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Development Economics – Charmaine Neo Ning Fang 12CMc

ECONOMIC DEVELOPMENT..................................................................................................................................1
MEASURING DEVELOPMENT............................................................................................................................... 4
DOMESTIC FACTORS AND ECONOMIC DEVELOPMENT......................................................................................7
INTERNATIONAL TRADE AND ECONOMIC DEVELOPMENT............................................................................10
FOREIGN DIRECT INVESTMENT AND ECONOMIC DEVELOPMENT.................................................................14
AID, DEBT AND ECONOMIC DEVELOPMENT....................................................................................................15
THE BALANCE BETWEEN MARKETS AND INTERVENTION............................................................................16

Economic development
 Economic growth – increase in real output of an economy over time
 Sources of economic growth
o Natural factors
 Anything that could increase the quantity / quality of a FOP
should lead to an increase in potential growth
 Quality of the land may be increased by fertilization, better
planning of land usage, improved agricultural methods &
building upwards
o Human capital factors
 Could be increased by encouraging population growth /
increasing immigration levels & by improving quality by
improving health care, improving education, vocational training
& re-training for the unemployed + provision of fresh water &
sanitation.
o Physical capital & technological factors
 Definition of physical capital: factory buildings, machinery, shops,
offices & motor vehicles
 Quantity of physical capital is affected by the level of savings,
domestic invesments, government involvment & foreign
investment
 Quality can be improved by higher education, R&D, access to
foreign technology & expertise
 Capital widening: when extra capital is used with an
increased amount of labour but ratio of capital per
worker does not change. Total production increases but
productivity is likely to remain unchanged.
 Capital deepening: increase in amount of capital for each
worker & thus this often means there is an improvement
in technology & will usually lead to improvements in
labour productivity & total production
o Institutional factors
 E.g. adequate banking system, structured legal systems, good
education system, reasonable infrastructure, political stability &
good international relationships.
 Does economic growth lead to economic development?
o Higher incomes
 It depends on the distribution of income (whether it is fair)
o Improved economic indicators of welfare
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 Could be linked to increased average life expectancy, average

years of schooling & literacy rates.
o Higher govt revenues
 The government will gain increased tax revenues & be in a better
situation when it comes to the provision of essential services (e.g.
education, health care & infrastructure)
o Creation of inequality
 Rich get richer & poor get poorer. Even if the poor get some
money, the gap is said to grow with the rich getting the majority
of the gains. It does not mean that the rich spend more & some of
this goes to the poor
o Negative externalities & lack of sustainability
 Often leads to pollution as incomes rise, people drive cars, enjoy
plane travel & buy goods that are imported across long distances.
This creates negative externalities of consumption & production
where market prices of goods & services do not reflect full costs
to society & environment. It could also lead to problems of
deforestation, soil degradation & reduction in bio-diversity
 Lead to increase in burning of fossil fuels as demand for energy
increases. Results in large emissions of CO2 and global warming.
Forests, coral reefs & other ecological systems will be damaged
as a result of their inability to adjust to changing temperature &
precipitation patterns. Access to safe water will become more
precarious. Tropical diseases spread further north. Droughts will
become more intense & frequent, food production in middle &
high latitudes becomes easier but this is no gurantee that the risk
to food security will lessen. Rising sea level with floods.
 Uneconomic growth – when increases in production come at an expense in
resources & well being that is worth more than the items made.
 Sustainability – the ability to meet the needs of the current generation without
compromising the ability of the future generations to meet their needs.
(compromising the living standards of future generation)
 Common characteristics of developing countries
o Low standards of living
 Low incomes
 Inequality
 Poor health
 Inadequate education
 High infant mortality rates
 High levels of malnutrition
o Low levels of productivity
 Due to low education standards, low level of health amongst
workers, lack of investment in physical capital & lack of access to
technology.
o High rates of population growth & dependency burden
 Definition of crude birth rate: annual numbers of live birth per
1000 of the population [crude birth rate in developing countries
is high]
 High dependency ratios (many young people) & thus those of
working age have to support a much larger proportion of
children then the work force in developed countries
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population
(% of )
 65
old age dependency ratio=
(% of population 15¿64)
( % of population under 15 )
 child dependency ratio=
( % of population 15¿64 )

