interventionist strategies, development Flashcards
what are interventionist strategies
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1- Development of human capital
This would provide workers with skills and training and thus help them to be more efficient and improve productivity.
Businesses struggle to expand where there are skills shortages and it also limits innovation.
Human capital could be developed through schools or vocational training, whether this be apprenticeships or simply classes provided for business people.
Higher skills would allow the country to develop from the primary sector to a manufacturing sector, overcoming primary product dependency.
Better education also improves quality of life.
example of human capital
India’s improved education system is often cited as one of the main contributors to its economic development. Much of the progress, especially in higher education and scientific research, has been credited to various public institutions.
evaluation of developing human capital
time lag
brain drain
2- protectionism
Protectionism allows domestic industries to grow by keeping foreign goods out and protects them from strong competition.
They can use a policy of import substitution, where they deliberately attempt to replace imported goods with domestically produced goods by adopting protectionist measures.
This will create jobs in the short run and will allow the industry to develop, perhaps to the extent where the barriers can be removed, and the industry can compete globally.
example of protectionism
Trade-weighted average import tariff rate of Ethiopia = 14%, India = 15%
In order to protect industries and raise government revenue
evaluation of protectionism
it means countries lose out from the benefits of specialisation and comparative advantage and could cause inefficiency, since domestic producers suffer from a lack of competition. Other countries are likely to retaliate.
3- managed exchange rate
The currency could be fixed against a number of different exchange rates.
Can introduce high exchange rates for the import of essential products and lower exchange rates for others. This will mean that the price within the country is low, which helps to reduce poverty if the goods are consumer goods and encourages investment if they are capital goods.
A lower exchange rate for other imports will mean that the price of these goods within the country is higher, discouraging their import and encouraging consumers to buy from domestic producers.
example of managed exchange rate
Ethiopia has a managed exchange rate, pegged to USD, as USD appreciated, so too has Ethiopia’s currency, leading to low prices in the country, helping to reduce poverty and encourage investments.
evaluation of managed exchange rate
they often fail to work in practice; black markets in foreign exchange develop which can destabilise the system and corruption becomes an issue when government officials buy currency at one exchange rate and sell it for profit at another.
4- infrastructure development
Infrastructure is essential for development; a country needs roads, airports, schools, hospitals, railways, etc.
it reduces transaction costs and trade costs, improving competitiveness, also makes country more attractive for FDI
direct investment in infrastructure creates production facilities and stimulates economic activities
example of infrastructure development
India plans to spend US$ 1.4 trillion on infrastructure during 2019-23 to have a sustainable development of the country
evaluation of infrastructure development
Infrastructure tends to suffer from the free-rider problem and has very high capital costs, making it unlikely the private sector will develop it.
government may not have the funds to provide the infrastructure and it is argued that they may be inefficient. Infrastructure projects are often associated with bribery and corruption, cause environmental damage and may be poorly built and maintained.
5- Promoting joint ventures with global companies
One way to reduce the exploitation of countries as a result of FDI would be to set up a joint venture.
The government may insist that firms setting up production plants in their country find a local partner to create a jointly owned company with. This will help to keep some of the profits generated within the country , which can be used in investment, leading the development and growth.
example of joint venture with global companies
Tata Starbucks Pvt.Ltd is a joint venture company with Starbucks in India, Starbucks entered the India market through a partnership with Tata Global Beverages in 2012.
joint venture with global companies evaluation
Participating companies in a joint venture share control over the project, but work activities and use of resources relating to the completion of the joint venture are not always divided equally.
Can create clash of culture, a lack of cooperation due to this disadvantage can cause an agreement to unravel before any benefits become achievable
6- buffer stock scheme
This is where the government imposes both a maximum and minimum price for
goods, buying up stocks when there is excess supply and selling them off when
there is excess demand.
It is used on commodities, where the prices are volatile.
how do buffer stocks promote development
Beneficial because it stabilises prices and thus encourages investment since producers can
plan for the long term. It also prevents sharp falls in prices, meaning that producers
are kept from falling into absolute poverty, and prevents sharp rises in prices,
meaning that consumers are able to afford the good. It can solve some of the issues
relating to primary product dependency.
buffer stock schemes examples
The Ivory Coast and Ghana implemented a buffer stock scheme for cocoa in 2017 due to low prices
buffer stock schemes evaluation
minimum prices may be set too high, encouraging producers to become inefficient. They will produce as much as they like and know they will be able to sell it anyway, meaning that supply is high and the government has to continually buy up the stocks.
If the scheme is operating at a loss, the taxpayer feels the burden and government finances are worsened.
it requires stocks to go up and down ; if they keep rising, then the scheme will run out of money and if they keep falling, the scheme will run out of stocks. They require huge start-up costs , as well as administration costs and problems of storage.
