Global Economics

Week 12 Economic Development: Inequality and Sustainability

Economic Development is the creation of wealth from which community benefits are realized.

It is more than a jobs program, it's an investment in growing your economy and enhancing the

prosperity and quality of life for all residents. Economic development means different things

to different people.

Development can be seen as more than just being about raising GDP, it can also be thought as

being about the development of human rights and liberties and democracy and in the concept of

development we may wish to look at poverty levels in a nation and not just the total GDP and

also we may wish to factor in that that economic growth should not damage the environment

excessively if we are to think of it as leading to development.

• Poverty, inequality and economic growth in the world

Poverty – how is it measured, absolute, relative, causes

Poverty

Absolute – poverty line, extreme poverty is less than $2 per day PPP (UN definition)

Millennium Development Goal – to halve extreme poverty

Relative – in UK is 60% of median income (£100 per week for a single adult in 2004)

Water and fuel poverty

Causes of poverty:

1. Disability, physical and mental illness

2. Unemployment

3. A lack of skills

4. Dependence on others for income

5. Being born to poor parents – poverty can become a vicious cycle

6. Being a pensioner

7. Lack of physical capital and infrastructure

8. Civil war

9. Lack of investment in to the economy

10. Being a lone parent

Inequality – Lorenz, Gini, causes, is it good or bad, policies to reduce, progressive and

regressive tax, Laffer

Lorenz curve – diagram, line of absolute equality

Gini coefficient – area a divided by (area a + area b) – rising Gini coefficient in UK since 1979,

especially in late 1980s

Causes of inequality

1. Differing levels of education and skills

2. Some people work more and are more productive than others

3. Unemployment and retirement

4. Age – peoples’ wages tends to peak on average when they are in their 40s and early 50s

5. Ownership of assets (e.g. shares and property), and earning money from these assets (e.g. rental

income)

6. Rising property and share prices

7. Being the boss versus being a worker

8. Debt and interest repayments

9. Inheritance of wealth – earning interest on wealth

10. Family breakdown – single parent families tend to be less well off

11. Ageing population – less income for older people and there are more old people

12. Government policies

(a) A reduction in the top rate of tax

(b) Fewer/lower benefits

(c) Fewer free services and privatisation

(d) Higher VAT/indirect taxes

(e) Higher tuition fees

13. Monopolies – high profits for these companies and so their owners will earn more

Policies to reduce inequality

1. Progressive taxation – through a banded tax system

2. Benefits to the poor – although this may create reliance on benefits

3. Free public services (education and healthcare in particular) and the Welfare State

4. Minimum wage – may reduce the poverty trap

5. Active labour market policies – get people in to work (e.g. the New Deal under Labour)

6. Tax Credits – tax refunds to low earners (was a Labour policy)

• Development policies,

• Sustainable development, Sustainable Development Goals 2030

• The role of the World Bank Group, United Nations

Economic development –why are poor countries poor, how LEDCs can develop, criticism of

the IMF, WTO and World Bank

Economic development

Classifications of countries – DCs/MEDCs/the G8/G20, LEDCs (Third and Fourth World),

BRICs/NICs, Tiger Economies, Transition Economies/Second World

Global poverty – in 2001 2.7 billion lived on less than $2 per day PPP adjusted

UN development goals

Some characteristics of LEDCs (however these are generalisations):

1. Low GDP per capita

2. Low HDI

3. Few rights for women

4. Low levels of capital (machinery)

5. Poor infrastructure

6. Lack of skills and education – high unemployment and high underemployment

7. Poor healthcare – high infant mortality rates

8. Growing populations

9. Large subsistence and informal economies

10. Savings gap, low levels of reinvestment

11. Reliance on primary goods

12. Low levels of exports

13. Poor governance, corruption, a lack of transparency, weak rule of law and weak property

rights

14. Debt, reliance on aid and loans (IMF and World Bank)

15. Weak banking systems

Causes of poverty (again these are generalisations)

1. Low levels of physical capital (machinery)

2. Poor infrastructure

3. Low levels of human capital and skills

4. A lack of natural resources

5. High population growth

6. Women do not play a great enough role in the economy/social and cultural factors

7. Poor health and high infant mortality levels, AIDS/HIV, malaria etc

8. Poor/weak governance, a lack of transparency and corruption – leading to a lack of investment

9. Civil war, authoritarianism (dictatorship) and instability

10. A weak banking system and a weak legal system

11. Low levels of government spending and tax revenues not being collected

12. Savings gaps and inadequate capital accumulation

13. High unemployment and underemployment

14. Reliance on the production of primary goods and low levels of exports and a lack of exports

of finished goods

15. Non convertible currencies

16. Declining terms of trade (the Prebish-Singer hypothesis)

17. Foreign currency gap

18. An unfair trade system that does not allow LEDCs to use infant industry trade barriers (WTO

failed to correct this)

