MICRO FINANCE QUIZ 1 Review
The 4 Traps:
1. Conflict
Causes
Low income
Slow growth, stagnation, or even decline
Dependence on primary commodity exports (oil, diamonds)
Geography (huge with dispersed population, mountainous, Nepal is a good example)
Prior history
Costs/Consequences
Lasts more than 5 years, on average
15% poorer
Military spending - $64 billion
Social costs:
Deaths
Diseases
Deterioration in political rights
Legacy of organized killing - cheap guns, number of homicides
Refugees → costs beyond frontiers (epidemics, rape)
Solutions/Why should international actors intervene
One possible solution is democracy, but it does NOT reduce risk of civil war or coups
Only remaining solution is increased growth, but economies are stuck
Need external help
2. Natural Resource
Causes
The surplus from natural resource exports reduces growth because of rents (=excess of revenues over all costs including normal profit margins)
Economic explanation: Dutch Disease (relationship between the increase in the economic development of natural resources and a decline in the manufacturing or agricultural sector)
Political science explanation: resource rents make democracy malfunction and even worse, make resource-rich democracies underinvest
Costs/Consequences
Misuse of rents through patronage, bribing
Lack of tax
No competitive bidding
Solutions
Restraints (or checks and balances, the 2nd component of democracy, the 1st one being elections)
Data shows that free press increases growth rate in natural resource rich countries
However, checks and balances are a public good in nobody’s economic interest to supply
Need external help
3. Landlocked with Bad Neighbors
Causes
Geography: 38% of the Bottom Billion is landlocked
Worsening factor: Resource-scarce countries (=30% of Africa: e.g., Central African Republic, Burkina Faso)
Also depends on neighbor’s growth and whether they are stuck in another of the growth traps
Costs/Consequences
Transport costs: Dependent on coastal neighbor’s transport infrastructure →
1. Conflict
Causes
Low income
Slow growth, stagnation, or even decline
Dependence on primary commodity exports (oil, diamonds)
Geography (huge with dispersed population, mountainous, Nepal is a good example)
Prior history
Costs/Consequences
Lasts more than 5 years, on average
15% poorer
Military spending - $64 billion
Social costs:
Deaths
Diseases
Deterioration in political rights
Legacy of organized killing - cheap guns, number of homicides
Refugees → costs beyond frontiers (epidemics, rape)
Solutions/Why should international actors intervene
One possible solution is democracy, but it does NOT reduce risk of civil war or coups
Only remaining solution is increased growth, but economies are stuck
Need external help
2. Natural Resource
Causes
The surplus from natural resource exports reduces growth because of rents (=excess of revenues over all costs including normal profit margins)
Economic explanation: Dutch Disease (relationship between the increase in the economic development of natural resources and a decline in the manufacturing or agricultural sector)
Political science explanation: resource rents make democracy malfunction and even worse, make resource-rich democracies underinvest
Costs/Consequences
Misuse of rents through patronage, bribing
Lack of tax
No competitive bidding
Solutions
Restraints (or checks and balances, the 2nd component of democracy, the 1st one being elections)
Data shows that free press increases growth rate in natural resource rich countries
However, checks and balances are a public good in nobody’s economic interest to supply
Need external help
3. Landlocked with Bad Neighbors
Causes
Geography: 38% of the Bottom Billion is landlocked
Worsening factor: Resource-scarce countries (=30% of Africa: e.g., Central African Republic, Burkina Faso)
Also depends on neighbor’s growth and whether they are stuck in another of the growth traps
Costs/Consequences
Transport costs: Dependent on coastal neighbor’s transport infrastructure →