4.6 Promoting growth and development Flashcards
What are examples of market led policies?
- Fiscal discipline on spending and budgets
- Less subsidies - more health, infrastructure and education
- Tax reforms - low tax rates raise enterprise
- Liberalize market interest rates - financial markets allocate capital
- Floating exchange rates
- Trade liberalization
- Privatization
What are outward looking strategies?
EOI: export oriented industrialisation - focus on selling abroad with higher values
- Free market principle
- Maximise trade
- Removal of barriers to trade, reduce state intervention and privatisation
- Assumes markets run efficiently if no state control and consumers act rationally
- Requires trade liberalization
- May involve devaluing exchange rates SPICED
- Promotion of FDI
- Deregulation of capital markets to free up money flows
What are outward looking strategies?
EOI: export oriented industrialisation - focus on selling abroad with higher values
- Free market principle
- Maximise trade
- Removal of barriers to trade, reduce state intervention and privatisation
- Assumes markets run efficiently if no state control and consumers act rationally
- Requires trade liberalization
What are the effects of trade liberalization?
-Removing trade barriers, lowers price for consumers and high consumer surplus - use the tariff diagram and show what occurs when tariff removed
Lower prices
- Increased competition and lower barriers to entry
- Improved efficiency
- Better real wages
Macro:
- Multiplier
- Lower inflation from cheaper imports
- Risk of structural unemployment
- Increase in deficit
What are the effects of trade liberalization?
-Removing trade barriers, lowers price for consumers and high consumer surplus - use the tariff diagram and show what occurs when tariff removed
What are the gains and losses from attracting FDI?
Pros:
- Infrastructure
- Capital and productivity
- Training for locals
- Better export capacity
- Technological advancements
- More competition in markets lowers prices
- New jobs made
- Promotes shift to higher productivity jobs high value industries
Cons:
- Other countries hold power
- Exploitation of weak laws
- Poor working conditions
- Repatriation of profits
- Imports bad for trade balance
- Jobs made up of those from home country,
Why may countries remove subisides?
- Distorts price mechanism
- Stifles innovation as producers become dependent and may become corrupt
- Lowers incentive for efficiency - leads to negative externalities
Why may countries remove subisides?
- Distorts price mechanism
- Stifles innovation as producers become dependent and may become corrupt
- Lowers incentive for efficiency - leads to negative externalities
What are the arguments for switching to a floating exchange rate?
- Less exposed to economic shocks
- Stable currency
- Central bank doesn’t intervene to change currency prices so don’t have to maintain reserves
- More countries open to trade so capital controls may not be used to limit trade
- More attractive to FDI
- Less volatile
Eval:
- May only be appropriate with low trade to GDP ratios
- Consider size of reserves and ability to control currency
- Economy with one dominant trade partner may decide to peg currencies
What are sectoral strategies?
-Industrialisation and urbanisation
- seen as fundamental to and coincides development
- Develop on primary products
However:
- Externalities of urbanisation
- Income repatriated to home countries often
- Technology replaces workforce in the long run
- Primary workers don’t necessary have the skills
- Neglects agricultural sector
What are the disadvantages of microfinancee?
- Hard to monitor and police
- Low success rate as lack training
- Interest repayments
- Debt forcibly recollected
- Very competitive markets in small businesses
- Need education healthcare and other institutions
- Loan may be spent on short term consumption
- End up in debt
What are the benefits and costs of privatisation for development?
Pros:
- Profit incentive
- Tax gains
- Competition - lower prices
- Increased investment and EofS - drives exports and GDP growth
Cons:
- Less social objectives
- Some need to stay public e.g. public goods, water supply
- Government loses out on dividends
- Public sector assets sold cheaply - corruption
- Job losses as firms efficient
- Less easy to regulate, may create monopoly
What are the benefits and costs of privatisation for development?