o High & rising levels of unemployment & underemployment

 Firstly, we have to worry about those who have been
unemployed for so long that they have given up searching for a
job & no longer appear as unemployed.
 Secondly, there are the hidden unemployed who work for a few
hours on a family farm / family business / trade of some sort and
do not appear as unemployed
 Lastly, there are the underemployed. Those would like to work
full time but are only able to get part time employment often on
an informal basis.
o Substantial dependence on agricultural production & primary product
exports
 Over dependence on primary product exports
o Prevalance of imperfect markets & limited info
 Developing countries lean towards more market orientated
approach to growth but this can be troublesome as market based
approaches may work well in economics where markets are
efficiently functioning but not in developing countries faced with
imperfect markets & imperfect knowledge.
 Lack of functioning bank system – discourages savgins &
investments
 Lack of developed legal system
 Lack of adequate infrastructure – for efficient & low cost
transport & FDI.
 Lack of accurate info – imperfect info & misallocation of
resources & misinformed purchasing decisions
o Dominance, dependence & vulnerability in international relations
 Dominated by developed countries
 Dependent on developed countries (trade, access to technology,
aid & investment)
 Vulnerable on international stage & are dominated and harmed
by decisions of developed countries over which they have no
control
 Diversity among developing countries
o Resource endowment
 It is common for human resources to be undernourished &
poorly educated and low skilled however endowment in terms of
physical resources can vary immensely between developing
countries.
 They could be poorly endowed with physical resources but have
abundances of natural resources / synthetic resources
o Historical background
 Colonization
 Depends on the length of time that the countries were colonized
& whether the eventual independence was given freely / it had to
be fought for.
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Historical diff – set countries apart culturally, socially, politically

and economically.
o Geographic & demographic factors
 Diff geographical & population size
 Not all developing countries have large populations
o Ethnic & religious breakdown
 High levels of ethnic & religious diversity could increase the
chances of political unrest & internal conflict
o Structure of industry
 It is widely assumed that all developing countries depend upon
the production & exportation of primary products but some may
depend on exportation of manufactured products and some are
mainly exporters of service (in the form of tourism)
o Per capita income levels
 Marked diff in per capita income from developing country to
developing country
o Political structure
 Varying political structure
 Democracies
 Monarchies
 Military rule
 Single party states
 Theocracies
 Transitional political systems – country is in transition 
conflict & civil war
 MDG (millenium development goals)
o Eradicate extreme poverty & hunger
o Achieve universal primary education
o Promote gender equality & empower woman
o Reduce child mortality
o Improve maternal health
o Combat HIV / AIS, malaria & other diseases
o Ensure environmental sustainability
o Global partnership for development

Measuring development
 Poverty traps / poverty cycles
o Relative poverty – comparative level of poverty  if they do not reach a
specific level of income
 Depends upon where the specific level of income is set
o Absolute poverty – measured in terms of the basic necessities for survival
 level of income needed to buy items such as basic clothing, food &
shelter
 If they are below a certain level (e.g. 1.25)
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 Poverty cycle – development traps

 Single indicators – solidarity measures that may be used to access development

o Financial measures
1. GDP & GNI per capita
 GDP per capita – total of all economic activity in a country
regardless of who owns the productive assets, divided by the
number of people in the population (e.g income of foreign
companies producing within a country would be included in the
national income of that country but activity of its own companies
producing outside the country would not)
 GNI per capita – total income that is earned by a country’s
FOP regardless of where the asset is located divided by the
number of people in the population. (e.g income of foreign
countries producing within a country would not be included in
the national income of the country but the activities of its own
companies producing outside of the country would)
 If there is large amounts of FDI then GDP figures will be higher
than GNI since they will include profits that may well have been
repatriated. Thus, GNI figures tend to be used to measure the
status of developing countries
2. GDP per capita & GDP per capita at PPP (purchasing power parity)

