EBC2155 Sustainable Development for Emerging Markets Notes PDF

EBC2155 - Sustainable Development for Emerging Markets Growth vs Development Note: BRICS countries = Brazil, Russia, India, China, and South Africa Opening Lecture Endogenous growth – Romer model Solow Model Inputs (Production Function): Capital, Labor In...

EBC2155 - Sustainable Development for Emerging Markets Growth vs Development Note: BRICS countries = Brazil, Russia, India, China, and South Africa Opening Lecture Endogenous growth – Romer model Solow Model Inputs (Production Function): Capital, Labor Input, Technical knowledge and efficiency x-axis: Capital pp; y-axis: output pp Reasons for lower GDP per capita in China: - Large difference in capital per worker (same production function, more capital) - Role of productivity – how efficiently capital and labour are combined (other production function, same capital) Inputs for growth of output per capita: - Investment=Saving (Net of depreciation)  - Distance from steady state capital per worker - TFP Investment (capital accumulation) Growth factor: Gross investment - I/L = S/L= 𝑠𝑦 (per capita saving) Decrease factor: (Effective) depreciation Capital depreciation 𝛿; due to labor growth n (for same level of K, capital per worker k decreases) Overall effect: net investment = net capital growth 𝑘 = 𝑠𝑦 − (𝑛 + 𝛿)𝑘 (to be continued) Tutorial 1 – Economic Growth Note: convergence or divergence in income If you adjust the GDP per Capita using PPP (“How many units need to be paid for a specific volume of a good or service?”), differences between rich and poor countries will decrease. Lower income will not necessarily imply being able to purchase less GDP per capita vs growth Long-term changes since industrial revolution: China: Highest growth rates, medium GDP Rapid population growth dilutes GDP per capita Sub-Saharan countries: Structural problems, hinder economic growth & prosperity Low levels of state capacity and institutional quality, political unrest, lack of education and infrastructure, over-reliance on commodities (resource curse) Recent growth trends (COVID-19) - Africa and Latin America: struggle due to longstanding structural issues (Sub-Sharan Africa shows more resilience than rest) - Parts of Asia: rebounded faster industrial and export-based economies. - China/ South Korea: swift rebound (robust manufacturing sectors, strong domestic markets, effective pandemic responses) Sources / Patterns of economic growth Differences in Human Capital levels Higher human capital compared to economic output: Congo, Kyrgyzstan, Underutilized education, skill levels in limited job markets Lower human capital compared to economic output: Macao, Qatar, Uganda Rely on foreign labor (decreased incentive to invest in HC development) Labor share and economic development do not correlate (see share of labor compensation in total income) LS is determined by sector specialization Qatar (resource-rich country) relies on resources (similar: Central African Republic – agriculture, diamonds) USA/Philippines (service-focused) = higher labor share of income Average share of labor compensation in income: 51 % (e.g. India) Takeaway: Countries with a high stock of capital per worker also tend to have a high index of human capital per worker (0.75 correlation) Trade and competitiveness as factors of development Resources from trade (a positive trade balance / tariffs revenue) can support economic performance and development. - Export-led strategy: Expanding exports and producing mainly for foreign markets, instead of prioritizing domestic consumption or imports Requirements: - Trade liberalization - Subsidies & Industrial policies supporting specific sectors - Currency management to maintain cheap exports - Export-related infrastructure development - (potentially: innovation or education policy) Countries, using it as source of economic development: South-Korea, Taiwan and China - leveraged export-led strategy Note: China is world's largest goods exporter, followed by the USA and then Germany (2019) (+ UK – big service exporter) Different sources of global competitiveness become evident in East Asia, which benefits mainly from a great labor force or India, that is big in the technology segment or countries with natural resources. Global competitiveness (relative to EUNAM) Criteria: reliable institutions, infrastructure, macroeconomic stability, innovation access to health care, education, functioning of product-, labor-, and financial markets Countries (relative to EUNAM): East Asia & Pacific: weakness - human capital pillars health and skills Europe & Central Asia: weakness - innovation capability, financial system, and market size South Asia: strengths - market size ; weaknesses - ICT adoption and innovation capability Middle East & North Africa: weakness - innovation capability Sub-Saharan Africa: weakness - ICT adoption and innovation capability Latin America & Caribbean: strengths: market size and