Macro 20 - Strategies for growth and development

Question 1

What are the three different types of strategies used to promote growth and development?

Answer 1

• Market orientated
• Interventionist
• Others

Question 2

Give some examples of market orientated strategies to promote growth and development

Answer 2

• Trade liberalisation
• Promotion of FDI
• Removal of government subsidies
• Floating exchange rates
• Microfinance schemes
• Privitisation

Question 3

Give some examples of interventionist strategies used to promote growth and development

Answer 3

• Development of human capital
• Protectionism
• Managed exchange rates
• Infrastructure development
• Promotion of joint ventures
• Buffer stock schemes

Question 4

Give some examples of other (Neither market orientated or interventionist) strategies used to promote growth and development

Answer 4

• Industrialisation
• Development of tourism
• Development of primary industries
• Fair trade schemes
• Aid
• Debt relief

Question 5

Define Market orientated strategies

Answer 5

Market orientated strategies are plans that use the free market to achieve growth and development. They will feature the use of market forces to allocate resources

Question 6

What is Trade liberalisation?

Answer 6

Trade liberalisation involves measures designed to remove trade barriers and create free trade

Question 7

What are some of the benefits of trade liberalisation?

Answer 7

• Higher levels of competition increases efficiency and productivity in domestic firms. This should lead to lower costs and therefore lower prices for domestic consumers
• Utilises comparative advantage as the country should produce the product to which its resources are most suited. These firms that specialise should also gain from economies of scale
• Free movement of goods should encourage FDI into the country

Question 8

Define Foreign direct investment (FDI)

Answer 8

FDI is investment made by a multinational corporation in a country other than where its operations originate, the establishment of branches and productive processes abroad, or the purchase of foreign firms.

Question 9

What are some of the benefits of the promotion of FDI?

Answer 9

• Provision of training and skills
• Technology transfer
• Helps with diversification
• Jobs created and multiplier to help local firms too
• Infrastructure investment is more likely
• Government revenue increases from corporation tax
• Any general benefit of higher AD

Question 10

What are some of the disadvantages of the promotion of FDI?

Answer 10

• Over reliance - industries are often footloose and can leave if wages or regulations increase
• Opportunities for corruption - misuse of any government gains
• Finite resources are limited
• May be limited skills and technology transfer if the focus is on natural resource extraction
• Labour rights abuses
• Limited multiplier if profits are sent back to origin country

Question 11

What diagram could be used to analyse an increase in FDI?

Answer 11

A shift in LRAS on an AD/AS diagram

Question 12

Why would a government remove subsidies in an economy?

Answer 12

Subsidies can distort the operation of market forces and may result in a misallocation of resources

Question 13

What are some of the reasons for removing subsidies?

Answer 13

• The huge expenditure on subsidies that add to budget deficits
• Both the subsidy and any subsequent interest payment creates an opportunity cost preventing money being spent on other growth and development strategies
• Subsidies can create inefficiency in markets as they are essentially a form of protectionsim
• Subsidies removes the benefits of resources being allocated by the price mechanism as they encourage production and can lead to excess supply and wasted produce
• Subsidies could benefit the rich more than the poor

Question 14

What are the possible advantages of using a floating exchange rate to promote growth and development?

Answer 14

• The currency may depreciate making the country’s goods and services more competitive therefore increasing exports, AD, GDP and income levels
• If when left to market forces a weaker currency results this could encourage FDI if they can export from there more easily

Question 15

What are the possible disadvantages of using a floating exchange rate to promote growth and development?

Answer 15

• If the floating system means a weaker currency, higher import prices may increase the costs of production
• Higher import prices may increase the price of essential goods such as food reducing living standards
• A floating exchange rate is likely to be more volatile creating instability and additional challenges to trade
• A weaker currency may fail to boost exports if demand is price inelastic

Question 16

What are microfinance schemes?

Answer 16

Microfinance schemes are a means of providing poor families with small loans (microcredit) to help them engage in productive activities or grow their small businesses. It works by insisting repayment and charging interest to cover the admin costs of lending the money

Question 17

What are some of the advantages of using microfinance schemes to promote growth and development?

Answer 17

• Interest rates are far lower than those available elsewhere. Many of the recipients would find it difficult to access funds due to an absence of a credit history
• Money can be lent out and repaid time and time again which would make such schemes cost effective
• It enables the poor to build businesses, increase income and reduce vulnerability
• Loans can be targeted to certain groups in society

Question 18

What are some of the disadvantages of using microfinance schemes to promote growth and development?

Answer 18

• Although useful for small scale entrepreneurs, microfinance only reaches a small proportion of a developing country’s population
• Microfinance is unable to provide funds to stimulate necessary improvements in infrastructure and other public goods
• If finance is lent just to buy durable consumer goods rather than productive investment and innovation, there may be very small scale benefits

Question 19

Define privitisation

Answer 19

Privatisation is the sale of publicly owned assets to the private sector through the issue of shares

Question 20

What are some of the advantages of using privatisation to promote growth and development?

Answer 20

• Increase in competition will stimulate efficiency and productivity gains which could lower costs and prices making goods more affordable for society
• Increases in incentive to make profit will increase the quality of products and services improving consumer welfare
• Improvements in efficiency and productivity will shift LRAS to the right and increase productive capacity. This will help the country be internationally competitive due to the potential for non inflationary growth
• It will reduce the strain on government finances and help reduce the size of budget deficits if the industry was loss making

Question 21

What are some of the disadvantages of using privatisation to promote growth and development?

