’s 7.4 billion people living in low-income countries, life is a real struggle and living standards are low. In addition, over 900 million of these people try to sur-vive on incomes below the severe poverty line. Here there is great physical deprivation, hunger, inequality, insecurity, poor health, illiteracy, persecution, and the absence of hope and opportunity. In contrast, it is surely a great obscenity that many people in high-income nations grow obese from endless consumption, waste enough food each year to feed over 220 million starving people, and spend so much time at work that they are unhappy, stressed and have little time for relationships. With this in mind, the causes of low incomes, and lack of economic development in some countries, surely deserves our close attention as an important contemporary economic issue. In particular, we will examine the general causes of low-income in Third World nations and the challenges they face in accelerating development designed to alleviate poverty and improve living standards.

There is great inequality in incomes and material living standards between those living in rich and poor countries. The general obsession of high-income earners with consumption not only depletes the world’s resources, but it adds disproportionally to greenhouse gases, climate change and severe weather events that have a particularly adverse effect on those in low-income countries.

5.10 De�nition and indicators of a developing nationSo what exactly is a developing nation and what is meant by development? This is not an easy question to answer and different approaches are used. However, today most de�ne development as the economic, social, political and institutional changes that are needed in low-income countries to improve the material and non-material aspects affecting the quality of daily life.

Using average GDP or income to de�ne a developing nationOne way to de�ne a low-income developing nation is to use the level of GDP per head as an indicator. The World Bank, for example, currently de�nes low-income countries as those where people subsist on a mere $2.86 or less per day (i.e. an average of $1045 per person a year or less), as opposed to high-income countries where average incomes are de�ned as $34.89 or more per day, or a minimum of $12 736 per person a year. Figure 5.18 shows that most low-income countries are located in Africa and Asia. These nations usually have a high proportion of their population living below the severe poverty line (recently updated by the World Bank to include individuals on an income of less than $1.90 per day).

GDP per capita — PPP ininternational US dollars

Countries by GDP (PPP) per capita in 2015

>$50000+$35000–50000$20000–35000$10000–20000$5000–10000$2000–5000< $2000

No data

FIGURE 5.18 Where are low-income developing countries found?

Source: Map copied from Wikipedia, the free encyclopaedia, https://en.wikipedia.org/wiki/Development_economics#/media/File:Countries_by_GDP_%28PPP%29_Per_Capita_in_2015.svg.

UNCORRECTED Using average GDP or income to de�ne a developing nation

UNCORRECTED Using average GDP or income to de�ne a developing nationOne way to de�ne a low-income developing nation is to use the level of GDP per head as an indicator. The

UNCORRECTED One way to de�ne a low-income developing nation is to use the level of GDP per head as an indicator. The World Bank, for example, currently de�nes

UNCORRECTED World Bank, for example, currently de�nes low-income countries

UNCORRECTED low-income countries

$2.86 or less per day (i.e. an average of $1045 per person a year or less), as opposed to

UNCORRECTED $2.86 or less per day (i.e. an average of $1045 per person a year or less), as opposed to where average incomes are de�ned as $34.89 or more per day, or a minimum of $12

UNCORRECTED where average incomes are de�ned as $34.89 or more per day, or a minimum of $12Figure 5.18 shows that most low-income countries are located in Africa and Asia. These nations usually have

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Figure 5.18 shows that most low-income countries are located in Africa and Asia. These nations usually have a high proportion of their population living below the severe poverty line (recently updated by the World Bank

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a high proportion of their population living below the severe poverty line (recently updated by the World Bank to include individuals on an income of less than $1.90 per day).

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PAGE 5.10 De�nition and indicators of a developing nation

PAGE 5.10 De�nition and indicators of a developing nationdevelopment

PAGE development? This is not an easy question

PAGE ? This is not an easy question

to answer and different approaches are used. However, today most de�ne

PAGE to answer and different approaches are used. However, today most de�ne social, political and institutional changes that are needed in low-income countries to improve the material and

PAGE social, political and institutional changes that are needed in low-income countries to improve the material and

PROOFS

PROOFS

PROOFSThere is great inequality in incomes and material living standards between those living in rich and poor countries.

PROOFSThere is great inequality in incomes and material living standards between those living in rich and poor countries. The general obsession of high-income earners with consumption not only depletes the world’s resources, but it adds

PROOFSThe general obsession of high-income earners with consumption not only depletes the world’s resources, but it adds disproportionally to greenhouse gases, climate change and severe weather events that have a particularly adverse effect

PROOFS

disproportionally to greenhouse gases, climate change and severe weather events that have a particularly adverse effect



For these low-income countries, development can be seen as the process whereby a nation tries to accelerate the economic growth and lift its GDP at a faster rate than its population. The hope here is that this will solve problems like high unemployment, low incomes, poverty, illiteracy, short average life expectancy, poverty and low living standards. However, although GDP per capita is commonly used, to de�ne low-income countries, this really provides very limited information about development and the state of people’s daily lives or well-being. There are several limitations: • The problem of unrecorded subsistence production. GDP only measures the value of marketed goods

and services produced and exchanged in the economy. Because a large percentage of the population in low-income countries is involved in subsistence production that is never marketed or sold, GDP per capita is likely to be an underestimation of actual levels of economic welfare.

• The problem of unequal distribution. Most importantly, average GDP per capita fails to take account of how evenly or unevenly goods, services and incomes are distributed or shared among all members of the population. Most low-income countries have extreme inequality, where the poorest 20 per cent of the population receives perhaps less than 4 per cent of the nation’s income cake. Average GDP per capita is therefore a very inadequate guide of people’s general consumption or access to basic goods and services.

• Negative externalities. On its own, GDP does not consider the costs to society and the environment (i.e. called negative externalities) of economic progress, yet such costs are often very high in low-income countries due to their overpopulation.

• No consideration of the quality of daily lives. Importantly, GDP fails to accurately tell us whether the daily lives of ordinary people are getting better in terms of life expectancy, health, access to clean water, education and health, standards of food and nutrition, lower poverty rates, improved justice and reduced crime, greater freedom and democracy, better human rights and opportunities for all.

From what has just been said, development in low-income countries is a far broader concept and requires more than simply growing the size of the economy or GDP.

5.11 Using the human development index (HDI) to de�ne a developing nationGiven the limitations and narrowness of using GDP per capita as an indicator or measure of development, a broader measure of progress was devised called the human development index (HDI). Unlike GDP, this indicator re�ects both economic and social conditions. It is not just based on income per head (adjusted to international dollars or PPP), but it also re�ects life expectancy (calculated at birth) and education levels (based on literacy, school attendance and retention rates). A diagram showing the makeup of the HDI is shown in �gure 5.19.

In addition, �gure 5.19 shows the approximate levels of the HDI using a colour code (see the map key). A country score near 1 is highest, while a value near 0 is lowest. By following the International Human Development Indicators weblink in this topic’s student resources tab, you can click on particular countries in the map and �nd detailed information about levels of human development in each country. Typically, low-income nations also have lower HDI scores (e.g. in Africa, Sudan on 0.290 points), whereas high-in-come developed nations have elevated HDI scores (e.g. Australia is in number two position with a score of 0.935 points).


• International Human Development Indicators

This tells us far more about living standards and the level of development than simply using GDP or income per head. So development best refers to the economic, social, political and institutional changes needed in low-income countries to improve material and non-material aspects affecting the quality of daily life.

However, whichever indicator of development is used, most economists still believe that improvements in living standards and poverty reduction are most likely to occur when a nation grows the size of its economy. So while increasing GDP and incomes per capita do not guarantee development and wellbeing, it is generally seen as one of the preconditions or facilitators.

UNCORRECTED Given the limitations and narrowness of using GDP per capita as an indicator or measure of development,

UNCORRECTED Given the limitations and narrowness of using GDP per capita as an indicator or measure of development, a broader measure of progress was devised called the

UNCORRECTED a broader measure of progress was devised called the indicator re�ects both economic and social conditions. It is not just based on income per head (adjusted to

UNCORRECTED indicator re�ects both economic and social conditions. It is not just based on income per head (adjusted to international dollars or PPP), but it also re�ects life expectancy (calculated at birth) and education levels

UNCORRECTED international dollars or PPP), but it also re�ects life expectancy (calculated at birth) and education levels (based on literacy, school attendance and retention rates). A diagram showing the makeup of the HDI is

UNCORRECTED (based on literacy, school attendance and retention rates). A diagram showing the makeup of the HDI is

In addition, �gure 5.19 shows the approximate levels of the HDI using a colour code (see the map key).

UNCORRECTED In addition, �gure 5.19 shows the approximate levels of the HDI using a colour code (see the map key).

A country score near 1 is highest, while a value near 0 is lowest. By following the International Human

UNCORRECTED A country score near 1 is highest, while a value near 0 is lowest. By following the International Human Development Indicators weblink in this topic’s student resources tab, you can click on particular countries

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Development Indicators weblink in this topic’s student resources tab, you can click on particular countries in the map and �nd detailed information about levels of human development in each country. Typically,

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in the map and �nd detailed information about levels of human development in each country. Typically, low-income nations also have lower HDI scores (e.g. in Africa, Sudan on 0.290 points), whereas high-in

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come developed nations have elevated HDI scores (e.g. Australia is in number two position with a score f 0.935 points).

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PAGE in low-income countries is a far broader concept and requires more

5.11 Using the human development index (HDI) to

PAGE 5.11 Using the human development index (HDI) to de�ne a developing nation

PAGE de�ne a developing nationGiven the limitations and narrowness of using GDP per capita as an indicator or measure of development, PAGE Given the limitations and narrowness of using GDP per capita as an indicator or measure of development,

human development index (HDI)PAGE

human development index (HDI)

PROOFSmembers of the population. Most low-income countries have extreme inequality, where the poorest

PROOFSmembers of the population. Most low-income countries have extreme inequality, where the poorest 20 per cent of the population receives perhaps less than 4 per cent of the nation’s income cake. Average

PROOFS20 per cent of the population receives perhaps less than 4 per cent of the nation’s income cake. Average GDP per capita is therefore a very inadequate guide of people’s general consumption or access to basic

PROOFSGDP per capita is therefore a very inadequate guide of people’s general consumption or access to basic

On its own, GDP does not consider the costs to society and the environment

PROOFSOn its own, GDP does not consider the costs to society and the environment

(i.e. called negative externalities) of economic progress, yet such costs are often very high in low-income

PROOFS(i.e. called negative externalities) of economic progress, yet such costs are often very high in low-income

Importantly, GDP fails to accurately tell us whether the

PROOFS Importantly, GDP fails to accurately tell us whether the

daily lives of ordinary people are getting better in terms of life expectancy, health, access to clean water,

PROOFSdaily lives of ordinary people are getting better in terms of life expectancy, health, access to clean water, education and health, standards of food and nutrition, lower poverty rates, improved justice and reduced

PROOFS

education and health, standards of food and nutrition, lower poverty rates, improved justice and reduced crime, greater freedom and democracy, better human rights and opportunities for all.PROOFS

crime, greater freedom and democracy, better human rights and opportunities for all.in low-income countries is a far broader concept and requires more PROOFS

in low-income countries is a far broader concept and requires more



HumanDevelopmentIndex (HDI)

DIMENSIONS

INDICATORS

DIMENSIONINDEX

Long and healthy life Knowledge A decent standard of living

Life expectancy at birth Mean yearsof schooling

Expected yearsof schooling

GNI* per capita (PPP $)

GNI indexLife expectancy index Education index

Human Development Index (HDI)

Very high human development, index above 0.8 High human development, index around 0.7 to 0.8

Medium development, index around 0.6 to 0.7 Low human development, index below 0.5

FIGURE 5.19 Map showing the human development index (HDI) for different countries

Sources: The HDI diagram comes from the United Nations Human Development report, see http://hdr.undp.org/en/content/human-development-index-hdi. The map has been copied directly from United Nations Development Program, Human Development Reports, released December 2015, see http://hdr.undp.org/en/countries. *Note: GNI is fairly similar in value to GDP.


• If the world was a village of 1000 people• What if the world were 100 people?• Nigeria: Work and jobs for the giant of Africa• Developed economy• Debunking Third-World myths with the best stats you've ever seen• What does ‘Third World country’ mean?• The slum: Risky business


1 What is a low-income developing economy?2 What is gross domestic product (GDP) per head? What are three main weaknesses of this indicator as a

measure of a country’s development?3 What is the human development index (HDI)? How is it measured and why is this a better indicator of a

country’s development?




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UNCORRECTED Map showing the human development index (HDI) for different countries

UNCORRECTED Map showing the human development index (HDI) for different countries

The HDI diagram comes from the United Nations Human Development report, see http://hdr.undp.org/en/content/human-

UNCORRECTED The HDI diagram comes from the United Nations Human Development report, see http://hdr.undp.org/en/content/human-

development-index-hdi. The map has been copied directly from United Nations Development Program, Human Development Reports,

UNCORRECTED development-index-hdi. The map has been copied directly from United Nations Development Program, Human Development Reports, released December 2015, see http://hdr.undp.org/en/countries. *

UNCORRECTED released December 2015, see http://hdr.undp.org/en/countries. *Note:

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If the world was a village of 1000 people

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Developed economyDebunking Third-World myths with the best stats you've ever seen

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Debunking Third-World myths with the best stats you've ever seenWhat does ‘Third World country’ mean?

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Map showing the human development index (HDI) for different countriesPAGE

Map showing the human development index (HDI) for different countries

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5.12 The challenges and causes of poverty, low incomes and other problems in developing nationsThere are many theories used to explain why some countries experience extreme poverty while others do not. One theory was provided by an American economist, Walt Whitman Rostow, who published a book entitled Stages of Economic Growth.

Stages of economic growthRostow suggested that economic growth and development move through �ve main stages as illustrated in �gure 5.20 below.

Stage 3. ‘Take off stage’. Period ofindustrialisation and the growthof manufacturing. Agriculture

is no longer the main areaof employment.

Stage 2. Preconditions stage. Thefoundations for future economicgrowth are established throughcreating adequate social and

economic infrastructure (e.g. roads,schools), and the expansion ofpersonal and business services.

Stage 1. Subsistence stage.National production is very low.

Stage 5. High mass consumptionstage and strong living standards.

Stage 4. Drive to maturity stage orstage of sustained economicgrowth where there are rising

levels of investment.

FIGURE 5.20 Rostow’s stages of economic growth

Rostow’s theory suggests that countries must move through these stages to avoid poverty and achieve stage 5 where strong living standards are enjoyed. While some countries have followed this path of development and achieved high incomes, Rostow’s critics say that his explanation is too simplistic. It leaves out important in�u-ences. Alternative theories have also been proposed to help explain the process of economic development. Some of these emphasise the need for structural change in low-income economies, including the shift of labour from agriculture to manufacturing. Others have emphasised the importance of a market-based approach involving pro�t incentives and reduced government restrictions to bring about change, while some economists see international cooperation and trade as the key driver of development.

Unfortunately, there is no simple explanation for the causes of poverty that suits all cases, since each country is unique in certain ways. For instance, some nations have big populations, others are small. Some have many natural resources, others have few. Some have socialist economies, others use market capitalism. Some are on different sides of the equator. And some are former European colonies, but others are not. However, having pointed out some of the differences, it is possible to make a few generalisations about the factors that com-monly restrict economic development and cause poverty in low-income countries.

Factors that may cause poverty in low-income countriesLet us now look at the factors that restrict economic development and cause severe poverty in some countries.

The problem of limited productive capacityPerhaps the most common cause of poverty in low-income economies is the economy’s lack of productive capacity.

This restricts the level of output of goods and services, relative to the size of the population. It means that each person’s income and slice of the production pie is small. As a result, average consumption of goods (e.g. food,

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levels of investment.

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Rostow’s theory suggests that countries must move through these stages

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Rostow’s theory suggests that countries must move through these stageswhere strong living standards are enjoyed. While some countries have followed this path of development and

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where strong living standards are enjoyed. While some countries have followed this path of development and achieved high incomes, Rostow’s critics say that his explanation is too simplistic. It leaves out important in�u

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achieved high incomes, Rostow’s critics say that his explanation is too simplistic. It leaves out important in�uences. Alternative theories have also been proposed to help explain the process of economic development.

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ences. Alternative theories have also been proposed to help explain the process of economic development. Some of these emphasise the need for

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Some of these emphasise the need for

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labour from agriculture to manufacturing. Others have emphasised the importance of a

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labour from agriculture to manufacturing. Others have emphasised the importance of a involving pro�t incentives and reduced government restrictions to bring about change, while some economists

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involving pro�t incentives and reduced government restrictions to bring about change, while some economists see

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see international cooperation

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international cooperationUnfortunately, there is no simple explanation for the causes of poverty that suits all cases, since each country

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Unfortunately, there is no simple explanation for the causes of poverty that suits all cases, since each country is unique in certain ways. For instance, some nations have big populations, others are small. Some have many UNCORRECTED

is unique in certain ways. For instance, some nations have big populations, others are small. Some have many UNCORRECTED

natural resources, others have few. Some have socialist economies, others use market capitalism. Some are on UNCORRECTED

natural resources, others have few. Some have socialist economies, others use market capitalism. Some are on

PAGE

PAGE

PAGE economic infrastructure (e.g. roads,

PAGE economic infrastructure (e.g. roads,schools), and the expansion of

PAGE schools), and the expansion ofpersonal and business services.

PAGE personal and business services.

PROOFS

PROOFS

PROOFSStage 2.

PROOFSStage 2. Preconditions stage.

PROOFS Preconditions stage.

foundations for future economic

PROOFS

foundations for future economicgrowth are established throughPROOFS

growth are established throughcreating adequate social andPROOFS

creating adequate social andeconomic infrastructure (e.g. roads,PROOFS

economic infrastructure (e.g. roads,



clothing, housing) and services (e.g. health, education, transport) per capita is low. This causes poverty and subsistence living standards. Mention was made earlier in this text as to the factors that can limit the size of a country’s capacity or production possibility frontier (PPF). Basically, it comes down to two main constraints: • The volume of resources. Natural resources (e.g. agricultural land, climate, water), labour (e.g. the provision

of skills and physical effort) and physical capital resources (i.e. plant and equipment used in production, such as tractors, railways, electricity system) per person in low-income countries is too small to allow for suf�cient production or GDP. Perhaps the country is overpopulated given the quantity of resources available.

• The level of productivity or ef�ciency per worker. The output of goods and services produced per unit of input, often measured by the average level of GDP per hour worked, is very small in poor nations, and this restricts productive capacity.The problem with limited ef�ciency and low production per hour is that incomes paid to workers are also

low. This causes poverty, malnutrition, poor health and limited opportunities. Clearly, poverty and lack of development will persist in these countries unless there is economic growth and the expansion of the nation’s production possibility frontier (PPF).

Low savings and investment create povertyAs we know, low-income nations have low subsistence levels of production and income, and hence high levels of poverty. After purchasing basic necessities (e.g. food, housing), little or no household income remains for saving (i.e. saving is income not spent). However, without saving (by households, �rms or governments), there is limited �nance for investment in capital equipment that is needed to start and grow businesses or provide government services or infrastructure, unless there is a rise in overseas borrowing or debt.

Even if credit is available in low-income countries, it is very expensive as re�ected in high interest rate repayments up to 40 per cent. These higher interest rates make starting private businesses almost impossible as the repayments will eat into any possible pro�t. Many households also lack the basic requirements for gaining a credit rating. This means that they are unable to borrow from banks or local money lenders. In addition, if governments borrow to provide community services (as happens in many low-income countries), there is the ongoing burden of interest repayments for future generations.

Whatever the cause, low levels of investment in equipment and new technology mean that labour output per hour worked (i.e. ef�ciency) is very small indeed. This causes hourly pay rates, incomes and purchasing power to be limited, and hence living standards remain desperately low. One way to illustrate this problem is to use a diagram showing the vicious cycle of poverty. As shown in �gure 5.21, the poverty cycle can start with poor savings, inadequate investment, weak ef�ciency and hence low incomes, which will persist unless the cycle is somehow broken. However, escaping this vicious cycle is not easy. As we shall see shortly, it may take con-siderable time and requires a combination of many strategies.

2. Low levels of national savings are due to subsistence levels of

income.

The vicious cycle of poverty in low-income

countries

1. Low levels of output per worker per hour cause average incomes per head per year to be low, so there is

poverty and only some basic items are affordable.

4. Low investment spending on new equipment and technology makes labour

ef�ciency very low.

3. Inadequate savings make borrowing credit to set up and �nance business investment spending very

expensive, so investment levels are very low.

FIGURE 5.21 The vicious cycle of poverty and underdevelopment in low-income countries

Problems involving population and the labour forceOn average, the population of low-income countries is growing more than three times as fast than those of high-income countries. For instance, the average rate of population growth is around 2.2 per cent a year for economically poor countries, as against only 0.7 per cent in most richer countries.

UNCORRECTED diagram showing the vicious cycle of poverty. As shown in �gure 5.21, the

UNCORRECTED diagram showing the vicious cycle of poverty. As shown in �gure 5.21, the savings, inadequate investment, weak ef�ciency and hence low incomes, which will persist unless the cycle is

UNCORRECTED savings, inadequate investment, weak ef�ciency and hence low incomes, which will persist unless the cycle is

UNCORRECTED somehow broken. However, escaping this vicious cycle is not easy. As we shall see shortly, it may take con

UNCORRECTED somehow broken. However, escaping this vicious cycle is not easy. As we shall see shortly, it may take considerable time and requires a combination of many strategies.

UNCORRECTED siderable time and requires a combination of many strategies.

UNCORRECTED 1. Low levels of output per worker per hour cause

UNCORRECTED 1. Low levels of output per worker per hour cause

average incomes per head per year to be low, so there is

UNCORRECTED average incomes per head per year to be low, so there is


UNCORRECTED


4. Low investment spending on new

UNCORRECTED

4. Low investment spending on new equipment and technology makes labour

UNCORRECTED

equipment and technology makes labour ef�ciency very low.

UNCORRECTED

ef�ciency very low.

UNCORRECTED PAGE the repayments will eat into any possible pro�t. Many households also lack the basic requirements for gaining

PAGE the repayments will eat into any possible pro�t. Many households also lack the basic requirements for gaining a credit rating. This means that they are unable to borrow from banks or local money lenders. In addition, if

PAGE a credit rating. This means that they are unable to borrow from banks or local money lenders. In addition, if governments borrow to provide community services (as happens in many low-income countries), there is the

PAGE governments borrow to provide community services (as happens in many low-income countries), there is the

Whatever the cause, low levels of investment in equipment and new technology mean that labour output per

PAGE Whatever the cause, low levels of investment in equipment and new technology mean that labour output per

hour worked (i.e. ef�ciency) is very small indeed. This causes hourly pay rates, incomes and purchasing power

PAGE hour worked (i.e. ef�ciency) is very small indeed. This causes hourly pay rates, incomes and purchasing power to be limited, and hence living standards remain desperately low. One way to illustrate this problem is to use a PAGE to be limited, and hence living standards remain desperately low. One way to illustrate this problem is to use a diagram showing the vicious cycle of poverty. As shown in �gure 5.21, the PAGE

diagram showing the vicious cycle of poverty. As shown in �gure 5.21, the

PROOFSdevelopment will persist in these countries unless there is economic growth and the expansion of the nation’s

PROOFSdevelopment will persist in these countries unless there is economic growth and the expansion of the nation’s

As we know, low-income nations have low subsistence levels of production and income, and hence high levels

PROOFSAs we know, low-income nations have low subsistence levels of production and income, and hence high levels of poverty. After purchasing basic necessities (e.g. food, housing), little or no household income remains for

PROOFSof poverty. After purchasing basic necessities (e.g. food, housing), little or no household income remains for saving (i.e. saving is income not spent). However, without saving (by households, �rms or governments), there

PROOFSsaving (i.e. saving is income not spent). However, without saving (by households, �rms or governments), there is limited �nance for investment in capital equipment that is needed to start and grow businesses or provide

PROOFSis limited �nance for investment in capital equipment that is needed to start and grow businesses or provide government services or infrastructure, unless there is a rise in overseas borrowing or debt.

PROOFSgovernment services or infrastructure, unless there is a rise in overseas borrowing or debt.

Even if credit is available in low-income countries, it is very expensive as re�ected in high interest rate

PROOFS

Even if credit is available in low-income countries, it is very expensive as re�ected in high interest rate repayments up to 40 per cent. These higher interest rates make starting private businesses almost impossible as PROOFS

repayments up to 40 per cent. These higher interest rates make starting private businesses almost impossible as the repayments will eat into any possible pro�t. Many households also lack the basic requirements for gaining PROOFS

the repayments will eat into any possible pro�t. Many households also lack the basic requirements for gaining



Rapid population growth of over two per cent a year in low-income countries causes material living standards or GDP per head to rise more slowly. There are many causes of high birth rates, including a lack of education, limited access to contraceptives, high rates of infant mortality and economic insecurity.

Many factors contribute to rapid population growth such as the tradition of having large families (to counteract high infant mortality rates), restricted access to birth control (due to cost or religious beliefs) and a lack of information about birth control and family planning (see � gure 5.22 below). In addition, extra children are often seen by parents as an insurance against old age since they can earn extra income for the family (given that child labour is usually tolerated).

There are many in� uences on the rate of population growth. Figure 5.22 summarises some of these causes of rapid population growth in low-income countries, and outlines some of the effects.

1. Farms are overcrowded, small and inef�cient2. Drift of people to cities in search of work3. Urban problems arise4. Social and economic infrastructure cannot cope and is inadequate, discouraging business and lowering living conditions5. Increasing unemployment rates and wasted productive capacity6. Environmental problems are more severe.

Effects of rapid population growth:

1. Lack of access, information and education about birth control and family planning2. Children are often seen as parent insurance against old age, given the absence of welfare3. There is a tradition of large families4. The infant death rate is high so more births help to compensate5. Use of child labour means more income.

Causes of rapid population growth:

High population growth in low-income developing countries

FIGURE 5.22 The causes and effects of population growth in low-income countries

Rapid population growth places enormous pressures on the resources of poor countries. It does this in sev-eral ways: • Farming problems. Given that most families live in rural rather than in urban areas, the size of farms,

and the ability of rural populations to feed themselves and create jobs, is progressively reduced by popu-lation growth. Farmers are forced onto less fertile land, so ef� ciency and incomes decline. This problem is

UNCORRECTED 1. Lack of access, information and education

UNCORRECTED 1. Lack of access, information and education about birth control and family planning

UNCORRECTED about birth control and family planning2. Children are often seen as parent insurance

UNCORRECTED 2. Children are often seen as parent insurance

UNCORRECTED against old age, given the absence of welfare

UNCORRECTED against old age, given the absence of welfare3. There is a tradition of large families

UNCORRECTED 3. There is a tradition of large families4. The infant death rate is high so more births

UNCORRECTED 4. The infant death rate is high so more births help to compensate

UNCORRECTED help to compensate

UNCORRECTED

UNCORRECTED

UNCORRECTED 5. Use of child labour means more income.

UNCORRECTED 5. Use of child labour means more income.

PAGE are often seen by parents as an insurance against old age since they can earn extra income for the family (given

PAGE are often seen by parents as an insurance against old age since they can earn extra income for the family (given

There are many in� uences on the rate of population growth. Figure 5.22 summarises some of these causes

PAGE There are many in� uences on the rate of population growth. Figure 5.22 summarises some of these causes

of rapid population growth in low-income countries, and outlines some of the effects.

PAGE of rapid population growth in low-income countries, and outlines some of the effects.

PAGE

PAGE

1. Lack of access, information and educationPAGE

1. Lack of access, information and education

PROOFS

PROOFSRapid population growth of over two per cent a year in low-income countries causes material living standards or GDP

PROOFSRapid population growth of over two per cent a year in low-income countries causes material living standards or GDP per head to rise more slowly. There are many causes of high birth rates, including a lack of education, limited access to

PROOFSper head to rise more slowly. There are many causes of high birth rates, including a lack of education, limited access to

Many factors contribute to rapid population growth such as the tradition of having large families (to

PROOFSMany factors contribute to rapid population growth such as the tradition of having large families (to

counteract high infant mortality rates), restricted access to birth control (due to cost or religious beliefs) and a

PROOFScounteract high infant mortality rates), restricted access to birth control (due to cost or religious beliefs) and a lack of information about birth control and family planning (see � gure 5.22 below). In addition, extra children PROOFS

lack of information about birth control and family planning (see � gure 5.22 below). In addition, extra children are often seen by parents as an insurance against old age since they can earn extra income for the family (given PROOFS

are often seen by parents as an insurance against old age since they can earn extra income for the family (given



worsened by the fact that, often, the best land is owned by the rich minority, who either fail to cultivate the property or, alternatively, impose harsh rental conditions on farmers (i.e. 50–80 per cent of the crop is taken by the landlord as rent). This contributes to low productivity and higher unemployment. It also means that productive capacity is wasted and the nation’s output of food is lower than it could be. As a result, living standards are depressed to subsistence levels and poverty rates rise.

• Urban problems. In some developing countries, population growth has meant that there has been a massive shift of people in search of work from overcrowded rural areas into the city where there are some jobs avail-able in manufacturing. This creates severe urban problems involving inadequate transport, housing, waste disposal, pollution, sanitation, education, water supply and health services.

• Infrastructure problems. Usually, governments in low-income countries are expected to provide infra-structure and services such as education, health, water supply, sanitation, roads, railways, ports and elec-tricity. However, government tax revenue is inadequate to provide these, due to low incomes, unemployment, corruption and tax evasion. Rapid population growth puts pressure on infrastructure that is already insuf-�cient. It breaks down, is chaotic, congested, decaying and inef�cient. Apart from causing people to live in miserable conditions, poor infrastructure also scares away new businesses. This means that production is depressed, there are fewer jobs, and incomes are lower than otherwise.

• Unemployment problems. In many low-income countries, rapid population growth increases unemploy-ment (i.e. when those 15 years of age and over who want work cannot �nd jobs). Figure 5.23 shows the massive scale of this problem with rates in some countries over 40 per cent of the labour force. In addition, there is the issue of underemployment (i.e. when those working are not employed to their capacity and, for example, could work more hours and produce more output per hour). Commonly, those who are employed are working at perhaps only 50–60 per cent of their potential. Together, unemployment and underemploy-ment mean that a very large part of the country’s labour resources are idle, and its economy is operating well below capacity and inside its PPF. As a result, production and income levels per head of population are low and poverty is rampant.

0.40.91.91.93.23.43.64.155.66

11.111.2

13.61516

21.422.622.6

24.425.626.7

3535.1

4041.542

46 80

0 10 30 40 50 60 70 80

QatarThailand

Papua New GuineaSingapore

JapanVietnam

IndiaChinaUSA

AustraliaRussiaTurkey

IranSudan

ZambiaIraq

SpainMozambique

ChadGreece

North KoreaSouth Africa

YemenAfghanistan

SyriaGaza Strip

KenyaNepal

Zimbabwe

Unemployment rate (percentage of labour force)

Unemployment rates in low-income and other countries (percentage of the labour force)

Cou

ntry

20

FIGURE 5.23 High rates of unemployment in low-income countries restrict economic development, reduce incomes, cause poverty and lower living standards.

Source: Data derived from various sources including the CIA World Factbook.

Note: Data mostly for 2012–16.

