4.3.3 Strategies Influencing G + D Flashcards
1
Q
What are the market-orientated strategies?
A
- trade liberalisation
- promotion of FDI
- removal of govt subsidies
- floating exchange rate systems
- micro finance schemes
- privatisation
2
Q
What does market-orientated mean?
A
- encouraging the market to allocate resources + promoting openness to the international economy
- involves strategies that allow the market to operate with no or less govt intervention
3
Q
How should you end the chain of reasoning for growth or development
A
- growth = influence on real GDP
- development = life expectancy, average years of schooling, literacy rates, access to clean water, sanitation, number of doctors, reduction in extreme poverty
4
Q
What is trade liberalisation?
A
- The removal of tariffs + other obstacles to trade
- e.g. promotion of free trade
5
Q
How can trade liberalisation lead to development + growth?
A
- promotion of free trade means trade can follow the theory of comparative advantage
- therefore may allow LEDCs to export more + generate export led growth (increase AD)
- by selling goods + services abroad where average incomes are higher, it creates a wider market for goods produced in developing countries (domestic market is limited by poverty + low average incomes)
6
Q
Trade liberalisation evaluation
A
- however, developing countries tend to specialise in goods which are falling in price e.g. primary products
- therefore developing countries could suffer from a declining terms of trade
- developing countries may need to protect infant industries as they become more established —> if the industries aren’t competitive domestically firms may lose out on imports = increased unemployment
7
Q
Concluding argument for trade liberalisation
A
benefits of trade liberalisation will depend on the country + its comparative advantage
8
Q
How can the promotion of FDI lead to development + growth?
A
- AD/AS diagram - increase in investment shifts AD
- multiplier effect for local businesses
- creates jobs = fall in unemployment = rise in average incomes
- shifts LRAS to the right
- increased tax revenue from profits, incomes, taxes on spending (VAT, excise duties etc.) = greater govt investment in infrastructure, education + healthcare
9
Q
Evaluation for promotion of FDI
A
- May force out local businesses so overall job creation may not be so significant
- FDI may bring in own management/workforce = reduces job creation
- host govt may give tax concessions so gains in tax revenue will be minimal
- economic leakages = profits sent back to home country rather than invest in LEDC = debit on primary income of current account rather than reinvest
- FDI May exploit cheap wages + offer poor/low working conditions
10
Q
How can removal of govt subsidies lead to growth + development?
A
- encourage domestic firms to be more productive + allocative efficient
- make firms self-reliant not dependent on govt subsidies
- helps firms become more competitive = encourages exports + reduces imports
- may free up spending on other areas such as health, education + infrastructure = development
11
Q
Removal of govt subsidies evaluation
A
- depends on whether firms will be efficient enough to be competitive without govt support
- leftward shift in supply (demand + supply diagram)
- may need protection in early stages e.g. infant industries
12
Q
How may a floating exchange rate promote growth + development?
A
- developing countries have tried to maintain an exchange rate at an artificially high rate
- a floating exchange rate will result in a depreciation of the currency
- this means cheaper exports = increase demand for their exports
- increase in AD = increase in real GDP via the multiplier
13
Q
Evaluation for floating exchange rate?
A
- Marshall Lerner condition (J curve)
- commodities/agricultural products have an inelastic PED
- could also lead to inflation as imports are more expensive = cost push inflation = high cost of raw materials
- an unstable currency will lead to uncertainty + a fall in investment
14
Q
What is micro finance?
A
- refers to a large number of different financial products offered to low income groups that otherwise would not have access to financial services
- microcredit = providing extremely poor people will small loans to help them engage in productive activities or to grow their small business
- micro-savings = e.g. voluntary local savings clubs provided by charities
- micro-insurance = safety net to prevent people from falling back into extreme poverty - especially for people + businesses not traditionally served by commercial insurance businesses
- remittances management = managing remittance payments sent from one country to another
15
Q
How can micro finance lead to growth + development
A
- provide loans at lower interest rates than usually charged by banks = helps producers expand + growth their business without being charged extortionate interest rates by loan sharks or informal sector
- increase in AD
- encourages enterprise especially amongst women = helping to address gender imbalances + reduce extreme poverty
- can help social enterprises to fund local projects to improve infrastructure e.g. sanitation, irrigation = improves health (development)
16
Q
Evaluation of micro finance
A
- danger that too many loans are made at high interest rates as lenders seek profits = market-based so there may be a lack of necessary regulation = this may lead to over indebtedness
- may lead to lots of small loans made= lot of competition amongst the business setting up = little profits
- may encounter a lack of demand in countries where there is a high level of extreme poverty
17
Q
Concluding argument for microfinance
A
- while micro finance has a part to play, emphasis should be placed on increasing productivity especially in agriculture
- alternatives to microfinance could be used + may be more effective e.g. aid, debt relief, FDI, remittances
18
Q
What is privatisation?
