4.3.3 strategies influencing growth and development Flashcards
(23 cards)
What are some market-based strategies to influence growth and development?
- trade liberalisation
- promotion of FDI
- removal of government subsidies
- floating exchange rate systems
- microfinance schemes
- privatisation
How is trade liberalisation used to influence growth and development?
Relates to measures designed to remove trade barriers. This brings about export-led growth, as domestic industries either close or become as efficient as other world producers. resources are allocated to their best use where the country has comparative advantage
How is promotion of FDI used to influence growth and development?
FDI is investment by one private firm in a country into another private firm in another country. Includes direct acquisition of a firm or licensing intellectual property.
-FDI may be used due to lower production costs in developing countries and to gain access to a new market.
-Also involves transfer of knowledge from one firm to another, increasing efficiency and productivity.
-Can create jobs, causing a multiplier effect, helps to fill the savings gap.
-However, developing countries may feel exploited by the company, offering lower wages and poor working conditions.
-The country may become dependent on investment.
-May be difficult for local firms to compete and best jobs may go to imported labour, leaving low skilled jobs for locals.
-Environmental damage and exploitation of natural resources may be problems.
How is the removal of government subsidies used to influence growth and development?
Subsidies are usually placed on essential items within a country, or in agriculture/industry to increase output and investment. This can minimise absolute poverty and ensure a minimum standard of living but can create problems.
- subsidies are poorly targeted as everyone benefits, not just the poor
- subsidies to farmers and producers lead to inefficiency and may be ineffective in increasing development, however they may be beneficial if they allow an infant industry to grow
- subsidies require a large amount of government spending, incurring an opportunity cost and leading to high levels of debt
- subsidies cause corruption and crime problems
- removing a subsidy is politically unpopular, the best time to remove it is when the free market price is falling as the removal is less noticeable to people
How are floating exchange rate systems used to influence growth and development?
Should result in a depreciation of the currency, making exports cheaper and increasing demand = export led growth. Market forces determine currency value so the country doesn’t have to worry about gold and foreign currency reserves, no government intervention. However, the currency may be volatile, difficult for exporters/importers to make decisions about the future.
How are microfinance schemes used to influence growth and development?
Relates to providing poor people with small loans to help them engage in productive activities or grow their businesses, increasing investment levels. They take little or no collateral and there is guarantee of access to future loans if present loans are repaid fully and promptly. However, this may become a method of financing consumption spending and unemployment means that people don’t have necessary funds to ensure repayment. It has increased the informal economy as very little has been spent on sustainable methods of development. Financial assets may be diverted away from more productive and sustainable activities eg. manufacturing.
How is privatisation used to influence growth and development?
This can end the corruption within a firm owned by the state and encourage them to be more efficient due to increased competition. Selling off a loss-making firm improves government finances and reduce debt levels. However, if the firm is a monopoly, it can be associated with corruption as officials may sell the company at below market price to friends/family.
What are some interventionist strategies used to influence growth and development?
- development of human capital
- protectionism
- managed exchange rates
- infrastructure development
- promoting joint ventures with global companies
- buffer stock schemes
How is development of human capital used to influence growth and development?
Provides workers with skills/training, improving efficiency and productivity. Businesses struggle to expand if there are skills shortages and innovation is limited. Human capital can be developed through schools or vocational training. Higher skills ensure the country can develop from the primary sector to the manufacturing sector, overcoming primary product dependency. Better education leads to an improved quality of life.
How is protectionism used to influence growth and development?
Allows domestic industries to grow by keeping foreign goods out and protects them from strong competition. They can use import substitution, where they deliberately attempt to reduce import goods with domestically produced goods by adopting protectionist measures. This creates jobs in the short run, allows the industry to develop until it can compete globally. Countries may lose out on benefits of specialisation and comparative advantage, could cause inefficiency, since domestic producers have lack of competition. Other countries are likely to retaliate.
How are managed exchange rates used to influence growth and development?
The currency could be fixed against a number of different exchange rates. They could introduce high exchange rates for imports of essential products, meaning that the price within the country is low, reducing poverty for consumer goods and increasing investment for capital goods. A lower exchange rates for other goods means that the price of these goods in the country are higher, discouraging import and encouraging consumption from domestic producers. There could be a low exchange rate for exports. However, black markets may develop destabilising the system and causing corruption, when government officials buy currency at one rate and sell it for profit at a higher rate. Alternatively, governments can form a single exchange rate, reducing volatility, however speculation means that countries may find it difficult to maintain an exchange rate over several years.
How is infrastructure development used to influence growth and development?
Infrastructure is essential for development. Interventionists believe the government should provide this, however infrastructure may cause a free rider problem and has high capital costs, so it is unlikely the private sector would develop infrastructure. There are many positive social benefits, suggesting the government should provide it. One problem is that the government may not have the necessary funds to provide infrastructure and they may be inefficient. Infrastructure projects can be associated with bribery and corruption, they cause environmental damage and may be poorly built and maintained,
How is promoting joint ventures with global companies influence growth and development?
One way to reduce the exploitation of countries as a result of FDI would be to set up a joint venture. The government may insist that firms setting up production plants in their country find a local partner to create a joint owned company with. This ensures that some of the profits are definitely kept in the country, used to fund investment.
How are buffer stock schemes used to influence growth and development?
