LS18 - Strategies Influencing Growth And Development Flashcards
What is FDI and reasons for FDI in a developing country
FDI- When MNCs set up businesses and invest in physical capital in a country that is not their own
Reasons for FDI in a developing country:
Developing country may be rich in natural resources – help a MNC by Increasing, profits through export but also by reducing costs of production in their own country- send resources back home once extracted.
MNC’s may be looking to tap into new market opportunities. Developing countries= large pop and rising income growth- MNC’s can expand and inc global market presence. Locating directly in upcoming developing count, MNC’s have greatest chance to access a large number of new potential customers
A developing country with a stable gov= breed confidence in MNC’s to invest. Developing C= potential to grow and develop quickly- centralised support from accountable, transparent and corruption free govt MNC’s know to trust policy making and ease of doing business if gov fulfil these characteristics incentivising FDI.
Tax incentives could spur MNC’s to invest in a developing country- form of corp tax reductions, VAT exemptions, tariff free access to raw mat. This reduces costs of production for MNC’s providing profit incentive to operate there
Developing countries – abundant low cost of labour for MNC’s to use to bolster production. Gov don’t impose labour laws over min wages or working conditions allowing MNC’s to produce at a very low cost in developing countries without large productivity sacrifice- inc profitability
Governments in developing countries don’t impose strict, anti-business regulation and red tape. Environmental policy, planning laws, and employment law tend to be much more lenient or non-existent providing more business friendly environ with lower costs of production for MNC’s to operate and make large profits incentivising FDI
FDI pros
Direct injection into CFI= inc AD and S/T economic growth. FDI inc L/R econ growth and quantity and quality of capital stock in the economy increases. GNI/capita in developing countries will rise- basic life sustaining goods and services more affordable, lifting people out of absolute poverty. Job prospects in economy will improve increase in demand – encourage domestic firms – Increase output- increasing demand for labour- reducing U/E,= economic development -rising incomes and potentially an improvement in income distributing indicated by Gini coefficient tending towards
FDI can produce fiscal dividend for govts resulting from business profitability and economic growth. increasing receipts from income tax, VAT/corp tax. Rev= hypothecation into health, education, literacy rates, life expectancy levels, 2 areas of develop Michael Todaro features at the most sig development factors. Gov- infrastructure roads, bridges- decreasing transport costs- increase efficiency – achieving sustainable dev- businesses access markets, families access to hospitals and schools
When MNCs invest in a developing country tech, skills and expertise are transferred. Capital machinery and labour can be brought into country or specialist workers train local workers – improving skills and implement tech advances. Inc productivity, profitability inc, and incomes, SOL inc.
MNCs directly improve infrastructure in a developing country building roads, rail, ports, electricity pylons, and dams necessary for business to succeed. Such infrastructure develop- is to betterment of developing country reducing COP for all businesses- improving access to jobs, schools, hosp, -promoting development outcomes
FDI can improve BOP for a developing country.
An inc In FDI – improve financial acc on BOP – easier for developing countries to fund C.A deficits. Reduces need to issue debt i.e. borrow to fund C.A def. boost exp and improve c.a position- sustainable growth and development over time.