A
- the transfer of assets from the public (govt) sector to the private sector
- countries that pursue privatisation are adopting a market-orientated approach to development
19
Q
Examples of privatisation
A
- for some countries privatisation is part of the process of moving away from a state dominated economy to a mixed economy with both public + private
- e.g. China, India, Vietnam
20
Q
How can privatisation boost economic development?
A
- efficiency = some believe the private sector + discipline of market forces are a better incentive in the long run for businesses to be efficient = profit motive + competition stimulates incentive
- privatisation may also lead to less corruption
- innovation = a more dynamic economy which is less reliant on state subsidy + other forms of financial support
21
Q
Advantages of privatisation
A
- income from asset sales = selling off industries increases revenue for govt which might then be used to increase spending on health, education + infrastructure
- investment = some privatised enterprises go on to launch an initial public offering on the stock market to raise fresh capital = leads to greater capital investment = creates jobs = increase productive capacity of economy
- smaller financial deficit = state sector industries usually make heavy losses = increased budget deficit + high levels of govt debt - without this deficit the govt may lower tax burdens on businesses + households = growth
- lower prices + higher real incomes = state enterprise may hire surplus workers (productively inefficient) BUT privatisation = increased productivity + efficiency = lowers prices for consumers = higher real incomes
22
Q
Evaluation for privatisation
A
- job losses = profit maximising owners have different objected from the state BUT if new firms are created jobs may rise
- affordability of basic services = there is a case for state-ownership of important public services + charging prices below the free market profit maximising price so that are basic services are accessible for the majority of the population
- monopoly profits = if a newly privatised firm has monopoly power = raise prices to improve profit margin = market failure e.g. loss of consumer surplus + higher prices impact low income households who might struggle to afford basics e.g. energy, water, telecoms
- economic leakages = key industries at risk of foreign take over = loss of profits to oversea TNCs who bought state assets
23
Q
Examples of interventionist strategies
A
- development of human capital (education, training, health)
- development of infrastructure
- spending on healthcare
- protectionism = import substitution
- managed exchange rates
- promoting joint ventures with global companies
- buffer stock schemes
24
Q
What are interventionist strategies?
A
- strategies employed by the govt to boost economic development + growth
- e.g. supply side policies = govt spending on education, health, infrastructure = rightward shift in LRAS
- increase in AD due to increase govt spending = multipliers = increased real gdp, lower unemployment, lower inflation
25
Impact of an increase in govt spending on infrastructure, health + education on GROWTH
- increase productivity of workers = reduce unit labour costs
- makes a country’s goods more competitive
- increase exports = export led growth
- increase in AD due to+ then LRAS
- increase in real GDP = lowers unemployment
- could attract FDI = multiplier
26
Impact of an increase in govt spending on infrastructure, health + education on DEVELOPMENT
- improve access to clean water + sanitation = improved LE
- improved access to education = increased mean years of schooling + improved literacy rates
- improved healthcare standards = higher LE, reduce malnutrition, reduce infant mortality
27
How can infrastructure development promote growth + development?
- improve access to clean water
- improve sanitation
- improve roads, rail etc = reducing transport costs, allowing workers to travel to work (especially from rural areas) = improves geographical mobility
- could reduce unemployment
- digital infrastructure = broadband
- increase AD + then LRAS
28
How can spending on healthcare promote growth + development?
- improve LE
- reduce malnutrition
- reduce infant mortality
- reduce maternal mortality
- increase productivity of workers = multiplier effect = AD + LRAS
29
How can protectionism contribute to growth + development?
- makes imports less attractive e.g. tariffs + therefore they are replaced by domestically produced goods = **import substitution**
- protect infant industries in developing countries
30
Evaluation for protectionism
- other countries may retaliate + put tariffs on the country’s exports
- also imports become more expensive as a result of tariffs + domestic firms may experience higher costs if they import raw materials
- tariff diagram = increased prices, leads to lower consumer surplus
- depends on size of tariff + for how long the tariff is levied for (temporary or permanent)
31
How can a managed exchange rate assist development + growth?
