4.3.3 Strategies influencing growth + development Flashcards
what are some examples of market-led strategies to influence growth + development?
- trade liberalisation
- foreign direct investment
- removal of state subsidies
- free floating exchange rates
- microfinance
- privatisation
what is meant by ‘trade liberalisation’?
process of reducing/removing barriers and restrictions that impede the exchange of goods + services between countries
what are the advantages of trade liberalisation?
- lower prices - real income/purchasing power increased -> higher consumer surplus -> can reduce inequaliities in consumption
- increased competition - lower prices = increased allocative efficiency = higher productivity = lower unit costs; may benefit from EoS
what are the disadvantages of trade liberalisation?
- loss of import tariff revenue
- increased structural unemployment - if domestic demand shifts away from home suppliers to imports -> worsened if labour is geographically or occupationally immobile
- risk of increased relative poverty
- SR -> rise in trade deficit due to increased imports
- environmental exploitation
what are some good evaluation points regarding trade liberalisation?
- both a micro and macro effect -> impact depends on scale of tariff reductions and flexibility of domestic businesses to repsond to changing relative prices
- impact can be different for developed, high-income countries vs. low-income ones
what is meant by ‘foreign direct investment’?
investment made by a company/individual in one country into business interests in another country
what are the disadvantages of foreign direct investment?
- repatriation of profits - when profits are transferred back to the investor’s home country from the host country -> firms might exploit workers by offering low wages/ poor working conditions
- environmental damage/degradation of natural resources
- imports of components/capital goods -> worsened current account
what are the advantages of foreign direct investment?
- economic growth - through increased capital investment -> increased production capacity -~> job creation -> AD up -> real GDP up -> actual eco. growth
- job creation - foreign investors establish new businesses/expand exisiting ones -> DFL up
- transfer of technology and knowledge - increased skills -> more productive and innovative -> LRAS up -> real GDP up -> potential eco. growth
- infrastructure development - e.g. transportation and telecommunications
what is meant by ‘removal of state subsidies’?
process of reducing/eliminatig financial assistance provided by the government; offered to promote eco. development, protect domestic industries + any environmental concerns
what are the pros of removing state subsidies?
- reduced gov. expenditure -> reduced fiscal deficit -> allows gov. to allocate funds elsewhere
- eliminates market distortion as subsidies encourage overconsumption
- redirects resources from inefficient subsidised sectors
- forces previously subsidised sectors to be more competitive + productive -> incentive to innovate -> reduces overreliance
what are the cons of removing state subsidies?
- immediate price rise -> potential inflationary pressure (SR)
- reduced standard of living -> reduced purchasing power for low-income households
- increased cost -> higher prices -> possible unemployment in subsidised sector to cut costs
what is meant by a ‘floating exchange rate system’?
currency value is purely set by market forces. it can appreciate or depreciate. there is no intervention by the central bank
what are the advantages of a floating exchange rate system?
- monetary policy autonomy - more flexibility -> easier to adjust IR and QE to address unemployment, inflation, growth, etc.
- shock absorption - i.e. during a recession -> can rebalance economy
- trade balance adjustment - i.e. large trade deficit -> currency depreciation -> E=cheap; I=expensive -> net exports inc. -> trade deficit narrows
- country does not have to worry about their gold and foreign currency reserves
what are the disadvantages of a floating exchange rate system?
- exchange rate volatility - more uncertainyy for businesses involved in international trade and investment
- currency risk for businesses and investors
- inflation - fluctuations -> change in import prices -> imported inflation -> erode real purchasing power
- loss of exchange rate as a policy tool - can limit the direct influence of exchange rates on trade + expenditure
pros and cons of a fixed exchange rate system
ADV:
- economic stability
- reduces currency speculation
- predictability -> foreign investment up
- helps control inflation
DISADV:
- limits monetary policy flexibility -> can lead to over or undervalued currency
- vulnerable to economic shock
what is meant by ‘microfinance’?
provision of financial services to individuals or small businesses who are typically excluded from traditional banking services
what are the advantages of microfinance?
inc. access to credit -> provides for socially excluded groups -> allows them to inc. income or start businesses, etc.
