4.3 - Strategies influencing growth and development Flashcards
Emerging and developing economies
Explain the Market-Oriented Strategies influencing growth and development
- trade liberalisation
- Trade Liberalisation
- Trade liberalisation refers to the reduction or removal of barriers to international trade, such as tariffs, quotas, and trade restrictions.
- Benefits:
> Encourages competition, leading to efficiency and lower prices for consumers.
> Countries can aim for export led-growth.
> Increases access to foreign markets, promoting economic growth.
Explain the Market-Oriented Strategies influencing growth and development
- Promotion of FDI (Foreign Direct Investment)
2) Promotion of FDI
- FDI involves foreign entities investing in a country’s economy, typically by establishing businesses or acquiring assets.
- Benefits:
> Brings in capital, technology, and expertise.
> Creates jobs and stimulates economic growth.
Explain the market orientated strategies influencing growth and development
- Removal of Government Subsidies
3) Removing or reducing government subsidies can lead to a more efficient allocation of resources in the economy.
- Benefits
> Reduces market distortions and encourages innovation.
> Can help improve fiscal sustainability.
Explain the market orientated strategies influencing growth and development
- Floating Exchange Rate Systems
4) Floating exchange rate system
- A floating exchange rate system allows a currency’s value to fluctuate based on market forces.
- Benefits:
> Provides a natural mechanism for trade balance adjustments.
> Reduces the need for government intervention in currency markets.
Explain the market orientated strategies influencing growth and development
- Microfinance Schemes
5) Microfinance schemes
- Microfinance involves providing small loans and financial services to low-income individuals and businesses.
- Benefits
> Empowers individuals and promotes entrepreneurship.
> Alleviates poverty and fosters economic development.
Explain the market orientated strategies influencing growth and development
- Privatisation
6) Privatisation
- Privatisation involves transferring state-owned enterprises to private ownership and management.
- Benefits
> Increases efficiency and competitiveness.
> Generates revenue for the government.
Market-orientated strategies influencing growth and development
o trade liberalisation
o promotion of FDI
o removal of government subsidies
o floating exchange rate systems
o microfinance schemes
o privatisation
Interventionist strategies influencing growth
and development
o development of human capital
o protectionism
o managed exchange rates
o infrastructure development
o promoting joint ventures with global companies
o buffer stock schemes
Interventionist strategies influencing growth
and development
- development of human capital
- Investment in education, training, and healthcare to enhance the skills and well-being of the workforce.
> Improves productivity and innovation.
> Reduces poverty and inequality.
> Higher skills would allow the country to develop from the primary sector to a manufacturing sector, overcoming primary product dependency
Interventionist strategies influencing growth
and development
- Protectionism
- Protectionist policies include tariffs, quotas, and trade barriers designed to protect domestic industries.
> Shields domestic industries from foreign competition.
> Preserves jobs but can cause countries to lose out from the benefits of specialisation and
comparative advantage and could cause inefficiencies.
Interventionist strategies influencing growth
and development
- Managed Exchange Rates
- Governments intervene in currency markets to influence the exchange rate.
> Provides stability for international trade.
> The currency could be fixed against a number of different exchange rates . > They can introduce high exchange rates for the import of essential products and lower
exchange rates for others. > There could be an even lower one for exports.
> A high
exchange rate for essential products will mean that the price within the country is low,
which helps to reduce poverty if the goods are consumer goods and encourages
investment if they are capital goods.
> A lower exchange rate for other imports will
mean that the price of these goods within the country is higher, discouraging their
import and encouraging consumers to buy from domestic producers.
> Helps prevent currency crises.
> Alternatively, governments can manage a single exchange rate which will reduce
volatility, but speculation may mean that countries find it difficult to maintain an exchange rate over a number of years.
Interventionist strategies influencing growth
and development
- Infrastructure Development
- Infrastructure Development
> Investment in transportation, communication, and public facilities. - Benefits:
> Enhances economic productivity.
> Attracts private investment.
> One problem of this is that the government may not have the funds to provide the
infrastructure and it is argued that they may be inefficient. Infrastructure projects are
often associated with bribery and corruption , cause environmental damage and
may be poorly built and maintained.
