On February 6 my IB year 2 Economics classes welcomed Dr. Irene Forichi, former Research Officer for Zimbabwe’s Ministry of Agriculture, and former Regional Emergency Agronomist for the Food and Agriculture Organization for Southern Africa. Dr. Forichi spoke with our classes about the role of agricultural productivity in contributing to human development and economic growth in Southern Africa.

For students or teachers who are interested, she delivered an excellent presentation about the agriculture-related obstacles to and strategies for economic development in the Southern Africa Development Community (SADC). Her presentation can be viewed here, or the PowerPoint she presented can be viewed below.

As we study economic development in year 2 IB Economics, we examine different models for economic growth. Growth in GDP is not the only determinant of economic development, which in order to be measured effectively must account for human welfare determinants such as life expectancy, literacy rates, child mortality rates, distribution of income, and so on. However, it has been shown throughout history that economic growth, or the increase in real output and income, correlates directly with improvements in development factors like those above.

The reason? Increases in national income usually mean at least some levels of improvement in access to basic necessities for the average citizen in a developing country. Also, higher incomes mean more savings, which means greater access to capital for investment by entrepreneurs. More investment leads to greater productivity and rising incomes for those who join the emerging industrial and service sectors that usually accompany economic growth. Furthermore, rising incomes mean more tax revenue for governments, whose spending on public goods like education, health care, and infrastructure result in real improvements in standard of living for not just the emerging upper and middle classes, but the poor as well.

Of course, the following models can be observed to varying degrees among the world’s developing economies today. Some of these models will fail to play out if the institutional and political environment fails to create a stable atmosphere for savings and investment. What you should notice, however, is the underlying importance of savings in all three models. Poor countries suffering from low savings and, even worse, capital flight, are doomed to a cycle of poverty, where funds for investment leading to productivity increases are never made available due to instable institutions like banking and politics. To put a poor country on a path towards economic growth and development, a strategy is needed. Such strategies will be covered in a later post. For now, let’s look at the models:

Harrod-Domar Growth Model:

The model suggests that the economy’s rate of growth depends on:

1. the level of saving
2. the productivity of investment i.e. the capital output ratio

The Harrod-Domar model was developed to help analyse the business cycle. However, it was later adapted to ‘explain’ economic growth. It concluded that:

• Economic growth depends on the amount of labour and capital.
• As LDCs often have an abundant supply of labour it is a lack of physical capital that holds back economic growth and development.
• More physical capital generates economic growth.
• Net investment leads to more capital accumulation, which generates higher output and income.
• Higher income allows higher levels of saving.

Lewis Structural Change (dual-sector) Model:

Many LDCs have dual economies:

• The traditional agricultural sector was assumed to be of a subsistence nature characterised by low productivity, low incomes, low savings and considerable underemployment.
• The industrial sector was assumed to be technologically advanced with high levels of investment operating in an urban environment.

Lewis suggested that the modern industrial sector would attract workers from the rural areas.

• Industrial firms, whether private or publicly owned could offer wages that would guarantee a higher quality of life than remaining in the rural areas could provide.
• Furthermore, as the level of labour productivity was so low in traditional agricultural areas people leaving the rural areas would have virtually no impact on output.
• Indeed, the amount of food available to the remaining villagers would increase as the same amount of food could be shared amongst fewer people. This might generate a surplus which could them be sold generating income.

Those people that moved away from the villages to the towns would earn increased incomes:

• Higher incomes generate more savings.
• Increased savings meant more fund available for investment.
• Increased investment meant more capital and increased productivity in the industrial sector, higher wages, more incentive to move from low productivity agriculture to high productivity industry, the circle continues…

Rostow’s Model – the 5 Stages of Economic Development:

In 1960, the American Economic Historian, WW Rostow suggested that countries passed through five stages of economic development.

According to Rostow development requires substantial investment in capital. For the economies of LDCs to grow the right conditions for such investment would have to be created. If aid is given or foreign direct investment occurs at stage 3 the economy needs to have reached stage 2. If the stage 2 has been reached then injections of investment may lead to rapid growth.

Gapminder – Home

Hans Rosling, a Swedish professor of international health, is well known for his animated presentations on Human Health and Development. Some would describe Rosling’s presentations as doing for Economic Development what  Al Gore’s “The Inconvenient Truth” did for global warming, in that they have spread awareness of the obstacles to and sources of economic development to a wide audience using powerful visual metaphors and data presentations.

Using software he developed to analyze data on human development called “Gapminder”, Rosling gives a mind-blowing presentation on the trends in economic and human welfare over the last thirty years, debunking several myths believed true by many in the first world about development and poverty.

Watch three of Rosling’s presentations below before beginning the assignment.

