Economic development

Poverty

Absolute poverty

People living in absolute poverty are unable to obtain basic essentials like food, clean water, shelter, and medical treatment. It is commonly measured as living on less than $2.15 per day, adjusted for purchasing power across countries. This issue is most prevalent in developing nations, particularly in rural areas with limited access to basic amenities and economic prospects. Without outside assistance, people in this circumstance can't escape poverty because they frequently experience chronic hunger, health problems, and educational obstacles. Comprehensive measures, such as the creation of infrastructure, educational opportunities, and focused government policies, are needed to combat absolute poverty.

Relative poverty

Relative poverty refers to individuals being unable to maintain the standard of living typical in their society and is a comparative measure that changes depending on a country’s median income and social norms. Those in relative poverty may not face immediate survival threats but often experience social exclusion and inequality. The measure sheds light on disparities in wealth and access to opportunities within a population, and this type of poverty is more common in wealthier nations.

Causes of poverty

Inadequate education systems: A lack of access to quality education prevents individuals from acquiring skills needed for better jobs. Poor education infrastructure in rural areas only deepens this issue.

Unemployment and economic shocks: Joblessness, coupled with sudden economic downturns, can leave families without reliable incomes. This can be especially severe in regions dependent on unstable industries.

Political and social instability: Corruption, armed conflicts, and weak governance often disrupt essential services, thus leaving vulnerable populations even worse off.

Inequality

Income and wealth inequality

Income inequality describes the uneven distribution of earnings among individuals or groups, highlighting disparities in access to opportunities, whereas wealth inequality focuses on the ownership of assets, like property or savings, and tends to be more entrenched across generations. Both forms of inequality are disadvantageous, since they can hinder economic mobility and create social divisions.

Measurements of income and wealth inequality

Common measures include the Gini coefficient, which assesses the income distribution within a population on a scale of equality) to 1 (maximum inequality). Lorenz curves graphically represent this distribution. Other indicators, like the Palma ratio, focus on the income share of the richest versus the poorest segments. Measures of wealth inequality often examine net worth distribution across percentiles. These tools highlight disparities and inform policies for fairer wealth distribution.

Causes of inequality

Within countries:

Education Gaps: Unequal access to quality education creates a divide in job prospects, with well-educated individuals earning significantly more than those with limited schooling.

Tax Inefficiencies: Tax systems favouring high earners or allowing loopholes contribute to wealth concentration. This reduces the redistributive effect that taxation can have.

Labour market factors: Differences in wages, job availability, and employment conditions contribute to income inequality within economies.

Between countries:

Colonial legacy: Historical exploitation left many nations with limited infrastructure and dependence on primary commodities.

Global trade dynamics: Developing countries face barriers like tariffs or unfavourable terms of trade, reducing their economic opportunities.

Technological gaps: Unequal access to innovation and digital advancements deepens the divide in productivity and income levels.

Kuznets vs Piketty

Simon Kuznets argued that inequality initially rises during economic development but eventually falls as nations industrialise and redistribute wealth. This theory, known as the Kuznets curve, suggests inequality follows an inverted U-shape. Thomas Piketty, however, contends that inequality tends to increase over-concentration of capital in fewer hands unless actively addressed through progressive taxation and wealth redistribution policies.

Is capitalism to blame?

Capitalism promotes competition and innovation, driving economic growth, but it often rewards those with capital and resources, leading to inequality. Critics argue it prioritises profit over equity, leaving marginalised groups behind. However, proponents claim capitalism can reduce poverty through job creation and market expansion, provided redistributive policies exist. Factors such as governance and regulatory frameworks determine the extent of inequality under capitalism. While not inherently unfair, unregulated capitalism risks perpetuating disparities without checks like progressive taxation or welfare support.

Measures of development

Human Development Index (HDI)

Advantages of HDI:

Comprehensive measure: Combines multiple dimensions of development, giving a broader view than GDP alone.

International comparisons: Facilitates comparison of development across countries using a standardised index.

Focus on human welfare: Highlights aspects of well-being like education and health, encouraging holistic policy approaches.