- women empowerment -> inc. social status
-** inc. per capita incomes** -> reduced poverty -> job creation
what are the disadvantages of microfinance?
- very high interest rates to compensate for the risk of lending to low-income households -> more difficult to repay -> poverty up
- over-indebtness: borrowers may take multiple loans from diff. microfinance institutions -> financial stress up
what are the advantages of privatisation?
-** inc. competition** -> inc. efficiciency and productivity -> product quality improvement -> price reductions -> better service provision = consumer benefit
-** inc. investment** -> eco growth and employment up
- reduced gov. burden -> better allocation of resources to other public services e.g. healthcare + education
what are the disadvantages of privatisation?
- firms prioritise profit max. > higher costs -> less efficient resource allocation -> income inequality
- services may be less affordable for low-income households -> less access to essential services
- loss of gov. control -> limited ablity to address public interest
- private entities seek cost-cutting measures -> job losses, outsourcing, automation, etc.
what are some interventionalist strategies?
- development of human capital
- protectionism
- managed exchange rates
- infrastructure development
- promoting joint ventures with global companies
- buffer stock schemes
what are the advantages of developing human capital?
- enhanced productivity -> provides workers with skills + training -> efficiency and productivity
- reduced poverty -> improved human capital -> higher wages secured -> better quality of life
- innovation + technological advancement -> more skills = more likely to engage in R&D.
- FDI -> companies more likely to invest in high-skilled countries -> dec. training costs -> improves business environment
- economic diversification -> skilled labour force can reduce primary product dependency + overreliance on a single industry
what are some barriers to entry to education?
- financial barriers
- distance
- poor quality of education
- gender disparities
what are some interventions to improve access to education?
- conditional cash transfer programmes (CCTs) -> provide cash incentives to low-income families so that children attend and complete school
- school infrastructure investment
- school feeding programmes
what are the advantages of protectionism?
- job creation (SR)
- allows domestic industries to grow by keeping foreign goods out (protects them from competition) -> can use “import substitution” -> deliberately replacing imported goods w/ domestic ones
what are the disadvantages of protectionism?
- countries lose out on the benfits of specialisation and comparative advantage -> lack of competitiveness -> inefficiency
- other countries may retaliate
what is meant by a buffer stock scheme?
mechanism designed to stabilise the price + supply of a commodity e.g. a raw material or agricultural product. this prevents price fluctuations + ensures a steady supply
what are the advantages of a buffer stock scheme?
- price stability -> stabilises commodity prices -> predictable income for producers -> better living standards
- investment -> stable prices -> producers are better able to plan and invest in new capital -> increased yields + improved quality -> increased per capita incomes -> investment up = AD up -> real GDP up -> actual eco. growth
- food security -> maintaining adequate food supply -> prevents food shortages + price spikes e.g. after external shocks -> improved living standards
what are the disadvantages of a buffer stock scheme?
- finance - high startup/administrative costs (LR) -> gov may struggle to finance the scheme (many schemes have failed as operators ran out of money)
- management -> gov may struggle to manage with limited storage space + poor infrastructure + poor expertise -> reduced quality of stocks -> lower prices -> reduced profits for producers
- inefficiency -> min. prices may be set too high -> overproduction (LR) -> surpluses -> potential environmental damage -> gov. failure
- vulnerable to political interference -> undermines effectiveness and can lead to corruption
- vulnerable to changes in: weather patterns, global trade policies, sudden shifts in demand
what are some alternatives to buffer stock schemes?
- agricultural insurance -> provides protection against crop losses due to weather events
- subsidies -> reduced production costs -> lower prices -> increased price-competitiveness
- rural infrastructure -> roads, water supply, electricity -> increased productivity -> increased LRAS -> increased GDP -> potential eco. growth
