Economics of Development - Assignment Example

Economics of Development Topic 1 How to measure poverty and inequality Inequality can be measured using size distributions (quintiles and deciles), Lorenz curves, Gini coefficients and aggregate measures of inequality, and functional distributions. The measurement is based on indices of inequality which are used to evaluate a particular income distribution as well as for making comparisons between different distributions. Measurement of poverty starts by identifying the poor by drawing a border line between been income levels that are considered to be for the poor and those for the non-poor. There are two approaches used in defining the poverty line, based on whether poverty is viewed as relative or absolute deprivation. If poverty is regarded to be absolute deprivation, the poverty line is defined without considering the general living standard. If poverty is seen to be relative, then the poverty line is defined by taking the living standard into consideration. Why reducing poverty and inequality can be beneficial to growth Both poverty and inequality have a negative impact on growth. High poverty lead to low growth since the poor cannot make a significant contribution to economic growth. For instance deprived people do not have jobs and lack access to services such as healthcare and education. As such, they cannot actively participate in activities that enhance growth. Similarly, societies that are characterised by inequality have a large segment of the population which is poor. What this means that this segment does not contribute significantly to economic growth. Moreover, in unequal societies, governments have to redistribute taxes that would have been used to enhance growth to cater for the needs of the poor. Therefore reducing poverty and inequality can make the poor more vibrant and reduce the burden of supporting them. This in turn means that contribution of the poor as well as resources that would be channelled to helping them are used for development, which would in turn enhance growth. Special policies to help vulnerable groups Special policies to help vulnerable groups are forms of assistance to the vulnerable individuals of families. They include benefits in cash to the vulnerable groups, benefits in kind to the vulnerable groups, subsidies offered to the vulnerable groups such that they can buy goods at lower prices, subsidies offered to the vulnerable groups such that they can get some services at lower prices compared to the non-vulnerable groups, workfare programmes, conditional cash transfer programmes, and other risk-coping initiatives. Workfare programs are poverty alleviation programmes that require programme beneficiaries to do some jobs in exchange for benefits. Conditional cash transfer programmes are welfare benefits that are availed to vulnerable families on condition that they change behaviour, such as by taking their children to school or having pregnant women deliver in a medical facility. How to make workfare work For workfare to work, the programme should not lower or seriously weaken incentives for the targeted poor people to acquire human capital and other assets. That is, the earnings from workfare programs should not be so high that they undermine the ability of the poor who need human capital to get it. Also, the workfare program should have significant net benefits so as to attract the targeted population to join. Additionally, the arrangement for the programme should be such that it is harder to screen the poor without the workfare condition. The workfare program should also be designed in such a way that there is a lower opportunity cost of time for the people who are not targeted (so that they do not come to enjoy the benefits of the workfare program). Also, there should be social less stigma attached to taking part in the workfare programme so that the poor do not feel ashamed to join it. Topic 2 How can developing countries use demographic transition and population dividend to aid their growth? Demographic transition means the transition from a high birth rate coupled with a high death rate to lower birth and death rates as a region or country develops from a pre-industrial stage to an industrialised economic system. It starts with high birth and death rates followed by continued high birth rates but reduced death rates. This is finally followed by falling birth as well as death rates, which eventually stabilises. Developing countries can use demographic transition to aid their growth by ensuring that as the population size stabilises, the younger people who enter the working age group are well empowered through education and other income generation opportunities. When members of this group become empowered through jobs, they can make a contribution to economic growth of developing countries. The demographic dividend suggests that when a country has more young people joining the working age and the birth rate is lower, the country is likely to experience higher economic growth. Criticisms of the Malthusian population trap To start with, the Malthusian model ignores the important role that technological progress plays in offsetting the negative impacts that would be caused by population increase with respect to economic growth. Today, economic growth is spurred by technological, scientific and social innovations and inventions, which increase productivity even though the quantity of land remains the same. Based on this, the Malthusian model can be criticised for its assumption that the quantity of food supplies produced would not be able to keep up with the increasing population. In real sense, because of better methods of production, it is possible to keep the income growth rate above the population growth rate. The second criticism is that the model is based on the assumption that national population increase rates are positively correlated with the national per capita income level. However, the reality is that no positive relationship has been established between population increase and the level of per capita income. How to effectively reduce female fertility rate To effectively reduce the female fertility rate, there is need to ensure that girls go to school and that women are more empowered through education. By staying in school longer, girls of the childbearing age (starting from the teens) will be preoccupied by the academic needs such that there will be fewer cases of teenage pregnancies or child marriage, which are responsible for higher fertility rates. Educating and empowering women of childbearing age is also important to effectively reduce the fertility rate since educated women are likely to get