4.3.3 Strategies Influencing Growth + Development Flashcards
Give some examples of market-oriented strategies
- Trade Liberalisation
- Promotion of FDI
- Removal of subsidies
- Floating exchange rate
- Microfinance schemes
- Privatisation
What is a free-market approach
Favour of giving a larger role to the private sector enterprise using liberalisation of markets, structural + supply-side reforms to raise incentives for people and business and increased transparency
Describe how Trade Liberalisation can allow for growth and development
- lowering protectionism to open an economy to trade + investment
- Developing countries can specialise based upon comparative advantage
- Multiplier effect from higher export sales
- Lower inflation from cheaper imports
What are the problems with trade liberalisation
Risk some structural unemployment
larger initial trade deficit
Describe how the promotion of FDI can allow growth and development
- Source of Aggregate Demand and real growth
- Improved infrastructure - can allow increased productivity
- increase output + export capacity
- Allow diversification of the economy
- New jobs + more competitive markets
What are the problems with FDI growth?
Due to poor laws in developing countries, workers’ conditions and wages in new jobs created maybe poor
profits of MNC are repatriated
Describe how removal of Government subsidies can allow growth and development
Subsidies distort the price mechanism
Stifel innovation and power productivity due to dependency
Opportunity cost for government finance - could be used for an infrastructure project e.g
What are the problems with removing Government subsidies
e.g. in the case of food industries
Subsidies for some industries like food can allow for increased nutrition and increased real incomes
energy/necessities subsides can increase social welfare
Describe how a floating exchange rate can allow for growth + Development
- can protect against external shocks
- Reserves of cash aren’t needed
- Capital controls are not limited to maintaining currency stores
- floating is not necessarily volatile
What are the problems with floating exchange rates
Floating may be more appropriate for a country that is reliant on export-led growth
Pegged exchange rates may be more beneficial if there is a major trading partner
What is micro-credit, micro-saving, micro-insurance and remittance management
What are the aims of the micro-finance schemes
Micro-credit - provision of small scale loans to low-income groups
Micro-saving - voluntary local saving clubs provided by charities
Micro-insurance - especially for people, businesses to scared by insurance industries
Remittance management - making remittance easier
Aims to reduce poverty using small loans helps overcome savings gaps and encourages social enterprise
Describe how Privatisation can allow growth and development
Involves a transfer of a business, industry or service from public to private ownership
Allows increased efficiency and large economies of scale
Revenue from sales of assets can be gained by Gov
Could induce a natural monopoly leading to high output at low prices
What are the problems with Privatisation
Social objectives maybe more important than profit maximisation
Can lead to job losses
What are Interventionist strategies
Involve many different types of Government intervention designed to correct market failure, influence patterns of trade and investment and address causes for extreme poverty
How can the development of human capital allow growth and development
Differences in productivity and per capita incomes are strongly linked to variation in quality and quantity of human capital available in a country
This can be done by strategies to improve nutrition, school attendance, brain drain prevention and reskilling and training schemes
How can Protectionism allow for growth and development
Average import tariffs are higher when imposed by developing countries
Import substitution to support domestic industries and possibly infant industries
Can raise tax revenues
Reduce currency account deficits
Create jobs in domestic industries
What are the problems with protectionism
Tariffs may cause higher import prices - stifling any investment spending
Risks of retaliation
Loss of productivity, efficiency and higher prices through inflation
How can a Managed Exchange Rate affect growth and development
E.g. why maybe a managed devaluation be beneficial
This is when a central bank may choose to intervene in foreign exchange markets
Devaluation may be beneficial to improve CA deficit, prevent deflation and reduce import dependence
Seen to be less volatile and hence support economic confidence
Describe how infrastrucural development can allow for growth and development
Closing the infrastructure gap is crucial but especially in NEE who went to allow progress in meeting sustainable development goals
Savings gaps are a barrier to investment
China has benefited greatly from infrastructural development, however, it is questionable whether this growth has been equal
Describe how joint ventures with global companies have allowed growth and development
Joint venture is a separate business entity created by two or more parties, involving shared ownership, returns and risk
Provide an opportunity for developing countries to acquire specific expertise in industries that they are hoping will be a new source of comparative advantage
Example: 2017 Apple entered a joint venture in China to open new data center to serve iCloud users
Describe how buffer stock schemes allow for growth and development
Way to smooth out fluctuation in price - stabilise price of agricultural products
Buying up supplies when the harvest is plentiful
Selling stocks onto markets when supplies are low
In theory is profit making
Can reduce risk of extreme food poverty
Allow stable income for farmers
In theory-is self-financing
What are the problems with buffer stock schemes
Many buffer stock schemes have collapsed
only work effectively with storable commodities
Admin costs + corruption
Stocks maybe not big enough to change market price
Other Strategies: Lewis Model - industrialisation
Model of a dual economy of rural agriculture + urban manufacturing
Initially, majority of labour is employed on land being a fixed resources
There will experience diminishing marginal return and underemployment
Urban workers engaged in manufacturing tend to produce higher value of output, leading to higher wages. Hence temping surplus agricultural workers to migrate to cities leading to rural-urban migration
What is the problem with the lewis model
Dangers of automation in manufacturing
low-level assembly tasks don’t always add a great value of value-added
may not have the infrastructure to cope with higher rates of rural-urban migration
Other Strategies: Development of Tourism allowing growth and development
Creates large GDP growth and jobs globally (especially for women)
Export earnings through generating foreign exchange
Lifts AD and accelerator effect from investment
What is the problem with using tourism as a method for growth and development
- Exploitation of labour and low wages + long hours
- Remittance of profits
- Effect on environment
- Vulnerable to economic shocks e.g. covid
Other Strategies: Fair Trade schemes as a method of growth and development
Come about to prevent market failure and effect of monopsony power
Generate high prices/stability
Improve production standards
What are the problems with Fairtrade schemes
impact on non-participating farmers
Improving productivity would be better through infrastructural investment
Other Strategies: Overseas Aid to allow growth and development
Help to overcome saving gaps
Fast-forward critical infrastructure
Educational aid can improve productivity
What is the problems with overseas aid
Poor Governance may prevent money from going towards good
Dependency culture
Distorts market force + economic forces
Maybe instead beneficial when coming in the term of reform
Other Strategies: Debt relief to allow growth and development
External debt owed to overseas creditors can be a constraint on growth
Can involve cancelling, rescheduling or refining of nations external debts
High debts can further impoverish the poorest
LICs are highly dependent on primary commodity export which global shocks can push them further into debt
can be done on the terms of social or economic reform
What is the problem with debt relief
Moral Harazrd - Spend more and borrow more
If the Government ran better macroeconomic policies instead
What does the World Bank do
Provides grants + low-interest loans
Policy advice + technical assistance to developing countries
Co-ordinated projects with the Government
What does the IMF do
Promote international money cooperation
Expansion of international trade
Exchange stability
Resource available to members and advice
What are NGO’s
Not-for-profit, voluntary group
Work in local, regional and international scales
Work on environmental projects, community development and human rights
