2.6.5a Development indicators and barriers (A-level only)

Growth Is a Rise in Real Output, but Development Is the Wider Improvement in Living Standards, Welfare and Freedoms

1. Economic growth is a rise in real output.
2. Economic development is a broader, sustained rise in living standards, welfare and freedoms.
3. So growth is one part of development, not the whole of it.
4. Developing economies share some features but are not all alike.

Growth Can Occur Without Much Development

1. Growth measures more output, often as real GDP.
2. Development adds health, education and living standards.
3. It also covers freedoms and the quality of life.
4. Growth can occur without much development.

Developing Economies Share Common Features but Still Differ

1. Many developing economies have low income per head.
2. Some depend heavily on primary products.
3. Dualism means a modern sector alongside a traditional one.
4. Rapid population growth, poor infrastructure and weak institutions are common.

Keep Growth and Development Clearly Apart

Development Is Measured by More Than Income, Above All Through the HDI

1. Development is measured by more than income.
2. The Human Development Index combines income, education and health.
3. It uses GNI per head at PPP, schooling and life expectancy.
4. Other indicators cover poverty, mortality and access to services.

The HDI Combines Income, Health and Education Into One Index

1. HDI takes GNI per head adjusted for purchasing power parity.
2. It adds life expectancy as a health measure.
3. It adds years of schooling as an education measure.
4. The three combine into an index between zero and one.

Wider Indicators Add Poverty, Mortality and Access to Services

1. The Multidimensional Poverty Index covers several deprivations.
2. Infant mortality and literacy show health and education.
3. Access to clean water, the internet and mobile phones also help.
4. Purchasing power parity makes income comparisons fairer.

The HDI Improves on Income Alone but Is Still Incomplete

1. For HDI: it is broader than GDP and easy to compare.
2. Against: it ignores inequality, sustainability and political freedoms.
3. Real GDP per head is simple but even narrower.
4. On balance, HDI improves on income alone, but no single measure is complete, so it is best read alongside indicators of inequality, sustainability and freedom.

State What Each Measure Captures

Economies Are Grouped by Income per Head Into Low, Middle and High Income

1. Economies are commonly classified by their national income per head.
2. International organisations group countries as low-income, middle-income and high-income.
3. This gives a broad indication of a country's stage of development and living standards.

Countries Fall Into Low, Middle and High Income Bands

1. Low-income economies
   1. The poorest countries, with very low income per head.
2. Middle-income economies
   1. A broad group, often split into lower- and upper-middle income.
3. High-income economies
   1. The richest countries, with advanced living standards.

Income per Head Is Only a Starting Point for Judging Development

1. Income per head says nothing about how income is distributed.
2. It ignores non-income aspects of development, such as health and education.
3. Broader measures, like the HDI, give a fuller picture.

Use Income Classification, but Note Its Limits

Many Economic and Non-Economic Barriers Hold Back Growth and Development

1. Many barriers can hold back growth and development.
2. Economic barriers include primary product dependency and the savings gap.
3. They also include debt, capital flight and poor infrastructure.
4. Non-economic barriers include corruption, conflict and weak governance.

Economic Barriers Limit the Capital and Earnings Needed to Develop

1. Primary product dependency exposes an economy to volatile prices.
2. The savings gap limits the funds available for investment.
3. A debt burden diverts income to repayments.
4. Poor infrastructure and weak human capital lower productivity.

Non-Economic Barriers Weaken the Institutions Development Needs

1. Corruption diverts resources from productive use.
2. Poor governance weakens the rule of law.
3. Conflict destroys capital and deters investment.
4. Rapid population growth can dilute capital per worker.

Which Barrier Binds Most Depends on the Country's Context

1. The most binding barrier depends on the country.
2. For one, it may be debt; for another, conflict or weak institutions.
3. Barriers often reinforce one another.
4. On balance, the key is to identify which barrier is most binding in a given context rather than to list them, since the right strategy depends on the main constraint.

Explain the Mechanism Behind Each Barrier

Population Growth and Age Structure Shape an Economy's Ability to Develop

1. The rate of population growth and the age structure strongly influence development.
2. Rapid growth can strain resources and dilute capital per worker.
3. An ageing or very young population changes the workforce and the dependency burden.

Population Affects Development Through Both Its Rate of Growth and Its Age Structure

1. Rate of growth
   1. Rapid growth can outpace resources and capital investment.
2. Age structure
   1. The balance between working-age people and dependants.
3. The dependency ratio
   1. The share of dependants relative to the working-age population.