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UNCORRECTED

UNCORRECTED

UNCORRECTED 24.4

UNCORRECTED 24.4

25.6



UNCORRECTED 26.7

China

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ChinaUSA

UNCORRECTED

USAAustralia

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AustraliaRussia

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RussiaTurkey

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TurkeyIran

UNCORRECTED

Iran

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UNCORRECTED PAGE well below capacity and inside its PPF. As a result, production and income levels per head of population are

PAGE well below capacity and inside its PPF. As a result, production and income levels per head of population are

PAGE

PAGE

PAGE

PAGE

PAGE Unemployment rates in low-income and other countries (percentage of the labour force)

PAGE Unemployment rates in low-income and other countries (percentage of the labour force)

PAGE

PAGE PROOFS

corruption and tax evasion. Rapid population growth puts pressure on infrastructure that is already insuf

PROOFScorruption and tax evasion. Rapid population growth puts pressure on infrastructure that is already insuf�cient. It breaks down, is chaotic, congested, decaying and inef�cient. Apart from causing people to live

PROOFS�cient. It breaks down, is chaotic, congested, decaying and inef�cient. Apart from causing people to live in miserable conditions, poor infrastructure also scares away new businesses. This means that production is

PROOFSin miserable conditions, poor infrastructure also scares away new businesses. This means that production is

In many low-income countries, rapid population growth increases unemploy

PROOFS In many low-income countries, rapid population growth increases unemploy

ment (i.e. when those 15 years of age and over who want work cannot �nd jobs). Figure 5.23 shows the

PROOFSment (i.e. when those 15 years of age and over who want work cannot �nd jobs). Figure 5.23 shows the massive scale of this problem with rates in some countries over 40 per cent of the labour force. In addition,

PROOFSmassive scale of this problem with rates in some countries over 40 per cent of the labour force. In addition,

(i.e. when those working are not employed to their capacity and, for

PROOFS (i.e. when those working are not employed to their capacity and, for

example, could work more hours and produce more output per hour). Commonly, those who are employed

PROOFSexample, could work more hours and produce more output per hour). Commonly, those who are employed are working at perhaps only 50–60 per cent of their potential. Together, unemployment and underemploy

PROOFS

are working at perhaps only 50–60 per cent of their potential. Together, unemployment and underemployment mean that a very large part of the country’s labour resources are idle, and its economy is operating PROOFS

ment mean that a very large part of the country’s labour resources are idle, and its economy is operating well below capacity and inside its PPF. As a result, production and income levels per head of population are PROOFS

well below capacity and inside its PPF. As a result, production and income levels per head of population are



• Problems in education and skills. Potentially, people are one of the most valuable economic resources for any nation. Although low-income countries often have large labour forces, unfortunately most are unskilled. Illiteracy and the lack of access to information, new ideas, technology and skills means that agriculture, manufacturing, services and administration all remain backward. Poor education standards (typically with youth literacy rates for 15–24 year olds of only 50–60 per cent) slow economic development and contribute to poverty. Figure 5.24 shows the sharp contrasts in educational opportunities for low-income countries, as compared to high-income countries such as Australia.

There are many reasons for inadequate access to education. For example, given rapid population growth and limited �nance, governments simply cannot provide suf�cient schools and trained staff. In addition, a common expectation and necessity is that children work from an early age and contribute �nancially to the family.

Highincome

Uppermiddleincome

Lowermiddleincome

Lowincome

Tertiary

Gro

ss e

nrol

men

t ra

tio

(per

cent

age)

0

25

50

75

100

Pre-primary

Highincome

Uppermiddleincome

Lowermiddleincome

Sources: United Nations Educational, Scienti�c and Cultural Organization Institute for Statistics;World Development Indicators database (SE.PRE.ENRR, SE.TER.ENRR).

Lowincome

Not all children have the same opportunities to enrol in school

19

90

20

12

–13

0

25

50

75

100

19

90

20

12

–13

FIGURE 5.24 Children in low-income countries have fewer educational opportunities than those in high-income countries, restricting the growth in labour productivity, GDP and incomes.

Source: Graphs copied directly from the World Bank Development Indicators 2016, p. 9, https://openknowledge.worldbank.org/bitstream/handle/10986/23969/9781464806834.pdf.

• Environmental problems. Generally, more people means that there is greater pollution. In part, this is because of the need to increase the production of goods and services. It often means that natural resources are overused and abused, resulting in environmental degradation. For example, to allow for the growth of agriculture to feed growing populations in Indonesia and Brazil, logging and the clearing of forests have occurred on a massive scale. This has led to the destruction of native habitat, extensive soil erosion, reduced water and river quality, and increased risk of mud slides that destroy villages and infrastructure. Again, pov-erty is increased and living conditions become more depressed.

The problem of inef�cient government and other institutionsDemocracy involves giving people the freedom every few years to choose who will govern them. Often low-income countries have dictatorships and democracy fails to thrive. Ordinary people are usually power-less to judge or comment about poor government. The media is unable to expose rampant corruption and administrative failure, and vital economic and social change cannot occur. This slows development and incom-petence by government goes on, unchecked. Too often, for example, of�cials look after themselves, protect their friends, hand out special privileges to interest groups and fail to use policies to redistribute income and equitably share the bene�ts of economic development. In addition, it is not uncommon in low-income coun-tries with military dictatorships for scarce resources to be redirected, away from providing basic community services and infrastructure, into defence spending.

Sometimes this is even �nanced using foreign borrowing involving expensive debt repayments. This lowers economic development and adds to poverty.

Problems of limited foreign trade and rising debtCountries need to export in order to help pay for necessary imports. They also have to meet the burden of paying interest on their foreign debt or overseas borrowing. Unfortunately, there are many obstacles pre-venting low-income countries from being able to pay their way in international �nancial transactions with the rest of the world. As a result, most low-income countries have large de�cits on their balance of payments cur-rent account, and massive levels of foreign debt. Let us take a closer look.

UNCORRECTED Children in low-income countries have fewer educational opportunities than those in high-income

UNCORRECTED Children in low-income countries have fewer educational opportunities than those in high-income countries, restricting the growth in labour productivity, GDP and incomes.

UNCORRECTED countries, restricting the growth in labour productivity, GDP and incomes.

Graphs copied directly from the World Bank Development Indicators 2016, p. 9, https://openknowledge.worldbank.org/

UNCORRECTED Graphs copied directly from the World Bank Development Indicators 2016, p. 9, https://openknowledge.worldbank.org/

bitstream/handle/10986/23969/9781464806834.pdf.

UNCORRECTED bitstream/handle/10986/23969/9781464806834.pdf.

Generally, more people means that there is greater pollution. In part, this is

UNCORRECTED Generally, more people means that there is greater pollution. In part, this is

because of the need to increase the production of goods and services. It often means that natural resources

UNCORRECTED because of the need to increase the production of goods and services. It often means that natural resources are overused and abused, resulting in environmental degradation. For example, to allow for the growth of

UNCORRECTED

are overused and abused, resulting in environmental degradation. For example, to allow for the growth of agriculture to feed growing populations in Indonesia and Brazil, logging and the clearing of forests have

UNCORRECTED

agriculture to feed growing populations in Indonesia and Brazil, logging and the clearing of forests have occurred on a massive scale. This has led to the destruction of native habitat, extensive soil erosion, reduced

UNCORRECTED

occurred on a massive scale. This has led to the destruction of native habitat, extensive soil erosion, reduced water and river quality, and increased risk of mud slides that destroy villages and infrastructure. Again, pov

UNCORRECTED

water and river quality, and increased risk of mud slides that destroy villages and infrastructure. Again, poverty is increased and living conditions become more depressed.

UNCORRECTED

erty is increased and living conditions become more depressed.

The problem of inef�cient government and other institutions

UNCORRECTED

The problem of inef�cient government and other institutions

UNCORRECTED

Democracy

UNCORRECTED

Democracy involves giving people the freedom every few years to choose who will govern them. Often

UNCORRECTED

involves giving people the freedom every few years to choose who will govern them. Often low-income countries have dictatorships and democracy fails to thrive. Ordinary people are usually power

UNCORRECTED

low-income countries have dictatorships and democracy fails to thrive. Ordinary people are usually powerless to judge or comment about poor government. The media is unable to expose rampant corruption and

UNCORRECTED

less to judge or comment about poor government. The media is unable to expose rampant corruption and administrative failure, and vital economic and social change cannot occur. This slows development and incomUNCORRECTED

administrative failure, and vital economic and social change cannot occur. This slows development and incompetence by government goes on, unchecked. Too often, for example, of�cials look after themselves, protect UNCORRECTED

petence by government goes on, unchecked. Too often, for example, of�cials look after themselves, protect their friends, hand out special privileges to interest groups and fail to use policies to redistribute income and UNCORRECTED

their friends, hand out special privileges to interest groups and fail to use policies to redistribute income and

PAGE

PAGE Low

PAGE Lowincome

PAGE income

United Nations Educational, Scienti�c and Cultural Organization Institute for Statistics;

PAGE United Nations Educational, Scienti�c and Cultural Organization Institute for Statistics;

World Development Indicators database (SE.PRE.ENRR, SE.TER.ENRR).

PAGE World Development Indicators database (SE.PRE.ENRR, SE.TER.ENRR).

Children in low-income countries have fewer educational opportunities than those in high-income PAGE

Children in low-income countries have fewer educational opportunities than those in high-income

PROOFS

LowerPROOFS

LowerPROOFS

PROOFS

PROOFS

PROOFS

PROOFS

PROOFS

PROOFS

PROOFS

PROOFS

PROOFS

PROOFS



When low-income countries borrow credit from richer countries, this creates the burden of repaying debt abroad, along with regular interest payments. These repayments cause scarce resources to be reallocated away from other uses such as government spending on water supply, and providing health and education that would improve the wellbeing of people.

• Limited agricultural exports. It is common to � nd a large proportion of the population in low- income countries involved with subsistence agriculture. This obviously produces no surplus output to boost export sales and incomes. However, often the other more modern part of the rural sector produces for local and, especially, export markets. It entails growing cash crops and other food items (e.g. cocoa, sugar, coffee, spices, maize, timber, palm oil and rice). Unfortunately, there is little value added in this line of industry (due to the lack of processing) and so many of their commodities command only low prices internationally. Furthermore, high-income countries including the United States, Switzerland, Japan and the European Union, use tariffs and subsidies to protect their own rural industries. This all means that export incomes of poor countries are fairly low, and many nations face large CADs and rising foreign debts.

• Limited manufactured exports. There is a growing need in low-income countries to focus on basic man-ufactured exports (e.g. textiles and clothing, toys, simple electrical goods) produced in urban areas. This is often because opportunities and land for farming are limited, rural commodity prices are depressed, and incomes are low. As a result, unemployed or underemployed labour drifts to the cities in search of jobs in manufacturing. However, these countries’ exports of simple manufactured or processed goods are often reduced by the existence of substantial tariffs, import quotas, export subsidies and other protectionist tricks used by high-income countries.

• Increased reliance on imports. Often there is a reliance on imports of food, oil and more elaborately man-ufactured items (e.g. equipment) because of obstacles that restrict domestic production in these areas. This adds to a country’s trade and current account de� cit.

• The problem of overseas debt repayments. There are many reasons why many low-income nations have high levels of foreign debt and problems with debt repayment. For instance, savings levels are usually low. This scarcity of savings causes local interest rates to be high, making � nance for investment spending on capital equipment very expensive. Third World debt is also worsened by the fact that interest rates abroad are often lower than those offered locally. In addition, generous credit was previously made available at very seductive interest rates, sometimes by multilateral institutions like the International Monetary Fund (IMF) and World Bank. Governments in low-income countries often face serious � nancial problems, driving them into debt. On the one hand, the government’s economic worries are caused by inadequate revenue. As noted previously, this is due to subsistence or low average incomes of the population and tax collection dif� culties including corruption and institutional failings. On the other hand, with rapid population growth, the required level of government spending on providing basic social and economic infrastructure (e.g. services including health, education, transport, water supply, power generation) is massive. In addition, often the borrowed

UNCORRECTED It is common to � nd a large proportion of the population in low- income

UNCORRECTED It is common to � nd a large proportion of the population in low- income countries involved with subsistence agriculture. This obviously produces no surplus output to boost

UNCORRECTED countries involved with subsistence agriculture. This obviously produces no surplus output to boost export sales and incomes. However, often the other more modern part of the rural sector produces for

UNCORRECTED export sales and incomes. However, often the other more modern part of the rural sector produces for local and, especially, export markets. It entails growing cash crops and other food items (e.g. cocoa,

UNCORRECTED local and, especially, export markets. It entails growing cash crops and other food items (e.g. cocoa, sugar, coffee, spices, maize, timber, palm oil and rice). Unfortunately, there is little

UNCORRECTED sugar, coffee, spices, maize, timber, palm oil and rice). Unfortunately, there is little line of industry (due to the lack of processing) and so many of their commodities command only low

UNCORRECTED line of industry (due to the lack of processing) and so many of their commodities command only low prices internationally. Furthermore, high-income countries including the United States, Switzerland,

UNCORRECTED prices internationally. Furthermore, high-income countries including the United States, Switzerland, Japan and the European Union, use tariffs and subsidies to protect their own rural industries. This all

UNCORRECTED

Japan and the European Union, use tariffs and subsidies to protect their own rural industries. This all means that export incomes of poor countries are fairly low, and many nations face large CADs and rising

UNCORRECTED

means that export incomes of poor countries are fairly low, and many nations face large CADs and rising

Limited manufactured exports.

UNCORRECTED

Limited manufactured exports. There is a growing need in low-income countries to focus on basic man-

UNCORRECTED

There is a growing need in low-income countries to focus on basic man-ufactured exports (e.g. textiles and clothing, toys, simple electrical goods) produced in urban areas. This

UNCORRECTED

ufactured exports (e.g. textiles and clothing, toys, simple electrical goods) produced in urban areas. This

UNCORRECTED

is often because opportunities and land for farming are limited, rural commodity prices are depressed, and

UNCORRECTED

is often because opportunities and land for farming are limited, rural commodity prices are depressed, and incomes are low. As a result, unemployed or underemployed labour drifts to the cities in search of jobs in

UNCORRECTED

incomes are low. As a result, unemployed or underemployed labour drifts to the cities in search of jobs in manufacturing. However, these countries’ exports of simple manufactured or processed goods are often

UNCORRECTED

manufacturing. However, these countries’ exports of simple manufactured or processed goods are often reduced by the existence of substantial tariffs, import quotas, export subsidies and other protectionist tricks

UNCORRECTED

reduced by the existence of substantial tariffs, import quotas, export subsidies and other protectionist tricks used by high-income countries.

UNCORRECTED

used by high-income countries.Increased reliance on imports.

UNCORRECTED

Increased reliance on imports.ufactured items (e.g. equipment) because of obstacles that restrict domestic production in these areas. This UNCORRECTED

ufactured items (e.g. equipment) because of obstacles that restrict domestic production in these areas. This adds to a country’s trade and current account de� cit.UNCORRECTED

adds to a country’s trade and current account de� cit.

PAGE

PAGE

PAGE When low-income countries borrow credit from richer countries, this creates the burden of repaying debt abroad, along

PAGE When low-income countries borrow credit from richer countries, this creates the burden of repaying debt abroad, along with regular interest payments. These repayments cause scarce resources to be reallocated away from other uses such

PAGE with regular interest payments. These repayments cause scarce resources to be reallocated away from other uses such as government spending on water supply, and providing health and education that would improve the wellbeing of

PAGE as government spending on water supply, and providing health and education that would improve the wellbeing of

It is common to � nd a large proportion of the population in low- income PAGE

It is common to � nd a large proportion of the population in low- income countries involved with subsistence agriculture. This obviously produces no surplus output to boost PAGE

countries involved with subsistence agriculture. This obviously produces no surplus output to boost

PROOFS

PROOFS



money has been misappropriated through corruption, wasted by incompetent of�cials on poorly selected projects, and misused for �nancing repression and military operations (i.e. often around 20 per cent of Third World debt was spent on military equipment).

A seemingly attractive solution to this problem is for the private and government sectors to �nance their spending by borrowing credit overseas. Unfortunately, this adds to the foreign debt of low-income countries. As shown in �gure 5.25, public sector debt levels in many low-income countries like Lebanon or Zimbabwe, much of it money borrowed overseas, are very high when compared with the size of their economy or GDP. One would have to question the capacity of these countries to ever repay the loans without causing their citizens much pain and suffering.

Public sector debt as a percentage of GDP

Cou

ntry

ZimbabweLebanon

YemenEgypt

JordanGhana

Sri LankaMoroccoPakistan

0 50 100 150 200 250

MozambiqueSyria

Cote d’lvoireUganda 34.8

52.357.258.3

64.873.474.77679.2

205.3138.8

91.793.5

FIGURE 5.25 The problem of public sector foreign debt (much of it borrowed overseas) in selected low-income countries

Source: Data derived from CIA World Factbook, https://www.cia.gov/library/publications/the-world-factbook/rankorder/2186rank.html. Note: Mostly 2015 data.

The other problem is that interest repayments on foreign debt can amount to billions of dollars annually, so government spending on necessary community services (e.g. health, housing and education) and infra-structure (e.g. water supply and transport) must be cut dramatically. This then contributes to even more poverty and further depresses living standards. Perhaps we can now see why forgiveness of debt, offered by high-income countries in recent years, may allow struggling nations to make a new start and alleviate pov-erty. Although borrowing credit clearly has its dangers, moderate levels of government debt can be handy, provided that the borrowed funds have been used productively for �nancing important projects that add to the nation’s self-suf�ciency and the quality of daily life for ordinary people.

The problem of inequality in income and wealthThe gap in income and wealth between the rich and poor in low-income countries is even greater than it is in Australia. The Gini coef�cient is often used to measure the levels of inequality. It is a number between 0 (meaning total equality) and 1 (meaning total inequality). As shown in �gure 5.26, the Gini coef�cient in many low-income countries (e.g. Namibia, Central African Republic, South Africa, Botswana and Lesotho) is often very high, between 0.50 and 0.70.

By way of contrast, Australia’s Gini coef�cient for income is currently around 0.33 (i.e. relatively more equal). Frequently, inequality is reinforced by unequal ownership of land, of�cial corruption, the absence of democracy and free speech, military dictatorship, closed markets, state and private monopolies, the caste system that ranks society, special favours involving deals with the government, and the abuse of social, pol-itical and economic power. In addition, undemocratic governments in these countries often do not have a real commitment to promoting a fair or equitable income distribution. As a result, the rich tend to get richer, the poor get poorer, poverty thrives and living standards remain low.

Historical problemsOne thing that many low-income countries have in common (e.g. Africa, South America, Asia, Central Europe) is that during the 1700s, 1800s and early 1900s, they were colonies of European powers. Many of these nations were exploited for their cheap and obedient labour and for their natural resources. In the past, much wealth and income was sucked out, often leaving the local population worse off than before. It is hardly surprising, therefore, that most of these countries (e.g. India, South Africa, Indonesia, Vietnam and East Timor) pushed for independence through both peaceful and other means. In some cases, unfortunately, the end of European colonialism did not mean the end of poverty.

UNCORRECTED problem is that interest repayments on foreign debt can amount to billions of dollars annually,

UNCORRECTED problem is that interest repayments on foreign debt can amount to billions of dollars annually, so government spending on necessary community services (e.g. health, housing and education) and infra

UNCORRECTED so government spending on necessary community services (e.g. health, housing and education) and infrastructure (e.g. water supply and transport) must be cut dramatically. This then contributes to even more

UNCORRECTED structure (e.g. water supply and transport) must be cut dramatically. This then contributes to even more poverty and further depresses living standards. Perhaps we can now see why forgiveness of debt, offered by

UNCORRECTED poverty and further depresses living standards. Perhaps we can now see why forgiveness of debt, offered by

UNCORRECTED high-income countries in recent years, may allow struggling nations to make a new start and alleviate pov

UNCORRECTED high-income countries in recent years, may allow struggling nations to make a new start and alleviate poverty. Although borrowing credit clearly has its dangers, moderate levels of government debt can be handy,

UNCORRECTED erty. Although borrowing credit clearly has its dangers, moderate levels of government debt can be handy, provided that the borrowed funds have been used productively for �nancing important projects that add to

UNCORRECTED

provided that the borrowed funds have been used productively for �nancing important projects that add to the nation’s self-suf�ciency and the quality of daily life for ordinary people.

UNCORRECTED

the nation’s self-suf�ciency and the quality of daily life for ordinary people.

The problem of inequality in income and wealth

UNCORRECTED

The problem of inequality in income and wealthThe gap in income and wealth between the rich and poor in low-income countries is even greater than it is

UNCORRECTED

The gap in income and wealth between the rich and poor in low-income countries is even greater than it is in Australia. The Gini coef�cient is often used to measure the levels of inequality. It is a number between

UNCORRECTED

in Australia. The Gini coef�cient is often used to measure the levels of inequality. It is a number between 0 (meaning total equality) and 1 (meaning total inequality). As shown in �gure 5.26, the Gini coef�cient in

UNCORRECTED

0 (meaning total equality) and 1 (meaning total inequality). As shown in �gure 5.26, the Gini coef�cient in

UNCORRECTED

many low-income countries (e.g. Namibia, Central African Republic, South Africa, Botswana and Lesotho) is

UNCORRECTED

many low-income countries (e.g. Namibia, Central African Republic, South Africa, Botswana and Lesotho) is often very high, between 0.50 and 0.70.

UNCORRECTED

often very high, between 0.50 and 0.70.By way of contrast, Australia’s Gini coef�cient for income is currently around 0.33 (i.e. relatively more

UNCORRECTED

By way of contrast, Australia’s Gini coef�cient for income is currently around 0.33 (i.e. relatively more equal). Frequently, inequality is reinforced by unequal ownership of land, of�cial corruption, the absence UNCORRECTED

equal). Frequently, inequality is reinforced by unequal ownership of land, of�cial corruption, the absence of democracy and free speech, military dictatorship, closed markets, state and private monopolies, the caste UNCORRECTED

of democracy and free speech, military dictatorship, closed markets, state and private monopolies, the caste system that ranks society, special favours involving deals with the government, and the abuse of social, polUNCORRECTED

system that ranks society, special favours involving deals with the government, and the abuse of social, pol

PAGE

PAGE Public sector debt as a percentage of GDP

PAGE Public sector debt as a percentage of GDP

PAGE 150

PAGE 150

oblem of public sector foreign debt (much of it borrowed overseas) in selected low-income

PAGE oblem of public sector foreign debt (much of it borrowed overseas) in selected low-income

//www.cia.gov/library/publications/the-world-factbook/rankorder/2186rank.html. PAGE //www.cia.gov/library/publications/the-world-factbook/rankorder/2186rank.html.

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138.8

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138.8



A R C T I C O C E A N

I N D I A NO C E A N

P A C I F I CO C E A N


<0.25

0.25–0.29

0.30–0.34

0.35–0.39

0.40–0.44

Key for Gini coef�cients0.45–0.49

0.50–0.54

0.55–0.59

>0.60

No data

Gin

i coe

f�ci

ent

(0 m

eans

tot

aleq

ualit

y, 1

mea

ns t

otal

ineq

ualit

y)

0

Aus

tral

ia

Ken

ya

Iran

Mad

agas

car

Zim

babw

e

Zam

bia

Hon

dura

s

Bol

ivia

Cen

tral

Afr

ican

Rep

ublic

Bot

swan

a

Leso

tho

Sou

th A

fric

a

Nam

ibia

0.6

Incomes are usually divided unevenly in low-income countries

0.7

0.8

0.33

0.44 0.440.48 0.5 0.51 0.52

0.59 0.61 0.63 0.63 0.65

0.71

0.5

0.4

0.3

0.2

0.1

FIGURE 5.26 Incomes are usually divided unevenly in low-income countries (Gini coef�cient: 0 means total equality, 1 means total inequality)

Sources: Data derived from CIA World Factbook; map based on http://en.wikipedia.org/wiki/File:Gini_Coef�cient_World_CIA_Report_2009.png.


• Why some countries are poor and others rich • The new way of colonialism in Africa• Documentary: The dark side of chocolate• Cappuccino trail• Ethiopia, 30 years on from famine and Live Aid• Population and world resources• Stealing Africa — why poverty?

UNCORRECTED

UNCORRECTED

UNCORRECTED

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Ken

ya

UNCORRECTED

Ken

ya

Iran

UNCORRECTED

Iran

Mad

agas

car

UNCORRECTED

Mad

agas

car

UNCORRECTED

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UNCORRECTED

UNCORRECTED

UNCORRECTED

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UNCORRECTED

UNCORRECTED

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UNCORRECTED

UNCORRECTED

UNCORRECTED

UNCORRECTED

UNCORRECTED

5.26

UNCORRECTED

5.26 Incomes ar

UNCORRECTED

Incomes ar1 means total inequality)

UNCORRECTED

1 means total inequality)

Sources:

UNCORRECTED

Sources: Data derived from CIA World Factbook; map based on http://en.wikipedia.org/wiki/File:Gini_Coef�cient_World_CIA_

UNCORRECTED

Data derived from CIA World Factbook; map based on http://en.wikipedia.org/wiki/File:Gini_Coef�cient_World_CIA_

UNCORRECTED

Report_2009.png.UNCORRECTED

Report_2009.png.

PAGE

PAGE

PAGE

PAGE

PAGE

PAGE Incomes are usually divided unevenly in low-income countries

PAGE Incomes are usually divided unevenly in low-income countries

0.59

PAGE 0.59 0.61

PAGE 0.61 0.63

PAGE 0.63

PAGE

PAGE

PAGE

PAGE

PAGE

PAGE

PAGE

PAGE

PAGE

PAGE

PAGE

PAGE

PAGE PROOFS

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Incomes are usually divided unevenly in low-income countriesPROOFS

Incomes are usually divided unevenly in low-income countries




1 Outline how the existence of each of the following problems in many low-income countries might lead to poverty.a The problem of limited productive capacityb Low savings and investment levelsc Rapid growth in the population and size of the labour forced The problem of inef�cient government and other institutionse Problems of limited foreign trade and rising overseas debtf The problem of inequality in the distribution of income and wealthg Historical problems




5.13 Some government policy solutions to promote development and improve living standards in low-income countriesWith so much suffering in low-income countries, there is a desperate need for effective government policies and international collaboration to help accelerate sustainable development that improves the daily lives of people. Unfortunately, there is no single solution to the challenges and the problems need to be tackled on many fronts.

Most economists believe that one of the development priorities must me to accelerate economic growth so that the economy’s output of goods and services rises at a faster rate than its population. Ultimately, this involves growing a country’s productive capacity (i.e. increase the size of the PPF) through access to more resources, or especially, by using existing resources more ef�ciently. As shown in �gure 5.27, this means shifting the production possibility frontier (PPF) outwards and to the right, through improvements in the volume or ef�ciency of resources. This allows for a rise in average incomes and better access to goods and services. Provided that the government uses effective policies to redistribute this production more equitably, poverty can be reduced and living standards improved.

With this in mind, we now turn to consider the types of government policies and reforms that are required to accelerate development.

Policies to lift investment levelsAs mentioned, Third World nations have low subsistence incomes and high poverty rates. Savings (income or money not currently spent or consumed) are simply inadequate to �nance the necessary investment in govern-ment infrastructure, and in plant and equipment required to set up or grow private businesses. Countries need to escape the vicious cycle of poverty and low development. Breaking out of this circle is not easy, but the following strategies may help: • Governments must set up and supervise well run and secure banks and �nancial institutions to collect what-

ever household savings there are. • International capital in�ow or foreign investment must be pursued, but with appropriate safeguards. • International aid and gifts (private and government) need to be encouraged, as long as they do not have

harsh conditions attached that hurt the local community. • A system of microcredit needs to be created where small sums of money, perhaps as little as $100–200, are

provided to those who want to start up a tiny business and who, otherwise, would not qualify for bank loans. This needs to be supplemented with some free basic business training.

• The government needs to ensure that the rich, in particular, pay the required taxes (on incomes and luxury goods) to help �nance public investment and infrastructure projects.

• Government incentives (e.g. tax holidays) are needed to encourage private investment in projects that help promote national self-suf�ciency in food and basic community services (i.e. social infrastructure).

• Measures (e.g. proper accounting and transparent record keeping, freedom of information and the press) are needed to help avoid wasting or misusing the government’s limited �nancial resources, adding to the burden of repaying debt.

• Exports (e.g. cash crops and basic manufactured items) from low-income countries need to be encouraged. This may be pursued through multilateral (perhaps through institutions like the World Trade Organization) or bilateral free trade agreements (between two countries) that are designed to reduce high levels of protec-tion of primary industry, especially in Europe, Japan and the US. This would help to boost national income, savings and investment.

UNCORRECTED frontier (PPF) outwards and to the right, through improvements in the volume or ef�ciency of resources. This allows

UNCORRECTED frontier (PPF) outwards and to the right, through improvements in the volume or ef�ciency of resources. This allows for a rise in average incomes and better access to goods and services. Provided that the government uses effective

UNCORRECTED for a rise in average incomes and better access to goods and services. Provided that the government uses effective policies to redistribute this production more equitably, poverty can be reduced and living standards improved.

UNCORRECTED policies to redistribute this production more equitably, poverty can be reduced and living standards improved.With this in mind, we now turn to consider the types of government policies and reforms that are required

UNCORRECTED With this in mind, we now turn to consider the types of government policies and reforms that are required

Policies to lift investment levels

UNCORRECTED Policies to lift investment levelsAs mentioned, Third World nations have low subsistence incomes and high poverty rates.

UNCORRECTED

As mentioned, Third World nations have low subsistence incomes and high poverty rates. money not currently spent or consumed) are simply inadequate to �nance the necessary

UNCORRECTED

money not currently spent or consumed) are simply inadequate to �nance the necessary ment infrastructure, and in plant and equipment required to set up or grow private businesses. Countries need

UNCORRECTED

ment infrastructure, and in plant and equipment required to set up or grow private businesses. Countries need vicious cycle of poverty

UNCORRECTED

vicious cycle of povertyfollowing strategies may help:

UNCORRECTED

following strategies may help:vernments must set up and supervise well run and secure banks and �nancial institutions to collect what

UNCORRECTED

vernments must set up and supervise well run and secure banks and �nancial institutions to collect whatever household savings there are.

UNCORRECTED

ever household savings there are.International

UNCORRECTED

International capital in�ow or foreign investment must be pursued, but with appropriate safeguards.

UNCORRECTED

capital in�ow or foreign investment must be pursued, but with appropriate safeguards.International aid and gifts (pri

UNCORRECTED

International aid and gifts (priharsh conditions attached that hurt the local community.

UNCORRECTED

harsh conditions attached that hurt the local community.•

UNCORRECTED

• A system of microcredit needs to be created where small sums of mone

UNCORRECTED

A system of microcredit needs to be created where small sums of moneprovided to those who want to start up a tiny business and who, otherwise, would not qualify for bank loans. UNCORRECTED

provided to those who want to start up a tiny business and who, otherwise, would not qualify for bank loans. This needs to be supplemented with some free basic business training.UNCORRECTED

This needs to be supplemented with some free basic business training.

PAGE With so much suffering in low-income countries, there is a desperate need for effective government policies and

PAGE With so much suffering in low-income countries, there is a desperate need for effective government policies and international collaboration to help accelerate sustainable development that improves the daily lives of people.

PAGE international collaboration to help accelerate sustainable development that improves the daily lives of people. Unfortunately, there is no single solution to the challenges and the problems need to be tackled on many fronts.

