4.3.3 Strategies influencing growth and development Flashcards
What are free market approaches to development?
Free-market approaches favour giving a larger role to private sector enterprises using liberalisation of markets,
structural supply-side reforms to raise incentives for people and businesses and increased transparency for
government also high on the policy agenda.
What are examples of market led policies?
- Fiscal discipline – emphasising greater control of government spending, budget deficits and national debt
- Reallocating state spending away from subsidies (e.g. minimum prices to farmers) towards health care,
education & infrastructure - Tax reforms – including widening the base of taxation and encouraging lower tax rates to raise enterprise and
work incentives as a means of creating wealth - Liberalizing market interest rates – i.e. letting financial markets allocate capital among competing uses
- Floating rather than fixed exchange rates – which implies an absence of central bank intervention
- Trade liberalisation via reductions in import tariffs and fewer forms of protectionism such as import quotas
and other non-tariff barriers - Privatisation – i.e. moving state enterprises into the private sector
Explain trade liberalisation.
Trade liberalisation involves a country lowering import tariffs and relaxing import quotas and other forms of
protectionism. One of the aims of liberalisation is to make an economy more open to trade and investment so that it can then engage more directly in the regional and global economy. Supporters of free trade argue that developing countries can specialise in the goods and services in which they have a comparative advantage
Show the effects of removing an import tariff on cars.
What are micro effects of trade liberalisation?
- Lower prices for consumers / households which then increases their real incomes
- Increased competition / lower barriers to entry attracts new firms
- Improved efficiency – both allocative & productive
- Might affect the real wages of workers in affected industries
What are macro effects of trade liberalisation?
- Multiplier effects from higher export sales
- Lower inflation from cheaper imports – causing an outward shift of short run aggregate supply
- Risk of some structural unemployment / occupational immobility
- May lead initially to an increase in the size of a nation’s trade deficit
What are the advantages of attracting FDI inflows?
- Improved infrastructure especially in power and transport sectors
- Higher capital intensity / capital deepening i.e. more capital per worker which leads to higher productivity
- Better training for local workers leading to improved human capital and less risk of structural unemployment
- Investment grows a country’s export capacity (e.g. via firms attracted into special economic zones)
- Technology & know-how transfer, promoting diversification of the economy and reducing primary
dependence - More competition in markets which then lowers prices for consumers and increases their real incomes
- Creates new jobs leading to higher per capita incomes and increased household savings
- FDI can promote a shift to higher productivity jobs and high-value added industries
What are the disadvantages of attracting FDI inflows?
- Multinationals wield power within host countries especially LEDCs and they can gain favourable laws &
regulations - Foreign multinationals take advantage of weak laws on anti-competitive practices and environmental
protection - Multinationals have been criticised for poor working conditions in foreign factories
- Profits made in an LEDC are often repatriated to the host country
- Imports of components/capital goods initially have a negative effect on a country’s trade balance
- Multinationals may only employ local labour in lower skilled jobs
What are policies designed to attract FDI?
What are the advantages of government subsidies to promote development?
Economists who support
intervention to promote development argue that subsidies can play an important role in improving (for example) farm
incomes which then leads to higher capital investment and supports innovation and improved productivity in the long
run. Subsidies are also a way of encouraging increased production to help overcome the challenges of malnutrition
among the poor and they help to generate surpluses for export.
What do free-market critics of government subsidies argue the disadvantages of subsidies are?
- Subsidies distort the working of the price mechanism
- Subsidies can stifle innovation because producers are less reliant on innovation as a way of making more
profit - Producers / growers can become “subsidy-dependent” in the long run and there is also the risk of corruption
syphoning off financial support to those who don’t need it - From an environmental point of view, subsidies can lower the incentive for producers to improve efficiency,
instead they are rewarded by increasing the intensification of farming which can lead to deforestation, a loss
of biodiversity and increased water scarcity. Farmers may overuse fertilisers or pesticides, which can then
result in soil degradation which reduces the maximum sustainable yield in the long run
Explain how a floating exchange rate can be helpful to countries exposed to external economic shocks.
