4.3.3 Strategies influencing growth and development Flashcards
Describe market orientated strategies
o trade liberalisation
o promotion of FDI
o removal of government subsidies
o floating exchange rate systems
o microfinance schemes
o privatisation
Why is trade liberalisation likely to result in greater trade
trade liberalisation makes trading goods and services between nations easier. Therefore, the amount of trade taking place should increase.
how does trade liberalisation aid growth and dev
- 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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evaluate trade liberalisation as a strategy for development
- 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.
evidence of why we need to protect infant industries
- 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.
Cons of FDI
- 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.
pros of FDI
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
describehow FDI creates transfer of knowledge and solves savings gap
● 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.
Define microfinance
small loans and other financial services given to individuals or groups to promote business activity
(why - rural location often cannot access a bank)
example of microfinance
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)
cons of microfinance
- Some lenders are profit orientated rather than motivate to improve the lives of the poor. This has led to reckless lending and unsustainable debt.
- Some microloans have exorbitant interest rates greater chance of failure and leads to higher levels of indebtedness.
- Without increase in productivity and growth through industrialisation impact on per capita incomes is likely to be low.
feature of microfinance
- 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
examples of microfinance being ineffective
- 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.
define micro finance
Any form of credit service offered to low-income individuals not traditionally
serviced by the formal banking sector
Benefits of government subsidies
- 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.