 G&S don’t cost the same amount in diff countries and thus
purchasing power of a person’s income will be diff in diff
countries
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 Therefore the PPP exchange rate is used as it attempts to equate

the purchasing power of currencies in diff countries by
comparing the prices of identical G&S in diff countries
 Health measures
1. Life expectancy by birth
a. Average number of years that a person may be expected
to live from the time that they are born.
b. Factors: level of health care & health care services;
provision of clean water supplies & sanitation; provision
of nationwide education; supplies of food; diets &
lifestyles; levels of poverty; level of conflict.
2. Infant mortality rate
a. Measure of the number of deaths of babies under the age
of 1 year per thousand live births in a given year
 Education measures
1. Adult literacy rate
a. Measure of the proportion of the adult population, aged
15 or over, which is literate expressed as a percentage of
the whole adult population for a country at a specific
point of time
b. Influenced by the above factors + distribution of income
within the country
2. Net enrolment ratio in primary education
a. Measure of the ratio of the number of children of primary
school age who are enrolled in primary school, to the
total number of children who are of primary school age in
the country
 Composite measures
1. HDI
a. Life expectancy at birth - Long and healthy life
b. Education – adult literacy rate combined with a measure
of primary, secondary and tertiary school enrolment
c. Decent standard of living – GDP per capita
 HDI comparing with GDP per capita, we can make conclusions about the
country’s success in translating the benefits of national income into achieving
economic development.
 We cannot use only GDP per capita to measure development
 HDI is to reemphasize that people and their capabilities should be the ultimate
criteria for assessing the development of a country not economic growth
 Other indicators of development
o HDI is still an average figure that can mask inequalities within the
country (e.g. inequalities between rural and urban citizens, between men
and women, between diff ethnic groups)
o Gender related development index (GDI)
 Same indicators as HDI but takes into account the inequalities in
these indicators for women and men.
o Gender empowerment measure (GEM)
 One aspect of development takes into account developing self
esteem & creating opportunities & freedom for all people
therefore it is valuable to measure whether development in a
country is helping to create such freedoms and opportunities for
women.
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 Measures the extent to which women are able to actively

participate in economic & political life + number & percentage of
women in leadership, managerial & parliamentary positions & in
technical & professional jobs. It examines the participation in the
labour force & share of national income
o Human poverty index (HPI)
 Measure the level of deprivation & poverty
 Looks at the proportion of the people who are deprived of the
opp to reach a basic level in each area
 Looks at indicators that are comparable with the HDI
 HPI is useful for observing how evenly the benefits of
development are spread within the cotunry and is expressed as a
percentage
o Genuine progress indicator (GPI)
 Measure whether a country’s growth (an increase in the output
of G&S) has actually lead to an improvement in the welfare of the
people
 To the GDP figures, it adds a non-monetary benefits such as the
benefits of household work, parenting & volunteering work
 Given that economic growth generates many costs an indicator of
GPI will deduct such costs:
 Environmental costs
 Resouces depletion
 Social costs – loss of leisure time, crime etc
 Commuting costs
 Costs of automobile accidents

Domestic factors and economic development

 Institutional factors affecting development
1. Education
a. External benefits
b. More efficient work force
c. More discussions and debates thus leading to social
changes.
i. Improve the role of women in society
 Recognise political, economic and social
participation and leadership of women
ii. Improve levels of health
 People especially women are able to
communicate more fully and become
aware of some of the hazards that face
them & the opp that exist. They are able to
read about & be informed about dangers
such as HIV / AIDS, poor sanitary habits
and poor dietary habits. They are also
able to find out about things such as
innoculations & water filtering
iii. Large funds are required & there may be large
disparities in the provision of education with
urban areas receiving more funding then rural
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areas and there are family economic conditions

