Lesson video

Hello, geographers.

My name is Mrs. Griffiths, and today's lesson is all about strategies to reduce the development gap.

I'm talking about the development gap, the economic gap between higher and lower-income countries.

So two possible strategies are industrialization as well as foreign direct investment.

And we're gonna look at those strategies at different scales and think about what that impact might be.

Should we make a start? Okay, so our outcome for today, I hope you can say this by the end of the lesson, is I can explain how industry and investment strategies reduce the global development gap.

So that's the plan.

That's what we're trying to do today.

We've got some keywords.

Okay, so here's the first one, development gap: the widening difference in standards of living and wellbeing between the world's richest and poorest countries.

Manufacturing industries, this is the secondary economic sector and involves making goods from raw materials or other manufactured products, for example, motor vehicles.

Service industries, this is the tertiary economic sector, which includes tourism, banking, education, and health.

Microfinance, the provision of small-scale loans to people in lower-income countries to help them start a small business.

So already we can see that we are looking at investment at different scales.

Okay, so how does our lesson break down today? Our first section is trying to answer this question, can new industries help to reduce the development gap? And then secondly, we'll look at how can investment support economic growth.

Okay, so let's get started on that first question.

Now, if we look at this range of houses, perhaps as a proxy indicator for wealth and perhaps quality of life around the world, in the 20th century, there is a widening difference in standard of living and wellbeing between the world's economically richest and poorest countries.

So some really different housing there, and we can imagine the difference in quality of life.

How can we reduce this development gap? Well, there are various strategies that exist to address the development gap.

One of these is industry.

And we have an image here of a vast factory on the island of Java in Indonesia, which employs hundreds of workers manufacturing goods for export.

Industrialization is a process, a key process for us in this lesson.

It's the transition from a mainly agricultural society to one that depends on manufacturing industries.

And it's fair to say that Indonesia is industrialising.

A transnational corporation, we might refer to that as a TNC, is a company that has operations in more than one country.

Depending on the type of industry, a TNC might operate in some or all of the following aspects of production.

So we've got factories, offices, shops, research and development laboratories.

But most TNCs that sell goods are very large companies.

So we're talking about production on a large scale, and they often have famous brand names.

And Andeep is absolutely right when he says that, for example, when we think about branded goods, we're thinking about perhaps clothing brands or technology brands.

Think about the brand of your phone.

These are all TNCs.

Now Alex asks, "Why do TNCs have operations in more than one country? That sounds complicated and could cost more." Well, in fact, a TNC having its headquarters in one country, for example, a high-income country, but manufacturing products in another country which is low income or a newly-emerging economy, can have a number of economic benefits for the company.

Let's have a look at those.

So firstly, wages are lower in newly-emerging economies and lower-income countries.

So the company would be saving on its wage bill.

Taxes may be lower in those countries also.

And by locating the factories of the place of production actually in these other countries, that might give access to new markets so they can sell to more people.

So the comment here is absolutely right.

TNCs make more profit by locating their factories abroad, not less.

If we think about our title of our learning cycle here, we've got can new industries help to reduce the development gaps? So let's think about that specifically.

What might be the impact of TNCs putting their production elsewhere? So here we have TNCs headquartered in high-income countries but relocating factories to reduce labour costs.

What's the impact of that? Well, the knock-on impact of that is a positive one in the sense that skills and technology are transferred to the workforce in NEEs and LICs.

Now, as a result, manufacturing industries producing export-led growth can really boost the economy.

And you can imagine with that skills transfer, you have not only the factories of the TNCs producing for export, but eventually you have homegrown industries, homegrown businesses.

So the rapid growth of NEEs in the late 20th century and the early 21st century has shown how the development of manufacturing industries can reduce the development gap.

For example, if we think about the Asian Tigers, which is a nickname if you like, for countries that were growing very rapidly in the late 20th century, those include Hong Kong, Singapore, South Korea, and Taiwan.

In the 21st century we have the BRICS, which is an acronym for Brazil, Russia, India, China, and South Africa.

These have all shown rapid growth in terms of their economy, growing in size as a result of industrialization.

