4.5. Development Policies

Question 1

Development Policies

Answer 1

1) Aid
a) Bilateral
b) Multilateral
c) Tied
d) Project
e) Military
2) Trade
3) Investment
4) Multinational Corporations (MNCs)
5) Foreign Direct Investment (FDI)

Question 2

Bilateral Aid

Answer 2

One country gives directly to another.

Question 3

Multilateral Aid

Answer 3

Many countries give to international organisations (e.g. UN/IMF) for distribution

Question 4

Tied Aid

Answer 4

Rules on how the aid is spent.

Question 5

Project Aid

Answer 5

Specific projects e.g. schools, hospitals, infrastructure.

Question 6

Military Aid

Answer 6

Must buy military equipment from donor country.

Question 7

Positives of Aid

Answer 7

• Humanitarian (moral) reasons.
• Improved international image of donors.
• Better international relationships between developed and developing countries.
• Promotes conditions for peace and stability

Question 8

Problems of Aid

Answer 8

• Aid dependency (developing countries become reliant on aid).
• Developing countries become more indebted.
• Not a good substitute for domestic saving and investment.
• Aid leads to slower growth rates.
• Aid might focus on developing the wrong sectors.
• Donor countries lack information.
• Corruption.

Question 9

Increasing Trade as a development policy

Answer 9

Trade can lead to economic growth:

1) Access to larger markets leads to economies of scale
2) Increased competition leads to innovation & new production techniques.
3) Transfer of technology & skills.
4) Specialisation leads to higher incomes & employment.
5) Access to finance for investment & FDI.

This leads to:

1) Improved supply conditions.
2) Lower costs.
3) More efficient production.
4) Increase in net exports & AD

Question 10

Increasing Trade as a development policy in developing countries

Answer 10

Developing countries that have specialised in primary products have suffered due to:
- Y.E.D for primary products is low:
as world incomes rise, demand increases only a little.
- Monopoly power of developed country manufacturers: maintain high prices.
- Subsidies to developed country farmers:
unfair competitive advantage

Question 11

Increasing Investment as a development policy

Answer 11

Investment is not easy for developing countries due to:

1) A lack of savings to provide funds for investment.
2) A lack of financial institutions to lend money out.
3) A shortage of entrepreneurs.

However, if investment can be encouraged, it can lead to a “virtuous cycle”:

Question 12

Virtuous Cycle of Investment

Answer 12

Increase in investment –>
Increase in productivity –>
Increase in income –>
Increase in savings

Question 13

Countries suitable for investment have these features:

Answer 13

• Laws, regulations and policies for investors
• Corporate governance (rules by which a company is controlled)
• Promotion and facilitation of investment
• Policies for enabling responsible business conduct
• Clear trade policy
• Developing human resources
• Clear competition policy
• Developing infrastructure
• Clear tax policy
• Sound financial systems

Question 14

Attracting Multinational Corporations (MNCs) as a development policy

Answer 14

a firm that operates in more than one country.

- impacts on developing countries when they invest in those countries

Question 15

Advantages of Multinational Corporations (MNCs) moving into developing countries

Answer 15

• Employment and training
• Transfer of skills and expertise
• Purchase from local suppliers
• Competition incentivises local firms
• Greater choice for consumers
• Tax revenue to host government
• Main source of FDI

Question 16

Problems of Multinational Corporations (MNCs) moving into developing countries

Answer 16

• Low skilled / low paid jobs
• Important jobs done by foreigners
• May not act ethically
• Domestic firms cannot compete
• Imposition of MNC culture
• Use of transfer pricing to hide profits
• Profits remitted home

Question 17

Attracting Foreign Direct Investment (FDI) as a development policy

Answer 17

the setting up of production in other countries.

- impacts on developing countries as they invest in those countries

Question 18

How to attract Foreign Direct Investment (FDI)

Answer 18

• Special economic zones
• Low interest loans, subsidies, tax relief
• Flexible labour markets
• Trade and investment agreements
• Low labour costs
• Good quality infrastructure
• Low corporation tax rates
• Open capital markets

Question 19

Advantages of Foreign Direct Investment (FDI) on the developing country

Answer 19

• Technology and “know-how”
• Labour training
• Job creation
• Capital investment
• Increased export capacity
• More competition
• Increased labour productivity
• Improved infrastructure

Question 20

Problems of Foreign Direct Investment (FDI) on the developing country

Answer 20

• Limited job creation
• Unskilled job creation
• Unethical practices
• FDI profit repatriation
• Footloose FDI flows
• Natural resource depletion
• Bring along skilled foreign workers
• Rising inequality

Question 21

Barriers to development

Answer 21

1) Poor infrastructure
2) Unfair trade policies
3) Low human capital
4) Capital flight
5) Primary product dependency
6) Bad government (e.g. corruption)
7) Declining terms of trade
8) Aid dependency
9) Low savings ratio
10) Civil wars
11) Low capital investment
12) Population problems

Question 22

Dependency (Barriers to development)

Answer 22

Problems of developing countries occur due to their dependence on developed countries:

1) International trade is dominated by developed countries: terms of trade improve for developed countries but worsen for developing countries.
2) Developed countries gain more power in trade negotiations: developing countries are forced to concentrate on primary products.
3) Aid increases the indebtedness of developing countries: debt repayments can often exceed the aid that is received.
4) Unsuitable policies and advice: e.g. encourage capital intensive investment in a labour intensive country.

Question 23

External Debt (Barriers to development)

Answer 23

Total debt a country owes to foreign creditors

As a barrier to development:

• Debt repayment
• Interest repayment
• Opportunity cost of repayment
• More difficult / costly to borrow more
• Risk of loan defaults

Question 24

Solution to External Debt

Answer 24

1) Debt relief

2) Debt restructuring

Question 25

Corruption (Barriers to development)

Answer 25

dishonest or fraudulent conduct by those in power, typically involving bribery.

Impacts

1) Reduces FDI
2) Allocative inefficiency
3) Widening income and wealth inequality
4) Lack of trust
5) Lower human development

Question 26

Solutions to Corruption

Answer 26

1) Anti-corruption bodies
2) Transparency
3) Meritocracy
4) Accountability
5) Criminalisation
6) International cooperation (UN)
7) Asset recovery
8) Surveys

Question 27

The International Monetary Fund (IMF)

Answer 27

The IMF’s primary purpose is to ensure the stability of the international monetary system (the system of exchange rates and international payments that enables countries and their citizens to transact with each other).

The IMF does this through:

• Monitoring economies and policies
• Lending to countries that need assistance
• Capacity development - technical assistance and training

Question 28

The World Bank

Answer 28

The World Bank Group is one of the world’s largest sources of funding and knowledge for developing countries.

The World Bank has a commitment to:

• Reducing poverty
• Increasing shared prosperity
• Promoting sustainable development.