that prevent children from entering school
2. Health care
a. Training
b. Health facilities
c. Provision
d. Availability of immunisations
3. Infrastructure
a. Essential facilities & services such as roads, airports,
sewage treatments, water systems, railways, telephone &
other utilities that are necessary for economic activity
4. Political stability & lack of corruption
a. Citizens are more likely to have an input in running the
country
b. The government’s planning is likely to be more
structured & long term and the law is easier to enforce.
c. When there is corruption ( the dishonest exploitation of
power for personal gain)
i. Government spend large amounts on large scale
capital investment projects
ii. Official accounting practises are not well
formulated / controlled
iii. Political elections are not well controlled (no
democracy)
iv. Weak legal structure & lack of freedom of speech
d. Forms of corruption & effect
i. Electoral corruption – government is not voted
for by the majority & they will not put into place
policies that are for the benefit for the electorate
ii. Unfair allocation of resources – market failure &
resources are misallocated. It often sustains
inefficient producers, shielding them from
competition
iii. Bribes increase cost of business thus higher
prices
iv. Reduces trust in economy – harder to attract FDI
v. Increases risk of contracts not being honoured
thus deterrent to investment both internal &
external
vi. Reduces quality of government services to people
as they divert public investment into capital
projects where bribes are more likely.
vii. Turn blind eye to regulation
viii. Capital flight – monetary gains from corruption
are moved out of the country & reduces capital
available for internal investment
ix. Constant paying of small bribes reduces economic
well being of an ordinary citizen
5. Legal system
a. To enforce contracts
b. To uphold property rights
i. Right to own assets (buildings)
ii. Right to establish the use of our assets (e.g.
adding to the building – sanitation)
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iii. Right to benefit from our assets

iv. Right to sell
v. Rights to exclude others from using / taking over
c. If they are not guranteed the ownership, they will not
improve the property & there is reduction in investment
& growth and economic growth
6. Financial system, credit & micro-finance
a. Savings is necessary for funds to be available for
investment. If the financial institutions are weak &
untrustworthy, people tend to buy assets / invest their
money outside of the country
b. Financial systems are necessary if low income people are
to be able to manage their assets & to allow them to
increase in value thus enabling them to invest in things
(helath care, shelter & education)
c. Saving & borrowing money is the breakout point of the
poverty cycle
d. It is difficult to start a business due to the lack of funding.
e. Micro-finance is the provision of financial services (small
loans, savings accounts, insurance & cheque books)
geared specifically to the poor
7. Taxation
a. Difficult for governments to collect tax revenue in
developing countries – lack of inefficiency, information
and pure corruption
b. Corporate taxes tend to be low since there are relatively
little corporate activity in developing countries & they
offer large tax incentives in order to encourage domestic
corporate activity & to attract FDI
c. Export, import and excise (customs) duties – relatively
easy to collect since they are paid when the goods goes
through the country’s border posts. But only significant if
the country is heavily involved in foreign trade.
d. Size of informal markets – lower tax revenue and if
incomes are not recorded, tax is not collected thus
making it difficult for govt.
8. Use of appropriate technology
a. Technology that’s appropriate for use with existing factor
endowments
b. There is often a surplus of labour & thus it would be
appropriate to make use of the abundant labour supply
c. Giving workers capital equipment that are cheap to make
and requires labour to make use of it.
9. Empowerment of women
a. Improve through education and improved social standing
i. Well being of family is improved (health of
children as women are better informed)
ii. Education of children in family improve
iii. Quality of workforce in the country improves
iv. More control over contraception, marry later and
tend to have smaller families thus reducing
population growth
10. Income distribution
a. Income inequality
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i. Low levels of savings

ii. Low investmet
iii. Rich dominate politics & economy thus we do not
have pro-poor growth (economic growth leads to
a fall in some agreed measure of poverty thus
benefitting the poor)
iv. Rich move large amounts of funds out of the
economy in the form of capital flight.
v. Large proportion of goods purchase by rich are
foreign produced & consumption does not really
help the domestic economy

International trade and economic development

 International barriers to development
1. Over specialization on a narrow range of products
a. Many developing countries are dependent on primary
commodities for their export revenues and rising
commodity prices will be beneficial to these countries as
it increases their rate of economic growth & could start a
positive cycle. However if prices fall, there will be a
deteriorating terms of trade (export price relative to
import price) & current account deficits are likely to
increase and it will be difficult to finance current
expenditure and necessary imports.
b. They face great vulnerability and uncertainty (e.g.
economic growth dependent on tourism will be affected if
there is terrorism / global slowdown in economic growth
/ natural disasters)
2. Price volatility of primary products
a. Price elasticity of demand & price elasticity of supply for
commodities tend to be relatively inelastic and thus
change in demand/supply will lead to large fluctuations
3. Inability to access international markets
a. If protectionist measures (aimed at support domestic
producers at the expense of foreign producers) prevent
developing countries from utilizing their comparative
advantage & exporting to develop countries then they
will be limited in their ability to earn foreig exchange
b. Especially harmful for primary product makers –
developed countries export the surplus to the developing
countries and lower world prices thus damaging prices &
local supplies thus there is an argument of “dumping”
c. Tariff escalation (e.g. in agricultural markets of meat,
cocoa)
i. Rate of tariffs on goods rises the more the goods
are processed.
ii. Importing country protects its processing &
manufacturing industries by putting lower tariffs
on imports of raw materials & components &
higher tariffs on processed & finished products.
iii. There is little incentive to diversify away from
producing raw materials to processing them as
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the higher prices due to tariffs will make their