So let's have a look then at one specific country.

Here we have South Korea.

And we have a graph here which is showing us the breakdown of the workforce by percentage split into three sectors.

So those workers that are in agriculture, those workers that are working in the manufacturing sector, and those that work in the service industry or the tertiary industry.

And we've got how that split of the workforce has changed between 1991 and 2022.

In the 1960s, '70s and '80s, South Korea's manufacturing industries were rapidly being developed because they were being backed by the government.

And so that's a period of time that isn't featuring on our graph, but is a period of time where the workforce was switching from agriculture to manufacturing.

Here we're looking at South Korea over a period of time where the transition of the economy is at a relatively mature stage.

So much of that industrialization has already taken place.

So today South Korea is a high-income country with most people working in, I'm sure you spotted, service industries.

So its economy has been transformed.

And this comment here, South Korea's music industry is a big earner.

Yeah, that's absolutely right.

And that is a service industry.

Perhaps you are into K-Pop.

Now if we compare that with China, we've got the same graph here in terms of breaking down the workforce by percentage over those three sectors.

We can see that China, over the same period, is a little further behind South Korea in terms of its industrialization.

So the investment in manufacturing industry and the switching to manufacturing industry for export was taking place perhaps in the late 1970s and the 1980s initially.

Today, China is a newly emerging economy.

It has the world's second largest economy after the USA, so a vast producer of goods.

As I say, the process of industrialization, sorry, began later in South Korea, than in South Korea.

Slightly, slightly behind it.

But attracted by China's low wages and low-tax zones, TNCs have chosen to manufacture goods there for export.

So when I say low-tax zones, I'm talking about export processing zones that were created by the government, and they were set up as low-tax zones as an incentive to get TNCs to relocate there.

Today, China's nickname is factory of the world.

And I'm sure if you looked at the labels on your clothes or some of the goods you have at home, they might well say Made in China.

Check for you here then.

Can you use the graph to decide which of the following statements are true about China's economy? I'm gonna let you read those and make a decision.

And then, so if you pause the video and then restart it when you are ready to hear the answer.

And if you said, well, A and B are correct, you'd be absolutely right.

The share of people employed in manufacturing industries has increased over time in China.

And in 2022 most people worked in service industries.

Second check for you here.

Can you put these statements in the correct order to show how manufacturing goods to trade can reduce the development gap? So again, I'm gonna give you a chance to read those through and put them in order.

Replay the video when you are ready to check your answer.

And the correct answer is C, B, A: TNCs headquartered in HICs relocate factories to reduce labour costs.

This has the impact of skills and technology transfer.

And as a result, a wide range of manufacturing industries are able to produce export-led growth of the economy.

And that's how countries are closing the economic development gap.

Service industries, we've mentioned these already, these form the tertiary economic sector.

So if we're talking about manufacturing, that's the secondary economic sector.

Service industry's the tertiary economic sector.

What's involved? Well, we've got retail, we've got the financial sector, that's banking.

We've got professional people, lawyers and teachers, they work in the service industries.

We've got the social services like schools and hospitals.

We've got entertainment services like working in a restaurant or running a cinema.

And we've got personal services like hairdressing.

And I'm sure you know someone who works in the service industry.

Tourism is an example of a service industry.

So hotel employees, restaurant workers and tour guides all work in the tertiary sector.

Now it's true that some lower-income countries have benefited from economic growth associated with tourism.

Maybe you can think of some examples.

I've got some examples for you here, which are St.

Lucia, which is a Caribbean island nation, a popular holiday destination.

We've got Antigua and Barbuda, one of the smallest Caribbean countries but hosts giant cruise trip ships.

And we also have the Maldives, this time in the Indian Ocean, which is a more than a thousand coral islands.

Luxury tourism is the way it's developed.

Do you think looking at those countries then, is tourism an economic opportunity for all low-income countries? Well, I'm sure you notice that these are all coastal locations.

And I'm not saying that only low-income countries with coastal locations have used tourism to develop, but it's certain that they have key aspects of their physical geography in common.

These include exotic vegetation, a warm tropical climate, and beautiful landscapes.

