4.3.3 Strategies Influencing Growth and Development Flashcards
LS18
What are market orientated strategies?
brief definition
- Measures which make the economy more free, with minimum government intervention.
What are market orientated strategies?
list
- Trade liberalisation
- Promotion of FDI
- Removal of gov. subsidies
- Floating exchange rate systems
- Microfinance schemes
- Privatisation
How does trade liberalisation influence economic growth and development?
- Increases trade
- Helps to overcome foreign currency gap = ↑imports of capital and raw materials = ↑EG+D
- ↑employment and wages = ↑disposable income = ↑EG+D
- ↑competition = ↑innovation and efficiency = ↑quality = ↑EG+D
EVAL:
* Difficult for infant industries to become competitive
* Risk of structural unemployment
* Primary product dependency = limited benefits of trade liberalisation
How does the promotion of FDI influence economic growth and development?
- Injection into circular flow
- Potential for transfer of technology and skills = higher wages
- Improved working conditions = raised living standards
- LT FDI can = ↑ exports = improved current account on BoP
- ↑ tax revenue for host country = improved budget + reinvestment into public services etc.
- ↑ Competition = ↓ prices = raised living standards
EVAL:
*TNCs may mainly use expats to do high-paid work, limits FDI’s improvement of ED
*Tax revenue may be small as some LEDCs use tax breaks as an incentive - TNC may use accounting tricks and pay tax in diff country with lower corp. tax
*TNCs may outcompete local rivals –> monopoly status
*May exploit weak environmental regulations in LEDCs = ↑ external costs
How does the removal of government subsidies influence economic growth and development?
- Incentivises firms to be efficient = ↓ waste and ↑ innovation
- Subsidies could distort price signals (when given to industries that do not produce external benefits e.g. sugar farmers in US or produce external costs e.g. coal power companies) and lead to government failure - so removal can ↑ allocative efficiency
EVAL:
* Can support infant industries
* Allows firms to ↑ spending on R+D = technological advancements that ↑ LT economic growth + dynamic efficiency
Difference between a floating exchange rate and a fixed exchange rate?
- Floating: market forces determine the exchange rates
- Fixed: government sets the exchange rate
How do floating exchange rate systems influence economic growth and development?
- Government/central bank doesnt need to hold large reserves of gold/foreign currency to influence exchange rate = more foreign currency to use on imported capital = ↑ EG
- Mechanism acts itself as an automatic stabiliser in response to economic shocks - when in current account deficit - will depreciate = exports more competitive
- Frees up monetary policy - Interest rates can be used to target macroeconomic objectives e.g. inflation and economic growth
EVAL:
* LEDCs lose ability to support infant industries through undervaluing currency
* Exchange rate volatility can create instability = unattractive to FDI
How do microfinance schemes influence economic growth and development?
- Fills savings gap = ↑incomes + ↑capital accumulation = ↑EG + ↓poverty
- Empowers women = ↓poverty + ↑incomes + greater utilisation of factors of production
EVAL:
*Some lenders profit orientated = unsustainable debt
*Exorbitant interest rates
*Needs to be ↑ in productivity + output in order to see ↑ in EG
How does privatisation influence economic growth and development?
- Profit motive = incentive to ↑efficiency = ↑productivity and quality = ↑EG+D
- Competition = incentive to ↓ prices + meet consumer needs = ↑ED
EVAL:
* Natural monopoly e.g. British rail, Thames Water = monopoly power = limited choice and high prices for consumers
