4.3.3 strategies influencing growth and development Flashcards
how does trade liberalisation impact growth
Countries can aim for export led-growth.
● Removing trade barriers will mean that domestic industries either close or are forced to become as efficient as other world producers. Resources will be allocated to their best use where the country has a comparative advantage.
● Countries like Singapore and South Korea and regions like Hong Kong have benefitted from this method.
or imports become cheaper which as a result can boost AS growth
how does the promotion of fdi impact growth
FDI is investment by one private sector company in one country into another private sector company in another. It includes direct acquisition of a foreign firm, construction of a facility, investment in a joint venture with a local firm or licensing of intellectual property.
● Firms tend to undertake FDI because production costs are lower in developing countries and because it enables them access to a new market.
● It is different from a loan because if the investment fails, it is the company who has to deal with it and the country does not owe money to foreigners.
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.
● However, there is usually a repatriation of profits and developing countries may find the company exploits them, by offering lower wages and poorer conditions than they would in a developed country.
● The country will also lose some sovereignty and become dependent on another firm. Local competition may find it hard to set up and compete and the best jobs often go to imported labour, leaving only low skilled jobs for locals.
● Environmental damage and exploitation of natural resources and tend to become problems.
how does impact growth
how does the removal of government subsidies impact growth
Subsidies are 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. They can be an effective way of minimising absolute poverty and ensuring a minimum standard of living but they create many problems.
● They are often poorly targeted since subsidies on basic goods like rice will benefit everyone in the country, not just the poor. Economic theory suggests the problem would be better solved by giving poor households cash payments, as this would mean they were targeted at the poor.
● Subsidies to farmers and producers tend to lead to inefficiency and if they are given a large amount over a long period of time, the subsidy becomes ineffective in increasing development. In other cases, they can be beneficial in allowing an infant industry to grow.
● They represent a large amount of government spending, incurring an opportunity cost and often leading to high levels of debt.
They can also cause problems in terms of corruption and criminality, for example in 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.
how does having a floating exchange rate system impact growth
In these systems, market forces determine the currency. The country does not have to worry about their gold and foreign currency reserves and the government does not intervene.
● However, there are problems with this. It means that the currency can be volatile which makes it difficult for exporters/importers to make decisions about the future and can cause large changes in macroeconomic variables, including economic growth.
how do micro finance schemes impact growth
● These schemes aim to give poor and near-poor households permanent access to a range of financial services, including loans, savings, insurance and fund transfers. It is used to refer to loans from providers known as microfinance institutions (MFI) who deliver small loans to unsalaried borrowers, such as ‘Opportunity’.
● 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.
● The scheme tends to target groups who would be less likely to otherwise receive loans, for example women.
● However, South Africa has shown the problems that can occur with this system. It has become a method of financing consumption spending and unemployment means that 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.
how does privitisation impact growth
Privatisation can end the corruption within a firm who is owned by the state, as well
as encouraging them to be more efficient by increasing competition.
● Selling off a firm, particularly if it is loss making, will improve government finances
and reduce levels of debt.
● However, if the firm is privatised as a monopoly there will be no competition within the market. On top of this, it can be associated with corruption where politicians or officials sell the company at below market price to a friend or family member or receive bribes to accept one company’s bid.
● The water industry in Ghana was privatised in 2006 but when the contract was expired in 2011, the government did not extend it. Water quality improved but reliability did not. There had been increased revenue and efficiency and improved customer service.
how does the development of humans capital impact growth
This would provide workers with skills and training and thus help them to be more efficient and improve productivity. Businesses struggle to expand where there are skills shortages and it also limits innovation.
● Human capital could be developed through schools or vocational training, whether this be apprenticeships or simply classes provided for business people.
● Higher skills would allow the country to develop from the primary sector to a manufacturing sector, overcoming primary product dependency.
● Better education also improves quality of life.
● Both China and South Korea developed their human capital massively in order to develop.
how does protectionism impact growth
Protectionism allows domestic industries to grow by keeping foreign goods out and protects them from strong competition. They can use a policy of import substitution, where they deliberately attempt to replace imported goods with domestically produced goods by adopting protectionist measures.
● This will create jobs in the short run and will allow the industry to develop, perhaps to the extent where the barriers can be removed, and the industry can compete globally.
● However, it means countries lose out from the benefits of specialisation and comparative advantage and could cause inefficiency, since domestic producers suffer from a lack of competition. Other countries are likely to retaliate.
how does impact growth