It's also true that 6 of the top 10 countries that are most reliant on tourism are island nations.

So having a beautiful coastline can help.

And 8 of the top 10 countries with the largest share of their population employed in tourism are actually in the Caribbean, so perhaps close to North America and a big market of tourists.

Let's have a look at the Maldives 'cause that's a slightly different case.

It's in the Indian Ocean, but a lot of people in the Maldives depend on tourism.

What do you notice about this line graph? So we've got a graph of change in GDP per capita over time.

We're looking at the period from 1990 to 2023.

Have a look at that.

I'm sure you spotted that gross domestic product per capita reduced significantly 2020 to 2021.

Why is that? That's right, COVID-19 lockdowns and travel bans meant few people could holiday in these remote islands at this time, and it had a big impact on the Maldives and their economy.

By 2022, so we have a bounce back here, tourism provided 68% of the Maldives' GDP.

Like St.

Lucia and Antigua and Barbuda, it is now a high-income country.

So we can see that tourism's been a good strategy for these countries to develop, but also being so development, so dependent, sorry, on a single industry can have its downsides.

Another downside is that not all profits from tourism stay in the Maldives.

And if we have transnational corporations that perhaps own hotels in the Maldives, we get the leakage of profits back to perhaps those European countries, those North American countries where the TNC is based.

Check for you then.

Tourism is a service industry.

Is that true or false? And remember I'm going to need you to tell me why.

That's right.

It's true.

But what did you say in terms of why? Well, hotel guides, restaurant staff, and tour guides provide a service to visitors.

I have another check for you here.

True or false, the tourist industry has benefited small island nations? Do you think that's true or false, and why? And if you said true, you'd be absolutely right.

What was your explanation of why? Well, here we have the idea that St.

Lucia, Antigua and Barbuda and the Maldives are all high-income countries today having benefited from economic growth linked to tourism.

Though not all of the profits made from tourist visits stay local, one thing to remember about tourism.

Okay, so I've got some practise tasks for you here.

Let's just read them through together, and then I'm gonna give you time to get on with them.

So question one says, "Complete the table below to show the percentage of people working in the three different sectors of these two industries." So we've got China, we've got South Korea at different dates.

So we're looking at 1991 and 2022.

So we can see we've got this table and we have some gaps.

So the task is to fill in the gaps.

And clearly, agriculture, manufacturing and service employment must add up to 100% of the workforce.

So a hint there about what you've got to do.

Our second question is can you describe how employment has changed in China? Then I'm gonna ask you to rewrite the following sentence using the correct geographical terms from this lesson.

So we have the sentence, "New jobs making things to sell for elsewhere can make more money.

This helps poor countries get richer and catch up." Now that's all true, but I think we can rephrase that to make it sound a bit more geographical.

Then lastly, I'd like you to explain why tourism may not be a useful strategy for reducing the development gap in all low-income countries.

So we got four things to do there.

I'm gonna give you a chance to pause the video now and then restart it when you want to check your answers.

Good luck.

Okay, so how did we get on? Let's have a look at our first question.

We had to complete the table below to show the percentages of people working in the three different sectors.

And our answer here looks at China in 1991.

How did we make that calculation in terms of the percentage of people working in the service industry? So if we know that all three agriculture, manufacturing, services will add up to 100%, then what we do is we take 100.

Well, we don't do that first, of course, we're gonna start with the brackets.

What we're gonna do is add 59.

7 to 21.

4.

And the sum of those we are going to subtract from 100 to get the result 18.

9.

So that's the percentage of people that were working in the service industry in 1991.

And that's how we calculated those four different answers.

Well done if you've got those right.

Then question two, we were asked to describe how employment has changed in China.

So your answer might look like this.

"The percentage of people in China employed in manufacturing industries increased from 1991 to 2022.

So by 2022, they employed 10.

8% more of the working population.

Employment in service industries also increased while the share of people working in agriculture more than halved." What I like about that answer is we've actually got some real data use.

So we've got the 10.

8% more working in manufacturing industries.

And we've also done a calculation there, haven't we? We've actually calculated how much smaller the percentage is of people working in our culture in that change between 1991 and 2022.

