Assignment

Name : Malik Muhammad Haris

Sap Id : 70071893

Section : C

Subject : Development Economics

Submitted To : Sir Zaigham Abbas

Q 1 : Does aid increase economic welfare?

Provides foreign capital which can be used for investment and increasing productive capacity of
the economy. However, a large % of aid is tied aid. This means it is fixed for certain investment
projects which benefits the donor countries. In a sense this is not really aid, but it is classed as
Aid. (e.g. building of dams in Argentina).
Can be important for solving economic, environmental and food crises. Without aid the
developing country would struggle to rebuild. e.g. after tsunami disaster. However, there is
concern aid can lead to dependency. Developing countries come to rely on aid and lose
incentives to improve productivity. This depends on the type of aid given. E.g. some aid can be
just to improve infrastructure, this is more beneficial than handouts.
Food aid can harm local farmers. An increase in supply from the west can drive down market
prices. Because demand is inelastic for food, lower prices can lead to lower revenues. This was
a real problem when the EU "dumped" its surplus on world Markets. However, if food aid is
temporary, e.g. in a famine low prices are not concern. Food aid needs to be short term and
specifically targeted to avoid this potential problem.
Foreign aid has its limitations in increasing productive capacity. Arguably long term growth
requires building up trade and new industries. However, aid could play a role in improving trade
performance. For example, aid could be used for education and training to increase labor
productivity. This enables the country to become more competitive in the long run. Aid can be
used to prevent environmental damage. E.g. securing the purchase of rainforest and prevent
exploitation of natural resources.
A real problem with Aid is making sure it gets to the targeted people. This can actually be quite
difficult in countries with more infrastructures. The problem is exacerbated when countries
experience civil war. Unfortunately, aid often does not reach the intended recipients.
There is no guarantee that Aid will improve economic and social development; however, there
is no reason why it cannot increase economic and social development, if this it is targeted in the
right way.
Q 2 : What are the problems of free trade for developing economies?
There is a set of problems developing nations facing in world market when trading with
industrialised countries:
a) Nondiversified economies
Many developing nations’ economies are highly dependent on the advanced nations as
majority of their exports go to advanced nations and imports come from these advanced
nations

b) Unstable export markets

Another characteristic of many developing nations exports are based on primary products
(agricultural products, raw materials and fuels) as shown table below. Therefore, when there is
a poor harvest or decrease in demand for nation’s specialised product, it can significantly
reduce revenues from export and seriously disrupt domestic income and damage employment
levels.

c) Worsening terms of trade

According to Mankiw (2004) developing nations complain that their commodity terms of trade
has declined long time ago, meaning that prices of their exports relative to their imports have
fallen. Observers maintain that the export prices of primary products of developing nations
determined in competitive market, whereas the monopoly of manufacturers in the industrial
nations results in high prices.

Furthermore, worsening terms of trade has been used to justify refusal of many developing
nations from to attend in trade-liberalisation negotiations.

d) Limited market access.

Integration of developing countries as whole into world market has improved significantly.
However, protectionism and trade barriers imposed by many advanced nations has been
hindrance to developing nations’s market access (Economist.com). Specially, global
protectionism in agriculture has been major problem for third world countries as agricultural
commodities form their export. Many advanced nations use sizable subsidies to support their
farmers. By doing that, they discourage agricultural imports.
Furthermore, the unwanted surplus that resulted from government subsidies are dumped into
world market at lower price, which in turn decreases prices for agricultural commodities in
market and reduces export revenues significantly for developing countries.

Q 3 : Why growth may not benefit developing countries?

Growth rates in many sub Saharan African countries have lagged miserably behind growth
rates in more developed countries. However, the experience of China, and to a lesser extent
India, show that developing countries are not doomed to negative or low growth rates.
Factors that Can Prevent Developing countries experiencing Economic Growth
Specialization in one Commodity
Developing countries may focus on production of one primary product. e.g. Cuba depends on
Sugar.
Economic growth doesn't mean demand for all commodities increases. Sugar has a low income
elasticity of demand, rising incomes means a smaller % increase in demand. Therefore,
economic growth does not translate into higher demand for these goods.
Furthermore, the prices of commodities can easily fall due to excess global supply. Therefore,
countries who rely on this product see a fall in revenue. This is important because demand is
very inelastic for these goods. Increase in supply causes big fall in price and incomes. It is
important because a high % of revenue can come from one good. In recent years, coffee has
been a good example of a commodity with a falling price.
Structural weakness
Many developing economies doesn't have sufficient transport and infrastructure to make the
most from trade. Low levels of human capital mean the economy struggles to grow and
diversify into manufacturing industries. However, the cheap labour costs may encourage
inward investment in labour intensive industries. This has been one of the main reasons for
China's success.
Agricultural based economy
Countries who rely on agricultural output may suffer from adverse weather conditions. E.g. a
prolonged drought in sub Saharan Africa can lead to loss of farming income and therefore lower
growth.
Internal Conflict
Internal conflict or mismanagement can lead to declining living standards for many. E.g. war
brings about lower life expectancy and deters foreign investment.
Corruption and Mismanagement
Government in many of the poorest developing countries misuse Aid and the proceeds of
growth.