PAGE Unfortunately, there is no single solution to the challenges and the problems need to be tackled on many fronts. priorities must me to accelerate economic growth so that the

PAGE priorities must me to accelerate economic growth so that the

economy’s output of goods and services rises at a faster rate than its population. Ultimately, this involves growing

PAGE economy’s output of goods and services rises at a faster rate than its population. Ultimately, this involves growing

(i.e. increase the size of the PPF) through access to more resources, or especially,

PAGE (i.e. increase the size of the PPF) through access to more resources, or especially,

by using existing resources more ef�ciently. As shown in �gure 5.27, this means shifting the production possibility PAGE by using existing resources more ef�ciently. As shown in �gure 5.27, this means shifting the production possibility frontier (PPF) outwards and to the right, through improvements in the volume or ef�ciency of resources. This allows PAGE

frontier (PPF) outwards and to the right, through improvements in the volume or ef�ciency of resources. This allows for a rise in average incomes and better access to goods and services. Provided that the government uses effective PAGE

for a rise in average incomes and better access to goods and services. Provided that the government uses effective

PROOFS

PROOFS

PROOFS



5.13 Some government policy solutions to promote

PROOFS5.13 Some government policy solutions to promote development and improve living standards in

PROOFSdevelopment and improve living standards in

With so much suffering in low-income countries, there is a desperate need for effective government policies and PROOFS

With so much suffering in low-income countries, there is a desperate need for effective government policies and international collaboration to help accelerate sustainable development that improves the daily lives of people. PROOFS

international collaboration to help accelerate sustainable development that improves the daily lives of people.



productionof services

Annual

Annualproductionof goods

1. Economic development may occur when thereis economic growth and a bigger PPF.

0

A country’s new PPFafter there has beenstrong economic growthand the expansion ofproductive capacity

A country’s originalproductive capacitybefore economicgrowth occurs

2. A person’s slice of the ‘production/income pie’before economic growth occurs

3. A person’s slice of the ‘production/income pie’after strong economic growth lifts national

output and income

FIGURE 5.27 How growing the size of the economy’s productive capacity can lift incomes and improve living standards

Provision of basic infrastructureAs we now know, having adequate economic and social infrastructure including education, health, power, water supply, transport, and law and order is an important key to growing the nation’s productive capacity, alleviating poverty and improving the quality of daily life. However, problems here are dif�cult to �x because of the scarcity of savings and lack of government revenue. Various strategies were previously mentioned as to how countries might raise the necessary investment capital.

When good infrastructure is not present in developing countries, it is often dif�cult to accelerate economic growth.

UNCORRECTED of the scarcity of savings and lack of government revenue. Various strategies were previously mentioned as to

UNCORRECTED of the scarcity of savings and lack of government revenue. Various strategies were previously mentioned as to how countries might raise the necessary investment capital.

UNCORRECTED how countries might raise the necessary investment capital.

UNCORRECTED PAGE How growing the size of the economy’s productive capacity can lift incomes and improve living standards

PAGE How growing the size of the economy’s productive capacity can lift incomes and improve living standards

infrastructure

PAGE infrastructure including education, health, power,

PAGE including education, health, power,

water supply, transport, and law and order is an important key to growing the nation’s productive capacity,

PAGE water supply, transport, and law and order is an important key to growing the nation’s productive capacity, alleviating poverty and improving the quality of daily life. However, problems here are dif�cult to �x because PAGE alleviating poverty and improving the quality of daily life. However, problems here are dif�cult to �x because of the scarcity of savings and lack of government revenue. Various strategies were previously mentioned as to PAGE

of the scarcity of savings and lack of government revenue. Various strategies were previously mentioned as to

PROOFS

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PROOFS

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PROOFS

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PROOFS

How growing the size of the economy’s productive capacity can lift incomes and improve living standardsPROOFS

How growing the size of the economy’s productive capacity can lift incomes and improve living standards



Managing debt levelsDebt levels in poor countries are often high and represent well over 100 per cent of their GDP in some cases. This causes crippling interest repayments that must be made to rich nations. It often forces govern-ments to reduce the level of government spending on community services and infrastructure. Debt needs to be cut to manageable levels, wasteful ‘white elephant’ projects that add little to welfare terminated, sub-stantial military expenditures cut and governments held accountable for all spending. Even so, some coun-tries need a hand getting their debt under control. The International Monetary Fund (IMF) has provided full or partial debt relief to 36 countries to January 2016 equal to $76 billion. This provides a breather, but is not a permanent solution. Additionally, borrowed money needs to be used ef�ciently for projects that bring widespread improvements in the capacity of the economy to produce goods and services that encourage national self-suf�ciency and independence.

Reforming government and promoting democracyPoor countries badly need political democracy where the majority of voters in regular and free elections, can choose the government from a range of candidates representing different political parties. In addition, it is also vital that there is freedom of speech and freedom of the press (i.e. where the media can be critical of govern-ment policies). These things add to administrative transparency, help to hold governments accountable for their actions, and reduce incompetence, corruption and war.

A strong legal framework is also important in poorer countries to ensure that laws protect the rights of workers, make child labour illegal so children gain an education, guarantee civil rights including free speech, protect the environment and promote strong price competition in domestic markets. While change is desper-ately needed, making it happen peacefully is often dif�cult. This is because those with power usually want to hang on to it by using military force, repression and resisting reform.

Reducing trade protection by rich countriesMany rich nations protect their farmers, manufacturing �rms and miners from competition by poorer coun-tries that are trying to export primary commodities (e.g. coffee, rice, soy beans, maize and sugar) and basic manufactured products. Here, we think of the heavy protection of farmers in the US, Japan and the European Union by means of tariffs, subsidies and import quotas that were operated in past decades. We also think of the attempts by Australia and some developing countries through numerous rounds of multilateral trade negotiations to convince these rich countries of the need to expand free trade. Progress here has been slow. However, as table 5.3 shows, tariff protection on products imported from the ‘least’ developed Third World countries came down during the last three decades.

TABLE 5.3Changes in levels of tariff protection by selected developed countries on imports from the least-developed Third World countries

Country

Percentage of imported goods from least

developed countries that are admitted free of

tariffs 2000/2007

Average tariff rate on agricultural

imports from least developed countries

2000/2007

Average tariff rate on textile


2000/2007

Average tariff rate on clothing


2000/2007

Australia 94.5/100.0 0.2/0.0 5.0/0.0 19.6/0.0

Canada 48.3/99.9 0.3/0.1 5.8/0.2 18.8/1.7

Japan 82.2/99.6 4.9/1.3 0.2/2.6 0.0/0.1

Switzerland 93.3/95.0 6.0/2.8 0.0/0.0 0.0/0.0

US 46.2/76.8 6.3/6.0 6.8/5.6 13.9/11.3

Sources: Data derived from the World Bank, World Development Indicators 2010, table 1.4, p. 44

Indeed, if all rich countries reduced protection, it would further boost the export incomes of poor countries, thereby reducing their need to borrow money and run up a large foreign debt. It would also make essential imports of equipment, medicines and technology by low-income countries more affordable, and lead to higher living standards.

Reducing income inequalityIncome inequality is often much larger in poor countries (typically the Gini coef�cient is between 0.50 and 0.70) than in rich nations (the Gini is generally less than 0.35). Frequently, inequality is reinforced by unequal ownership of land, of�cial corruption, the absence of democracy, closed markets, state and private monopolies,

UNCORRECTED Union by means of tariffs, subsidies and import quotas that were operated in past decades. We also think

UNCORRECTED Union by means of tariffs, subsidies and import quotas that were operated in past decades. We also think of the attempts by Australia and some developing countries through numerous rounds of multilateral trade

UNCORRECTED of the attempts by Australia and some developing countries through numerous rounds of multilateral trade negotiations to convince these rich countries of the need to expand free trade. Progress here has been slow.

UNCORRECTED negotiations to convince these rich countries of the need to expand free trade. Progress here has been slow. However, as table 5.3 shows, tariff protection on products imported from the ‘least’ developed Third World

UNCORRECTED However, as table 5.3 shows, tariff protection on products imported from the ‘least’ developed Third World countries came down during the last three decades.

UNCORRECTED countries came down during the last three decades.

UNCORRECTED

UNCORRECTED

UNCORRECTED

UNCORRECTED

UNCORRECTED

UNCORRECTED

UNCORRECTED Changes in levels of tariff protection by selected developed countries on imports from

UNCORRECTED Changes in levels of tariff protection by selected developed countries on imports from the least-developed Third World countries

UNCORRECTED the least-developed Third World countries

Percentage of imported

UNCORRECTED

Percentage of imported goods from least

UNCORRECTED

goods from least developed countries

UNCORRECTED

developed countries that are admitted free of

UNCORRECTED

that are admitted free of tariffs 2000/2007

UNCORRECTED

tariffs 2000/2007

Canada

UNCORRECTED

Canada

Japan

UNCORRECTED

Japan

Switzerland

UNCORRECTED

Switzerland

USUNCORRECTED

US

PAGE hang on to it by using military force, repression and resisting reform.

PAGE hang on to it by using military force, repression and resisting reform.

Reducing trade protection by rich countries

PAGE Reducing trade protection by rich countriesMany rich nations protect their farmers, manufacturing �rms and miners from competition by poorer coun

PAGE Many rich nations protect their farmers, manufacturing �rms and miners from competition by poorer countries that are trying to export primary commodities (e.g. coffee, rice, soy beans, maize and sugar) and basic

PAGE tries that are trying to export primary commodities (e.g. coffee, rice, soy beans, maize and sugar) and basic manufactured products. Here, we think of the heavy PAGE manufactured products. Here, we think of the heavy protectionPAGE

protection of farmers in the US, Japan and the European PAGE of farmers in the US, Japan and the European

Union by means of tariffs, subsidies and import quotas that were operated in past decades. We also think PAGE

Union by means of tariffs, subsidies and import quotas that were operated in past decades. We also think of the attempts by Australia and some developing countries through numerous rounds of multilateral trade PAGE

of the attempts by Australia and some developing countries through numerous rounds of multilateral trade

PROOFS where the majority of voters in regular and free elections, can

PROOFS where the majority of voters in regular and free elections, can choose the government from a range of candidates representing different political parties. In addition, it is also

PROOFSchoose the government from a range of candidates representing different political parties. In addition, it is also vital that there is freedom of speech and freedom of the press (i.e. where the media can be critical of govern

PROOFSvital that there is freedom of speech and freedom of the press (i.e. where the media can be critical of government policies). These things add to administrative transparency, help to hold governments accountable for their

PROOFSment policies). These things add to administrative transparency, help to hold governments accountable for their

A strong legal framework is also important in poorer countries to ensure that laws protect the rights of

PROOFSA strong legal framework is also important in poorer countries to ensure that laws protect the rights of

workers, make child labour illegal so children gain an education, guarantee civil rights including free speech,

PROOFSworkers, make child labour illegal so children gain an education, guarantee civil rights including free speech, protect the environment and promote strong price competition in domestic markets. While change is desper

PROOFS

protect the environment and promote strong price competition in domestic markets. While change is desperately needed, making it happen peacefully is often dif�cult. This is because those with power usually want to PROOFS

ately needed, making it happen peacefully is often dif�cult. This is because those with power usually want to



special favours involving deals with the government, the caste system and the abuse of social, political and economic power. Democratically elected governments can best deal with economic inequality by introducing policies including: • fairly progressive income taxes where rates (percentage of income paid in tax) rise with taxable income • provision of free or cheap basic community services • passing and enforcing trade practices acts to promote stronger competition between �rms in markets and

check personal greed • attacking corruption.

Reducing population pressuresPopulation in some low-income countries is growing quickly, at more than double the rate of high-income nations (some of which actually have declining populations). This places great strain on the government’s pro-vision of infrastructure and services (e.g. transport, water, education, power, transport, law and health), and leads to unemployment, underemployment and idle resources.

The great burden created by population pressures can however be eased. Historical experience tells us that birth rates slow and families get smaller if there are improvements in general health (e.g. clean water supply and control of HIV-AIDS, malaria, measles and tuberculosis) and education standards, and by low-ering the child mortality (death) rate. This is because, apart from common ignorance about family plan-ning and health matters, to some extent, large families also re�ect the uncertainties of infant survival and old age in countries where there is no government welfare system (e.g. unemployment bene�ts or old age pensions). Clearly, government spending to improve health and education must be given very high priority.


• Overpopulation: The future of planet Earth • Ethiopia: Land of tomorrow• New insights on poverty


1 Explain in general terms how governments in low-income countries might attempt to accelerate economic development.

2 How might each of the following government policies help accelerate economic development and improve the daily lives of people in low-income countries?a Policies that lift investment levelsb Improved provision of basic infrastructurec Debt levels are controlledd Reforms of government that promote democracy and greater opennesse Reductions in trade protection by rich countriesf Reductions in inequality in the distribution of income and wealthg Reductions in the rate of population growth






• School-assessed tasks > Option 3 > An essay

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governments

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governments in low-income countries might attempt to accelerate economic

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in low-income countries might attempt to accelerate economic

of the following

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of the following government policies

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government policiesthe daily lives of people in low-income countries?

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the daily lives of people in low-income countries?Policies that lift investment levels

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Policies that lift investment levelsoved provision of basic infrastructure

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oved provision of basic infrastructureDebt levels ar

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Debt levels are controlled

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e controlledReforms of gover

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Reforms of government that promote democracy and greater openness

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nment that promote democracy and greater opennessReductions in trade pr

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Reductions in trade prReductions in inequality in the distribution of income and wealth

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Reductions in inequality in the distribution of income and wealth

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Reductions in the rate of population gr

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Reductions in the rate of population gr

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PAGE PROOFS

vision of infrastructure and services (e.g. transport, water, education, power, transport, law and health), and

PROOFSvision of infrastructure and services (e.g. transport, water, education, power, transport, law and health), and

The great burden created by population pressures can however be eased. Historical experience tells us

PROOFSThe great burden created by population pressures can however be eased. Historical experience tells us that birth rates slow and families get smaller if there are improvements in general health (e.g. clean water

PROOFSthat birth rates slow and families get smaller if there are improvements in general health (e.g. clean water supply and control of HIV-AIDS, malaria, measles and tuberculosis) and education standards, and by low

PROOFSsupply and control of HIV-AIDS, malaria, measles and tuberculosis) and education standards, and by lowering the child mortality (death) rate. This is because, apart from common ignorance about family plan

PROOFSering the child mortality (death) rate. This is because, apart from common ignorance about family planning and health matters, to some extent, large families also re�ect the uncertainties of infant survival and

PROOFSning and health matters, to some extent, large families also re�ect the uncertainties of infant survival and old age in countries where there is no government welfare system (e.g. unemployment bene�ts or old

PROOFSold age in countries where there is no government welfare system (e.g. unemployment bene�ts or old age pensions). Clearly, government spending to improve health and education must be given very high

PROOFS

age pensions). Clearly, government spending to improve health and education must be given very high



5.14 International action taken to promote sustainable development and reduce poverty in low-income countriesInternational action and collaboration have been vital in helping low-income countries meet the challenges of reducing poverty. In particular, we think of the work of … • The United Nations (UN) • Individual countries through their ongoing provision of foreign aid.

However, here we will focus on the work of the United Nations, along with foreign aid.

The work of the United NationsIn September 2000, 189 countries agreed to eight key Millennium Development Goals (MDGs) proposed by the United Nations for achievement by the year 2015. In turn, these goals were then broken down into 21 targets that could be measured using 60 indicators of people’s wellbeing and daily existence. These eight basic goals (and how they are measured) are summarised in table 5.4.

TABLE 5.4 Summary of the UN’s Millennium Development goals, 2000–15

The Millennium Development Goals (MDGs) are a set of global development objectives to be achieved by 2015 that were unanimously adopted at the United Nations Millennium Summit in September 2000. They represent an unprecedented global unifying force for reducing poverty and improving human development. Progress towards the goals is measured against a number of targets, shown here, which were developed during and after the Summit.

1 End Poverty and Hunger

• Halve, between 1990 and 2015, the proportion of people whose income is less than one dollar a day.

• Achieve full and productive employment and decent work for all, including women and young people.

• Halve, between 1990 and 2015, the proportion of people who suffer from hunger.

2 Universal Education

• Ensure that, by 2015, children everywhere, boys and girls alike, will be able to complete a full course of primary schooling.

3 Gender Equality • Eliminate gender disparity in primary and secondary education, preferably by 2005, and in all levels of education no later than 2015.

4 Child Health • Reduce by two thirds, between 1990 and 2015, the under-�ve mortality rate.

5 Maternal Health • Reduce by three quarters the maternal mortality ratio.• Achieve universal access to reproductive health.

6 Combat HIV/AIDS • Have halted by 2015 and begun to reverse the spread of HIV/AIDS.• Achieve, by 2010, universal access to treatment for HIV/AIDS for all those who

need it.• Have halted by 2015 and begun to reverse the incidence of malaria and other

major diseases.

7 Environmental Sustainability

• Integrate the principles of sustainable development into country policies and programmes and reverse the loss of environmental resources.

• Reduce biodiversity loss, achieving, by 2010, a signi�cant reduction in the rate of loss.

• Halve, by 2015, the proportion of the population without sustainable access to safe drinking water and basic sanitation.

• By 2020, to have achieved a signi�cant improvement in the lives of at least 100 million slum dwellers.

8 Global Partnership

• Targets cover: trading and �nancial systems, the special development needs of disadvantaged states, debt sustainability, affordable access to essential drugs and access to information and communications technologies.

Sources: Table copied from ‘Budget — Australia’s International Development Assistance Program, 2011–12’, Statement by Kevin Rudd, Minister for Foreign Affairs (10 May 2011), p. viii; see http://budget.australia.gov.au/2011–12/content/download/ms_ausaid.pdf.

UNCORRECTED

UNCORRECTED complete a full course of primary schooling.

UNCORRECTED complete a full course of primary schooling.

Eliminate gender disparity in primary and secondary education, preferably by

UNCORRECTED Eliminate gender disparity in primary and secondary education, preferably by 2005, and in all levels of education no later than 2015.

UNCORRECTED 2005, and in all levels of education no later than 2015.

•

UNCORRECTED • Reduce by two thirds, between 1990 and 2015, the under-�ve mortality rate.

UNCORRECTED Reduce by two thirds, between 1990 and 2015, the under-�ve mortality rate.

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Maternal Health

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Maternal Health

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6

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6

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Combat HIV/AIDS

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Combat HIV/AIDS

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PAGE against a number of targets, shown here, which were developed during and after the Summit.

PAGE against a number of targets, shown here, which were developed during and after the Summit.

Halve, between 1990 and 2015, the proportion of people whose income is less

PAGE Halve, between 1990 and 2015, the proportion of people whose income is less

Achieve full and productive employment and decent work for all, including women

PAGE Achieve full and productive employment and decent work for all, including women

Halve, between 1990 and 2015, the proportion of people who suffer from hunger.

PAGE Halve, between 1990 and 2015, the proportion of people who suffer from hunger.

Ensure that, by 2015, children everywhere, boys and girls alike, will be able to PAGE Ensure that, by 2015, children everywhere, boys and girls alike, will be able to complete a full course of primary schooling.PAGE

complete a full course of primary schooling.

PROOFSMillennium Development Goals (MDGs)

PROOFSMillennium Development Goals (MDGs) proposed

PROOFS proposed

by the United Nations for achievement by the year 2015. In turn, these goals were then broken down into

PROOFSby the United Nations for achievement by the year 2015. In turn, these goals were then broken down into gets that could be measured using 60 indicators of people’s wellbeing and daily existence. These eight

PROOFSgets that could be measured using 60 indicators of people’s wellbeing and daily existence. These eight

PROOFS

PROOFS

PROOFSThe Millennium Development Goals (MDGs) are a set of global development objectives to be achieved by 2015 that were

PROOFSThe Millennium Development Goals (MDGs) are a set of global development objectives to be achieved by 2015 that were unanimously adopted at the United Nations Millennium Summit in September 2000. They represent an unprecedented

PROOFS

unanimously adopted at the United Nations Millennium Summit in September 2000. They represent an unprecedented global unifying force for reducing poverty and improving human development. Progress towards the goals is measured PROOFS

global unifying force for reducing poverty and improving human development. Progress towards the goals is measured against a number of targets, shown here, which were developed during and after the Summit.PROOFS

against a number of targets, shown here, which were developed during and after the Summit.



Recently, a UN report was prepared covering the achievements of this 15-year plan. It showed signi�cant progress in achieving many of the Millennium Development Goals. For instance, the aim of halving global poverty rates was more than achieved. From nearly 2 billion people in poverty in 1990 (equal to 37.1 per cent of the world’s population), this number was halved around 900 million by 2015 (around 12.7 per cent of the world’s population) using $1.90 per day, PPP as the new de�nition of severe poverty. As shown in �gure 5.28, while progress in Sub-Saharan Africa has been slow, much of the progress in reducing poverty has come from the economic transformation of many South and East Asian economies, particularly China. There was also good growth in universal education, a reduced incidence of HIV-AIDS, and lower mortality rates for children (i.e. under �ve years of age), now below 10 million per year.

0

25

50

75

2010 20122005200019951990

Share of population living on less than 2011 PPP $1.90 a day (%)

Note: Regional estimates exclude high-income countries.a. Estimates for 2009 onward are not shown because survey coverage is too low.

Sources: World Bank PovcalNet (http://iresearch.worldbank.org/.PovcalNet/);World Development Indicators database (Sl.POV.DDAY).

Sub-Saharan Africa

East Asia & Paci�c

South Asia

World

Latin America & Caribbean

Middle East & North Africaa

Europe & Central Asia

What have the millennium development goals achieved?’

MDG 1: Globally, the number of people living in extreme poverty (on less than $1.25 per day) has declined by more than half, falling from 1.9 billion in 1990 to 836 million in 2015. The target of halving the proportion of people suffering from hunger was almost reached.

MDG 2: The primary school net enrolment rate in the developing regions reached an estimated 91 per cent in 2015, up from 83 per cent in 2000. This was impressive but fell short of the target of universal primary education.

MDG 3: A majority of regions have reached gender parity in primary education.

MDG 4: The under-�ve mortality rate declined by more than half between 1990 and 2015, dropping from 90 to 43 deaths per 1000 live births. This was still short of the targeted reduction of two-thirds.

MDG 5: Since 1990 the maternal mortality ratio has been cut nearly in half, still short of the two-thirds targeted reduction.

MDG 6: New HIV infections fell by about 40 per cent between 2000 and 2013, from an estimated 3.5 million cases to 2.1 million. The target of halting the disease by 2015 and beginning to reverse its spread has not been met.

MDG 7: Between 1990 and 2015, the proportion of the global population using an improved drinking water source increased from 76 per cent to 91 per cent, surpassing the MDG target, which was met in 2010. Yet an estimated 663 million people worldwide still use unimproved drinking water sources.MDG 8: Mobile-cellular and internet penetration rates have grown strongly, but the digital divide between the rich and the poor is also increasing. Internet penetration grew from just over 6 per cent of the world’s population in 2000 to 43 per cent in 2015, and the number of mobile-cellular subscriptions increased almost tenfold during this period. However, an estimated 450 million people in rural areas still live out of reach of a mobile signal, and just over one-third of the population in developing countries uses the internet compared to 82 per cent in developed countries.

FIGURE 5.28 Poverty reduction and other achievements associated with the United Nation’s Millennium Development Goals (MDGs), 2000–15

Sources: Graph copied from World Bank, World Development Indicators 2016, p. 2, graph 1a, see https://openknowledge.worldbank .org/bitstream/handle/10986/23969/9781464806834.pdf. Summary table derived from UN, Millennium Development Goals Report 2015, www.un.org/millenniumgoals.

UNCORRECTED World Bank PovcalNet (http://iresearch.worldbank.org/.PovcalNet/);

UNCORRECTED World Bank PovcalNet (http://iresearch.worldbank.org/.PovcalNet/);

UNCORRECTED What have the millennium development goals achieved?’

UNCORRECTED What have the millennium development goals achieved?’

Globally, the number of people living in extreme poverty (on less than $1.25 per day) has declined by

UNCORRECTED Globally, the number of people living in extreme poverty (on less than $1.25 per day) has declined by

more than half, falling from 1.9 billion in 1990 to 836 million in 2015. The target of halving the proportion of

UNCORRECTED more than half, falling from 1.9 billion in 1990 to 836 million in 2015. The target of halving the proportion of people suffering from hunger was almost reached.

UNCORRECTED

people suffering from hunger was almost reached.

The primary school net enrolment rate in the developing regions reached an estimated 91 per cent in

UNCORRECTED

The primary school net enrolment rate in the developing regions reached an estimated 91 per cent in 2015, up from 83 per cent in 2000. This was impressive but fell short of the target of universal primary education.

UNCORRECTED

2015, up from 83 per cent in 2000. This was impressive but fell short of the target of universal primary education.

A majority of regions have reached gender parity in primary education.

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A majority of regions have reached gender parity in primary education.

The under-�ve mortality rate declined by more than half between 1990 and 2015, dropping from 90

UNCORRECTED

The under-�ve mortality rate declined by more than half between 1990 and 2015, dropping from 90

UNCORRECTED

to 43 deaths per 1000 live births. This was still short of the targeted reduction of two-thirds.

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to 43 deaths per 1000 live births. This was still short of the targeted reduction of two-thirds.

Since 1990 the maternal mortality ratio has been cut nearly in half, still short of the two-thirds

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Since 1990 the maternal mortality ratio has been cut nearly in half, still short of the two-thirds targeted reduction.

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targeted reduction.

MDG 6:

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MDG 6: New HIV infections fell by about 40 per cent between 2000 and 2013, from an estimated 3.5 million cases

UNCORRECTED

New HIV infections fell by about 40 per cent between 2000 and 2013, from an estimated 3.5 million cases to 2.1 million. The target of halting the disease by 2015 and beginning to reverse its spread has not been met.

UNCORRECTED

to 2.1 million. The target of halting the disease by 2015 and beginning to reverse its spread has not been met.

MDG 7: UNCORRECTED

MDG 7: Between 1990 and 2015, the proportion of the global population using an improved drinking water UNCORRECTED

Between 1990 and 2015, the proportion of the global population using an improved drinking water UNCORRECTED

source increased from 76 per cent to 91 per cent, surpassing the MDG target, which was met in 2010. Yet an UNCORRECTED

source increased from 76 per cent to 91 per cent, surpassing the MDG target, which was met in 2010. Yet an estimated 663 million people worldwide still use unimproved drinking water sources.UNCORRECTED

estimated 663 million people worldwide still use unimproved drinking water sources.

PAGE 2010 2012

PAGE 2010 2012

PAGE Estimates for 2009 onward are not shown because survey coverage is too low.

PAGE Estimates for 2009 onward are not shown because survey coverage is too low.

World Bank PovcalNet (http://iresearch.worldbank.org/.PovcalNet/);PAGE

World Bank PovcalNet (http://iresearch.worldbank.org/.PovcalNet/);World Development Indicators database (Sl.POV.DDAY).PAGE

World Development Indicators database (Sl.POV.DDAY).PAGE

PAGE

PAGE

PAGE PROOFS

PROOFSEast Asia & Paci�c

PROOFSEast Asia & Paci�c


PROOFSLatin America & Caribbean

Middle East & North AfricaPROOFS

Middle East & North AfricaPROOFS

Europe & Central AsiaPROOFS




In September 2015, another UN meeting was held to set the Sustainable Development Goals (SDGs) for the global community (including low-income countries) covering the period, 2015–30. The 17 key goals are summarised in �gure 5.29 and include the following:

‘World leaders have an unprecedented opportunity this year to shift the world onto a path of inclusive, sustainable and resilient development’ — Helen Clark, UNDP Administrator

FIGURE 5.29 The United Nation’s 17 Sustainable Development Goals (SDGs), 2015–30

Source: Graphics and quote copied from the United Nations Development Program, see http://www.undp.org/content/undp/en/home/sdgoverview/post-2015-development-agenda.html.

International action through of�cial foreign development aidForeign aid represents the transfer of funds and other types of assistance by governments and private indi-viduals from high-income to lower-income countries. If used properly, international aid can be an important way of helping poor countries to improve their living standards. Most importantly, this assistance can help to break the vicious cycle of poverty, raise per capita incomes and improve the quality of daily life. Often it does this by raising the funds available for investment in social and economic infrastructure, lifting ef�ciency and accelerating productive capacity.

The three main forms of foreign aidThere are three main types of foreign aid — loans, grants and technical assistance. These are summarised below.1. Loans

Loans are of three kinds — hard loans or credit offered at the normal market rate of interest; soft loans offered at a special discounted interest rate; and tied loans, where special conditions are imposed such as requiring that the money be used to purchase exports from the donor country. Of these, soft loans are probably the most bene�cial for the recipient country. Of�cial loans are also made by governments in donor countries like Australia. However, much is directed through multilateral institutions including the World Bank and the Inter-national Monetary Fund. Often the World Bank and IMF require that governments in countries receiving loans make certain changes such as: • deregulating markets • strengthening ef�ciency • becoming more accountable in �nancial administration • ensuring that much of the money loaned is directed into social and economic infrastructure • programs that meet the UN’s Millennium Development Goals designed to improve the daily lives of ordi-

nary people.

UNCORRECTED

UNCORRECTED

UNCORRECTED s 17 Sustainable Development Goals (SDGs), 2015–30

UNCORRECTED s 17 Sustainable Development Goals (SDGs), 2015–30

Graphics and quote copied from the United Nations Development Program, see http://www.undp.org/content/undp/en/home/

UNCORRECTED Graphics and quote copied from the United Nations Development Program, see http://www.undp.org/content/undp/en/home/

sdgoverview/post-2015-development-agenda.html.

UNCORRECTED sdgoverview/post-2015-development-agenda.html.

International action through of�cial foreign development aid

UNCORRECTED

International action through of�cial foreign development aid represents the transfer of funds and other types of assistance by governments and private indi

UNCORRECTED

represents the transfer of funds and other types of assistance by governments and private individuals from high-income to lower-income countries. If used properly, international aid can be an important

UNCORRECTED

viduals from high-income to lower-income countries. If used properly, international aid can be an important way of helping poor countries to improve their living standards. Most importantly, this assistance can help to

UNCORRECTED

way of helping poor countries to improve their living standards. Most importantly, this assistance can help to break the vicious cycle of poverty, raise per capita incomes and improve the quality of daily life. Often it does

UNCORRECTED

break the vicious cycle of poverty, raise per capita incomes and improve the quality of daily life. Often it does this by raising the funds available for investment in social and economic infrastructure, lifting ef�ciency and

UNCORRECTED

this by raising the funds available for investment in social and economic infrastructure, lifting ef�ciency and accelerating productive capacity.

UNCORRECTED

accelerating productive capacity.

The three main forms of foreign aid

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The three main forms of foreign aidThere are

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There are three

UNCORRECTED

three1. LoansUNCORRECTED

1. Loans

Loans UNCORRECTED

Loans

PAGE

PAGE

PAGE

PAGE

PAGE PROOFS

PROOFS

PROOFS

PROOFS

PROOFS



2. Grants

Grants are straight-out donations of cash that do not need to be repaid. When used wisely, this is perhaps the best type of help that high-income countries can offer. Normally grants are allocated by private international aid agencies (e.g. World Vision), or given by individual governments in donor countries. Often this type of aid is critical to provide immediate help after disasters such as famines, �oods, earthquakes, wars or tsunamis.3. Technical and other assistance

Technical and other assistance involves the donor country or a United Nations agency providing scienti�c, economic, educational, technical, industrial or agricultural personnel. These people advise on matters relating to economic development. On occasions, military-related assistance is given by individual donor countries.

Figure 5.30 shows some of the higher-income countries that provide government or of�cial development aid (abbreviated ODA). The amount given is expressed as a percentage of each country’s GDP. This gives a better idea as to a country’s generosity relative to the size of its economy. Note the following information from this �gure: • Although the US is easily the biggest single donor in dollar terms, as a percentage of GDP, Australia is nearly

twice as generous. However, most donor nations — with the exception of Sweden, Norway, Luxembourg, Netherlands and the UK — still fail to meet the 1970 agreed target of donating just 0.7 per cent of GDP.

• The table of data shown in �gure 5.30 looks at some of the main recipients of of�cial or government foreign aid. While generally the level of overseas development aid re�ects the neediness of the recipient country, sometimes other considerations appear to have an impact such as strategic considerations and international political considerations.

• Finally, the pie chart in �gure 5.30 shows how the of�cial development aid was used by low-income countries. Notice the importance of education and other social infrastructure like health, along with economic infra-structure including transport and communications. Here the funds are being used to help support the UN’s development gaols.

Who are the donor countries and what percentage of their GDP do they give in ODA?

