4.3.3 strategies influencing growth and development Flashcards
Market oriented strategies: trade liberalisation
-Reduction or removal of barriers to international trade
-Quotas, tariffs, trafe restrictions
Benefits:
-Encourage competition leading to efficiency and lower prices for consumers
-Increased economic growth through export led growth - ‘trickled down’ to poorest members of society - better living standards
-Incentive for economy to shift resources into new industries where they can maintain comparitive advantage
-Country becomes more attractive for inward investment - can attract foreign multinationals who can produce and sell closer to these new emerging markets - lead to capital inflows - help economy through diffusion of more technology, management techniques, knowledge
The Washington Consensus: free-market reforms, limited gov intervention
-Interest rate liberalisation
-Floating exchange rates
-Privatisation
-Deregulation
Evaluation:
-Worsens income inequality both domestically and internationally - winners and losers dependent on education and skill- structural unemployment from higher competitive markets
-These policies did not see developing countries diversifying into manufacturing - developing countries removed barriers while developed countries maintained heavy protectionsit policies
-Specialisation and comparative advantage is at odds with helping a developing economy to diversify away from primary commodities towards manufacturing goods with more added value
Market oriented strategies: promotion of FDI
-Investment by firms based in one country into the productive activities of another country - through investment in physical capital, or a significant long-term financial stake in the company
Benefits:
-Growth, employment, tax revenue - MNCs produce output contributing to economic growth - increased local employment and income as the MNC hires local workers - MNCs pay tax rev increasing strong and predictable gov revenues - new jobs at higher incomes
-MNCs support local industries - buying locally produced goods and services leading to establishment and growth of local firms which serve the MNC
-MNCs bring technical and managerial expertise and new production technologies - passed onto local population - improving capital and labour productivity - physical and human capital - higher MRP - higher incomes
-Halo effect - encourages broader investment in local economy and infrastructure - positive externalities - multipliers - integrates developing economy into global market
-FDI is a credit on financial account - valuable foreign exchange for imports - LR MNCs are export oriented - improving BoP
Examples:
-‘Business friendly’ regulatory policies - so activity is not limited by administration requirements, legal red tape, h+s laws
-Exchange rate liberalisation so MNCs can import necessary capital/tech
Evaluation:
-Highly exploitative nature of MNCs - they invest to take advantage of cheap labour, lax regulations, working hours/wages, natural resources in developing countries - sweat shops - ‘race to the bottom’ reduces benefits as more people fight for the jobs
-Much FDI has not included promised transfer of technology, management expertise, knowledge - do not hire local skilled workers
-Reduced benefits - reduced profits tax revenues left in country
-Risk of overinvestment in infrastructure not health and education by domestic gov - HDI
-Opening market to long term investments also means opening to short-term investment which can be volatile, reckless, counter-productive
-Hot money flows - speculation in developing country assets
-Lead to capital flight - Asian crisis - western investors pulled out so the currencies collapsed overnight and plunged the economies into recession
-Should ensure strong legal and political institutions - protected property rights
-Joint ventures - share maximised benefits
Market oriented strategies: Privatisation
-Transfer of assets from gov sector to private sector
Benefits:
-Introduces profit-incentive and encourages reforms - industry becomes more competitive and efficient - especially in heavily interventionist developing economies often blighted by inefficiences, over-staffing, corruption
-Initial sale of assets generates windfall revenues for gov - can be reinvested eslewhere into economy - health and education
Evaluation:
-Privatisation of key industries like utilities can lead to high price increases, reduced affordability and access to clean water, electricity, gas
-May fail due to lack of strong institutional framwork for private sector to efficiently operate - need a well-functioning capital market and protection of consumer and employee rights
Market oriented strategies: removal of government subsidies
Benefits:
-Subsidies are often poorly targeted - subsidies on basic goods like rice will benefit everyone not just the poor
-Subsidies tend to lead to inefficiencies - resources inefficiently allocated over long period of time- reduced incentive to innovate and reduce costs
-Opportunity cost to gov (healthcare/education) - high debt levels
-Subsidies may cause corruption/criminality - fuel smuggling in venezuela for profit in neighbouring countries - environmental unintended consequence
Eval:
