4.3.3 Strategies influencing growth and development

Question 1

What are free market approaches to development?

Answer 1

Free-market approaches favour giving a larger role to private sector enterprises using liberalisation of markets,
structural supply-side reforms to raise incentives for people and businesses and increased transparency for
government also high on the policy agenda.

Question 2

What are examples of market led policies?

Answer 2

• Fiscal discipline – emphasising greater control of government spending, budget deficits and national debt
• Reallocating state spending away from subsidies (e.g. minimum prices to farmers) towards health care,
  education & infrastructure
• Tax reforms – including widening the base of taxation and encouraging lower tax rates to raise enterprise and
  work incentives as a means of creating wealth
• Liberalizing market interest rates – i.e. letting financial markets allocate capital among competing uses
• Floating rather than fixed exchange rates – which implies an absence of central bank intervention
• Trade liberalisation via reductions in import tariffs and fewer forms of protectionism such as import quotas
  and other non-tariff barriers
• Privatisation – i.e. moving state enterprises into the private sector

Question 3

Explain trade liberalisation.

Answer 3

Trade liberalisation involves a country lowering import tariffs and relaxing import quotas and other forms of
protectionism. One of the aims of liberalisation is to make an economy more open to trade and investment so that it can then engage more directly in the regional and global economy. Supporters of free trade argue that developing countries can specialise in the goods and services in which they have a comparative advantage

Question 4

Show the effects of removing an import tariff on cars.

Answer 4

Question 5

What are micro effects of trade liberalisation?

Answer 5

• Lower prices for consumers / households which then increases their real incomes
• Increased competition / lower barriers to entry attracts new firms
• Improved efficiency – both allocative & productive
• Might affect the real wages of workers in affected industries

Question 6

What are macro effects of trade liberalisation?

Answer 6

• Multiplier effects from higher export sales
• Lower inflation from cheaper imports – causing an outward shift of short run aggregate supply
• Risk of some structural unemployment / occupational immobility
• May lead initially to an increase in the size of a nation’s trade deficit

Question 7

What are the advantages of attracting FDI inflows?

Answer 7

1. Improved infrastructure especially in power and transport sectors
2. Higher capital intensity / capital deepening i.e. more capital per worker which leads to higher productivity
3. Better training for local workers leading to improved human capital and less risk of structural unemployment
4. Investment grows a country’s export capacity (e.g. via firms attracted into special economic zones)
5. Technology & know-how transfer, promoting diversification of the economy and reducing primary
   dependence
6. More competition in markets which then lowers prices for consumers and increases their real incomes
7. Creates new jobs leading to higher per capita incomes and increased household savings
8. FDI can promote a shift to higher productivity jobs and high-value added industries

Question 8

What are the disadvantages of attracting FDI inflows?

Answer 8

1. Multinationals wield power within host countries especially LEDCs and they can gain favourable laws &
   regulations
2. Foreign multinationals take advantage of weak laws on anti-competitive practices and environmental
   protection
3. Multinationals have been criticised for poor working conditions in foreign factories
4. Profits made in an LEDC are often repatriated to the host country
5. Imports of components/capital goods initially have a negative effect on a country’s trade balance
6. Multinationals may only employ local labour in lower skilled jobs

Question 9

What are policies designed to attract FDI?

Answer 9

Question 10

What are the advantages of government subsidies to promote development?

Answer 10

Economists who support
intervention to promote development argue that subsidies can play an important role in improving (for example) farm
incomes which then leads to higher capital investment and supports innovation and improved productivity in the long
run. Subsidies are also a way of encouraging increased production to help overcome the challenges of malnutrition
among the poor and they help to generate surpluses for export.

Question 11

What do free-market critics of government subsidies argue the disadvantages of subsidies are?