ODA as per cent of GNI (2015)

Poland

Slovak Republic

Czech Republic

Spain

Greece

Korea

Slovenia

Portugal

United States

Italy

Japan

Iceland

Australia

New Zealand

Canada

DAC total

Austria

Ireland

France

Belgium

Germany

Switzerland

Finland

United Kingdom

Netherlands

Denmark

Luxembourg

Norway

Sweden

0 0.25 0.5 0.75 1 1.25 1.5

UN

target 0.7

%

FIGURE 5.30 Donors and recipients of of�cial development aid (ODA) (continued)

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Australia

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Australia

New Zealand

UNCORRECTED

New Zealand

Canada

UNCORRECTED

Canada

DAC total

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DAC total

Austria

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Austria

Ireland

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Ireland

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UN

target 0.7

%

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UN

target 0.7

%

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PAGE Who are the donor countries and what percentage of their GDP do they give in ODA?

PAGE Who are the donor countries and what percentage of their GDP do they give in ODA?

PAGE

PAGE ODA as per cent of GNI (2015)

PAGE ODA as per cent of GNI (2015)

PAGE PROOFS

, Australia is nearly

PROOFS, Australia is nearly

twice as generous. However, most donor nations — with the exception of Sweden, Norway, Luxembourg,

PROOFStwice as generous. However, most donor nations — with the exception of Sweden, Norway, Luxembourg, Netherlands and the UK — still fail to meet the 1970 agreed target of donating just 0.7 per cent of GDP.

PROOFSNetherlands and the UK — still fail to meet the 1970 agreed target of donating just 0.7 per cent of GDP.wn in �gure 5.30 looks at some of the main recipients of of�cial or government foreign

PROOFSwn in �gure 5.30 looks at some of the main recipients of of�cial or government foreign aid. While generally the level of overseas development aid re�ects the neediness of the recipient country,

PROOFSaid. While generally the level of overseas development aid re�ects the neediness of the recipient country, sometimes other considerations appear to have an impact such as strategic considerations and international

PROOFSsometimes other considerations appear to have an impact such as strategic considerations and international

, the pie chart in �gure 5.30 shows how the of�cial development aid was used by low-income

PROOFS, the pie chart in �gure 5.30 shows how the of�cial development aid was used by low-income the importance of education and other social infrastructure like health, along with

PROOFSthe importance of education and other social infrastructure like health, along with economic

PROOFSeconomic

structure including transport and communications. Here the funds are being used to help support the UN’s PROOFS

structure including transport and communications. Here the funds are being used to help support the UN’s PROOFS




Which countries receive the most ODA and how is it used?

Top ten recipients of gross ODA (US$ millions)

1 Myanmar 4171

2 Afghanistan 4164

3 India 3029

4 Vietnam 2902

5 Indonesia 2061

6 Kenya 1952

7 Ethiopia 1950

8 Pakistan 1896

9 Tanzania 1799

10 Syrian Arab Republic

1688

How of�cial development aid was used in lower-income countries(percentage of total aid)

Debt relief2%

Education20%Other

24%

Production7%

Humanitarian11% Social

infrastructureother thaneducation

17%

Economicinfrastructure

(19%)

Source: The bar graph was copied from the OECD, http://www2.compareyourcountry.org/oda?cr=oecd&lg=en; the table and data for the pie chart came from OECD, World Book, DAC aid at a glance, https://public.tableau.com/views/AidAtAGlance/DACmembers?:embed=y&:display_count=no?&:showVizHome=no#1.

Australia’s overseas development aid (ODA)During 2016–17, the Australian government will provide $3.8 billion (less than 0.3 per cent of GDP) in of�cial development aid to various countries, especially those in our region like Papua New Guinea and Indonesia. This is shown in �gure 5.31.

Mongolia 10.0

Bhutan7.3

NepalMyanmar

LaosVietnam

PhilippinesNorth Paci�c

9.8

Timor-Leste

East AsiaRegional

NauruSolomonIslands

Paci�cRegional

Paci�c

Tuvalu9.2

Samoa

KiribatiLatin America andthe Caribbean 11.0

Latin America &Caribbean

Estimated total ODA tocountry/region ($m)

Cook Islands3.4Vanuatu

FijiTonga

Niue andTokelau

3.1

Afghanistan

PakistanBangladesh

CambodiaSri LankaMaldives

5.3Sub-Saharan

AfricaSouth and WestAsia Regional

South and West Asia

All �gures are 2016–17 budget estimated total Australian ODA

South Eastand East Asia

PalestinianTerritories

Middle East andNorth Africa

Map key:

Sub-Saharan Africaand the Middle East

$m

93.7365.7Indonesia

81.9

62.3

162.025.5

62.576.9

29.6

37.8

131.628.7

83.690.0

40.759.8

27.5

23.0

56.1

34.047.0

82.743.6

51.8

89.5558.3

Papua NewGuinea

FIGURE 5.31 Countries that receive of�cial development aid from Australia

Source: Map copied from the Australian government, DFAT, http://dfat.gov.au/about-us/corporate/portfolio-budget-statements/Documents/where-we-give-aid-map.pdf.

UNCORRECTED During 2016–17, the Australian government will provide $3.8 billion (less than 0.3 per cent of GDP) in of�cial

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PAGE

PAGE

PAGE The bar graph was copied from the OECD, http://www2.compareyourcountry.org/oda?cr=oecd&lg=en; the table and

PAGE The bar graph was copied from the OECD, http://www2.compareyourcountry.org/oda?cr=oecd&lg=en; the table and

data for the pie chart came from OECD, World Book, DAC aid at a glance, https://public.tableau.com/views/AidAtAGlance/

PAGE data for the pie chart came from OECD, World Book, DAC aid at a glance, https://public.tableau.com/views/AidAtAGlance/DACmembers?:embed=y&:display_count=no?&:showVizHome=no#1.

PAGE DACmembers?:embed=y&:display_count=no?&:showVizHome=no#1.

Australia’s overseas development aid (ODA)PAGE Australia’s overseas development aid (ODA)During 2016–17, the Australian government will provide $3.8 billion (less than 0.3 per cent of GDP) in of�cial PAGE

During 2016–17, the Australian government will provide $3.8 billion (less than 0.3 per cent of GDP) in of�cial

PROOFS

PROOFSSocial

PROOFSSocial

infrastructure

PROOFSinfrastructure

other than

PROOFS

other thaneducationPROOFS

education17%PROOFS

17%

Economic

PROOFSEconomicinfrastructure

PROOFSinfrastructure

(19%)

PROOFS(19%)



Australia’s ODA typically goes to UN projects that improve education, water supply, transport, health, dis-aster relief, law and order, and other areas within the UN’s Millennium Development Goals (2000–15) and Sustainable Development Goals (2015–30).


• United Nations video gallery• Endless famine — Ethiopia


1 Identify and outline the key Millennium Development Goals (MDGs) adopted by the UN. To what extent were these goals achieved during 2000–15?

2 Identify and outline three important UN Sustainable Development Goals for 2015–30.3 What types of assistance is provided by high-income countries to low-income countries?4 What is of�cial development aid (ODA) and from which countries does it come?5 Which countries receive most ODA and for what purposes is it used?6 What type of assistance does Australia provide to low-income countries?







5.15 School-assessed tasksIn order to satisfactorily complete VCE Economics Unit 2, area of study 3, your teacher must assess your ability to demonstrate the general achievement of the set of outcomes speci�ed for the unit, including key knowledge and key skills for Outcome 3. You will be assessed from a selection of school-based assessment tasks. Generally, this assessment should be part of the regular teaching and learning program, and completed mainly in class and within a limited timeframe. A range of these activities has been provided in this section.

Note to teachers: Courses and assessments can change. Please check the latest VCAA assessment guide and various bulletins to ensure that all assessment requirements are met fully.


Multiple-choice test questionsInstructions: Using the multiple-choice answer grid available in this topic’s student resources tab, select the letter (A, B, C, D) that represents the most appropriate answer for each question by marking this with a tick (✓).

Digital documentsMultiple-choice answer grid: Topic 5 — Option 1 Searchlight ID: doc-19272

UNCORRECTED Apply your understanding of this subtopic by accessing and completing the School assessment task(s).

UNCORRECTED Apply your understanding of this subtopic by accessing and completing the School assessment task(s).


UNCORRECTED School-assessed tasks > Option 3 > Multiple-choice questionsSchool-assessed tasks > Option 3 > Terminology revision

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UNCORRECTED School-assessed tasks > Option 3 > A report on an investigation or inquirySchool-assessed tasks > Option 3 > A blog of media commentaries

UNCORRECTED School-assessed tasks > Option 3 > A blog of media commentariesSchool-assessed tasks > Option 3 > Analysis of visual evidence — a cartoon

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School-assessed tasks > Option 3 > Analysis of visual evidence — a cartoon

5.15 School-assessed tasks

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5.15 School-assessed tasksIn order to satisfactorily complete VCE Economics Unit 2, area of study 3, your teacher must assess your

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knowledge and key skills for Outcome 3. You will be assessed from a selection of school-based assessment

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knowledge and key skills for Outcome 3. You will be assessed from a selection of school-based assessment tasks. Generally, this assessment should be part of the regular teaching and learning program, and completed

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tasks. Generally, this assessment should be part of the regular teaching and learning program, and completed mainly in class and within a limited timeframe. A range of these activities has been provided in this section.

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PAGE Question 4

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Apply your understanding of this subtopic by accessing and completing the Applied economic exercise(s).PROOFS




Question 1

Free trade involves:A lower tariffs.B reductions in business subsidies.C a reduction in import quotas.D the complete absence of industry protection and controls on trade.

Question 2

Government subsidies to local producers help businesses by:A taxing imports.B limiting the volume of particular imports.C allowing �rms to sell their goods or services at a lower price than otherwise.D all of the above.

Question 3

Protectionist policies might include which of the following measures?A Import quotasB Taxes on importsC Local content rules and cash payments to inef�cient producersD All of the above

Question 4

Those who favour protectionism usually do not claim that it:A lowers in�ation.B protects jobs and lowers unemployment.C helps infant industries to get established and expand.D strengthens our defence capabilities.

Question 5

Free trade encourages businesses to allocate resources ef�ciently by:A not protecting inef�cient �rms.B promoting stronger competition among producers and sellers of goods and services.C encouraging nations to specialise in those areas of production where they have a comparative cost

advantage.D all of the above.

Question 6

A comparative cost advantage most likely occurs when:A a nation is the cheapest producer in the world.B a nation is good at making a product.C a nation has been producing a product for many years.D a nation is relatively most ef�cient or least inef�cient in producing a product.

Question 7

In the longer-term, the policy of gradually liberalising trade would normally lead to:A higher ef�ciency and more jobs, despite the possibility of structural unemployment in the shorter

term.B higher GDP per head, lower in�ation or consumer prices, and better purchasing power of incomes.C higher exports, GDP per head and material living standards.D all of the above.

Question 8

Regarding Australia’s international trade transactions, which statement is incorrect?A Australia probably has a comparative cost advantage when trading wool with Japan.B Specialisation in selected areas of production usually helps make Australia more internationally

competitive and ef�cient, thus improving our material living standards.C Australia mainly exports to countries that produce the same types of goods and services.D International trade helps to increase consumer choice.

Question 9

As part of its policy of trade liberalisation over the last 40 years or so, the Australian government has generally:A abolished all import duties but overall increased its subsidies to businesses to around $30 billion

per year.B greatly lowered tariffs to a general rate of around 5 per cent or less and abolished import quotas.C entered into only two bilateral free trade agreements.D increased protection of local manufacturing businesses so as to keep jobs.

UNCORRECTED encouraging nations to specialise in those areas of production where they have a comparative cost

UNCORRECTED encouraging nations to specialise in those areas of production where they have a comparative cost

most likely occurs when:

UNCORRECTED most likely occurs when:

a nation is the cheapest producer in the world.

UNCORRECTED a nation is the cheapest producer in the world.a nation is good at making a product.

UNCORRECTED a nation is good at making a product.a nation has been producing a product for many years.

UNCORRECTED

a nation has been producing a product for many years.a nation is relatively most ef�cient or least inef�cient in producing a product.

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a nation is relatively most ef�cient or least inef�cient in producing a product.

In the longer-term, the policy of gradually

UNCORRECTED

In the longer-term, the policy of gradually higher ef�ciency and more jobs, despite the possibility of structural unemployment in the shorter

UNCORRECTED

higher ef�ciency and more jobs, despite the possibility of structural unemployment in the shorter

higher GDP per head, lower in�ation or consumer prices, and better purchasing power of incomes.

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higher GDP per head, lower in�ation or consumer prices, and better purchasing power of incomes.higher exports, GDP per head and material living standards.

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higher exports, GDP per head and material living standards.all of the above.

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all of the above.

Question 8

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Question 8

Regarding Australia’s international trade transactions, which statement is UNCORRECTED

Regarding Australia’s international trade transactions, which statement is AUNCORRECTED

A Australia probably has a UNCORRECTED

Australia probably has a

PAGE ef�ciently

PAGE ef�ciently by:

PAGE by:

promoting stronger competition among producers and sellers of goods and services.PAGE promoting stronger competition among producers and sellers of goods and services.encouraging nations to specialise in those areas of production where they have a comparative cost PAGE encouraging nations to specialise in those areas of production where they have a comparative cost

PROOFS



Question 10

Some countries try to justify high tariffs using which of the following arguments?A Tariffs help protect jobs and lower unemployment.B Tariffs help self-suf�ciency in case of war.C Tariffs provide help for struggling infant industries.D All of the above arguments are frequently used.

Question 11

Australian �rms often �nd it dif�cult to be internationally competitive because:A wages are high by the standards of other countries in our region.B the absence of suf�cient economies of large-scale production among some of our �rms means that costs

per unit of output produced are too high.C some �rms have not paid suf�cient attention to restructuring their operations so as to cut costs and

improve product quality, speed of delivery and customer service.D all of the above are common explanations.

Question 12

Concerning international trade agreements between Australia and other nations, which statement is false?A Bilateral agreements usually exist between two countries.B An example of a multilateral trade agreement is the Closer Economic Relations with New Zealand.C Most international trade agreements seek to lower tariffs and expand the volume of trade.D Australia is a member of the Asia–Paci�c Economic Cooperation (APEC), but is not a full member of the

Association of South-East Asian Nations (ASEAN).

Question 13

In the long-term, which of the following government economic policies would not strengthen the international competitiveness of Australian producers in local and foreign markets?A A gradual reduction in tariffsB A lower rate of company taxC A 10 per cent rise in the minimum award wageD Increased levels of worker ef�ciency and the extension of �rm-by-�rm workplace or enterprise agreements

Question 14

Concerning government policies in countries around the world towards trade liberalisation, which statement is generally least correct?A Most governments have decreased tariffs over the last 20 years or so.B Tariff rates tend to be lower in low-income countries rather than in high-income countries.C Those countries that have reduced tariffs are generally more ef�cient in production.D Cutting tariffs forces local �rms to restructure their production to help reduce costs.

Question 15

Following trade liberalisation, which of the following government policies would be least likely to help local �rms become more internationally competitive against imports?A Higher rates of company tax and increased subsidies to local businessesB More spending to upgrade national road, rail and port infrastructureC Budget spending on R&D, and the lifting of the minimum school leaving ageD Changes to the wage �xing system where pay rises are closely linked with better worker productivity and

conditions of demand and supply of labour

Digital documentsMultiple-choice answers: Topic 5 — Option 1 Searchlight ID: doc-19273

Terminology revisionUse the Puzzlemaker weblink in this topic’s student resources tab to construct a terminology crossword. Using the key words from the list below, you will need to write out de�nitions for the clues across and down (Hint: You can use the de�nitions found in your Economics dictionary as the clues.)

Weblinks The weblinks in these activities are available in this topic’s student resources tab.• Puzzlemaker

UNCORRECTED Concerning government policies in countries around the world towards trade liberalisation, which statement

UNCORRECTED Concerning government policies in countries around the world towards trade liberalisation, which statement

Most governments have decreased tariffs over the last 20 years or so.

UNCORRECTED Most governments have decreased tariffs over the last 20 years or so.Tariff rates tend to be lower in low-income countries rather than in high-income countries.

UNCORRECTED Tariff rates tend to be lower in low-income countries rather than in high-income countries.Those countries that have reduced tariffs are generally more ef�cient in production.

UNCORRECTED Those countries that have reduced tariffs are generally more ef�cient in production.Cutting tariffs forces local �rms to restructure their production to help reduce costs.

UNCORRECTED Cutting tariffs forces local �rms to restructure their production to help reduce costs.

Following trade liberalisation, which of the following government policies would be

UNCORRECTED

Following trade liberalisation, which of the following government policies would be �rms become more internationally competitive against imports?

UNCORRECTED

�rms become more internationally competitive against imports?Higher rates of company tax and increased subsidies to local businesses

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Higher rates of company tax and increased subsidies to local businessesMore spending to upgrade national road, rail and port infrastructure

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More spending to upgrade national road, rail and port infrastructureBudget spending on R&D, and the lifting of the minimum school leaving age

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Budget spending on R&D, and the lifting of the minimum school leaving ageChanges to the wage �xing system where pay rises are closely linked with better worker productivity and

UNCORRECTED

Changes to the wage �xing system where pay rises are closely linked with better worker productivity and conditions of demand and supply of labour

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conditions of demand and supply of labour

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Multiple-choice answers: Topic 5 — Option 1UNCORRECTED

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UNCORRECTED PAGE In the long-term, which of the following government economic policies would

PAGE In the long-term, which of the following government economic policies would not

PAGE notinternational competitiveness of Australian producers in local and foreign markets?

PAGE international competitiveness of Australian producers in local and foreign markets?

Increased levels of worker ef�ciency and the extension of �rm-by-�rm workplace or enterprise agreements

PAGE Increased levels of worker ef�ciency and the extension of �rm-by-�rm workplace or enterprise agreements

Concerning government policies in countries around the world towards trade liberalisation, which statement PAGE

Concerning government policies in countries around the world towards trade liberalisation, which statement

PROOFSConcerning international trade agreements between Australia and other nations, which statement is

PROOFSConcerning international trade agreements between Australia and other nations, which statement is false

PROOFSfalse?

PROOFS?

An example of a multilateral trade agreement is the Closer Economic Relations with New Zealand.

PROOFSAn example of a multilateral trade agreement is the Closer Economic Relations with New Zealand.Most international trade agreements seek to lower tariffs and expand the volume of trade.

PROOFSMost international trade agreements seek to lower tariffs and expand the volume of trade.Australia is a member of the Asia–Paci�c Economic Cooperation (APEC), but is not a full member of the

PROOFSAustralia is a member of the Asia–Paci�c Economic Cooperation (APEC), but is not a full member of the

strengthen the PROOFS

strengthen the



absolute cost advantageanti-dumping legislationcomparative cost advantageconsume price in�ationeconomic globalisationeconomies of large-scale productionef�ciency

enterprise bargainingfree tradefree trade agreements (FTAs)import quota or licenceinfant industriesinfrastructureinternational competitivenesslabour market deregulation

multinational or transnational companyproductive capacity of a nationprotectionismsubsidytarifftrade liberalisation

Applied economic exercisesQuestion 1

A What is protectionism in international trade and what forms can it take?B Supporters usually raise four main justi�cations for using government protectionist policies. Explain.C What is free trade and what government policies does this involve?D The price at which goods and services are bought and sold is important in international trade. Nations tend

to export goods or services where they have an advantage and import where they have a disadvantage. Distinguish between an absolute cost advantage and a comparative cost advantage in international trade.

E Using the internet for research, write a paragraph about David Ricardo’s economic theory of international specialisation and trade based on comparative cost advantage.

F Examine table 5.5 below before answering the questions that follow. This table shows hypothetical data for England and Portugal. It indicates the number of hours that a worker in each country must work in order to produce each unit of wine or cloth- this gives an indicator of relative ef�ciency in each country, in the production of these two goods.

The number of man-hours that must be worked to produce a unit of cloth or a unit of wine in England and PortugalTABLE 5.5

Country Cloth (number of hours per unit produced) Wine (number of hours per unit produced)

Portugal 90 80

England 100 120

(i) Giving reasons, which country has an absolute cost advantage in producing: (a) cloth (b) wine.

(ii) Giving reasons, which country has a comparative cost advantage in producing: (a) cloth (b) wine.

(iii) Would it be possible and bene�cial for these two countries to trade with each other? Explain.

G Select any two of the following industries where you believe that Australia’s comparative cost advantage is greatest (or disadvantage is least) in our region. Be prepared to defend your answers.

(i) Making cars(ii) Biomedical research

(iii) Producing wool(iv) Producing minerals such as bauxite and gold(v) Selling environmental tourism

(vi) Producing oil(vii) Making video equipment

(viii) Making movies(ix) Making twin-hulled ferries(x) Making textiles and clothing

H Explain how freer international trade can bring the following bene�ts for a country: (i) increase the rate of economic growth and raise incomes(ii) reduce in�ation

(iii) boost exports(iv) increase the number of jobs.

I There is an index that measures the extent to which different countries have open economies and encourage freer trade. One index is called the Enabling Trade Index (ETI) where the scores range from a low of 0 up to a high of 7 (here the country is very open to and encourages free trade). Based on research, �gure 5.32 shows the relationship between countries that enable trade and the yearly level of their GDP per capita.

UNCORRECTED

UNCORRECTED ving reasons, which country has an

UNCORRECTED ving reasons, which country has an absolute

UNCORRECTED absolute

ving reasons, which country has a

UNCORRECTED ving reasons, which country has a

ould it be possible and bene�cial for these two countries to trade with each other? Explain.

UNCORRECTED

ould it be possible and bene�cial for these two countries to trade with each other? Explain.

of the following industries where you believe that Australia’s

UNCORRECTED

of the following industries where you believe that Australia’s greatest (or disadvantage is least) in our region. Be prepared to defend your answers.

UNCORRECTED

greatest (or disadvantage is least) in our region. Be prepared to defend your answers. Making

UNCORRECTED

Making cars

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carsBiomedical

UNCORRECTED

Biomedical research

UNCORRECTED

research(iii)

UNCORRECTED

(iii) Producing

UNCORRECTED

Producing (iv)

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(iv) Producing

UNCORRECTED

Producing (v)

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(v) Selling

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Selling (vi)

UNCORRECTED

(vi) Producing

UNCORRECTED

Producing (vii)UNCORRECTED

(vii)(viii)UNCORRECTED

(viii)

PAGE of wine or cloth- this gives an indicator of relative ef�ciency in each country, in

PAGE of wine or cloth- this gives an indicator of relative ef�ciency in each country, in

PAGE

PAGE The number of man-hours that must be worked to produce a unit of cloth or a unit of

PAGE The number of man-hours that must be worked to produce a unit of cloth or a unit of

Cloth (number of hours per unit produced) Wine (number of hours per unit produced)

PAGE Cloth (number of hours per unit produced) Wine (number of hours per unit produced)

PROOFS. Explain.

PROOFS. Explain.

The price at which goods and services are bought and sold is important in international trade. Nations tend

PROOFSThe price at which goods and services are bought and sold is important in international trade. Nations tend to export goods or services where they have an advantage and import where they have a disadvantage.

PROOFSto export goods or services where they have an advantage and import where they have a disadvantage.

comparative cost advantage

PROOFScomparative cost advantage in international trade.

PROOFS in international trade.

Using the internet for research, write a paragraph about David Ricardo’s economic theory of international

PROOFSUsing the internet for research, write a paragraph about David Ricardo’s economic theory of international

Examine table 5.5 below before answering the questions that follow. This table shows hypothetical data

PROOFSExamine table 5.5 below before answering the questions that follow. This table shows hypothetical data for England and Portugal. It indicates the number of hours that a worker in each country must work in PROOFS

for England and Portugal. It indicates the number of hours that a worker in each country must work in of wine or cloth- this gives an indicator of relative ef�ciency in each country, in PROOFS

of wine or cloth- this gives an indicator of relative ef�ciency in each country, in



1 10 100 1000 10000 100000 1000000

1

2

3

4

5

6

7

Singapore

Kuwait

Russian FederationLybiaAlgeria

Mongolia

Angola

Gabon

Iran, Islamic Rep.

VenezuelaETI

20

14

sco

re (

1−7

)

GDP per capita (US$, log scale), 2012

Sources: IMF, World Economic Outlook (October 2013 edition) and World Economic Forum.

FIGURE 5.32 The relationship between countries with open economies and high scores (nearer 7) on the Enabling Trade Index (ETI) and the average yearly level of GDP per person (US$)

Source: Graph copied from the World Economic Forum, ‘The Global Enabling Trade Report 2014’, �gure 2, p. 8, see http://www3 .weforum.org/docs/WEF_GlobalEnablingTrade_Report_2014.pdf. Note: The horizontal scale uses a logarithmic scale that compresses GDP per capita as it increases, making it look less impressive.

(i) Describe the general relationship between the Enabling Trade Index (ETI) and a country’s annual GDP per head. Illustrate your response by selecting two countries named on this graph.

(ii) Explain why many economists believe that free trade and specialisation in areas of comparative cost advantage, should allow the countries involved to enjoy higher levels of production (GDP), incomes and material living standards.

Question 2

A What is meant by the term trade liberalisation?B Describe the extent to which the Australian government has liberalised trade in recent decades, and outline

the speci�c aspects of trade policy that have been changed.C By mid 2016, Australia had no fewer than ten bilateral free trade agreements (FTAs), with more in the

pipeline.(i) What are FTAs?(ii) List four Australian examples of important bilateral FTAs. Select two of these examples and for each, use

the internet to research two important costs and two important bene�ts of this agreement for Australia.(iii) How are FTA’s expected to be bene�cial for our material living standards?

Question 3

When the Australian government started to liberalise trade and move towards freer trade, why was it also necessary to change the following policies?

(i) Wage �xing arrangements(ii) The rate of company tax

(iii) Improve national infrastructure.

An essayWrite a 500 to 600 word essay on the following topic:

Explain what is meant by free trade. To what extent has the Australian government adopted this policy in recent decades, noting the costs and bene�ts of this policy?

A class debateAfter dividing into two teams (one for the af�rmative and one for the negative), work with others to prepare a debate about one of the following topics:A ‘That Australia’s move towards free international trade has created more problems than it solved’B ‘Protectionism is needed for jobs and a strong defence capability.’

UNCORRECTED advantage, should allow the countries involved to enjoy higher levels of production (GDP), incomes

UNCORRECTED advantage, should allow the countries involved to enjoy higher levels of production (GDP), incomes

trade liberalisation

UNCORRECTED trade liberalisation?

UNCORRECTED ?

to which the Australian government has

UNCORRECTED to which the Australian government has

the speci�c aspects of trade policy that have been changed.

UNCORRECTED the speci�c aspects of trade policy that have been changed.By mid 2016, Australia had no fewer than ten bilateral free trade agreements (FTAs), with more in the

UNCORRECTED By mid 2016, Australia had no fewer than ten bilateral free trade agreements (FTAs), with more in the

Australian examples of important bilateral FTAs. Select two of these examples and for each, use

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Australian examples of important bilateral FTAs. Select two of these examples and for each, use the internet to research two important costs and two important bene�ts of this agreement for Australia.

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the internet to research two important costs and two important bene�ts of this agreement for Australia.w are FTA’s expected to be bene�cial for our material living standards?

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w are FTA’s expected to be bene�cial for our material living standards?

When the Australian government started to liberalise trade and move towards freer trade, why was it also

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When the Australian government started to liberalise trade and move towards freer trade, why was it also necessary to change the following policies?

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necessary to change the following policies?W

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Wage �xing arrangements

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age �xing arrangementsWage �xing arrangementsW

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Wage �xing arrangementsW(ii) UNCORRECTED

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rate of company tax(iii) UNCORRECTED

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ImproUNCORRECTED

Improve national infrastructure.UNCORRECTED

ve national infrastructure.

PAGE Graph copied from the World Economic Forum, ‘The Global Enabling Trade Report 2014’, �gure 2, p. 8, see http://www3

PAGE Graph copied from the World Economic Forum, ‘The Global Enabling Trade Report 2014’, �gure 2, p. 8, see http://www3 The horizontal scale uses a logarithmic scale that compresses

PAGE The horizontal scale uses a logarithmic scale that compresses

the general relationship between the Enabling Trade Index (ETI) and a country’s annual

PAGE the general relationship between the Enabling Trade Index (ETI) and a country’s annual

GDP per head. Illustrate your response by selecting two countries named on this graph.

PAGE GDP per head. Illustrate your response by selecting two countries named on this graph.

why many economists believe that free trade and specialisation in areas of comparative cost PAGE why many economists believe that free trade and specialisation in areas of comparative cost

advantage, should allow the countries involved to enjoy higher levels of production (GDP), incomes PAGE

advantage, should allow the countries involved to enjoy higher levels of production (GDP), incomes

PROOFS

PROOFS100 1000 10000 100000 1000

PROOFS100 1000 10000 100000 1000000

PROOFS000

(October 2013 edition) and World Economic Forum.

PROOFS (October 2013 edition) and World Economic Forum.

The relationship between countries with open economies and high scores (nearer 7) on the Enabling

PROOFSThe relationship between countries with open economies and high scores (nearer 7) on the Enabling Trade Index (ETI) and the average yearly level of GDP per person (US$)

PROOFS

Trade Index (ETI) and the average yearly level of GDP per person (US$)

Graph copied from the World Economic Forum, ‘The Global Enabling Trade Report 2014’, �gure 2, p. 8, see http://www3PROOFS

Graph copied from the World Economic Forum, ‘The Global Enabling Trade Report 2014’, �gure 2, p. 8, see http://www3 The horizontal scale uses a logarithmic scale that compresses PROOFS

The horizontal scale uses a logarithmic scale that compresses



A report on an investigation or inquiryThe task — a report on an investigation into one of Australia’s trading agreements

As you know, Australia already has many bilateral and multilateral trade agreements with other countries. For instance, there are bilateral trade agreements with New Zealand, Thailand, Singapore, Malaysia, Japan, ASEAN, Korea, Chile, USA and China, along with progress on an agreement with India and the European Union. In addition, there are multilateral trade agreements with Asia–Paci�c Economic Cooperation (APEC), Organization for Economic Co-operation and Development (OECD) and the World Trade Organization (WTO).

Your task is to investigate one of these agreements and then present a report to the class. You could perhaps research some of the following aspects: • Which countries signed the agreement and what are the aims? • When was the agreement signed? • What are the aims or purposes of the agreement? • What are the advantages of the agreement for Australia and the other country? • What are the disadvantages of the agreement for Australia (e.g. which particular industries may suffer from

stronger competition)?This work could be undertaken individually or in small groups.References

You may like to follow the weblinks in this topic’s student resources tab to �nd some relevant references.

Weblinks These weblinks are available in this topic’s student resources tab.• Department of Foreign Affairs and Trade (DFAT)• Centre for International Economics (CIE)• Online newspapers

Presentation

Your �ndings could be presented in a number of different ways, for instance: • a wall chart or poster • PowerPoint slides to illustrate your talk to the class • a written report • a lift-out feature article in a multicolumn newspaper format.

Analysis of visual evidence — a cartoonThere are many cartoons in this topic that can be used to extend your understanding of economics. Examine the cartoons using the following questions as a guide. • What is the economic concept being presented in the cartoon? • What is the main message of the cartoon? • What is your reaction to the cartoon? Do you agree with what it is saying? • Is the message of the cartoon politically or economically biased or distorted in some way? Explain your

answer.




Question 1

Economic globalisation involves:A multinational and transnational companies.B the movement of money capital and production from country to country.C a move towards the creation of a single international market for particular goods or services.D all of the above features.

UNCORRECTED werPoint slides to illustrate your talk to the class

UNCORRECTED werPoint slides to illustrate your talk to the class

lift-out feature article in a multicolumn newspaper format.

UNCORRECTED lift-out feature article in a multicolumn newspaper format.

