strategies influencing growth and development Flashcards
what are market orientated strategies?
these are measures which make the economy more free with minimum govt intervention
recall the market orientated strategies used to influence growth and development?
trade liberalisation
promotion of FDI
removal of govt subsidies
floating exchange rate system
microfinances scheme
privatisation
how does trade liberalisation influence growth and development + ev?
- world GDP can be increased using free trade since output increases when countries specialise
- therefore living standards may inc and there could be more economic growth
domestic industries are forced to become efficient
resources allocated to their best use where the country has comp adv
however only efficient industries may survive which leads to job losses
how does promotion of FDI influence growth and development?
- FDI is the flow of capital from one country to another
- to gain lasing interest in an enterprise in the foreign country
- can help create employment, encourage innovation of technology, promote long term sustainable growth
- also provides LEDCs with funds to invest and develop
allows developing countries to access new markets
how can the use of govt subsidies influence growth and development be evaluated?
- govt subsidies could distort price signals by distorting the free market mechanism
- this could lead to govt failure
- there could be an inefficient allocation of resources because the market mechanism is not able to act freely
- e.g the govt might end up subsidising an industry which has few prospects
how does floating exchange rate systems influence growth and development?
- central bank isn’t required to keep large amounts of foreign currency reserves
- the reserves can be used for promoting growth by importing capital goods
ER devaluation could make exports more price competitive
how do microfinance schemes influence growth and development?
- involves borrowing small amounts of money from lenders to finance enterprises
- it increases the incomes of those who borrow and also reduce their dependency on primary products
- could be a multiplier effect from the investment of the loan
- they are small loans for usually unbankable people to allow them to break away from aid and gives borrowers financial independence
- also detaches the poor from high interest and exploitative loan sharks
how can you evaluate the use of microfinance schemes to influence growth development?
- the data collected o microfinance loans might not be reliable if theres dishonesty regarding where the money was spent
- also microfinance loans may have high repayment rates
- money may be spent on immediate consumption rather than investment
how does privatisation influence growth and development?
- free market economists will argue that the private sector gives firms he incentive to operate efficiently which may increase economic welfare
- firms in free market have a profit incentive whereas firms which are nationalised dont
- they also have to produce foods and services that consumers want which increases allocative efficiency and goods and services may be of higher quality
- revenue is raised for the govt by selling the assets
- however this is only a one of payment
what are interventionalist strategies?
the govt intervenes in the market to try and influence growth and development using interventionist strategies
recall the interventionalist strategies used to influence growth and development?
development of human capital
protectionism
managed exchange rate
infrastructure development
promoting joint ventures with global companies
buffer stock schemes
how does development of human capital influence growth and development?
- provides workers with skills and training
- would improve productivity and efficiency
- allow more advanced technology to be used as workers as workers would have the necessary skills
- if human capital isnt developed businesses struggle to expand where there are skills shortages which limits innovation
- a country can also move their production up the supply chain from primary products to manufactured goods and services which means they could earn more
how does protectionism influence growth and development?
- can help reduce a trade deficit as they’ll be importing less due to tariffs and quotas on imports
- can protect infant industries which are new and need support
- usually short term until the industry develops at which point industry can trade freely
- creates jobs in the SR
- import substitution - deliberately attempt to replace imported goods with domestically produced goods
how can you evaluate the use of protectionism to influence growth and development?
- this could distort the market and lead to a loss of allocative efficiency as domestic producers suffer from lack of competition
- loss of consumer welfare
- consumers face higher prices and less variety
- firms have little to no incentive to lower their costs of production by not competing in a competitive market
- tariffs are regressive and most damaging to those on lower incomes
- risk of retaliation from other countries so they may become hostile
- countries lose out from the benefits of specialisation
how can a managed exchange rate be used to influence growth and development
- can be used to improve the current account by making exports more price competitive and imports more expensive - lower exchange rate
- improve trade balance
- increase (x-m) component of AD
- can introduce high ER for import of essential goods and lower ER for others
However if imports are more expensive … inflation?
how can infrastructure development be used to influence growth and development?