19. A lack of FDI

20. Capital flight and profit leakage

21. High levels of debt and interest payments on debt owed to MEDCs and to the IMF and the

World Bank

22. Conditionalities on loans from the IMF and World Bank, which have not worked (i.e. they

have not promoted economic growth):

(a) Privatisation

(b) Liberalisation of trade (i.e. free trade rather than fair trade) and of capital movements (FDI)

(the WTO has also promoted these policies)

(c) Reducing the amount of government spending

23. Reliance on aid, which may also have conditions attached to it

Poverty is a vicious cycle that you can become trapped in

Policies for economic development/growth in LEDCs

1. More aid from MEDCs – but conditionalities may be attached, aid is not significant compared

to trade, it may be misspent (corruption), it may lead to dependence on aid. The UK’s (and other

G8 nations’) aid target is 0.7% GDP.

2. Debt relief and reducing interest payments on debt – but this relies on lenders from MEDCs

allowing this to happen and they may not be so willing to lend to LEDCs in the future if they have

had to cancel debt in the past

3. A fairer global trade system – which allows LEDCs to use infant industry trade barriers, this

will encourage production of secondary goods, but this relies on MEDCs permitting these reforms

and this might not be likely

Trade or aid? Which is more important? Trade probably.

4. Infant industry protectionism (tariffs on imports and subsidies for domestic businesses) –

again this relies on MEDCs and the WTO permitting this

5. Fair trade schemes – e.g. consumers from MEDCs paying a higher price for coffee from

LEDCs, however, is this that significant? A fairer trade system (points 3 and 4 above) is more

important/significant than fair trade schemes for individual goods.

6. More government investment in infrastructure, education, the development of human

capital (skills) and healthcare

7. Industrialisation (the Lewis model) – promote value added sectors, select winners/national

champions and subsidise them (this was done by Japan and South Korea in the past), try to

produce finished goods rather than primary goods/commodities. But this may cause inequality,

create problems associated with urbanisation (e.g. shanty towns), cause environmental damage

and mean that there are less resources for the production of other goods e.g. agricultural goods

(opportunity cost)

8. Try to get more FDI and use foreign production methods and machinery – however capital

flight and profit leakage

9. Develop a better banking system and increase microfinance – microfinance (farmers in

Bangladesh, Muhammad Yunus)

10. Increase property rights – may encourage investment

11. Development of tourism – but this may not provide that much income

12. Outward-looking/market led policies – this involves trade liberalization (free trade rather

than fair trade), allowing your currency to depreciate (having a freely floating rather than a pegged

currency), opening up to capital markets (free movement of capital to encourage FDI), removing

domestic subsidies and tariffs on imports (but this is all the opposite of infant industry

protectionism and it is similar to IMF conditionalities, which haven’t worked)

13. Try to increase the savings rate (the Harrod-Domar model) – but people in LEDCs have

no money to save. However, the savings gap could be filled by greater FDI or aid instead.

14. Reduce red tape – supply side reforms to make it easier for new businesses to be established

15. Develop systems to collect tax revenues to allow higher government spending – relates to

point 6 above

16. Try to reduce corruption and have a stronger rule of law – e.g. a less corrupt civil service,

this may encourage investments

17. Encourage women to be more involved in the economy – this would raise the labour supply,

however this may require changes in social attitudes, which the government may not be able to

bring about easily

18. Take loans from MEDCs, the IMF and the World Bank – but these may have

conditionalities attached, profit leakage and capital flight may occur

19. Try to mechanise agriculture – this may encourage people to move to cities and work in

industry (the secondary sector)

20. Promote hi-tech sectors – however this requires an educated population

Criticisms of the IMF, World Bank and the WTO (their free market orientated policies have

been called the Washington consensus) – their policies have failed in Africa, infrastructure has

been inadequate, there has not been enough spending on merit and public goods, government

spending has been too low

Lessons from China – they took their own slower/staged route to the free market (without IMF

interference) and their government played a major role in their economic development (lots of

government spending on infrastructure, merit and public goods)