Strategies To Promote Growth & Development

Question 1

List policies which can help to promote growth & development.

Answer 1

1) Aid
2) Debt relief
3) Development of human capital
4) Inward/outward looking strategies
5) Free market/government intervention approaches
6) Industrialisation; development of tourism; agriculture
7) Microfinance
8) Fair trade schemes
9) Role of international financial institutions & non-government organisations in promoting growth & development

Question 2

What is aid?

Answer 2

Refers to voluntary transfer of resources from one country to another or to loans given on concessionary terms (less than the market rate of interest)

Question 3

What is the purpose of aid?

Answer 3

1) To reduce absolute poverty in LR
2) Provide emergency relief following natural disasters in ST
e. g floods, famines, earthquakes or for refugees following civil war

Question 4

What types of aid are there? Explain them.

Answer 4

1) Tied aid: aid with conditions attached
e. g requirement to buy goods from donor country
2) Bilateral aid: aid given directly by 1 country to another
3) Multilateral aid: when countries pay money to international agency which then distributes it to countries on basis of certain criteria

Question 5

What are the benefits of aid?

Answer 5

1) Reduction in absolute poverty
2) Filling savings gap experienced by many developing countries (Harrod-Domar model illustrates importance)
3) Providing funds for infrastructure
- essential if country is to industrialise
- aid will help to increase AD and I will have multiplier effect on GDP
- promote entrepreneurship
- help promote sectoral development
4) Improving human capital
- promotion of healthcare, education, training & expertise
e. g training of teachers & doctors
- some countries aid might be used to help prevention and treatment of AIDS
5) Might contribute to increased globalisation & trade
- both associated with growth and development
6) Reduction of world inequality

Question 6

What is the multiplier?

Answer 6

Describes the process by whereby a change in an injection causes a proportionately larger change in GDP

Question 7

What the costs associated with aid?

Answer 7

1) Dependency culture
- recipients of aid become dependent on it
- don’t pursue appropriate macroeconomic policies to achieve independent growth and development
2) Might not benefit those whom it’s intended
e.g diverted into military expenditure or ‘lost’ as result of corruption
3) No clear evidence that aid contributes to reduction of absolute poverty or growth/development
4) Some economists argue it distorts market forces and results in inefficient allocation of resources
other economists regard aid as form of economic imperialism where donor countries aim o secure political influence in the countries they give aid to
5) Aid in form of concessional loans involves repayments of interest
- opportunity cost for developing countries
e.g improvements in health and education services

Question 8

What is the issue with debt?

Answer 8

Burden of debt bears heavily on countries
e.g Gambia, Malia, Bolivia, Malawi
Debt usually owed to all/some of:
IMF, World Bank, gov’s and banks in developed countries
Problem is servicing the debt may account for disproportionate amount of public expenditure
- resources available for expenditure on health and education severely limited
- pressure to cancel debs of poorest countries has increased

Question 9

What is he Heavily Indebted Poor Countries (HIPC) initiative and the Multilateral Debt Relief Initiative (MDRI)?

Answer 9

1) IMF & World Bank aims to reduce external debts of poorest/ most heavily indebted countries of the world to a sustainable level
2) Process made quicker & deeper to strengthen links between debt relief poverty reduction and social policies
3) HIPC enhanced by MDRI to speed up progress towards meeting Millennium Development Goals (MDGs)
e. g halving absolute poverty 2015

Question 10

What are the benefits of debt cancellation?

Answer 10

1) Developing countries have more foreign currency
- buy M capital and consumer goods from developed countries
2) To the extent that money released from debt cancellation is used for capital goods
- prospect of higher EG in future
3) Developing countries able to buy more goods from richer countries
4) Reduce absolute poverty
- more money and resources available for those unable to meet basic needs
5) Reduce both savings gap and foreign exchange gap
- have more funds available for I in infrastructure and expenditure on developing human capital
6) Conserve environment
e. g debt for nature swaps
7) Increased confidence
- increase in domestic I and FDI

Question 11

What are the costs of debt cancellation?

