Poverty, the state and development

Pearson Edexcel International A Level Economics (WEC14), specification Issue 2, June 2018. This topic covers spec sections 4.3.4–4.3.6 in full: poverty and inequality (two rows); the role of the state in the macroeconomy — public expenditure, taxation, borrowing and macroeconomic policy (four rows); and growth and development measures, constraints and strategies (four rows). All worked numbers are original and re-derived below.

Must-know for this topic:

Absolute poverty 绝对贫困 is inability to meet basic needs. The World Bank's international extreme-poverty line was updated in June 2025 to 3.00 international dollars per person per day, measured at 2021 purchasing-power parity. State the line, PPP basis and reference date when comparing estimates. Relative poverty 相对贫困 is deprivation against the society's norm, often measured using a stated share of median household income (4.3.4.1a–b). Reference: World Bank poverty-line update. Causes of changes in both (4.3.4.1c): economic growth (can reduce absolute poverty, depending on its distribution), education and training, welfare benefits 福利, tax-structure changes, structural change 结构性变化 (industrial decline deepens relative poverty in left-behind regions), aid, and civil wars and conflict.

Wealth inequality 财富不平等 concerns the stock of assets; income inequality 收入不平等 the flow of earnings (4.3.4.2a). Measurement (4.3.4.2b): the Lorenz curve 洛伦兹曲线 plots cumulative income against cumulative population from the poorest up; the Gini coefficient 基尼系数 is the area between the equality line and the Lorenz curve divided by the whole triangle beneath the equality line — equivalently $1 - 2 \times$ (area under the Lorenz as a share of the square). Original example: quintile shares 5, 10, 15, 20 and 50 percent give a Lorenz curve over (0,0), (20,5), (40,15), (60,30), (80,50), (100,100); the area under it is $50 + 200 + 450 + 800 + 1500 = 3000$ of the 10000 square, so Gini $= 1 - 2 \times 0.30 = 0.40$ — a fairly unequal distribution. Causes of inequality (4.3.4.2c): within countries — wages and skills, wealth-holding, inheritance 继承, globalisation's skill premium; between countries — growth histories, institutions and geography. Its impacts (4.3.4.2d): enterprise and incentives may suffer at the extremes; savings concentration; unequal education; migration incentives; life expectancy 预期寿命 gaps. Development and economic change first WIDEN inequality (industrialisation) then can narrow it (4.3.4.2e); free-market capitalism generates inequality by rewarding scarce skills and capital — the price of its incentives (4.3.4.2f).

Public expenditure divides into CAPITAL expenditure (assets), CURRENT expenditure (running costs) and transfer payments 转移支付 (benefits, no output received) (4.3.5.1a); its size and pattern change with incomes, age distributions and expectations in an international context (4.3.5.1b); its GDP share matters for productivity and growth, crowding out 挤出效应, and the tax level (4.3.5.1c).

Taxes (4.3.5.2a–b): DIRECT on income and wealth (income tax, corporation tax) versus INDIRECT on spending (VAT, excise); progressive 累进 (average rate rises with income), proportional 比例 (flat), regressive 累退 (average rate falls). Original example: taxes of 1k, 8k and 30k on incomes of 10k, 40k and 100k are progressive (average rates 10, 20, 30 percent); a flat 25 percent is proportional; a 5k charge on everyone is sharply regressive (50 against 5 percent). The effects of tax changes (4.3.5.2c) run through work incentives, revenue (the Laffer curve 拉弗曲线: revenue $= t(1-t) \times 400$ peaks at 100 when $t = 50\%$ — beyond it, avoidance and shrinking activity cut revenue), income distribution, output and employment, the price level, the trade balance and FDI.

Public borrowing (4.3.5.3a): a fiscal deficit 财政赤字 is one year's shortfall; the national debt 国债 is the accumulated stock. Automatic stabilisers 自动稳定器 move the budget with the cycle without policy change; discretionary 相机抉择 policy is a chosen change. A STRUCTURAL deficit persists at full employment; a CYCLICAL deficit exists only because output is below trend. Deficit and debt sizes (4.3.5.3b) follow the cycle, recessions, banking rescues and demography; their significance (4.3.5.3c): interest rates and crowding out, DEBT SERVICING costs, and intergenerational equity 代际公平 — today's borrowing is tomorrow's taxpayers' bill.