- examples of physical infrastructure include transport, energy, water and telecommunications
- developing infrastructure can reduce the cost of production and transportation of goods and services
- infrastructure projects creates jobs which can improve productivity … multiplier effect?
how can promoting joint ventures with global companies influence growth and development?
reduced exploitation of countries as a result of FDI
- joint ventures open up new markets for small firms so they can distribute their products to customers
- this saves them time and funds
- it also spreads their risk
- important in industries where developing a product is expensive
- a joint venture with a global company also helps firms penetrate a foreign market (access to new markets)
- usually difficult due to barriers to entry
how can buffer stock schemes be used to influence growth and development?
- in the agriculture market, governments might intervene with a buffer stock system to reduce price volatility
keeps prices within a band which its allowed to move within- however, historically these have been unsuccessful
- helps incomes of farmers to remain stable as fluctuations in the market are reduced
- also increases consumer welfare by ensuring prices arent in excess
how can the use of buffer stock schemes to influence growth and development be evaluated?
- however govts might not have the financial resources to buy up the stock
- storage is difficult and expensive as agriculture doesnt last long
- admin costs
recall other strategies that can be used to influence growth and development?
industrialisation
development of tourism
development of primary industries
fair trade schemes
aid
debt relief
what is the lewis model ?
- lewis model is an explanation of how a developing country which focuses on agriculture could move towards manufacturing
- lots of workers idle in agriculture which causes a lot of productivity so he suggested they should move to urban areas
how can the lewis model be evaluated?
- profits might not be reinvested into the firm
- capital investment might replace labour→ demand for labour could also fall instead
- not always easy for labour in the agriculture sector to move to the manufacturing sector (immobility of labour as the workers may not the have skills)
- may be dependent on agriculture
- more workers migrating to urban areas could lead to the formation of shanty towns are they cant deal with rapid migration
how can the development of tourism be used to influence growth and development?
- tourism can create thousands of jobs ad shift a developing country away from depending on primary products
- developing countries tend to have a high MPC which could lead to a multiplier effect
- helps to diversify the economy
- may attract FDI + develop their infrastructure
- benefits are similar to those of free trade
- can also be a way of earning foreign currency for developing countries
- low technology and labour intensive work in tourism is suited to LDCs
how can developing tourism to influence growth and development be evaluated?
- little revenue is retained in the country as travel agents an hotel owners profits may be sent back to their own country
- issue of overcrowding and loss of habitats
- income from tourism likely to be unstable as it relies on business cycle in developed countries
- investing in tourism can be risky
- locals could feel stigmatised by tourism especially if they cant afford the luxuries tourists have
- negative externality as more flights -> more pollution
- environmental damage such as pollution
how can the development of primary industries be used to influence growth and development?
- ensure that farmers receive fair price for their goods
- supermarkets buy a guaranteed quantity at a price above market equilibrium
- helps farmers as they have a guaranteed income and certainty about their sales so can plan for the future
- can help support community development and social projects and ensure working conditions meet a minimum standard
- encourages sustainable production
- promotes environmental protection
- stops use of child labour
how can fair trade schemes influence growth and development?
- it promotes self-sufficiency and encourage them to be independent
- also provides a sense of community
- can give farmers a fair price for their produce
fair working conditions
protect the environment
how can you evaluate the use of fair trade schemes to influence growth and development
- some say impact of fair trade is insignificant
- they say fair trade is a psychological influence on consumers in developed countries who believe theyre buying fair trade goods
- could distract from other policies/ development and make producers not part of fair trade worse off
- divides the market into fair trade and non fair trade
- by distorting price signals, fair trade is less efficient
- increases the price of goods which encourages farers to produce more which inc their supply
- those not on fair trade have to deal with a lower market equilibrium price due to the inc in supply
- fair trade could make farmers reliant of the sale of their products
how can aid be used to influence growth and development?
