4.3.3 Strategies influencing growth and development Flashcards
Strategy 1: trade liberalisation
Influence on economic growth:
- Entry into trade agreements or WTO lowers tariffs from foreign countries on developing countries
- Exports before tariffs are reduced: Q2 – Q1
- Exports after tariffs are reduced: Q4-Q3
- This increases exports from developing countries, shifting AD right
- Closes the savings gap
- Reinvestment of profits, diversification, improved capital shifting LRAS right – labour intensive
However: strategy 1 trade liberalisation
- Depends on comparative advantage
- May result in primary product dependency
- Are rich countries willing to reduce tariffs on higher value goods? Negative externalities
- Better than the employment that was available before depends on your comparative advantage
- You cant build yoru own indrusties as other will come into the makret due to low tarrifs and this can destroy infant indrustires
Strategy 2: promotion of FDI (Foreign Direct Investment)
Influence on economic growth:
- AD shifts right as investment is a component of AD
- Investment brings new capital and technology, improving the quality and quantity of capital, a factor of production, shifting LRAS right.
- Foreign firms may train local workers, improving the quality of labour, a factor of production
- Closes the savings gap
- GNi increase gdi increase tax revenue comes in
Strategy 2: promotion of FDI (Foreign Direct Investment)
however depends on Inclusive FDI (e.g. textiles)
Many firms contribute to tax revenue
Labour intensive – high levels of employment and some training leads to consumption and local multipliers
Less environmental damage
Creates demand for local goods and suppliers
Strategy 2: promotion of FDI (Foreign Direct Investment)
however depends on extractive FDI (e.g. textiles)
Few firms can avoid taxes through corruption
Capital intensive – low levels of employment, high positions to foreign workers leads to high imports and capital flight
Large environmental damage (increased through corruption)
Little demand for goods from local suppliers
Strategy 5: microfinance schemes
- Small loans on concessional terms (e.g. low interest rates) offered to those without collateral
- Often offered to women and the poor to help set up small businesses or invest
- Creates local inclusive growth and high multipliers – local employment, supplier
- Small loand given to people without any assets – buy local people, local supply achieve macor economic objective of reduce the inequality – hdi
Strategy 5: microfinance schemes
however
- Debt traps and high interest rates – you get into debt and you lose everything
- Limited scale
- Many do not have the skills to open businesses
Strategy 6: privatisation
influence on economic growth
Influence on economic growth:
- Profit motive encourages competition, innovation, and investment
- Selling state owned firms to the private sector generates income which can be invested into health, education and infrastructure
- AD and LRAS shift right
However: privitatsion
- Loss of jobs?
- May not encourage competition if a private monopoly is created
Strategy 7: development of human capital
- Education and health spending (G) is a component of AD, shifting it right
- Better educated workers have a higher Marginal Revenue Product and can command higher wages
- Heathier workers take fewer sick days and learn better in school
- Education promotes gender equality, better maternal outcomes, and lower birth rates
- Education allows for diversification away from primary industries
- Increase in the quality of labour improves a factor of production, shifting LRAS right
However:
development of human capital
- Opportunity cost
- Time lag
- Depends on who the education and health is provided to (e.g. urban vs rural, primary vs secondary education)
Strategy 9: managed exchange rates
include however as well
- Less volatility, more investment, LRAS shifts right
However: - Cost of managing exchange rate (foreign reserves, interest rates)
- Exchange rates often set to high to limit inflation
Strategy 17: Aid
- Fills savings gaps
- Can be directed to specific projects (e.g. health and education) to promote development outcomes
- Can reduce the problem of government failure
aid
however
However:
- Depends on the type of aid
o humanitarian aid (such as food and shelter in times of emergency),
o grants (sums of money that do not need to be repaid)
o soft loans (money that must be repaid at a lower rate of interest)
- Moral hazard
- Corruption
Strategy 16: Fair trade schemes
include however
- Monopsony power / protectionist policies from developed countries limit the benefits to trade for developing countries
- Fair trade schemes give a guaranteed price
However: - Distorts market signals – should farmers not be moving to more profitable goods?
- Middlemen / supermarkets may benefit the most