Answer 11

1) Time
- takes much longer to agree debt cancellation compared to aid
2) Moral hazard problem
- unless conditions attached to debt cancellation there’s no guarantee gov’s will pursue sound macroeconomic policies
- running up further debts in future
3) Corruption
- benefits of debt cancellation channelled into gov officials rather than the poor
4) Impact on financial institutions in developed countries
- shareholders of banks in developed world may bear some of the burden of debt cancellation
- less willing to lend to developing countries in future
5) HIPC scheme doesn’t help all those in poverty
- less effective than intro of policies to reduce protectionism in developed countries
- large no. poor people live in countries with low levels of debt but not be helped by HIPC scheme

Question 12

What are inward-looking strategies?

Answer 12

Refer to industrialisation based on import substitution,

i.e the country tries to industrialise by replacing M manufactured goods with domestically produced goods

Question 13

What are outward-looking strategies?

Answer 13

Refer to a set of policies based on free-market approach

e.g removal of trade barriers & a reduction in state intervention in the economy (Nigel Farrage)

Question 14

Give examples of inward-looking strategies?

Answer 14

1) Import substitution
- replacement of M with domestically produced manufactured goods
2) Protectionism
3) Restrictions on FDI

Question 15

Give examples of outward-looking

Answer 15

1) Free trade/ trade liberalisation
- increase in trade bringing welfare benefits
e. g lower prices & increased consumers’ surplus
2) Deregulation of capital markets
- allows flow of money between countries, facilitating trade
3) Promotion of FDI
- TNCs find it easier to trade
4) Devaluation of exchange rates
- X more competitive boosting X-led growth

Question 16

What are the benefits of inward/outward-looking strategies?

Answer 16

Early stage of development use of inward-looking strategies
- country can develop manufacturing industry under the cover of protectionism
Outward-looking strategies used once gained economies of scale
- strong enough to withstand foreign competition

Question 17

What are the costs of inward-looking strategies?

Answer 17

1) Distortion of comparative advantage
- resources not allocated efficiently
2) Lack of competition
- result in inefficiency

Question 18

What are the costs of outward-looking strategies?

Answer 18

1) Countries may find infant industries simply too small to compete in world markets or with TNCs which establish themselves in developing countries
2) TNCs may have disruptive impact on domestic economy
3) Financial crisis 2008 demonstrated dangers of close integration with global economy
- problems quickly spread from 1 country to another

Question 19

What are infant industries?

Answer 19

Newly established industries with small markets

- therefore too small to benefit from economies of scale

Question 20

What is free market analysis?

Answer 20

Assumes markets are efficient and therefore best way to allocate resources

Question 21

What is the public choice theory?

Answer 21

Based on assumption that politicians, civil servants and gov’s use their power for their own self interest

Question 22

What are examples free market/government intervention approaches? How do these strategies benefit E.G and development?

Answer 22

1) Trade liberalisation
- removal of protectionist barriers making it easier to trade
- encourage FDI
2) Market liberalisation
- range of policies
e. g nationalised industries are privatised and emphasis on deregulation and measures to promote competition between firms
3) Supply-side policies
4) Structural adjustment programmes: eliminate budget deficits and c.a deficits
- abolishing food and agricultural subsidies to reduce gov expenditures
- deep cuts to social programmes
e. g health, education and housing
- devaluation of currency to increase competitiveness of country’s goods

Question 23

What are the costs of free market/government intervention approaches?

Answer 23

1) Asymmetric information
e. g C may have much less information than producers so not able to make rational choices
2) Externalities
- costs and benefits which affect 3rd parties not directly involved in transaction
- not be reflected in market price
3) Absence of property rights (Hernando de Soto)
- Soto argued strong market economy depends critically on property (ownership) rights and the rule of law
e. g if person owns no assets then v.difficult for him/her to secure bank loan because don’t have collateral
- without legal system market will fail
4) Investment decisions
5) Monopolies
- C may face only single supplier of product/service
- no choice and P>MC therefore allocative inefficiency

Question 24

What are some examples of government intervention approaches?