- country/central bank may seek to lower the exchange rate
- exports prices are cheaper, imports are more expensive
- increase demand for exports, fall in demand for imports
- improved trade balance = AD increases —> real GDP, employment, inflation
- encourages investment = multiplier
32
What is a managed exchange rate?
- when the govt intervenes to manipulate the value of the exchange rate
- most likely scenario is that the LEDC seem to engineer depreciation
- allows exports to be more price competitive = net exports improve
- may encourage investment which is crucial for growth + development
33
Evaluation for managed exchange rate
- imports more expensive = costs increase for firms importing raw materials = can become less competitive (leftward shift in supply)
- inflation increasing = purchasing power of money falls, living standards fall especially for the poorest
- Marshall Lerner condition
34
Marshall Lerner condition as an evaluation for managed exchange rate
- Marshall Lerner condition = following a depreciation of the currency the trade balance will only improve if the PED for imports + exports sum to a figure greater than one
- unlikely to be the case in the short run as PED is inelastic as customers have less time to alter spending patterns
- the trade balance deteriorates before it improves = J curve
35
What is a buffer stock scheme?
- aim to reduce the volatility of agricultural/commodity markets = inelastic PES (demand + supply diagram shows exaggerated change in price)
- involves a price ceiling + a price floor
- if the price of a commodity drops too low (through high supply) then the govt or buffer stock authority purchases large quantities of the good + store it = reduced supply to ensure price doesn’t fall below the floor price
- if the price is too high, the govt or buffer stock authority release the good onto the market from storage, thus increasing supply to ensure that prices do not exceed the ceiling price
36
Benefit of the buffer stock scheme?
- very important for an economy with primary product dependency
- this can help producers make informed investment decisions as they will have a more stable income than if there are volatile price fluctuations
- creates a climate of greater certainty for producers
37
Evaluation of buffer stock schemes
- storage is expensive - transport to + from storage
- goods can be perishable + may need refrigeration (higher costs compared to storing something at room temp.) - not suitable for all agricultural products
- high administrative costs
- very difficult to equate supply + demand in the long run
- all producers need to be part of the scheme for it to be effective
38
What is a joint venture?
- when two or more businesses join together to pursue a common project
- businesses remain separate still in legal terms
- many joint ventures seek to share the fixed costs of major business research/infrastructure projects
- govts may promote joint ventures between local companies + TNCs/MNCs
39
Benefits of joint ventures (growth)
- sharing of know how between TNCs + local companies = spark innovation, improved technology
- infrastructure projects may have a positive impact on locals
- stimulate investment (FDI) = AD = multiplier
- may help boost a local companies exports
- developing countries may gain more expertise in an industry
40
Evaluation of joint ventures
- debatable on how likely a TNC will divulge all of its info to local companies such as sharing all its technology
- may be a delay before benefits are established
- relies on close collaboration which is not always possible
41
Benefits of joint ventures (development)
- vaccine = life expectancy
- good, grain = diet, reducing malnutrition
- infrastructure = greater access to the internet
- joint venture in remote area = access clean water, sanitation = reduces absolute poverty
42
What are other strategies?
- aid
- development of tourism
- debt relief
- fairtrade schemes
- industrialisation (Lewis)
- development of primary sector
43
Different types of aid
- bilateral aid = aid on a country to country basis
- multi-lateral aid = aid channeled through international bodies/aid agencies e.g. IMF, world bank
- project aid = direct financing of specific projects for a donor country
- humanitarian aid = emergency disaster relief
- technical assistance = funding of expertise of various types
44
Benefits of aid
- overcoming the savings gap = aid provides a financial inflow for low income countries = savings are important for investment
- aid can finance projects for development + growth
- stabilises post conflict environmental e.g. after civil wars
- well targeted aid can benefit the poorest members of society = reduce poverty
45
Human capital + post conflict help (aid)
- long term aid for health + education projects = builds human capital + raises productivity
- aid combined with effective policy can have lasting positive effects
- spending on big three = health, education + infrastructure = AD, multiplier etc.