Answer 11

1. Subsidies distort the working of the price mechanism
2. Subsidies can stifle innovation because producers are less reliant on innovation as a way of making more
   profit
3. Producers / growers can become “subsidy-dependent” in the long run and there is also the risk of corruption
   syphoning off financial support to those who don’t need it
4. From an environmental point of view, subsidies can lower the incentive for producers to improve efficiency,
   instead they are rewarded by increasing the intensification of farming which can lead to deforestation, a loss
   of biodiversity and increased water scarcity. Farmers may overuse fertilisers or pesticides, which can then
   result in soil degradation which reduces the maximum sustainable yield in the long run

Question 12

Explain how a floating exchange rate can be helpful to countries exposed to external economic shocks.

Answer 12

A floating exchange rate can be helpful for countries exposed to external economic shocks. For example,
Poland operates with a floating currency (the Zloty) inside the EU Single Market. When the global financial
crisis erupted in 2007-08 and the wider European economy went into recession, the Polish zloty depreciated
heavily against the Euro and the US dollar. This helped the Polish economy stabilise since their exports were
now more competitive. In contrast, Greece was locked into the single currency and could not rely on a
depreciation to restore some loss competitiveness

Question 13

What are other advantages of countries choosing floating exchange rates other than to help countries exposed to external economic shocks?

Answer 13

• Floating exchange rates mean that a country’s central bank does not have to intervene to change the currency’s price. This means that they do not have to maintain large reserves of gold and other foreign currencies.
• Many developing countries have become more open to trade in goods and services and inflows and outflows of investment. Maintaining a floating exchange rate implies that capital controls will not be used to limit the inflow and outflow of currency and this in turn may make a country more attractive to foreign investment
• Floating currencies are not necessarily volatile ones and allowing market forces to determine the price means that a government/central bank is not using up foreign currency reserves to defend a fixed exchange rate that the market has decided is not sustainable

Question 14

What is the evaluation of floating exchange rate’s suitability for a country?

Answer 14

• A floating currency might be more appropriate for a country with a low trade to GDP ratio since exchange
  rate fluctuations would have less of an impact on the trade balance and the inflation rate.
• We have to consider whether a country has the size and reserves to be able to control their own currency.
  Many smaller EU nations including the island countries of Cyprus and Malta have chosen to join the single
  European Currency.
• An economy with one dominant trade partner might decide that the advantages of a pegged currency
  outweigh come of the possible gains from currency flexibility

Question 15

Define microfinance

Answer 15

Microfinance is a form of banking service that’s offered to unemployed or low-earnings individuals, or businesses that in any other case haven’t any different access to economic services.

Question 16

What financial products does microfinance refer to?

Answer 16

1. Micro-credit - the provision of small-scale loans to the poor for example by credit unions
2. Micro-savings – for example, voluntary local savings clubs provided by charities
3. Micro-insurance - especially for people and businesses not traditionally served by commercial insurance businesses - a safety net to prevent people from falling back into extreme poverty
4. Remittance management – managing remittance payments sent from one country to another including for example transfer payments made through mobile phone solutions

Question 17

What are benefits of microcredit?

Answer 17

• Helps overcome the savings gap which limits entrepreneurship
• Encourages entrepreneurship especially social enterprises
• Targeted at women entrepreneurs
• High rates of repayment because the system is built on social capital / trust

Question 18

What are disadvantages of microcredit?

Answer 18

• High interest rates
• Low success rate for new small businesses
• Alleged forcible collection of debt in many villages – hard to monitor
• Perhaps relatively ineffective compared to the impact of migrant remittances & foreign direct investment

Question 19

What is privatisation?

Answer 19

Privatisation is the transfer of a business, industry or service from public to private ownership.

Question 20

What are the benefits of privatisation?

Answer 20

1. Private companies have a profit incentive to cut costs and be more productively efficient and raise efficiency
2. Government gains revenue from the sale of assets and no longer has to support a potentially loss-making
   industry
3. If a state monopoly is replaced by a number of firms this extra contestability in an industry will lead to lower
   prices which helps to increase the real incomes of poorer households
4. The competitiveness of the macro economy may also improve especially if privatisation leads to increased
   investment and benefits from economies of scale. Improved competitiveness will drive higher exports and
   long run GDP growth

Question 21

What are the disadvantages of privatisation?

