4.3.3 Strategies influencing growth and development Flashcards
Market-orientated strategies influencing growth and development
- trade liberalisation
- promotion of FDI
- removal of govt subsidies
- floating exchange rate systems
- microfinance schemes
- privatisation
How can the promotion of FDI promote economic development?
the impact of increased investment was considered in Theme 2 and the effect of FDI on the balance of payments was mentioned in section 4.1.8.
How can a floating exchange rate system influence economic development?
- in many cases developing countries have tried to maintain an exchange rate at an artificially high rate.
- Consequently, floating the exchange rate should result in a depreciation of the currency. Floating exchange rates see section 4.1.8.
How can microfinance scheme promote economic development?
- can help break the debt-p over cycle by shifting borrowing away from urban money lenders/loan sharks which might have hgih interest rates
- helps smooth consumption when income flows are volatile (e.g due to commodity price volatility/external shocks/farming)
- encourages enterprise especially among women, can help address structural gender imbalances and reducing extreme poverty
- provides a platform for saving and insurance lifting household saving important in the Harrod-Domar growth model
Microfinance
A type of banking service that is provided to unemployment or low-income individuals or groups who otherwise have no other access to financial services
- micro-credit
- Micro-saving
- micro-insurance
- remittance management
(Bottom up approach)
Evaluation of microfinance
- this is a marked bashed approach nad borrowers in some countries have been encouraged to take too many loans (e.g sub-prime lending) at high interest rate. Over-indebtedness. There is a risk that borrow become over indebt if they take out multipler loans from different micro finance institutions = bankruptcy. This can sh them further into poverty. There might be a tendency for lenders to focus on increasing their own profits
- ## not necessarily the most effective way to lifting sustainable savings and the impact is limited. Sustainable savings come form in-work income (formal jobs) or from welfare system which matters in the long run. The focus should be on work productivity, yield in farming sector, getting more ppl into formal employment to raise per capita incomes or education might be more effective.
Interventionist strategies to promote economic development
- Development of human capital – section 2.6.3
- Protectionism – see section 4.1.6.
- Managed exchange rates – see section 4.1.8.
- Infrastructure development – section 2.6.3
- Promoting joint ventures with global companies – see section 3.1.2
- Buffer stock scheme
Buffer stock schemes
Buffer stock scheme
- If the price of the commodity drops too low (probably through high supply) = the government or buffer stock authority purchases large quantities of the good and stores it (xy in the diagram below) = reduce supply sufficiently to ensure that the price does not fall below the floor price.
- If the price becomes too high, the government or buffer stock authority release the good onto the market from storage = increasing supply sufficiently to ensure that the price does not rise above the ceiling price (ab in the diagram below).
Evaluation of buffer stock scheme
The problems with buffer stock schemes are that storage is expensive, transport to and from storage is expensive, it is very difficult to equate supply and demand in the long run, and all producers need to be part of the scheme for it to be effective.
- can lead to moral hazard = govt failure
How can industrialisation promote economic development?
Lewis argued that growth would be achieved by the transfer of workers from the rural primary sector (low productivity) to the modern industrial urban sector (high productivity) through higher wage incentives.
Industrialisation
a stage where there is a rapid expansion of manufacturing industry
Explain the Lewis model (rural workers)
- as more labour is put to work on the land, diminishing marginal returns eventually set in
- Marginal workers in rural areas add little to the output of the rural economy due to insufficient tasks for the marginal worker to undertake (underemployed) = 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 tempt surplus agricultural workers to migrate to cities and engage in manufacturing activity.
High urban profits = encourage firms to expand = further rural-urban migration.
Explain the Lewis model (urban workers)
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 tempt surplus agricultural workers to migrate to cities and engage in manufacturing activity.
High urban profits = encourage firms to expand = further rural-urban migration.
Evaluation of Lewis model
e.g official Chinese statistics place the number of internal migrants over the past 20 years at over 10% of the 1.3bn population.
45% were aged 16-25 and two-thirds were male. Urban incomes are around 3.5 times those of rural workers.
A Marxist criticism states that profits will be retained by the capitalist entrepreneur, at the expense of workers. Urban expansion might be driven by increases in capital rather than labour.
Evidence suggests that surplus labour is as likely in the urban sector as in the agricultural sector. Migrating workers may possess insufficient information about job vacancies, pay and working conditions. This results in high unemployment levels in towns and cities.
Towns and cities may also be fixed in size and unable to accommodate large numbers of immigrants. This gives rise to slums and shanty towns, which are often illegal, built on flood planes or areas vulnerable to landslides and without sanitation or clean water. Cape Town provides a good example. Globally 1bn people live in slums
Uncertainty. Some countries such as South Korea, have prospered from governments favouring the growth of private manufacturing companies from shipbuilding to car manufacturing to electronics. In most countries however, forced industrialisation can lead to a waste of scarce resources because these industries have failed.
Marginal workers in cities often have as low incomes and be as underemployed as marginal workers in the countryside.
How might the development of tourism help promote economic development?
many LDCs are increasingly highly dependent on tourism from the developed world as incomes rise.
- They may encourage tourism because it allows foreign currency to be earned and it is labour- intensive.
The evaluation of tourism to help promote economic development
However, there may be significant negative externalities resulting from tourism growth; for example, use of clean water for tourists not locals, expansion of airports causing pollution and loss of farmland.
- The Kingdom of Bhutan, in the Himalayas, aims to tackle this problem by taxing tourists heavily for every night they spend in the country.
How might the development of primary industries help promote economic development?
some countries have managed to develop on the basis of primary products in which they have a comparative advantage.
- e.g, Chile has benefited from the production of copper (at least, when the price is high) and other primary products with a high income elasticity of demand, such as blueberries and papaya.
How might fair trade schemes of primary industries help promote economic development?
- WTO
- fair trade movement
How might fair trade schemes of primary industries help promote economic development? (WTO)
- the WTO works towards reducing protectionist policies.
Many developing and emerging economies are unable to sell their primary- sector products abroad due to:- protectionism in the developed world
- can only do so at relatively low prices because of the monopsony power of large companies in developed countries.
How might fair trade schemes of primary industries help promote economic development? (Fair trade movement)
- this is a way guarantee farmers a certain price for their products = so that they are not subject to monopsony purchasing power from developed countries. = improving development.
Evaluation of how fair trade can help promote economic development
- there are often a significant number of ‘middle men’ involved = reducing the benefits that fair trade farmers receive.
- also, it is argued that supermarkets in developed countries are the main beneficiaries.
- fair trade schemes can result in a misallocation of resources: low prices = encourage farmers to reallocate their resources to the production of more profitable goods.
Aid
- humanitarian aid (such as food and shelter in times of emergency)
- to grants
- soft loans
Grants
sums of money that do not need to be repaid)
Soft loans
money that must be repaid but at a concessionary rate of interest
Explain one benefit of aid
- reduction in absolute poverty and improved access to food and water.
- Bilateral aid and example
- Somalia case study
- Foreign aid, taken in the form of subsidised food/consumer goods, can help in famine situations and reduce poverty levels in the short run.
- The benefits of foreign aid to Somalia has improved food accessibility enabling families to afford food and basic needs therefore reducing poverty levels.