Answer 21

• Many industries may still require state support especially if they are in their early stages of development (infant industries)
• Privatisation may lead to monopolies rather than a competitive environment and prices higher than hoped for in a competitive market
• There is a risk of corruption as some governments may sell the organisation to friends and family at a low price
• If the industry was profit making the government may lose out financially long term from selling it, particularly if it is sold too cheaply

Question 22

Define Interventionist strategies

Answer 22

In interventionist strategies the government plays a leading role, regulating and manipulating markets or bypassing markets through direct provision of goods and services

Question 23

What are the three main ways in which the development of education and human capital would occur?

Answer 23

• Improvements in access to education
• Increase in the number of years of schooling for individuals
• Increase in the quality of education

Question 24

What are the advantages of the development of education and human capital in promoting growth and development?

Answer 24

• It increases the skills and qualities of the workforce raising productivity levels. This shifts LRAS and the PPF to the right
• It may attract FDI as locals will be able to do a greater range of tasks more efficiently
• It helps a country move from primary to secondary and then tertiary industry as the workers are able to adapt their skills to more advanced tasks
• By improving literacy the poorest in society are able to use medicines and safely follow instructions

Question 25

What are the disadvantages of the growth and development of education and human capital in promoting growth and development?

Answer 25

• The cost to the government in providing state education. Much education provision in developing countries is still provided privately limiting the access
• There is an inelastic supply of teachers. Finding and training teachers takes a long times so in many areas there is a shortage of suitable teachers. Class sizes are high reducing the quality of education
• Gender inequality may persist meaning access to education is not equal

Question 26

What are the main aims of using protectionism to promote growth and development?

Answer 26

• To promote import substitution and replace imports with domestically manufactured goods
• Import substitution will help a country diversify away from primary commodities and industrialise its production
• Ultimately the hope is to build a strong domestic base until the firms are large enough to benefit from economies of scale and then cope with foreign competition
• To raise revenue as some methods of protectionism such as tariffs raise revenue for the government. Many developing countries are reliant on these revenue streams

Question 27

What are the disadvantages of using protectionism to promote growth and development?

Answer 27

If domestic firms are sheltered from competition there is a danger of inefficiency within domestic producers
- Comparative advantage can be distorted as the country is not necessarily the most efficient producer. In this case resources will not be allocated efficiently.
- It may contravene with WTO rules
Use a tariff diagram to support this analysis

Question 28

Define managed exchange rate

Answer 28

A managed exchange rate is where market forces partly determine the value at which one currency exchanges for another but intervention by the central bank influences the exchange rate of the currency

Question 29

What are the advantages of using a managed exchange rate to promote development and growth?

Answer 29

• Managed exchange rate systems can help maintain stability for firms which can encourage investment and job creation
• If managing the exchange rate keeps it above the rate it would be if floating this can make imports more affordable. These imports could be necessities which increases living standards
• The managed system could be used to keep the currency weaker as a way of enhancing the competitiveness of industries

Question 30

What are the disadvantages of using a managed exchange rate to promote development and growth?

Answer 30

• Retaliation can occur from trading partners
• Managed exchange rate systems can be expensive to maintain. This money may be better used improving sanitation or infrastructure

Question 31

Define infrastructure

Answer 31

Infrastructure refers to the physical organisation structures and facilities such as buildings, roads, railways, power supplies and the internet. It is the network that allows economic activity to occur

Question 32

What are the advantages of improving infrastructure?

Answer 32

• The majority of infrastructure projects like building a new road will never be privately profitable because of their public good and free rider nature, hence the government is likely to need to take a lead on this
• It enables firms to move goods and services between destinations thus facilitating output, income and expenditure. It also helps trade between countries helping imports and exports
• It increases the speed of production and productivity rates which increases productivity capacity and LRAS
• It should attract additional FDI as foreign multinationals recognise how better infrastructure will reduce their costs of production
• A stable electricity supply will allow firms to be able to plan their production and have more confidence

Question 33

What are the disadvantages of improving infrastructure?

Answer 33

• There is a huge cost involved and many developing countries struggle with high levels of debt. The expenditure may require governments to borrow in international markets and incur long term liabilities in terms of interest payments
• If a government is corrupt contacts could be given to friends rather than efficient providers
• Infrastructure takes time to plan, design and construct so there is a huge time lag before improvements can occur
• Many landlocked countries lack access to ports through neighbouring countries so improvements in their own infrastructure may not be the issue

Question 34

What is the promotion of joint ventures?

Answer 34

A joint venture is an association of two or more major businesses for the purpose of engaging in a specific enterprise for profit. Promotion suggests that the government will be influential in negotiating the terms of the joint venture

Question 35

What are some of the advantages of joint ventures?

Answer 35

• They combine the strengths of the two organisations. This is particularly helpful for the developing country that may lack experience in manufacturing or management
• They increase the competitive advantage by learning technology transfer
• They enable part ownership with the organisation rather than simply hosting a foreign multinational

Question 36

What are some of the disadvantages of joint ventures?

Answer 36

• There could be difficulties in combining two very different working cultures
• Difficulty in ensuring that both parties equally gain from the agreement

Question 37

What is a buffer stock scheme?

Answer 37

A buffer stock scheme is a scheme designed to reduce price fluctuations. It involves setting a ceiling and a floor price (max and min prices) and the buying and selling of stocks to maintain prices within these limits

Question 38

What is the buffer stock?

Answer 38

The buffer stock can be operated by a government or producer’s association. It would store or release stocks as required in order to reduce price fluctuations to the agreed limits. The stocks are likely to be held in warehouses

Question 39

What assumption is made about supply in buffer stock schemes?

Answer 39

Supply is price inelastic so the supply curves are vertical lines