4.3.3 Strategies influencing growth and development Flashcards
Market-orientated strategies influencing growth and development
- trade liberalisation
- promotion of FDI
- removal of govt subsidies
- floating exchange rate systems
- microfinance schemes
- privatisation
How can the promotion of FDI promote economic development?
the impact of increased investment was considered in Theme 2 and the effect of FDI on the balance of payments was mentioned in section 4.1.8.
How can a floating exchange rate system influence economic development?
- in many cases developing countries have tried to maintain an exchange rate at an artificially high rate.
- Consequently, floating the exchange rate should result in a depreciation of the currency. Floating exchange rates see section 4.1.8.
How can microfinance scheme promote economic development?
- can help break the debt-p over cycle by shifting borrowing away from urban money lenders/loan sharks which might have hgih interest rates
- helps smooth consumption when income flows are volatile (e.g due to commodity price volatility/external shocks/farming)
- encourages enterprise especially among women, can help address structural gender imbalances and reducing extreme poverty
- provides a platform for saving and insurance lifting household saving important in the Harrod-Domar growth model
Microfinance
A type of banking service that is provided to unemployment or low-income individuals or groups who otherwise have no other access to financial services
- micro-credit
- Micro-saving
- micro-insurance
- remittance management
(Bottom up approach)
Evaluation of microfinance
- this is a marked bashed approach nad borrowers in some countries have been encouraged to take too many loans (e.g sub-prime lending) at high interest rate. Over-indebtedness. There is a risk that borrow become over indebt if they take out multipler loans from different micro finance institutions = bankruptcy. This can sh them further into poverty. There might be a tendency for lenders to focus on increasing their own profits
- ## not necessarily the most effective way to lifting sustainable savings and the impact is limited. Sustainable savings come form in-work income (formal jobs) or from welfare system which matters in the long run. The focus should be on work productivity, yield in farming sector, getting more ppl into formal employment to raise per capita incomes or education might be more effective.
Interventionist strategies to promote economic development
- Development of human capital – section 2.6.3
- Protectionism – see section 4.1.6.
- Managed exchange rates – see section 4.1.8.
- Infrastructure development – section 2.6.3
- Promoting joint ventures with global companies – see section 3.1.2
- Buffer stock scheme
Buffer stock schemes
Buffer stock scheme
- If the price of the commodity drops too low (probably through high supply) = the government or buffer stock authority purchases large quantities of the good and stores it (xy in the diagram below) = reduce supply sufficiently to ensure that the price does not fall below the floor price.
- If the price becomes too high, the government or buffer stock authority release the good onto the market from storage = increasing supply sufficiently to ensure that the price does not rise above the ceiling price (ab in the diagram below).
Evaluation of buffer stock scheme
The problems with buffer stock schemes are that storage is expensive, transport to and from storage is expensive, it is very difficult to equate supply and demand in the long run, and all producers need to be part of the scheme for it to be effective.
- can lead to moral hazard = govt failure
How can industrialisation promote economic development?
Lewis argued that growth would be achieved by the transfer of workers from the rural primary sector (low productivity) to the modern industrial urban sector (high productivity) through higher wage incentives.
Industrialisation
a stage where there is a rapid expansion of manufacturing industry
Explain the Lewis model (rural workers)
- as more labour is put to work on the land, diminishing marginal returns eventually set in
- Marginal workers in rural areas add little to the output of the rural economy due to insufficient tasks for the marginal worker to undertake (underemployed) = reduced marginal product (output produced by an additional worker) and underemployment.
Urban workers, engaged in manufacturing, tend to produce a higher value of output than their agricultural counterparts.
The resultant higher urban wages (Lewis stated that a 30% premium was required) = might tempt surplus agricultural workers to migrate to cities and engage in manufacturing activity.
High urban profits = encourage firms to expand = further rural-urban migration.