Governments combine FISCAL policy, MONETARY policy, EXCHANGE-RATE policy, SUPPLY-SIDE policies and direct controls 直接管制 to reduce deficits and debt, control inflation, respond to external shocks and cut poverty and inequality (4.3.5.4a) — the 2008 global financial crisis saw worldwide reflationary demand-side responses: bank rescues, near-zero interest rates and quantitative easing (4.3.5.4b). TNCs are controlled by anti-avoidance rules and TRANSFER-PRICING regulation — with limits: footloose firms relocate (4.3.5.4c). Policy changes ripple across local, national and global economies (4.3.5.4d); policymakers face inaccurate information, risks and uncertainties, and uncontrollable external shocks (4.3.5.4e).

Development is broader than growth. The Human Development Index 人类发展指数 (HDI, 4.3.6.1a) combines three components, each measured as an index between 0 and 1: EDUCATION (mean and expected years of schooling), HEALTH (life expectancy at birth) and INCOME (GNI per capita 人均国民总收入, PPP, log-scaled), combined by geometric mean. Advantages: broader than GDP, comparable, capped; limitations: hides distribution, omits freedom, environment and gender gaps (4.3.6.1b). Other measures (4.3.6.1c): the share of adult male labour in agriculture, clean-water access, energy per capita, internet, mobile-phone and doctor access per thousand.

Constraints (4.3.6.2): ECONOMIC — commodity-price volatility, primary product dependency 初级产品依赖 (the Prebisch–Singer hypothesis: primary prices trend down against manufactures), the savings gap 储蓄缺口 (the Harrod–Domar model: growth needs the savings ratio ÷ the capital–output ratio, and poor economies save too little), the foreign-currency gap, capital flight 资本外逃, demography, debt, credit access, infrastructure, education and skills (4.3.6.2a); NON-ECONOMIC — corruption 腐败, poor governance, civil wars, migration, terrorism (4.3.6.2b).

Strategies (4.3.6.3): MARKET-ORIENTATED — trade liberalisation, FDI promotion, subsidy removal, privatisation, floating exchange rates, microfinance 小额信贷 (4.3.6.3a); INTERVENTIONIST — human capital, protectionism, managed rates, infrastructure, joint ventures 合资企业 with TNCs, buffer stocks 缓冲库存 (4.3.6.3b); OTHER — industrialisation (the Lewis dual-sector model 刘易斯二元经济模型: surplus agricultural labour transfers to industry at low wages, funding accumulation), tourism, primary-industry development, debt relief 债务减免, aid (4.3.6.3c). International institutions (4.3.6.3d): the WORLD BANK (concessional project loans), the IMF (crisis lending and conditionality 附加条件) and NGOs (grass-roots delivery).

Extract. Bangladesh has been one of the world's fastest-growing economies since 2000, with real GDP growth often above 6% a year. Ready-made garments earn more than 80% of its export revenue, and the industry employs about four million workers, most of them women who moved from farms to factories in the cities. Extreme poverty has fallen sharply, and life expectancy is now above 70 years. But wages in the garment industry are among the lowest in the world, and in 2013 the collapse of the Rana Plaza factory building killed more than 1,100 workers. In 2026 Bangladesh is due to leave the United Nations' list of Least Developed Countries, which means losing some tariff-free access to markets such as the EU over the following years.

Questions

• (a) Bangladesh's GDP is about US$450 billion and its population about 173 million. Calculate GDP per head. [2]
• (b) Explain two limitations of GDP per head as a measure of development, using the extract. [4]
• (c) Explain, with reference to the Lewis dual-sector model, how the growth of the garment industry has helped to reduce poverty. [6]
• (d) Examine two risks of Bangladesh's dependence on garment exports. [8]
• (e) Evaluate the policies Bangladesh could use to keep developing after it loses its Least Developed Country status. [12]

Model answers

(a) $\tfrac{450 \text{ billion}}{173 \text{ million}} \approx \$2{,}600$ per head.

