Measuring the development gap
- Development generally means the ways in which a country seeks to develop economically and to improve the standard of living for its inhabitants.
- The development gap describes the widening difference in level of development between the world's richest and poorest countries. It can also occur within countries, for example between regions or between urban and rural areas.
- The global development gap can be measured in a variety of ways. Traditionally, a country's level of development has been shown by economic indicators of its wealth, such as gross domestic product (GDP) per capita.
- GDP is the total value of goodds and services produced by a country during a year.
- Gross national income (GNI) is similar, but also includes income from overseas investment by organisations and residents.
- It therefore includes income from shares, and company profits from manufacturing or investment overseas (e.g. income from Coca-Cola returning to the parent company in the USA).
- For this reason, it is generally better to use GDP to measure income
North and South
- GDP is used to classify countries as more developed and less developed.
- IN 1981 the Brandt commission's report on world development emphasised what it saw as a division between the wealthy 'North', mainly in the northern hemisphere, and the poorer 'South', mainly in the southern hemisphere.
- The boundary separating them was known as the Brandt Line or the North-South divide.
- Later, this twofold classification was refined by the World Bank into three main groupings: high-, middle-, and low-income countries, with the 'middle' category subdivided into two ('upper' and 'lower').
- The development gap refers to the defferences between these countries
- The UN argues that development is about improving people's social as well as economic wellbeing - addressing human development rather than just economic development.
- For example, people with low incomes may have a decent quality of life if they have access to free healthcare, free education, and clean water.
- More recent indicators of development have therefore focused on demographic and social factors such as literary rates, life expectancy, number of people per doctor and infant mortality. These can be combined to reflect a broader picture of development.
- The Human Development Index (HDI) was devised by the UN to describe human development (both economic and social) within countries.
- It is based on three factors: life expectancy, literacy, and GDP per capita. The HDI ranges from 0 (least developed) to 1 (most developed).
- It is interesting to compare the picture of development given by different indicators.
- Development profiles can give a visual representation of a country's level of development according to it world ranking on different indicators.
- The more recent gender-related development index (GDI) shows the inequalities between men and women in terms of life expectancy, education levels and income.
- It is one of the five indicators used in the UN Development Programme's annual Human Development Report.
- The difference between countries is sometimes called a development continuum rather than a gap.
- Some people believe this better reflects reality: there is a gradation of countries at different levels of development rather than clusters in distinct groups.
- Development data can also provide information about the distribution of inequality. There is an unequal division of the world's weakth and population between the major economic regions identified by the World Bank, and the variety in their distribution.
There are large differences betwen countries. Key development factors can interact;
- Physical resources. Water availability, quality and location of mineral deposits, harsh environments, natural soil quality, agricultural potential.
- Social. Population levels and dependency levels, birth rates and population policies, education legels and workforce skills, infrastructure quality.
- Economic. Stage of industrial development, dependency on particular industries and globalisation trends, location of TNCs, trade links, and economic groupings.
- Political. Commitment of governments to take action. Level and conditions of overseas investment, level of debt, corruption, the legacy of colonialism.
Rostow development theory
- A number of theories have been put forward to explain the widening development gap between developed and developing countries.
- Rostow's model of economic development is based on development experienced by western Europe and North America.
- Rostow argued that a country passes from underdevelopment to development through a series of stages of economic growth, similar to an aircraft taking off.
- 1. Traditional society. Basic subsidence agriculture and craft industries. Stagnant and static society with social stratification.
- 2. Preconditions for take-off. New social and political elite. Export mining and cash cropping.
- 3. The take-off. Social, political and institutional change favours dynamic growth. Beginning of one or more manufacturing industries.
- 4. Drive to maturity. Decreasing social equality. Growth to all sectors of the economy.
- 5. High mass consumption. Welfare capitalism? International power? Durable consumer industries and service industries.