Explain the Lewis model (urban workers)
Urban workers, engaged in manufacturing, tend to produce a higher value of output than their agricultural counterparts.
The resultant higher urban wages (Lewis stated that a 30% premium was required) = might tempt surplus agricultural workers to migrate to cities and engage in manufacturing activity.
High urban profits = encourage firms to expand = further rural-urban migration.
Evaluation of Lewis model
e.g official Chinese statistics place the number of internal migrants over the past 20 years at over 10% of the 1.3bn population.
45% were aged 16-25 and two-thirds were male. Urban incomes are around 3.5 times those of rural workers.
A Marxist criticism states that profits will be retained by the capitalist entrepreneur, at the expense of workers. Urban expansion might be driven by increases in capital rather than labour.
Evidence suggests that surplus labour is as likely in the urban sector as in the agricultural sector. Migrating workers may possess insufficient information about job vacancies, pay and working conditions. This results in high unemployment levels in towns and cities.
Towns and cities may also be fixed in size and unable to accommodate large numbers of immigrants. This gives rise to slums and shanty towns, which are often illegal, built on flood planes or areas vulnerable to landslides and without sanitation or clean water. Cape Town provides a good example. Globally 1bn people live in slums
Uncertainty. Some countries such as South Korea, have prospered from governments favouring the growth of private manufacturing companies from shipbuilding to car manufacturing to electronics. In most countries however, forced industrialisation can lead to a waste of scarce resources because these industries have failed.
Marginal workers in cities often have as low incomes and be as underemployed as marginal workers in the countryside.
How might the development of tourism help promote economic development?
many LDCs are increasingly highly dependent on tourism from the developed world as incomes rise.
- They may encourage tourism because it allows foreign currency to be earned and it is labour- intensive.
The evaluation of tourism to help promote economic development
However, there may be significant negative externalities resulting from tourism growth; for example, use of clean water for tourists not locals, expansion of airports causing pollution and loss of farmland.
- The Kingdom of Bhutan, in the Himalayas, aims to tackle this problem by taxing tourists heavily for every night they spend in the country.
How might the development of primary industries help promote economic development?
some countries have managed to develop on the basis of primary products in which they have a comparative advantage.
- e.g, Chile has benefited from the production of copper (at least, when the price is high) and other primary products with a high income elasticity of demand, such as blueberries and papaya.
How might fair trade schemes of primary industries help promote economic development?
- WTO
- fair trade movement
How might fair trade schemes of primary industries help promote economic development? (WTO)
- the WTO works towards reducing protectionist policies.
Many developing and emerging economies are unable to sell their primary- sector products abroad due to:- protectionism in the developed world
- can only do so at relatively low prices because of the monopsony power of large companies in developed countries.
How might fair trade schemes of primary industries help promote economic development? (Fair trade movement)
- this is a way guarantee farmers a certain price for their products = so that they are not subject to monopsony purchasing power from developed countries. = improving development.
Evaluation of how fair trade can help promote economic development
- there are often a significant number of ‘middle men’ involved = reducing the benefits that fair trade farmers receive.
- also, it is argued that supermarkets in developed countries are the main beneficiaries.
- fair trade schemes can result in a misallocation of resources: low prices = encourage farmers to reallocate their resources to the production of more profitable goods.
Aid
- humanitarian aid (such as food and shelter in times of emergency)
- to grants
- soft loans
Grants
sums of money that do not need to be repaid)
Soft loans
money that must be repaid but at a concessionary rate of interest
Explain one benefit of aid
- reduction in absolute poverty and improved access to food and water.
- Bilateral aid and example
- Somalia case study
- Foreign aid, taken in the form of subsidised food/consumer goods, can help in famine situations and reduce poverty levels in the short run.
- The benefits of foreign aid to Somalia has improved food accessibility enabling families to afford food and basic needs therefore reducing poverty levels.
Bilateral aid definition and an example
when a country transfers resources directly to the recipient country.