Answer 21

1. Social objectives are given less importance because privately-owned firms are driven by the profit motive
2. Some activities are best run by the state operating in the public interest because they are strategic parts of
   the economy e.g. water supply, steel and railways and have the characteristics of a natural monopoly
3. Government loses out on dividends from any future profits
4. Public sector assets are often sold cheaply, and the privatisation process may suffer from corruption
5. Privatisation leads to job losses as firms increase their efficiency – this increases the risk of poverty for those
   affected
6. Unless privatised corporations are regulated effectively, there is a risk of creating private monopolies who use their market power to increase prices and profits, this can have a regressive effect on the distribution of income

Question 22

What do interventionist strategies for development involve?

Answer 22

Interventionist policies involve many different types of government intervention in markets designed to correct for multiple market failures, influence patterns of trade and investment and address some of the root causes of extreme poverty and inequality.

Question 23

What do supporters of interventionist strategies believe?

Answer 23

Supporters of interventionist strategies believe in the concept of a developmental state – where
the government can be an active and positive force in driving sustainable and inclusive growth and development.

Question 24

What are some of the key roles of the govt?

Answer 24

• Basic (universal) and health care
• Accessible & affordable education of good quality
• Infrastructure especially in telecommunications, health and transport
• Public-private partnerships in supporting urbanization
• Smarter regulation e.g. building codes, regulation of monopoly power

Question 25

What is human capital (World Bank)?

Answer 25

“the knowledge, skills, and health that people accumulate over their lives,
enabling them to realize their potential as productive members of society”

Question 26

What did the Human Capital Index say about the children in the world in 2018?

Answer 26

According to the World Bank when they launched their new Human Capital Index in 2018, in poorer countries, almost a quarter of children under five are malnourished, and 60 percent of primary school students fail to achieve even a rudimentary education. Worldwide, more than 260 million children and youth are not in school.

Question 27

Explain interventions to improve human capital

Answer 27

1. Strategies to improve nutrition and reduce the extent of stunted growth among young people. An example
   is the use of conditional cash transfers: Shombhob, a conditional cash transfer piloted in Bangladesh, has
   been found to reduce wasting among children aged 10-22 months and improve mothers’ knowledge about
   the benefits of breastfeeding
2. Other health interventions can also increase school attendance - a famous study in Kenya by economist Esther
   Duflo found that deworming in childhood reduced school absences while raising wages in adulthood by as
   much as 20 percent. A project in Nepal to improve basic sanitation led to a measured decline in anaemia
   among the young
3. Increased investment in primary and secondary schooling - including policies to improve the quality of
   teaching and access to online education
4. Incentives to attract an inflow of skilled migrant workers and curb ‘brain drains’ of highly qualified people -
   there are more Sudanese doctors working in London than Sudanese doctors working in Sudan.
5. Investment in training to re-skill people at risk of unemployment from the fast-changing pattern of
   employment including robotics, automatic and artificial intelligence
6. Cash transfer interventions can increase demand for education especially among the poorest families who
   must make hugely difficult decisions about how to spend a meagre budget

Question 28

What are the main arguments for protectionism?

Answer 28

1. Import substitution - erecting trade barriers are designed to protect fledgling domestic industries that have
   not yet achieved sufficient economies of scale to become cost and price competitive in international markets.
   The infant industry argument is often used as justification for tariffs that increase the prices of substitute products in strategically important industries
2. Need to raise tax revenues - import duty revenues can be a useful source of tax revenues for developing
   countries especially when per capita incomes and formal employment is low which then limits the tax take
   from the domestic economy.
3. Tariffs can be justified as a response to alleged dumping of products into a country i.e. selling at a price below cost. Dumping can have a serious impact on the profits, investment and employment in those industries
   affected
4. Tariffs might also be a retaliatory response to allegations that a country has used a competitive devaluation of their currency to make their exports more price competitive

Question 29

What are the main risks of protectionism for developing countries if they maintain high tariffs on imported goods and services?