processed goods uncompetitive.
iv. This reduces the imports of the more important
processed goods & their final processing is done
in developed countries & since these add the
highest value to the product in terms of the price
at which it is sold, this is where the largest gains
are to be made.
v. Many of them have non-convertible currency and
this can only be used domestically and not
accepted for exchange on foreign exchange
markets. Most developing countries adopt a fixed
exchange rate system where the domestic
currency is pegged to a more acceptable currency
(often the US dollar) at a certain rate. Trade is less
likely to occur as there will be more risk and they
are likely to go elsewhere to conduct their
business & FDI
vi. Non covertible currencies are often over valued at
their official pegged, exchange rate therefore
there might be a black market & this will be
damaging. Some domestic currency may become
unacceptable within the country & this damages
local trade as well international trade
4. Long term changes in TOT
a. If commodity prices are falling, export revenues of
primary commodities exporters fall and ability to buy
imports decrease.

 Trade strategies for economic growth & economic development

1. Import substitution
a. Inward orientated strategy – produce goods domestically
rather then import them
b. Industries producing goods domestically will be able to
grow as well as the economy and will be able to be
competitive on world markets in the future as they gain
from economies of scale.
c. The necessary conditions
i. The government needs to adopt a policy of
organizing the selection of goods to produce
domestically
ii. Subsidies are made available to encourage
domestic industries
iii. Implement a protectionist system with tariff
barriers to keep out foreign imports.
d. Advantages
i. Protects jobs in the domestic market
ii. Protects local culture & social habits by isolating
from foreign influence
iii. Protects economy from the power, bad influence
of MNC
e. Disadvantages
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i. Protect jobs in the short run – in the long run,

economic growth may be slower & lack of growth
= lack of job creation
ii. Does not gain from comparative advantage &
specialization so producing products relatively
inefficiently
iii. Lack of competition – lack of efficiency = lack of
R&D
iv. High rates of inflation due to domestic aggreate
supply constraints
v. Cause other countries to take retaliatory
protectionist measures
2. Export promotion
a. Export led growth – outward orientated growth strategy
based on openness & increased international trade 
achieved by concentrating on increasing exports & export
revenues as a leading factor in the AD of the country thus
increased GDP, incomes & growth in domestic &
exporting markets. Concentrate on producing &
exporting products in which it has a comparative
advantage of production
b. Policies that are needed:
i. Liberalized trade – open up domestic markets to
foreign competition in order to gain access to
foreign markets
ii. Liberalized capital flows – reduce restrictions on
FDI
iii. Floating exchange rate
iv. Investment in the provision of infrastructure to
enable trade to take place
v. Deregulation & minimal govt intervention
c. Differences involved in using the export of primary /
secondary (manufactured) products as the engine for
growth
i. Overall trend for primary produts has been
downwards for many years due to increasing
supply & relatively insignificant increases in
demand for a number of diff reasons + combined
with increased protectionism by developed
countries = export led growth by exporting
primary products is unlikely to be achieved.
ii. Products in which the countries has comparative
advantage in is being exported, usually based on
low-cost labour & over time the type of product
being exported by the majority of countries has
also tended to change from products that were
being produced using labour intensive methods
requiring low skills levels from the workers to
more sophisticated products using capital
intensive methods and more highly skilled
workers. (requires improvements in education
systems)
d. Disadvantages
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i. Increased protectionism in developed countries