much better on health and financial system Reliance on external financing for infrastructure development China’s involvement in Africa (China overtook the US as Africa’s largest trading partner) - Examples: Kenya’s main railway, Mega-port and a SEZ in Tanzania Key Term: Belt and Road Initiative (BRI)  - Problems: Can lead to dept dependency (highly vulnerable to debt distress), reduced autonomy, or regime instability, requires long-term investments (see: Chinese-built Tazara train station) - !! Risk for African borrowers should match project’s profitability Tutorial 2 – Economic Growth Issues with industrialisation policies Special Economic Zones (SEZs): Tool for promoting economic development Aim to attract investment, create jobs, improve infrastructure, promote exports, and enable skill and technology transfer, Synergies & Spillover effects (when productive SEZs necessitate investments in improved infrastructure (positive changes in structural development indicators) Risks: Relaxation of certain regulations = illicit activities at lower risk (e.g. faking brands, money laundering, general smuggling) Becomes known for criminal attractivity = less attractivity to firms Examples: Shenzhen, China; Southern Italy (simplified administrative procedures and reduced charges, tax credit) Improvement in infrastructure is presented as a public good that offsets the public costs associated with SEZs (e.g. tax concessions, preferential access to water and electricity and displacement of people) (= not simply land grabs but should act as catalysts for local growth) Types of SEZS: Free-Trade Zone, Export Processing Zone, Industrial Park, Specialized Zone Reasons for failure of the SEZ policy (India (also Nigeria)) - Alternative electoral strategies yield a higher payoff (more cost-effective) compared to broad-based developmental initiatives like successful SEZs - Incumbency disadvantage harms long-term growth plans as present politicians will likely not be elected again -State-owned development corporations, designed to facilitate industrialization and growth, have become tools for corrupt land deals (acquiring land for SEZs, often for real estate speculation rather than actual development) (mostly regional governments > decentralized) Factors hindering growth and sustained development (World Bank) - Lack of adequate infrastructure outside SEZs - Bureaucratic inefficiencies deter investors - Lack of skilled labor Efficient implementation:  - Strengthening Governance and Transparency - Focusing on linkages with domestic firms - Investing in infrastructure & skill development (China: Incentives to prioritize GDP growth and development to secure promotions India: Political and economic incentive structures, motivating local politicians to prioritize rent extraction over long-term growth and development) Chaebol system (Close collaboration between state and family-controlled conglomerates) – A necessary evil or unintended consequence of South Korea’s industrial policy? Key driver of rapid economic transformation following the Korean War Government (Park Chung-hee) heavily supported the growth of these companies through subsidies, loans, and tax incentives Unintended consequence? - Government's initial support solely aimed to rebuild the economy after the war - Chaebols' rapid growth and diversification, coupled with their political clout, allowed them to amass significant power and influence Positive Impact: Resulted in industrial development and contributed to a substantial rise in wages and living standards Key Problems: Limited employment opportunities: Chaebols account for a disproportionate share of market capitalization but employ only a small percentage of workforce > wage gap between large and small firms (Stifles entrepreneurship) Perpetuation of education arms race: Parents have to invest heavily in private education (disadvantages low-income students, widens wealth gap) Exacerbation of the housing crisis: Chaebols' involvement in construction and land speculation > skyrocketing real estate prices Undermining of democracy: Chaebols' immense lobbying power & involvement in corruption undermine South Korea's democracy Tutorial 3 – Poverty and inequalities Remember: Since the 80s income inequality in China and India is rising significantly The majority of the poorest now live in Sub-Saharan Africa (Formerly: East then South Asia) National Poverty Line (individually chosen by each country) Gini coefficient: Benchmarks: ( attracts and retains talent from abroad Concerns about pressure to publish and constraints on free speech (could hinder unorthodox thinking and limit progress) Recommendation (World Bank): Strengthen human capital in Africa (through investments in health, education, social protection, and jobs) Tutorial 9 – Education Issues with youth unemployment and educational mismatch Youth unemployment trends High- vs. Low- and Middle-Income Countries: Youth in HI countries benefit from tertiary