Answer 24

1) Import substitution
- instrialisation seen key to economic development
- countries protected domestic firms so foreign M could be replaced by domestic production
2) Nationalisation
- refers to transfer of ownership from private sector to state control of key industries
e. g energy, transport and manufacturing companies of significance
3) Price subsidies
4) Over-valued exchange rates
- gov’s tried to maintain exchange rate at artificially high level in order to keep down cost of M raw materials and finished goods
5) State-controlled boards
- forced farmers to sell produce to boards (e.g buffer stocks) at low Ps so goods could be sold to C cheaply

Question 25

What are the costs of government intervention approaches?

Answer 25

1) Low rates of E.G
- large state sector stifle competition and enterprise
- low productivity rates therefore slow growth
2) Resource and allocative inefficiency
- absence of profit motive and limited competition
- firms not produce at output P=MC
3) Government failure
4) Corruption
5) Increasing fiscal deficits
- food subsidies and losses arising from inefficient nationalised industries
6) Increasing BoP deficits on c.a
- over-valued exchange rates

Question 26

What is industrialisation?

Answer 26

Essential characteristic of economic development

Question 27

What are the benefits of tourism?

Answer 27

1) Source of foreign exchange
- tourist spend significant sums of money on goods and services provided in local economy
- helps fill foreign exchange gap
- help to improve the BoP on c.a
2) Investment by TNCs
- I in hotels and associated services
e. g will have multiplier effects on GDP
3) Infrastructure
- I in various forms of infrastructure like roads, airports etc
- some may be provided by TNCs as agreements
- I also have multiplier effect on GDP
- positive externalities for local businesses that benefit from improved infrastructure
4) Employment opportunities
- tourist industry labour intensive
- significant job creation
5) Increased tax revenues
- due to all of above points
- used to reduce absolute poverty, improve public services and redistribute incomes
6) Demand income elastic
- real incomes rising, D increase> proportionately
7) Preservation of natural heritage
- country has incentive to preserve natural heritage may be key source of attraction to tourists

Question 28

What are the costs of tourism?

Answer 28

1) Adverse effect of c.a of the BoP
- capital goods required for building of hotels and equipment needed
- food and gifts D by tourists
- profits repatriated to foreign shareholders of TNCs
- significant increase in M
2) Fluctuations associated with trade cycle
- fall in D may be>proportionate
3) External costs
4) Employment
- seasonal unemployment
e. g skiing instructor
- jobs created may only be low skilled and low paid if TNC supplies own managers & professional staff
5) Changes in fashion
- developed world: Spain suffered from significant downturn in tourism in recent years as Europeans prefer more exotic destinations
- climate change may affect tourism
e. g Mike skiing
6) Negative impact on cultural values
- tourists might undermine local way of life

Question 29

What is microfinance?

Answer 29

A means of providing extremely poor families with small loans (microcredit) to help them engage in productive activities or grow their tiny businesses
e.g successful establishment of Grameen Bank in Bangladesh

Question 30

What are the key features of microfinance schemes?

Answer 30

1) In contrast to development lending, microcredit insists on repayments
2) Interest is charged to cover costs involved
3) Focus is on groups whose alternative sources of finance are limited to informal sector, where interest charged would be high

Question 31

Who are the main clients of microfinance?

Answer 31

1) Women (who form >97% of the clients)
2) Self-employed, often household-based entrepreneurs
3) Small farmers in rural areas
4) Small shopkeepers, street vendors and service providers in urban areas

Question 32

What are the costs of microfinance?

Answer 32

1) Based on promise that poor people can make themselves richer if provided with access to credit
- in practice wealth creation depends on the skills and knowledge of institutions as well as individuals
2) Not self-financing unless assistance from gov or aid agencies
3) High IRs charged without outside assistance
4) Most loans not used to start up businesses but to fund extraordinary items of expenditure
5) In LR not v.sucessful at creating prosperous small businesses
6) Overemphasis on microfinance might lead to reduction in aid

Question 33

What is the aim of fair trade schemes?

