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IB economics > global economy 4.10 - Economic growth and/or economic development strategies > Flashcards

global economy 4.10 - Economic growth and/or economic development strategies Flashcards

1
Q

state five trade strategies that aim to promote economic growth and/or development

A
  • import substitution
  • export promotion
  • economic integration
  • diversification
    (- social enterprise)
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2
Q

explain import substitution

A

a strategy that says that a developing country should, wherever possible, produce goods domestically rather than import them. this should mean that the industries and economy producing the goods domestically will be able to grow and compete on a world market in the future (economies of scale)

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3
Q

conditions needed for import substitution to work

A
  • govt needs to adopt a policy of organising the selection of goods to produce domestically
  • subsidies made available to encourage domestic industries
  • protectionist system implemented (tariffs)
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4
Q

advantages of import substitution industrialisation (ISI)

A
  • protects job in the domestic market, which means domestic firms can dominate the market
  • protects local culture and social habits by practically isolating the economy from foreign influence
  • protects the economy from the power, and possibly bad influence, of multinational corporations
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5
Q

disadvantages of ISI

A
  • may only protect jobs in the short run, as in the LR, economic growth may be lower which may lead to a lack of job creation
  • country does not enjoy benefits from comparative advantage and specialisation, so is producing products relatively inefficiently when they could be imported from efficient foreign producers
  • may lead to inefficiency in domestic industries as competition is not there to encourage R&D
  • high rates of inflation due to domestic AS constraints
  • may cause other countries to take retaliatory protectionist measures
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6
Q

explain export promotion

A

where growth is achieved by concentrating on increasing exports and export revenue as a leading factor in the aggregate demand of the country. rising GDP should lead to higher incomes and growth in domestic and exporting markets.

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7
Q

what policies need to be adopted to ensure export promotion?

A
  • country concentrates on producing and exporting product in which it has a comparative advantage of production
  • country may manage its er keeping it as low as possible and thus making exports more attractive
  • open up domestic markets to foreign competition in order to gain access to foreign markets
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8
Q

advantages of export promotion

A
  • Greater output generates higher economies of scale
  • Greater output creates more employment
  • National specialisation increases
  • International competition leads to innovation and increased efficiency
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9
Q

disadvantages of export promotion

A
  • Some firms may be unable to compete internationally and fail
  • There is an opportunity cost to the government for supporting firms through export promotion
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10
Q

explain economic integration

A

A process in which countries become more interdependent as they form an agreement which decreases barriers to trade (tariffs, quotas etc.) and increasing common fiscal and/or monetary policies.

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11
Q

advantages of economic integration

A
  • Decreases prices and increases choice
  • Access to a wider range of technology
  • More political cooperation between countries (higher levels of investment)
  • Expands markets for domestic firms -> economies of scale, encouraged diversification, reduced dependence on narrow range of commodities
  • Generates higher efficiency in the global allocation of resources as there is greater competition
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12
Q

disadvantages of economic integration

A
  • Some loss of national sovereignty may occur
  • Some integration requires common barriers (e.g. tariffs) to be erected to third part nations which may limit other opportunities for increasing trade
  • unemployment may rise
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13
Q

explain increasing diversification

A

Occurs when a country is able to increase the number of products that it offers for export and this reduces risk - if one product fails others may well still be successful. Countries may move away from the production/export of primary commodities and replace these with the production and export of manufactured/semi-manufactured goods

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14
Q

advantages of increasing diversification

A
  • Reduces the problems associated with over specialisation such as price volatility
  • Creates new employment opportunities
  • Reduces risk of failure during recessions or periods of economic slowdown
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15
Q

disadvantages of increasing diversification

A
  • Firms may fail to compete as global competitors may be well established
  • It takes time and money to create new industries
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16
Q

two barriers to increasing diversification

A
  • practice of tariff escalation: the rate of import tariffs on goods rises the more the goods are processed, so there is little incentive for domestic producers to shift
  • the need for a more highly qualified workforce in order to produce more sophisticated products
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17
Q

explain social enterprise

A

A social enterprise focuses
on meeting specific social
objectives such as worker welfare, or profit sharing with workers, or providing equal ownership of the business to employees

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18
Q

advantages of social enterprise

A

Raises motivation, productivity and output
Can create new employment opportunities
Raises income within the communities

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19
Q

disadvantages of social enterprise

A

These ventures tend to be small and very localised
It can be difficult for them to generate economies of scale or to compete internationally