So great answer there.

I'm sure your answer was as good.

Question three, we had to rewrite this sentence.

What did you have? This is what we had.

So we transformed it into creating jobs in manufacturing industries to produce goods for export can boost a country's income.

This helps to reduce the development gap between high-income countries and low-income countries.

So using some of the key terms from the lesson.

Well done if you've managed that.

And then our last question, this was a tricky one, wasn't it? Explain why tourism may not be a useful strategy for reducing the development gap in all low-income countries.

So this is what we had.

Let's read it through.

"A lot of countries that have benefited from the growth of tourism are island nations, many of which are in the Caribbean.

This is because they have a tropical climate and scenic coastal landscapes attracting wealthy visitors from across North America.

Not all low-income countries benefit from the same physical geography.

The Maldives is an island nation in the Indian Ocean, which has benefited from the growth of luxury tourism and is now a high-income country.

However, being so remote, it is very exposed to any disruption to long-haul travel.

This was clear in 2021 at the time of the COVID-19 pandemic.

So the Maldives may need other industries to rely upon in future." Okay, so that was our first part of the lesson, and I want to now look at this question, how can investment support economic growth? Let's dive in.

When TNCs invest in manufacturing facilities outside the country they are headquartered in, this is called foreign direct investment.

So we've got our image here of the factory again.

And of course, the place where the new or expanded factory is located as a result of foreign direct investment will benefit in a range of ways, and this is called the multiplier effect.

So let's think about what that might look like.

Maybe you have an idea already what is involved in the multiplier effect.

Now I have a diagram up here.

I'm gonna build up stage by stage, but imagine the title is foreign direct investment and the multiplier effect.

So we've got our TNC, and it decides to buy a company in a low-income country or a newly-emerging economy.

This factory creates new jobs and local suppliers recruit also.

So lots of jobs created in the factory, but also suppliers to the factory can recruit new workers too.

This means that local people have higher incomes because they've got these new jobs.

The knock-on impact of that is that service industries in the area, for example, shops benefit as those wages are being spent in the local area.

And that feeds back into the fact that more people have higher incomes because those people that work in the shops, they're benefiting too.

And also let's not forget that not only the factory owners, but those local people that are working in the factory but in the services are paying tax to the government in the area.

And the government therefore has more tax money that it can spend in infrastructure in the area.

Now developing new roads or perhaps broadband infrastructure for the internet means that this improved infrastructure might attract more TNCs to an area.

So what we have is a virtuous circle known as the multiplier effect where things just get better.

Here's a variant of this diagram, so I've just changed the title.

It says foreign direct investment has fewer benefits for the host in low-tax zones.

Now can you spot the difference? What's actually happened is in this low-tax zone, the factory owners are not paying tax to the government.

But we still have local people with higher incomes, they're paying tax, and we still have local services.

They might be paying some tax, but there's slightly less tax revenue that the government can spend on improved infrastructure.

So a slight variant on the multiplier effect there.

So check for you here.

We have our diagram of the multiplier effect.

And I have three labels that are missing: A, B, and C.

Can you have a look at them and decide what my labels are? I'm gonna give you a minute or two to think about that and then restart the video.

Okay, how did you get on? If you said A was taxes, you'd be absolutely right.

Against our dotted red line, we have missing taxes.

So in a low-tax zone, we might find that the TNCs are actually not being charged tax just to attract them to locate in that area.

And then C was improved infrastructure leading to further foreign direct investment.

So we have that slightly amended version of the multiplier effect there.

Well done.

Right, does investment always have to be a kind of macro scale? Does it have to be really large amount of money that's being invested in one company? Well, I would say not.

So microfinance is the provision of small-scale loans to people in low income countries to start or develop a small business.

And here we've got the example of a woman who's working at a sewing machine.

So perhaps she would like to start a tailoring business.

She's a would-be entrepreneur who needs a loan to purchase essential equipment for that business.

So microfinance are loans from specialist community banks.

And we have our example here, which is Grameen Bank in Bangladesh, very famous microfinance institution.

