4.3 (Paper 3) Flashcards
Definition of a Market orientated strategy
Focus on removing government intervention to enable free markets to function more effectively
Trade liberalisation
Advantages - Countries can aim for export led growth
- Allows country to exploit their comparative advantage increasing global productivity
- Benefits country such as China, Hong Kong, Singapore
Disadvantages- may lead to primary product dependency, this may limit development long term
Promotion of FDI
advantages
- investment by 1 private sector company in one country into another private sector company in another, transfer of knowledge and technology
- Creates jobs leading to the effect of the multiplier
- helps reduce the savings gap due to the creation of jobs
- improves production due to training
- benefits the balance of payments
- increases government tax revenue
Disadvantages
- employment is often short term and labour force may not be from domestic economy
- finite raw materials of the country may be used up quickly
- tax revenue collection may be avoided by MNC’s
- environmental costs/ degradation
- MNC’s invest in capital intensive technology
Government subsidies A + D
Advantages
- subsidies are placed on essential goods within an economy and in industries to help improve output and investment. Effective ways of reduction absolute poverty and ensuring a minimum standard of living
- used to support health care
Disadvantages
- distort the price mechanism
- can reduce incentives to innovate because producers are less reliant on innovation as a way of making more profit
- producers become subsidy dependant and therefore inefficient, increasing costs
- risk of corruption syphoning of support to those who don’t need it
- farming subsidies have caused environmental damage through deforestation and increased use of pesticides damaging biodiversity
microfinance
advantages - schemes aim to give poor households permanent access to credit and a range of financial services : loans, saving, insurance
- they take no collateral allowing people to start up businesses
- can fill the savings gap
disadvantages - low consumption in these economies can leads to fails in business ventures
- most money is used for consumption of basic needs = debt
- sometimes interest rates are used = unpayable debt
- loans are not sufficient to alleviate poverty
what is the savings gap
difference between actual savings and the level of savings needed to achieve growth
what is capital flgiht
large amount of money taken out of the country instead of being left in for people to borrow and invest
how does primary product dependency effect economic development
A large amount of most developing
country’s economic activity is based on a primary product,
this causes problems because:
- natural disaster could completely wipe out the product
- often non renewable so country will suffer when it runs out
- tend to have a low income elasticity of demand meaning as people get richer they don’t demand more, they likely demand more of manufactured goods
all market oriented strategies influencing growth and development
trade liberalisation promotion of FDI removal of government subsidy floating exchange rate system microfinance schemes privatisation
Describe diagram changes due to trade liberalisation
Price with tariff line moves down, still below equilibrium price
Consumer surplus increase of ‘trapezium on left’
Excess demand decrease / amount that has to be bought from global source increases
Issues with Primary product dependancy
- Natural disasters can wipe out production of the product
- Often non renewable so country will suffer when it runs out
- low income elasticity of demand, as people get richer they don’t buy more of the good
- price fluctuations: exports earnings and therefore the trade balance deterioration, reduce tax revenue, and make investment planning harder
- protectionism by developed countries such as the subsidy given to American Cotten farmers, creating difficulty for Indian Cotten farmers, blessed with lots of natural resources will fall an appreciation in currency therefore reducing exports
- Dutch disease
How volatility in commodity market influences growth and development
- demand and supply of commodities tends to be inelastic consequently a demand/supply shocks will effect price massively
- these large changes in price mean that producers income and countries earnings are rapidly fluctuating, making it more difficult to plan and carry out long term investment
- producers may see their income drop rapidly causing poverty
How capital flight influences growth and development
- Large amounts of money are taken out of the economy rather than being left in for people to borrow and invest
- can occur due to a lack of faith in the countries stability, restricting economic growth
How levels of savings and investment influences growth and development
- many countries have a low GDP per capita and consequently hold inadequate savings to finance the investment needed to achieve economic growth
- savings gap
The harord domar model: low income = low savings = low investment = low capital accumulation = low income
How the foreign currency gap influences growth and development
When exports from a developing country are too low, compared to imports, to finance the purchase of investment or other goods
