4.3.3 Strategies influencing growth and development Flashcards
What strategies can be used to help a country to develop?
- Aid and debt relief
- Structural change – e.g. development of the agriculture, industrial or tourism sectors.
- Policies favouring either an interventionist approach or a market-oriented approach.
Harrod-Domar model
The Harrod-Domar model says that the growth rate of an economy is directly linked to:
- The level of saving in the economy
- The efficiency with which the capital in the economy can be used
If either of these factors can be increased, then economic growth should be faster.
Aid
The transfer of resources from one country to another
What are the different types of aid?
- Bilateral aid
- Multilateral aid
- Tied aid
Bilateral aid
When a donor country (i.e. the country sending the aid) sends aid directly to the recipient country.
Multilateral aid
When donor countries pass the aid to an intermediate agency (e.g. the World Bank), which then distributes the aid to recipient countries.
Tied aid
Aid sent on condition that the money is spent in a particular way (e.g. on imports from the donor country).
What are the two different uses of aid>
Aid can be used as emergency relief (for example, during a drought or war) but it can also be used to promote development – known as development aid.
Arguments in favour of development aid
- It reduces absolute poverty.
- If it leads to improvements in health and education, this will improve a country’s human capital.
- It helps to fill the savings gap and the foreign exchange gap.
- There can be ‘multiplier effects’. For example, if aid is used to improve a country’s infrastructure, there will be a direct increase in AD. An increase in AD will mean more people will have jobs (and money to spend), and this will lead to further increases in AD.
Arguments against development aid
- The donor country can impose conditions about how aid is used – these conditions may mean that money isn’t used in the most appropriate way to encourage the economic growth of the recipient country.
- Aid can be misused by corrupt governments, meaning the money doesn’t help the people it was meant to help.
- Some say aid is aimed more at securing ‘favours’ for the donor country than helping the recipient countries.
Debt relief
The process of cancelling some of the debts owed by developing countries.
Why is debt relief used?
For low-income countries, debt servicing can use up a large proportion of their total income.
This leaves less money available for other services, such as healthcare or education.
Arguments in favour of debt relief
- It frees up money for improving infrastructure and public services, such as healthcare and education, which will contribute to long-term economic growth.
- The money saved by the developing country can be invested in capital goods to help grow its economy.
- Countries with lower debts are more likely to participate in global trade, benefiting the global economy.
Arguments against debt relief
- Some people claim that cancelling debt creates a risk of moral hazard and a dependency culture. For example, countries may feel that future debts will also be cancelled, so they may just borrow more.
- Cancelling the debt of countries run by corrupt governments may mean more money is misused – e.g. for personal gain or to buy weapons for internal repression (i.e. using force to control the country’s people).
- Debt cancelling can be used by a donor country as a way to secure influence in the recipient country.
Historically, when has debt relief been used?
Debt Relief was a key part of the Millenium pledge.
This was an idea proposed and overseen by former PM Gordon Brown – whilst he was Chancellor of the Exchequer in 1999/2000.
The Lewis Model
The Lewis model has been used to argue that increasing an economy’s industrial sector is the key to development.
It says growth in industry and manufacturing can be achieved without reducing agricultural output or increasing inflation.
Issues with the Lewis Model
- Like all models, the Lewis model involves a lot of simplifications. In practice, things often work out differently.
- It may not be easy to transfer labour to industry — workers (often young males) migrating from the countryside will leave fewer people to do physically demanding agricultural labour, while at harvest times there may be no ‘spare workers’ at all. Investment in education and training is also needed to develop the human capital needed to expand industrial output.
- Also, profits aren’t always reinvested locally — they may be invested abroad or used for consumption.
- And if industrial production is capital intensive and involves little human labour, economic growth may not provide many additional jobs.
Development of the agricultural sector
The agricultural sector is often seen as a low-productivity sector (i.e. the output is low compared to the inputs required) where it’s difficult to add value.
Although there are potential problems for a country if it depends too much on primary products, it can be worth a country developing its agricultural sector if that’s where it has a comparative advantage.
Developments in the agricultural sector can be seen as a stepping stone to developing other sectors. For example, if improvements in the agricultural sector lead to increases in national income, other sectors can then be invested in.
Advantages of development of tourism industry
- Employment will increase.
- Increased tourism means that a country earns foreign currency from tourists.
- Tourist is an export. This improves the country’s current account of balance of payments.
- Tourism tends to attract FDI.
Disadvantages of development of tourism industry
- Increased employment is mainly low-skiilled and seasonal.
- Increased tourism is likely to mean that more goods are imported (either capital goods to build facilities or goods demanded by tourists on holiday). This will be bad for the country’s balance of payments.
- Increased tourism may lead to environmental damage or inconvenience for the locals, as tourists’ needs are prioritised.
- Demand in the tourism industry is often income elastic, meaning that during economic downturns, demand is likely to fall quickly too.
- Tourist destinations aren’t guaranteed to remain popular forever — tourists’ tastes can change quickly.
Fair trade schemes
Fair trade schemes aim to offer individual farmers (or groups of small producers) in developing countries a guaranteed minimum (‘fair’) price for their goods.
In return, the producers usually have to accept certain conditions (e.g. they must agree to inspections, use approved farming techniques, and treat employees fairly).
Advantage of fairtrade schemes
The guaranteed price makes long-term planning easier for producers - they’re not subject to the large fluctuations in price that are often associated with primary products.
Disadvantage of fairtrade schemes
The distortion of the market price can lead to overproduction - farmers may not realise that a low price is a sign that they should grow a different crop. So when prices are low, farmers may flood the market and drive the price down further — affecting producers who aren’t in the fair trade scheme.
- It is important to note that these schemes rely on buyers being willing to pay above the market price, which might not be the case.
Microfinance
This means providing loans to small businesses and low-income individuals who may not be able to get loans from traditional banks.
The aim is for people in developing countries to use the loans to become more financially independent — either by developing businesses or investing in education.
Although microfinance works for some people, it’s not clear that microfinance can reduce poverty on a large scale.