Interventionist strategies influencing growth
and development
- Promoting Joint Ventures with Global Companies
Promoting Joint Ventures with Global Companies
> Encouraging partnerships between local and foreign firms to leverage technology and expertise. This will
help to keep some of the profits generated within the country , which can be used
in investment.
- Benefits:
> Access to global markets and technology.
> Transfer of knowledge and skills.
Interventionist strategies influencing growth
and development
- Buffer stock schemes:
Buffer stock schemes:
- This is where the government imposes both a maximum and minimum price for goods, buying up stocks when there is excess supply and selling them off when
there is excess demand.
- As a result, it should be self-financing: money is raised when selling the products, which allows the government to buy the next lot of stocks.
- It is used on commodities, where the prices are volatile, and can either be set up by
a group of countries or within a country.
- When it works effectively, it is beneficial
because it stabilises prices and thus encourages investment since producers can
plan for the long term.
- It also prevents sharp falls in prices, meaning that producers
are kept from falling into absolute poverty, and prevents sharp rises in prices, meaning that consumers are able to afford the good.
- It can solve some of the issues
relating to primary product dependency.
> Prevents price fluctuations and ensures food security.
> Protects farmers and consumers.
● However, it requires stocks to go up and down ; if they keep rising, then the scheme will run out of money and if they keep falling, the scheme will run out of stocks.
- They require huge start-up costs , as well as administration costs and
problems of storage.
● Other countries may benefit from a buffer stock system since it keeps global prices
fairly stable when undertaken by a group of countries, and so they can be seen as free riders of the system. This may mean that some countries will not want to
introduce the system.
● The biggest issue is that minimum prices may be set too high, encouraging
producers to become inefficient.
Other strategies influencing growth
and development
o industrialisation: the Lewis model
o development of tourism
o development of primary industries
o Fairtrade schemes
o aid
o debt relief
Other strategies influencing growth
and development Industrialisation
- The Lewis Model describes a process where surplus labour from the agricultural sector moves to the industrial sector, driving economic growth.
> The Lewis model assumed that developing countries had dual economies with a
traditional agricultural sector, which had low wages, low productivity,
underemployment and low savings, and a modern industrial sector, with high levels of investment and urbanisation.
It suggested that the modern industrial sector would attract workers from rural areas by offering higher wages.
Lewis believed that labour productivity was so low in agricultural areas that people leaving the area would have no impact on output and
would in fact mean there was a surplus of food, since the same amount was being shared amongst less people.
Those who moved to the urban areas would have
higher incomes and thus more savings for investment.
- Benefits:
> savings and investment were important for growth and thus growth
could be achieved through rural-to-urban migration
> Transforms an agrarian economy into an industrial one.
> Creates jobs and raises living standards.
Other strategies influencing growth
and development
Development of tourism
- Developing tourist attractions and infrastructure to attract international visitors.
● The income elastic nature of tourism means that as the global economy grows,
demand for the industry will increase even further, allowing the developing country to continue development. However, it also means that they will suffer in times of
recession.
● Tourists represent a source of foreign currency, which will fill the currency gap. so
countries will be able to fund their imports without negative consequences. However,
holidaymakers’ demands for products from their home countries mean that the tourism industry is associated with an increase in imports and so may not help the
foreign currency gap at all.
● Countries are likely to attract investment from transnational hotel companies, who
will also bring knowledge with them. It can help to fund improvements in
infrastructure, as tourism requires reliable electricity, airports, clean water etc. and
so the government have an incentive to provide this. This investment will have a
multiplier effect through the economy.
● Jobs are created locally since the tourism industry relies on low skilled workers who
know the local area, rather than to high skilled workers which may be sourced from
abroad. It is very labour intensive.
● The government will see higher tax revenues due to higher income and higher
profits. It can provide funds to allow countries to diversify.
● However, the industry is seasonal and involves low skilled, low paid jobs which
means the effect of the multiplier is limited. Tourism destinations can go in and
out of fashion , meaning some areas will see a loss of employment and that
investment may only receive a short-term return.