education In LMI countries the informal sector dominates > limited access to quality jobs (e.g. Sub-Saharan Africa - highest youth NEET rate + gender inequality) Causes: Demographic Factors (high influx of youth) Weak economic growth (lack of employment opportunities) Mismatched education and actual demand Overeducation: higher education levels than required for their jobs Overskilling: higher skills than required for their jobs Policies: Ensuring primary and secondary school completion Vocational Education (VET) (smoothen school-to-work transition) Problem: stigmatization of students pursuing vocational track Matching higher education with job creation Tutorial 10 – Population Dynamics and health Non-linear relationship between income per capita and health outcomes  Pattern of diminishing returns: Gains in life expectancy for every additional dollar spent on healthcare decrease as healthcare expenditure rise (> as richer countries can allocate more “public resources” to healthcare) Biggest improvements are seen in countries with initially low spending levels Growing Population – Hindering or boosting development? Issues and opportunities for countries in demographic transition Opportunities: Population growth leads to technological change (Kremer, 1993: More people = more geniuses, scientists & engineers) Population growth (e.g. through migration) can solve labor market constraints or mismatch > increase potential GDP Bargaining Power (& “Trade importance”) Greater demand > could lead to innovation Larger Workforce > economic growth (not necessarily) Issues: Resource Depletion (> tensions) Pressure on environment Difficulty of policy implementation If employment is not adjusted > unemployment, rising informal sector Empirics: From a neutral relation in the 60s to a negative relation since the 80 After WW2: reduction in mortality rates and sustained economic growth After 1973: continuing improvements in mortality and stagnant growth; budget constraints to family size Malthusian view (against population growth) Key takeaway: Negative association of population growth and development In a fixed q of land, population growth will eventually reduce number of resources per individual > disease, starvation, war omits implications of technological process - An increase in people’s income would encourage them to marry earlier - Higher fertility results from unavailable contraception Mechanisms between women’s low status & lack of decision making power in son- preference societies: Importance of family planning development initiatives “development ‘best buy’” Helping across all 5 (SDG) themes Saves money in maternal and newborn healthcare How do population dynamics change along development phases and why? (Most EMs are at stage 2 or mostly 3) Stage 1: Pre-Industrial Society High birth rates > agricultural labor needs, lack of family planning, cultural norms High death rates > poor healthcare, famine, diseases, and lack of sanitation Stage 2: Early Industrialization (Rapid Population Growth) Death rates decline > improved medical care, sanitation, and food supply High birth rates > cultural inertia and lack of contraception Stage 3: Late Industrialization (Slowing Growth)  Birth rates decline > urbanization (economic shifts - less reliance on children for labor), improved education (especially for women), family planning Stage 4: Post-Industrial Society (Stable Population) Birth rates decline to match low death rates - Economic prosperity, higher living costs, delayed family planning, widespread contraception reduce family size Stage 5: Declining Population (Possible Negative Growth) Aging societies with low fertility rates > shrinking populations Economic challenges (e.g. fewer workers) & social norms (small families) Health improvements → Reduce mortality. Urbanization and education → Lower fertility. Economic changes → Families rely less on children for labor Tutorial 11 – Population Dynamics and health Issues with population ageing Demographic dividend: if share working age > world share Reverse dividend: if share working age < world share Income per capital rises if share of working age population is high. Issues related to population aging: LMICs: Strains weak formal health system (burden for families), less working family members make care giving less feasible HICs: Concerns about sustainability of pension systems and how to finance health and long- term care (mostly overblown) China's one-child policy > shrinking population Economic decline as share of working population decreased Now: subsidies to promote births (e.g. Yichun) Policies: Mitigate the effects of population ageing on economic performance and health Fertility policies (e.g.subsidies for families) Education policies (increase the human capital of a shrinking labor force) Labour policies (increase labor participation (of women)) Health policies (dealing with higher demand for health care; increase age in good health) Pension reform