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20
Q

give 3 market based policies to promote economic growth

A

trade liberalisation
privatisation
deregulation

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21
Q

explain trade liberalisation

A

Removing the barriers to international trade such as tariffs, quotas etc. to increase world trade and enable developing countries to concentrate on the production of goods and services in which they have a comparative advantage

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22
Q

advantages of trade liberalisation

A
  • More trade increases output, employment & incomes
  • Lowers costs of production for firms (economies of scale + no tariffs)
  • May result in lower prices for consumers
  • More efficient global allocation of resources
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23
Q

disadvantages of trade liberalisation

A
  • Global competition intensifies and some firms may fail
  • There may be an element of structural unemployment as inefficient industries die out
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24
Q

explain privatisation

A

The sale of public government-owned firms to the private sector.

  • It is argued that privately-owned, profit-maximising firms will be more efficient than nationalised firms and will therefore increase the potential output of the economy.
  • Nationalised firms tend to have goals like maintenance of employment or provision to an isolated market, which may lead to inefficient operation.
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25
Q

advantages of privatisation

A
  • May increase competition leading to an increase in output, employment & incomes
  • Private firms may be more efficient than government firms
  • Competition may result in cheaper prices for consumers
  • The money from the sale of assets can be used to provide more merit and public goods
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26
Q

disadvantages of privatisation

A
  • Government assets are often sold off cheaply at prices below fair market value
  • The quality of services may deteriorate as private firms focus on profit maximisation
  • Unemployment may increase as private firms seek to cut their wages in order to maximise profits
  • Prices may actually rise as firms provide a monopoly service e.g. rail travel
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27
Q

explain deregulation

A

The process of removing government controls/laws from markets (eg environmental, health and safety laws) in order to increase AS and stimulate economic growth

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28
Q

advantages of deregulation

A
  • Any regulation increases costs of production for firms and deregulation decreases costs which may result in greater supply
  • Less regulation may result in innovation and more enterprise in an economy
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29
Q

disadvantages of deregulation

A
  • may create an environment of corruption leading to inefficiency
  • may increase the quantity of negative externalities
  • may allow foreign firms to monopolise industry within the nation, leading to higher prices and less output
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30
Q

state 3 interventionist policies

A
  • tax policies
  • transfer payments
  • minimum wagest
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31
Q

explain tax policies

A

A progressive tax system redistributes from those with higher income to those with lower income & reduces income inequality

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32
Q

advantages of tax policies

A
  • redistribution often starts with the provision of free education & healthcare paid for from tax revenue (increased LRAS)
  • tax revenue provides the means of supporting poorer households and the unemployed (find jobs, increased income, increased taxes)
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33
Q

disadvantages of tax policies

A
  • sometimes, the benefits of a good progressive tax system are eradicated by the penalties imposed through multiple regressive (indirect) taxes
  • if the tax burden is too high it may become a disincentive to work
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34
Q

explain transfer payments

A

Transfer payments are usually given to the poorest & most vulnerable people in society and include unemployment & disability payments, pension payments, heating discounts, public transport subsidies etc.

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35
Q

advantages of transfer payments

A
  • The poorest households are supported
  • Money received from transfer payments generates consumption in the economy and increases aggregate demand
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36
Q

disadvantages of transfer payments

A
  • Poorer countries have less money available to support the poor
  • There is an opportunity cost for the government associated with each transfer payment
  • Supporting the poor makes good economic sense but is sometimes politically unpopular
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37
Q

explain minimum wages

A

Minimum wages are set above the free market rate and firms are not allowed to pay anyone less than the legal rate

38
Q

advantages of minimum wages

A
  • Workers receive higher wages and have more disposable income
  • Consumption increases leading to increased aggregate demand
  • Standard of living increases with higher income
39
Q

disadvantages of minimum wages

A
  • Costs of production for firms increase, possibly leading to less international competitiveness
  • With higher costs of production, output may fall leading to increased unemployment
40
Q

give 3 examples of the provision of merit goods

A

education programs
health programs
infrastructure including energy, transport, telecommunications, clean water and sanitation

41
Q

explain provision of education programs

A

These include pre-school, primary, secondary and tertiary education programs which are free at the point of consumption, but paid for with tax revenue

42
Q

advantages of provision of education programs

A
  • Education helps to intervene and break the poverty trap by increasing human capital
  • Increased human capital results in higher productivity and output
  • Higher output can lead to higher wages which improve the standard of living
  • Higher wages may lead to more consumption and an increase in aggregate demand
43
Q

disadvantages of provision of education programs

A
  • Education programs take a long time before there is an increase in productivity
  • There is an opportunity cost associated with the provision of education
  • Education may still be under consumed in developing nations as children are required to work for the family: family survival depends on the income they generate
44
Q

explain provision of health programs

A

These range from emergency-only healthcare to full healthcare and preventative healthcare (e.g. cancer screening) programs, which are free at the point of consumption, but paid for with tax revenue

