L18- Strategies influencing growth and development pt1 Flashcards
market- orientated startegies
market-orientated strategies influencing growth and development
- trade liberalisation
- promotion of FDI
- removal of govt. subsidies
- floating exchange rates
- microfinance schemes
- privatisation
interventionist strategies influencing growth and development
- development of human capital
- protectionism
- managed exchange rates
- infrastructure development
- promotion of joint ventures
- buffer stock schemes
other strategies influencing growth and development
- industrialisation
- development of tourism
- development of primary industries
- fair trade schemes
- aid
- debt relief
what are market orientated strategies
measures which make the economy more free, with minimum government intervention.
market- orientated strategies: trade liberalisation
- results in greater trade
- allows countries to specialise- output up- living standards up, economic growth up
- more foreign currency earned= overcome foreign currency gap= funds imports of capital and raw materials= econ growth up
- higher employment and wages= overcome savings gap= econ growth up
- more competition= promotes innovation and efficiency= econ growth up
advantages and disadvantages of trade liberalisation for firms
+ greater market access- greater sales potential and expand and benefit from economies of scale
+ cheaper raw materials and capital goods
- more competition
-risk of dumping
advantages and disadvantages of trade liberalisation for economies
+ more competition= increase in efficiency and quality (or outcompeted and go out of business)= resources allocated to industries in which country has comparative advantages = efficiency and economic growth increase
-infant industries unlikely to survive competition= hinder efforts to move up value chain and into more advanced goods and services= period of protectionism needed before trade liberalisation fully implemented to give country best chance of achieving economic development
why does the savings gap hinder economic development
- financial capital in system is limited (as savings rates are low)= restricts amount of finance can be provided to firms seeking to invest= amount of capital goods is limited= low economic growth- incomes likely to remain low
what is the foreign currency gap and why does it hinder economic development?
- in LEDCs, the amount of foreign currency available is not enough to meet the demand for imports
- imported goods vital for industrialisation- limited due to foreign currency gap, productivity growth limited= economic development of LEDCs is constrained
disadvantages of trade liberalisation (Eval)
- difficult for infant industries to mature into competitive firms
- risk of structural employment in some industries if it exposes them to more competitive rivals
- some LEDCs will be specialised in primary products- limit economic development in long run
- price volatility may negatively impact export revenue esp for LEDCs specialising in primary products
what is FDI
the flow of capital from one country to another, to gain a lasting interest in an enterprise in the foreign country.
how does FDI help LEDCs
- MNCs setting up in country provides external funding
- MNCs likely to train local workers and suppliers
- MNCs likely to bring more advanced forms of capital
Advantages of FDI
- injection into circular flow
- potential for transfers of tech and skills
- higher economic growth
- capital inflows can be used to finance current account deficit
- higher exports from host country- improves position on current account
- FDI generates tax revenue for host country
- FDI lead to higher wages and improved working conditions esp if TNCs take social responsibility seriously - raise living standards, overcome savings gap
- greater competition lowers prices= raise living standards
Disadvantages of FDI
- may only hire local workers to limited extent as low- skilled work left to locals and high skilled done by expats= limits degree to which FDIs will improve skills of LOCAL labour force
- tax revenue raised may be small as some LEDCs use tax breaks as incentive for TNCs. MNCs may have accounting tricks to minimise tax bill
- TNCs likely to outcompete local rivals through superior quality- monopoly status
- may take advantage of weak environmental regulation and external costs borne by host country
what is microfinance
- small loans and other financial services given to individuals or a group to promote business activity
- increases income of those who borrow and can reduce their dependency on primary products - could be multiplier effect form investment of loan
- usually for unbankable people- allows to break from aid and gives financial independence
advantages of microfinance
- fills savings gap= higher incomes + higher capital accumulation= lower poverty + economic growth+ higher chance of economic development
- empowers women= higher incomes= lower poverty + greater utilisation of available factors of production= higher economic growth= chance of economic development
- detach poor from high interest loan sharks, investment, stimulate employment
disadvantages of microfinance
- some lenders are profit orientated rather than motivated to improve lives of poor= reckless lending and unsustainable debt
- some microloans have high interest rates= greater chance of failure and higher chance of debt
- some microloans spent on immediate consumption
- data collected on microfinance may not be reliable if there is dishonesty regarding where money was spent
- tamil nadu- less than 2% of microenterprises still operating after establishment
how can removal of govt. subsidies increase growth and development
- govts. often give subsidies to goods and services that do not produce external benefits or produce external costs
- firms with subsidies may feel less under pressure to be efficient and minimise waste (can counter this by making subsidies contingent on positive economic performance)
- subsidies could distort price signals by distorting free market mechanism- could lead to govt. failure= could be inefficient allocation of resources as market mechanism is unable to act freely
what is privatisation
the transfer of economic activity from the public sector to the private sector- govt. sells a firm (revenue raised for govt), firm is left to free market and private individuals
- e.g. royal mail
advantages of subsidies
- for LEDCs can be used to support infant industries= growth of these industries can lead to economic development= once able to produce at competitive level, subsidies removed= dynamic efficiency
- e.g. south korea- creating domestic car, ship and semiconductor industries
- increased production of goods and services, spending on R&D can lead to tech innovations and boost economic growth
how does privatisation increase growth and development and eval
- profit motive present, competition present= efficiency up as firms can increase profits by lowering costs= increases economic welfare
- competition= incentive to lower costs and meet customer needs = increases allocative efficiency + higher quality
- BUT risk that price and quality will not improve if privatised industry is a natural monopoly (because introducing competition to these markets is difficult) and LEDCs may lack capacity to regulate these industries- risking corrupt practices
what is a floating exchange rate
- market forces (S+D) determine exchange rates instead of govt. in fixed exchange rate
advantages of floating exchange rate-
- exchange rates may be overvalued in a fixed exchange rate- this would reduce competitiveness of imports
- LEDcs govts./central banks do not need to hold large reserves of gold/currency- this means there is more foreign currency to use on imported capital goods
- monetary policy is freed up to target macro objectives
- can help reduce deficit on current account
disadvantages of floating exchange rate
- LEDCs lose ability to support infant industries through undervaluing the currency
- LEDCs lose ability to pursue import substitution industrialisation
- exchange rate volatility can create instability that undermines investment