Analysis of visual evidence — a cartoon

UNCORRECTED Analysis of visual evidence — a cartoonThere are many cartoons in this topic that can be used to extend your understanding of economics. Examine

UNCORRECTED There are many cartoons in this topic that can be used to extend your understanding of economics. Examine the cartoons using the following questions as a guide.

UNCORRECTED the cartoons using the following questions as a guide.

is the economic concept being presented in the cartoon?

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is the economic concept being presented in the cartoon? is the main message of the cartoon?

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is the main message of the cartoon? is your reaction to the cartoon? Do you agree with what it is saying?

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is your reaction to the cartoon? Do you agree with what it is saying? Is the message of the cartoon politically or economically biased or distorted in some w

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Is the message of the cartoon politically or economically biased or distorted in some w

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OPTION 2

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OPTION 2

Multiple-choice test questionsUNCORRECTED

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Instructions:letter (A, B, C, D) that represents the most appropriate answer for each question by marking this with a tick (UNCORRECTED

letter (A, B, C, D) that represents the most appropriate answer for each question by marking this with a tick (

PAGE

PAGE

PAGE Your �ndings could be presented in a number of different ways, for instance:

PAGE Your �ndings could be presented in a number of different ways, for instance:

PROOFSantages of the agreement for Australia (e.g. which particular industries may suffer from

PROOFSantages of the agreement for Australia (e.g. which particular industries may suffer from


PROOFSYou may like to follow the weblinks in this topic’s student resources tab to �nd some relevant references.

PROOFS

PROOFS



A report on an investigation or inquiryThe task — a report on an investigation into one of Australia’s trading agreements

As you know, Australia already has many bilateral and multilateral trade agreements with other countries. For instance, there are bilateral trade agreements with New Zealand, Thailand, Singapore, Malaysia, Japan, ASEAN, Korea, Chile, USA and China, along with progress on an agreement with India and the European Union. In addition, there are multilateral trade agreements with Asia–Paci�c Economic Cooperation (APEC), Organization for Economic Co-operation and Development (OECD) and the World Trade Organization (WTO).

Your task is to investigate one of these agreements and then present a report to the class. You could perhaps research some of the following aspects: • Which countries signed the agreement and what are the aims? • When was the agreement signed? • What are the aims or purposes of the agreement? • What are the advantages of the agreement for Australia and the other country? • What are the disadvantages of the agreement for Australia (e.g. which particular industries may suffer from

stronger competition)?This work could be undertaken individually or in small groups.References


Weblinks These weblinks are available in this topic’s student resources tab.• Department of Foreign Affairs and Trade (DFAT)• Centre for International Economics (CIE)• Online newspapers

Presentation

Your �ndings could be presented in a number of different ways, for instance: • a wall chart or poster • PowerPoint slides to illustrate your talk to the class • a written report • a lift-out feature article in a multicolumn newspaper format.

Analysis of visual evidence — a cartoonThere are many cartoons in this topic that can be used to extend your understanding of economics. Examine the cartoons using the following questions as a guide. • What is the economic concept being presented in the cartoon? • What is the main message of the cartoon? • What is your reaction to the cartoon? Do you agree with what it is saying? • Is the message of the cartoon politically or economically biased or distorted in some way? Explain your

answer.




Question 1

Economic globalisation involves:A multinational and transnational companies.B the movement of money capital and production from country to country.C a move towards the creation of a single international market for particular goods or services.D all of the above features.

Question 2

Concerning economic globalisation, which statement is generally true?A The process has been underway now for at least 200 years.B The process did not start until the 1940s.C The process did not start until the 1980s.D The process did not start until the 1990s.Question 3

The process of economic globalisation has not been helped by:A the continued existence of tariffs and other government controls in different economies.B market deregulation in Australia and elsewhere.C cheap electronic communication and faster transport systems.D international differences in the cost of labour and other resources needed for production.Question 4

Concerning economic globalisation, which of the following is false?A David Ricardo was an Italian economist who made the idea of globalisation popular in the 1990s.B Colonisation by European nations in Africa, India, Asia, Australia and the Americas resulted in the

international growth of commodity trade.C The Great Depression of the 1930s and World War I and II slowed the process of globalisation.D International agreements and organisations such as WTO, World Bank, IMF and the creation of the EU

have helped globalisation.Question 5

Which statement about the annual sales of Wal-Mart stores and other multinational corporations is false? Wal-Mart’s annual sales are higher than:A Australia’s GDP.B Israel’s GDP.C Sweden’s GDP or General Electric’s annual sales.D Singapore’s GDP or Ford’s annual sales.Question 6

Which statement is generally false? Economic globalisation helps:A corporations take advantage of differences in labour costs that are an important consideration in the

manufacture of some goods.B provide corporations with access to natural resources that would not otherwise be available in their

country of origin.C increase per unit costs of production for corporations by diversi�cation in production.D increase the �exibility of corporations in decision making to maximise pro�ts.Question 7

Economic globalisation is helped by governments that:A have fewer or no environmental laws.B impose higher tax rates on foreign companies.C have minimum wage legislation as in Australia.D offer production subsidies only to locally-owned �rms.Question 8

Economies of large-scale production gained by some multinational corporations most accurately involve:A mass production.B lower variable costs as production is increased.C lower per unit �xed costs because these costs can be spread more thinly over more units of output.D the exploitation of labour as a means of lifting pro�ts as companies get bigger.Question 9

Which of the following is not normally an effect of economic globalisation?A Economic growth is usually increased by greater ef�ciency and larger export volumes.B In�ation is increased.C The product range for consumers is likely to increase.D Governments need to consider the effects of their policies on the reaction of global traders and markets

and the impact on the in�ation rate, since these considerations affect our international competitiveness.Question 10

Economic globalisation may cause:A the disappearance of some national companies or their takeover by foreign investors.B massive shifts in population and the spread of illegal drugs and crime from one country to another.C the depression of local wage levels towards those in cheap labour countries overseas.D all of the above.

UNCORRECTED corporations take advantage of differences in labour costs that are an important consideration in the

UNCORRECTED corporations take advantage of differences in labour costs that are an important consideration in the

provide corporations with access to natural resources that would not otherwise be available in their

UNCORRECTED provide corporations with access to natural resources that would not otherwise be available in their

increase per unit costs of production for corporations by diversi�cation in production.

UNCORRECTED increase per unit costs of production for corporations by diversi�cation in production.increase the �exibility of corporations in decision making to maximise pro�ts.

UNCORRECTED increase the �exibility of corporations in decision making to maximise pro�ts.

by governments that:

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by governments that:have fewer or no environmental laws.

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have fewer or no environmental laws.impose higher tax rates on foreign companies.

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impose higher tax rates on foreign companies.have minimum wage legislation as in Australia.

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have minimum wage legislation as in Australia.

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offer production subsidies only to locally-owned �rms.

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offer production subsidies only to locally-owned �rms.

Economies of large-scale production gained by some multinational corporations most accurately involve:

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Economies of large-scale production gained by some multinational corporations most accurately involve:mass production.

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mass production.lower variable costs as production is increased.

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lower variable costs as production is increased.

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lower per unit �xed costs because these costs can be spread more thinly over more units of output.

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lower per unit �xed costs because these costs can be spread more thinly over more units of output.the exploitation of labour as a means of lifting pro�ts as companies get bigger.UNCORRECTED

the exploitation of labour as a means of lifting pro�ts as companies get bigger.UNCORRECTED

Question 9UNCORRECTED

Question 9

PAGE ? Economic globalisation helps:PAGE ? Economic globalisation helps:

corporations take advantage of differences in labour costs that are an important consideration in the PAGE

corporations take advantage of differences in labour costs that are an important consideration in the

PROOFSColonisation by European nations in Africa, India, Asia, Australia and the Americas resulted in the

PROOFSColonisation by European nations in Africa, India, Asia, Australia and the Americas resulted in the

The Great Depression of the 1930s and World War I and II slowed the process of globalisation.

PROOFSThe Great Depression of the 1930s and World War I and II slowed the process of globalisation.International agreements and organisations such as WTO, World Bank, IMF and the creation of the EU

PROOFSInternational agreements and organisations such as WTO, World Bank, IMF and the creation of the EU

Which statement about the annual sales of Wal-Mart stores and other multinational corporations is PROOFS

Which statement about the annual sales of Wal-Mart stores and other multinational corporations is



Question 11

Globalisation in China has led to:A increased exports.B increased direct and portfolio investment that has grown productive capacity and expanded the country’s

production possibility frontier.C greater ef�ciency and cost cutting within local �rms.D all of the above.

Question 12

Which of the following is incorrect? Globalisation in China has generally tended to:A increase pollution and health problems, lowering some aspects of non-material living standards.B reduce the Gini coef�cient for the distribution of income between individuals.C decrease poverty.D cause people to move from rural areas to cities.

Question 13

The opposite of economic globalisation is best described as:A economic internalisation.B economic localisation.C economic corporatisation.D economic commercialisation.

Question 14

Concerning international organisations and institutions in the global economy, which statement is least correct?A The WTO believes in protection and the use of tariffs among member countries, so as to create

more jobs.B The IMF supervises the global �nancial system and tries to promote a degree of exchange rate

stability.C The World Bank is often criticised because its free market policies can damage fragile Third World

economies.D The IMF is a lender of last resort to governments in �nancial dif�culties, but this involves the borrowing

countries meeting certain conditions.

Question 15

Which of the following is least correct?A Globalisation may lower the living standards of some workers, especially in the shorter term.B Globalisation may raise consumer prices.C Globalisation means that governments should partly deregulate the labour market.D Globalisation means that lower tax rates on companies may help �rms compete with imported goods and

services, both here and abroad.




comparative cost advantageconsumer price in�ationeconomic instabilityeconomies of large-scale productionenterprise bargaining

globalisationincome distributionInternational Monetary Fund (IMF)multinational or transnational company

national sovereigntystructural unemploymentWorld BankWorld Trade Organisation (WTO)

UNCORRECTED The IMF is a lender of last resort to governments in �nancial dif�culties, but this involves the borrowing

UNCORRECTED The IMF is a lender of last resort to governments in �nancial dif�culties, but this involves the borrowing

correct?

UNCORRECTED correct?

Globalisation may lower the living standards of some workers, especially in the shorter term.

UNCORRECTED Globalisation may lower the living standards of some workers, especially in the shorter term.Globalisation may raise consumer prices.

UNCORRECTED Globalisation may raise consumer prices.Globalisation means that governments should partly deregulate the labour market.

UNCORRECTED Globalisation means that governments should partly deregulate the labour market.Globalisation means that lower tax rates on companies may help �rms compete with imported goods and

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Globalisation means that lower tax rates on companies may help �rms compete with imported goods and services, both here and abroad.

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services, both here and abroad.

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Digital documents

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Digital documentsMultiple-choice answers: Topic 5 — Option 2

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Multiple-choice answers: Topic 5 — Option 2

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Terminology revision

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Terminology revisionUse the

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Use the Puzzlemaker

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PuzzlemakerUsing the key words from the list below, you will need to write out de�nitions for the clues across and down UNCORRECTED

Using the key words from the list below, you will need to write out de�nitions for the clues across and down (Hint: You can use the de�nitions found in your UNCORRECTED

(Hint: You can use the de�nitions found in your

PAGE The WTO believes in protection and the use of tariffs among member countries, so as to create

PAGE The WTO believes in protection and the use of tariffs among member countries, so as to create

The IMF supervises the global �nancial system and tries to promote a degree of exchange rate

PAGE The IMF supervises the global �nancial system and tries to promote a degree of exchange rate

The World Bank is often criticised because its free market policies can damage fragile Third World

PAGE The World Bank is often criticised because its free market policies can damage fragile Third World

The IMF is a lender of last resort to governments in �nancial dif�culties, but this involves the borrowing PAGE

The IMF is a lender of last resort to governments in �nancial dif�culties, but this involves the borrowing

PROOFS

Concerning international organisations and institutions in the global economy, which statement is PROOFS

Concerning international organisations and institutions in the global economy, which statement is

The WTO believes in protection and the use of tariffs among member countries, so as to create PROOFS

The WTO believes in protection and the use of tariffs among member countries, so as to create




A What is meant by the term economic globalisation?B It took 38 years after its invention for radio to be used by 50 million consumers, 16 years for personal

computers, 13 years for TV, and only four years for the World Wide Web! Examine table 5.6 below.

TABLE 5.6The change in internet usage in various countries, 1998 to 2014

Internet users (per 100 people)

Country 1998 2014

Iceland 36.3 98.2

UK 13.7 91.6

Japan 13.4 90.6

USA 30.1 87.4

Germany 9.9 86.2

Australia 30.8 84.6

France 6.3 83.8

Russian Federation 0.8 70.5

Argentina 0.8 64.7

Saudi Arabia 0.1 63.7

Brazil 1.5 57.6

China 0.2 49.3

Nigeria 0.0 42.7

Philippines 1.1 39.7

Sri Lanka 0.3 25.8

India 0.1 18.0

Indonesia 0.3 17.1

Papua New Guinea 0.2 9.4

Mozambique 0.0 5.9

Madagascar 0.1 3.7

Niger 0.0 1.9

Timor-Leste N/A 1.1

Source: Data derived from World Bank, http://data.worldbank.org/indicator/IT.NET.USER .P2?end=2014&start=1998&year_high_desc=true.

(i) Describe the trend in internet usage between 1998 and 2014, as a percentage of the population in various countries.

(ii) How has the rise in the WWW helped to facilitate the globalisation of commerce, and the expansion of multinational business and trade?

C Examine the data contained in �gure 5.33 below, showing changing transport and communication costs using a price index with 1930 as the base or comparison year for the subsequent years.

Falling transport and communication costs

1930 1940 1950 1960

1990 costs = 100

1970 1980 1990 20000

20

40

60

80

100

120

Air transport*

Sea freight*

Transatlanticphone call*

*Cost of three minute telephone call from New York to London*Average ocean freight and port charges per short ton of import and export cargo*Average air transport revenue per passenger mile

Source: HM Treasury

Satellite charges

FIGURE 5.33 The changing costs of transport and communication

Source: Graph copied from an article, ‘What factors have contributed to globalisation in recent years?’ by Maziar Homayounnejad, Queen Elizabeth’s School, Barnet, see http://www.redbornecommunitycollege.com/_�les/Curriculum/5F173131A1478B73B9D918395207B05C.pdf.

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UNCORRECTED 0.0

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N/A

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Data derived from World Bank, http://data.worldbank.org/indicator/IT.NET.USER

UNCORRECTED Data derived from World Bank, http://data.worldbank.org/indicator/IT.NET.USER

.P2?end=2014&start=1998&year_high_desc=true.

UNCORRECTED .P2?end=2014&start=1998&year_high_desc=true.

the trend in internet usage between 1998 and 2014, as a percentage of the population in

UNCORRECTED the trend in internet usage between 1998 and 2014, as a percentage of the population in

w has the rise in the WWW helped to facilitate the globalisation of commerce, and the expansion

UNCORRECTED w has the rise in the WWW helped to facilitate the globalisation of commerce, and the expansion

of multinational business and trade?

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of multinational business and trade?Examine the data contained in �gure 5.33 below, showing changing transport and communication costs

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Examine the data contained in �gure 5.33 below, showing changing transport and communication costs using a price index with 1930 as the base or comparison year for the subsequent years.

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using a price index with 1930 as the base or comparison year for the subsequent years.

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1990 costs = 100

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1990 costs = 100

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PROOFS

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42.7 PROOFS

42.7

39.7 PROOFS

39.7



(i) Referring to the graph and quoting data, what has happened to the cost of transport and communi-cations over the years since 1930?

(ii) How has the trend in transport and communications costs helped the process of globalisation and the spread of multinationals?

D How did colonisation by European powers some centuries ago help lead to globalisation? Question 2

A What are transnational or multinational companies? Are they signi�cant in the global economy?B Companies grow and become multinationals for many reasons. (i) Wages are cheaper in some countries. Why are there large wage differences between countries? Which

countries are seen by multinationals as low-wage countries? Explain how wage differences between nations lead to globalisation.

(ii) Firms can gain economies of large-scale. What are economies of large-scale production? Explain how globalisation can help multinationals gain these economies, reduce costs and make better pro�ts.

(iii) Governments will often try to attract multinationals to their country. Why are some governments keen to attract multinationals? Explain the methods they use to do this.

Question 3

A Globalisation has meant that the Australian economy has had to undergo change and become more internationalised. What sorts of changes have been forced upon the Australian government and society due to economic globalisation?

B Outline one important cost and two key bene�ts to Australia of economic globalisation.Question 4

‘Globalisation has transformed the Chinese economy.’ After examining table 5.7 below, answer the questions that follow. Where appropriate, quote statistics from the table.

TABLE 5.7 Globalisation and its impacts on China — some statistics

Chinese indicator Change over the period

Change in real GDP 27 fold, 1990–2015

Average growth rate in real GDP 10.1 per cent, 1990–2015

Growth in population 20 per cent, 1990–2015

Growth in average real GDP per head 22 fold or 9.2 per cent a year, 1990–2015

Percentage change in Gini coef�cient 28 per cent rise in income inequality

Rise in CO2 pollution emissions Around a 290 per cent rise 1990–2015, accounting for 25 per cent of all global emissions

Comparison of happiness index Ranks 60th out of 151 countries

Change in average life expectancy Rise from 69 to 79 years, 1990–2015

Change in adult literacy rate Rise from 78 to 96 per cent, 1990–2015

Of�cial unemployment rate Rise from 2.3 in 1990 to 4.1 per cent in 2015

Change in in�ation Average annual rise of 3.7 per cent 1994–2015, but lower rates in recent years

Source: Data has been derived from various sources including Wikipedia, the free encyclopedia, Historical GDP of China, see https://en.wikipedia.org/wiki/Historical_GDP_of_China; Happiness index score, see http://www.happyplanetindex.org/countries/china/; Life expectancy, see http://www.china-pro�le.com/data/�g_WPP2008_L0_1.htm; Adult literacy rate, see http://www.uis.unesco.org/literacy/Documents/UIS-literacy-statistics-1990-2015-en.pdf; Unemployment, see http://www.nber.org/digest/oct15/w21460.html and other; In�ation, see http://www.in�ation.eu/in�ation-rates/china/historic-in�ation/cpi-in�ation-china.aspx.

A The size of China’s economy measured by GDP grew 27 fold over the years 1990–2015. Identify and outline two reasons why economic growth in China has been so rapid.

B Why might you normally have expected China’s in�ation rate to accelerate between 1994 and 2015?C How has the growth in urban manufacturing in China helped reduce rural unemployment and

underemployment rates (where people are not working to capacity)? What urban problems have been created as a result?

D Examine the graph contained in �gure 5.34, showing differences in Chinese annual incomes across various occupations.

(i) Why are income differences in China today much larger than in previous times (e.g. following the socialist revolution of 1949, and the subsequent three decades)?

(ii) Explain why average incomes in agriculture are today much lower than those in manufacturing, and especially banking and �nance, and information technology.

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UNCORRECTED Comparison of happiness index

UNCORRECTED Comparison of happiness index

Change in average life expectancy

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Change in average life expectancy

Change in adult literacy rate

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Change in adult literacy rate

Of�cial unemployment rate

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Of�cial unemployment rate

Change in in�ation

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Change in in�ation

Source:

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Source: Data has been derived from various sources including Wikipedia, the free encyclopedia, Historical GDP of China, see https://

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en.wikipedia.org/wiki/Historical_GDP_of_China; Happiness index score, see http://www.happyplanetindex.org/countries/china/; Life expectancy, see http://www.china-pro�le.com/data/�g_WPP2008_L0_1.htm; Adult literacy rate, see http://www.uis.unesco.org/literacy/

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expectancy, see http://www.china-pro�le.com/data/�g_WPP2008_L0_1.htm; Adult literacy rate, see http://www.uis.unesco.org/literacy/Documents/UIS-literacy-statistics-1990-2015-en.pdf; Unemployment, see http://www.nber.org/digest/oct15/w21460.html and other;

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Documents/UIS-literacy-statistics-1990-2015-en.pdf; Unemployment, see http://www.nber.org/digest/oct15/w21460.html and other; In�ation, see http://www.in�ation.eu/in�ation-rates/china/historic-in�ation/cpi-in�ation-china.aspx.UNCORRECTED

In�ation, see http://www.in�ation.eu/in�ation-rates/china/historic-in�ation/cpi-in�ation-china.aspx.

PAGE

PAGE

PAGE Globalisation and its impacts on China — some statistics

PAGE Globalisation and its impacts on China — some statistics

Change over the period

PAGE Change over the period

27 fold, 1990–2015

PAGE 27 fold, 1990–2015

10.1 per cent, 1990–2015PAGE 10.1 per cent, 1990–2015

20 per cent, 1990–2015PAGE

20 per cent, 1990–2015

PROOFSglobalisation can help multinationals gain these economies, reduce costs and make better pro�ts.

PROOFSglobalisation can help multinationals gain these economies, reduce costs and make better pro�ts.

Why are some governments keen

PROOFS Why are some governments keen

Globalisation has meant that the Australian economy has had to undergo change and become more

PROOFSGlobalisation has meant that the Australian economy has had to undergo change and become more internationalised. What sorts of changes have been forced upon the Australian government and society due

PROOFSinternationalised. What sorts of changes have been forced upon the Australian government and society due

key bene�ts to Australia of economic globalisation.

PROOFSkey bene�ts to Australia of economic globalisation.

‘Globalisation has transformed the Chinese economy.’ After examining table 5.7 below, answer the questions PROOFS

‘Globalisation has transformed the Chinese economy.’ After examining table 5.7 below, answer the questions



Ann

ual i

ncom

e (r

enm

inbi

)Average income per year (in Chinese renminbi = $0.2)

Agriculture Hotel andrestaurant

Manufacturing

Occupation

Bankingand �nance

Informationtechnology

0

10000

20000

30000

40000

50000

FIGURE 5.34 Income differences in China by occupation

Sources: Data derived from state Bureau of Statistics of the People’s Republic of China, China’s Yearbook of Statistics, China’s Statistics Press and other sources.


Discuss the important costs and bene�ts of economic globalisation for Australia.

A class debateAfter dividing into two teams (one for the af�rmative and one for the negative), work with others to prepare a debate about one of the following topics:A ‘That economic globalisation is a blessing, not a curse for Australia and the global economy’B ‘That economic globalisation must be stopped before it is too late. It is contributing to global terror.’

A report on an investigation or inquiryQuestion 1 — A report on an investigation into the nature and operation of multinational corporations

This is a small group activity and it involves some research into various aspects of a multinational corporation such as American Express, BHP Billiton, Deutsche Bank, Exxon, Ford, General Electric, Johnson & Johnson, McDonald’s, Microsoft, Nike, Shell, Sony and Union Carbide. You may like to �nd out information about the following: • the structure and size of the organisation • the reasons for its global expansion • how the company gains a competitive advantage • the use of technology in the corporation • the nature of the relationship between the corporation and the host country • use a search engine to try to �nd criticisms of any multinational companies involving, for example, the use

of sweatshops, child labour and pro�t shifting to minimise tax.

Presentation

Your investigation and report could be presented as: • a poster or wall chart • a class report using a set of PowerPoint slides with charts, pictures and tables • a newspaper feature article.

Question 2 — Have multinationals invaded your home?

An alternative for your research could be to conduct a survey in your home of the basic goods and services purchased by your family. Discover what proportion of the ‘basket’ of items in your home is produced or sold by foreign-owned multinationals, as opposed to locally-owned �rms. (Note: The AUSBUY Guide is useful for this purpose.) Use your survey results to: • construct graphs showing the degree of foreign business penetration into the Australian market • �nd out more information about a number of the companies noted in your survey (e.g. their home base,

their size, their marketing strategies, their impact on the Australian economy, and so on).Your basket of items for the survey might include: • electrical appliances such as a TV, computer, fridge, stove, hot water system, toaster and vacuum cleaner • car • breakfast cereal • banking

UNCORRECTED A report on an investigation or inquiry

UNCORRECTED A report on an investigation or inquiryQuestion 1 — A report on an investigation into the nature and operation of multinational corporations

UNCORRECTED Question 1 — A report on an investigation into the nature and operation of multinational corporations

This is a small group activity and it involves some research into various aspects of a multinational

UNCORRECTED This is a small group activity and it involves some research into various aspects of a multinational corporation such as American Express, BHP Billiton, Deutsche Bank, Exxon, Ford, General Electric,

UNCORRECTED corporation such as American Express, BHP Billiton, Deutsche Bank, Exxon, Ford, General Electric, Johnson & Johnson, McDonald’s, Microsoft, Nike, Shell, Sony and Union Carbide. You may like to �nd out

UNCORRECTED Johnson & Johnson, McDonald’s, Microsoft, Nike, Shell, Sony and Union Carbide. You may like to �nd out

structure and size of the organisation

UNCORRECTED structure and size of the organisationreasons for its global expansion

UNCORRECTED

reasons for its global expansionw the company gains a competitive advantage

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w the company gains a competitive advantageuse of technology in the corporation

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use of technology in the corporationnature of the relationship between the corporation and the host country

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nature of the relationship between the corporation and the host country

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a search engine to try to �nd criticisms of any multinational companies involving, for example, the use

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a search engine to try to �nd criticisms of any multinational companies involving, for example, the use of sweatshops, child labour and pro�t shifting to minimise tax.

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of sweatshops, child labour and pro�t shifting to minimise tax.

Your investigation and report could be presented as:

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Your investigation and report could be presented as:poster or wall chart

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poster or wall chart

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class report using a set of PowerPoint slides with charts, pictures and tables

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class report using a set of PowerPoint slides with charts, pictures and tablesnewspaper feature article.UNCORRECTED

newspaper feature article.UNCORRECTED

Question 2 — Have multinationals invaded your home?UNCORRECTED

Question 2 — Have multinationals invaded your home?

PAGE After dividing into two teams (one for the af�rmative and one for the negative), work with others to prepare

PAGE After dividing into two teams (one for the af�rmative and one for the negative), work with others to prepare

‘That economic globalisation is a blessing, not a curse for Australia and the global economy’

PAGE ‘That economic globalisation is a blessing, not a curse for Australia and the global economy’‘That economic globalisation must be stopped before it is too late. It is contributing to global terror.’

PAGE ‘That economic globalisation must be stopped before it is too late. It is contributing to global terror.’

A report on an investigation or inquiryPAGE A report on an investigation or inquiryQuestion 1 — A report on an investigation into the nature and operation of multinational corporationsPAGE

Question 1 — A report on an investigation into the nature and operation of multinational corporations

PROOFS

PROOFS Data derived from state Bureau of Statistics of the People’s Republic of China, China’s Yearbook of Statistics, China’s

PROOFS Data derived from state Bureau of Statistics of the People’s Republic of China, China’s Yearbook of Statistics, China’s


PROOFS




• shoes • fruit and vegetables • underwear • hair shampoo • insurance • magazines.

Presentation

Your group’s �ndings could be reported in various ways. For example: • a PowerPoint data show involving computer-generated slides presented to the class • a wall chart or poster • a class talk, perhaps illustrated using overhead transparencies containing graphs, diagrams, �ow charts,

advertising materials, photographs • a written report of 500 words containing graphs and other illustrative evidence.

References

The internet can be a great way to obtain information about some multinational corporations. Most companies have their own home pages.

Question 3 — Where in the world would I set up a business? A presentation about taking your local business offshore

Working individually or in small groups, your task here is to imagine that you are an owner of an Australian manufacturing business producing clothing. You want to expand your operations to become a multinational and are investigating possible countries for your expansion overseas. In making a decision about which country to locate your new operations, try to consider some of the following aspects: • the level of wage rates or labour costs • labour force size and level of education and training • market size (located domestically and overseas) • transport or freight costs of materials and �nished goods (both domestically and to overseas) • other production costs like electricity and water • the cost of borrowing business credit to �nance your expansion • government policy towards overseas �rms and the environment (in the selected country) • the provision of infrastructure (e.g. government provision of water, power, transport) • rates of company tax • the availability and cost of the natural and other resources you require for production.

Whatever your decision, you should try to justify your choice of country by basing your verdict on real facts and actual data. To get you started and to show you what sort of factual data is available, take a look at table 5.8 below. This includes evidence of some factors affecting production costs and business pro�tability in different countries.

Presentation of your inquiry

Your research and investigation could be presented as: • PowerPoint slides • a poster • a written report.

Try to incorporate graphs, tables, diagrams and photos into your presentation.

TABLE 5.8 Factors affecting business pro�ts and business location decisions in different countries

Part A — Minimum hourly pay rates by country

Country Minimum hourly wage rate (US dollars)

Australia 15.58

China 0.8

Indonesia 0.53

Ireland 12.14

Mexico 0.69

New Zealand 12.65

Sri Lanka 0.29

Taiwan 4.05

United States 7.25

UNCORRECTED vernment policy towards overseas �rms and the environment (in the selected country)

UNCORRECTED vernment policy towards overseas �rms and the environment (in the selected country)provision of infrastructure (e.g. government provision of water, power, transport)

UNCORRECTED provision of infrastructure (e.g. government provision of water, power, transport)

availability and cost of the natural and other resources you require for production.

UNCORRECTED availability and cost of the natural and other resources you require for production.

Whatever your decision, you should try to justify your choice of country by basing your verdict on real

UNCORRECTED Whatever your decision, you should try to justify your choice of country by basing your verdict on real facts and actual data. To get you started and to show you what sort of factual data is available, take a look at

UNCORRECTED facts and actual data. To get you started and to show you what sort of factual data is available, take a look at table 5.8 below. This includes evidence of some factors affecting production costs and business pro�tability

UNCORRECTED table 5.8 below. This includes evidence of some factors affecting production costs and business pro�tability


UNCORRECTED


Your research and investigation could be presented as:

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Your research and investigation could be presented as:werPoint slides

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werPoint slides

written report.

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written report.Try to incorporate graphs, tables, diagrams and photos into your presentation.

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CountryUNCORRECTED

Country

PAGE country to locate your new operations, try to consider some of the following aspects:

PAGE country to locate your new operations, try to consider some of the following aspects:

or freight costs of materials and �nished goods (both domestically and to overseas)

PAGE or freight costs of materials and �nished goods (both domestically and to overseas)

cost of borrowing business credit to �nance your expansionPAGE cost of borrowing business credit to �nance your expansion

vernment policy towards overseas �rms and the environment (in the selected country)PAGE vernment policy towards overseas �rms and the environment (in the selected country)

provision of infrastructure (e.g. government provision of water, power, transport)PAGE

provision of infrastructure (e.g. government provision of water, power, transport)

PROOFSThe internet can be a great way to obtain information about some multinational corporations. Most

PROOFSThe internet can be a great way to obtain information about some multinational corporations. Most

Question 3 — Where in the world would I set up a business? A presentation about taking your local

PROOFSQuestion 3 — Where in the world would I set up a business? A presentation about taking your local

Working individually or in small groups, your task here is to imagine that you are an owner of an Australian

PROOFSWorking individually or in small groups, your task here is to imagine that you are an owner of an Australian manufacturing business producing clothing. You want to expand your operations to become a multinational

PROOFSmanufacturing business producing clothing. You want to expand your operations to become a multinational and are investigating possible countries for your expansion overseas. In making a decision about which PROOFS

and are investigating possible countries for your expansion overseas. In making a decision about which country to locate your new operations, try to consider some of the following aspects:PROOFS

country to locate your new operations, try to consider some of the following aspects:



Part B — Labour productivity by country as a percentage of US worker productivity

CountryLabour productivity index (percentage of productivity in USA,

USA = 100 points)

Australia 83

Greece 48.7

Ireland 83

Mexico 24.1

New Zealand 54.7

Singapore 61.6

South Korea 48

Taiwan 59.4

United States 100

Source: Data derived from OECD, Labour productivity levels in the total economy, see http://stats.oecd.org/Index.aspx?DatasetCode=LEVEL.