45
Q

advantages of provision of health programs

A
  • Universal access to vaccinations can improve life expectancy and productivity significantly
  • Improved health care helps to break the poverty trap
46
Q

disadvantages of provision of health programs

A
  • each health care intervention by the government requires expenditure and so carries an opportunity cost
  • How much health care should be provided is a normative issue and is subject to political pressure and ideology
47
Q

advantages of infrastructure including energy, transport, telecommunications, clean water and sanitation

A
  • telecommunications speed up the flow of information and exchange of knowledge and ideas which can directly help to improve human capital and the standard of living
  • access to energy has a significant effect on productivity e.g. the opportunity cost of previously spending time looking for heating fuel can now be used more productively
48
Q

disadvantages of infrastructure including energy, transport, telecommunications, clean water and sanitation

A
  • Each infrastructure project requires significant government spending and so carries an opportunity cost
  • Infrastructure projects may take a long time to complete
  • Infrastructure projects are subject to political pressure and lobbying
49
Q

define inward foreign direct investment

A

Inward FDI occurs when investment by foreign firms results in more than a 10% share of ownership of domestic firms

50
Q

give the aims of inward foreign direct investment

A
  • Foreign FDI has the potential to generate significant economic growth as more economic activity, employment and output is generated
  • Foreign FDI has the potential to raise household income which helps to break the poverty cycle
51
Q

advantages of inward FDI

A
  • FDI can be a major source of finance in less economically developed countries
  • FDI helps to generate extra national income which can increase the level of savings - and higher savings can help to increase funds available for domestic investment
  • Expansion of supply can lead to increased employment opportunities
    The government may receive higher tax revenue generated by the increased profits from the additional level of national output
  • As more foreign firms invest, governments often start to develop new infrastructure to support their business activity
52
Q

disadvantages of inward FDI

A
  • Weak local regulations are often exploited leading to poor working conditions and increased negative externality’s of production
  • Profits tend to be moved off-shore or returned to the home country of the multinational firms which means that less is reinvested back into the development of the host nation
  • Multinational firms often pay very little tax to host nations as they use sophisticated corporate practices to reduce the amount of tax they are liable for (e.g.transfer pricing )
  • Local firms may struggle to compete with multinational firms who are now based in their country - and they go out of business
  • Multinationals are likely to have the power to keep wages low
  • Multinationals may use workers from their country for management roles and only employ local unskilled labour for manual tasks. The workers may not develop many new skills from the role
53
Q

give the 4 types of foreign aid

A
  • humanitarian aid/development aid
  • debt relief
  • Official Development Assistance (ODA)
  • Non-governmental organisations (NGOs)
54
Q

define humanitarian aid

A

aid given to save lives and alleviate suffering in response to emergencies such as natural disasters or human made crises, or medical crises.

55
Q

advantages of humanitarian aid

A
  • Aid has proven beneficial in times of distress
  • It is particularly helpful in response to large-scale one-off events such as earthquakes or tsunamis
56
Q

explain development aid

A

given by govt, multilateral organisations and NGOs in order to alleviate systematic poverty and promote the economic, social, environmental or political development in recipient countries - more long term assistance than humanitarian aid

57
Q

explain debt relief

A
  • Many developing nations have borrowed significant sums of money in the past which have to be repaid (with interest) over a long period of time
  • The opportunity cost of these repayments is significant & often includes
    -> Loss of infrastructure development
    -> Inability to create a welfare system
    -> Investment in human capital/education
  • Countries began to default on their loans & this has led to the restructuring of these loans to make it more affordable
  • More recently there has been significant progress in writing off the entire debt of the most heavily indebted poor countries (HIPC) so that they can focus on building their economies
58
Q

advantages of debt relief

A
  • The actual repayment of debt is removed or reduced
  • The opportunity cost of debt repayments is reduced or eliminated
  • The Government is able to use the money saved to provide new services and additional public/merit goods
59
Q

disadvantages of debt relief

A
  • The country may have a lot more funds available than ever before and this can breed corruption as individuals in government seek to get their hands on it
  • Once the debt is forgiven, many developing nations borrow more money and the cycle starts again
60
Q

explain official development assistant

A
  • ODA can be bilateral (from donor government to recipient government) or provided through a multilateral
    development agency, such as the United Nations
  • Two of the most common forms of ODA are grants & soft loans
  • The United Nations has set a target for more economically developed countries to spend 0.7 per% of their gross domestic product (GDP) on ODA to help countries eliminate poverty and become developed
61
Q

what is the aim of ODA

A

promote and specifically target the economic development and welfare of developing countries