2006 TED Conference:

2007 TED Conference:

Hans Rosling’s Magical Washing Machine

A week after the earthquake, the Haitian people now speak of day zero plus seven.  Day zero was the day when an earthquake rumbled and shook the shallow bay near Port-au-Prince and crumpled the many fragile houses, hospitals, churches and hotels. The quake did not discriminate against the rich and the poor, but in the months and years to come the world needs to ensure that the country gets a fair chance to rebuild.

Some consider the day of the quake, as the day a new nation began. As Economists we can offer insights about the path to improved living standards, through our understanding of what has worked, and not worked, in other countries.

Haiti has a history which is more turbulent than most.  In 1697 when Spain ceded control of Haiti to the French, much of the land was deforested and the ecology wrecked as sugar fields were planted. In 1804 the republic was founded, and later the dominant political figure was Dr. François Duvalier, and his son who reined as Presidents of the country from 1957 – 1972 (François) and his son till 1987. In 1990 the ruling military junta gave up power and President Clinton sent in 20,000 troops to a country ravaged by HIV and entrenched poverty. Hurricanes in 2004 and 2008 displace hundreds of thousands of Haitian’s and ruined existing infrastructure. But the recent earthquake might be the biggest challenge yet for most fragile and poorest nation in the Caribbean. On the Human Development Index, Haiti is classified as one of the least developed nations in the world at 149th of 182 countries (HDI Report, UN 2009).

After the mourning and eventual stabilisation, the government will need explain what the future holds for Haiti. This is a window of unfortunate opportunity that the government will never see again and mustn’t squander. The developed world has made promises of aid to support the reconstruction, but health care and education, skills and employment must be offered to the people to help the nation grow from the depths of this disaster in a sustainable way. From our learning about Development Economics we can explain strategies appropriate to Haiti.

Former President Bill Clinton who is the UN’s Special Envoy to Haiti, offered a good insight on the nations challenge in his excellent essay in last weeks Time Magazine.

Time Magazine – Jan 14 2010 – Bill Clinton: The Haiti Earthquake

We’ve got to all work together toward a common goal (for Haiti). We have to relentlessly focus on trying to build a model that will be sustainable, so we don’t plant a bunch of trees and then revert to deforestation, or adopt a program to bring power to the country that can’t be sustained, or adopt an economic strategy that is going to wither away in two years.

What the economic strategy will be for Haiti will likely be influenced by the trade agreement with USA called the Caribbean Initiative. This has recently provided an impetus for the clothing industry in Haiti. Hanes, which sells T-shirts throughout North America, produces part of their stock in Haiti in the factories, which are now being protected from looting. These labour intensive industries are important in a nation with approximately two-thirds of labour force unable to find work. The quake and eventual rebuild also offer opportunities to build on existing plans as Clinton explains,

Haiti isn’t doomed. Let’s not forget, the damage from the earthquake is largely concentrated in the Port-au-Prince area. That has meant a tragic loss of life, but it also means there are opportunities to rebuild in other parts of the island. So all the development projects, the agriculture, the reforestation, the tourism, the airport that needs to be built in the northern part of Haiti — everything else should stay on schedule. Then we should simply redouble our efforts once the emergency passes to do the right sort of construction in Port-au-Prince and use it to continue to build back better.

It is evident that Haiti can use this opportunity to develop the country as Clinton explains. In addition, there are many other ways that the country could improve the living standards of the Haitian people. These development and growth strategies could include;

• The development of Fair Trade schemes to improve Haiti producer’s access to world markets.
• Facilitating the provision of small loans through Micro Finance schemes
• Developing the export sector by investing in the transportation infrastructure to transport products.
• Exploring new trade agreements with nations.
• Promoting foreign direct investment in Haiti by multinational companies.

Nevertheless the task is daunting for Haiti. As a UN staff member recently explained to a New York Times reporter, the immediate recovery is complex. The future reconstruction and redevelopment will be difficult, and the road long.

“You’re talking about a country that pre-earthquake had limited resources and capability, and what resources it did have were concentrated in the capital,” said Kim Bolduc, who is coordinating the relief effort for the United Nations. “This context helps explain why this emergency is probably the most complex in history, more than the tsunami, more than the Pakistan earthquake” of 2005. Link

Here are some interesting facts about Haiti

• 40% of the population is under 14 years of age.
• The nations main exports are coffee, mango and other agricultural products.
• 66% of all Haitian’s work in the agricultural sector on small subsistence farms.
• Before the quake foreign aid made up a large proportion of national income. In 2004 over $1 billion was pledged by USA, World Bank and Canada and France. Partly in loans but also in direct assistance.
• In 2006 Haiti was ranked as the most corrupt nation in the world by Transparency International, followed by Burma and Iraq.