Answer 33

To address the injustice of low prices by guaranteeing that producers receive a fair price
- paying P price above free-market level for their produce, provided they meet particular labour and production standards

Question 34

What are the benefits of fair trade schemes?

Answer 34

1) Producers receive a higher P
2) Extra money available to spend on education, health, infrastructure, clean water supplies and other development programmed in producers’ countries
3) Smaller price fluctuations, allowing producers to be shielded from market forces
4) Extra money used to improve quality of products
5) Producers enabled to diversify into other products

Question 35

What are the costs of fair trade schemes?

Answer 35

1) Distortion of market forces
- low Ps due to overproduction and producers need to recognise this as signal to switch growing other crops
- artificially high Ps encourage more producers to enter the market
2) Certification based on normative views on best way to organise labour
e. g coffee, certification only available to cooperatives of small producers
3) Inefficient way to get money to poor producers
- consumers pay large premium for fair trade goods but much goes to supermarkets in profits
- only 10% of premium paid for fair trade coffee tickles down to producer
4) Guaranteeing minimum P provides no incentive to improve quality
5) May create dependency trap for producers

Question 36

What is the role of the International Monetary Fund (IMF)?

Answer 36

1) Increased lending
2) More flexibility in lending
3) Providing forecasts, analysis and advice
4) Developing future policy

Question 37

What is the role of the International Monetary Fund (IMF) since 2008 global financial crisis?

Answer 37

1) Increased lending
- lending commitments reaching > $250bn in 2010
2) More flexibility in lending
- better at responding to individual needs of countries
3) Providing forecasts, analysis and advice
- monitoring, forecasts and policy advice informed by global perspective and experience from previous crises been in high demand and used by G20
4) Developing future policy
- considering implications of crisis for policy and regulation

Question 38

How is the IMF funded? Why are the quotas important?

Answer 38

When a country joins has to pay quota, based on their GDP
1/4 paid in SDRs, 3/4 paid in country’s own country
Quota important as it determines:
- voting rights
- about which may be borrowed from the IMF

Question 39

What are special drawing rights (SPRs)?

Answer 39

IMF’s unit of account
Value of a fixed amount of yen, dollars, pounds & euros expressed in dollars at current exchange rate
Represent potential claim on other countries’ foreign currency reserves, which can be exchanged voluntarily
- or other countries with high foreign currency reserves can buy SDRs from countries that need hard currency

Question 40

What is the role of The InternationalBank for Reconstruction and Development (IBRD)? (commonly known as the World Bank)

Answer 40

Imposes structural adjustment programmes (SAPs), which set out the conditions on which loans are given
- aim is to ensure that debtor countries do not default on repayment of debts

Question 41

What are the problems with SAPs?

Answer 41

Based on free market reforms
e.g free trade, removal of state subsidies on food, privatisation and reduction in public expenditure to reduce budget deficits
Criticised because:
- little to help world's poor
- failed to promote development
- increased inequality
- caused environmental degradation
- resulted in social and political chaos in many countries

Question 42

What are the World Banks poverty reduction strategies?

Answer 42

SAPs had devastating effect on some developing country so change role to concentrate on aid directed towards:

• countries following sound macroeconomic policies
• healthcare; broadening education
• local communities rather than gov’s

Question 43

What is the future of the IMF and World Bank?

Answer 43

Roles are currently blurred: both have role in developing world and poverty reduction
- suggested they be reformed to reflect changing needs of global economy
Critics suggest:
1) IMF should be slimmed down and undertake ST lending to crisis-hit countries
2) WB should act as development agency and undertake detailed credit appraisal of creditworthiness of recipient countries

Question 44

What is the role of non-government organisations (NGOs)?

Answer 44

Brought community-based development to forefront of strategies to promote growth and development)

i. e focus moved away from state managed schemes
- local control of small-scale projects
- self reliance
- emphasis on using skills available
- environmental sustainability