Population Dynamics Can Either Hold Back or Boost Development

1. Rapid growth can dilute capital per worker, holding back productivity.
2. A high dependency ratio strains public finances.
3. A large working-age share can, if employed, deliver a demographic dividend.

Separate the Rate of Growth From the Age Structure

1. Investment in physical capital such as roads, power and ports, together with spending on education, training and healthcare, raises the productivity of workers and firms, so higher investment and human capital tend to lift both real output and the wider welfare that the HDI measures.

1. The best indicator depends on the purpose of the comparison, and even the HDI still omits inequality, the environment and political freedom, so it is best read alongside other measures.

2.6.5b Policies to promote growth and development (A-level only)

Policies to Promote Growth and Development

1. Policies to promote growth and development fall into market-oriented and interventionist strategies.
2. Trade, aid and debt relief are the main external routes to development.
3. Institutions such as the IMF and the World Bank, plus tools like FDI and microfinance, also play a role.
4. No single policy always works; the right mix depends on a country's stage, institutions and constraints.

Market-Oriented Strategies Use Freer Markets to Speed Up Development

1. Trade liberalisation
   1. Cutting tariffs and quotas opens the economy to trade and lets it exploit comparative advantage.
2. Promotion of FDI
   1. Attracting multinationals brings in capital, technology and management skills.
3. Privatisation and deregulation
   1. Transferring firms to the private sector and removing red tape aim to raise efficiency and competition.
4. Removing subsidies and floating the exchange rate let prices reflect market forces.
5. The aim throughout is greater efficiency and more private investment.

Interventionist Strategies Use State Action to Tackle Market Failures

1. Human capital
   1. Spending on education and health raises skills and productivity over time.
2. Infrastructure
   1. Building roads, ports and power supply lowers costs and supports production and trade.
3. Financial sector development
   1. Stronger banks channel savings into investment and widen access to credit.
4. Protecting property rights and governance
   1. Secure property rights and lower corruption give firms the confidence to invest.
5. Other tools include protectionism to shelter infant industries and buffer stocks or managed exchange rates to stabilise prices.

The Role of Trade in Promoting Development

1. Trade lets a country specialise in its comparative advantage and reach larger markets.
2. Export earnings can fund imports of capital and technology needed for growth.
3. Fair-trade schemes aim to raise and stabilise producer incomes.
4. Tourism, remittances and inward FDI are further routes to foreign-currency earnings.

The Role of Aid and Debt Relief

1. Aid can fund investment that a poor economy cannot afford and relax the saving and foreign-exchange gaps.
2. Debt relief frees income from repayments so it can be spent on health and schooling.
3. Aid may be bilateral or multilateral, and tied or untied, which affects how useful it is.
4. But aid can create dependency, fuel corruption or carry damaging conditions, so its value depends on its form and conditions.

Trade Versus Aid Is the Core Development Debate

1. For aid: it relieves constraints and funds investment that markets alone would not provide.
2. Against aid: it can create dependency, fuel corruption or carry conditions that harm the recipient.
3. Many argue trade does more for development in the long run because it builds self-sustaining income rather than reliance on donors.
4. On balance, aid is not automatically beneficial, so its form, conditions and effectiveness decide its value, and trade is often the more durable route.

The IMF and World Bank Support Development in Different Ways

1. IMF crisis lending
   1. The IMF provides short-term finance to economies facing balance of payments crises, usually attaching conditions such as cutting deficits or freeing markets.
2. IMF surveillance
   1. It monitors member economies and advises on managing public finances, so its focus is short-term stability rather than long-run development.
3. World Bank project finance
   1. The World Bank lends long term for projects markets neglect, such as infrastructure, health and education, to reduce poverty.
4. Both are criticised: IMF conditions can deepen a downturn, and World Bank loans can add to debt or impose unsuitable conditions.

FDI, Microfinance and Buffer Stocks Target Specific Barriers

1. Foreign direct investment
   1. FDI brings capital, technology and jobs, but multinationals may repatriate profits or exploit weak regulation.
2. Microfinance
   1. Small loans reach people without access to ordinary banking, but are too small to transform an economy on their own.
3. Buffer stocks
   1. These stabilise volatile commodity prices to protect producer incomes, but are costly and fail if the intervention price is set wrong.

Which Policy Works Depends on the Country's Context

1. There is no single best policy; the right mix depends on a country's specific barriers, institutions and stage of development.
2. Where governance is sound, trade liberalisation and FDI can deliver rapid gains.
3. Where corruption is the binding constraint, institutional reform and secure property rights usually have to come first, or market opening and aid simply leak away.
4. Market and interventionist strategies often work best together, sequenced to match the barrier actually holding a country back.