Topic 13- Ways of promoting growth and development

Question 1

State interventionist approach

Answer 1

• Import substitution:
• Nationalism
• price subsidies
• Over-valued exchange rates
• sate-controlled boards

Question 2

State interventionist approach:

1. ) Import substitution:
2. ) Nationalism
3. ) price subsidies
4. ) Over-valued exchange rates
5. ) sate-controlled boards

Answer 2

1. ) Refers to policies designed to replace imports with domestically produced goods
2. )Occurs when privately owned firms and industries are brought under state control
3. ) Government subsidised certain goods regarded as necessities e.g basic food
4. )Gov try to maintain exchange rates at a relatively high level to decrease the cost of imported raw materials and finished goods.
5. )Boards set up by government in developing countries. Forced farmers to sell their produce to these boards at low prices so that they could be sold to consumers cheapily

Question 3

Problems with interventionist policies

End of 1970s

Answer 3

• low rate of economic growth: Large state sector reduced competition&enterprise> low productivity>slow growth
• Resource and allocative inefficiency: Absence of the profit motive and reduced competition> firms do not produce at the output at which price is equal to marginal cost
• Government failure: occurs when involvement by the gov leads to a movement further away from the socially optimal output
• corruption: large state sector and gov intervention
• increasing fiscal deficits: arose from food subsidies and losses from inefficient nationalised industries

Question 4

Free market approaches

Answer 4

-Trade liberalisation: Methods of encouraging trade through the removal of protectionist barriers (Tariffs& quotas)
-Supply side policies
-Structural adjustment polices: designed to eliminate budget and current account deficit e.g:
>Removal of food and agricultural subsidies to reduce gov expenditure
>cuts to social programmes e.g education, healthcare
>Devaluation of the currency: Makes exports cheaper> increases competitiveness

Question 5

Inward-looking strategies

Answer 5

This approach is interventionist and protectionist. Policies focused on developing domestic firms.

• Import substitution: Occurs when imports are replaced by domestically produced goods
• Protectionism: Policies such as tariffs,quotas and subsidies to domestic producers
• Restrictions of FDI

Question 6

Benefits of inward-looking policy

Answer 6

• Protects infant industry
• protection of declining industries
• job creation
• increased income

Question 7

Problems with inward-looking policy

Answer 7

• Distortion of comparative advantage: Protectionism would lead to a misallocation of resources
• Restriction of competition: Could result in inefficiency

Question 8

Outward looking strategies

Answer 8

Policies based on a free market approach

• Trade liberalisation: removal of tariffs and quotas (diagram with barriers to free trade>higher prices)
• Deregulation of capital markets:Allows the flow of between countries> making trade easier
• Promotion of FDI: above factors> ^trade as TNCs will find it easier to trade
• Devaluation of exchange rates: Exports cheaper> increase competitiveness> boost export-led growth

Question 9

Benefits of outward looking strategies

Answer 9

• free trade brings welfare gains from tariff removal and increased competition and efficiency.
• outward looking countries may be better able to cope with globalisation and with external shocks

Question 10

Problems of outward looking strategies

Answer 10

• Infant industries too small to compete in world markets or with TNCS
• TNcs may have a disruptive impact on the domestic economy