Part C — Rate of company tax by country

Country Company tax rate (percentage of pro�ts)

Australia 28.5 to 30

Cayman Islands 0

China 25

Indonesia 25

Ireland 12.5

Mexico 30

New Zealand 28

Taiwan 17

United States 35 plus state taxes

Part D — Electricity costs or prices by country

Country Electricity costs per kilowatt hour (approximate, US cents)

Australia 8.17

China 10

Ireland 28

Kuwait 1

Russia 14

Singapore 20

South Africa 8.46

Thailand 9

United States 9.43

Sources: Data derived from Statista, the Statistics Portal, see http://www.statista.com/statistics/263492/electricity-prices-in-selected-countries, and other sources.

Part E — Strike activity by country measured in working days lost per 1000 employees

Country Strike rates (annual working days lost per 1000 workers)

Australia 86

Germany 2

Iceland 90

Italy 76

Japan 1

Mexico 22

New Zealand 20

Portugal 20

Turkey 28

United States 60

Sources: Data derived from various sources including OECD, Measures of strikes, http://www.oecd-ilibrary.org/docserver/download/8107021e.pdf?expires=1466252269&id=id&accname=guest&checksum=7A2B962E11114ECC2FA8E98C69E0CF79; Wikipedia, the free encyclopaedia, Electricity price statistics Europe, see https://en.wikipedia.org/wiki/Electricity_pricing#/media/File:Electricity-prices-europe.jpg; and other sources.

(continued)

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Data derived from Statista, the Statistics Portal, see http://www.statista.com/statistics/263492/electricity-prices-in-selected-

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Data derived from Statista, the Statistics Portal, see http://www.statista.com/statistics/263492/electricity-prices-in-selected-countries, and other sources.

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countries, and other sources.

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Germany

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Germany

Iceland UNCORRECTED

Iceland

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PAGE 30

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PAGE

PAGE Part D — Electricity costs or prices by country

PAGE Part D — Electricity costs or prices by country

Electricity costs per kilowatt hour (approximate, US cents)PAGE Electricity costs per kilowatt hour (approximate, US cents)

PROOFS

PROOFS

PROOFS

PROOFS

PROOFS

PROOFS

PROOFSCompany tax rate (percentage of pro�ts)

PROOFSCompany tax rate (percentage of pro�ts)

12.5 PROOFS

12.5



TABLE 5.8 (continued)

Part F — Cost for businesses borrowing credit in different countries (annual interest rate)

Country Cost of borrowing credit for business (interest rate, percentage)

Australia 5.6

Brazil 32

India 10.3

Indonesia 12.7

Italy 4.9

Japan 1.2

New Zealand 5.8

Philippines 5.5

United States 3.3

Vietnam 8.7

Source: Data derived from World Bank, Lending interest rates (mostly 2014 or 2015) see http://data.worldbank.org/indicator/FR.INR.LEND.

A blog of media commentariesSelect a couple of articles from the media about globalisation as an economic issue. Set up a blog and initiate discussion based about these commentaries. For instance, these media commentaries may report: • the activities and impacts of a multinational corporation operating in Australia or overseas • the economic, social and environmental impacts of globalisation • the impact of globalisation on government policies, here and overseas • the latest activities of global institutions such as the WTO, IMF or World Bank • local and international developments that accelerate or slow the rate of globalisation.

Analysis of visual evidence — a cartoonThere are many cartoons in this topic that can be used to extend your understanding of economics. Examine the cartoons using the following questions as a guide. • What is the economic concept being presented in the cartoon? • What is the main message of the cartoon? • What is your reaction to the cartoon? Do you agree with what it is saying? • Is the message of the cartoon politically or economically biased or distorted in some way? Explain your answer.




Question 1

Which of the following measures best indicates the level of material living standards in a country?A GDPB GDP per capitaC GDP per capita adjusted for purchasing power parity (PPP)D Total national income

Question 2

Nowadays in a low-income country, the term development is best de�ned as the process of:A raising the total value of goods and services.B economic, social, political and institutional change needed in low-income countries to improve their

material and non-material aspects affecting the quality of daily life.

UNCORRECTED There are many cartoons in this topic that can be used to extend your understanding of economics. Examine

UNCORRECTED There are many cartoons in this topic that can be used to extend your understanding of economics. Examine the cartoons using the following questions as a guide.

UNCORRECTED the cartoons using the following questions as a guide. is the economic concept being presented in the cartoon?

UNCORRECTED is the economic concept being presented in the cartoon? is the main message of the cartoon?

UNCORRECTED is the main message of the cartoon? is your reaction to the cartoon? Do you agree with what it is saying?

UNCORRECTED is your reaction to the cartoon? Do you agree with what it is saying?

Is the message of the cartoon politically or economically biased or distorted in some w

UNCORRECTED Is the message of the cartoon politically or economically biased or distorted in some w

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OPTION 3

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POVERTY

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OVERTY

Multiple-choice test questions

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Multiple-choice test questionsInstructions:

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Instructions: Using the multiple-choice answer grid available in this topic’s student resources tab, select the

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Using the multiple-choice answer grid available in this topic’s student resources tab, select the letter (A, B, C, D) that represents the most appropriate answer for each question by marking this with a tick (

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letter (A, B, C, D) that represents the most appropriate answer for each question by marking this with a tick (

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Digital documents

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Digital documentsMultiple-choice answer grid: Topic 5 — Option 3UNCORRECTED

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UNCORRECTED PAGE activities and impacts of a multinational corporation operating in Australia or overseas

PAGE activities and impacts of a multinational corporation operating in Australia or overseaseconomic, social and environmental impacts of globalisation

PAGE economic, social and environmental impacts of globalisationimpact of globalisation on government policies, here and overseas

PAGE impact of globalisation on government policies, here and overseaslatest activities of global institutions such as the WTO, IMF or World Bank

PAGE latest activities of global institutions such as the WTO, IMF or World Bank

and international developments that accelerate or slow the rate of globalisation.

PAGE and international developments that accelerate or slow the rate of globalisation.

Analysis of visual evidence — a cartoonPAGE Analysis of visual evidence — a cartoonThere are many cartoons in this topic that can be used to extend your understanding of economics. Examine PAGE

There are many cartoons in this topic that can be used to extend your understanding of economics. Examine

PROOFS

PROOFS

PROOFS Data derived from World Bank, Lending interest rates (mostly 2014 or 2015) see http://data.worldbank.org/indicator/FR.INR.LEND.

PROOFS Data derived from World Bank, Lending interest rates (mostly 2014 or 2015) see http://data.worldbank.org/indicator/FR.INR.LEND.

as an economic issue. Set up a blog and

PROOFS

as an economic issue. Set up a blog and initiate discussion based about these commentaries. For instance, these media commentaries may report:PROOFS

initiate discussion based about these commentaries. For instance, these media commentaries may report:activities and impacts of a multinational corporation operating in Australia or overseasPROOFS

activities and impacts of a multinational corporation operating in Australia or overseas



TABLE 5.8 (continued)

Part F — Cost for businesses borrowing credit in different countries (annual interest rate)

Country Cost of borrowing credit for business (interest rate, percentage)

Australia 5.6

Brazil 32

India 10.3

Indonesia 12.7

Italy 4.9

Japan 1.2

New Zealand 5.8

Philippines 5.5

United States 3.3

Vietnam 8.7

Source: Data derived from World Bank, Lending interest rates (mostly 2014 or 2015) see http://data.worldbank.org/indicator/FR.INR.LEND.

A blog of media commentariesSelect a couple of articles from the media about globalisation as an economic issue. Set up a blog and initiate discussion based about these commentaries. For instance, these media commentaries may report: • the activities and impacts of a multinational corporation operating in Australia or overseas • the economic, social and environmental impacts of globalisation • the impact of globalisation on government policies, here and overseas • the latest activities of global institutions such as the WTO, IMF or World Bank • local and international developments that accelerate or slow the rate of globalisation.

Analysis of visual evidence — a cartoonThere are many cartoons in this topic that can be used to extend your understanding of economics. Examine the cartoons using the following questions as a guide. • What is the economic concept being presented in the cartoon? • What is the main message of the cartoon? • What is your reaction to the cartoon? Do you agree with what it is saying? • Is the message of the cartoon politically or economically biased or distorted in some way? Explain your answer.




Question 1

Which of the following measures best indicates the level of material living standards in a country?A GDPB GDP per capitaC GDP per capita adjusted for purchasing power parity (PPP)D Total national income

Question 2

Nowadays in a low-income country, the term development is best de�ned as the process of:A raising the total value of goods and services.B economic, social, political and institutional change needed in low-income countries to improve their

material and non-material aspects affecting the quality of daily life.

C increasing incomes and the annual consumption of goods and services.D growing the economy.

Question 3

All of the following would tend to cause a nation’s productive capacity to grow except:A discovery of new mineral deposits.B increased household consumption spending and reduced rates of national savings and investment.C use of genetically modi�ed crops in agriculture.D government provision of improved infrastructure, including water and power supply.

Question 4

The concept of labour ef�ciency or productivity is best de�ned as:A the level of production or GDP per year.B the rate of economic growth between one year and the next.C the value of GDP divided by the total number of hours worked.D the value of GDP divided by the size of the population.

Question 5

Agricultural productivity in low-income countries is usually very weak due to:A the lack of access to technology and fertiliser, and the use of traditional methods of production.B overcrowding, the diminished size of farms and the shift onto less fertile agricultural soils.C widespread underemployment of labour.D all of the above.

Question 6

Most low-income countries are characterised by:A the vicious cycle of poverty.B the lack of savings and proper �nancial institutions.C high interest rates, low investment and the absence of widespread business expansion.D all of the above.

Question 7

Regarding economic growth and development in a low-income country, which of the following is incorrect?A Economic development concerns improvements in general living standards and the quality of daily life.B Economic development is only concerned with rises in material living standards.C Economic development may be helped by economic growth, if output rises faster than the total population.D Economic development often used to be seen as the same as economic growth, but it is probably

preferable to use a broader measure that considers not only economic aspects but also social, political and institutional considerations.

Question 8

Which of the following would be least likely to accelerate economic development in a low-income country?A Allowing free speech and democracyB Using foreign borrowing to �nance consumption and military spendingC Increased spending on lifting literacy and education standardsD Measures to improve health (including sanitation, vaccination programs and water supply), reduce infant

mortality rates, and improve welfare bene�ts for the aged

Question 9

Most low-income countries have large trade and income de�cits. Which of the following generally offers the weakest explanation of this problem?A Often rich countries in Europe, Japan and the United States protect their farmers and �rms, thus limiting

export volumes from low-income countries.B Widespread subsistence farming in many of these countries reduces export volumes.C There are usually heavy interest repayments by low-income countries on their large foreign debts.D Imports of defence equipment by dictatorships are easily the main reason for the de�cit.

Question 10

Which statement about foreign debt in low-income countries is incorrect?A All foreign debt is bad and slows economic development through income repayment abroad to rich

nations.B Debt that is used for social and economic infrastructure can help to improve the quality of daily life of

ordinary people, partly by growing the nation’s productive capacity.C For some countries, the value of the foreign debt is equal to more than 100 per cent of the value of GDP.D All of the above.

UNCORRECTED Regarding economic growth and development in a low-income country, which of the following is

UNCORRECTED Regarding economic growth and development in a low-income country, which of the following is Economic development concerns improvements in general living standards and the quality of daily life.

UNCORRECTED Economic development concerns improvements in general living standards and the quality of daily life.Economic development is only concerned with rises in material living standards.

UNCORRECTED Economic development is only concerned with rises in material living standards.Economic development may be helped by economic growth, if output rises faster than the total population.

UNCORRECTED Economic development may be helped by economic growth, if output rises faster than the total population.Economic development often used to be seen as the same as economic growth, but it is probably

UNCORRECTED Economic development often used to be seen as the same as economic growth, but it is probably preferable to use a broader measure that considers not only economic aspects but also social, political and

UNCORRECTED preferable to use a broader measure that considers not only economic aspects but also social, political and

Which of the following would be

UNCORRECTED

Which of the following would be least

UNCORRECTED

least likely to accelerate economic development in a low-income country?

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likely to accelerate economic development in a low-income country?least likely to accelerate economic development in a low-income country?least

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least likely to accelerate economic development in a low-income country?leastAllowing free speech and democracy

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Allowing free speech and democracyUsing foreign borrowing to �nance consumption and military spending

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Using foreign borrowing to �nance consumption and military spendingIncreased spending on lifting literacy and education standards

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Increased spending on lifting literacy and education standards

UNCORRECTED

Measures to improve health (including sanitation, vaccination programs and water supply), reduce infant

UNCORRECTED

Measures to improve health (including sanitation, vaccination programs and water supply), reduce infant mortality rates, and improve welfare bene�ts for the aged

UNCORRECTED

mortality rates, and improve welfare bene�ts for the aged

Question 9

UNCORRECTED

Question 9

Most low-income countries have large trade and income de�cits. Which of the following generally offers the

UNCORRECTED

Most low-income countries have large trade and income de�cits. Which of the following generally offers the weakest UNCORRECTED

weakest explanation of this problem?UNCORRECTED

explanation of this problem?weakest explanation of this problem?weakest UNCORRECTED

weakest explanation of this problem?weakest UNCORRECTED

Often rich countries in Europe, Japan and the United States protect their farmers and �rms, thus limiting UNCORRECTED

Often rich countries in Europe, Japan and the United States protect their farmers and �rms, thus limiting export volumes from low-income countries.UNCORRECTED

export volumes from low-income countries.

PAGE high interest rates, low investment and the absence of widespread business expansion.

PAGE high interest rates, low investment and the absence of widespread business expansion.

Regarding economic growth and development in a low-income country, which of the following is PAGE

Regarding economic growth and development in a low-income country, which of the following is

PROOFSthe lack of access to technology and fertiliser, and the use of traditional methods of production.

PROOFSthe lack of access to technology and fertiliser, and the use of traditional methods of production.overcrowding, the diminished size of farms and the shift onto less fertile agricultural soils.

PROOFSovercrowding, the diminished size of farms and the shift onto less fertile agricultural soils.



Question 11

Rapid population growth is often a serious problem in low-income countries because:A overpopulation puts pressure on the nation’s limited natural resources, depresses rural productivity and

worsens environmental damage.B it causes many problems associated with accelerated rates of urban growth.C it diminishes the quality of social and economic infrastructure and worsens the government’s �nancial

problems.D all of the above.

Question 12

Increasing investment levels is vital for economic development. Which statement about the role of investment in low-income countries is incorrect?A High levels of investment grow labour productivity and per capita incomes.B High levels of investment in social infrastructure improve the daily wellbeing of people, and grow

productivity and per capita incomes.C High levels of investment in the long term will cause even higher unemployment by replacing labour with

physical capital, equipment and machines.D High levels of investment help to break the vicious cycle of poverty and low income.

Question 13

Concerning the role of the United Nations and its Millennium Development Goals (MDGs, 2000–15) and Sustainable Development Goals (SDGs, 2015–30), which statement is least correct?A The maternal mortality rate was almost halved during 2000–15.B Ending hunger and poverty are key objectives in the SDGs, 2015–30.C The environment and climate change are important issues in the SDGs, 2015–30.D Unfortunately, the MDG of halving poverty by 2015 was not achieved nor was there much progress in

improving access to education.

Question 14

International and Australian foreign aid is mostly used to promote development in line with the United Nation’s Millennium Development Goals. Which statement about international aid is false?A Australia donates a higher percentage of its GDP in foreign aid than does the US or Japan.B Hard loans to low-income countries are those where the receiving country is given a favourable,

discounted or lower interest rate than that normally prevailing in the market.C Debt repayments by low-income countries mean that governments often reduce outlays on education and

health.D The achievement of the UN’s Millennium Development Goals involve improving a broad range of aspects

affecting the quality of daily life for people living in low-income countries by 2015, indicated by around 60 statistical measures.




developmentef�ciencyforeign debthigh-income countryhuman development index (HDI)infrastructure

investmentlow-income countryMillennium Development Goals (MDGs)negative externalitiespoverty line

productive capacitystages of economic growthSustainable Development Goals (SDGs)unemploymentunequal income distribution

UNCORRECTED Australia donates a higher percentage of its GDP in foreign aid than does the US or Japan.

UNCORRECTED Australia donates a higher percentage of its GDP in foreign aid than does the US or Japan.Hard loans to low-income countries are those where the receiving country is given a favourable,

UNCORRECTED Hard loans to low-income countries are those where the receiving country is given a favourable, discounted or lower interest rate than that normally prevailing in the market.

UNCORRECTED discounted or lower interest rate than that normally prevailing in the market.Debt repayments by low-income countries mean that governments often reduce outlays on education and

UNCORRECTED Debt repayments by low-income countries mean that governments often reduce outlays on education and

The achievement of the UN’s Millennium Development Goals involve improving a broad range of aspects

UNCORRECTED The achievement of the UN’s Millennium Development Goals involve improving a broad range of aspects affecting the quality of daily life for people living in low-income countries by 2015, indicated by around

UNCORRECTED affecting the quality of daily life for people living in low-income countries by 2015, indicated by around

UNCORRECTED

Digital documents

UNCORRECTED

Digital documentsMultiple-choice answers: Topic 5 — Option 3

UNCORRECTED

Multiple-choice answers: Topic 5 — Option 3

UNCORRECTED

Terminology revision

UNCORRECTED

Terminology revisionUse the

UNCORRECTED

Use the Puzzlemaker

UNCORRECTED

PuzzlemakerUsing the key words from the list below, you will need to write out de�nitions for the clues across and down

UNCORRECTED

Using the key words from the list below, you will need to write out de�nitions for the clues across and down (Hint: You can use the de�nitions found in your UNCORRECTED

(Hint: You can use the de�nitions found in your

PAGE The environment and climate change are important issues in the SDGs, 2015–30.

PAGE The environment and climate change are important issues in the SDGs, 2015–30.Unfortunately, the MDG of halving poverty by 2015 was not achieved nor was there much progress in

PAGE Unfortunately, the MDG of halving poverty by 2015 was not achieved nor was there much progress in

International and Australian foreign aid is mostly used to promote development in line with the United

PAGE International and Australian foreign aid is mostly used to promote development in line with the United Nation’s Millennium Development Goals. Which statement about international aid is PAGE Nation’s Millennium Development Goals. Which statement about international aid is

Australia donates a higher percentage of its GDP in foreign aid than does the US or Japan.PAGE

Australia donates a higher percentage of its GDP in foreign aid than does the US or Japan.Hard loans to low-income countries are those where the receiving country is given a favourable, PAGE

Hard loans to low-income countries are those where the receiving country is given a favourable,

PROOFSHigh levels of investment in social infrastructure improve the daily wellbeing of people, and grow

PROOFSHigh levels of investment in social infrastructure improve the daily wellbeing of people, and grow

High levels of investment in the long term will cause even higher unemployment by replacing labour with

PROOFSHigh levels of investment in the long term will cause even higher unemployment by replacing labour with

High levels of investment help to break the vicious cycle of poverty and low income.

PROOFSHigh levels of investment help to break the vicious cycle of poverty and low income.

Concerning the role of the United Nations and its Millennium Development Goals (MDGs, 2000–15) and

PROOFSConcerning the role of the United Nations and its Millennium Development Goals (MDGs, 2000–15) and

correct?

PROOFS correct?

The environment and climate change are important issues in the SDGs, 2015–30.PROOFS

The environment and climate change are important issues in the SDGs, 2015–30.




A De�ne what is meant by low-income countries. What are some of the general indicators and effects of being a low-income country?

B ‘Economic development is nowadays seen as more than accelerating the rate of economic growth’. Explain what this statement means.

C Before answering the questions that follow, read the extract in �gure 5.35 below. This report condenses the world’s population of over 7 billion people down to just 1000, to give us a better grasp of the problems we face as global citizens.

If the world were a village of 1000 people . . .

Dona Meadows

If the world were a village of 1000 people, it would include:• 584 Asians• 124 Africans• 95 East and West Europeans• 84 Latin Americans• 55 Soviets (including for the moment Lithuanians, Latvians, Estonians and other national groups)• 52 North Americans• 6 Australians and New Zealanders

The people of the village have considerable dif�culty in communicating:• 165 people speak Mandarin• 86 English• 83 Hindi/Urdu• 64 Spanish• 58 Russian• 37 ArabicThat list accounts for the mother tongues of only half the villagers. The other half speak (in descending order of frequency) Bengali, Portuguese, Indonesian, Japanese, German, French and 200 other languages.

In this village of 1000 there are:• 329 Christians (among them 187 Catholics, 84 Protestants, 31 Orthodox)• 178 Moslems• 167 ‘non-religious’• 132 Hindus• 60 Buddhists• 45 atheists• 3 Jews• 86 all other religions• One-third (330) of the 1000 people in the world village are children and only 60 are over the age of 65. Half

the children are immunised against preventable infectious diseases such as measles and polio.• Just under half of the married women in the village have access to and use modern contraceptives.• This year 28 babies will be born. Ten people will die, 3 of them for lack of food, 1 from cancer, 2 of the

deaths are of babies born within the year. One person of the 1000 is infected with the HIV virus; that person most likely has not yet developed a full-blown case of AIDS.

• With the 28 births and 10 deaths, the population of the village next year will be 1018.• In this 1000-person community, 200 people receive 75 per cent of the income; another 200 receive only

2 per cent of the income.• Only 70 people of the 1000 own an automobile (although some of the 70 own more than one automobile).• About one-third have access to clean, safe drinking water.• Of the 670 adults in the village, half are illiterate.

The village has six acres of land per person, 6000 acres in all, of which• 700 acres are cropland• 1400 acres pasture• 1900 acres woodland• 2000 acres desert, tundra, pavement and other wasteland• The woodland is declining rapidly; the wasteland is increasing. The other land categories are roughly stable. The village allocates 83 per cent of its fertiliser to 40 per cent of its cropland — that owned by the richest and best-fed 270 people. Excess fertiliser running off this land causes pollution in lakes and wells. The remaining 60 per cent of the land, with its 17 per cent of the fertiliser, produces 28 per cent of the food grains and feeds 73 per cent of the people. The average grain yield on that land is one-third the harvest achieved by the richer villagers.

FIGURE 5.35 Thinking of the world as a village helps us come to grips with some of the real problems in the world. (continued)

UNCORRECTED 329 Christians (among them 187 Catholics, 84 Protestants, 31 Orthodox)

UNCORRECTED 329 Christians (among them 187 Catholics, 84 Protestants, 31 Orthodox)

One-third (330) of the 1000 people in the world village are children and only 60 are over the age of 65. Half

UNCORRECTED

One-third (330) of the 1000 people in the world village are children and only 60 are over the age of 65. Half the children are immunised against preventable infectious diseases such as measles and polio.

UNCORRECTED

the children are immunised against preventable infectious diseases such as measles and polio.Just under half of the married women in the village have access to and use modern contraceptives.

UNCORRECTED

Just under half of the married women in the village have access to and use modern contraceptives.This year 28 babies will be born. Ten people will die, 3 of them for lack of food, 1 from cancer, 2 of the

UNCORRECTED

This year 28 babies will be born. Ten people will die, 3 of them for lack of food, 1 from cancer, 2 of the deaths are of babies born within the year. One person of the 1000 is infected with the HIV virus; that

UNCORRECTED

deaths are of babies born within the year. One person of the 1000 is infected with the HIV virus; that person most likely has not yet developed a full-blown case of AIDS.

UNCORRECTED

person most likely has not yet developed a full-blown case of AIDS.With the 28 births and 10 deaths, the population of the village next year will be 1018.

UNCORRECTED

With the 28 births and 10 deaths, the population of the village next year will be 1018.

UNCORRECTED

In this 1000-person community, 200 people receive 75 per cent of the income; another 200 receive only

UNCORRECTED

In this 1000-person community, 200 people receive 75 per cent of the income; another 200 receive only 2 per cent of the income.

UNCORRECTED

2 per cent of the income.Only 70 people of the 1000 own an automobile (although some of the 70 own more than one automobile).

UNCORRECTED

Only 70 people of the 1000 own an automobile (although some of the 70 own more than one automobile).About one-third have access to clean, safe drinking water.UNCORRECTED

About one-third have access to clean, safe drinking water.UNCORRECTED

Of the 670 adults in the village, half are illiterate.UNCORRECTED

Of the 670 adults in the village, half are illiterate.

PAGE That list accounts for the mother tongues of only half the villagers. The other half speak (in descending order

PAGE That list accounts for the mother tongues of only half the villagers. The other half speak (in descending order of frequency) Bengali, Portuguese, Indonesian, Japanese, German, French and 200 other languages.PAGE of frequency) Bengali, Portuguese, Indonesian, Japanese, German, French and 200 other languages.

PROOFS

PROOFS

PROOFS

PROOFS55 Soviets (including for the moment Lithuanians, Latvians, Estonians and other national groups)

PROOFS55 Soviets (including for the moment Lithuanians, Latvians, Estonians and other national groups)

The people of the village have considerable dif�culty in communicating:PROOFS

The people of the village have considerable dif�culty in communicating:




In the village of 1000 people, there are:• 5 soldiers• 7 teachers• 1 doctor• 3 refugees driven from home by war or droughtThe village has a total budget each year, public and private, of over $3 million - $3,000 per person if it is dis-tributed evenly (which, we have already seen, it isn’t).

Of the total $3 million:• $181 000 goes to weapons and warfare• $159 000 for education• $132 000 for health care The village has buried beneath it enough explosive power in nuclear weapons to blow itself to smithereens many times over. These weapons are under the control of just 100 of the people. The other 900 people are watching them with deep anxiety, wondering whether they can learn to get along together; and if they do, whether they might set off the weapons anyway through inattention or technical bungling; and, if they ever decide to dismantle the weapons, where in the world village they would dispose of the radioactive materials of which the weapons are made.

Source: Article by Dona Meadows copied from http://www.gdrc.org/uem/1000-village.html, and originally published by the Sustainability Institute, 31 May 1990.

(i) What is the most common nationality?(ii) How would expenditure on defence compare with spending on health or education?

(iii) What are the most serious causes of death?(iv) Of the village income of $3 million, what proportion would the top 200 (i.e. 20 per cent) income

earners receive, relative to the lowest 200?(v) What proportion of the population would be children and what proportion would be over 65 years of

age? Suggest reasons for this situation.(vi) What percentage of married women has access to and uses modern contraceptives? In turn, what

problems does this create for some low-income countries?(vii) The richest or best fed 270 people (i.e. 27 per cent) would eat food crops grown on 280 acres of

the most fertile 700 acres of arable land available. How much land is left to feed the remaining 73 per cent of the people?

(viii) What proportion of villagers has access to clean drinking water?(ix) What proportion of villagers owns automobiles?(x) What proportion of villagers is illiterate? Explain how this might affect production, income and

living standards.(xi) What percentage of children is immunised against preventable diseases?

(xii) Looking at the total village budget (public and private) of $3 million available for spending (i.e. an average of $3000 per person if it were divided evenly which, as mentioned, it is not), what area is regarded as more important — education, health or defence?

D Explain how each of the following can be used to measure the level of development in low-income countries, noting the main weaknesses of each:

(i) annual average GDP per capita or annual average income per capita (ii) the human development index (HDI).E Use the information in table 5.9 below to calculate GDP per capita for Australia, Vietnam and Sudan.

TABLE 5.9 GDP and population for Australia, Vietnam and Sudan

CountryAnnual GDP

(international dollars or PPP) Population (millions)Annual GDP per capita

(international dollars or PPP)

Australia 1177 24.1 $ ……..

Vietnam 593 91.7 $ ……..

Sudan 174 39.6 $ ……..

Sources: Data derived from various sources including Knoema, see https://knoema.com/nwnfkne/world-gdp-ranking-2015-data-and-charts; Wikipedia, the free encyclopaedia, see https://en.wikipedia.org/wiki/List_of_countries_and_dependencies_by_population; the IMF and World Bank. Note: Data are rounded and for 2015–16.

UNCORRECTED problems does this create for some low-income countries?

UNCORRECTED problems does this create for some low-income countries?richest or best fed 270 people (i.e. 27 per cent) would eat food crops grown on 280 acres of

UNCORRECTED richest or best fed 270 people (i.e. 27 per cent) would eat food crops grown on 280 acres of the most fertile 700 acres of arable land available. How much land is left to feed the remaining

UNCORRECTED the most fertile 700 acres of arable land available. How much land is left to feed the remaining

proportion of villagers has access to clean drinking water?

UNCORRECTED proportion of villagers has access to clean drinking water?proportion of villagers owns automobiles?

UNCORRECTED proportion of villagers owns automobiles?proportion of villagers is illiterate? Explain how this might affect production, income and

UNCORRECTED proportion of villagers is illiterate? Explain how this might affect production, income and

percentage of children is immunised against preventable diseases?

UNCORRECTED

percentage of children is immunised against preventable diseases?at the total village budget (public and private) of $3 million available for spending (i.e. an

UNCORRECTED

at the total village budget (public and private) of $3 million available for spending (i.e. an average of $3000 per person if it were divided evenly which, as mentioned, it is not), what area is

UNCORRECTED

average of $3000 per person if it were divided evenly which, as mentioned, it is not), what area is regarded as more important — education, health or defence?

UNCORRECTED

regarded as more important — education, health or defence?Explain how each of the following can be used to measure the level of

UNCORRECTED

Explain how each of the following can be used to measure the level of countries, noting the main

UNCORRECTED

countries, noting the main (i)

UNCORRECTED

(i) annual

UNCORRECTED

annual average GDP per capita or annual average income per capita

UNCORRECTED

average GDP per capita or annual average income per capita(ii)

UNCORRECTED

(ii) the

UNCORRECTED

the human development index (HDI).

UNCORRECTED

human development index (HDI).E

UNCORRECTED

E Use the information in table 5.9 below to calculate GDP per capita for Australia, Vietnam and Sudan.

UNCORRECTED

Use the information in table 5.9 below to calculate GDP per capita for Australia, Vietnam and Sudan.

UNCORRECTED

TUNCORRECTED

TAUNCORRECTED

A

PAGE w would expenditure on defence compare with spending on health or education?

PAGE w would expenditure on defence compare with spending on health or education?

the village income of $3 million, what proportion would the top 200 (i.e. 20 per cent) income

PAGE the village income of $3 million, what proportion would the top 200 (i.e. 20 per cent) income

proportion of the population would be children and what proportion would be over 65 years of

PAGE proportion of the population would be children and what proportion would be over 65 years of

percentage of married women has access to and uses modern contraceptives? In turn, what PAGE percentage of married women has access to and uses modern contraceptives? In turn, what

problems does this create for some low-income countries?PAGE

problems does this create for some low-income countries?richest or best fed 270 people (i.e. 27 per cent) would eat food crops grown on 280 acres of PAGE

richest or best fed 270 people (i.e. 27 per cent) would eat food crops grown on 280 acres of

PROOFS

PROOFS

PROOFSThe village has buried beneath it enough explosive power in nuclear weapons to blow itself to smither

PROOFSThe village has buried beneath it enough explosive power in nuclear weapons to blow itself to smithereens many

PROOFSeens many times over. These weapons are under the control of just 100 of the people. The other 900 people are watching them

PROOFStimes over. These weapons are under the control of just 100 of the people. The other 900 people are watching them with deep anxiety, wondering whether they can learn to get along together; and if they do, whether they might set off

PROOFSwith deep anxiety, wondering whether they can learn to get along together; and if they do, whether they might set off the weapons anyway through inattention or technical bungling; and, if they ever decide to dismantle the weapons,

PROOFSthe weapons anyway through inattention or technical bungling; and, if they ever decide to dismantle the weapons, where in the world village they would dispose of the radioactive materials of which the weapons are made.

PROOFSwhere in the world village they would dispose of the radioactive materials of which the weapons are made.

Article by Dona Meadows copied from http://www.gdrc.org/uem/1000-village.html, and originally published by the

PROOFS Article by Dona Meadows copied from http://www.gdrc.org/uem/1000-village.html, and originally published by the

w would expenditure on defence compare with spending on health or education?PROOFS

w would expenditure on defence compare with spending on health or education?