Pros:
- Profit incentive
- Tax gains
- Competition - lower prices
- Increased investment and EofS - drives exports and GDP growth
Cons:
- Less social objectives
- Some need to stay public e.g. public goods, water supply
- Government loses out on dividends
- Public sector assets sold cheaply - corruption
- Job losses as firms efficient
- Less easy to regulate, may create monopoly
What are the arguments for protectionism? What are the risks?
- Import substition - protects domestic industries without EofS to become cost and price competitive
- Raises tax revenues
- Tariffs could be justified if used in response to dumping - may be retaliatory responses if country used competitive devaluation
Risks:
- Protects job in some industries, damages others due to increased prices of imports
- Tariff revenues very low
- Risk of retaliatory action
- Loss of competition
- Increased price for consumers - inflation
- Subsidy opportunity cost
What are the arguments for protectionism? What are the risks?
- Import substition - protects domestic industries without EofS to become cost and price competitive
- Raises tax revenues
- Tariffs could be justified if used in response to dumping - may be retaliatory responses if country used competitive devaluation
Risks:
- Protects job in some industries, damages others due to increased prices of imports
- Tariff revenues very low
- Risk of retaliatory action
How may exchange rates be managed to increase development?
Depreciation:
- Improve trade balance
- Reduce risk of recession from deflation
- Rebalance economy away from domestic consumption towards investment and exports
- Sell foreign currency to overseas investors
Or appreciate:
- Curb demand pull inflationary pressures
- Reduce price of imported capital and technology
What are buffer stock schemes?
-Price support schemes by buying up suppliers when prices are low or supply is high then selling when they are low
Can be illustrated on supply/demand diagram - bought at horizontal low price below equilibrium and sold at horizontal high price above equilibrium. This causes supply to be greater than planned supply leading to a surplus which drives market price higher.
For:
- Lower risk of extreme food poverty as spare capacity
- More stable incomes and profits
- Helps macroeconomic stability
- Self financing
Against:
- May not be large enough to change market price
- Setting high price for farmers causes rising surpluses
- High cost of storage
- Poor administration
Disadvantages of growth in tourism?
- Exploit labour by TNCs
- Many workers are migrants, poor employment conditions
- Outflow of profits to home countries
- Ignores local economy - caters to rich
- Inflation of local area
- Rising property prises
- Loss of culture
- Cyclical/seasonal employment
- Negative externalities
- Imports may rise
- Income elastic so vulnerable to fluctuations
- Higher costs to host country - mainly environmental
Disadvantages of growth in tourism?
-Exploit labour by TNCs
-Many workers are migrants, poor employment conditions
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What are the aims and advantages of fair trade schemes?
- Guarantees higher and premium price to certified producers
- Achieve price stability for growers
- Improve production standards - grower only certified if meets standards of working conditions, pay and environmental sustainability
Advantages:
- Addresses problem of primary product producers receiving low proportions of income
- Fair price agreed acceptable standard of livings for workers whilst meeting environmental and labour standards
- Producers receive fair price
- Trendy/popular with public
- Producers receive premium which is reinvested into health, education and development
- Successful producers encouraged to build up business and diversify
What are the aims and advantages of fairtrade schemes?
- Guarantees higher and premium price to certified producers
- Achieve price stability for growers
- Improve production standards - grower only certified if meets standards of working conditions, pay and environmental sustainability
Advantages:
- Addresses problem of primary product producers receiving low proportions of income
- Fair price agreed acceptable standard of livings for workers whilst meeting environmental and labour standards
- Producers receive fair price
- Trendy/popular with public
- Producers receive premium which is reinvested into health, education and development
- Successful producers encouraged to build up business and diversify
What are the criticisms of fairtrade?
- Have to pay fees to join
- Impacts on those not in fair trade/poorer nations - tends to focus on countries who are poor but can also supply
- Premium price may go to processors and distributors instead of farmers
- Other issues need to be addressesd e.g. tariffs and access to poorer countries
- Prices to consumers above market price so limited demand
- Premium may not be large enough to benefit
- Creating cooperatives of their own may be better investment target.