Answer 29

1. Tariffs may protect jobs in some industries e.g. car making but have damaging effects elsewhere because
   they increase the prices of key imported raw materials, components and capital technologies
2. Revenues raised by tariffs might only be a small percentage of total government revenue and lost jobs in
   other sectors will diminish the net effect on these revenues
3. There is always the risk of retaliatory action by other countries - a good recent example has been the tit-fortat
   trade war developing between the United States and
   China
4. Protectionist tariffs risk causing a loss of competition for domestic firms which eventually leads to lower
   productivity, less innovation and weaker competitiveness
5. Tariffs increase prices for consumers leading to higher inflation, reduced real incomes and an increased risk
   of poverty for poorer households
6. Protectionist subsidies for domestic firms can cost a government a lot of money leading to an increased
   budget deficit and rising national debt

Question 30

What is a managed floating currency?

Answer 30

A managed-floating currency when the central bank may choose to intervene in the foreign exchange markets to
affect the value of a currency to meet specific macroeconomic objectives.

Question 31

Why might the central bank attempt to bring about a depreciation?

Answer 31

• Improve the balance of trade in goods and services / improve the current account position
• Reduce the risk of a deflationary recession - a lower currency increases export demand and increases the
  domestic price level by making imports more expensive
• Rebalance the economy away from domestic consumption towards exports and investment
• Sell foreign currencies to overseas investors as a way of reducing the size of government debt

Question 32

Why might the central bank attempt to bring about a appreciation?

Answer 32

• To curb demand-pull inflationary pressures
• To reduce the prices of imported capital and technology

Question 33

Explain why one aim of managed floating currency is to reduce the volatility of exchange rates.

Answer 33

This is because big fluctuations in the external value of a currency can increase investor risk and perhaps damage business confidence. If the risk for example of overseas investor buying a government’s bonds rises, then they may demand a higher interest rate (or yield) on those bonds as compensation.

Question 34

What are countries using a managed rate?

Answer 34

Peru, India, Ukraine, Brazil

Question 35

What are countries using a free floating rate?

Answer 35

Russia, Poland, Canada, Australia

Question 36

Why might there be insufficient investment in infrastructure and how can this be fixed?

Answer 36

For many countries there is insufficient investment in infrastructure. In part this is because of the enormous up-front
financial commitment and the many years before the full benefits of new projects show fruit. The savings gap in many lower and middle-income nations makes financing big capital projects problematic and full of risk and the result can be a lack of investment which ultimately hampers growth and affects people’s everyday lives. Attracting foreign direct investment to help fund and build infrastructure has become a common feature for many developing countries. The Chinese One Belt One Road initiative is an example of a hugely ambitious project stretching across many countries that could have a transforming impact but there are risks involved in relying too heavily on overseas capital.

Question 37

What is a joint venture?

Answer 37

A joint venture (JV) is a separate business entity created by two or more parties, involving shared ownership, returns and risks. Joint ventures provide an opportunity for developing countries to acquire specific expertise in industries that they are hoping will be a new source of comparative advantage in the years ahead.

Question 38

What are examples of joint ventures?

Answer 38

• (2017) Apple entered into a joint venture in China to open a new data centre to serve iCloud users there
• Brilliance China Automotive Holding has a joint venture with BMW from Germany

Question 39

How can buffer stock schemes stabilise the market price of agricultural products?

Answer 39

• Buying up supplies when harvests are plentiful
• Selling stocks onto the market when supplies are low

Question 40

Explain this graph of buffer stock scheme

Answer 40

In the diagram below, actual supply (S1) is greater than planned supply leading to a surplus. If there is a run of good
harvests, then stockpiles can build to high levels. Intervention purchases helps to drive the market price higher again

Question 41

What are Arguments for a buffer stock scheme?

Answer 41

1. Lower risk of extreme food poverty for poorest consumers
2. More stable incomes and profits for farmers
3. Helps macroeconomic stability / investment
4. Buffer stock ought to be self-financing

Question 42

What are Arguments against a buffer stock scheme?

Answer 42

1. Buffer stock may not be large enough to change the market price
2. Setting a high price for farmers often causes rising surpluses – i.e. a misallocation of resources
3. High costs of storage and falling quality of product (which might then have to be sold at discounted prices)
4. Many buffer stock schemes fail because of poor administration/corruption

Question 43

What are strategies to reduce primary product dependency?

