Emerging and Developing Economies

Growth and development

Growth usually enables development by raising incomes and tax revenue. But growth without development is possible: where the gains from a resource boom accrue to a small elite or to foreign investors, GDP rises while most people's lives do not improve. Opening with this distinction frames every answer in the topic.

Measures of development

The Human Development Index combines three dimensions into a figure between 0 and 1:

Strengths: broader than income alone; captures the outcomes income is supposed to buy; comparable across countries and time; and two countries with similar income can have very different HDI, revealing how well income is converted into wellbeing.

Limitations: still an average, so it hides inequality within a country; ignores the environment and sustainability; ignores political freedom and human rights; ignores gender inequality unless a separate index is used; data quality varies.

Other measures: the Inequality-adjusted HDI, the Multidimensional Poverty Index, the Gender Inequality Index, the Gini coefficient (4.2), infant and maternal mortality, access to clean water and sanitation, and mobile phone or internet penetration.

Using several indicators together beats any single one, a reliable concluding recommendation.

Barriers to growth and development

• The savings gap. Poor households cannot save → little domestic capital to lend → low investment → low productivity → low income → still no saving. This is the Harrod–Domar logic and the poverty cycle at national level.
• Low human capital: poor education and health.
• Poor infrastructure, raising firms' costs and deterring investment.
• Rapid population growth, so output per head barely rises.
• Primary product dependency: volatile world prices, income-inelastic demand, and the Prebisch–Singer hypothesis that the terms of trade tend to move against primary producers over time.
• The resource curse: mineral wealth appreciating the currency and crowding out manufacturing (Dutch disease), while concentrating rents and inviting corruption.
• Debt, where servicing costs absorb revenue.
• Corruption, weak institutions and political instability.
• Weak property rights and rule of law, so entrepreneurs cannot rely on contracts.
• Capital flight and the brain drain.
• Geography: landlocked status, drought, disease burden.
• Trade barriers in developed countries restricting market access.

Strategies to promote growth and development

Market-oriented:

▶

Interventionist:

Other approaches: aid (fills the savings gap, but risks dependency and misappropriation); debt relief (frees revenue, but moral hazard); development of tourism (foreign exchange and jobs, but seasonal, low-skilled and environmentally costly); fairtrade schemes; and institutional reform, property rights, anti-corruption, rule of law.

The underlying debate is market-led versus state-led. Market strategies mobilise private capital but risk inequality and volatility; interventionist ones can address market failure directly but risk government failure. The successful East Asian economies used both.

Working the numbers

GNI per capita, and the population trap. A country's GNI is $84bn with a population of 28m:

GNI per capita = 84,000 ÷ 28 = $3,000

GNI grows 3.5%; population grows 2.8%:

Per capita growth ≈ 3.5 − 2.8 = 0.7%

Headline growth of 3.5% delivers well under a percentage point per person. Where population growth exceeds output growth, income per head falls even as the economy expands, which is why development targets are always set per capita.

GDP against GNI. Foreign-owned mines repatriate $6bn of profit while migrant workers send home $4bn in remittances:

GNI = GDP − 6 + 4 → GNI is $2bn below GDP

A country can therefore post strong GDP growth while residents' incomes lag, the standard criticism of extraction-led, foreign-owned development, and it is invisible unless you use GNI.

PPP matters more here than anywhere. If a basket costing $100 in the US costs the local equivalent of $40, then $3,000 of local income buys what $7,500 would buy in the US:

3,000 × (100 ÷ 40) = $7,500 PPP

Market exchange rates price only traded goods, while housing, food and local services, most of what people actually consume, are far cheaper. Comparing living standards at market rates therefore understates low-income countries substantially, which is why development figures are quoted PPP-adjusted.

Worked example

A low-income country depends on exporting a single primary commodity.

1. Export earnings depend on one volatile world price
2. demand for primary products is income-inelastic, so earnings do not rise with world growth
3. supply is price-inelastic in the short run, so price swings are severe
4. export and government revenue are unpredictable
5. planning long-term investment in schools and hospitals becomes impossible
6. development stalls.

Compounding this, the terms of trade tend to move against primary producers (Prebisch–Singer), so a given volume of exports buys progressively fewer imported manufactures.

Strategy 1, attract FDI into manufacturing.

1. FDI brings capital, technology and management skills the country lacks
2. employment and incomes rise
3. workers acquire transferable skills
4. export earnings diversify
5. the savings gap is partly filled without borrowing.

But: profits are repatriated; MNCs may use transfer pricing to minimise tax; jobs may be low-skilled with managers brought from abroad; and the firm can relocate.

Strategy 2, invest in education and infrastructure.

1. Human capital and productivity rise
2. higher-value production becomes feasible
3. diversification happens on the country's own terms
4. the gains are retained domestically and are durable.

But: the payoff is a generation away, the cost is large relative to the tax base, and the money must come from borrowing or aid.

Evaluation.

• The two are complements: FDI is far more likely to arrive, and to bring higher-value activity, where the workforce is educated and infrastructure works. Education without capital produces emigration; capital without education produces low-skilled assembly work.
• Institutions are often the binding constraint. Without property rights and control of corruption, neither investment nor aid translates into development.
• Diversification is the real long-run solution, but it must be financed and staffed, which is why sequencing matters.

Judgement: no single strategy suffices. The defensible package is institutional reform to make investment safe, education and infrastructure to raise capacity, and FDI to supply capital in the interim, with diversification as the objective rather than the starting point.

Common exam mistakes

• Treating growth and development as the same thing.
• Naming only two HDI components, or citing GDP rather than GNI per capita at PPP.
• Listing barriers without a mechanism.
• Presenting FDI or aid as unambiguously good, ignoring repatriated profits and dependency.
• Ignoring population growth when comparing living standards.
• Treating all developing countries as alike.
• Failing to classify strategies as market-oriented or interventionist, which is the specification's own framing.

Exam technique

Open by distinguishing growth from development, it frames the answer and often carries marks in itself.

Group barriers into economic (savings gap, primary dependency, debt), social, education, health, population, and institutional/political (corruption, property rights, instability). Three grouped headings beat a list.

Label each strategy market-oriented or interventionist, since Edexcel structures the specification that way and expects the vocabulary.

For evaluation, judge on time horizon, who captures the gains, and institutional capacity, and conclude that strategies are complements.

Quick revision

• Growth = more real GDP. Development = better living standards. Growth without development is possible.
• HDI = life expectancy + schooling (mean and expected) + GNI per capita at PPP, scored 0–1.
• HDI ignores inequality, the environment, political freedom and gender.
• Barriers: savings gap (Harrod–Domar), low human capital, weak infrastructure, population growth, primary product dependency, Prebisch–Singer, the resource curse, debt, corruption, capital flight, brain drain.
• Market-oriented: trade liberalisation, FDI, removing subsidies, floating rates, microfinance, privatisation.
• Interventionist: human capital, infrastructure, protectionism, managed rates, buffer stocks, industrial strategy.
• Also: aid, debt relief, tourism, fairtrade, institutional reform.
• Judge on time horizon, who captures the gains, and institutions.

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