FDI cons
Employment from FDI may be lower than expected and S/T in nature. MNCs bring workers from own country instead of employing locals to form the majority workforce in the developing country. Employment may be S/T if MNCS strip resources and leave once own agenda - satisfied. Even worse is if MNCs bring about replacing technology reducing job opportunities from FDI. Absolute poverty, low incomes can persist with FDI inc econ growth but not necessarily SOL
Tax revenue collected could be lower than expected. To attract MNCs into developing county, tax reduction or exemptions are given or MNCs engage in tax avoidance. Fiscal dividend to gov will be smaller – reducing hypothecate on infrastructure, health/ ed – development outcomes won’t be attained
Uncontrolled FDI- rapid depletion of natural resource and other neg externalities in production – excessive air pollution, deforestation, resource degradation and loss of biodiversity. Resource depletion – risk developing countries being converted from resource rich – poor
Once more depleting natural resources = negative externalities ignored by MNCs who follow their own self-interest. There is an over-production of natural resources- allocative inefficiency- welfare loss for society burdening future gen - constraining L/T sustainable development
MNCs may have too much power over a developing country gov. This is because of their size, tax revenue potential and growth/employment boosting capabilities- may Influence policy decisions that favour themselves e.g. loosening environ and implementing deregulation hiring and firing regulation that may not be in the interests of development in developing country
How can trade liberalisation help overcome foreign currency gap
TL leads to more competition and efficient production –> more output –> more exports –> earn foreign currency
How can trade liberalisation help overcome savings gap
TL results in more output, meaning more income –> higher savings
Why might infant industries struggle with trade liberalisation
They might be unable to compete with tough foreign competition
How can TL and diversification beyond primary products develop economy
Primary prods are income elastic, with volatile prices, meaning income is not insured - this leads to uncertainty, and so, low levels of investment
Manufacturing sector is more income inelastic, meaning more secure income - more growth and investment
Microfinance
Micro finance- the provision of loans at a low interest to small scale entrepreneurs in a developing country
It is a free market oriented strategy
Pros:
Microfinance can break the growth and development poverty cycles in developing countries- increasing investment and profits – thus incomes of small-scale entrepreneurs; incomes can then increase material and nonmaterial SOL- ability to access health and education
Microfinance can fill the savings gap in developing countries – means to gain finance for small businesses to grow- become more productive by buying capital machinery. Profitability therefore increases – increases incomes – families access better standards of education, healthcare, increasing development.
Microfinance can alleviate poverty and create jobs for others. As profits and incomes increase, need to hire more workers- derived demand from the growth of their business. Not only is income rising and poverty alleviated for more entrepreneurs and their families but as jobs are given to others in the community, other family livelihoods improve, and widespread poverty can be alleviated
Microfinance provides a means to finance – official lenders may reject riskier small-scale entrepreneur’s – more capital machinery= boost productivity. Such loans= low interest – paid back over long period of time. Maximum profit and income growth without pressure of having to pay back debts within short period of time.
Microfinance schemes can empower women.
Many small-scale business ventures are started by women who need finance to grow and develop their business. Women make profits, earn incomes become leaders- inspiring more women. SOL increases
Cons:
Presumption of microfinance= every business venture= successful = not the case. Businesses do fail, individuals with very low incomes will have debts to repay – cannot afford- trapping themselves into poverty
Evaluation. To overcome this- microfinance loans are usually issued with a mentor or regular meeting providing guidance and support to make business profitable enough the loan can be paid back. Tend to be given to groups rather than individuals.
Large risk that microfinance institutions become profit motivated rather than being development promotion and alleviating poverty. I/R charged could become exorbitant and repayment periods – shorter- pressure on entrepreneurs to repay loans. Recipients face losing all assets- reducing SOL and causing absolute povertybarrier to growth and develop
Temptation for individuals on low incomes who receive microfinance loans to use money to better SOL of family rather than invest in business. Only improve Short term standards of living and worsen long term position if loan cannot be paid back. Invested into informal economy
How can removal of subsidies help develop economies
Able to redirect spending to investment in inrastrcuture, education, healthcare - boosts productivity, living standards and quality of labour
Why is supporting infant industries harder with subsidy removal
Infant industries/SMEs need help while starting up, due to high competition from incumbent firms and global firms.
Why can removal of subsidies on goods such as food or fuel worsen poverty
If subsidies for these goods are removed, the price of essential goods rises, as the firms face higher costs of production
This reduces the purchasing power of households, with poorer families being hit the hardest, as they struggle to afford necessities
How can floating exchange rate help LEDC gain competitiveness
Can adjust to market forces - exports cheaper (lower ex rate), meaning their exports are more competitive
How can managed exchange rates worded foreign exchange gap
If currency is overvalued, exports are more expensive, reducing export demand and so income
So foreign currency revenue falls, widening the gap
How can floating exchange rate hinder LEDC economic development
Floating exchange rate is dependent on supply/demand, which causes uncertainty –> bad planning of investment and lack of FDI
How protectionism helps develop economies
Supported domestic firms and industries, allowed economy to grow value adding industries such as manufacturing
South Korea - shipbuilding, mobile phones, automobiles