The loans are borrowed by low-income individuals who might not otherwise access funds.

And those recipients not only get the loan, but they also get some training around financial literacy because, of course, the loans have to be paid back, which has wider benefits in terms of, for example, managing the family budget.

It's also true that microfinance is a tool for the empowerment of women in low-income countries.

'Cause if we look at the example of Grameen Bank by 2022, 97% of the people who were borrowing from the bank, and those were a large number of people, so 9.

5 million borrowers, 97% of those were women.

So let's have a look at our systems diagram to think about what impact that might have.

I've given the example of a tailoring business, but we also have here agriculture 'cause microfinance can benefit people working in agriculture.

So here we have our bank specialising in microfinance loans, and that's provided to a farmer to invest in their farm.

They might buy seeds, they might buy livestock.

Here we've got our example of the goat.

Perhaps they're buying a herd of goats.

What happens is when subsistence farmers perhaps get that investment and can produce more produce than the family can consume, that's the surplus is gonna be sold at market.

As a result, they can over time repay the loan but also keep some profit, which could be spent on things like medical bills or school bills for the family.

Now of course, that has a positive impact on the family's prospects because they have better health, so they're more likely to be able to work on the farm and better skills which then perhaps they can apply to their agriculture.

And that feeds back in terms of kind of human investment in the farm, creating, again, perhaps a virtuous circle.

Check for you here.

That was our diagram showing the impact of microfinance loans on agriculture.

But can you fill in the gap in this diagram showing how microfinance loans help low-income farmers? What should be in that gap? That's right, it was the surplus produce which is sold at market, which helps the farmer repay the loan but also provides profit that might be spent on their family.

Well done.

True or false, second check here, only large-scale investments can help to reduce the development gap? Is that true or false? And remember, I need you to tell me why.

That's right, it's false.

And why was that? Our answer here is that Grameen Bank in Bangladesh has millions of borrowers that have benefited from microfinance loans, which enabled them to improve their income and invest in better healthcare and schooling for their family and the future.

So actually big numbers of small loans.

Okay, we have a practise task here now.

Alex and Andeep have different views about which investment strategy is most effective at reducing the development gap.

I'd like you to discuss these views with a partner, thinking about who you agree with, who you don't agree with, perhaps what are the pros and cons of their arguments.

So I'm gonna let you read their arguments, and I'm gonna let you discuss 'em with your partner.

Can you pause the video now, and then come back to me when you are ready to check your answers? Okay, how did you get on? So Alex and Andeep had different views about investment, didn't they? One thinking that microfinance loans, I believe that was Andeep, were the way to go.

And Alex suggesting that investment by TNCs would be larger scale and therefore more effective.

So I guess the pros and cons of these different strategies are as follows: microfinance loans can be targeted at the poorest, they empower women, and they improve financial literacy.

But I suppose the downside might be that they can be limited in scale and repayment is needed.

So what impact might that have on the poorest if in fact they fall into debt? Alex's argument was that investment by TNCs was the way to go.

And clearly, if you build a new factory, it's creating many jobs, so it's helping people at scale.

But I suppose the downside of investment by TNCs is often they're attracted to an area by the government making compromises, for example, creating low-tax zones.

And that might limit the kind of positive impact that all that industry has on the local area.

For example, if the government doesn't collect many taxes, can they repair the roads? So we've got some pros and cons of the two investment strategies.

One at a large scale, one at a smaller scale.

Did that chime with what you thought? Well, well done for having a go.

Let's just summarise what we've looked at this lesson.

So there are various strategies that exist to reduce the development gap between low-income countries and high-income countries.

The creation of manufacturing industries helps to reduce the gap.

New service industries also, for example, tourism can contribute to economic development of low-income countries.

Though it's worth remembering that not all profits stay local.

Foreign direct investment, FDI, by TNCs can promote economic growth via the multiplier effect.

However, low-tax zones can mean benefits to the local area are more limited.

Microfinance loans enable people on low incomes to set up or develop a small business to better support their family.

But of course, those must be repaid.

So we've covered quite a lot this lesson.

Thank you for all your contributions and taking part, and I look forward to hearing from you soon.