Lesson 45-Strategies influencing growth and development

Question 1

Who and what do free market approaches favour?

Answer 1

They favour giving a large role to private sector enterprises using liberalisation of markets
.Structural supply side reforms to raise incentives

Question 2

Give three examples of market led policies

Answer 2

.Fiscal discipline
.Reallocating state spending away from subsidies
.Tax reforms
.Floating rather than fixed exchange rates
.Privatisation of state enterprises

Question 3

What does trade liberalisation involve?

Answer 3

This involves a country lowering import tariffs and relaxing import quotas and other forms of protectionism

Question 4

What is the main aim of trade liberalisation?

Answer 4

It is to make the economy more open to trade and investment so it can engage more directly in the regional and global economy

Question 5

Give two micro effects of trade liberalisation

Answer 5

.Lower prices for consumers/households which then increases real incomes
.Increased competition/lower barriers to entry
.Improved allocative and productive efficiency
.Might affect real wages of workers in certain industries

Question 6

Give two macro effects of Trade liberalisation

Answer 6

.Multiplier effects from higher export sales
.Lower inflation from cheaper imports-causing outward shift of short run aggregate supply
.Risk of some structural unemployment
.May initially lead to an increase in the size of a nations deficit

Question 7

Give three main gains of attracting inflows of HDI

Answer 7

.Improved infrastructure in power and transport sectors
.Higher capital intensity/Capital deepening
.Better training for local workers
.Investment grows country’s export capacity
.More competition in markets which lowers prices
.Creates new jobs leading to higher per capita incomes and increased household savings
.FDI can promote a shift to higher per capita incomes

Question 8

Give two main risks from policies designed to attract investment into an emerging country

Answer 8

.Multinationals wield power within host countries and they can gain favourable laws and regulations
.Foreign multinationals take advantage of weak laws on anti competitive practices
.Multinationals tend to have poor working conditions
.Profits made in a LEDC are often sent back to the host country
.Multinationals can only employ local labour in lower skilled jobs

Question 9

Give an example of three policies which are designed to attract foreign direct investment

Answer 9

.Attractive rates of corporation tax
.Soft loans and tax reliefs/subsidies
.Trade and investment agreements
.Flexible labourforce+skilled workers
.Creation of special economic zones
.High quality infrastructure
.Attraction of low unit labour costs

Question 10

What are some criticisms of subsidies?

Answer 10

.Subsidies distort the working price mechanism
.Subsidies can stifle innovation because producers are less reliant on innovation as a way of making more profit
.Producers can become subsidy dependent
.There is a chance of corruption with the funds
.Subsidies can lower the incentive of producers to improve efficiency

Question 11

Why would a country choose to have a floating exchange rate?

Answer 11

.It can be helpful for countries exposed to external economic shocks
.It means a country’s central bank does not have to intervene to change the currency’s price
.Capital controls can be used to limit the inflow and outflow of currency and this may make a country more attractive to foreign investment
.A govt does not have to use up foreign currency reserves to defend a fixed exchange rate that the market has decided is not sustainable

Question 12

Give a benefit of privatisation

Answer 12

.Private companies have a profit incentive to cut costs and be more productively efficient
.Govt is able to gain revenue from the scale of assets and does not have to support a loss making industry
.Competitiveness increases and increased competitiveness will drive higher exports and long run GDP growth

Question 13

Give two drawbacks of privatisation

Answer 13

.Social objectives are given less importance as private owned firms are driven by the profit motive
.Govt loses out on dividends from any future profits
.Public sector assets are sold cheaply and privatisation may suffer from corruption
.Privatisation leads to job losses as firms increase their efficiency

Question 14

What interventions may be used to improve human capital?

Answer 14

.Strategies to improve nutrition and reduce the extent of stunted growth among young people
.Increase investment in primary and secondary schooling
.Incentives to attract an inflow of skilled migrant workers and curb ‘brain drains’
.Investment in training to re-skill people at risk of unemployment
.Cash transfer interventions can increase demand for education

Question 15

What are two of the main arguments for protectionism?

Answer 15

Import substitution- trade barriers are designed to protect domestic industries which have not yet achieving economies of scale
.Can be a useful source of tax revenues for developing countries
.Tariffs can be used in response to the dumping of products into a country set at a price below cost

Question 16

What are some risks associate to developing countries if they maintain high tariffs?

Answer 16

.Tariffs may protect jobs in some industries
.Revenues raised by tariffs may only be a small percentage of total govt revenue and lost jobs in other sectors will diminish the net effect
.There is a risk of retaliatory action by other countries
.Protectionist tariffs risk causing a lack of competition for domestic firms
.tariffs increase prices for consumers leading to high inlfation, reduced real incomes and increased risk of poverty

Question 17

What is the one key aim of managed floating currencies?

Answer 17

To reduce the volatility of exchange rates

Question 18

What are the two aims in appreciating the value of a currency?

Answer 18

.To curb demand pull inflationary measures
.To reduce the prices of imported capital and technological

Question 19

Give two aims in depreciating the value of the currency

Answer 19

.Improve the balance of trade in goods and services/improve current account position
.Reduce the risk of a deflationary recession
.Rebalance the economy away from domestic consumption towards exports and investment
.Sell foreign currencies to overseas investors as a way of reducing the size of government debt

Question 21

Give two arguments for having a buffer stock

Answer 21

.Lower risk of extreme food poverty for poorest customers
.More stable incomes and profits for farmers
.Helps macroeconomic stability/investment

Question 22

Give two arguments against using buffer stock schemes

Answer 22

1.Buffer stock may not be large enough to change the market price
.Setting a high price for farmers could cause rising surpluses
.High costs of storage and falling quality of product
.Many buffer stock schemes fail because of poor administration/corruption

Question 23

Give a benefit of overseas aid to the receiving country

Answer 23

.Helps to overcome the savings gap and can help stabilise post conflict environments
.Project aid can fast forward investment in critical infrastructure
.Long term aid for health and education projects-this builds human capital
.Target aid might add around 0.5% to the annual growth rate of the poorest countries which benefits donor countries as trade grows
.India has a space station and we dont

Question 24

Give a drawback of high levels of overseas aid

Answer 24

.Poor governance-aid might leave the recipient country due to corruption
.Lack of transparency
.It may lead to countries becoming dependent on aid and ruining any entrepreneurial culture
.Aid may lead to a distortion of market forces and a loss of economic efficiency

Question 25

What is debt relief?

Answer 25

.It is the cancellation, rescheduling or refinancing of a nations external debts

Question 26

What are the arguments for offering debt relief?

Answer 26

.It is an appropriate form of aid for countries who lack access to global markets as interest payments can further impoverish nations
.Poor countries are highly dependent on exports of primary commodities and can be exposed to global economic shocks
.Debt relief can be made partially conditional on govts introducing economic and social reform

Question 27

Give an argument against debt relief

Answer 27

.Moral hazard argument-govts will spend and borrow more-if they know and expect their debts to be paid off they will continue to borrow
.If govts ran better macroeconomic policies then interest rates would fall on the loans and how much they need to pay back