F Carefully examine table 5.10 below, which contains seven possible indicators for the level of economic development in selected countries.

TABLE 5.10 Some possible indicators of economic development in selected countries

Country

1. Index of people above the

poverty line of $1.25/day (100 is best)

2. Life expectancy index (100 is long life

expectancy)

3. Adult literacy index (100 is

top score)

4. Education

index (100 is top

score)

5. Employment index

(100 is no unemployment)

6. Index of corruption perception

(100 is least corrupt)

7. Index of national income received

(100 is best)

Australia 100 82 99 99.3 95 81 86

Indonesia 82 69 92 83 93 32 54

Zambia 32 49 71 67 86 38 38

Rwanda 37 55 71 60.2 70 53 35

Niger 56 54 28 26.7 59 34 27

Sierra Leone 47 48 42 38.1 61 30 29

Sources: Data derived from Human Development Report, see data.worldbank.org/indicator/NY.GDP.PCAP.CD; UNDP, Human development indicators, 2013, see hdr.undp.org/en/content/human-development-indicators-and-thematic-tables; Transparency International, see www.transparency.org/topic/detail/politics_and_government; The CIA Factbook, OECD; NationMaster.com and other.

(i) Your task is to try to calculate your own composite (i.e. single) index measuring the level of econ-omic development, using any four of the seven indicators. Show your calculations and justify your choice of measure. It is up to you as to whether you score or measure your index out of 400, 100, 10, or any other number of index points; and whether you weight some items or indicators in this index more heavily than others, because you feel they have a larger in�uence on the level of development.

(ii) Using your calculated index, rank the six countries from the highest to the lowest level of development.

Question 2

‘Low-income countries have limited productive capacity. One requirement for economic development is to grow this capacity.’A Accurately de�ne what is meant by an economy’s productive capacity, explaining this using an

appropriate hypothetical PPF diagram.B Why are high levels of investment spending important for economic development? Use the vicious cycle of

poverty diagram (�gure 5.21 in section 5.12) to show why investment is inadequate and poverty is high in low-income countries.

C What are economic and social infrastructure? Provide two examples of each. Explain how poor infrastructure restricts economic and social development.

D Identify and explain at least four important ways that rapid population growth tends to slow economic development in many low-income countries.

E Why is the growth of exports so important for low-income developing countries? Identify and explain two reasons why the growth in their exports is limited, slowing economic development.

F How might the development of democracy actually help to promote faster economic development in low-income countries?

Question 3

Examine the data relating to the productive capacity or production possibilities for a hypothetical low-income country in northern Africa, called the Republic of Saradonia. This small country is primarily an agricultural economy, but it is starting to grow its manufacturing industry. Assume, therefore, that the country can choose to produce either manufactured goods or agricultural goods. This and other information is shown in table 5.11 below. Notice also that there are two parts to the table, one containing data for 2015 and the other containing data for 2020. Each table has numbered rows, 1–5.A Use rows 1 and 2 of the table of information for 2015 to accurately complete and fully label a production

possibility diagram (see �gure 5.36 below), similar to that shown in �gure 5.27 (in section 5.13). Your diagram should contain the production possibility frontier (PPF) for Saradonia in 2015. Next, accurately draw and clearly label a second PPF for Saradonia in 2020. This can be done using the 2020 data, rows 1 and 2.

UNCORRECTED x, rank the six countries from the highest to the lowest level of development.

UNCORRECTED x, rank the six countries from the highest to the lowest level of development.

‘Low-income countries have limited productive capacity. One requirement for economic development is to

UNCORRECTED ‘Low-income countries have limited productive capacity. One requirement for economic development is to

Accurately de�ne what is meant by an economy’s

UNCORRECTED Accurately de�ne what is meant by an economy’s productive capacity

UNCORRECTED productive capacity

appropriate hypothetical PPF diagram.

UNCORRECTED appropriate hypothetical PPF diagram.Why are high levels of investment spending important for economic development? Use the

UNCORRECTED Why are high levels of investment spending important for economic development? Use the

(�gure 5.21 in section 5.12) to show why investment is inadequate and poverty is high in

UNCORRECTED

(�gure 5.21 in section 5.12) to show why investment is inadequate and poverty is high in

What are economic and social infrastructure? Provide two examples of each. Explain how poor

UNCORRECTED

What are economic and social infrastructure? Provide two examples of each. Explain how poor infrastructure restricts economic and social development.

UNCORRECTED

infrastructure restricts economic and social development.Identify and explain at least

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Identify and explain at least four

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fourdevelopment in many low-income countries.

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development in many low-income countries.Why is the growth of exports so important for low-income developing countries? Identify and explain

UNCORRECTED

Why is the growth of exports so important for low-income developing countries? Identify and explain reasons why the growth in their exports is limited, slowing economic development.

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reasons why the growth in their exports is limited, slowing economic development.How might the development of democracy actually help to promote faster economic development in low-

UNCORRECTED

How might the development of democracy actually help to promote faster economic development in low-income countries?

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income countries?

Question 3UNCORRECTED

Question 3

Examine the data relating to the productive capacity or production possibilities for a hypothetical low-income UNCORRECTED

Examine the data relating to the productive capacity or production possibilities for a hypothetical low-income

PAGE our task is to try to calculate your own composite (i.e. single) index measuring the level of econ

PAGE our task is to try to calculate your own composite (i.e. single) index measuring the level of econ of the seven indicators. Show your calculations and justify your

PAGE of the seven indicators. Show your calculations and justify your

choice of measure. It is up to you as to whether you score or measure your index out of 400, 100,

PAGE choice of measure. It is up to you as to whether you score or measure your index out of 400, 100, 10, or any other number of index points; and whether you weight some items or indicators in

PAGE 10, or any other number of index points; and whether you weight some items or indicators in this index more heavily than others, because you feel they have a larger in�uence on the level of

PAGE this index more heavily than others, because you feel they have a larger in�uence on the level of

x, rank the six countries from the highest to the lowest level of development.PAGE

x, rank the six countries from the highest to the lowest level of development.

PROOFS

PROOFS

PROOFS

PROOFS35

PROOFS35

27

PROOFS27

29

PROOFS29

Data derived from Human Development Report, see data.worldbank.org/indicator/NY.GDP.PCAP.CD; UNDP, Human

PROOFS Data derived from Human Development Report, see data.worldbank.org/indicator/NY.GDP.PCAP.CD; UNDP, Human

development indicators, 2013, see hdr.undp.org/en/content/human-development-indicators-and-thematic-tables; Transparency

PROOFSdevelopment indicators, 2013, see hdr.undp.org/en/content/human-development-indicators-and-thematic-tables; Transparency International, see www.transparency.org/topic/detail/politics_and_government; The CIA Factbook, OECD; NationMaster.com and other.

PROOFS

International, see www.transparency.org/topic/detail/politics_and_government; The CIA Factbook, OECD; NationMaster.com and other.

our task is to try to calculate your own composite (i.e. single) index measuring the level of econPROOFS

our task is to try to calculate your own composite (i.e. single) index measuring the level of econ



TABLE 5.11Production possibilities for the hypothetical country of Saradonia, a low-income developing economy

Information for Saradonia, 2015

Production possibility

A


B


C


D

1. Annual production of manufactured goods in 2015 (millions of units)

250 200 100 0

2. Annual production of agricultural goods in 2015 (millions of units)

0 350 550 600

3. Population size (millions) in 2015 = 1.2 million 1.2 million 1.2 million 1.2 million

Information for Saradonia, 2020


A


B


C


D

1. Annual production of manufactured goods in 2020 (millions of units)

350 250 150 0

2. Annual production of agricultural goods in 2020 (millions of units)

0 400 650 750

3. Population size (millions) in 2020 = 1.3 million 1.3 million 1.3 million 1.3 million

0 200Annual production of manufactured

goods (millions of units)

Ann

ual p

rodu

ctio

n of

agr

icul

tura

l goo

ds (

mill

ions

of

unit

s)

400

FIGURE 5.36 Production possibility diagram for Saradonia, a low-income developing economy

B In general, the size of any nation’s PPF is affected by two main sets of factors. Identify and outline these two factors, explaining how they might affect the size of the PPF.

C Assuming that this nation is fairly typical of low-income countries, identify and explain at least six speci�c developments that could account for the growth in the size of Saradonia’s PPF between 2015 and 2020. Using all the rows in the tables for 2015 and 2020, attempt the following:

(i) Explain what has happened to economic growth (measured by the change in the total number of units manufactured and agricultural goods produced (millions of units)) over the years 2015–2020.

(ii) Explain what is likely to have happened to average consumption per person and material living standards between 2015 and 2020. Giving reasons, would you draw the same conclusion had Saradonia’s population grown at a faster rate to reach 1.5 million (not 1.3 million) by 2020?

D The pressures of population growth create problems for many low-income countries. Imagine that you are a development economist advising Saradonia about its population policies. Without using force, list and explain four key measures (in descending order) that you would recommend to the government in order to halve the birth rate over the next ten years.

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FIGURE 5

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5.36

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.36

B UNCORRECTED

B In general, the size of any nation’s PPF is affected by UNCORRECTED

In general, the size of any nation’s PPF is affected by two factors, explaining how they might affect the size of the PPF. UNCORRECTED

two factors, explaining how they might affect the size of the PPF.

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D

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PROOFS 0

PROOFS0650

PROOFS650

1.3 million 1.3 million 1.3 million 1.3 million

PROOFS1.3 million 1.3 million 1.3 million 1.3 million

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E In order to �nance development projects including investment in social and economic infrastructure, the government of Saradonia negotiated to borrow US$5 billion as a hard loan through the World Bank. Assuming that this was spent on improving water supply, education and power generation, explain how this might affect economic development. What economic problems might result from this hard loan?

Question 4

A What are the main types of foreign aid and what are its main aims?B Which type of aid is probably most bene�cial to a low-income country? Explain.C ‘Australia is not as generous as the US when it comes to foreign aid.’ Discuss this opinion using statistical

evidence drawn from your text and elsewhere.


Identify and explain what you feel are the four most important causes of poverty and low living standards in many low-income nations. For each problem, explain two key government policy changes that are needed to help overcome these obstacles to economic development. Where possible, illustrate your answer by reference to particular countries.

A class debateAfter dividing into two teams (one for the af�rmative and one for the negative), work with others to prepare a debate about one of the following topics:A ‘It is immoral that the richest 20 per cent of the world’s population consumes 80 per cent of the world’s

resources.’B ‘The best way to improve living standards in low-income countries is to provide free contraceptives and

enforce a policy involving a one-child family, as used in China until recently.’C ‘A colonial past has caused many poor countries to be even poorer.’D ‘Economic development should seek to promote industrialisation.’E ‘The main thing for economic development is to maximise the country’s rate of growth in GDP.’F ‘Western nations need to spread democracy as a solution to poverty in low-income nations.’G ‘The actions of rich countries, especially in Europe, keep low-income countries poor.’H ‘Rich nations need to show leadership and morality by quadrupling the percentage of their GDP provided

in foreign aid or assistance.’I ‘International aid creates more problems than it solves for low-income countries.’J ‘Debt cancellation by rich nations helps low-income countries to accelerate economic development.’

A report on an investigation or inquiry

‘Saving our planet, lifting people out of poverty, advancing economic growth . . . these are one and the same Fight. We must connect the dots between climate change, water scarcity, energy shortages, global health, food security and women’s empowerment. Solutions to one problem must be solutions for all.’

Ban Ki-moon, Secretary of the United Nations, 2007–

Examine �gure 5.37 on the top of next page, which shows the targeted reduction in severe poverty (less than $1.90 per day in PPP) by the United Nations for 2012–30.

The task for this investigation is to select a particular low-income developing nation, perhaps in Sub-Saharan Africa (e.g. Ethiopia or Chad), and report on the types of challenges faced in the following areas: • the rate of GDP growth • population pressures and issues including unemployment and underemployment • education — literacy levels, school attendance and opportunity, and gender equality • health — infant mortality, access to clean drinking water, medical attention, avoidance of preventable

diseases, the problem of HIV-AIDS • trends in food production and agriculture • political corruption and incompetence • environmental problems • trade problems.

In addition, your report should summarise the actions taken by the government, and/or a branch of the UN or World Bank, to reduce poverty and raise living standards. You can use the weblinks in this topic’s student resources tab to help you.

UNCORRECTED ‘The main thing for economic development is to maximise the country’s rate of growth in GDP.’

UNCORRECTED ‘The main thing for economic development is to maximise the country’s rate of growth in GDP.’‘Western nations need to spread democracy as a solution to poverty in low-income nations.’

UNCORRECTED ‘Western nations need to spread democracy as a solution to poverty in low-income nations.’‘The actions of rich countries, especially in Europe, keep low-income countries poor.’

UNCORRECTED ‘The actions of rich countries, especially in Europe, keep low-income countries poor.’‘Rich nations need to show leadership and morality by quadrupling the percentage of their GDP provided

UNCORRECTED ‘Rich nations need to show leadership and morality by quadrupling the percentage of their GDP provided

‘International aid creates more problems than it solves for low-income countries.’

UNCORRECTED ‘International aid creates more problems than it solves for low-income countries.’‘Debt cancellation by rich nations helps low-income countries to accelerate economic development.’

UNCORRECTED ‘Debt cancellation by rich nations helps low-income countries to accelerate economic development.’


UNCORRECTED


UNCORRECTED

‘Saving our planet, lifting people out of poverty, advancing economic growth

UNCORRECTED

‘Saving our planet, lifting people out of poverty, advancing economic growthWe must connect the dots between climate change, water scarcity, energy shortages, global health, food

UNCORRECTED

We must connect the dots between climate change, water scarcity, energy shortages, global health, food security and women’s empowerment. Solutions to one problem must be solutions for all.’

UNCORRECTED

security and women’s empowerment. Solutions to one problem must be solutions for all.’

Examine �gure 5.37 on the top of next page, which shows the targeted reduction in severe poverty (less

UNCORRECTED

Examine �gure 5.37 on the top of next page, which shows the targeted reduction in severe poverty (less

UNCORRECTED

than $1.90 per day in PPP) by the United Nations for 2012–30.

UNCORRECTED

than $1.90 per day in PPP) by the United Nations for 2012–30.The task for this investigation is to select a particular low-income developing nation, perhaps in Sub-UNCORRECTED

The task for this investigation is to select a particular low-income developing nation, perhaps in Sub-UNCORRECTED

Saharan Africa (e.g. Ethiopia or Chad), and report on the types of challenges faced in the following areas:UNCORRECTED

Saharan Africa (e.g. Ethiopia or Chad), and report on the types of challenges faced in the following areas:

PAGE ‘It is immoral that the richest 20 per cent of the world’s population consumes 80 per cent of the world’s

PAGE ‘It is immoral that the richest 20 per cent of the world’s population consumes 80 per cent of the world’s

‘The best way to improve living standards in low-income countries is to provide free contraceptives and

PAGE ‘The best way to improve living standards in low-income countries is to provide free contraceptives and enforce a policy involving a one-child family, as used in China until recently.’

PAGE enforce a policy involving a one-child family, as used in China until recently.’‘A colonial past has caused many poor countries to be even poorer.’

PAGE ‘A colonial past has caused many poor countries to be even poorer.’‘Economic development should seek to promote industrialisation.’PAGE ‘Economic development should seek to promote industrialisation.’‘The main thing for economic development is to maximise the country’s rate of growth in GDP.’PAGE

‘The main thing for economic development is to maximise the country’s rate of growth in GDP.’‘Western nations need to spread democracy as a solution to poverty in low-income nations.’PAGE

‘Western nations need to spread democracy as a solution to poverty in low-income nations.’

PROOFSlow living standards

PROOFSlow living standards key government policy changes that are needed to

PROOFS key government policy changes that are needed to help overcome these obstacles to economic development. Where possible, illustrate your answer by reference

PROOFShelp overcome these obstacles to economic development. Where possible, illustrate your answer by reference

After dividing into two teams (one for the af�rmative and one for the negative), work with others to prepare PROOFS

After dividing into two teams (one for the af�rmative and one for the negative), work with others to prepare

‘It is immoral that the richest 20 per cent of the world’s population consumes 80 per cent of the world’s PROOFS

‘It is immoral that the richest 20 per cent of the world’s population consumes 80 per cent of the world’s



Sub-Saharan Africa

East Asia & Paci�c

South Asia

World



0

10

20

30

40

50

20302012

Share of population living on less than 2011 PPP $1.90 a dayif national growth rates for the last 10 years prevail (%)

Note: Regional estimates exclude high-income countries. Data for theMiddle East and North Africa are unavailable due to low survey coverage.

Source: Ferreira, F. H. G., and others, 2015. ‘A Global Count of the Extreme Poor in 2012: Data Issues,Methodology and Initial Results,’ Policy Research Working Paper 7432, World Bank, Washington, DC.

FIGURE 5.37 Targeted reduction in severe poverty by the UN for 2012–30

Source: Graph copied from World Bank Development Indicators 2016, p. 2, https://openknowledge.worldbank.org/bitstream/handle/ 10986/23969/9781464806834.pdf.

Weblinks These weblinks are available in this topic’s student resources tab.

• World Bank Development Indicators for 2016• OECD• OECD, African Economic Outlook• OECD, African statistics

• United Nations, Human Development Report• United Nations, International Human Development

Indicators• United Nations, Human Development Statistical tables


Your research and investigation could be presented as: • a class presentation using PowerPoint slides containing photos, graphs and tables • a wall poster • a written report.


A blog of media commentariesSelect a couple of articles from the media about poverty or other problems experienced by low-income developing economies as an economic issue. Set up a blog and initiate discussion about these commentaries. For instance, these media commentaries may report: • economic conditions and developments in low-income nations • government policies that have affected economic development in a low-income country • issues related to international aid programs (government and private sources) and disaster relief efforts to

help low-income countries • international discussions by the WTO and other organisations related to reducing agricultural tariffs and

farm subsidies by high-income countries in Europe, as well as in Japan and the US • the effect of global economic conditions on low-income countries • poverty reduction policies in low-income countries • developments in the pursuit of the UN’s Millennium Development Goals (2000–15) or its more recent

Sustainable Development Goals (2015–30).

Analysis of visual evidence — a cartoonThere are many cartoons in this topic that can be used to extend your understanding of economics. Examine the cartoons using the following questions as a guide. • What is the economic concept being presented in the cartoon? • What is the main message of the cartoon?

UNCORRECTED

UNCORRECTED

UNCORRECTED

UNCORRECTED Your research and investigation could be presented as:

UNCORRECTED Your research and investigation could be presented as:

class presentation using PowerPoint slides containing photos, graphs and tables

UNCORRECTED class presentation using PowerPoint slides containing photos, graphs and tables


UNCORRECTED


A blog of media commentaries

UNCORRECTED

A blog of media commentariesSelect a couple of articles from the media about

UNCORRECTED

Select a couple of articles from the media about developing economies as an economic issue. Set up a blog and initiate discussion about these commentaries.

UNCORRECTED

developing economies as an economic issue. Set up a blog and initiate discussion about these commentaries. For instance, these media commentaries may report:

UNCORRECTED

For instance, these media commentaries may report:economic

UNCORRECTED

economic conditions and developments in low-income nations

UNCORRECTED

conditions and developments in low-income nations•

UNCORRECTED

• go

UNCORRECTED

government policies that have affected economic development in a low-income country

UNCORRECTED

vernment policies that have affected economic development in a low-income country•UNCORRECTED

• issues UNCORRECTED

issues help low-income countriesUNCORRECTED

help low-income countries

PAGE Graph copied from World Bank Development Indicators 2016, p. 2, https://openknowledge.worldbank.org/bitstream/handle/

PAGE Graph copied from World Bank Development Indicators 2016, p. 2, https://openknowledge.worldbank.org/bitstream/handle/

PAGE These weblinks are available in this topic’s student resources tab.

PAGE These weblinks are available in this topic’s student resources tab.

•PAGE • United Nations, Human Development ReportPAGE

United Nations, Human Development Report•PAGE

• United Nations, International Human Development PAGE

United Nations, International Human Development PAGE PROOFS

PROOFS Ferreira, F. H. G., and others, 2015. ‘A Global Count of the Extreme Poor in 2012: Data Issues,

PROOFS Ferreira, F. H. G., and others, 2015. ‘A Global Count of the Extreme Poor in 2012: Data Issues,

Methodology and Initial Results,’ Policy Research Working Paper 7432, World Bank, Washington, DC.

PROOFSMethodology and Initial Results,’ Policy Research Working Paper 7432, World Bank, Washington, DC.

Graph copied from World Bank Development Indicators 2016, p. 2, https://openknowledge.worldbank.org/bitstream/handle/PROOFS

Graph copied from World Bank Development Indicators 2016, p. 2, https://openknowledge.worldbank.org/bitstream/handle/



• What is your reaction to the cartoon? Do you agree with what it is saying? • Is the message of the cartoon politically or economically biased or distorted in some way? Explain your answer.

5.16 ReviewSummary


International trade and other types of transactions between countries

• International trade is bene�cial for the countries involved. It entails the buying of imports and the selling of exports of goods and services.

• International transactions also involve the movement of investment �nance or money capital between nations.

The nature and effects of government policies involving protectionism as opposed to free trade

• Protectionism is when governments use policies to reduce competition from overseas imports. This involves tariffs, subsidies, import quotas, anti-dumping legislation, preferential treatment and restrictions on overseas ownership.

• Supporters of protectionism often argue that these government policies are bene�cial because they: – help grow infant industries – reduce the external causes of economic instability – reduce unemployment and create jobs.

• Free trade is the opposite of protectionism and involves the complete abolition of: – tariffs or taxes on imports – subsidies to local producers – import quotas – restrictions on capital in�ow or foreign investment – the signing of many multilateral and bilateral free trade agreements (FTAs)

• The main bene�ts or advantages of free trade include: – increased exports by growing markets overseas – improved ef�ciency in the use of resources – more jobs in the long run, higher incomes – lower in�ation – greater consumer choice – increased specialisation in production to gain cost advantages – greater economies of large-scale production for local �rms – improved opportunities for countries to export excess resources and import at the lowest possible cost, whatever resources they lack.

• The main problems or disadvantages of free trade (arguments for protection) include: – the possible loss of some types of jobs (structural unemployment) – infant industries may not survive without government assistance – lack of national self-suf�ciency in times of war – increased instability due to exposure to external events (e.g. overseas recessions or a GFC).

Governments have adopted the policy of trade liberalisation

• The last few decades have seen Australia (and many other nations) move towards trade liberalisation or freer trade. This involves lower government tariff protection, reduced subsidies paid to local producers and the signing of various types of FTAs. These policies ultimately help improve ef�ciency in resource allocation, strengthen our international competitiveness, promote economic and employment growth, and lower in�ation.

• In gradually adopting trade liberalisation over the last 40–50 years, the Australian government has: – lowered tariffs for all industries by 2015 to just 5 per cent or less – abolished all import quotas by 2000 – reduced subsidies by 75 per cent – signed 10 bilateral FTAs to mid 2016 – been part of multilateral FTA and trading groups like APEC.

Actions taken following the adoption of trade liberalisation

• The Australian government seeks to promote international competitiveness. This means being able to sell quality goods and services at a competitive price without depending on government support. It means that local �rms can survive against imports. It helps us to better pay our way in international �nancial

UNCORRECTED or advantages of free trade include:

UNCORRECTED or advantages of free trade include:

jobs in the long run, higher incomes

UNCORRECTED jobs in the long run, higher incomes

specialisation in production to gain cost advantages

UNCORRECTED specialisation in production to gain cost advantages

economies of large-scale production for local �rms

UNCORRECTED

economies of large-scale production for local �rmsved opportunities for countries to export excess resources and import at the lowest possible cost,

UNCORRECTED

ved opportunities for countries to export excess resources and import at the lowest possible cost, whatever resources they lack.

UNCORRECTED

whatever resources they lack.disadvantages

UNCORRECTED

disadvantages possible loss of some types of jobs (structural unemployment)

UNCORRECTED

possible loss of some types of jobs (structural unemployment)

UNCORRECTED

ant industries may not survive without government assistance

UNCORRECTED

ant industries may not survive without government assistanceof national self-suf�ciency in times of war

UNCORRECTED

of national self-suf�ciency in times of warincreased

UNCORRECTED

increased instability due to exposure to external events (e.g. overseas recessions or a GFC).

UNCORRECTED

instability due to exposure to external events (e.g. overseas recessions or a GFC).Governments have adopted the policy of trade liberalisation

UNCORRECTED

Governments have adopted the policy of trade liberalisation

last few decades have seen Australia (and many other nations) move towards

UNCORRECTED

last few decades have seen Australia (and many other nations) move towards freer tradeUNCORRECTED

freer trade. This involves lower government tariff protection, reduced subsidies paid to local producers UNCORRECTED

. This involves lower government tariff protection, reduced subsidies paid to local producers UNCORRECTED

and the signing of various types of FTAs. These policies ultimately help improve ef�ciency in resource UNCORRECTED

and the signing of various types of FTAs. These policies ultimately help improve ef�ciency in resource allocation, strengthen our international competitiveness, promote economic and employment growth, and UNCORRECTED

allocation, strengthen our international competitiveness, promote economic and employment growth, and

PAGE is the opposite of protectionism and involves the complete abolition of:

PAGE is the opposite of protectionism and involves the complete abolition of:

signing of many multilateral and bilateral free trade agreements (FTAs)PAGE signing of many multilateral and bilateral free trade agreements (FTAs)

PROOFSThe nature and effects of government policies involving protectionism as opposed to free trade

PROOFSThe nature and effects of government policies involving protectionism as opposed to free trade

is when governments use policies to reduce competition from overseas imports. This

PROOFS is when governments use policies to reduce competition from overseas imports. This

involves tariffs, subsidies, import quotas, anti-dumping legislation, preferential treatment and restrictions

PROOFSinvolves tariffs, subsidies, import quotas, anti-dumping legislation, preferential treatment and restrictions

often argue that these government policies are bene�cial because they:

PROOFS often argue that these government policies are bene�cial because they:



transactions. Various aggregate supply-side policies have been used to help reduce production costs, lift our international competitiveness and improve our long-term performance and living standards. For example: – Partial labour market deregulation. Labour market deregulation (e.g. encouraging the spread of ef�ciency-based, �rm-by-�rm enterprise or workplace agreements) helps to lower the cost of wages (labour costs) for local �rms, making our exports more competitive. This strengthens our trade balance and boosts living standards.

– Reduced company tax rates. Company tax rates have been reduced to help make local �rms more cost competitive and to encourage investment in new, more ef�cient plant and equipment. This helps to make local exports more competitive, strengthens our trade balance, creates jobs, boosts GDP and incomes and improves our living standards.

– Investment in national infrastructure projects. Building up national infrastructure (e.g. highways, NBN, water, power) can help reduce business production costs, lift ef�ciency and competitiveness, grow export capacity, and lift GDP and incomes.

– Education and training policies. Government outlays and policies designed to increase the education and skills of our labour force (e.g. the schools building program, the ‘education revolution’, �nancial incentives for apprentices) help make workers more ef�cient and creative, improve local competitiveness, increase exports and GDP, and boost living standards.


De�nition and history of economic globalisation

• Economic globalisation refers to the spread of business, trade and investment across national borders, and the uni�cation of local markets to become part of bigger international markets.

The acceleration of globalisation

• Globalisation is not new, but it has accelerated and gained momentum. It also seems to have advanced in phases. • Globalisation has been facilitated recently by:

– reduced government controls and the widespread adoption of trade liberalisation policies around the world – cheaper, faster and better transport and communications – technological advances including the internet – the mobility of international investments – a belief that globalisation improves incomes and living standards.

Reasons for the growth in global businesses

• There are also good reasons why some corporations go global (i.e. become multinationals or transnationals) — it is seen as bene�cial for their ef�ciency, costs, pro�tability and growth.

• More speci�cally, the bene�ts for multinational corporations of globalisation relate to: – the minimisation of labour costs by moving to low-wage countries for labour intensive production – a greater access to natural resources than would be available in the country of origin – the gaining of better economies of large-scale production by expanding the size of the business; in this way, costs that are relatively �xed (e.g. product development, management) can be spread more thinly, reducing the per unit cost or price of the product

– an ability to take advantage of helpful government policies offered in some countries (e.g. the absence of environment controls, offers of generous tax concessions or exemptions, provision of free land or cheap power) that are good for business pro�ts

– the desire to minimise transport and storage costs – improvement in the �exibility in decision making by companies.

The effects of economic globalisation on stakeholders and the overall economy

Globalisation has both good and bad effects on individuals, countries and regions. For Australia: • Globalisation and openness have helped lower in�ation by exposing local producers to intense foreign

competition as tariffs are reduced. • Globalisation and openness increased structural unemployment by forcing the closure of uncompetitive

local industries and �rms. However, in the longer term, globalisation can help increase employment in areas where there is good ef�ciency and a comparative cost advantage exists.

• By forcing governments, �rms and workers to lift ef�ciency, globalisation has probably helped to accelerate economic growth.

• Globalisation has helped to grow Australia’s GDP, incomes and material living standards. • Globalisation has necessitated partial government deregulation of the labour market, along with changes in

other policies like reducing company tax rates. • Globalisation has increased consumer choice or product variety by giving our consumers access to foreign

items- the world is now their supermarket.

UNCORRECTED advances including the internet

UNCORRECTED advances including the internetmobility of international investments

UNCORRECTED mobility of international investmentsbelief that globalisation improves incomes and living standards.

UNCORRECTED belief that globalisation improves incomes and living standards.


UNCORRECTED Reasons for the growth in global businesses

are also good reasons why some corporations go global (i.e. become multinationals or

UNCORRECTED are also good reasons why some corporations go global (i.e. become multinationals or

transnationals) — it is seen as bene�cial for their ef�ciency, costs, pro�tability and growth.

UNCORRECTED transnationals) — it is seen as bene�cial for their ef�ciency, costs, pro�tability and growth.

bene�ts

UNCORRECTED bene�ts for multinational corporations of globalisation relate to:

UNCORRECTED for multinational corporations of globalisation relate to:

minimisation of labour costs by moving to low-wage countries for labour intensive production

UNCORRECTED

minimisation of labour costs by moving to low-wage countries for labour intensive productiongreater access to natural resources than would be available in the country of origin

UNCORRECTED

greater access to natural resources than would be available in the country of origingaining of better economies of large-scale production by expanding the size of the business; in this

UNCORRECTED

gaining of better economies of large-scale production by expanding the size of the business; in this way, costs that are relatively �xed (e.g. product development, management) can be spread more thinly,

UNCORRECTED

way, costs that are relatively �xed (e.g. product development, management) can be spread more thinly, reducing the per unit cost or price of the product

UNCORRECTED

reducing the per unit cost or price of the product

UNCORRECTED

ability to take advantage of helpful government policies offered in some countries (e.g. the absence

UNCORRECTED

ability to take advantage of helpful government policies offered in some countries (e.g. the absence of environment controls, offers of generous tax concessions or exemptions, provision of free land or

UNCORRECTED

of environment controls, offers of generous tax concessions or exemptions, provision of free land or cheap power) that are good for business pro�ts

UNCORRECTED

cheap power) that are good for business pro�ts–

UNCORRECTED

– the

UNCORRECTED

the desire to minimise transport and storage costs

UNCORRECTED

desire to minimise transport and storage costs–

UNCORRECTED

– impro

UNCORRECTED

improThe effects of economic globalisation on stakeholders and the overall economyUNCORRECTED

The effects of economic globalisation on stakeholders and the overall economyUNCORRECTED

Globalisation has both good and bad effects on individuals, countries and regions. For Australia:UNCORRECTED

Globalisation has both good and bad effects on individuals, countries and regions. For Australia:

PAGE refers to the spread of business, trade and investment across national borders, and

PAGE refers to the spread of business, trade and investment across national borders, and the uni�cation of local markets to become part of bigger international markets.