46
Evaluation for aid
- corruption = in a poorly governed country much of the aid doesn’t go two how it is intended for (goes to corrupt govt officials instead) —> HOWEVER developments such as MPESA in Kenya allow donors to select recipients of aid (mobile phone based transfer of money system)
- ruling elites = politicians psu more attention to aid donors than to their citizens = aid dependent countries are accountable to donors not to their pop = causes corruption
- aid dependency = may lack the drive to become self sufficient + raise their own tax revenue to finance projects
- humanitarian aid may distort markets e.g. lots of food donated can depress food price which is hard fall to local farmers - free food can sometimes impact the food supply in the long run
47
How can tourism increase growth + development?
- increase in export revenue = increase AD
- increase in real GDP via the multiplier
- job creation = hotels, restaurants, guides at tourist attractions
- derived demand from hotels, infrastructure e.g. roads + airports = bigger multiplier effect
- access to hard currency (one less likely to fall in value) - e.g. euro, dollar, pound
- diversification = not just realist on primary products - tourism depends to be highly income elastic in demand
48
Evaluation of tourism
- jobs in hotels, tourist resorts are seasonal + therefore temporary
- traditional they are fairly low paid e.g. waiter, waitress, receptionist
- economic leakages from foreign owned tourist resorts
- negative externalities = air travels, damage to coastline, congestion
- rising property prices = puts locals out of business due to rise in holiday homes
- tourism is vulnerable to external shocks e.g. global down turns from Covid
Therefore tourism can not be relied on for sustained growth + development
49
Impact of external debts on developing countries
- many of the world’s poorest countries have high levels of external debt owed to other govts, institutions such as the IMF + foreign companies, banks etc
- most of these countries have limited access to international capital markets - their sovereign debt does not have an official credit rating
- can have severe constraint on growth + development as interest payments take up large percentage of annual tax revenue
- these debt repayments have an opportunity cost - might be better used in supported development policies such as investment in health + education = boost human capital
50
What is external debt relief?
- refers to the reduction or forgiveness of debt owed by developing countries to external creditors such as govts, international organisations + private lenders
- e.g. debt rescheduling + debt forgiveness
51
What is debt forgiveness?
- involves the complete cancellation of a portion, or all of the debt owed by a developing country to its creditors
- this is often granted in exchange for certain conditions, such as policy reforms or improved governance
- this might be conditional (on condition the govt adopts the change in approach required by the world bank or imf)
52
Benefits of debt relief on development
- releases funds which could be spent on education, health + infrastructure
- increased govt spending = increase AD = multiplier effect
- increased real GDP, increased employment
- reduce poverty = LE, literacy, school enrolment, access to clean water
53
Benefits of debt relief on growth
- countries burdened with high levels of debt May struggle to invest in productive sectors
- debt relief gives breathing space for govt to focus on economic development, attracting FDI + create job opportunities
54
Evaluation of debt relief
- if the debts were to be cancelled, it is not clear how this money would be spent = no guarantee it will be spent on health, education and poverty reduction - instead could be spent on armaments
- no guarantee that debt cancellation will benefit the poor
- could just allow corrupt dictators to accumulate greater fortunes
- therefore dependent on where the money is spent + degree of transparency + proper governance
55
Evaluation of debt relief (moral hazard)
- there would be no incentive for the country to avoid going into debt again
- therefore the cancellation of debt may mean an increased chance of the debt crisis happening again
- debt relief can lead to more reckless borrowing
56
Benefits of fair trade
- increase export revenue = increase AD = multiplier effect
- increases investment, incomes, consumption
- increase in real GDP
- reduce of poverty in rural areas
57
How does fair trade correct market failure?
- counteract the effects of monopsony power among transnational food processors + manufacturers = led to farmers in some of the worlds poorest countries receiving low + unsustainable prices for their products
- guarantees a minimum price for producers = increases incomes of producers + achieves greater price stability to promote investment
- improve production standards = a grower will be able to receive a fair trade licence if it can improve working conditions, better pay + environmental sustainability
58
Evaluation of fairtrade
- impact on non-participating farmers v encouraging consumers to buy from fairtrade sources cuts demand for farmers in poorer regions not covered by the scheme = worsens the risk of extreme poverty
- who really gains from the scheme? = some evidence suggests that a large part of the premium price goes to processors + distributors rather than farmers themselves
- fundamental causes of poverty not addressed by fair trade = more of a starting point but not sufficient in addressing significant development issues
- greater investment needed in raising farming productivity + reaching multi-lateral trade agreements between countries to reduce import tariffs + improve access for poor countries into the market
59
Importance of industrialisation to help growth + development
- countries should seek to grow + develop by moving away from rural, agriculturally based economy into a more industrialised/manufacturing based economy
- this is backed by Lewis’ argument
60
How does Lewis suggest the economy changes?