- In 2022, the UK planned to send aid nearly £61.2 million to Somalia to tackle drought, food insecurity and poverty
Somalia aid
Somalia is highly vulnerable to natural disasters affecting their agricultural production therefore leading to high levels of poverty and food insecurity.
Evaluation of the benefits of aid
- • However, high levels of corruption in Somalia has meant that aid has often been diverted and therefore might not always reach those most in need. It could be said that foreign aid has helped support the corruption in Somalia such as conflict and terrorism. The aid sent from countries might give the Somalian government little incentive to invest in healthcare and the wellbeing of the people since, as long as there are high poverty levels and food insecurity issues in Somalia, the country will likely continue to receive foreign aid. This can represent moral hazard since Somalia possibly knows the country doesn’t have to the bear the risks of bad healthcare and infrastructure therefore leading to government failure from the UK. In this way, aid might encourage Somalia to become more dependent on aid preventing it from becoming self-sufficient and developing by themselves. In the long run, food aid can increase the supply of food on the local market, depress local prices and therefore discourage local production of food. This increases the dependence of the country on imported food and can result in lower living standards for farmers. In reality, the amount of aid sent to Somalia is relatively small compared to the population. This factor (along with corruption) suggests this aid will have a small multiplier effect and therefore the benefits of aid will not be too big. Despite the amount of aid sent to Somalia, the country remains poor and the humanitarian crisis has continued to worsen (famines and high malnutrition rates). Rather than send aid to combat food insecurity due to natural disasters, it might be more beneficial for foreign countries to focus on ensuring fair trade agreements and for Somalia to try and diversify themselves away from agricultural good.
Example of the importance of microfinance
% of females that own a bank account in 2017
- Singapore 96.1%
- Pakistan 4.8%
Micro credit
The provision of small-scale loans to poorer households
Micro savings
Voluntary local savings organisations provided by charities
Remittance management
E.g transfer payments made through mobile phone solutions
Examples of micro finance in action
In India the micro-finance model of group lending has created support systems for women outside of the family (mostly in rural areas)
- micro-finance lending has increased by 900% in the last six years
How can privatisation help promote growth and development?
- assets are transferred from public sector to private sector
- Free market economist: private sectors gives firms profit incentives to operate efficiently = firms have to product food which consumers want since they are on free market = increase allocative efficiency = increase economic welfare
Some criticisms of aid
- much of the aid is squandered on projects = will not contribute to development or diverted into the private bank accounts of government ministers.
- that aid is channelled into projects which have captured the global media interest = in the long run, the provision of aid can reduce the level of development in a developing country.
How can debt relief help promote economic development?
many developing countries hit a ‘debt crisis’ in the 1980s & 1990s, as they could not afford to pay the interest on their large debts to international financial institutions
- This was a combination of interest rates rising & the value of the dollar rising
- Latin American countries & many African countries were among the worst hit – Mexico defaulted on its loans first, and others followed suit = these countries were then unable to borrow.
- The massive debts that they had to repay = the govt of these countries were unable to invest in human capital or other infrastructure necessary for growth and development.
Main functions of the World Bank
o granting reconstruction loans to war devastated countries
o granting developmental loans to underdeveloped countries
o providing loans to governments for agriculture/irrigation/power/transport/water supply/education/health
o encouraging industrial development of underdeveloped countries by promoting economic reforms.
Main functions of the International Monetary Fund
o to ensure the stability of the international monetary system
o prevent crises in the international monetary system
o to provide member countries with finance to correct balance of payments problems.
How does the IMF ensure the stability of the international monetary system?
the system of exchange rates/international payments that enables countries to transact with each other; to maintain stability
How does the IMF prevent crises in the international monetary system?
by reviewing country policies and national, regional and global economic and financial developments through surveillance
What is an NGO?
any non-profit, voluntary citizens’ group which is organised on a local, national or international level.