What are the types of aid?
Bilateral - one to one
Multilateral - many nations to one e.g. UN
Project aid - finances projects
-Technical assistance - funding of expertise
-Humanitarian aid - emergency disasters
-Soft loans
-Tied aid - tied to suppliers in donor country
-Debt relief
What is aid?
The transfer of resources from one country to another - may be money or other stuff e.g. food and services
ODA - official development assistance is aid specifically given to help development.
Loans are given at much lower interest rates
Microfinance = $38bn
Global aid is over $1Tn
UK aid budget is £14bn
UN target from rich countries is 0.7% of GNI - UK meets target
What are the motives/benefits of aid? What are some less altruistic benefits?
-Second mover advantage - teaching about how to make better products e.g. through processing
- Reduce abbsolute poverty
- Reduce IMR and mortality rates
- Reduce inequality
- Fill savings gap
- Fund infrastructural projects - project
- Fill foreign exchange gap
- Improve human capital
- Support business growth
- Long term health and education projects
- Targeted aid adds 0.5% to annual growth rate of poorest countries
less altruistic reasons
- boost donor exports
- ensure political support
- cheap selling of natural resources to donors
- keep ‘aid industry’ in business for NGOs
What is debt relief?
There is high external debt due to high levels of debt from low interest loans in the 1980s.
Debt cancellation is writing off a loan with no further repayments and no further interst OR the debtor is given longer to pay
The debt service ratio is the ratio of debt service payments to its export earnings
The High Indebted Poor Countries scheme helped 36 countries get debt relief, accounting to $75bn
What is debt relief?
There is high external debt due to high levels of debt from low interest loans in the 1980s.
Debt cancellation is writing off a loan with no further repayments and no further interst. OR the debtor
Arguments for debt relief?
For:
- Debt further impoverishes most poor countries
- Poor countries highly dependent on primary sector exposed to economic shocks leading to further debt - moral argument
- Debt relief partially conditional on governments when introducing social reformss
- Frees up money to reduce poverty
- Reduces foreign exchange and savings gap
- Increases confidence
Arguments against debt relief?
- Moral hazard argument - governments will just borrow more if they know will be relieved
- May need better policies to repay debt instead
- Slow and complex to agree cancellation
- Corruption - money saved won’t be spent well
- Rich countries less willing to lend in future
- Only helps those who have built up big debts
What is the world bank?
- Provides grants and low interest loans
- Offers policy advice and technical assistance to developing countries
- Coordinates projects with governments
- Structural adjustment programmes SAPS
Institution risk is averse, over staffed and often their projects are within the benefit of HICs rather than for development
What is the world bank?
- Provides grants and low interest loans
- Offers policy advice and technical assistance to developing countries
- Coordinates projects with governments
Institution risk is averse, over staffed and often their projects are within the benefit
What is the role of the IMF?
Stabilisation projects - free trade and free markets - often damages countries further by raising costs of food, cutting education and health spending.
- Provides finacing to members suffering economic difficulties
- Secure financial stability
- Global trade
- Employment
- GLobal monetary cooperation
- Sustainable economic growth
- REduce poverty
- Assistance in form of loans or training
What is the Lewis problem
States countries can develop on primary products but usually in a duel economy - mix of agriculture and urban manufacturing
Labour is variable and land is fixed so as more labour is put to work on the land eventually there is a point where marginal returns set in and so there is a maximum amount of labour a country should divert to manufacturing - creates higher value and wages which tempts more surplus workers to migrate and firms to expand.
Is manufacturing the best approach to development?
- May limit job opportunities (robots)
- Needs farming and extraction to develop e.g. Kenya
- Light manufacturing does not always add more value - especially low level capital so is only good in the long run if invests in building human capital in industries which will help growth of manufacturing sector
- Externalities of rapid urbanisation occur.