Disadvantages of HDI:

Oversimplification: Reduces complex development issues to a single index, potentially masking inequalities.

Limited scope: Excludes critical factors like environmental sustainability and political freedom.

Data quality submitted: The HDI relies on the quality of the data produced, meaning that if the data is low quality, then it will not be an effective measure on development.

Inequality-adjusted Human Development Index (IHDI)

The IHDI adjusts the HDI to account for inequalities in health, education, and income, thus improving the effectiveness on the measure of development. A lower IHDI compared to HDI indicates high inequality. This measure provides a more accurate depiction of development by highlighting disparities that standard HDI masks.

Multidimensional Poverty Index (MPI)

To measure poverty/level of development in a country, the Multidimensional Poverty Index (MPI) considers factors other than money, and examines several criteria, including health, education, and living situations, which provides a more complete picture of deprivation/advancement. This strategy aids in the identification of specific areas for improvement.

Factors influencing development

Access to finance: If a country has weak access to finance, the economic agents within the country are unable to access loans. This can halt the process of economic development.

Debt: A large quantity of debt means that a country is unable to spend more on public services since they have to service their debt. This can challenge development.

Capital flight: The local economy loses out on important resources when affluent people or businesses relocate their funds overseas. This may occur when there is a lack of trust in the nation's financial system or corruption.

Non-economic conditions: Non-economic conditions such as climate can affect development, since climate can affect worker productivity, especially in the primary sector. Countries with harsh climates typically find it harder to develop, since they are so focused on supplying enough needs for the population.

Infrastructure: A lack of infrastructure can make it difficult for a country to develop. This is because they would have inadequate transport and communication links that could increase productivity.

Education: Education would help countries develop since it would increase labour productivity. However, it may incentivise workers in LEDCs to migrate elsewhere in pursuit of higher-paying jobs.

Primary product dependency: If a country is dependent on one product, it is hard to grow in other industries. This would limit economic development.

Savings gap: Insufficient savings reduce the capacity for domestic investment, requiring external funding sources.

Intervention to promote development

Market-based

Trade liberalisation: By promoting free trade, firms have more markets to purchase raw materials from, and have larger markets to export into. This can help domestic firms develop globally.

Removing subsidies: By removing subsidies, firms can be incentivised to become more efficient. This may help industries to grow and develop the economy.

Encouraging FDI: FDI from foreign countries can bring in money to poorer countries, meaning that aggregate demand is stimulated (due to increased investment). This can enhance economic development.

Microfinance: It provides capital to the needy and the poor to begin businesses, especially in rural areas where other forms of financial services are hard to find.

Privatisation: Entering into the equity of SOEs can enhance efficiency in industries if entered into properly but has the potential of being damaging to the public if not well supervised.

Interventionist

Protectionism: Tariffs or import limits help domestic industries grow by reducing foreign competition. While effective in the short term, overuse may hurt consumers with higher prices.

Fixed exchange rates: Pegging a currency to another can make trade more predictable and attract investors, though it can be costly to maintain if market conditions change.

Buffer stock schemes: Governments purchase and store surplus commodities to stabilise market prices, protecting producers and consumers from severe fluctuations. This reduces income uncertainty, particularly in agriculture.

Infrastructure spending:

Other interventions

Tourism: Generates revenue and employment while showcasing cultural and natural assets, though it may strain local resources.

Industrialisation: Diversifying the economy through manufacturing reduces reliance on volatile primary products.

Aid: Provides essential funding for development projects but risks fostering dependency without structural reforms.

World Bank: The World Bank can provide large loans which can lead to the development of public services which can thus stimulate economic development.

Debt relief: Relieving countries of debt allows more resources to be directed towards public services which can help economic development.

IMF: The IMF are able to give fiscal advice on policies that can stimulate economic development. Additionally, the IMF can provide loans to countries when they have an exchange rate crises, helping smaller countries with volatile currencies to grow.

NGOs: Deliver targeted programmes to improve health, education, and livelihoods, focusing on grassroots empowerment.