Growth and Development Strategies Part 1 (Trade, FDI) Flashcards
Trade Strategies
- Export promotion
- Import substitution
- Economic Integration (Bilateral and multilateral trade agreements)
Export Promotion
Shifting from primary goods → manufactured exports, driving industrialization.
Trade liberalisation and bilateral/regional trade agreements
Singapore - excels in trade, electronics, and finance, leveraging labor, regulations, and location.
Asian Tigers (South Korea, Singapore, Hong Kong, Taiwan) successfully used export promotion from the 1960s-90s
Ways to export promotion
- Free trade
- Capital and labor mobility
- Currency depreciation
- Production incentives (e.g., fewer restrictions)
- Higher savings to boost investment
- Political stability, tourism, and international ties aid exports and investment
- Attract MNCs for tech and training benefits
Advantages of Export Promotion
- Reduces export dependence.
- Avoid markets for primary goods with protection.
- Shifts to manufacturing and exports.
- Promotes competition.
- Removes costly government-induced distortions.
Cons of Export promotion
- Protectionism and trade barriers applied by developed countries
- Struggle to maintain low ER as demand for products and currency rises.
- Relies on strong hand of government to ensure quality standards and implementation of policy
- Sometimes risky choice of products
- Requires taking out large debts for manufacturing equipment
- Periods of global economic recession are felt more keenly.
Import Substitution
- Countries manufacturing consumer goods domestically instead of importing them
- Acquire a greater domestic industrial diversification
- Are often protected by trade barriers (tariffs, quota)
Mexico (1960s) Automotive industry - Government placed high tariffs on imported cars to help develop domestic car manufacturing sector.
Examples of import substitution
- Domestic products mimic international brands
- Protected industry is directly downstream of an existing primary industry
- Countries with a diverse resource base
Malaysia’s Proton automobile, chips and snacks
Advantages of Import substitution
- Decrease in unemployment
- Widens the industrial base
- No inappropriate technology arising from MNCs
Import substitution involves…
- Tariffs to protect the home market and reduce imports.
- Restricted capital and labor movement.
- Protectionism for infant industries.
- Limit MNCs with unsuitable products and tech.
- Initially protect simple industries, then progress to more complex manufacturing.
Problems with Import Substitution
- Immune from competitive pressure → firms remain inefficient and costly to operate
- Higher prices for consumers, lower quality goods
- Tariff barriers set up against import may cause retaliation from other countries
- No technology transfer
Economic Growth with Economic Integration
- Access to more markets
- Increased effciency
- Greater flows of goods and services
- Increase in investment
- More employment opportunities
- More EOS with higher profits
- AD increases
EU, USMCA, ASEAN, TTIP, CARICOM
Economic Development with Economic Integration
- Increased choice
- Higher quality products
- Reduced prices
- Increased efficiency
- Stability and improved political relationships
- Facilitates peace and cooperation
EU, USMCA, ASEAN, TTIP, CARICOM
Drawbacks of Economic Integration as a strategy?
- Compromise of domestic policies
- Many states are locked out of opportunities to integrate
- No monetary policy in a monetary union (harder to fight inflation)
- Have to impose common trade restrictions which could cause import prices to rise
Diversification
- Moving from primary products into several
- Changing the structure of an economy so that it does not rely on one volatile-priced good
China and South Korea
Benefits of Diversification
- Reduces losses in recessions
- Solves over-specialization issues
- Creates jobs
- Lowers price fluctuation risks
- Increases efficiency
- Spurs profitable related industries
- Mitigates supply shocks
- Opens new markets
- Reduces import reliance
Drawbacks of Diversification
- Long-term strategy
- Requires large investments
- Limited natural resources
- High failure risk
- Lacks expertise
- High initial costs
Social Enterprise
- An organisation that focuses on meeting specific social objectives
- Many of these are “non-profits” or NGOs, charities
- Want to maximize social and environmental benefit for society
Oxfam, Khan academy, Open university, British Council, Operation Smile, ICAP
Advantages of social enterpises
- Encourage volunteerism and civic commitment
- Tax incentives and good treatment from government
- Attracts media attention
- Align with ecological and environmental needs of communities
Disadvantages of social enterprises
- Tend to be small as the funding is small
- Relies on commitment and passion of individuals
- Retained profit so less investment in cause
- Have to maintain transparent with accounting
Market Orientated
- Trade liberalization
- Privatization
- Deregulation
capitalist - trying to free up the market
Interventionist
Redistribution policies including tax policies, transfer payments and minimum wages
socialist - intervening to help people
Pros of Market led policies
- Minimize role of gov. and maximize supply and demand
- Export led growth
- FDI
- Structural Adjustment
- Free trade, low taxes, low regulation, low gov. spending
Cons of Market-led policies
- Infrastructure is less likely to be created
- Not all trade is liberalized and free
- Asian Tigers did use intervention
Trade liberalization
Removal or reduction of trade barriers that block free trade of goods and services
Important organizations:
- WTO
- World Bank
- International Monetary Fund
Advantages of Trade Liberalization
- Increase efficiency
- More choice
- Lower prices for domestic consumer
- Access to bigger market
- More export → AD increase
Cons of Trade Liberalization
- Vulnerable to external shocks
- Countries have advantage with gov. intervention
- Competition → potential increase in unemployment
- Loss of gov. revenue (tariff)
Privatization
Market based policy to sell or transfer public sector assets to private sector
Why use privatization?