PAGE the uni�cation of local markets to become part of bigger international markets.

lobalisation is not new, but it has accelerated and gained momentum. It also seems to have advanced in phases.

PAGE lobalisation is not new, but it has accelerated and gained momentum. It also seems to have advanced in phases.

vernment controls and the widespread adoption of trade liberalisation policies around the world

PAGE vernment controls and the widespread adoption of trade liberalisation policies around the world

, faster and better transport and communicationsPAGE , faster and better transport and communications

PROOFSGovernment outlays and policies designed to increase the education

PROOFSGovernment outlays and policies designed to increase the education and skills of our labour force (e.g. the schools building program, the ‘education revolution’,

PROOFSand skills of our labour force (e.g. the schools building program, the ‘education revolution’, �nancial incentives for apprentices) help make workers more ef�cient and creative, improve local

PROOFS�nancial incentives for apprentices) help make workers more ef�cient and creative, improve local

PROOFS

PROOFS

PROOFS

PROOFS

PROOFSECONOMIC

PROOFSECONOMIC ISSUE

PROOFSISSUE

refers to the spread of business, trade and investment across national borders, and PROOFS

refers to the spread of business, trade and investment across national borders, and the uni�cation of local markets to become part of bigger international markets.PROOFS

the uni�cation of local markets to become part of bigger international markets.



transactions. Various aggregate supply-side policies have been used to help reduce production costs, lift our international competitiveness and improve our long-term performance and living standards. For example: – Partial labour market deregulation. Labour market deregulation (e.g. encouraging the spread of ef�ciency-based, �rm-by-�rm enterprise or workplace agreements) helps to lower the cost of wages (labour costs) for local �rms, making our exports more competitive. This strengthens our trade balance and boosts living standards.

– Reduced company tax rates. Company tax rates have been reduced to help make local �rms more cost competitive and to encourage investment in new, more ef�cient plant and equipment. This helps to make local exports more competitive, strengthens our trade balance, creates jobs, boosts GDP and incomes and improves our living standards.

– Investment in national infrastructure projects. Building up national infrastructure (e.g. highways, NBN, water, power) can help reduce business production costs, lift ef�ciency and competitiveness, grow export capacity, and lift GDP and incomes.

– Education and training policies. Government outlays and policies designed to increase the education and skills of our labour force (e.g. the schools building program, the ‘education revolution’, �nancial incentives for apprentices) help make workers more ef�cient and creative, improve local competitiveness, increase exports and GDP, and boost living standards.


De�nition and history of economic globalisation

• Economic globalisation refers to the spread of business, trade and investment across national borders, and the uni�cation of local markets to become part of bigger international markets.

The acceleration of globalisation

• Globalisation is not new, but it has accelerated and gained momentum. It also seems to have advanced in phases. • Globalisation has been facilitated recently by:

– reduced government controls and the widespread adoption of trade liberalisation policies around the world – cheaper, faster and better transport and communications – technological advances including the internet – the mobility of international investments – a belief that globalisation improves incomes and living standards.


• There are also good reasons why some corporations go global (i.e. become multinationals or transnationals) — it is seen as bene�cial for their ef�ciency, costs, pro�tability and growth.

• More speci�cally, the bene�ts for multinational corporations of globalisation relate to: – the minimisation of labour costs by moving to low-wage countries for labour intensive production – a greater access to natural resources than would be available in the country of origin – the gaining of better economies of large-scale production by expanding the size of the business; in this way, costs that are relatively �xed (e.g. product development, management) can be spread more thinly, reducing the per unit cost or price of the product

– an ability to take advantage of helpful government policies offered in some countries (e.g. the absence of environment controls, offers of generous tax concessions or exemptions, provision of free land or cheap power) that are good for business pro�ts

– the desire to minimise transport and storage costs – improvement in the �exibility in decision making by companies.

The effects of economic globalisation on stakeholders and the overall economy

Globalisation has both good and bad effects on individuals, countries and regions. For Australia: • Globalisation and openness have helped lower in�ation by exposing local producers to intense foreign

competition as tariffs are reduced. • Globalisation and openness increased structural unemployment by forcing the closure of uncompetitive

local industries and �rms. However, in the longer term, globalisation can help increase employment in areas where there is good ef�ciency and a comparative cost advantage exists.

• By forcing governments, �rms and workers to lift ef�ciency, globalisation has probably helped to accelerate economic growth.

• Globalisation has helped to grow Australia’s GDP, incomes and material living standards. • Globalisation has necessitated partial government deregulation of the labour market, along with changes in

other policies like reducing company tax rates. • Globalisation has increased consumer choice or product variety by giving our consumers access to foreign

items- the world is now their supermarket.

• Globalisation has worsened environmental problems due to increased consumption of fossil fuels in making and transporting goods and services, along with increased waste disposal issues.

• Globalisation has undermined our national sovereignty and ownership. • Globalisation may have led to the spread of crime, terrorism, illegal drugs and uncontrollable migration

which could undermine both economic and non-material living standards of countries.The impacts of globalisation on China’s economy

Over the past 30-odd years, globalisation has had both good and bad effects on the Chinese economy. These include: • changing government policies (i.e. related to foreign investment, private ownership, economic and social

freedoms, poverty, the legal system, and membership of international organisations) • raising the level of export income and capital �ows (i.e. the dramatic rise in foreign investment often by

multinationals, the explosion of export production, sales and income • increasing GDP and material living standards (i.e. growing investment and exports boosted AD and led to

increased GDP and higher average incomes or purchasing power) • adding to economic instability (i.e. severe booms and recessions originating overseas can cause signi�cant

instability in China due to its greater international exposure associated with globalisation). • increased inequality in income distribution (i.e. growing inequality between incomes of workers living in

the globalised cities on the eastern seaboard and those in the rural regions; rural poverty remains but has decreased as workers move to cities in search of jobs and better incomes)

• adverse environmental effects (i.e. the trade-off for rapid growth in exports, GDP and living standards has been environmental destruction and pollution that impacts on non-material living standards including health).

International responses to globalisation

Internationally, there are mixed reactions to economic globalisation. • On the one hand, some people believe that it helps improve the living standards of all people, including

those in low-income countries. • On the other hand, some believe that it mostly bene�ts rich countries and that it needs to be stopped.

There are three complementary international institutions that have been set up to facilitate globalisation and expand international trade as a means of promoting economic development: • the World Trade Organization (WTO) • the International Monetary Fund (IMF) • the World Bank.


De�ning economic development and the role of development economics

• Development is nowadays de�ned as the economic, social, political and institutional changes that are needed in low-income countries to improve the material and non-material aspects affecting the quality of daily life.

• Once, economic development was seen narrowly as the same thing as economic growth. In other words, it was thought that growing the level of national production or GDP was all that was needed to make people better off. However, from the 1980s, economic development was seen more broadly as the economic, social, political and institutional changes needed in low-income countries, to improve material aspects (increased per capita levels of income and consumption) and non-material aspects (e.g. increased literacy, life expectancy, health) affecting the quality of daily life for ordinary people.

Measurement of development

• Economic development is a tricky thing to measure, especially using a composite or single measure. • Several measures are commonly used:

– Average income or GDP per capita represents the total annual value of goods and services produced by a nation divided by the population size. This single measure suffers from many weaknesses including unrecorded subsistence production, unevenness in the distribution of goods, services and incomes, the failure to take account of negative externalities or costs, and the failure to take account of the quality of people’s daily lives.

– The human development index (HDI) is a composite measure. It is based on both an economic indicator (i.e. GDP per capita, with the �gure adjusted or standardised to remove variations in the actual purchasing power of money in different countries — called purchasing power parity or PPP expressed in US$), along with social indicators (i.e. life expectancy at birth and education standards shown by adult literacy rates).

The challenges and causes of poverty, low incomes and other problems in developing countries

Many theories have been used to try to explain the causes of economic development. Some have seen development as going through various stages of economic growth. However, despite great differences that exist between countries, low-income countries commonly face the following obstacles.

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CONTEMPORARY

UNCORRECTED CONTEMPORARY

De�ning economic development and the role of development economics

UNCORRECTED De�ning economic development and the role of development economics

is nowadays de�ned as the economic, social, political and institutional changes that are needed in

UNCORRECTED is nowadays de�ned as the economic, social, political and institutional changes that are needed in

low-income countries to improve the material and non-material aspects affecting the quality of daily life.

UNCORRECTED

low-income countries to improve the material and non-material aspects affecting the quality of daily life.development

UNCORRECTED

development was seen narrowly as the same thing as economic growth. In other words, it

UNCORRECTED

was seen narrowly as the same thing as economic growth. In other words, it was thought that growing the level of national production or GDP was all that was needed to make people

UNCORRECTED

was thought that growing the level of national production or GDP was all that was needed to make people better off. However, from the 1980s, economic development was seen more broadly as the economic,

UNCORRECTED

better off. However, from the 1980s, economic development was seen more broadly as the economic, social, political and institutional changes needed in low-income countries, to improve material aspects

UNCORRECTED

social, political and institutional changes needed in low-income countries, to improve material aspects (increased per capita levels of income and consumption) and non-material aspects (e.g. increased literacy,

UNCORRECTED

(increased per capita levels of income and consumption) and non-material aspects (e.g. increased literacy, life expectancy, health) affecting the quality of daily life for ordinary people.

UNCORRECTED

life expectancy, health) affecting the quality of daily life for ordinary people.


UNCORRECTED


Economic

UNCORRECTED

Economic development is a tricky thing to measure, especially using a composite or single measure.

UNCORRECTED

development is a tricky thing to measure, especially using a composite or single measure.Se UNCORRECTED

Several UNCORRECTED

veral measures UNCORRECTED

measures A UNCORRECTED

A UNCORRECTED

verage incomeUNCORRECTED

verage incomenation divided by the population size. This single measure suffers from many weaknesses including unrecorded UNCORRECTED

nation divided by the population size. This single measure suffers from many weaknesses including unrecorded

PAGE the one hand, some people believe that it helps improve the living standards of all people, including

PAGE the one hand, some people believe that it helps improve the living standards of all people, including

the other hand, some believe that it mostly bene�ts rich countries and that it needs to be stopped.

PAGE the other hand, some believe that it mostly bene�ts rich countries and that it needs to be stopped.

that have been set up to facilitate globalisation and

PAGE that have been set up to facilitate globalisation and

expand international trade as a means of promoting economic development:

PAGE expand international trade as a means of promoting economic development:

PROOFSto economic instability (i.e. severe booms and recessions originating overseas can cause signi�cant

PROOFSto economic instability (i.e. severe booms and recessions originating overseas can cause signi�cant

inequality in income distribution (i.e. growing inequality between incomes of workers living in

PROOFSinequality in income distribution (i.e. growing inequality between incomes of workers living in the globalised cities on the eastern seaboard and those in the rural regions; rural poverty remains but has

PROOFSthe globalised cities on the eastern seaboard and those in the rural regions; rural poverty remains but has

dverse environmental effects (i.e. the trade-off for rapid growth in exports, GDP and living standards has been

PROOFSdverse environmental effects (i.e. the trade-off for rapid growth in exports, GDP and living standards has been

environmental destruction and pollution that impacts on non-material living standards including health).

PROOFSenvironmental destruction and pollution that impacts on non-material living standards including health).

the one hand, some people believe that it helps improve the living standards of all people, including PROOFS

the one hand, some people believe that it helps improve the living standards of all people, including



• The problem of limited productive capacity or PPF due to a low ef�ciency or volume of resources. • Low levels of national savings and investment cause the vicious cycle of poverty • Rapid population growth creates pressure on farming land, infrastructure and government �nances, and

adds to high labour force unemployment rates. • The lack of democracy and freedom contribute to poor government, incompetence and corruption • Exports and foreign trade are limited, due partly to the trade protection policies used by many rich nations,

along with high levels of foreign debt or interest repayments • The existence of great inequality in the distribution of income and wealth contributes to poverty for some • Some low-income countries were former colonies and exploited for their resources by European powers.

Even after independence, the growth of multinationals has sometimes led to exploitation.

Some government policy solutions to promote development and improve living standards in low-income countries

• There is no single solution that will reduce poverty and lift living standards in low-income countries. All countries also face slightly different problems.

• One focus is to try to grow the country’s productive capacity or PPF at a faster rate than population, perhaps involving the following: – strategies to lift private and government investment levels, thereby breaking the vicious cycle of poverty – better provision of basic social and economic infrastructure to improve people’s living standards and encourage business expansion

– keeping debt levels and the burden of interest repayments to sustainable levels – reforming government, including the promotion of democracy and free speech, making government more accountable and transparent — essential for reducing corruption

– trying to persuade rich countries to move towards free trade and the removal of tariff protection, so that low-income countries can grow their export incomes and pay for imports

– reducing inequality in the distribution of income and wealth so that the rich help to provide government revenue to better fund social and economic infrastructure

– reducing population pressures through better welfare for the aged, health care to lower infant mortality, family planning and education.

International action taken to promote sustainable development and reduce poverty in low-income countries

• There are at least two main ways the international community helps to reduce poverty — through the work of the United Nations and through of�cial development aid (ODA).

• The United Nations has helped to focus efforts to reduce poverty and improve living standards in low-income countries: – The UN’s Millennium Development Goals and projects, 2000–2015. The UN has measured progress over the 15 years in achieving eight key Millennium Development Goals (including halving poverty, universal education, gender equality, reduced infant mortality, reduce HIV-AIDS, environmental sustainability). Progress has been measured by around 60 separate indicators.

– The UN’s Sustainable Development Goals (2015–30). The UN and its members have now agreed to pursue 17 sustainable development goals for the period 2015–30.

• Of�cial development aid (ODA) has also been critical to providing funding and other assistance to help alleviate poverty: – Foreign aid refers to �nancial help (i.e. hard and soft loans, and gifts) and other assistance, usually given by richer countries to poorer countries.

– Aid can be of�cial (government) or non-of�cial (private). Often aid is often used for projects that help to pursue the UN’s Millennium Development Goals.

• Australia gives around $4 billion annually in government foreign aid, or less than 0.3 per cent of our GDP. This aid goes to countries (especially in the Asia–Paci�c area) including Papua New Guinea, Solomon Islands, Indonesia, Vietnam, the Philippines, East Timor and Fiji.

Key termsAbsolute cost advantage occurs when a nation is the cheapest or most ef�cient producer of a particular

good or service in the world.Asia–Paci�c Economic Cooperation (APEC) is a regional forum aimed at promoting freer trade among

21 member countries in the Asia–Paci�c area.Association of South-East Asian Nations (ASEAN) brings together ten countries from the South-East

Asia region. These countries accept the principle that freer international trade will help their economic development, so their governments have been gradually cutting tariffs and protection levels.

Australian Fair Work Commission (or its many predecessors) determines minimum wages and conditions for Australian workers.

UNCORRECTED are at least two main ways the international community helps to reduce poverty — through the work

UNCORRECTED are at least two main ways the international community helps to reduce poverty — through the work of the United Nations and through of�cial development aid (ODA).

UNCORRECTED of the United Nations and through of�cial development aid (ODA).

United Nations has helped to focus efforts to reduce poverty and improve living standards in low-

UNCORRECTED United Nations has helped to focus efforts to reduce poverty and improve living standards in low-

The UN’s Millennium Development Goals and projects, 2000–2015

UNCORRECTED The UN’s Millennium Development Goals and projects, 2000–2015

over the 15 years in achieving eight key Millennium Development Goals (including halving poverty,

UNCORRECTED over the 15 years in achieving eight key Millennium Development Goals (including halving poverty, universal education, gender equality, reduced infant mortality, reduce HIV-AIDS, environmental

UNCORRECTED

universal education, gender equality, reduced infant mortality, reduce HIV-AIDS, environmental sustainability). Progress has been measured by around 60 separate indicators.

UNCORRECTED

sustainability). Progress has been measured by around 60 separate indicators.UN’s Sustainable Development Goals (2015–30

UNCORRECTED

UN’s Sustainable Development Goals (2015–30pursue 17 sustainable development goals for the period 2015–30.

UNCORRECTED

pursue 17 sustainable development goals for the period 2015–30.development aid (ODA) has also been critical to providing funding and other assistance to help

UNCORRECTED

development aid (ODA) has also been critical to providing funding and other assistance to help alleviate poverty:

UNCORRECTED

alleviate poverty:oreign aid

UNCORRECTED

oreign aid refers to �nancial help (i.e. hard and soft loans, and gifts) and other assistance, usually

UNCORRECTED

refers to �nancial help (i.e. hard and soft loans, and gifts) and other assistance, usually oreign aid refers to �nancial help (i.e. hard and soft loans, and gifts) and other assistance, usually oreign aid

UNCORRECTED

oreign aid refers to �nancial help (i.e. hard and soft loans, and gifts) and other assistance, usually oreign aidgiven by richer countries to poorer countries.

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given by richer countries to poorer countries.–

UNCORRECTED

– Aid

UNCORRECTED

Aid can be of�cial (government) or non-of�cial (private). Often aid is often used for projects that help

UNCORRECTED

can be of�cial (government) or non-of�cial (private). Often aid is often used for projects that help to pursue the UN’s Millennium Development Goals.

UNCORRECTED

to pursue the UN’s Millennium Development Goals.•UNCORRECTED

• Australia UNCORRECTED

Australia This aid goes to countries (especially in the Asia–Paci�c area) including Papua New Guinea, Solomon UNCORRECTED

This aid goes to countries (especially in the Asia–Paci�c area) including Papua New Guinea, Solomon

PAGE to persuade rich countries to move towards free trade and the removal of tariff protection, so that

PAGE to persuade rich countries to move towards free trade and the removal of tariff protection, so that low-income countries can grow their export incomes and pay for imports

PAGE low-income countries can grow their export incomes and pay for importsinequality in the distribution of income and wealth so that the rich help to provide government

PAGE inequality in the distribution of income and wealth so that the rich help to provide government

revenue to better fund social and economic infrastructure

PAGE revenue to better fund social and economic infrastructure

population pressures through better welfare for the aged, health care to lower infant mortality,

PAGE population pressures through better welfare for the aged, health care to lower infant mortality,

International action taken to promote sustainable development and reduce poverty in low-income PAGE International action taken to promote sustainable development and reduce poverty in low-income

PROOFSis no single solution that will reduce poverty and lift living standards in low-income countries. All

PROOFSis no single solution that will reduce poverty and lift living standards in low-income countries. All

focus is to try to grow the country’s productive capacity or PPF at a faster rate than population,

PROOFSfocus is to try to grow the country’s productive capacity or PPF at a faster rate than population,

gies to lift private and government investment levels, thereby breaking the vicious cycle of poverty

PROOFSgies to lift private and government investment levels, thereby breaking the vicious cycle of povertyprovision of basic social and economic infrastructure to improve people’s living standards and

PROOFSprovision of basic social and economic infrastructure to improve people’s living standards and

eeping debt levels and the burden of interest repayments to sustainable levels

PROOFSeeping debt levels and the burden of interest repayments to sustainable levels

government, including the promotion of democracy and free speech, making government

PROOFSgovernment, including the promotion of democracy and free speech, making government

more accountable and transparent — essential for reducing corruption PROOFS

more accountable and transparent — essential for reducing corruptionto persuade rich countries to move towards free trade and the removal of tariff protection, so that PROOFS

to persuade rich countries to move towards free trade and the removal of tariff protection, so that low-income countries can grow their export incomes and pay for importsPROOFS

low-income countries can grow their export incomes and pay for imports



Bilateral free trade agreements (FTAs) are negotiated between two or more countries and involve the removal of industry protection such as tariffs.

Centralised minimum wage �xing system involves the Australian Fair Work Commission determining the minimum pay and conditions.

Comparative cost advantage occurs when a nation specialises in the production of those goods and services where it is relatively most ef�cient or where its costs disadvantages are least, thereby raising incomes and material living standards.

Democracy involves free speech and exists where a government is elected by the people. It is the opposite of a dictatorship.

Deregulation of the labour market means that there is less government interference in how wages are determined in the labour market, and more reliance on the conditions of demand and supply of labour and the process of enterprise bargaining. Often, higher wages are linked to increases in ef�ciency.

Development is today de�ned as the economic, social, political and institutional changes that are needed in low-income countries to improve the material and non-material aspects affecting the quality of daily life.

Economic globalisation is the economic uni�cation or joining together of the world’s economies and its various commercial and �nancial markets.

Economies of large-scale production can occur when a �rm produces on a large scale that enables it to spread its �xed production costs (i.e. costs that do not rise much as output increases including research, advertising, product development, some aspects of management and, up to a point, equipment) more thinly over a greater volume of sales.

Enterprise bargaining is a more �exible alternative to centralised wage �xing and involves negotiations between workers and their boss on a �rm-by-�rm basis, with pay rises usually re�ecting worker ef�ciency or productivity.

Foreign debt exists when a country has external liabilities from money borrowed overseas. The credit can be used to �nance development projects, but often it is misused for other purposes. The downside of debt is the repayment of interest.

Free trade is the opposite government policy to protection. It exists when there are no tariffs, subsidies, quotas or other restrictions on the movement of goods, services and capital between countries.

Grants are straight-out donations of cash that do not need to be repaid. When used wisely, this is perhaps the best type of help that high-income countries can offer. Normally grants are allocated by private international aid agencies (e.g. World Vision), or given by individual governments in donor countries.

High-income nations are those where average incomes are currently de�ned as being at least $34.89 a day or $12 736 per person a year.

Horizontal integration occurs when �rms in the same industry are joined together.Human development index (HDI) is an indicator (based on a scale from the lowest score of 0 to the highest

score of 1) that re�ects both economic and social conditions in a country. It is not just based on income per head (adjusted to international dollars or PPP), but also re�ects life expectancy (calculated at birth) and education levels (based on literacy, school attendance and retention rates).

Import quotas represent quantity limits imposed by the government on the importation of particular types of goods (such as cars, cheese and textiles) and services from abroad.

Infrastructure provides the services (like roads, railways, water, power and ports) used by producers of goods and services and the general community. It facilitates production and grows a nation’s productive capacity.

International competitiveness means that local businesses are able to sell good quality goods and services at relatively low prices overseas without government assistance.

The International Monetary Fund (IMF) is a global organisation that keeps an eye on the world’s �nancial system to help stabilise international exchange rates, promote economic development, provide technical assistance and act as a lender of last resort to governments.

International trade involves a nation exporting and importing goods and services.Loans are of three kinds of loans — hard loans or credit offered at the normal market rate of interest; soft

loans offered at a special discounted interest rate; and tied loans which have special conditions imposed such as requiring that the money be used to purchase exports from the donor country.

Low-income countries are currently de�ned as those where most people live on a mere $2.86 or less per day (i.e. an average of $1045 per person a year or less). Life is a real struggle, severe poverty is common place and living standards are low.

Millennium Development Goals (MDGs) were the targets for development in low-income countries that were set by the United Nations for the period 2000 to 2015. Among the eight goals was the halving of world poverty, improving access to education, and reductions in child mortality rates.

Multinational businesses or transnationals undertake production in more than one country, and operate across national borders as they grow their operations and markets.

Overpopulated countries are those where there are too many people for the quantity of resources available.

UNCORRECTED the best type of help that high-income countries can offer. Normally grants are allocated by private

UNCORRECTED the best type of help that high-income countries can offer. Normally grants are allocated by private international aid agencies (e.g. World Vision), or given by individual governments in donor countries.

UNCORRECTED international aid agencies (e.g. World Vision), or given by individual governments in donor countries. are those where average incomes are currently de�ned as being at least $34.89 a day

UNCORRECTED are those where average incomes are currently de�ned as being at least $34.89 a day

UNCORRECTED occurs when �rms in the same industry are joined together.

UNCORRECTED occurs when �rms in the same industry are joined together.

is an indicator (based on a scale from the lowest score of 0 to the highest

UNCORRECTED is an indicator (based on a scale from the lowest score of 0 to the highest

score of 1) that re�ects both economic and social conditions in a country. It is not just based on income

UNCORRECTED score of 1) that re�ects both economic and social conditions in a country. It is not just based on income per head (adjusted to international dollars or PPP), but also re�ects life expectancy (calculated at birth) and

UNCORRECTED per head (adjusted to international dollars or PPP), but also re�ects life expectancy (calculated at birth) and education levels (based on literacy, school attendance and retention rates).

UNCORRECTED

education levels (based on literacy, school attendance and retention rates). represent quantity limits imposed by the government on the importation of particular types of

UNCORRECTED

represent quantity limits imposed by the government on the importation of particular types of goods (such as cars, cheese and textiles) and services from abroad.

UNCORRECTED

goods (such as cars, cheese and textiles) and services from abroad. provides the services (like roads, railways, water, power and ports) used by producers of

UNCORRECTED

provides the services (like roads, railways, water, power and ports) used by producers of

UNCORRECTED

goods and services and the general community. It facilitates production and grows a nation’s productive

UNCORRECTED

goods and services and the general community. It facilitates production and grows a nation’s productive

International competitiveness

UNCORRECTED

International competitivenessat relatively low prices overseas without government assistance.

UNCORRECTED

at relatively low prices overseas without government assistance.International Monetary Fund

UNCORRECTED

International Monetary Fund

UNCORRECTED

system to help stabilise international exchange rates, promote economic development, provide technical

UNCORRECTED

system to help stabilise international exchange rates, promote economic development, provide technical assistance and act as a lender of last resort to governments.UNCORRECTED

assistance and act as a lender of last resort to governments.UNCORRECTED

International tradeUNCORRECTED

International trade

PAGE exists when a country has external liabilities from money borrowed overseas. The credit can be

PAGE exists when a country has external liabilities from money borrowed overseas. The credit can be used to �nance development projects, but often it is misused for other purposes. The downside of debt is

PAGE used to �nance development projects, but often it is misused for other purposes. The downside of debt is

is the opposite government policy to protection. It exists when there are no tariffs, subsidies,

PAGE is the opposite government policy to protection. It exists when there are no tariffs, subsidies,

quotas or other restrictions on the movement of goods, services and capital between countries.

PAGE quotas or other restrictions on the movement of goods, services and capital between countries.

are straight-out donations of cash that do not need to be repaid. When used wisely, this is perhaps PAGE are straight-out donations of cash that do not need to be repaid. When used wisely, this is perhaps

the best type of help that high-income countries can offer. Normally grants are allocated by private PAGE the best type of help that high-income countries can offer. Normally grants are allocated by private international aid agencies (e.g. World Vision), or given by individual governments in donor countries.PAGE

international aid agencies (e.g. World Vision), or given by individual governments in donor countries.

PROOFS is today de�ned as the economic, social, political and institutional changes that are needed in

PROOFS is today de�ned as the economic, social, political and institutional changes that are needed in

low-income countries to improve the material and non-material aspects affecting the quality of daily life.

PROOFSlow-income countries to improve the material and non-material aspects affecting the quality of daily life. is the economic uni�cation or joining together of the world’s economies and its

PROOFS is the economic uni�cation or joining together of the world’s economies and its

can occur when a �rm produces on a large scale that enables it to

PROOFS can occur when a �rm produces on a large scale that enables it to

spread its �xed production costs (i.e. costs that do not rise much as output increases including research,

PROOFSspread its �xed production costs (i.e. costs that do not rise much as output increases including research, advertising, product development, some aspects of management and, up to a point, equipment) more thinly

PROOFSadvertising, product development, some aspects of management and, up to a point, equipment) more thinly

is a more �exible alternative to centralised wage �xing and involves negotiations

PROOFS is a more �exible alternative to centralised wage �xing and involves negotiations

between workers and their boss on a �rm-by-�rm basis, with pay rises usually re�ecting worker ef�ciency or

PROOFS

between workers and their boss on a �rm-by-�rm basis, with pay rises usually re�ecting worker ef�ciency or

exists when a country has external liabilities from money borrowed overseas. The credit can be PROOFS

exists when a country has external liabilities from money borrowed overseas. The credit can be



The poverty cycle is common in low-income countries. ‘Low income’ means there are poor savings levels, inadequate investment to grow the economy’s capacity, low ef�ciency and hence low incomes.

Protectionist policies seek to restrict imports and advantage local producers, and involve the use of tariffs, subsidies and import quotas.

Structural change by businesses often involves �nding ways of cutting production costs, lifting worker ef�ciency, and sometimes closing down or relocating business operations.

Structural unemployment occurs when �rms change the ways they organise production perhaps involving the use of technology, the closure of inef�cient branches or the relocation or closure of a business.

Subsidies are government cash payments made to local producers to make them more competitive by covering some of their production costs.

Sustainable Development Goals (SDGs) for the global community were set up by the United Nations to cover the period 2015–30. These included the eradication of poverty, access to clean water and sanitation, and action on climate change.

Tariffs are an indirect tax added onto the price of selected imports to increase the price of imports relative to the locally made good.

Technical and other assistance involves the donor country or a United Nations agency providing scienti�c, economic, educational, technical, industrial or agricultural personnel to advise on matters relating to economic development.

Trade liberalisation occurs when governments reduce their protection of local industry by cutting tariffs on imports, abolishing quotas or quantity controls on particular types of imports, and lowering the payment of subsidies to local �rms.

Underemployment exists when those working are not employed to their capacity and could work more hours and produce more output per hour.

Vertical integration occurs when �rms are linked downward or upward in different but perhaps related industries.

Worker ef�ciency is calculated as GDP or output per hour worked.The World Bank is an international �nancial institution set up to provide technical and �nancial help in the

form of �nancial loans and grants to member nations. The money may be used for numerous purposes, such as to build schools to improve literacy, roads and bridges to develop transport, and water, gas and electricity infrastructure to assist growth in national production (GDP) and improve living standards.

The World Trade Organization (WTO) is an international organisation that is committed to free trade and the orderly conduct of international transactions between countries.

UNCORRECTED is an international organisation that is committed to free trade and

UNCORRECTED is an international organisation that is committed to free trade and the orderly conduct of international transactions between countries.

UNCORRECTED the orderly conduct of international transactions between countries.PAGE occurs when �rms are linked downward or upward in different but perhaps related

PAGE occurs when �rms are linked downward or upward in different but perhaps related

is calculated as GDP or output per hour worked.

PAGE is calculated as GDP or output per hour worked.

PAGE is an international �nancial institution set up to provide technical and �nancial help in the

PAGE is an international �nancial institution set up to provide technical and �nancial help in the

form of �nancial loans and grants to member nations. The money may be used for numerous purposes,

PAGE form of �nancial loans and grants to member nations. The money may be used for numerous purposes, such as to build schools to improve literacy, roads and bridges to develop transport, and water, gas and

PAGE such as to build schools to improve literacy, roads and bridges to develop transport, and water, gas and electricity infrastructure to assist growth in national production (GDP) and improve living standards.PAGE electricity infrastructure to assist growth in national production (GDP) and improve living standards.PAGE

is an international organisation that is committed to free trade and PAGE

is an international organisation that is committed to free trade and

PROOFS are an indirect tax added onto the price of selected imports to increase the price of imports relative to

PROOFS are an indirect tax added onto the price of selected imports to increase the price of imports relative to

involves the donor country or a United Nations agency providing scienti�c,

PROOFS involves the donor country or a United Nations agency providing scienti�c, economic, educational, technical, industrial or agricultural personnel to advise on matters relating to

PROOFSeconomic, educational, technical, industrial or agricultural personnel to advise on matters relating to

occurs when governments reduce their protection of local industry by cutting tariffs on

PROOFS occurs when governments reduce their protection of local industry by cutting tariffs on

imports, abolishing quotas or quantity controls on particular types of imports, and lowering the payment of

PROOFSimports, abolishing quotas or quantity controls on particular types of imports, and lowering the payment of

exists when those working are not employed to their capacity and could work more

PROOFS

exists when those working are not employed to their capacity and could work more

occurs when �rms are linked downward or upward in different but perhaps related PROOFS

occurs when �rms are linked downward or upward in different but perhaps related