Answer 43

• In the long term, investment in capital goods such as irrigation and wider access to affordable insurance can
  be powerful
• So too are policies to reduce dependency on any one particular crop

Question 44

Explain the Lewis model of industrialisation

Answer 44

Initially, the majority of labour is employed upon the land, which is a fixed resource. Labour is a variable resource and, as more labour is put to work on the land, diminishing marginal returns eventually set in: there may be insufficient tasks for the marginal worker to undertake, resulting in reduced marginal product (output produced by an additional worker) and underemployment.
Urban workers, engaged in manufacturing, tend to produce a higher value of output than their agricultural
counterparts. The resultant higher urban wages (Lewis stated that a 30% premium was required) might therefore tempt surplus agricultural workers to migrate to cities and engage in manufacturing activity. High urban profits would encourage firms to expand and hence result in further rural-urban migration.

Question 45

Give examples of countries using industrialisation

Answer 45

Countries such as Bangladesh, Malaysia and Vietnam have developed light manufacturing – by building textiles and
garment industries – to add momentum to the process industrialisation but much of sub Saharan Africa lags the rest
of the world in terms of the contribution that manufacturing makes to national GDP. On average, across the continent,
manufacturing only represents about 10 percent of total GDP in Africa, lagging behind other developing regions.
Africa’s share of world manufacturing exports is less than 1%. Ethiopia, Rwanda and Tanzania are three countries that
have made sizeable progress in establishing scaled manufacturing sectors with growing export capacity whereas
Nigeria and South Africa have seen declining growth in their industrial economy.

Question 46

Is rapid industrialisation always the right approach for sustaining growth and development? Explain why or why not.

Answer 46

1. Whilst much manufacturing remains labour-intensive, the rapid adoption of robots and other automated
   processes can limit the scale of new job opportunities for people moving to urban areas where industries are
   concentrated
2. Successful manufacturing strategies often have close links back to farming and extractive sectors e.g.
   developing processing capabilities for farmers who grow fruit. Kenya has established a cut-flower processing
   industry that employs over 200,000 people and contributes more than $1 billion worth of exports each year
3. Light manufacturing does not always add a great deal of value added to production especially low-level
   assembly tasks. Countries might do better in the long run if they also invest in building human capital in
   industries such as research, engineering and design.
4. There are drawbacks from rapid urbanisation especially if a country does not have the infrastructure to cope with high rates of rural-urban migration

Question 47

What are the benefits of tourism and development?

Answer 47

1. Employment creation, tourism is labour intensive industry.
2. Employs a significantly higher % of women helping to increase female labour market participation
3. Export earnings - tourism is a service industry – it helps to generate foreign exchange
4. An important source of diversification for many smaller countries – reducing primary dependency
5. Lifts aggregate demand – possibly creating local and regional income-multiplier effects.
6. Accelerator effects from investment in tourism infrastructure and services such as airlines and telecoms

Question 48

What are the disadvantages of expanding tourism?

Answer 48

1. Exploitation of local labour by overseas TNCs, consider the rapid growth of sex industry in many countries
2. Many workers in tourism are migrants suffering from poor employment conditions such as low
   wages/long hours
3. Outflow of profits from foreign-owned tourist resorts, many resorts have few locally-owned hotels.
4. All-inclusive deals tend to ignore the local economy
5. Negative externalities from construction projects such as congestion, waste, pressure on the natural
   environment.
6. Rising property prices makes housing less affordable for local people.
7. Deepening pressures on local cultures from westernisation, the doubtful benefits of slum-tourism +
   concerns with security and health.
8. Tourism can be a highly cyclical industry vulnerable to global economic and political shocks

Question 49

What are the key aims of FairTrade?

Answer 49

• Guarantee a higher / premium price to certified producers
• Achieve greater price stability for growers
• Improve production standards. A grower will be able to receive a Fairtrade licence if it can improve working
  conditions, better pay and guarantees of environmental sustainability

Question 50

Explain the criticisms of the Fairtrade movement.

