4.3.3 Strategies influencing growth and development Flashcards

1
Q

Describe market orientated strategies

A

o trade liberalisation
o promotion of FDI
o removal of government subsidies
o floating exchange rate systems
o microfinance schemes
o privatisation

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2
Q

Why is trade liberalisation likely to result in greater trade

A

trade liberalisation makes trading goods and services between nations easier. Therefore, the amount of trade taking place should increase.

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3
Q

how does trade liberalisation aid growth and dev

A
  • Removing trade barriers exposes firms to greater levels of competition.
  • Domestic industries will therefore be under more pressure to increase efficiency and quality in order to remain profitable.
  • Those firms which are unable to do so will be outcompeted and likely go out of business.
  • Resources can then be allocated to industries in which the country has a comparative advantage*.
  • This increases efficiency and economic growth
  • For developing countries, there are likely to be labour-intensive (because the population is youthful) and basic in terms of technology (because skill levels and infrastructure are also likely to be basic).
    .
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4
Q

evaluate trade liberalisation as a strategy for development

A
  • infant industries are unlikely to survive the competition brought about through trade liberalisation.
  • hinder a country’s efforts to move up the value chain into more advanced goods and services.
  • Therefore, a period of protectionism may be needed before trade liberalisation is fully implemented to give a country the best chance of achieving economic development.
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5
Q

evidence of why we need to protect infant industries

A
  • South Korea during its period of economic development (1960-80s) developed through protecting infant industries (textiles, steel).
  • Once the country had fully industrialised, trade liberalisation was pursued e.g. joining WTO in 1995, signing FTA with US in 2007.
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6
Q

Cons of FDI

A
  • there is usually a repatriation of profits and developing countries may find the company exploits them, by offering lower wages and poorer conditions than in a developed country.
  • The country will also lose some sovereignty and become dependent on another
    firm.
  • The amount of tax revenue raised may be small as some LEDCs use tax breaks as an incentive for TNCs to enter their economy.
  • Local competition may find it hard to set up and compete so tnc becomes monopoly and the best jobs often go to imported labour, leaving only low skilled jobs for locals. so skills don’t improve that much
  • TNCs may choose to operate in LEDCs to take advantage of weak environmental regulation. The external costs will be borne by the host country.
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7
Q

pros of FDI

A

1) Injection into circular flow & higher econ growth
2) Potential for transfers of technology and skills
4) Capital inflows can be used to finance a current account deficit
5) Long-term FDI can lead to higher exports from the host country which improves the position on the current account
6) FDI generates tax revenue for the host country
7) FDI could lead to higher wages and improved working conditions, especially if TNCs take corporate social responsibility seriously = helps to raise living standards and overcome the savings gap.
8) Greater competition lowers prices = helps to raise living standards

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8
Q

describehow FDI creates transfer of knowledge and solves savings gap

A

● It also involves the transfer of knowledge from one country to another, with the
company bringing production and management techniques and training for staff
which will benefit the country as a whole.
● It will create jobs and leads to the effect of the multiplier. Labour productivity tends to
increase and wages are often higher. It is a source of investment and can help to fill
the savings gap.

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9
Q

Define microfinance

A

small loans and other financial services given to individuals or groups to promote business activity
(why - rural location often cannot access a bank)

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10
Q

example of microfinance

A

country: bangladesh
- didn’t have enough money to afford the materials required to create the bamboo sheets.
- no formal banking institution was willing to lend to them as they were viewed as too much of a credit risk
- Solution: a microcredit loan provided, the whole group, from the Grameen Bank (a Bangladeshi microfinance institution)

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11
Q

cons of microfinance

A
  1. Some lenders are profit orientated rather than motivate to improve the lives of the poor. This has led to reckless lending and unsustainable debt.
  2. Some microloans have exorbitant interest rates  greater chance of failure and leads to higher levels of indebtedness.
  3. Without increase in productivity and growth through industrialisation impact on per capita incomes is likely to be low.
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12
Q

feature of microfinance

A
  • target groups who would be less likely to otherwise receive loans, for example women are main beneficiaries
  • They take little or no collateral and use group lending, pre-loan saving requirements
    and an implicit guarantee of access to future loans if present loans are repaid fully
    and promptly. It allows borrowers to invest in their businesses or start up new ones.
    4) interest rates tend to be much lower than those of loan sharks
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13
Q

examples of microfinance being ineffective

A
  • in south africa has become a method of financing consumption spending and unemployment: most people do not have the funds necessary to ensure repayment of
    their loan, meaning they have to sell off family assets, borrow from friends and family
    or simply take out new loans to repay the old ones.
  • When actually used for investment, it has simply increased the informal economy with very little being spent on sustainable methods of development.
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14
Q

define micro finance

A

Any form of credit service offered to low-income individuals not traditionally
serviced by the formal banking sector

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15
Q

Benefits of government subsidies

A
  • Efficiency – by increasing the consumption of merit goods and production of goods with external benefits, subsidies can increase allocative efficiency.
  • Economic growth – 1) subsidies should lead to increased production of goods and services 2) spending on R&D can lead to technological innovations that boost economic growth e.g. GPS.
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16
Q

Purpose of sending subsidies to firms

A
  • Efficiency – by increasing the consumption of merit goods and production of goods with external benefits, subsidies can increase allocative efficiency.
  • Economic growth – 1) subsidies should lead to increased production of goods and services 2) spending on R&D can lead to technological innovations that boost economic growth e.g. GPS.
17
Q