● A large amount of wealth created will be withdrawn as TNCs repatriate their profits ,
causing problems involving capital flight.
● On top of this, the country can suffer from a large number of externalities, including
pollution, waste, environmental damage and impact on culture.
Other strategies influencing growth
and development
> Development of Primary Industries
- Focusing on the growth of primary sectors like agriculture and mining.
- The development of a primary
industry provides funds to allow a country to diversify as well as allowing infrastructure development and better education. - Benefits:
> Provides raw materials for industry.
> Boosts rural development.
● However, primary products are volatile and primary product dependency causes
many issues. Primary industries also suffer from corruption
Other strategies influencing growth
and development
Fair-trade schemes
- Fair-trade promotes equitable trading partnerships, ensuring fair prices for producers in developing countries.
> Supports small-scale farmers and artisans.
This gives producers stability and raises their income.
> Promotes sustainable agriculture.
Other strategies influencing growth
and development
Aid
- Financial assistance provided by developed countries to support economic development in poorer nations.
> Addresses immediate needs like healthcare and education and absolute poverty
> Promotes long-term development.
> It can fill the savings gap , as outlined by Harrod-Domar, and thus provides funds for investment, whether this be in infrastructure or in human capital. Both of these often have to be done by the government because they can be seen as public goods and suffer from the free rider problem. It also provides foreign exchange to fill the
foreign currency gap.
> It can contribute to increased globalisation and trade as well as reducing world
inequality.
> however can create a dependency culture where countries are
unconcerned by their finances as they know they can receive aid from another
country.
> corruption could mean money goes elsewhere - not into public investment
There are different types of aid:
o tied aid is aid with conditions attached, such as economic or political reforms
or a commitment to buy goods from the donor country
o bilateral aid is directly from one country to another
o multilateral aid is when countries give aid to an international organisation who
distributes it to other countries.
o concessional loans are loans given on lower, or no, interest rates
Other strategies influencing growth
and development
Debt relief
- Forgiving or restructuring the debt of developing countries to reduce their financial burden.
> Allows countries to allocate resources to development.
Alleviates the debt trap.
● Many countries suffer greatly from the high interest repayments to loans they have
taken out. It limits the growth of some of the poorest countries, whilst being relatively
small for the countries and agencies that are owed the money. Therefore, it seems
reasonable for the debt of developing countries to be written off.
● It will ease government finances and allow more money to be spent on provision
of services and infrastructure to aid development.
● However, it causes moral hazard because it creates a precedent: every poor country
may now expect to receive debt relief. It also eases pressure on weak governments
to adopt reforms and good economic policies.
World Bank
- Role: Provides financial and technical assistance for development projects in developing countries.
- Focus: Poverty reduction, infrastructure, and sustainable development.
International Monetary Fund (IMF)
- Role: Offers financial assistance, policy advice, and macroeconomic stability to member countries.
> They provide loans to help countries when there are international exchange rate
crises or when they cannot afford to pay off their international debt.
> When providing loans, the IMF insists that countries make macroeconomic reforms
to resolve the problems.
> The IMF has received criticism for this because it causes
problems for countries.
> Usually, it involves reducing imports and increasing exports which reduces the amount of resources available for domestic consumption.
> It can also be in the form of lower government spending.
● The IMF also provides advice which aims to bring about economic stability and
raise living standards and help countries to develop their economic institutions
through training and technical assistance
- Focus: Exchange rate stability, fiscal policies, and economic reforms.
NGOs (Non-Government Organisations)
- Role: NGOs operate independently of governments and work on various development projects and humanitarian efforts.
- Focus: Diverse areas such as healthcare, education, human rights, and environmental conservation.
Alternative of turning to IMF
> countries are not forced to turn to the IMF for help but many do because the alternative is defaulting on their loans , which would cause even more problems than the reforms do.
The reforms intend to help countries to overcome issues and should allow a country to develop in the long term; they are not meant to
be a punishment.
Problems with defaulting on loans
Default induces a banking and financial crisis, leading to bank failures. Economic instability, marked by high inflation, low growth, and unemployment