Q 4 : What are the causes of overtime worsened income distribution in Pakistan and factors
affecting them? How do you think that this situation can be made favorable for Pakistan?

That income distribution worsens in initial stages of economic growth and is

followed by improvements in income distribution later is a phenomenon known as
Kuznet Curve. The phenomenon is believed to arise because of movements of labor
from a more egalitarian agricultural sector to the industrial sector where higher income
opportunities are exploited by the few.

Whereas different studies provide estimates of various inequality indices in

Pakistan the Lorenz curve and gini coefficients have been most commonly used in the
policy discussions in Pakistan. Various studies on income inequality in Pakistan show
different estimates arising due the following five important factors. Firstly, different
studies use different data sets some are based on Household Income and Expenditure
Surveys, others make use of income tax data, and some other studies splice the two sets
of data. Second, while some studies consider inequalities in income, the others consider
inequalities in the consumption expenditures. Third, while some studies are done for
Pakistan as a whole, others examine income inequalities in both the rural and urban areas.
Fourth, some studies report income inequalities across households; the others report
inequalities across population or earners. Fifth, some researchers classify data by deciles
prior to estimation of gini-coefficient; the others employ the income intervals that are not
uniform. Therefore, the need for consistent income inequality of measures over time is
imminent.
Factors behind changes in the income distribution patterns can best be explored
through a full-fledged model comprising distribution of assets; functional income
distribution determined by various factors including changes in the composition of
sectoral output, technology employed, demand for labor by education, occupation, and
skills, and wage rates; and the transfers payments. These factors may be influenced by
major policy initiatives and as such can be rather helpful in better policy formulation to
keep income distribution patterns in the acceptable limits.

PRSP the MTDF does not separately suggest measures to improve income
distribution though it would have significant implications for income distribution. The
policies impacting positively the income distribution includes pro-poor growth,
generation of employment opportunities, improving access to human capital, and
organization of the poor for better access to various development activities and
infrastructure. The agenda of MTDF is similar to that of PRSP.
The MTDF recognizes that a significant change in inequality in income and
wealth is possible only in a long-term perspective. The focus of medium term framework
is on the expansion of employment opportunities through priority to agriculture
particularly agro-industry, agri-business and livestock, and water sector development;
small and medium enterprises; and housing and construction industries.

Q 5 : Energy crises has slowed down the growth process in Pakistan. In your opinion what
needs to be done in order to resolve this problem and what should be Pakistan’s optimal
energy mix?

Out of all the problems we face as a country, energy seems to be the one that annoys us the
most. It’s not that other issues are not important or are somehow less annoying; it is just that
every single person in Pakistan uses energy in one form or another and hence is directly
affected by it at a very personal level.

A few ideas that can help with our energy crisis:

Replacing thermal power fuel

Pakistan produces about 81 percent of its electricity through oil and gas which costs us about
9.4 billion dollars. To put it in other terms, that is about 53 percent of our total exports and is
the biggest cost on our import bill. Now given that our reliance on thermal power is so large, we
simply cannot dismantle it and magically move to hydro power, however we can change the
fuel used to gain thermal power. Instead of using oil and gas, both of which are getting more
expensive and have volatile international prices, we can move to using coal.

Moving past the myth of Thar coal

Yes, there is coal in Thar, but assuming that it can be used immediately or it will solve all our
energy problems is a myth propagated by a few people and political parties for their personal
gains. Experts agree that Thar coal is highly unstable – making it difficult to transport it from
one location to another – and even its gasification is not risk-free.

Improved energy mix

Energy mix refers to the sources of energy we utilize in Pakistan to fulfill our overall energy
needs. The fact is that all our energy is interdependent. I have previously advocated that we
need to move off CNG as we simply do not have enough of it to supply to all the commercial,
industrial and home users. It’s about time that any future energy strategy Pakistan is supposed
to have comes with a proper energy mix to solve our issues.