-Subsidies minimise absolute poverty and ensure a minimum standard of living
-Politically unpopular - best time to do is when free market price is falling as price change is less noticeable
Market oriented strategies: Floating exchange rate regimes
-Market forces determine currency
-Country do not have to worry about gold or foreign currency reserves - gov does not intervene
Benefits:
-Provides natural mechanism for trade balance adjustments
Eval:
-Currency can be volatile - so difficult for exporters/importers to make decisions about future
-Can cause large changes in macroeconomic variables including economic growth
Market oriented strategies: Microfinance schemes
-Grassroots approach to bridging savings gap and improving access to credit in developing nations - particularly amongst women
Micro-credit: provision of small scale loans to the poor - credit unions $1-$100 - buy very basic equipment to start small scale businesses or fix practical problems
Micro-insurance: especially for people not traditionally served by commercial insurance businesses - a safety net to prevent people from falling back into extreme poverty
Benefits:
-Prevents people falling into extreme poverty - banks have no interest in small scale unprofitable loans
-Targets women as they perform better as cliennts of micro finance institutions - their participation has more desirable LT development outcomes - transforms status and power
-Allows lending circles
-Address clear market failure as the poor have no access to financial markets - big social returns
-Low default rate
Evaluation:
-Won’t directly solve development
-Doesn’t change structure of the economy - sectoral development
-Keeps people in agriculture - PPD problem
-Unsustainable debt: many borrowers allowed to take on multiple loans - sub-prime lending - charged exorbitant rates of interest
-Evidence of coercive collection practices
-Savings: Perhaps too much focus on micro-credit and not enough of micro-saving schemes in general
-Sustainable saving from in-work income is more important in LR - real incomes must rise from higher productivity
Micro-insurance:
-Poorest countries are vulnerable to external shocks
-When this happens, interest on debt still needs to be paid
Distracts from other development goals: Cannot compensate for inadequate healthcare, education, infrastructure
Interventionist strategies:
Protectionsim
-Protectionist measures like tariffs, quotas, subsidies, can help economy develop own domestic industries for manufacturing simple consumer goods - prevents improts of these products
Benefits:
-Reduce dependence on exports of primary commodities - creates domestic market for consumer goods - economy can diversify into manufacturing
-Reduce balance of payment problems - limiting imports helps avoid persistant deficits in current account
-Support infant industies - protect them from competition so they can grow
-create jobs - eventually barriers can be removed for global competition
RWE: Many developing economies in 50s and 60s pursued ‘import substitution’ strategy
Eval:
-lose out from benefits of specialisation and comparitive advantage
-Cause inefficiencies due to lack of competition
-Inappropriate capital: developing countries need to prioritise labour-intensice industries rather than capital-intensive - as they have ready supply of low-cost labour
-Retaliation
Interventionist strategies: Managed exchange rates
-Pegging currency to currency of a key export parrtner/ developed nation with strong stable currency -promote certainty over exchange rates - increased trade - increased FDI
Undervalued exchange rate: promote export led growth
Eval:
-leave currency vulnerable to accusations of currency manipulation and retaliatroy tariffs
-imported capital machinery and raw materials more expensive
-imported consumer goods more expensive harms living standards
Overvalued:
-In SR improve living standards by enabling cheaper imports of food and other consumer goods
-Enabling capital to be imported cheaply
EVal:
-inappropriate capital
-cultivates reliance on imports
-prevents development of domestic industries
Interventionist strategies: Infrastructure provision
-Providing basic infrastructure - transport and utilities - not profitable for private sector so interventionist approach required from gov
Benefits:
-Supports long-term economic growth
-Better transport makes supply chains more efficient - allows those in rural areas to access healthcare services, airpots - promote trade
-Building of hospitals and schools lead to improvements in health and educations outcomes
-Utilities - improvements in living standards - cleaner water, electricity, sanitation
Eval:
-Limited gov tax revenues to fund large-scale projects
-Vulnerable to corruption and ‘kick-backs’ in procurement process
-More visible projects (HS2) favoured over those less glamourrous - sewarage/sanitation
Interventionist strategies: Development of human capital
-Education raises human capital and allows workers to be more productive - outpur per hour
-LRAS shifts out - contribute to LR economic growth
-Allows developing countries to absorb modern technology and develop capacity for self-sustaining growth and developmentt
Eval:
-Evidence suggests education policies most effective at reducing poverty when targeted at primary education (literacy and numeracy)