However, this theory does not take into account several important non-economic factors of development
Poverty cycle development theory
Poverty cycle development theory explained
- Other theories have focused on underdevelopment, using poverty and social deprivation to explain the inequality between countries.
- Less developed countries are trapped in a continuing cycle of poverty becaause of a lack of capital (money) and low incomes.
- However, this theory cannot account for the rapid economic emergence of countries such as China, India, and South Korea.
- It also assumes that global development takes place in isolation from other countries and is free of global interactions.
- Furthermore, it does not take account of foreign aid or loans from international banks.
Politics development theories
- Politics models examine the impact of different philosophers on equality and development.
- For example, Karl Marx believed that the capitalist free market economy caused exploitation and social inequality while communism, in which the state runs all key sectors of the economy, made the effects of development more equitable.
- Rostow's model of development also has a political aspect. It is a modell of a capitalist society developing a high level of material wealth alongside economic growth.
Dependency development theory
- Gundar Frank's dependency theory of development suggested that developed countries, such as the USA, control and exploit less developed 'satellite areas of the world.
- This produces a relationship of dominance and dependency possibly leading to poverty and underdevelopment in the less-developed countries.
- One example of this is colonialism, and its legacy.
- The relationship between regions or countries is a key focus of the core-periphery theories.
- Friedmann argued that beneficial effects can spread from developed core regions or countries to less developed, peripheral regions.
- Myrdal's model is similar, except that spread effects are overwighed by backwash effects which favour the core region.
- This widens the development gap. Many governments attempt to neutralise backwash effects with international aid or trade agreements.
- All these models illustrate that geographical disparities in wealth and development arise from different social, economic, and political systems.
- More recent debates have focused on the effects of economic globalisation on development.
- Countries are becoming increasingly connected and interdependent at a global scale, in complex wats that are cheaper, faster and more efficient than previously.
- The main types of global flow that connect plaves around the world involve the movement of people (migrants, tourists, business people), capital, technology, ideas (including political ideologies) and information.
- One other factor needs to be identified in this search for explanations of the development gap: the debt crisis.
- In the last 50 years, many poor countries have accepted loans from rich countries.
- Interest payments on the loans affect development as they put pressure on the already stretched financial situation of a country.
- Loans have to be repaid, plus interest, and some have strings attached.
- For example, developed countries give trade loans to enable poorer countries to buy their products or services.
- The debt crisis largely concerns the poorest regions, causing even more hardship to their people and preventing the development gap closing.
The debt crisis was produced by a chain of events:
- The Arab-Israeli war of 1973-74 led to a sharp increase in oil prices.
- Individuals and governments in the oil-producing countries invested so-called petro-dollars in rich countries' banks.
- These banks offered loans at low interest rates to recycle their large reserves of petro-dollars. Poor countries were encouraged to borrow to fund their development, and to exploit raw materials and grow cash crops to that they could pay back their loans with profits made from exports
- In the 1980s, Western countries experienced recession and tried to combat rising inflation by increasing interest rates. At the same times crop surpluses led to a decline in prices. Demand for developing countries' goods fell. These factors, plus oil price increases, left developing countries unable to pay the interest on their debts.
The debt crisis continues because of:
- High interest rates charged by some banks; typically 10-25% higher than for projects in developed countries.
- Corruption within developing countries' governments and companies which diverts loan monies from the intended target.
- Political instability leading to a loss of confidence that some countries can repay their loans.
- New IMF and World Bank loans to help pay back the old ones. These have conditions attached, e.g. allowing foreign imports which harm local industries.
- Trade barriers imposed by developed countries that make it hard for poorer countries to export their goods.
- The most influential players in promoting economic development are the transnational corporations.
- The largest of these companies now match some countries in terms of their wealth, power, and trading.
- TNCs are driven by the need to maintain profitability to reward shareholders, so they constantly search for more 'efficient' methods of production and cheaper locations for that production.
- Traditionally, TNCs have located in developed countries or in the newly industrialised countries (e.g. South Korea, Taiwan, Singapore, Malaysia).
