To what extent is P.P.D a constraint on economic growth & development in developing countries?

To what extent is P.P.D a constraint on economic growth & development in developing countries?

1. Primary Product Dependency

   • A Nation that relies on the export of 1 or 2 primary products for the majority of its FOREX earnings, leaving it vulnerable to fluctuating world prices
   • Primary Products can be divided into hard commodities
     • Copper
     • Tin
     • Iron
   • Soft Commodities
     • Agricultural Crops: Wheat, Palm Oil, Rice and Fruit

2. Issues w/ PPD

   • Price Fluctuations
     • Given thier PES and PED, any demand-side or supply-side shock will result in a significant price change
   • Fluctuations in producers' incomes and foreign exchange earnings
     • since demand in price inelastic, then a fall in price will cause total revenue to fall and in turn, the foreign currency earning from exports to fall
   • Difficulty of planning investment & output
     • the price fluctuations cause uncertainty which is a detterent to investment.
   • Natural Disasters
     • extreme weather such as hurricanes, tornadoes, droughts and tsunamis can cause severe distruption to production of primary products, especially agricultural products
   • Protectionism by developed countries
     • EX: The huge subsidies given to US cotton farmers have created great difficulties for Indian cotton farmers, who are unable to compete; the EU's Common Agricultiral Poliy has meant that there is no free acess to European markets for food from developing ocuntries.
   • Low YED for Primary Products
     • Prebisch Singer Hypothesis states that terms of trade between primary products and manufactured goods tend to detiriorate over time

3. Evaluation

   • Less Economically Developed Countries (LEDCs) have comparative advantage in primary products
   • Demand may be income elastic
     • Diamonds (Botswana)
     • Oil (Nigeria)
     • Gold (Ghana)
   • Sustainability
     • i.e. in the L-run if resources are non-renewable, economic growth in unlikely to be sustainable
   • Eval. for Prebisch-Singer
     • Some countries have developed on the basis of their primary products, ex. Botswana w/ their diamonds
     • if a developing country has a comparative advantage in a primary product then its resources will be used more efficiently by specialising in the production of that product
     • Primary product prices rose sharply until mid 2008 while the prices of manufactured goods were falling