Pearson Edexcel IAL Economics: Industrialisation, aid, debt relief, institutions (YEC11)

This guide is written for the Pearson Edexcel International Advanced Subsidiary/Advanced Level in Economics (YEC11) specification, Issue 2, June 2018. It teaches the last two parts of item 3 in section 4.3.6, which deals with growth and development across developing, emerging and developed economies: other development strategies (3c) and international institutions (3d). By the specification’s own labels, Units 1 and 2 make up the International AS (IAS) and Units 3 and 4 add the International A2 (IA2) content, so this Unit 4 material sits in the full International Advanced Level only. All countries, firms and numbers below are made up for practice.

Related pages: revision notes, practice questions, exam preparation, the course hub, the checklist and the free 10-minute diagnostics. Market-orientated and interventionist strategies, measures of development and the constraints on development have their own pages, so they are not repeated here.

Scope of this guide

Spec point	Skill required
3c	Assess the impact of industrialisation (the Lewis structural dual-sector model)
3c	Assess development of tourism and of primary industries
3c	Assess debt relief and aid
3d	Explain the role of the World Bank, the International Monetary Fund (IMF) and non-government organisations (NGOs)

Industrialisation and the Lewis model

Industrialisation means shifting resources from low-productivity farming into manufacturing and other modern industry. The Lewis structural dual-sector model describes how that shift can happen.

• Traditional sector: rural, mostly subsistence farming. Labour is plentiful, so some workers add nothing to output. Their marginal product is zero. They are called surplus labour.
• Modern sector: urban industry using capital. Firms pay a wage a little above subsistence to draw workers out of farming.
• Engine of growth: modern-sector profits are reinvested in capital, so more jobs appear and more surplus labour moves across.
• Turning point: once the surplus is used up, further transfers cost farm output, so wages must rise.

Worked example (Country A, illustrative). Farming employs 120 workers and produces 3,840 units a year. Average product is 3,840 / 120 = 32, the subsistence wage. Forty workers are surplus. The modern sector pays a 25% premium: 32 x 1.25 = 40. Each modern worker adds 70 units of output. Firms reinvest 75% of profit, and each new job needs capital worth 75.

Round	Workers	Output	Wage bill	Profit	Reinvested	New jobs
1	20	1,400	800	600	450	6
2	26	1,820	1,040	780	585	7.8, about 8
3	34	2,380	1,360	1,020	765	10.2, about 10

Check round 1: output 20 x 70 = 1,400; wage bill 20 x 40 = 800; profit 600; reinvested 600 x 0.75 = 450; new jobs 450 / 75 = 6. After round 3 the plan calls for about 44 workers, but only 40 are surplus. Once the 40th leaves, the 80 farm workers share 3,840, so average product is 3,840 / 80 = 48. Beyond that, each extra worker removed lowers farm output, so the modern sector must raise its wage. That is the turning point.

Evaluation.

• Zero marginal product is hard to find in real farms, especially at harvest time.
• The model needs profits to be reinvested at home. Owners who spend on imports or send funds abroad stall it.
• Firms that choose capital-intensive methods create few jobs per unit of investment, so the transfer is slow.
• Migrants may become urban unemployed if modern jobs grow slower than the rural exodus.
• Success depends on infrastructure, skills and stable policy, so industrialisation is rarely a stand-alone fix.

Tourism

Tourism is an export of services. Foreign visitors spend money in the country, which raises incomes, jobs and tax revenue.

Benefits: foreign exchange earnings; jobs, often for low-skilled workers; a multiplier effect; better roads, airports and utilities; links to local farms and crafts.

Costs: leakages when hotels import food and fuel or foreign owners repatriate profit; seasonal and insecure work; dependence on a few source markets and on exchange-rate movements; environmental damage and pressure on water; low wages in some firms.

Worked example (Country B, illustrative island). Tourists spend 200m in a year. Imports used by the industry take 30% and repatriated profit takes 20%.

• Leakage = 200 x (0.30 + 0.20) = 100m, so 100m stays as local income.
• Local residents spend 40% of extra income on domestically produced goods, so the multiplier is 1 / (1 - 0.4) = 1.67.
• Total local income created = 100 x 1.67 = 166.7m, which is 66.7m more than the first round.
• Net foreign exchange gain is 200m less the 100m of leaked spending, so 100m.

Reducing leakage matters as much as raising arrivals. Evaluation points: how large tourism is relative to GDP, how much is locally owned, how exposed it is to a drop in visitors, and the cost of environmental damage to future income.

Primary industries

Developing primary industries means expanding agriculture, mining, fishing and forestry. A country with abundant land or minerals can earn export revenue, create jobs and fund investment without needing advanced technology.

Benefits: it uses the country’s comparative advantage; it quickly adds export earnings; it can employ many rural workers; tax and royalty income can finance public spending.

Costs: prices can swing sharply, so earnings are unstable; relying on one product leaves the economy exposed; mining and logging can degrade land; processing profits may be captured abroad; raw exports add little value per worker.