- this has brought community- based development to the forefront of strategies to promote growth and development
What are some key characteristics of community based schemes from NGO?
- local control of small scale projects
- self-reliance
- an emphasis on using the skills available
- environmental sustainability.
Why might high levels of corruption act as a barrier to development?
- deters FDI by increasing risk
- leads to allocative inefficiency diverting public resources for private gain
- ## decisions influenced by political motives
Name two advantages of export-led growth
- injection in circular flow = increase AD = raise per capita incomes = reduce extreme poverty
- export salves = revenue
Name two disadvantage of export led growth
- over dependence/vulnerability
- persistent trade surpluses = protectionist response
- demand pull inflation & higher interest rates = export industry less competitive in overseas market & domestic producers less price competitive against imports
- unsustainable if natural resources
Why might high levels of corruption hinder growth?
high levels of tax avoidance and tax evasion
- if capital spending projects successfully drive faster economic growth = govt is unlikely to see the fiscal dividend needed to fund improved basic health and education services – both pivotal to better development outcomes
Policy to improve development
increase in government = borrowing to fund critical infrastructure projects.
- target long-term borrowing as a way of funding projects or given their savings gap, aim to attract inflows of FDI
- The involvement of FDI might help to increase the share of taxation that comes from corporations
What might be a microeconomic advantage of improved infrastructure?
supply costs fall leading to lower prices for consumers and higher supernormal profits for firms
How might increase spending on education help competitiveness?
At a macroeconomic level, successful education investment has the advantage of improving skills and capabilities across the economy = an outward shift in both AD and LRAS = increase trend economic growth, lift employment and real wages in the formal economy = lowering Brazil’s Gini Coefficient
How important is education in the Human Development Index?
This policy might help close the gap that exists between expected and means years of education which has a 1/3rd weighting in the Human Development Index
Evaluation of economic growth = reduce poverty in developing countries
- not always inclusive
- whilst absolute poverty might be declining, relative poverty can rise ans measured by gini
Advantages of econ growth
- reduce extreme poverty
- attract greater inflows of fDI
How can econ growth in developing countries lead to FDI?
- FDI = supply side gains
- inflows of capital = improve capital stock = improve productivity = help nation achieve ‘catch up growth’ with richer countries (solow growth model)
Evaluation of gains from FDI
- many economists have cast doubt on gains from GDI
- e.g how many new jobs actually go to domestic workers such as the outflow of profits by some MNCs
- FDI might contribute to environmental damage e.g deforestation
Example of corruption of tax collection
- Ethiopia and Zambia, tax collection is less than 15% of GDP (insufficient to fund public goods)
Advantages of FDI
- economic growth & employment
- finance a current account deficit
- higher wages & improve working conditions
- better training
How can FDI create econ growth?
- increased capital stock = increase productivity = rise in GNI per capita = increase in consumption
How does FDI lead to higher wages?
- if the TNCs take their CSR policy seriously = higher incomes anad savings
Drawbacks of FDI for developing nations
- TNCs power
- inequality
- only employ local labour
How can FDI lead to TNCs wielding too much power?
- LEDCs might use their financial strength to gain favourable law and regulations and tax exemptions
- Ethnical standards of TNCs may be por (e.g mining, farming) = long term environmental damage (e.g over-fishing)
- profits made in a LEDC are repatriated to the host country = low GNI
How can FDI lead to inequality?
- Foreign multinationals may only employ local labour in lower-skilled jobs = little opportunity for locals
- profits from FDI flow disproportionately to powerful elites within a country
Evaluation of FDI
- depends on whether TNCs pay sufficient rate of tax
- FDI are now significantly more important than remittances, debt and aid (most important way of overcoming a savings gap)
- strong FDI = currency appreciation = threaten price competitiveness (crowd out local producers)
- can help overcome primary product dependency
Benefits of growing population
- increase workforce
- increased consumption
- increased tax revenue