married at an older age hence having the first at an older age than most uneducated women. Educated and empowered women have a strong reason for moderating the birth rate through strategies such as family planning and making decisions regarding when to have a child and the number of children that they need to have. Topic 7 What are the three general forms of market failure? The first form is a case in which the market is unable to function properly or no market exists. The presence of a non-functioning market can be due to very high costs or barriers involved getting access to the market. The second form is where the market exists but the market is characterized by inefficient allocation of resources. Inefficient resource allocation arises to conditions such as the existence of too few markets, lack of competition or the presence of non-competitive behaviour. The third form of market failure is a case in which the market creates results that are not desirable when the market is measured in terms of social objectives other than mere allocation of resources. For instance, conditions in the market may produce effects like more unequal distribution of income, which in itself can lead to further market failure. Discuss the “Washington Consensus” on the role of the state in development and its limitations The Washington Consensus is a set of ten policy objectives that were considered as the standard measure to help developing countries that were raved b economic crises to revive their economies and achieve development. The reform package entails measures such as fiscal discipline, tax reforms, securing property rights, redirection of public expenditure to priority areas such as education and health, having unified and competitive exchange rates, deregulation, privatisation public enterprises, elimination of barriers to FDI, liberalization of trade, and financial liberalization. Under the Washington Consensus, the state had a minimal role in development, with private enterprises playing a bigger role in the economy. Limitations of Washington Consensus are as follows. First, consensus ignored the important role played by the state in development. Secondly, the policies contained in the Washington Consensus were assumed to be one-size-fits all and hence a remedy for all problems affecting developing countries, which is wrong since different countries have different conditions. Do NGOs actually work and what are their limitations Yes, NGOs actually work. The work that NGOs do is seen through the role that the organisations play in influencing and promoting their values as well as their roles in economic and social development. For instance, NGOs promote good use of natural resources, advocate measures to conserve the environment and enhance sustainable development, advocate fairness in the use or allocation of public goods, and they also come up with ideas that help in the social and economic of people or regions in which they operate. The limitations related to the work of NGOs are as follows. First, some NGOs may be insignificant due to their small scale of operation or because of having limited resources. As a result, the NGOS may not able to adequately play their role in shaping policy reaching the targeted objective. Another point is that NGOs may be misused to focus on the personal gains of the funders instead of the targeted beneficiaries. Topic 8 What are the main predictions and controversies from the traditional trade theory? The main predictions from the traditional trade theory are as follows. First, trade is an important factor that stimulates economic growth. Second, trade has the tendency to domestic and international equality by equalising factor prices, increasing real incomes of the countries that trade, and making efficient use of resources. Third, trade helps nations to attain development by enhancing and rewarding the economic sectors in which countries have a comparative advantage. The fourth prediction is that trading volumes are determined by international prices and costs of production. Finally, it is predicted that an outward-looking international policy by countries is necessary to promote growth and development. Some controversies exist from the traditional trade theory. For instance, the theory assumes that there would be perfect competition in trade. This is not true since perfect competition is hampered by market controls by governments as well as monopolistic and oligopolistic tendencies by some players involved in trade. How sound is the infant industry argument The infant industry argument proposes that a new industry that has a potential comparative advantage may not advance in a country unless it is accorded short-term protection against foreign competitors. That is a the newly formed industry in a country needs to be protected so that it can develop to a level where it can freely compete with already established players from other countries. On one hand, this argument is reasonable because protecting new industries against stiff competition from established players can help the infant industries to grow, hence protecting the jobs that the industry offer an allowing the domestic industry to grow. On the other hand, some economists argue that an infant industry will always remain an infant even if it is protected. This is because of the point that such an industry will not be exposed to the kind of competition that is required to make it grow quickly. It is also argued that the protection of infant industries can lead to inefficiency, higher prices for consumers, and misallocation of resources. Compare and contrast the pros and cons of free trade Free trade has a number of advantages. First is the utilisation of increased economies of scale since trade increases the size of the market that a firm can access. There is also improved resource allocation through specialisation that is enabled by increased economies of scale and comparative advantage. Free trade also leads to increased economic growth, real incomes and better living standards due to improved resource allocation. Free trade is also associated with increased competition an increased use of technology, which leads to efficiency and better prices for consumers. On the other hand, the disadvantages of free trade are as follows. Unemployment can result when domestic industries become inefficient due to stiff competition from foreign firms. Free trade can also lead to increased instability of the global market due to the interdependence of different economies. Free trade can also make it difficult to control what is traded, making it possible for unwanted goods such as illicit drugs to be moved between countries. Read More