LS18- Strategies Influencing Growth and Development Flashcards
How can trade liberalisation help overcome the foreign currency gap?
- Increased sales of domestic goods to foreign nations increases the sum of foreign currency
Why may infant industries struggle if a country pursues trade liberalisation?
They are exposed to more competition.
What are market orientated strategies?
Measures which make the economy more free, with minimum government intervention.
List the market orientated strategies
6 strategies
- Trade liberalisation
- Promotion of FDI
- Removal of government subsidies
- Floating exchange rate systems
- Microfinance schemes
- Privatisation
How trade liberalisation influences growth and development
- Increases free trade based on the principle of comparative advantage
- Helps overcome the foreign currency gap by increasing exports of goods and raw materials
- Higher competition leads to increased innovation and efficiency -> higher quality = EG+D
- However, may be difficult for infant industries to become competitive, can also lead to primary product dependency
Promotion of FDI impact on EG+D
- Can help create employment, encourage the innovation of tech and promote long term sustainable growth
- Provides LEDCs with funds to invest and develop
FDI definition
The flow of capital from one country to another, in order to gain a lasting interest in an enterprise in the foreign country.
How do the removal of government subsidies lead to EG+D?
- Gov subsidies could distort price signals by distorting the free market mechanism, which a free market economist would argue could lead to government failure.
- Could be an inefficient allocation of resources because the market mechanism is unable to act freely.
Floating exchange rate system
The value of the exchange rate in a floating system is determined by the forces of supply and demand.
How privatisation leads to EG+D
- Assets are transferred from the public sector to the private sector
- The firm is left to the free market and private individuals
- The private sector gives firms incentives to operate efficiently because of the profit motive, which increases economic welfare
- In free market, firms produce what consumers want, increasing allocative efficiency and perhaps the quality of goods produced
Interventionist strategies
When the government intervenes in the market to try and influence growth and development using interventionist strategies.
Interventionist strategy- development of human capital
- Skills base in the economy my would improve -> increased productivity and more advanced tech used since workers would have the skills
- Country can move their production up the supply chain from primary products, to manufactured goods and to services, which can earn them more income
Interventionist strategy- protectionism
+ evaluation
- Can help reduce the trade deficit due to tariffs and quotas reducing imports
- Protects infant industries
- However, could distort the market leading to a loss of allocative efficiency, consumer welfare may fall due to lack of competition
- Tariffs are regressive and are most damaging to those on low and fixed incomes
- Risk of retaliation e.g. 2016 trump trade war
Interventionist strategy- managed exchange rates
- When the exchange rate floats on the market, but the central bank of the country buys and sells currencies to try and influence their exchange rate
HDI scale
- mean years schooling
- adult literacy rate
- GNI per capita
- life expectancy
