Chapter 6 Economic Development and Poverty

1. Chapter 6Economic Development and Poverty

2. Economic Development • Economic development of a country • A process of raising the per capita standard of living of the citizens • A major aim of any government • Measures: • Gross National Income (GNI): Also referred to as Gross National Product (GNP) is the total value added from domestic and foreign sources claimed by residents • Gross Domestic Product (GDP): Measures the value of goods and services produced within the country • Human Development Index (HDI): Measures a nation’s welfare by including measures of health, leisure, and natural environment, along with income

3. Top 10 countries ranked by GDP (2016)

4. Foundational Concepts • Free trade: Eliminating barriers to movement of goods and services between nations. • Free markets (laissez faire): Reducing government intervention in the market place and allowing market forces to set prices. • “Invisible hand” • Purchasing Power Parity (PPP): Academically calculated exchange rates that aim at valuing currencies in terms of their purchasing power.

5. Reasons for Government Intervention: • To direct resources towards national priorities • Protect infant industries • Market failure • Factors that lead to inefficient or undesirable outcomes • Externalities. Price may not fully reflect costs/benefits • High concentration/monopolies

6. Theories Justifying Free Trade • Absolute advantage (Adam Smith) • Nations should specialize in those products in which they have natural endowments (an absolute advantage) and trade with others for the rest. • Comparative advantage (David Ricardo) • Nations should specialize in those products in which they have relatively higher productivity, and trade for the rest.

7. Comparative advantage • Production capabilities (workers/unit) • I. Autarky (No trade; 1000 workers in each country, ½ in each industry)

8. Comparative advantage (contd.) • II. If they specialize and trade. (West allots 700 workers to produce computers and 300 to produce bikes. East makes only bikes.) • Both are better off than without trade. Though West has absolute advantage in both, each has a different comparative advantage.

9. Free Trade • Gains from Trade: • Total amount of goods and services available for consumption in both countries is greater and available at a lower cost by specializing and trading than if each country were to do everything itself. • Disruptions to producers not considered. • Stronger political voice of producers can restrict trade.

10. Economic and Political Ideologies • Free markets most closely associated with capitalism • Major economies of the west • Central planning most closely associated with communism • Former USSR, Cuba, Laos • China, Vietnam combines communism with free markets • Transition (from planning to market driven) and Emerging (less to more developed) economies

11. Economic Groups and Interconnections • Regional/Preferential Trading Areas: • Smaller group that negotiates preferences in trade amongst themselves • Examples include MERCOSUR, ECHOWAS, ASEAN • Debate on trade creation (global free trade) versus trade diversion (preferential trade) • How a country manages its economy has repercussions on others • Transmitted through trade and capital flows • Countries meet and exchange notes about their perspective to economic management • G7 – Major developed economies • G20 – Mix of developed and major emerging economies

12. RTAs and trade diversion • Country A has import tariff of 10%. Country A imports from Country C. • After RTA between Country A and B, tariffs eliminated. Tariff remains for Country C. Country A imports from B.

13. Poverty and Inequality • UN Sustainable Development Goal of eliminating extreme poverty (below $1.90 per day) by 2030 * 10.7% of world population is below • * Between 1990 and 2015 poverty has been halved • Poverty levels have been falling: • Economic growth in India and China has helped reduce the % of population in poverty • Income distribution has been worsening: • 70% of the world’s adults own about three percent of global wealth • Nine percent own about 86% of the wealth

14. Foreign Investments in an Economy • Foreign direct investment (FDI): • Investment is effectively controlled from overseas • May take the form of a new enterprise or acquisition of a controlling interest in an existing enterprise • A high level of commitment of the investor; usually for the long term • Portfolio investment: • No control involved • May take the form of purchasing equity in an enterprise, or granting a loan • Often short term in nature • These investments are a net addition to the economic activities of the nation

15. World Bank • Officially know as the International Bank for Reconstruction and Development • Initial goal: • To help in the reconstruction of postwar Europe and in promoting economic growth in general • Present focus on fighting poverty in developing countries • It provides loans to the members at preferential rates of interest, as well as grants and technical assistance.

16. International Monetary Fund (IMF) • Objective: • To promote financial stability and facilitate international trade by overseeing the global financial system • Initially helped maintain fixed exchange rates • Presently, helps nations deal with their balance of payments position through loans to tide over short-term difficulties World Trade Organization (WTO) • Objective: Liberalizing global trade • Deals with the rules of trade between nations • Facilitates trade agreements • Helps settle trade disputes between nations

17. ‘Soft’ Institutions • Systems of rules and behavior that help to support and ensure the smooth functioning of the market, and guide the activities in a country • Market creating – Eg. Property rights, enforcing contracts • Market regulating – Eg. Regulatory agencies • Market stabilizing – Eg. Central banks • Market legitimizing – Eg. Public pension programs

18. Corruption • ‘Abuse of public office for private gain’ • Exists in government and in private corporations • Critique: • Economic – misallocation of resources • Ethical – rich can purchase access, corner resources, and marginalize the poor • Transparency International provides ranking of countries

19. Chinese Development • Liberal economic policy: • Directing investments through preferential treatments, labor flexibility, low tax and regulatory burden, and creating a reliable infrastructure • Communist government: • Tight control over courts, army, the internal security apparatus, and restricting freedom of speech and information • Internal prosperity leads others to want to emulate

20. Alternative Thinking • Alternative to the GNI • Gross National Happiness • Practiced by Bhutan • Maximize well-being with minimum of consumption • Behavioral economics • Human decision making not always rational