Sources:

http://www.nytimes.com/2004/07/21/world/1-billion-is-pledged-to-help-haiti-rebuild-topping-request.html

http://news.bbc.co.uk/2/hi/business/3522155.stm – Haiti: An economic basket-case.

http://news.bbc.co.uk/2/hi/business/6120522.stm – Transparency International

https://www.cia.gov/library/publications/the-world-factbook/geos/ha.html – Haiti – CIA World Factbook

http://www.flickr.com/photos/un_photo/ – UN Photo stream, Creative Commons

http://topics.nytimes.com/top/news/international/countriesandterritories/haiti/index.html – New York Times, Haiti News.

Discussion Questions:

1. In your opinion, what is Haiti’s most valuable resource endowment? Explain.
2. Choose two development or growth strategies and explain how these could be implemented in Haiti.
3. Evaluate the strengths and weaknesses of each strategy.
4. How could corruption be a barrier to the future development of Haiti?
5. What do you think Haiti will be like in 20 years?

Managing Globalization: To reduce poverty, money isn’t everything – International Herald Tribune

Two developing countries: Venezuela and Brazil. Two ideologies underpinning economic growth and development: command in Venezuela versus free market in Brazil. Which system has worked better for the people of these two large South American countries?

How much can governments do to fight poverty? In South America, a couple of answers are emerging in the growing economies of Venezuela and Brazil. Both governments have publicly pledged billions of dollars to raise living standards – but have they succeeded?

Overall income is moving upward in both countries, if for different reasons. Venezuela is riding the black tide of high-priced oil, while Brazil’s relatively firm economic policies have built confidence in its business prospects among both locals and foreigners.

The president of Venezuela, Hugo Chávez, has portrayed himself as an ardent socialist and a disciple of Fidel Castro. Reducing inequality is fundamental to his agenda, whether by dividing up Venezuela’s oil wealth or, as he has obliquely suggested this month, through land reform. His consolidation of executive power has brought Venezuela closer to a centrally planned economy and, as such, has given him the opportunity to invest heavily in social programs.

But identifying the results isn’t easy. The poverty rate in Venezuela was about 50 percent when Chávez’s presidency began in 1999, according to the government’s own figures. Since then, roughly equal numbers of people have fallen into and out of poverty at various times, with a spike to more than 60 percent in 2003 and a drop below 40 percent in 2005…

Rodríguez also questioned whether Chávez’s programs could be completely effective because of the way they were managed. Some of the world’s most successful initiatives for improving the well-being of the poor, he said, linked families’ benefit payments to useful actions like their children’s attendance in school or visits to the doctor. In Venezuela, he said, the link is to political loyalty instead.

“The level of political polarization has become so high that not only is loyalty to the regime the key determinant of your access to benefits, it is also the key determinant of your capacity to be involved in the administration of those benefits to others,” Rodríguez said.

One example of this problem was a program intended to improve literacy. “The government had no system of accountability to monitor performance other than the reports of its own administrators,” Rodríguez said. “When program administrators learned that it was more important to show loyalty to the regime than to effectively run the program, any incentives that they had to administer resources efficiently, from a social point of view, disappeared.”

In Venezuela, president Chavez’s socialist inspired, command policies, paid for by the sale of expensive oil to the rest of the world have led to benefits primarily for those citizens willing to show political loyalty to Chavez and his party. Hard work and productivity is not rewarded as much as loyalty and support for the government. This system of incentives leads to some poor outcomes. The result? Only mediocre improvements in poverty rates, literacy, employment and health of the people.

In Brazil, where free market principles underlie much of the economic development policies, monetary benefits for development workers and the families they serve are linked not to political affiliation but to actual behavior of households and government employees. The result, not surprisingly, has been real improvements in education, health, and poverty levels amongst Brazilians.

Meanwhile, in Brazil, progress appears to have been more widespread. Figures compiled last year by Rômulo Paes de Sousa of the Ministry of Social Development and Fight Against Hunger, covering the period from 1999 through 2004, painted a rosy picture: School attendance was up, while illiteracy was down. Life expectancy was up, but hospital visits were down. Employment was up, and child labor was down.

Again, however, it’s difficult to say with certainty where the credit should go… [perhaps] to the simple fact that Brazil’s monetary benefits for families are indeed linked to actions like attendance in school, prenatal care and childhood vaccinations?

The lesson here? In a command economy like Venezuela’s, in which the government decides how resources are to be allocated, it appears that real improvements in people’s lives are not as important as political loyalty. Because most people involved in economic development work for the government, they focus on making themselves appear more dedicated and loyal to president Chavez, in order to make sure they get paid more and promoted up the ladder.

In Brazil’s free market economy, on the other hand, rewards are based on performance, not political loyalty. Brazilians have enjoyed access to a wider variety of efficiently run development programs than Venezuelans, despite Hugo Chavez’s pledge to alleviate poverty. Correct incentives explain why the market system is more efficient and effective than a command system, and the examples of Venezuela and Brazil illustrate this observation quite nicely

Discussion Questions:

1. Why do command economies fail efficiently allocate resources to where they are needed the most?
2. What does Brazil do that Venezuela does not that has led to real improvements in people’s lives?

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