-Could be inefficient spending if skilled workers leave (brain drain)
-Or if focused on educating the elite
-Success of policies depend on reducing poverty which help incentivise young people to consumer education - must incentivise school attendance - if poverty is high children may be required to work to supplement family household income
Interventionist strategies: Buffer stock schemes
-Solution to price volatility in primary products
-Entail a price ceiling and floor
-If price of commodity drops too low (high supply) gov or buffer stock authory purchases large quanities of the good and stores it
-If price becomes too high, gov or buffer stock authority release good onto the market from storage - increases supply sufficiently to ensure price not does rise above ceiling
-Ensure stable incomes and revenues for producers
RWE: Ghana - cocoa
Eval:
-Storage is expensive
-Transport to and from storage is expensive
-Difficult to equate s+d in LR
-All producers need to be part of scheme for it to be effective
Interventionist strategies: Promoting joint ventures with global companies
-Between local and foreign firms to leverage tech and expertise
-Reduce exploitation of countries
-Keep some profits in domestic country
Other strategies: Industrialisation and The Lewis Model
-Assumes developing countries have a dual economy
-Traditional agricultural sector - low wages, productivity, employment, savings
-Modern industrial sector - high levels of investment and urbanisation
-Modern industrial sector attracts workers from rural areas by offering higher wages - higher incomes=more savings for investment
-Savings and investment key to growth - rural-urban migration needed
-Kuznets hypothesis - wealth inequality arises from this - incomes of industrial workers rise faster than farmers
Eval:
-During harvesting and planting, vast amounts of labour needed
-Not everyone with higher wagers will save and invest their money
-Urban poverty - industrial sector unable to provide jobs for all that have moved - improvements in technology lead to a reduced demand for labour
-More so a result of development rather than a cause
-South Korea - gov builds factories to encourage transition to industrialisation - risk of wasting resources
Other strategies: Tourism
-Major part of economy
-Significant source of income and employment
-10% of Thailand’s GDP
Benefits:
-Creates employment - labour intensive industry - employs higher % of women - tertiary - shift from primary - lewis model and ppd
-Export earnings - service industry - generates foreign exchange earnings
-Boosts AD - income multiplier effects
-Accelerator effects from increased capital investment in tourism infrastucture and servies
-Diversification away from PPD
Eval:
-Exploitation of local labour by overseas trans-national tourist businesses with migrant workers suffering from poor employment conditions
-Outflow of profits from foreign-owned tourist resorts - all-inclusive deals ignore local economy
-Externalities - construction, waste, congestion
-Impact on way of life if too many visitors, environmental degredation - locals vs tourists
-Downside of interdependence - luxury good - sensitive to economic cycle in the west
Aid
-Bilateral - between two countries
-Multilateral - provided through international institutions - less exploitation
-Conditional - must follow certain policies
-Technical assistance - expertise
Benefits
-Highly effective and morally justified
-Focus on poverty reduction, healthcare provision, education
-Vaccination programs save lives
-Multilateral aid based on assessments of needs not politics
-Conditionally - structural adjustment programs - incentive on LEDCs to improve policies and allow free trade and FDI
Eval:
-It may reduce poverty but it has not led to long lasting economic growth and development
-There has not been enough - UNDP asked for 0.7% of GDP in MDGs which no one has met
-Lots of aid to the wrong countries - rich countries focus on aid to their friends - linked to political or commercial favours
-Money is wasted - corruption, poor administartion, waste
-Encourages dependency - moral hazard - lot good in the long-run
-Conditionality failed - SAPs imposed western ideology but not always in interests of the country - exploitation - cheap labour
Debt relief
-Many LEDC governments borrowed huge sums from western private banks
-Some for development, a lot not
-Corrupt dictators, military spending, vanity projects
-Many govs have fallen but the debt remains
-Crippingly high interest rates almost impossible to pay off
-Jubilee 2000 coalition
Writing off debts - agreement to not pay it back
Benefits:
- Saves developing countries £billions in debt interest
-More funds available for spending on health, education, infrastructure
- Debt was illegitimate - unfairly imposed at high interest rates
- Debt makes aid policy nonsensical- at one point in 19802 MEDCs received $5 interest for every $1 aid money
Eval:
-Moral hazard - wrong lesson learnt
- Incentive to borrow again and act irresponsibly
-Defaulting on debt will affect credit rating
-May not be able to borrow again in the future or face higher interest rates
- Western banks and investors lose out
