Strategies Influencing Growth and Development

Question 1

Strategies influencing growth and development

Answer 1

• Trade Liberalisation
  Free trade is the act of trading between nations without protectionist
  barriers, such as tariffs, quotas or regulations. World GDP can be increased
  using free trade, since output increases when countries specialise. Therefore,
  living standards might increase and there could be more economic growth.
• Promotion of FDI
  FDI is the flow of capital from one country to another, in order to gain a
  lasting interest in an enterprise in the foreign country.
  FDI can help create employment, encourage the innovation of technology
  and help promote long term sustainable growth. It provides LEDCs with funds
  to invest and develop.
• Removal of Government Subsidies
  Government subsidies could distort price signals by distorting the free market
  mechanism. A free market economist would argue that this could lead to
  government failure. There could be an inefficient allocation of resources
  because the market mechanism is not able to act freely.
  For example, the government might end up subsidising an industry which is
  failing or has few prospects.
• Freely Floating Exchange Rates
  The value of the exchange rate in a floating system is determined by the
  forces of supply and demand.
• Microfinance Schemes
  Microfinance involves borrowing small amounts of money from lenders to
  finance enterprises. It increases the incomes of those who borrow, and can
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  reduce their dependency on primary products. There could be a multiplier
  effect from the investment of the loan.
  They are small loans for usually unbankable people. It allows them to break
  away from aid and gives borrowers financial independence. In Bangladesh,
  95% of microfinance cohorts are women.
  Microfinance loans detach the poor from high interest, exploitative loan
  sharks. They could help businesses to be set up, although the money could
  also be spent on immediate consumption, rather than investment. Since the
  money goes directly to SMEs, it can stimulate employment.
  However, the data collected on microfinance loans might not be reliable if
  there is dishonesty regarding where the money was spent.
  In Tamil Nadu, India, less than 2% of microenterprises were still operating
  after their establishment.
  Microfinance loans have high repayment rates.
• Privatisation
  This means that assets are transferred from the public sector to the private
  sector. In other words, the government sells a firm so that it is no longer in
  their control. The firm is left to the free market and private individuals.
  Free market economists will argue that the private sector gives firms
  incentives to operate efficiently, which increases economic welfare. This is
  because firms operating on the free market have a profit incentive, which
  firms which are nationalised do not.
  Since they are operating on the free market, firms also have to produces the
  goods and services consumers want. This increases allocative efficiency and
  might mean goods and services are of a higher quality.
  By selling the asset, revenue is raised for the government. However, this is
  only a one-off payment.

Question 2

Interventionist strategies

Answer 2

• Development of Human Capital
  By developing human capital, the skills base in the economy would improve.
  This would improve productivity and allow more advanced technology to be
  used, since workers will have the necessary skills.
  Businesses struggle to expand where there are skills shortages. It also limits
  innovation.
  Primary school enrolment has increased from about 80% to around 90% of
  children. However, secondary and tertiary education enrolment is still low.
  By developing human capital, the country can move their production up the
  supply chain from primary products, to manufactured goods and to services,
  which can earn them more.
• Protectionism
  Protectionism can help reduce a trade deficit. This is because they will be
  importing less due to tariffs and quotas on imports.
  It can protect infant industries, which are relatively new and need support.
  Protectionism is usually short term until the industry develops, at which point
  the industry can trade freely.
  However, protectionism could distort the market and lead to a loss of
  allocative efficiency. It prevents industries from competing in a competitive
  market and there is a loss of consumer welfare. Consumers face higher prices
  and less variety. By not competing in a competitive market, firms have little
  or no incentive to lower their costs of production.

Moreover, tariffs are regressive and are most damaging to those on low and
fixed incomes.
There is also the risk of retaliation from other countries, so countries might
become hostile.

• Managed Exchange Rates
  Managed exchange rate systems combine the characteristics of fixed and
  floating exchange rate systems. The currency fluctuates, but it does not float
  on a fully free market. This is 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.
• Infrastructure Development
  Examples of physical infrastructure include transport, energy, water and
  telecommunications.
  Higher supply costs delay businesses and it reduces the mobility of labour.
  For example, India’s poor irrigation system makes it difficult to sustain food
  grain production if there is low rainfall. It hurts the poorest communities and
  it leads to rising food prices. There are also regular power cuts. The lack of a
  continuous supply of electricity affects transport, communication and
  healthcare. It is estimated that $400 billion needs to be invested in power to
  meet the development goals.
• Promoting Joint Ventures with Global Companies
  This occurs when a partnership is formed between two firms based in
  multiple countries.
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  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.
  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, which is important in industries where developing a product is
  expensive.
  A joint venture with a global company also helps firms penetrate a foreign
  market, which is usually difficult because of barriers to entry.
• Buffer Stock Schemes
  In the agriculture market, governments might intervene with a buffer stock
  system to reduce price volatility. Governments buy up harvests during
  surpluses and then sell the goods onto the market when supplies are low.
  However, historically, these have been unsuccessful.
  It helps incomes of farmers to remain stable, because fluctuations in the
  market are reduced and it increases consumer welfare by ensuring prices are
  not in excess.
  However, governments might not have the financial resources to buy up the
  stock. Moreover, storage is difficult and expensive, since agricultural goods
  do not last long, and there are administrative costs.

