Policies to Promote Growth & Development Flashcards
Market-based Strategies to Generate Economic Growth & Development - trade liberalisation
explanation - Removing the barriers to international trade such as tariffs, quotas etc.
advantage - More trade increases output, employment & incomes
Lowers costs of production for firms
May result in lower prices for consumers
More efficient global allocation of resources
disadvantesg -
Global competition intensifies and some firms may fail
There may be an element of structural unemployment as inefficient industries die out
Market-based Strategies to Generate Economic Growth & Development - privatisation
explained - Government firms are usually so big that private enterprise refrain from trying to compete with them
Privatisation encourages new firms to enter the market and compete, thus increasing the total supply in the economy
advantages -
May increase competition leading to an increase in output, employment and incomes
Private firms may be more efficient than government firms
Competition may result in cheaper prices for consumers
The money from the sale of assets can be used to provide more merit and public goods
disadvantage-
Government assets are often sold off cheaply at prices below fair market value
The quality of services may deteriorate as private firms focus on profit maximisation
Unemployment may increase as private firms seek to cut their wages in order to maximise profits
Prices may actually rise as firms provide a monopoly service e.g. rail travel
Market-based Strategies to Generate Economic Growth & Development - deregulation
explanation -
This is the process of removing government controls/laws from markets in order to increase competition
advantages -
Any regulation increases costs of production for firms and deregulation decreases costs which may result in greater supply
Less regulation may result in innovation and more enterprise in an economy
disadvantages -
Deregulation may create an environment of corruption leading to inefficiency
Deregulation may increase the quantity of negative externalities
Deregulation may allow foreign firms to monopolise industry within the nation, leading to higher prices and less output
why would market based policies be put in place
Market-based strategies create the conditions for private individuals and firms to pursue an economic activity with the aim of maximising output and profit
These strategies are able to generate a better standard of living, leading to an improvement in economic development
why may interventionist policies be put in place
Interventionist strategies are put in place by governments to correct the failings of the free market and promote the welfare/development of its citizens
Interventionist strategies aim to increase human capital, productivity and output
These can lead to an improvement in the standard of living
Interventionist Strategies to Generate Economic Growth & Development- tax polivies
A progressive tax system redistributes from those with higher income to those with lower income & reduces income inequality
advantages
Redistribution often starts with the provision of free education & healthcare paid for from tax revenue
Tax revenue provides the means of supporting poorer households and the unemployed
disadvantages-
Sometimes, the benefits of a good progressive tax system are eradicated by the penalties imposed through multiple regressive (indirect) taxes
If the tax burden is too high it may become a disincentive to work
Interventionist Strategies to Generate Economic Growth & Development - Transfer payments
Transfer payments are usually given to the poorest & most vulnerable people in society and include unemployment & disability payments, pension payments, heating discounts, public transport subsidies etc.
advantages
The poorest households are supported
Money received from transfer payments generates consumption in the economy and increases aggregate demand
disadvantages -
Poorer countries have less money available to support the poor
There is an opportunity cost for the government associated with each transfer payment
Supporting the poor makes good economic sense but is sometimes politically unpopular
Interventionist Strategies to Generate Economic Growth & Development - minimum wages
Minimum wages are set above the free market rate and firms are not allowed to pay anyone less than the legal rate
advantages
Workers receive higher wages and have more disposable income
disadvantages
Consumption increases leading to increased aggregate demand
Standard of living increases with higher income
Costs of production for firms increase, possibly leading to less international competitiveness
With higher costs of production, output may fall leading to increased unemployment
why may aid be offered
Aid is often offered to developing nations in several different forms to promote growth and development:
Humanitarian/development aid
Debt relief
Official Development Assistance (ODA)
what are the two most common forms of Humanitarian/development aid
grants - a sum of money that does not need to be repaid
soft loans - a loan that has to be repaid but at a lower interest rate
Critics argue that aid breeds dependency, corruption & disincentivises individual responsibility
debt relief
Many developing nations have borrowed significant sums of money in the past which have to be repaid (with interest) over a long period of time
The opportunity cost of these repayments is significant & often includes
Loss of infrastructure development
Inability to create a welfare system
Investment in human capital/education
More recently there has been significant progress in writing off the entire debt of the most heavily indebted poor countries (HIPC) so that they can focus on building their economies
The country may have a lot more funds available than ever before and this can breed corruption as individuals in government seek to get their hands on it
Once the debt is forgiven, many developing nations borrow more money and the cycle starts again
official development assistance
ODA can be bilateral (from donor government to recipient government) or provided through a multilateral
development agency, such as the United Nations
Two of the most common forms of ODA are grants & soft loans
Bilateral ODA can help to develop the relationship between the two countries, possibly facilitating the exchange of resources, ideas and technology
Corruption may mean funds are diverted from their true purpose
ODA in the form of loans has to be repaid and these repayments carry an opportunity cost