How debt influences growth and development
- In the 1970s/80s developing countries received vast loans from banks around the world, now they suffer with interest repayments meaning money is flowing from developing countries to developed countries
- this mean they have less money to spend on services for the population, may have to raise taxes
All factors influencing growth and development
Primary product dependancy Volatility in commodity market Capital flight Levels of savings and investment Foreign currency gap Debt Access to credit + banking - harder to save and take out loans Education Infrastructure Demographic factors - population growth Absence of property rights - reduces investment Non economic factors - war , disease, climate
Interventionist strategies to influence economic growth and development
Development of human capital Protectionism Manages exchange rate Infrastructure development Promotion of joint ventures Buffer stock schemes
Other strategies to influence economic growth and development
Industrialisation - Britain example Development of tourism Fair trade schemes Aid Debt relief
How industrialisation influences economic growth and development: the Lewis model
Model describes the transfer of surplus labour from low productivity sectors (agriculture) to high productivity sectors ( industrial)
Lewis thought that the marginal productivity of workers was close to zero, due to the excess supply, therefore the opportunity cost of transferring them to the industrial sector was zero
Industrialisation is associated with investment, increasing productivity and profits, which can be reinvested
- the share of profits as a % of GDP will increase, as will the savings ratio, providing more funds for investment
Criticisms
Profits made by the industrial sector may not be invested locally
Reinvestment might be made in capital equipment, limited amount of extra labour required
Often doesn’t fit the evidence, favelas
Buffer stock schemes
Designed to reduce price fluctuations
This shows commitment from government to the market giving producers more confined e to invest and therefore increase productivity
Schemes are upper and lower bands in the marker that the price cannot exceed or drop below other government will buy up stock or sell it
Should be self financing
Problems
- gov may run out of money/ stock
Public anguish if scheme runs at a loss due to increase taxes
Storage costs
If the minimum price is set too high it encourages producers to be inefficient as government will continuously buy up the stock
Huge start up costs
How fair trade schemes influences economic growth and development
Aim of fair trade is to address the injustice of low prices
Means laying producers an above market price provided they meet a certain labour + production standard
Advantages
Producers receive a higher price, extra money is available to spend on health, education, infrastructure
Smaller price fluctuations, shielding producers from market forces, = more investment
Extra money used to improve quality of products
Producers are enabled to diversify into other products
Disadvantages:
Distortion of market forces. Low prices may have resulted from overproduction, which in a free market would act as a signal for producers to switch to producing another product
Guaranteeing a minimum price provides no incentive to improve quality
Inefficient way of getting money to the producers - most of the premium payed by consumers goes to the super market
These schemes may create a dependancy trap
How development of tourism influence economic growth and development
Advantage
Demand is income elastic meaning as incomes rise people demand more of the product
Source of foreign currency
Tourism is likely to attract investment from TNC’s
Jobs will be created
All of those factors will increase tax revenue
Improvements in infrastructure may be made by the hotels/TNC’s
Disadvantages
Associated with a significant rise in imports: capital equipment to meet the demand of tourists
Balance of payments is adversely effected by the reparation of profits to shareholders
Employment may be only be seasonal and low skilled / low paying if TNC’s uses own managers + professionals
Tourisms is subject to a change in fashion e.g terrorism
Significant external costs as the needs to tourists are prioritised
How aid influences economic growth and development
Used to describe the voluntary transfer of resources from 1 country to another
3 types:
Tied aid - conditional , political reforms
Bilateral aid - given directly from 1 country to another
Multilateral aid - paid to a international agency which distributes the money
Advantages of aid Reduction in absolute poverty Filling the savings gap Fill the foreign exchange gap Providing funds for infrastructure Improving human capital through the promotion of healthcare , training, education Reduction in inequality between countries Contribution to globalisation
Disadvantages
Results in a dependancy culture, countries do not purse macroeconomic policies to achieve economic growth + development
Aid might not be diverted to those who it is intended “lost in corruption” / military
No clear evidence that aid contributes to the reduction of absolute poverty or growth and development
Aid in the form of concessional loans involves the repayments of interest, gives opportunity for costs to the developing country