- However, other areas of the world such as the emerging BRIC economies and South Africa are developing their own large corporations. We may see a second generation of globalisation, with companies from the South playing a significant role.
- Various indices can be used to measure how global or transnational a company is.
- THe UN's transnationality index (TNI) is based on three ratios: foreign assets to total assets, foreign sales to total sales, and foreign employment to total employment.
- The geographical spread index (GSI) addresses the number of countries in which a company operates.
- The GSI is calculated as the square root of the internationalisation index (the number of foreign affiliates divided by the total number of affiliates) multiplied by the number of host countries.
- TNCs can provide opportunities for economic development and poverty alleviation in a country. Whether a TNC invests in a country depends on its resources, the size of the economy, the business environment, government policies and how skilled the workforce is.
Impact of TNCs
- Direct economic. Linkages between foreign and domestic companies - supply chains, service contracts, etc. Competition for local companies. Foreign investment (FDI). Leakage of profits/finance out of the country. Can help smaller companies reach economies of scale. May lead to dependency on TNC.
- Indirect economic. Multiplier effects in the local community. Infrastructure development. Affects macroeconomic performance of the host country - income distribution, economic growth, balance of payments. Financial linkages to the government via taxes, wages, shared profits. Exports help to generate foreign exchange.
- Social and political. Generates employment. Develops skills and knowledge. Management not often local. Disrupts traditional lifestyles. Cost of government incentives to attract this investment. Impact if TNC withdraws from the area: unemployment, cycle of poverty. Exploitation of workers. Health and safety concerns. Corruption of officials to allow further developments. Conflict with government. Influx of migrant workers.
- Environmental. Exploitation of local resources. Pollution and long-term health issues. Impact on local ecosystems (e.g. deforestation). Factories need large amounts of energy and water: may conflict with the needs of the local community. Planning for accidents/cleaning operations.
- Increasing exports can help a country to narrow the development gap.
- Traditionally, North-South trade flows have focused on developing countries exporting primary products such as minerals and agricultural producs. However, in the last 20 years developing countries have moved into manufacturing - about 80% of their merchandise exports are now manufactured products. There has also been an increase in service exports from developing countries.
- This has meant a change in the nature of North-South trade relations. Trade is often unequal, however. Some countries have trade surpluses (exports exceed imports), while others have trade deficits (imports exceed exports). Trade deficits may eventually lead to a 'debt trap' that inhibits investment and growth.
- Economic globalisation has had a big impact on the flows of goods between countries. Some countries have had large increases in trade (e.g. China, India, Mexico and Brasil), while others have had decreases. Inequality betwen rich and poor does not always change with increases in trade. In Uganda, inequality has decreased, with a good growth rate of 3.8% per capita. In Vietnam, however, there has been little change in inequality during the development of trade.
- Some argue that inequality in China has increased during its recent rapid economic growth.
- Some countries organise themselves into trade blocs.
Terms of trade
- Another important consideration in international trade is the terms on which it takes place.
- A country's terms of trade is the ratio between the currencies earned from its exports (a unit price index is normally used) and the prices of imports.
- Generally speaking, world prices for raw materials have fallen over recent years in relation to the price of manufactured goods. Manufacturing adds value to commodities. Therefore, any countries that export raw materials and import manufactured goods are likely to have declining terms of trade.
- Often the poorest developing countries in this situation have to export even more as the world price falls.
- If all they have to export is cereals and other food products food becomes scarcer at home and prices rise. As a result there might be a decline in living standards and increased poverty.
- Recent rises in commodity prices have brought improved terms of trade for some countries, particularly those exporting materials.
- The most effective way to achieve development through trade is to agree on improved trade conditions and better marrket access for developing countries. This can generate more gains for developing countries than any other area of international economic cooperation or aid. But it is not only unfair trade conditions that inhibit development. Other handicaps include rapid population growth, political instability and climatic disasters (such as drought) that reduce food supply.