- consumers in LEDCs have a higher MPC than MPS due to their limited incomes
- capital inflows including those in the form of aid can help fill this savings gap
- provides temporary assistance to a country
- e.g humanitarian aid offered to countries after conflict or natural disasters
- could also grant for a project than a country might not have the funds for
- could be used to reduce human capital inadequacies or to pay off debt
- improve infrastructure making a country more productive
how can you evaluate the use of aid to influence growth and development
- however corrupt leaders may limit the benefits of aid as they may not spend the money on infrastructure / services that could benefit the population
- size of aid payment may lead to the recipient country becoming dependent on aid
- dumping of goods into a country means that private firms cant compete and are forced out of business
- if theres conditions set on the aid sent (tied aid) it and how it should be used -> may not be effective as the aid may be needed elsewhere
how can debt relief be used to influence growth and development?
- is the partial/ total forgiveness of debt
- in developing countries debt is seen to be he cause of poverty as it causes human suffering and misery
- also hampers development
- high levels of debt means that financial resources are diverted from infrastructure, education, healthcare so debt relief can help govt them divert their spending to these
- if a country defaults on debt it can make it hard to borrow more money in the future
- so debt forgiveness allows a country to import more, inc standard of living
how can the use of debt relief to influence growth and development be evaluated?
- however it could encourage more borrowing
- there also could be corruption
- can cause moral hazard as it may create the idea that every poor country should expect to receive debt relief
what is the aim of the world bank and the IMF?
aim to provide structure and stability to the world economic and financial systems
aim to reduce imports and increase exports -> reduces the number of resources available for domestic consumption
can also be in the form of lower govt spending
what does the world bank do?
mainly focuses on long term development
- can loan funds to member countries
- aims to promote economic and social progress by raising productivity and reduce poverty
- world bank is involved in several projects such as providing microcredit, supporting education
etc
give loans to countries with low interest payments to LEDCs
what does the international monetary fund do (IMF)?
IMF tries to keep payments and receipts between countries logical and ordered
- the IMF aims to promote monetary cooperation between nations and monetary problems can be consulted in the institution
- also aims to help free trade globally so jobs are supported
- promotes exchange rate stability and tries to avoid competitive depreciations in a country
- members can borrow from the IMF if for e.g they need to correct an imbalance in the balance of payments
what are NGOs and what do they do?
- could be funded by govts, firms or private individuals but arent part of governments or for-profit individuals
- they are voluntary groups which aim to raise the voices of ordinary citizens
- usually focus on particular issues such as human rights, healthcare or the environment
can act as pressure groups to lobby governments to adop more pro development strategies
how can the development of primary industries be used to influence growth and development?
- some developing countries have an abundance of raw materials so some govts might choose to exploit this by developing the industry so they have comparative advantage in it
- primary industries may sometimes be the only source of income for most families
how can the lewis model be used to influence growth and development
- workers from agriculture are attracted to the higher wages in the manufacturing sector
- in this sector entrepreneurs charge prices above wage rate which allows them to make profits
- its assured these profits are invested into more fixed capital for the business
- the demand for labour increases since the productive capacity of firms has increased
- since there is a surplus labour in the agricultural sector , this labour is employed in the manufacturing sector
- grows the manufacturing sector to the extent that the economy moves from agriculture to manufacturing
- this is from a traditional state to an industrialised state
what does the lewis model assume
- based on the assumption that in agriculture theres a surplus of unproductive labour in developing countries
- model assumes that in the manufacturing sector wages are fixed
how can you evaluate the use of infrastructure development to promote growth
tends to suffer from the free rider problem
has high capital costs making it unlikely the private sector will develop it
time lag
burden on tax payer
what is a joint venture
- occurs when a partnership is formed between two firms based in multiple countries
- they allow the firm to participate in international trade without the responsibilities involved of it
- they help technological knowledge to be transferred which can help improve and develop small companies
how can you evaluate promoting joint ventures to increase growth and development
may have different goods
asymmetric info
conflict of interest
what is a buffer stock scheme
- in the agriculture market, governments might intervene with a buffer stock system to reduce price volatility
- govts buy up harvests when there is excess supply and then sell the goods onto the market when supplies are low and there is excess demand
how can removal of subsidies influence growth and development
encourages firms to become more competitive and efficient
what is privatisation
- when assets are transferred from the public sector to the private sector
- govt sells a firm so that its no longer in their control and the firm is left to the free market and private individuals
how can you evaluate the use of the floating exchange rate system to promote growth and development
currency can be volatile
makes it difficult for producers to plan for the future