Why may subsidies lead to inefficiency and waste

A

1) Governments often give subsidies to goods and services that do not produce external benefits. For example, sugar farmers in the US receive billions in subsidies from the government. Goods which produce external costs also receive subsidy e.g. coal power and fishing companies.
2) Firms receiving subsidies may feel under less pressure to be efficient and minimise waste. One way to counter this is to make the subsidies contingent on positive economic performance. South Korea used export targets to ensure subsidies were not wasted

18
Q

How else are subisdies crucail in ding world

A
  • placed on essential items within a country, such as food or fuel, or target agriculture and industry in an attempt to increase output and investment.
  • helps minimising absolute poverty and ensuring a minimum standard of living .
19
Q

So why is removing a subsidy a strategy for development?

A
  • large amount of government spending , incurring an opportunity cost and often leading to high levels of debt.
  • Governments often give subsidies to goods and services that do not produce external benefits. (sugar farmers in the US receive billions in subsidies from the gov Goods which produce external costs also receive subsidy e.g. coal power and fishing companies. )
20
Q

How to make subsidies effective

A

Subsidies can reduce incentives for producers to be efficient as they increase the chances that firms will be profitable. This can lead to waste and hinder innovation. MEMORISE!!

  • make the subsidies contingent on positive economic performance. South Korea used export targets to ensure subsidies were not wasted, creating successful startups IN INFANT INDUSTIRES like car, ship and semiconductor
  • once industries are able to produce at a competitive level subsidies can be removed. This process can therefore lead to dynamic efficiency.
21
Q

evaluate subsidies

A
  • subsidies are not guaranteed to foster economic development in the manner outlined above.
  • If used in areas unrelated to development such as food, this will likely be a wasted opportunity
  • removing them is politically unpopular and often leads to a government being thrown out
22
Q

Failed subsidies in venezuela

A
  • problems in terms of corruption and criminality, e.g Venezuela subsidised fuel is smuggled across its borders and sold in neighbouring countries for profit. The fuel subsidies have also led to high emissions, an unintended consequence.
  • Venezuela has placed subsides on almost all goods due to high inflation and low
    wages, but this is still not enough and demand is still higher than supply.
23
Q

Pros of privatisation

A
  • n the private sector, the profit motive is present and firms face competition.
  • This should result in increased efficiency as firms can increase profits by lowering costs.
  • Additionally, the threat of competition also acts an incentive to lower costs and meet customer needs
  • Selling off a firm, particularly if it is loss making, will improve government finances
    and reduce levels of debt.
24
Q

Cons of privatisation as a strategy

A
  • risk that price and quality will not improve if the privatised industry is a natural monopoly.
    because introducing competition to these markets is extremely difficult e.g. the rail service
  • also LEDCs may lack the capacity to effectively regulate these industries thereby risking corrupt practices
  • However, if the industry is not a natural monopoly, huge improvements in efficiency and quality can result e.g. supermarkets or airlines. e.g BA was privatised
25
Q

What is the difference between a floating exchange rate and a fixed exchange rate?

A

Market forces determine exchange rates in a floating exchange rate system. In a fixed exchange rate, the government sets the exchange rate.

26
Q

Pros of floating exchange rate

A

1) The government/central bank does not need to hold large reserves of gold or currency to defend the currency

2) If a country has a current account deficit, this should act to depreciate the currency. This will make exports more competitive which should lead to a reduction in the deficit (depending on the PED of exports and imports.

3) Interest rates can be used to target macroeconomic objectives such as inflation and economic growth.

4) Exchange rate may be overvalued under a fixed or managed exchange rate system. This would act to reduce the competitiveness of imports.

27
Q

Costs of floating exchnage rate

A

1) Countries lose a means of protecting their infant industries: deliberately maintaining a weak currency.
2) Volatility can create instability which will affect investment.
3) LEDCs lose the ability to pursue import substitution industrialisation.
4) self- correction of trade deficits are unliekly as so many other facotrs affecting trade deficit which are way more dominant

28
Q

pros of microfinance

A
  • fills savings gap -small scale biz onwers access finance
  • can relieve poverty
  • source of finance wihtout hug interest
  • cna emppower women
29
Q

2018 venezuelan subsidies -BBC

A
  • venezuela offers citizens heavily subsidised fuel
  • imf predicting inflation rates will reach a million percent this year - price of fuel has barely changed.
  • IN 2018: 1L petrol in Venezuela is 1 bolivar. On the black market, Venezuelans pay more than 4m bolivares for one US dollar.
  • That means that for the equivalent of one dollar, Venezuelans can fill the tank of a medium-sized car about 720 times
  • Venezuela loses $18bn to fuel smuggling annually
30
Q

Describe venezuelan economy strengths

A
  • largest proven oil reserves in world
  • 95% export earnings from oil#
  • so when prices were high, lots of money flowing in for gov
  • socialist president hugo chavez used some of this revenue to finance generous social programmes to reduce inequality and poverty
  • oil prices dropped sharply in 2014, the government was suddenly faced with a gaping hole in its finances and had to cut back on some of its most popular programme
  • lack of gov revenue due to falling oil prices led to extreme debts#
  • now 2018: hyperinflation driving shortage of food and basic necessitie sled to 2 million people fleeing since 2014 so lack of labour and inv has meant oil production fall to lowest point in 70 years