Question 3

Other strategies for development

Answer 3

• Industrialisation: the Lewis model *WATCH ECONPLUSDAL
  The Lewis model is an explanation of how a developing country which
  focuses on agriculture could move towards manufacturing.
  It is based on the assumption that in agriculture, there is a surplus of
  unproductive labour in developing economies. The model assumes that in the
  manufacturing sector, wages are fixed. Workers from agriculture are
  attracted to the higher wages in the manufacturing sector.
  In the manufacturing sector, entrepreneurs charge prices above the wage
  rate, which allows them to make profits. It is assumed these profits are
  invested into more fixed capital for the business.
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  The demand for labour increases since the productive capacity of firms has
  increased. Since there is surplus labour in the agricultural sector, this labour
  is employed in the manufacturing sector.
  This 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.
  However, in reality, profits might not be reinvested into the firm. Moreover,
  the capital investment might replace labour, so the demand for labour could
  fall instead. Also, it is not always easy for labour in the agricultural sector to
  move to the manufacturing sector.
• Development of Tourism
  Tourism can create thousands of jobs and help shift a developing country
  away from dependency on primary products. Developing countries tend to
  have a marginal propensity to consume, which could create a multiplier
  effect.
  It helps to diversify the economy and it could make the country more
  attractive to FDI, as well as developing their infrastructure.
  Tourism accounts for 6% of world trade and 9% of global GDP. For LDCs,
  about 8% of exports are from tourism. It is one of the largest and fastest
  growing sectors in the world. Since it is an outward-looking policy, it is
  considered a more modern way to grow an economy, and the benefits are
  similar to those of free trade.
  Tourism can also be a way of earning foreign currency for developing
  countries. The low technology and labour intensive work in tourism is suited
  to LDCs.
  However, little revenue is retained in the country, since travel agents and
  hotel owners are likely to repatriate their profits. Moreover, there is the issue
  of overcrowding and the loss of habitats.
  Income from tourism is likely to be unstable, since it relies heavily on the
  business cycle in developed countries.
  Investing in tourism can be risky and expensive, however. States have to
  focus where tourism is attracted, such as transport, land availability and
  improving infrastructure.
  Locals could feel stigmatised by tourism, especially if they cannot afford the
  luxuries that the tourists have. There could also be some environmental
  damage, such as pollution.
• Development of Primary Industries
  Some developing countries have an abundance of raw materials, so some
  governments might choose to exploit this advantage and develop the
  industry so the country can have a comparative advantage in its production.
  Moreover, primary industries, especially those allied to farming, form the
  livelihoods of the bulk of the population. It is sometimes the only source of
  income for most families. Therefore, it is important that the industry is
  supported.
• Fairtrade schemes
  Fairtrade schemes ensure that farmers can receive a fair price for their
  goods. Supermarkets buy a guaranteed quantity at a price above the market
  equilibrium. This helps farmers since they have a guaranteed income and
  certainty about their sales, so they can plan for the future.
  Fairtrade can help support community development and social projects, as
  well as ensuring working conditions meet a minimum standard.
  It encourages sustainable production, promotes environmental protection,
  and stops the use of child labour.
• Aid
  Aid provides temporary assistance to a country, such as humanitarian aid
  offered to countries after conflicts or natural disasters. Aid could also be a
  grant for a project that a country might not have the funds for.
  Aid could be used to reduce human capital inadequacies or to pay off debt. It
  can improve infrastructure, which can help make the country more
  productive.
  However, the benefits of aid are limited by corrupt leaders, the size of the aid
  payment and the potential for the recipient country to become dependent on
  aid.
• Debt relief
  Debt relief is the partial or total forgiveness of debt.
  In developing countries, debt is considered to be a principal cause of poverty,
  since it causes human suffering and misery, and it hampers development.
  With high levels of debt, financial resources are diverted from infrastructure,
  education and healthcare. The country’s ability to pay the debt, not the size,
  is most important. If a country defaults on its debt, it can make it hard to
  borrow more money in the future.
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  Debt forgiveness can allow a country to import more and increase the
  population’s standard of living. It improves government finances, so public
  services could be funded instead.
  However, if debt is forgiven, it could encourage more borrowing in the
  future. Moreover, there could be corruption.

Question 4

The Role of international financial institutions and non-government organisations

Answer 4

The World Bank and IMF are sometimes called the Bretton Woods
Institutions. They aim to provide structure and stability to the world’s
economic and financial systems.
Almost every country is a member of both institutions. The governments of
each member nations own and direct the institutions.
The World Bank mainly focuses on development. The IMF tries to keep
payments and receipts between countries logical and ordered.

• World Bank
  The World Bank can loan funds to member countries, and its aim is to
  promote economic and social progress by raising productivity and reducing
  poverty.
  The World Bank is involved in several projects globally, such as providing
  microcredit, supporting education, and helping the rebuilding of countries
  after earthquakes.
• International Monetary Fund (IMF)
  The IMF aims to promote monetary cooperation between nations, and
  monetary problems can be consulted in the institution.
  It also aims to help free trade globally, so jobs are supported. The IMF
  promotes exchange rate stability, and tries to avoid competitive
  depreciations in the currency.
  Members can also borrow from the IMF, such as if they need to correct an
  imbalance in the balance of payments.
• NGOs
  NGOs could be funded by governments, firms or private individuals, but they
  are not part of governments or for-profit businesses. They are voluntary
  groups which aim to raise the voices of ordinary citizens. Usually, they focus
  on particular issues such as human rights, healthcare or the environment.