OCR economics global economy, development and sustainability notes

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Filling the savings gap through international aid
According to Harrod- Domar model growth is held back by lack of domestic savings,
due to low levels of income and low living standards
Policies responses to this would be to narrow this gap in savings, one policy is to
seek international aid
Foreign aid is a flow of capital to developing countries that meet two criteria
Non-commercial objective from point of donor
Characterised by concessionary terms e.g. lower interest rates than market rate
Forms of aid
Grants- no repayment is required, they include money for development projects, free technical help,
expertise and free university education
Loans- repayment is required, but to qualify as aid they must be soft e.g. not a market rate
Tied aid- given in return for the purchase of donor country goods and services
Bilateral aid- direct aid from one country to another
Multilateral aid- money from international agencies such as World Bank, UNICEF or IMF or more than
one country
Food Aid- often in the form of emergency relief aid
Government of developed countries normally have aid as a policy (overseas development assistance
World Bank exists to provide aid in the form of loans to developing countries
Observations suggest that the policy of aid is not entirely driven by need, on the surface it may help
to improve economic development in education and health, but in many other respects it is in the
interest of the donor countries
E.g. Israel receives 100 times more aid per person from the US than Bangladesh
There is little evidence for aid promoting economic growth e.g. falling incomes in Africa despite vast
amount of aid
Aid is adding to macroeconomic problems by adding to debt and worsening balance
of payments
Aid being redirected into schemes that have little to do with improving human well
Aid not reaching intended recipients due to corruption
Countries may become dependent on aid as a major source of government

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Economic development
Meaning and measurement of economic development
Economic development: the process of improving peoples economic wellbeing and quality of life
Development is a concept that encompasses much more than just levels of income
GDP per capita figures do not tell us what resources are used for, who got the
income, and how people's lives and environments are affected by production and
Development focuses on the outcomes of economic activity and resource allocation
Michael Todaro states the process of development must achieve…read more

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National income/ population = GDP per capita
The world bank then uses these figures to class them into categories
Low income country = GDP per capita $905 or less
Lower middle income country= $906-$3595
Upper middle income country= $3956- $11,115
High income country- $11,116 or more
Using the dollar helps to compare, but market exchange rates do not reflect what
we can buy in terms of goods and services
Purchasing power parity is therefore taken into account
Despite this GDP per capita measurement still has…read more

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Cost and value are also an issue, to improve HDI there is opportunity cost of
allocating resources to health and education as opposed to clean water and
transport infrastructure improvement
HDI says nothing about the quality of indicator e.g.…read more

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Resource endowment
Historical background
Economic structure
Balance between states and markets
So developing countries should not be viewed as a homogenous group
Constraints on development
The continuing dominance of the primary sector in developing countries can be down
to the factor endowments of that country
E.g.…read more

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This is done thorough import-substituting industrialisation (ISI) where a tariff is
imposed on imported goods to let the domestic industry to grow
This is so they become less reliant on primary sector goods and there would be new
comparative advantage, freeing the economy from the constraint of declining terms
of trade and the development trap created by free trade
The countries who adopted this approach experience rapid growth, however only
for a few years after which they encountered problems
One being income inequality rising considerably…read more

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Filling the savings gap through international aid (page 21)
Washington consensus
After planning protectionism and aid had failed, the Washington consensus was formed, it has 10
policy recommendations which can be summaries under 3 headings:
Fiscal discipline- elimination of budget deficit, limit on government spending, and
development of reliable tax base
Market liberalisation and privatisation- ending of government intervention in
markets, selling of state owned industries, and ending of price control
Trade liberalisation and encouragement of foreign investment- scrapping tariffs and
other protectionism methods, including…read more

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Making better use of scarce resources to increase goods and services available for
To be sustainable there must be sufficient resources allocated to investment in
human and physical capital, (improving supply side performance)
Social objectives of economic growth:
Everybody has certain basic goods and services so lives are healthy and productive
e.g. food, shelter education
Comes with benefits e.g.…read more

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This can be used to judge whether sustainable development as occurred
Also used in assessment of policy choices, however they aren't currently, due to limitations of
composite indicators:
Lack of agreement on the choice of adjustments to be made to GDP more detail
could be added as in the measure of domestic progress crime rated and cost of
family breakdown are included
Weighting cannot be determined easily so value judgements are made
Difficulty in placing monetary value on some things e.g.…read more


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