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