62
Q

advantages of ODA

A

Funds are available to the LEDC over a long-term period to help with the economic development goals
Bilateral ODA can help to develop the relationship between the two countries, possibly facilitating the exchange of resources, ideas and technology

63
Q

disadvantages of ODA

A

Countries may become dependent on the ODA
Corruption may mean funds are diverted from their true purpose
ODA in the form of loans has to be repaid and these repayments carry an opportunity cost

64
Q

define NGOs

A

These are typically voluntary, community-based organisations which do not aim to make a profit but seek to meet a need or provide a service

65
Q

what do NGOs do?

A
  • Engage in small scale projects giving control to community stakeholders
  • Draw on local skills
  • Encourage sustainability & remove the need for aid
  • Tackle environmental sustainability using local knowledge & resources
66
Q

advantages of NGOs

A
  • NGOs can elicit support for particular need from a very wide audience including the global public and many wealthy governments
  • They often have specialists working for them who provide in country support so as to increase the efficiency of their aid
  • They conduct research, gather data and as a result often make highly specific project proposals aimed at directly improving the standard of living
  • NGOs can help develop human skills in the countries in which they work and this helps to break the poverty trap
67
Q

disadvantages of NGOs

A
  • The country receiving the aid can become overly dependent on it
  • The scope of what an NGO can do may be limited or only focussed on one segment of the population e.g children
68
Q

give the main criticisms of aid

A
  1. if the govt in power does not have the welfare of the majority of the population at heart, it may mean that when aid is received it goes to a small sector of the population/economy that doesn’t need support
  2. sometimes given for political reasons, not countries that need it greatest - so developed countries give aid to countries that are of political/economic interest to them
  3. often linked to political views of donor govt - if these change after change in government for eg, this can have serious consequences on receiving country
  4. long-term provision of large quantities of food may force down domestic prices and make matters worse for domestic farmers
  5. creates a culture of dependency that can limit long term economic development, as the govt has little incentive to implement its own strategies
69
Q

define multilateral organisations

A

made up of member governments from around the world and pool their resources together which enables large-scale development programmes to be funded

70
Q

describe the world bank

A
  • They provide reconstruction loans to countries devastated by war
  • They provide loans to developing countries to aid in their development
  • They provide loans to countries to assist with the development of infrastructure
  • They work with governments and institutions so as to encourage economic reform and trade liberalisation
71
Q

describe the IMF

A
  • aim to facilitate a stable global financial system
  • oversee exchange rates and the system of international payments that occurs between nations and individuals
  • monitor country policies and national, regional and global economic and financial developments through a formal system known as surveillance
  • provide member countries with currency to help deal with balance of payments problems
72
Q

state 5 ways in which institutional change can be implemented to promote economic growth and development

A
  1. improved access to banking, including microfinance and mobile banking
  2. increasing women’s empowerment
  3. reducing corruption
  4. property rights
  5. land rights
73
Q

explain how access to banking stimulates economic growth

A
  • Financial institutions enable individuals and firms to borrow money which can be used for investment or to generate growth
  • A lack of financial institutions prevents this from happening and causes the poverty trap to continue
74
Q

Mobile banking

A
  • allows customers to conduct financial transactions more easily and facilitates a flow of finance in more remote areas
  • remittances can be sent much more easily, cost-effectively and securely
75
Q

define microfinance

A

provision of financial services, such as small loans, savings accounts, insurance and even cheque books

76
Q

advantages of microfinance

A
  • The loans can be targeted at women
  • Running a business improves human capital and also raises income
  • Loan repayment helps to build self esteem
77
Q

disadvantages of microfinance

A
  • some loans are not repaid (a very small %)
  • Some microfinance organisations raise money from private donors and have been criticised for taking high management fees and salaries
78
Q

explain increasing women’s empowerment as a measure

A
  • Gender inequality reduces the incentive for women to enter the workforce resulting in a smaller production possibility curve for the nation
  • This represent a loss of efficiency for a nation
  • Household income is suppressed which worsens the quality of life
79
Q

advantages of increasing women’s empowerment as a measure

A
  • The additional income helps to break the poverty trap in LEDCs
  • Increased opportunity incentivises young girls to study harder which helps to close any existing education gaps between genders
80
Q

why is corruption an issue

A

Corruption reduces investment, limits economic growth and affects the pattern of government spending within a country