This includes a price ceiling and price floor. If the commodity price drops too low, due to high supply, the government purchases large quantities of the good and stores it. This reduces supply sufficiently to ensure the price doesn’t fall below the price floor. If the price becomes too high, the government releases the good onto the market from storage, increasing supply sufficiently to ensure price doesn’t rise above the price ceiling. It is used on commodities where prices are volatile and can stabilise price, encouraging investment since producers can plan for the long run. Prevents sharp price falls so that producers don’t fall into absolute poverty, and ensure consumers can afford the good. Other countries may benefit from the scheme and global prices are fairly stable when undertaken by a group of countries, so are free riders of the system. The problems with buffer stock schemes are that storage is expensive, very difficult to equate supply and demand in long run, and all producers need to be part of the scheme for it to be effective. Minimum prices may be set too high, encouraging inefficiency from producers. If the scheme operates at a loss, the taxpayer feels the burden and government finances are worsened.
How is industrialisation (the Lewis model) used to influence growth and development?
The Lewis model says that growth can be achieved by a migration of workers from the rural primary sector to modern industrial sector, this would occur through higher wage incentives. He believed that labour productivity was so low in agricultural areas that people leaving the area would have no impact on output and people who moved would have higher incomes, leading to saving and investment. However, this may be inappropriate for many developing economies as there is often high unemployment in urban areas. This also assumes that secondary-sector production would be labour intensive, but it tends to be capital intensive. Also, there may be times of the year where vast amounts of labour are needed to plant and harvest in agricultural sectors. Migration may lead to urban poverty replacing rural poverty as the industrial sector is unable to provide jobs for everyone who moved, improved technology may reduce demand for labour. Also, developing economies may lack the savings and investment needed to purchase more capital for industrialisation to take place.
How can development of tourism be used to influence growth and development?
Many developing countries are highly dependent on tourism from the developed world as world incomes rise, as tourism is income elastic, however they may suffer in times of recession. They may take advantage of their climate and geography to encourage tourism as it allows foreign currency to be earned, filling the currency gap, and it is labour intensive. They earns funds for development and improved living standards. They may attract investment from TNCs (hotels), bring about knowledge, improved infrastructure, creates a multiplier effect. Low skilled jobs are created, higher tax revenues for the government due to incomes and profits. However, there may be negative externalities eg. loss of clean water for locals, pollution, loss of farmland. They may aim to tackle external costs by taxing tourists heavily when they visit. The industry may rely on increased imports, may not help the foreign currency gap. The industry is seasonal, and jobs may be low paid, reducing the impact of the multiplier effect. TNCs may withdraw their profits from the country, reducing the wealth created, capital flight problems.
How can development of primary industries influence growth and development?
Some countries have managed to develop on the basis on primary products in which they have comparative advantage, or because of an abundance in natural resources. Funds allow a country to diversify, allowing infrastructure development and improved education. However, primary products are volatile and their may be corruption. There are several problems associated with primary product dependency.
How can fairtrade schemes influence growth and development?
The WTO works towards reducing protectionism. Many developing economies are unable to sell products due to protectionism, or have to sell at low prices due to monopsony power of large firms in developed countries. The fair trade movement is aimed towards farmers, improving development. It has key principles: fair price, community development, fair working conditions, environmental protection. Schemes may guarantee farmers a fair price for products, giving them stability and higher incomes. This ensures child labour is not an issue, so that children are able to receive education, and that production is sustainable. However, there are a significant amount of middle men involved, reducing benefits received by fair trade farmers. The schemes can result in a misallocation of resources: low price should encourage farmers to reallocate their resources to the production of more profitable goods. It may reduce the incentive to diversify, as it keeps farmers engaged in low profit activities.
How can aid be used to influence growth and development?
When a country voluntarily transfers resources or offers loans to another country. May lead to reduced absolute poverty, especially when used for emergency relief. It can fill the savings gap, providing funds for investment in infrastructure or human capital. Provides foreign exchange to fill the currency gap. Contributes to increased globalisation and trade, reducing world inequality. However, it may create a dependency culture where countries are unconcerned by their finances due to aid. Corruption means that money doesn’t always go to the correct people. Difficult to know how to best spend the aid, opportunity cost is incurred.
How can debt relief be used to influence growth and development?
Many countries experienced a debt crisis in the 80s, they couldn’t afford to pay the interest on large debts to international financial institutions, due to rising value of the dollar and higher interest rates. Debt repayments meant that governments were unable to invest in human capital or infrastructure needed for growth and development. Debt relief can ease government finances and allow more money to be spent on provision of services and infrastructure to aid development. However, it causes moral hazard as poor countries can expect to receive debt relief. It also eases pressure on weak governments to adopt reforms and good economic policies.
What is the World Bank?
Aims to bring about long term development and reduced poverty.
- provides financing, policy advice and technical assistance
- helps development in poorer countries
- helps strengthen the private sector in developing countries
- granting reconstruction loans to war devastated countries
- granting developmental loans to underdeveloped countries
- providing loans to governments for agriculture, irrigation, transport, power, water, education, health, etc
- encourages industrial development of underdeveloped countries by promoting economic reforms
What is the International Monetary Fund (IMF)?
Set up to ensure that exchange rate systems work well. They provide loans to countries when there are international exchange rate crises or when they are unable to pay off international debt. Provides advice about economic stability and raising living standards to ensure development. They can also provide member countries with finance to correct balance of payments issues.
What are NGOs?
A non-profit, voluntary citizens’ group organised on a local, national or international level, run independently from the government. Brings about community-based development to promote growth and development. Key characteristics include local control of small scale projects, self-reliance, emphasis on using the skills available and environmental sustainability.
- can provide direct assistance to countries as project work
- they can act as pressure groups to lobby governments to adopt more pro-development strategies
- however, they alone may not be able to solve the problem, the government has to fix the issues
- they are generally anti-capitalist, which causes divisions within development projects and global capitalism usually helps to bring about development
