Define primary product dependency
When a country has a high dependence on extracting and then exporting primary commodities, making it vulnerable to volatile global prices and terms of trade
Export commodity- dependent country
When more than 60% of its total merchandise exports are composed of primary commodities
What is the Prebisch-Singer Hypothesis (PSH)?
Over the long run, real prices of primary commodities decline relative to prices of manufactured goods because primary products have a lower income elasticity of demand
What is the resource curse?
A natural resource find attracts inward investment, causing the currency to appreciate and making other industries less internationally price competitive
Dutch disease
Term used for the resource curse after it happened in the Netherlands when natural gas was found
Petrocurrency effect
When the resource found is oil and the currency then appreciates due to increasing exports of oil
Problems caused by primary product dependency
- risk of corruption, political conflict, land grabs by MNCs
- resource extraction is capital intensive so income is redistributed to capital owners/politicians
- vulnerable to global commodity price volatility
- over-rapid extraction damages the environment, growth may be unsustainable
- currency may appreciate (resource curse) making exports less competitive, can cause de-industrialisation and exacerbate primary product dependency
Policies to reduce primary product dependency
- economic diversification
- agricultural and rural development
- export diversification
- human capital development
- add value to primary products through processing, manufacturing and refining
- better governance
- stabilisation fund/Sovereign wealth fund (SWF) to ensure extra income is used to fund education/healthcare/infrastructure
What can volatile commodity prices cause and what does this lead to?
Cause uncertainty, it’s unpredictable for a commodity producer what will happen to export earnings and terms of trade overtime. Also deters investment
What happens when prices rise/fall unexpectedly?
Rise:
- Rise in export earnings
- economic growth
- inflation pressure
- trade surplus
- appreciation of currency
- income inequality
- increase gov revenue
Fall:
- fall in export earnings
- trade deficit
- fall in revenue/profit for producers
- loss of gov revenue
- unemployment
- depreciation of currency
Define savings gap
In low income countries, extreme poverty and weak financial markets makes it hard to generate enough savings to fund capital investment projects that could boost development
What does the Harrod-Domar model suggest?
Higher savings ratio leads to an increased rate of investment (in a closed economy), thereby helping to build the capital stock of a country, and increasing output through a rise in productive capacity (LRAS).
Ways to overcome the savings gap
- attract FDI
- external/overseas aid
- net inflows of remittances from workers abroad
- behavioural interventions to encourage people to save
- industrialisation to increase wages
- cash transfer/minimum wage polices
Define foreign currency gap
When outflows of currency exceed inflows of currency
Causes of foreign currency gap
- current account deficit
- capital flight
- fall in remittances from overseas workers
Problems caused by a foreign currency gap
Country doesn’t haven enough foreign currency to pay for imports such as;
- medicine
- food
- raw materials
- capital goods
Hinders SR economic growth and development outcomes
How to reduce foreign currency gap?
Gov needs to attract external sources of finance:
- FDI
- portfolio investment
- loans (short and long term)
- foreign aid and remittances
Define capital flight
The rapid outflow of capital from a country often due to economic/political/social instability
Problems caused by capital flight
- reduction in funds for domestic investment in education/healthcare/infrastructure
- inflation due to depreciation of currency increasing cost of imports
- loss of tax revenue that could’ve been used to finance public services and development initiatives
- higher borrowing costs for gov - increasing debt service costs, straining national budgets and diverting resources from. Development priorities
How to reduce capital flight?
- Implement stable economic policies
- Improve governance and transparency
- provide incentives for domestic investment
Demographic problems
- rapid population growth
- youth bulge (challenges providing)
- ageing population
- net migration
- rapid urbanisation
- healthcare needs
- educational challenges
- gender inequality
Advantages of rapid population growth
- expansion of working age population (increased LRAS)
- increased domestic market size
- wider tax base
- rural-urban shift can generate agglomeration Econs of scale
- catalyst for innovation
Disadvantages of rapid population growth
- youth unemployment
- hard to ensure everyone’s basic needs are met
- pressure on natural environment
- higher urban density can increase crime/disease/social problems
- increased inequality
Define net emigration
A net outflow of workers from a country
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Application15
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Trading Blocs And The WTO14
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1 - Globalisation13
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Specialisation And Trade6
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Pattern Of Trade12
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Trade Restricitons And Protectionism17
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Blance Of Payments20
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Exchange Rates18
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Terms Of Trade9
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International Competitiveness6
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Poverty11
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Income And Wealth16
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Development8
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Barriers To Development49
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Market Strategies21
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Interventionist Strategies23
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Other Strategies For Growth And Development26
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The Financial Sector22
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Role Of The State41
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Global Macro Policies2