Worked example (Country C, illustrative). A tonne of raw crop sells for 1,000 and uses 200 of purchased inputs, so value added by growing = 1,000 - 200 = 800. Processing the tonne locally sells for 2,600 using the 1,000 of crop plus 300 of other inputs, so value added by processing = 2,600 - 1,000 - 300 = 1,300. Total value added in the chain = 800 + 1,300 = 2,100, which equals 2,600 - 200 - 300. Processing adds 1,300 / 800 = 1.63 times as much value as growing.

Risk example: if one primary product is 65% of export earnings and its price falls 20%, total export earnings fall by 0.65 x 0.20 = 13%, even if nothing else changes. Strategy therefore aims to move up the value chain and diversify. Processing needs electricity, finance and access to foreign markets, which may impose higher tariffs on processed goods.

Debt relief

Debt relief reduces what a country must pay to foreign lenders. It can mean cancelling part of the debt, lowering the interest rate, or rescheduling (stretching repayments over a longer time). Two ratios show the burden: debt to GDP, and the debt service ratio, which is annual interest plus principal payments as a percentage of export earnings.

Worked example (Country D, illustrative). External debt is 9,600m, GDP 12,000m, exports 3,000m, debt service 720m a year, government revenue 2,400m and spending on health and education 480m.

• Debt to GDP = 9,600 / 12,000 = 80%.
• Debt service ratio = 720 / 3,000 = 24%.
• Debt service takes 720 / 2,400 = 30% of revenue, against 20% for health and education.

Suppose 40% of the debt is cancelled and payments fall in proportion. New debt = 9,600 x 0.6 = 5,760, which is 48% of GDP. New debt service = 720 x 0.6 = 432, so the ratio is 14.4%. Freed money = 720 - 432 = 288m, which would raise health and education spending by 288 / 480 = 60% if all of it were spent there.

Evaluation.

• Relief helps most when the freed funds go into schools, clinics and infrastructure, not into more imports or military spending.
• Lenders lose, and may charge higher rates to others or lend less in future.
• Moral hazard: a government that expects forgiveness may borrow recklessly.
• Conditions tied to relief can force spending cuts that hurt poorer households.
• Rescheduling lowers each year’s payment but raises total interest paid.

Aid

Aid is a transfer of resources from donors to poorer countries on concessional terms.

Type	Meaning
Bilateral	from one government to another
Multilateral	pooled through an institution such as the World Bank
Grants and concessional loans	free, or at below-market interest
Tied	spending is restricted to goods or firms from the donor country
Emergency (humanitarian)	short-run relief after a famine, flood or war
Project and technical	specific schemes, or expert help and training

Worked example (Country E, illustrative). GNI is 20,000m, aid received is 1,000m and population is 25 million. Aid as a share of GNI = 1,000 / 20,000 = 5%. Aid per person = 1,000m / 25m = 40. Suppose 60% of the aid is tied and donor goods cost 25% above world prices. The tied 600 buys only 600 / 1.25 = 480 of goods, so real value = 400 + 480 = 880, a loss of 120, or 12%.

Evaluation.

• Aid can fund roads, health and schools that markets underprovide and that raise productivity.
• Tied aid shrinks real value, and aid can crowd out a government’s own tax effort.
• Corruption can divert funds, and unpredictable flows make planning hard.
• Long-run dependency may weaken incentives to reform.
• Emergency aid saves lives quickly, while long-term projects work better when local people take ownership.

International institutions

The World Bank lends mainly for long-term development: infrastructure, education, health and poverty reduction. It also gives technical advice and can lend on softer terms to the poorest members.

The IMF promotes stability of the international monetary system. It monitors members’ economies, offers temporary loans to countries with balance of payments problems and gives policy advice and training. Loans usually carry conditions such as spending cuts or exchange-rate reform. Critics say these conditions can raise unemployment and hardship, and that voting power reflects financial contributions, which favours rich members.

NGOs are non-profit organisations independent of government, funded by donations and grants. They run local projects such as water supply and schools, supply emergency relief and lobby for policy change.

• Strengths: local knowledge, flexibility and the ability to reach communities that government misses.
• Limits: small scale, dependence on donors, duplicated effort and weak accountability.

Common errors

• Describing the Lewis model without the reinvestment link, or forgetting the turning point.
• Treating the multiplier as the same as leakage. Leakage cuts the multiplier.
• Mixing up World Bank (long-term development lending) and IMF (short-term balance of payments support).
• Calling debt relief free. Someone bears the cost.
• Stating that aid always helps or always fails. Link the result to how it is used.

Official syllabus

Pearson Edexcel International Advanced Subsidiary/Advanced Level in Economics specification, Issue 2, June 2018, first assessment June 2020, published by Pearson Education Limited: section 4.3.6, Growth and development in developing, emerging and developed economies, item 3, parts c and d (Unit 4, Developments in the global economy).