- primary sector based economy - agriculture, commodities
- secondary sector based - e.g. Uk Industrial Revolution
- tertiary sector based - economy based on services, following deindustrialisation
61
What is Lewis’ theory
- initially the majority of labour is employed upon the land, which is a fixed source of
- labour is a variable resource + therefore diminishing marginal returns eventually sets in as more labour is out on the land = reduced marginal product + underemployment
- urban workers engaged in manufacturing tend to produce higher value output than in agriculture = higher urban wages might therefore tempt surplus agricultural workers to migrate to cities
- high urban profits encourage firms to expand + result in further urban-rural migration
62
What is Prebisch-Singer’s thesis?
- he argues that the price of primary commodities declines relative to the price of manufactured goods over the long term
- this therefore causes the terms of trade of the primary sector economies to deteriorate
- HOWEVER - this doesn’t always hold true as the price of crude oil has increased
63
Criticism of Lewis model?
- agricultural workers did not have the skill to work in the manufacturing sector v therefore not easy from them to transfer
- poorly developed infrastructure may make such a move difficult
- if too many workers go into the city at once the urban infrastructure may be unable to cope = shanty towns emerge due to lack of housing
- FDI may mean that production is more capital intensive + this means fewer jobs are available + only skilled workers who can operate the tech are needed
- profits may also be sent back to home country (economic leakages)
64
How would the development of the primary sector be beneficial?
- a strategy of developing primary industries is based on the idea of exploiting the benefits of comparative advantage
- most developing countries have a comparative advantage in primary sector commodities - some agriculturally based while others require mining
65
How could development of the primary sector cause growth + development?
- specialise in the good the country has a comparative advantage in = enjoy benefits of economies of scale
- trade = export revenue = increase AD = multiplier = increase in real GDP
- increase demand for primary products lead to an increase in price + increase export revenue since demand is price inelastic for commodities such as oil, copper, gold
- increased tax revenue spent on health, education + infrastructure
66
Evaluation of development of primary sector?
- prices are volatile = agricultural products vulnerable to weather, pesticides etc.
- impact of conflicts e.g. wheat in Ukraine
- PED/PES inelastic = leads to higher price changes
- buffer stock could solve the problem? = however can be expensive (storage) especially for perishable items
- Prebisch Singer suggests primary products will experience a decline in the eras of trade over time, so there needs to be caution over primary product dependency
67
Conclusion for development of primary sector
- developing primary products is a good way for a developing country to grow + develop through apply theory of comparative advantage + making the most of natural resources
- increases export revenue = to be reinvested elsewhere
- the success of primary sector will depend on the existence of a buffer stock
- HOWEVER - countries should seek to diversify e.g. tourism or industrialisation, so they do not suffer from primary product dependency as prices can fluctuate greatly
68
What is aid?
- transfer of resources on concessional terms (grants of money, subsidies, donations, soft loans etc.)
- also known as official development assistance (ODA)
69
What is the main function of the world bank?
- granting reconstruction loans to war devastated countries
- granting development loans to underdeveloped countries - providing loans to govt for agriculture, irrigation, transport, power etc.
- encouraging industrial development of underdeveloped countries by promoting economic reforms
70
Branches of the world bank
- compromises of two institutions managed by 188 member countries
- international bank for reconstruction + development
- international development association
71
Goals of the world bank
- aims to reduce the number of people living in extreme poverty by 3% by 2030
- also aims to increase the income of the poorest 40% of the population = promote shared prosperity
72
What is the function of the IMF?
- to ensure the stability of international monetary system = system of educnwge rates + international payments that enable countries (and their citizens) to transact with each other
- review country policies + national, global economic + financial developments = maintain stability + prevents crises
- provide members countries with finance to correct current account of the balance of payment problems
73
Compare the role of world bank + IMF
- world bank = improving extreme poverty
- IMF = ensuring global macroeconomic stability
74
Why is the IMF needed?
- lends money when others may not as it loans to highly indebted countries
- these countries are likely to find it difficult to borrow money from the financial markets due to them being a high risk
75
Role of NGOs
- small scale development = community based schemes e.g. small scale projects, self-reliance
- strategies to promote growth + development
