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Limits to development

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by

Hugo Flower

on 14 January 2015

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Transcript of Limits to development

Limits to development
Foreign Exchange Gap
Low incomes
Low savings
Low investment
Low capital accumulation
The Harrod Domar Model
(Flower's Viscous Cycle...)
Similar to the savings gap, developing nations may have a deficiency in foreign exchange.
This may have been caused by:
Dependence on primary products for exports whilst importing all capital goods and machinery.
This is when more foreign currency leaves the country than enters.
Capital flight - when money is moved from the domestic country to foreign banks or is invested in foreign shares
Large debt repayments - if a country is obliged to pay back loan repayments each year then currency is constantly leaving the economy.
Without foreign currency reserves, it will be difficult to maintain a stable domestic currency
When a country's current account deficit is greater than the value of capital inflows.
However:
The foreign exchange gap can be offset by debt cancellation from developed governments
It could also be helped by an increase in FDI for various reasons or foreign aid.
The view that exports will remain low is not necessarily a valid one. There are arguments to say that (ceteris paribus!) a country will develop a comparative advantage in a product, eg Ghana and cocoa, allowing export currency to flow in.
A lack of foreign currency can lead to a loss in investor confidence.
Capital Flight
Capital flight is the uncertain and rapid movement of large sums of money out of a country
Lack of confidence in a country's economy and/or its currency
Reasons:
Political turmoil
Fear that the government will seize private assets.
Case Studies:
More than $700 billion fled sub-Saharan Africa between 1970 and 2008.
If this capital was invested abroad and earned interest at the going market rates, the accumulated capital loss for these countries over the thirty-nine-year period was $944 billion.
By comparison, total GDP for all of sub-Saharan Africa in 2008 stood at $997 billion.
Africa could expunge its entire stock of foreign debt if it could recover only a fraction of the wealth held by Africans in foreign financial centers around the world.
Zimbabwe's economic decline has been hastened by continued capital flight
If FDI is to continue the Zimbabwean government's controversial political and economic policies must be reversed.
Legislation that forces foreign-owned firms to “indigenise” ownership, a move that could further alienate potential investors
Many firms have fled the country.
However:
Rwanda has recovered strongly after the genocide of 1994 where 500,000-1,000,000 people were killed
It is an increasingly attractive destination for FDI – US$118 million in 2009 represents 14x increase from 2004
8th in the world for 'Best countries to start a business'.
Population of Rwanda
If correctly governed, a country can attract capital
Corruption, conflict and poor governance
Accountability
1.Keeping track of election promises
2.Transparency of where tax revenues come from
3.How is state money spent and on whom?
Effectiveness
1.Is the government delivering key public services?
2.How is this money spent? Does it deliver good outcomes per $ spent?
3.Is spending effective in promoting long run development?
Fairness
1.Can people trust government and institutions?
2.How free of corruption is the government?
3.Is the distribution of spending equitable?
Conflicts:
Angola has lost 80% of its farmland because of landmines
Huge cost in human capital
AS shift left
Recovery can take decades
Rwanda, although doing well is still aid-dependent
Capital flight
Corruption:
eg Zimbabwe
Capital flight
AS shift left as profits reduced and wealth seized
Inequality increased
Savings gap worsened
Degradation of public services
Poverty increased
Poverty increased
Monopolies flourish
Disease
Other problems
If a government is just too weak to govern adequately, no tax revenue will be raised
No public services - poor education and health - human capital problems
No capital accumulation
Poor economic decisions could also lead to a reduction in development.
eg. Zimbabwe printing too much money
Zimbabwe's peak month of inflation is estimated at 6.5 sextillion percent in mid-November 2008!
However:
Counties can recover - Rwanda is doing well
Foreign powers can influence reform by using economic sanctions - eg Iran
Foreign aid may help alleviate some of the humanitarian issues
Corruption still remains one of the most significant problems in the developing world
40% of Africa's annual GDP is lost to corruption
Plenary & Homework
Repugnancy grocer if
Apperception muddy nerd cry
Countdown conundrums:
With reference to the article on Rwanda, assess the view that development in Rwanda is permanently damaged (15)
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