against manufactured products from developing
countries. It is argued that developing countries
could not compete against the imports from low-
wage developing countries and that it is unfair.
Lobbied their governments to put tariffs & quotas
on the lower priced goods thus increasing prices
as a result of tariffs effectively removed the
comparative advantage of exporting countries
and also reduced the ability of developing
countries to export processed goods & assembled
products forcing many to export primary
products and low skilled manufactured products
instead
ii. Infant industry argument
iii. If countries attempt to kick start their export led
growth by attracting MNCs, there is always the
fear that the MNCs become too powerful
iv. Increase income inequality (economic growth at
the expense of economic development)
3. Trade liberalization
a. Removal / reduction of trade barriers that block free
trade of G&S between countries (e.g. trade barriers,
quotas, export subsidies, administrative legislation)
b. Increase world trade & enable developing countries to
concentrate on production of G&S in which they have
comparative advantage
c. Policies to encourage market based reforms & economic
growth
i. Fiscal discipline
ii. Redirect spending from things like indiscriminate
subsidies to basic health & education
iii. Lower marginal tax rates & broaden tax base
iv. Interest rate liberalization
v. Competitive exchange rate
vi. Trade liberalization
vii. Liberalization of FDI inflows
viii. Privatization
ix. Deregulation
x. Secure property rights
4. Bilateral & regional preferential trade agreements
a. Countries in a trading bloc give preferential access to
products from other member countries (reducing tariffs)
b. More agreements, greater the ability of developing
countries to trade & gain growth and development
5. Diversification
a. Many countries have a problem of being over dependent
on exporting a limited range of primary commodities
b. This aim – move from producing & exporting primary
commodities to producing & exporting manufactured &
semi – manufactured products thus protecting
themselves from volatile changes in primary product
prices to stabilize / increase export revenues &
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employment. Also, increased use of technology & demand

for more highly skilled workers
 Development strategies
o Fairtrade organizations
 Ensure that producers of food & some non-food, products in
developing countries receive a fair deal when they are selling
their products
 Help small farmers & landless workers
 A trading country wishing to quality for the international
fairtrade certification mark must:
 Product must reach the trader as directly as possible with
few if any intermediaries
 Product must be purchased at least at the Fairtrade
minimum price & is a guranteed price that covers
production costs & provides a living income.
 Producer receives a premium if the product is certified as
organic
 Trader must be committed to a long term contract
 Producer must use sustainable farming methods to
produce good
 Trade also pays a fairtrade premium to producer & they
use these funds to aid local community development
(promote health care, education & other social schemes)