(b) It hides distribution: an average says nothing about whether garment workers, many on very low wages, share in the growth. It ignores quality of life and working conditions: GDP counts the output of unsafe factories in the same way as safe ones; the Rana Plaza deaths and long hours do not lower GDP. (Also: it omits health and education, which the HDI includes, and it is not adjusted for purchasing power unless PPP is used.)

(c) The Lewis model has a large traditional (farming) sector with surplus labour, whose marginal product is close to zero, and a modern (industrial) sector. Factories can hire workers from the farms at a wage only a little above farm incomes. As garment firms grow, workers move to the cities, total output rises, and the profits are reinvested in more factories, so the modern sector keeps expanding. Workers, especially women, earn more than on farms, which reduces poverty and gives them more independence. Evaluation: the model assumes profits are reinvested at home and that there is surplus labour; once surplus labour runs out, wages must rise.

(d) Demand and price risk: if world demand for clothes falls (a recession in the EU or US) or buyers move orders to cheaper countries, export revenue and jobs fall sharply, because there is little else to export. Loss of preferential access: leaving the Least Developed Country list means facing tariffs in some markets, which raises prices for buyers and could cut orders. Also: automation could replace low-wage sewing jobs. Evaluation: the risks are smaller if firms move into higher-value products and if Bangladesh signs new trade agreements.

(e) Diversification: developing new export industries (electronics, pharmaceuticals, food processing) reduces dependence on garments. This needs infrastructure (ports, power, roads) and skills, which take time and money.

Human capital: more spending on education and health raises productivity and lets workers move into higher-paid jobs, and it improves the HDI directly. The returns come over many years.

Trade agreements and FDI: negotiating free-trade agreements can replace lost tariff-free access; attracting foreign direct investment brings capital and technology. But foreign firms may repatriate profits and look for the cheapest place to produce.

Better working conditions and higher wages: safer factories and minimum wages protect workers and meet buyers' demands for responsible supply chains, but too fast a rise in costs may move orders to other countries.

Judgement: the most important policies are diversification and human capital, because they reduce the main risk (one export) and raise long-run productivity. In the short run, trade agreements to keep market access are urgent. The best mix depends on how fast tariffs change after 2026 and on whether Bangladesh can fund infrastructure without excessive debt.

What examiners reward: a GDP-per-head calculation with units, limitations linked to the extract, a correct explanation of the Lewis model with its assumptions, examined risks, and a judgement that ranks policies by time scale.

• Absolute versus relative poverty with measures; the seven causes of change (4.3.4.1).
• Wealth versus income inequality; the Lorenz curve and Gini with the 0.40 calculation; causes, six impacts, development's effect, capitalism's significance (4.3.4.2).
• Capital/current/transfer expenditure; three drivers of its size; productivity, crowding out, taxation (4.3.5.1).
• Direct vs indirect; progressive/proportional/regressive with the 10-20-30 example; the seven effect channels incl. the Laffer peak of 100 at 50% (4.3.5.2).
• Deficit vs debt; stabilisers vs discretionary; structural vs cyclical; size factors; interest, servicing, intergenerational equity (4.3.5.3).
• The five policy families with four aims; 2008 demand-side responses; TNC control and its limits; local-national-global impacts; three policymaker problems (4.3.5.4).
• HDI's three components and measurement; advantages and limitations; six other development measures (4.3.6.1).
• The eleven economic and five non-economic constraints, incl. Prebisch–Singer, Harrod–Domar and capital flight (4.3.6.2).
• Market-orientated, interventionist and other strategies incl. the Lewis model; World Bank, IMF, NGOs (4.3.6.3).

Boundary notes: WEC14 Section C essays offer 20-mark evaluative questions — knowledge/application/analysis 12 plus evaluation 8, with level caps for missing diagrams or named contexts. Calculation marks reward the index and Gini arithmetic shown above. All worked numbers are original and internally consistent.