81
Q

advantages of reducing corruption

A
  1. There is more confidence in the economy and foreign direct investment increases
  2. Money allocated to development projects in the country actually gets used for development
  3. As national output rises, tax revenue rises and the government is able to provide more services, merit goods, and public goods
  4. An increase in national output leads to more employment opportunities, which can raise household income
82
Q

measures to reduce corruption

A
  • transparent, merit-based hiring and merit- based pay
  • invest in high levels of transparency and independent external scrutiny, allowing audit agencies and the public to provide effective oversight
83
Q

explain the issue with lack of property rights

A
  • in many countries, property is the main household asset which can be used to secure loans or generate income
  • a lack of property rights in some developing countries prevents this from happening and causes the poverty trap to continue
84
Q

advantages of assigning property and land tenure rights

A
  1. land rights for agriculture: when farmers know their land rights will be guaranteed, they have the incentive to invest in their land and borrow money for agricultural inputs or make improvements to the land.
  2. land rights for urban development: in order to create affordable and lovable urban areas, effective urban planning is needed but this is impossible without guaranteed land rights
  3. property rights to protect the environment: people have more incentive to look after their land, ensuring sustainability
  4. property rights/access to land for private sector development and job creation: give land and collateral to companies to help them finance their operations, expand 7ltheir businesses and create new jobs.
  5. property rights for empowering women
  6. property rights for indigenous peoples’ rights: they will be able to use the resources on their land more sustainably, thus improving their economic/social status as a constructive force in society
  7. keeping peace
85
Q

disadvantages of assigning property and land rights

A
  • The issuing of property rights can lead to property monopolies over time as wealthier individuals purchase multiple properties
  • Property monopolies could reduce the amount of property available for purchase or rent - and raise housing or rental prices
86
Q

explain how market-orientated approaches should work

A
  • aim to reduce government intervention and free up private-sector economic activity so that national output (real GDP) increases
  • as national output increases, the potential to break the poverty trap increases and this can lead to better economic development in a nation
87
Q

pros of market-orientated approaches

A

Competitiveness: the more competitive the environment the more foreign firms are likely to invest as competition lowers costs and generates innovation

Efficiency: Less government intervention should result in better allocation of resources as the process is led by the market forces of demand and supply

Economic growth: free markets encourage entrepreneurship in the search of profit and this increases real GDP

Increased FDI: Multinational corporations prefer to invest in economies where the markets are more open, where there is less regulation and government intervention

Trade liberalisation: Removing the barriers to international trade such as tariffs and quotas increases economic growth, raising household income

88
Q

cons of market-orientated approaches

A

Increased market failure: with less government intervention the amount of negative externalities will increase (both production and consumption)

Development of a dual economy: Many LEDCs have both a large informal sector and a thriving formal sector based around the activities of multinational corporations which contributes to growing income inequality

Increasing inequality: the benefits of free markets are increasingly concentrated in the hands of a few as those with assets continue to buy up the factors of production

89
Q

pros of government intervention

A

Infrastructure: energy, transport, health and telecommunications infrastructure improves the standard of living

Investment in human capital: education increases skills leading to higher productivity in an economy

Provision of social welfare: support mechanisms for the most vulnerable in society helps to raise the standard of living

Stable economic growth: government intervention can even out the swings in the business cycle

Reduction in income inequality: governments are able to regulate the disparity between rich and poor through the use of policies such as progressive taxation

Institutional systems: Strong institutions such as police and defence forces can be used to deal with national emergencies such as earthquakes which helps a country to recover more quickly

90
Q

cons of government intervention

A

Inefficiencies: The government focusses on services and not necessarily on generating profit. This can generate inefficiencies in resource allocation and the development of large, overstaffed organisations

Corruption: large amounts of money generated through taxation can prove tempting to those managing the budgets leading to the misuse of government funds and other forms of corruption

Government capture: powerful business people or large corporations can build such strong relationships with government ministers that they end up controlling the resources through the influence

Poor planning and decision-making: politicians are assigned to run departments in which they do to necessarily have any expertise and this can lead to poor planning and decision making

Fluctuating political agendas: government terms are relatively short and two party government systems tend to result in wild fluctuations of policy which can create instability

91
Q

look over Armenia and Ecuador case studies

A

IB economics (26 decks)

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