Foreign direct investment and economic development

 Definition for FDI: long term investment by private MNC in countries overseas
o Build new plants / expand their existing facilities in foreign countries
(greenfield investments)
o Merge with / acquire (buy) existing firms in foreign countries
 MNCs are attracted to developing countries because:
o Countries may be rich in natural resources (oils/minerals). MNCs have
the tech & expertise to extract such resources
o Some developing countries represent huge & growing markets and if
MNCs are located directly in the markets, they have much better access
to the large number of potential consumers. Growing incomes =
increased demand for all sorts of consumer goods
o Costs of labour = much lower and allow firms to sell final products at
lower prices & higher profits
o Government regulations are less severe and makes it easier for
companies to set up & greatly reduce costs of production + the
government may offer tax concessions to attract FDI
 Advantages
o FDI helps to fill the savings gap & this may lead to economic growth
o Employment (education & training) thus improving skill levels &
managerial capabilities
o Greater access to R&D, tech, marketing expertise and could enhance
industrialization
o Increased employment & earnings may have a multiplier effect
o Tax revenue to invest in infrastructure / improve public services (health
& education) to promote economic development
o Injecting foreign capital & increasing AD by buying existing companies
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o Improve infrastructure (both physical & financial) / act as a spur for the
govt to do so to attract them
o Provide more choice & lower prices for consumers / providing essential
goods that are not available domestically
o More efficient allocation of world resources
 Disadvantages
o Bring in their own management team, only using inexpensive low skilled
workers for basic production & do not provide education / training +
limiting ability of host countries to acquire new technologies
o MNC have too much power & they gain large tax advantages / subsidies,
reducing govt income and their incomes & size allow them to exert too
much influence on policy decisions taken in institutions such as WTO.
o Transfer pricing (sell G&S from one division of the company to another
division of the company in a separate country in order to take advantage
of diff tax rates on corporate profits). Therefore, developing countries
with low tax rates to encourage MNCs to invest reap little tax reward &
developed countries also lose out on potential tax revenue. Govts have
rules to prevent firms from abusing ability to use transfer pricing to
minimize their tax payments but they are difficult to enforce & monitor
o Legislation on pollution is not effective & thus they are able to reduce
private costs while creating external costs – this is damaging for the
environment. Labour laws are also weak therefore allowing the
exploitation of local workers in terms of both low wages & poor working
conditions
o MNCs may enter to extract & strip particular resources before leaving –
there may be unrest from the host countries as profits from their
reasources are being sent out of the country to foreigners.
o MNCs may use capital intensive production methods to make use of
abundant natural resources – this will improve employment levels. MNC
should use appropriate technology where production methods are
aligned to the resources available & since there is a large supply of cheap
labour in developing countries, labour intensive production methods
would be more appropriate.
o When MNCs buy domestic firms, owners are paid in shares (stocks) from
the MNC – actual money may never be used in developing country’s
economy
o MNCs may repatriate profits – transferring their profits out of the
country back to the MNCs country of origin
 Main concerns relate to the positive negative effects of MNCs on sustainable
economic development. The extent to which FDI is able to contribute depends on
the type of investment & ability of host country govts to appropriately regulate
MNCs behavior & use the benefits of the investment to achieve development
objectives.
 Concerns related to MNCs activity:
o Possible exploitation of workers
o Use of child labour
o Inability of workers to join unions
o Business practises that cause immediate / future damage to
environment
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Aid, debt and economic development

 Definition of Aid – any assistance that is given to a country that would not have
been provided through normal market forces
 Aid is provided because:
o Help people who have experienced some form of natural disaster / war
o Help developing countries to achieve economic development
o Create / strengthen political or strategic alliances
o Fill savings gap & encourage investment
o Improve quality of human resources
o Improve levels of technology
o Fund specific development projects
 Humanitarian aid
o Alleviates short term suffering (may be caused by events such as
droughts, war / natural disasters)
o Usually comes under the headings  Grant aid – short term aid provided
as a gift & does not have to be repaid

Types of grant aids:

 Food aid – provision of food / money to pay for food (also
includes money for transport, storage & distribution of food)
 Medical aid – provision of medical services & provisions + money
to faciliate medical services
 Emergency aid – provision of emergency supplies (e.g. temporary
shelter, tents, clothing, fuel, heating and lighting)
 Development aid
o Alleviate poverty in the long run & improve welfare of individuals
o Also referred to as Official development assistance (ODA)
 “flows to developing countries & multilateral corporations
provided by official agents, including state & local governments /
by executive agencies, each transaction meets the test:
 Administered with promotion of economic development
& welfare of developing countries as its main objective
 Concessional in character & contains grant element of at
least 25%
Types of development ai:
o Long term aids – usually repayable by the developing country over a
period of 10 – 20 years (also known as concessionary loans / soft loans)
which could be repaid in foreign currency / in local currency / mixture.
Tend to have low interest rates & repayable over a long period of time
then a standard commerical loan
o Tied aid – grants / loans given to developing countries but on the
condition that funds are used to buy G&S from donor country
o Project aid – for a specific project in a country & given in the form of
grant aid that requires no repayment. Often used to improve
infrastructure & one of the main suppliers is the world bank
o Technical assistance aid – tends to have two aims
 Raise level of technology by bringing in foreign technology &
technicians who can instruct on its use
 Raise quality of human capital by provision of training facilities &
expert guidance (foreign scholarships are also sometimes
provided so that managers & technicians can study abroad)
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o Commodity aid – to increase productivity  funds for purchasing

commodities including consumer items, intermediate inputs & industrial
raw materials

Ways of classifying official aid:

o Bilaterial aid – from one country to another
o Multilateral aid – given by rich countries to international aid agencies

 Concerns about aid

o Corruption – government in power may not necessarily have the majority
of the population at heart and therefore it only goes to a small sector
o

The balance between markets and intervention