Answer 50

1. Impact on non-participating farmers: Some claim that by encouraging consumers to buy their products from
   Fairtrade sources, this cuts demand for farmers in poorer nations not covered by the Fairtrade label thereby
   worsening the risk of extreme poverty
2. Who captures the gains from Fair-Trade coffee? There is some evidence that a large part of the premium
   price goes to processors and distributors rather than the farmers themselves.
3. Others argue that the fundamental causes of poverty are not really addressed by Fairtrade. Greater investment
   needs to be made in raising farm productivity, reducing vulnerability to climate change, and reaching multilateral
   trade agreements between countries to reduce import tariffs and improve access for poor countries
   into the markets of rich advanced nations.
4. Other investment might be better targeted at encouraging farmers to establish producer co-operatives of
   their own and create their own branded products selling direct to consumers.

Question 51

What are the types of overseas development assistance?

Answer 51

• Tied aid - i.e. projects tied to suppliers in the donor country
• Debt relief - e.g. cancellation, rescheduling, refinancing of a country’s external debts

Question 52

What are the benefits of overseas aid?

Answer 52

1. Helps to overcome the savings gap + aid can help stabilize post-conflict environments and in disaster recovery
2. Project aid can fast-forward investment in critical infrastructure – eventually leading to higher productivity
3. Long-term aid for health and education projects – this builds human capital and stronger social institutions
4. Targeted aid might add around 0.5% to the annual growth rate of the poorest countries - this benefits donor countries too as trade grows

Question 53

What are the risks of overseas aid?

Answer 53

1. Poor governance - aid might leave the recipient country. It can finance corruption by ruling political elites
2. Lack of transparency – hundreds of $m is spent on aid consultants and developed country non-governmental
   organisations
3. Dependency culture – one aid paradox is that aid tends to be most effective where it is needed least – it may
   harm an entrepreneurial culture
4. Aid may lead to a distortion of market forces and a loss of economic efficiency and might cause higher
   inflation

Question 54

What is debt relief?

Answer 54

• Debt relief involves the cancellation, rescheduling, or refinancing of a nation’s external debts.
• Many of the world’s poorest countries have high levels of external debt owed to other governments,
  institutions such as the IMF and foreign companies, banks and individuals.
• The Heavily Indebted Poor Countries Initiative (HIPCI) is an initiative to provide debt relief to heavily indebted
  low-income countries
• Debt relief agreements are often conditional on the host country introducing structural economic reforms

Question 55

Explain the case for offering debt relief

Answer 55

1. High debt and the interest payments on debt can further impoverish the most vulnerable people in poor
   countries – debt relief is an appropriate form of aid for countries who lack access to global capital markets
2. Poor countries highly dependent on exports of primary commodities are exposed to global economic shocks
   which can damage their export revenues and take them further into external debt. There is a moral argument
   for helping.
3. Debt relief can be made partially conditional on governments introducing economic and social reforms

Question 56

What are arguments against extensive debt relief?

Answer 56

1. Moral hazard argument – governments will spend and borrow more – perhaps recklessly – if they
   know/expect that some of their debts will be written off in the future – this increases the risk of government
   failure
2. If governments ran better macroeconomic policies e.g. to control inflation and state borrowing, then the
   interest rates charged on new loans would fall making the repayment of debt less costly

Question 57

What does the World Bank do?

Answer 57

• Provides grants and low interest loans
• Offers policy advice and technical assistance to developing countries
• Co-ordinates projects with governments

Question 58

What are the roles of the IMF?

Answer 58

1. Promote international monetary co-operation
2. Facilitate the expansion of international trade
3. Provide exchange stability
4. Make resources available to members experiencing balance of payments difficulties

Question 59

What are NGOs?

Answer 59

An NGO is any not-for-profit voluntary group – it can operate on a local, regional, or international scale. NGOs often operate on a small scale in developing countries. They frequently work in the areas of environmental improvement, community development, and human rights.

Question 60

What are notable interventions of NGOs?

Answer 60

There have been notable interventions from NGOs eg Oxfam, Since 2015, the NGO has reached over 3 million people in Yemen with services like clean water, sanitation, hygiene, and cash for food