Market-orientated strategies, development Flashcards
what are market orientated strategies
Free market strategies that recommend less government intervention and place greater emphasis on free trade, aims to increase efficiency by freeing the market.
1- trade liberalisation
Involves removing barriers to trade between different countries and encouraging free trade.
how does trade liberalisation lead to development
allows countries to specialise in producing the goods and services where they have a comparative advantage. This enables a net gain in economic welfare.
make the country more attractive for inward investment. Inward investment leads to capital inflows but also helps the economy through diffusion of more technology, management techniques and knowledge.
what is an example of trade liberalisation
part of economic reforms in India, was initiated during 1991 through various measures like easing of quantitative restrictions on imports and reduction in import duties across all the segments of the industry and agriculture
trade liberalisation evaluation
may be damaging for developing economies who cannot compete against free trade.
often leads to a shift in the balance of an economy. Some industries grow, some decline. Therefore, there may often be structural unemployment from certain industries closing.
can often be painful in the short run, as some industries and some workers suffer from the decline in uncompetitive firms.
2- promotion of fdi
FDI is investment by one private sector company in one country into another private sector company in another.
how does promotion of fdi lead to development?
involves the transfer of knowledge from one country to another, with the company bringing production and management techniques and training for staff which will benefit the country as a whole.
It will create jobs and leads to the effect of the multiplier.
Labour productivity tends to increase and wages are often higher.
It is a source of investment and can help to fill the savings gap.
example of promotion of fdi
India has benefited greatly from FDI. The Make In India initiative liberalised FDI
policy and led to a 48% increase in FDI in a range of sectors, including pharmaceuticals, manufacturing and railways.
1990, india cut corporation tax from from 50% to 40%
promotion of fdi evaluation
there is usually a repatriation of profits and developing countries may find the company exploits them, by offering lower wages and poorer conditions than they would in a developed country.
The country will also lose some sovereignty and become dependent on another firm.
Local competition may find it hard to set up and compete and the best jobs often go to imported labour, leaving only low skilled jobs for locals.
Environmental damage and exploitation of natural resources.
3- removal of govt subsidy
Subsidies are placed on essential items within a country, such as food or fuel, or target agriculture and industry in an attempt to increase output and investment. They can be an effective way of minimising absolute poverty and ensuring a minimum standard of living but they create many problems:
how does removal of govt subsidy lead to development
often poorly targeted since subsidies on basic goods like rice will benefit everyone in the country, not just the poor. theory suggests the problem would be better solved by giving poor households cash payments, as this would mean they were targeted at the poor.
Subsidies to farmers and producers tend to lead to inefficiency and if they are given a large amount over a long period of time, the subsidy becomes ineffective in increasing development.
They represent a large amount of government spending , incurring an opportunity cost and often leading to high levels of debt.
They can also cause problems in terms of corruption and criminality, for example in Venezuela subsidised fuel is smuggled across its borders and sold in neighbouring countries for profit.
removal of govt subsidy example
Venezuela has placed subsides on almost all goods due to high inflation and low wages, but this is still not enough and demand is still higher than supply.
removal of govt subsidy evaluation
Removing a subsidy can be very politically unpopular and some governments have even been thrown out because of attempting to do this, can then lead to political instability.
4- Floating Exchange Rate Systems
market forces determine the currency. The country does not have to worry about their gold and foreign currency reserves and the government does not intervene.
how floating exchange rate system leads to development
exchange rates to be set by market forces means exporting firms aren’t protected against currency fluctuations, but it may improve efficiency and productivity as it helps the market react easily to international demand.