A floating exchange rate can be helpful for countries exposed to external economic shocks. For example,
Poland operates with a floating currency (the Zloty) inside the EU Single Market. When the global financial
crisis erupted in 2007-08 and the wider European economy went into recession, the Polish zloty depreciated
heavily against the Euro and the US dollar. This helped the Polish economy stabilise since their exports were
now more competitive. In contrast, Greece was locked into the single currency and could not rely on a
depreciation to restore some loss competitiveness
What are other advantages of countries choosing floating exchange rates other than to help countries exposed to external economic shocks?
- Floating exchange rates mean that a country’s central bank does not have to intervene to change the currency’s price. This means that they do not have to maintain large reserves of gold and other foreign currencies.
- Many developing countries have become more open to trade in goods and services and inflows and outflows of investment. Maintaining a floating exchange rate implies that capital controls will not be used to limit the inflow and outflow of currency and this in turn may make a country more attractive to foreign investment
- Floating currencies are not necessarily volatile ones and allowing market forces to determine the price means that a government/central bank is not using up foreign currency reserves to defend a fixed exchange rate that the market has decided is not sustainable
What is the evaluation of floating exchange rate’s suitability for a country?
- A floating currency might be more appropriate for a country with a low trade to GDP ratio since exchange
rate fluctuations would have less of an impact on the trade balance and the inflation rate. - We have to consider whether a country has the size and reserves to be able to control their own currency.
Many smaller EU nations including the island countries of Cyprus and Malta have chosen to join the single
European Currency. - An economy with one dominant trade partner might decide that the advantages of a pegged currency
outweigh come of the possible gains from currency flexibility
Define microfinance
Microfinance is a form of banking service that’s offered to unemployed or low-earnings individuals, or businesses that in any other case haven’t any different access to economic services.
What financial products does microfinance refer to?
- Micro-credit - the provision of small-scale loans to the poor for example by credit unions
- Micro-savings – for example, voluntary local savings clubs provided by charities
- Micro-insurance - especially for people and businesses not traditionally served by commercial insurance businesses - a safety net to prevent people from falling back into extreme poverty
- Remittance management – managing remittance payments sent from one country to another including for example transfer payments made through mobile phone solutions
What are benefits of microcredit?
- Helps overcome the savings gap which limits entrepreneurship
- Encourages entrepreneurship especially social enterprises
- Targeted at women entrepreneurs
- High rates of repayment because the system is built on social capital / trust
What are disadvantages of microcredit?
- High interest rates
- Low success rate for new small businesses
- Alleged forcible collection of debt in many villages – hard to monitor
- Perhaps relatively ineffective compared to the impact of migrant remittances & foreign direct investment
What is privatisation?
Privatisation is the transfer of a business, industry or service from public to private ownership.
What are the benefits of privatisation?
- Private companies have a profit incentive to cut costs and be more productively efficient and raise efficiency
- Government gains revenue from the sale of assets and no longer has to support a potentially loss-making
industry - If a state monopoly is replaced by a number of firms this extra contestability in an industry will lead to lower
prices which helps to increase the real incomes of poorer households - The competitiveness of the macro economy may also improve especially if privatisation leads to increased
investment and benefits from economies of scale. Improved competitiveness will drive higher exports and
long run GDP growth
What are the disadvantages of privatisation?
- Social objectives are given less importance because privately-owned firms are driven by the profit motive
- Some activities are best run by the state operating in the public interest because they are strategic parts of
the economy e.g. water supply, steel and railways and have the characteristics of a natural monopoly - Government loses out on dividends from any future profits
- Public sector assets are often sold cheaply, and the privatisation process may suffer from corruption
- Privatisation leads to job losses as firms increase their efficiency – this increases the risk of poverty for those
affected - Unless privatised corporations are regulated effectively, there is a risk of creating private monopolies who use their market power to increase prices and profits, this can have a regressive effect on the distribution of income
What do interventionist strategies for development involve?
Interventionist policies involve many different types of government intervention in markets designed to correct for multiple market failures, influence patterns of trade and investment and address some of the root causes of extreme poverty and inequality.
What do supporters of interventionist strategies believe?
Supporters of interventionist strategies believe in the concept of a developmental state – where
the government can be an active and positive force in driving sustainable and inclusive growth and development.
What are some of the key roles of the govt?
- Basic (universal) and health care
- Accessible & affordable education of good quality
- Infrastructure especially in telecommunications, health and transport
- Public-private partnerships in supporting urbanization
- Smarter regulation e.g. building codes, regulation of monopoly power