- Improve competition, efficiency, and productivity
- Encourage firms to be efficiency in order to survive and be profitable
- Provides finance to government organizations
Advantages of Privatization
- Cut expenditure used to maintain assets
- Raises one-off revenues for govt.
- Frees company from political interferences and bureaucracy
Disadvantages of Privatization
- Private companies typically cut jobs → increases unemployment
- Price of goods and services tends to rise
- Emerge of duopolies or monopolies with immense market power
Deregulation
- Removal of barriers or rules in an industry to make it easier to produce
- To create more competition and greater efficiency
Advantages of Deregulations
- Reduces inefficiencies from government control
- Speeds up resource allocation and decision-making
Disadvantages of Deregulations
- Markets are more exposed to uncertainties and fluctuations
- Often leads to increase in corruption
- Gov still needs to measure business activity to ensure laws are follows
Interventionist policies
Redistributing policies including:
- tax policies, transfer payments and minimum wages
Positives of Interventionist Policy
- provision of infrastructure
- investment in human capital
- provision of a stable macroeconomic economy
- provision of a social safety net
Cons of Interventionist Policy
- excessive bureaucracy
- poor planning and corruption
- subject to political whims
- tax changes depend on laws controlled by the rich and powerful
Advantages of Inverventionism
- Protection of Domestic Industries
- Job Security
- Reduced Income Inequality
- Economic Stability
- Encouragement of Industrialization
Disadvantages of Intervensionism
- Inefficiency and Bureaucracy
- Higher Costs for Consumers
- Risk of Market Distortions
- Reduced Innovation and Global Competitiveness
- Fiscal Burden
Provision of Merit goods
- Education and Health
- Infrastructure - energy, transport, telecomunications, clean water, sanitation
Advantages of Provision of Merit Goods
- Improved human capital
- Reduced inequality
- Positive externailites
- Market failure correction
- Long-term Development
Disadvantages of Provision of Merit Goods
Higher fiscal costs - high govt. spending
Potential inefficiencies - May suffer bureacracy
Opportunity costs - funding for merit good or critical sectors
Investment
Expenditure on capital goods
Foreign investment
Capital that originates abroad
FDI
Investing abroad by setting up operations or acquiring assets
Multi-national Corporation
Worldwide enterprise or firm that owns production units in more than one country
Why are MNCs/TNCs attracted to LEDCs?
- Supply of raw materials/natural resources
- Avoid protectionisms
- Large/new/growing market
- Locational advantages (less coporate tax, etc..)
- Reduce transport expenses by being closer to the market
- Regulations are less strict
Capital Widening
- More capital and labor used, but capital per worker remains unchanged.
- Production will rise, but productivity will not
Capital deepening
- Increase in the amount of capital per worker – capital increases > labor increases
- production and productivity will both rise
Advantages of MNCs
- Creates job, boosts national income
- Regional market advantages
- Government make tax revenues
- Improve education/training/skills
- Allows technological transfer
- Multiplier effect of employment
- Consumer choice and lower prices
Disadvantages of MNCs
- Host countries doesn’t always benefit
- Benefits go to MNCs
- Immense size and power of MNCs may influence governments of LDCs
BHP, Australian gold mining company that set up in Papua New Guinea.
Corporate Social Responsibility (CSR)
When companies set initiatives to improve their own environment or social wellbeing status.
How can LEDCs encourage private foreign investment?
- Political stability and freedom
- Security of life and property
- Good facilities for remittance of profit
- Lack of competition
- Availabilities of opportunities to earn profit
- Chear costs incurred by producers
- No government legislation in immigration
Types of foreign investment - domestic government borrowing from overseas to fund projects
Real life examples:
- Jordan borrowed from overseas to fund projects to aid tourism
- SK borrowed funds to to purchase capital equiments
