Theme 4 CC8 - Strategies influencing G&D

Question 1

Give 6 Market orientated strategies influencing G&D

Answer 1

 Trade liberalisation
 Promotion of FDI
 Removal of government subsidies
 Microfinance schemes
 Floating exchange rate systems
 Privatisation

Question 2

Explain Trade liberalisation as a strategy influencing G&D

Answer 2

Countries can aim for export led-growth.
● Removing trade barriers will mean that domestic industries either close or are forced to become as efficient as other world producers. Resources will be allocated to their best use where the country has a comparative advantage.
- Refer to efficiencies, EOS, ^FDI, effect on consumer prices
Therefore, living standards might increase and there could be more economic growth.
- AD/AS diagram ^AS effect
-Tarriff diagram, reduce trade barriers effects, ^consumer surplus

Question 3

Evaluate Trade liberalisation as a strategy influencing G&D

Answer 3

• However, if firms are unable to compete globally, they will collapse. This will cause a loss of jobs and limit development and growth. Therefore, the impact depends on whether the firms are able to compete internationally or not.
• Evaluate tariff diagram - Loss of govt revenues
• Reduction in domestic producer surplus, lower prices
  -TNCs may bring their own workers - loss of jobs etc

Question 4

Explain FDI as a strategy influencing G&D

Answer 4

• AD/AS Diagram following investment from TNC- ^Investment compononent of AD, ^AD, ^Output, ^Employment, ^GDP, ^Growth
• Draw Harrod-domar growth model. FDI=^Investment leading to greater economic growth, higher incomes, increased savings which can fund more investments, ^Rate of growth.
• It will create jobs and leads to the effect of the multiplier. Labour productivity tends to increase and wages are often higher. It is a source of investment and can help to fill
  the savings gap. It also involves the transfer of knowledge from one country to another, with the company bringing production and management techniques and training for staff which will benefit the country as a whole.

Question 5

Evaluate FDI as a strategy influencing G&D

Answer 5

• Evaluate AD/AS diagram, causes demand pull inflation if on inelastic side of AS curve as economy near full capacity.
• MNCs use transfer pricing and tax avoidance to reduce tax burden, meaning they can still target these countries for revenue but pay less back in tax. Reduces govt revenues which could be spent on infrastructure, health or eductation for example, restraining G&D.
• MNCs could bring own workers, taking jobs off domestic workers which may result in capital flight, reduced multipler effect.
• FDI increases demand for currency, causing an appreciation of the exchange rate, leading to export prices to rise and become less competitive. Fall in demand for exports, M cheaper, ^demand, worsen trade balance, fall in AD, Growth etc.

Question 6

Explain Removal of Govt subsidy as a strategy influencing G&D

Answer 6

• Subsidies often poorly targeted and wasteful, usually on food/fuel to minimise absolute poverty however this benefits everybody in the country. Therefore by removing subsidy, govt can help poor households with welfare payments (benefits) and reduce govt debt.
• Subsidies to farmers and producers tend to lead to inefficiency and if they are given a large amount over a long period of time, the subsidy becomes ineffective in increasing development. Furthermore, producers can become reliant on these subsidies.
• Removal of Subsidy diagram, show price increase, quantity fall and govt saving. Large opportunity cost, therefore can be spent elsewehere.

Question 7

Evaluate removal of subsidy

Answer 7

• Removing a subsidy can be very politically unpopular and some governments have even been thrown out because of attempting to do this. The best time to remove a subsidy is when the free market price is falling, as this means the removal is less noticeable to the people.
• They can also cause problems in terms of corruption and criminality, for example in Venezuela subsidised fuel is smuggled across its borders and sold in neighbouring countries for profit. The fuel subsidies have also led to high emissions, an unintended consequence.

Question 8

Explain floating exhange rates influencing G&D

Answer 8

• Exchange rates adjust to restore competitiveness. If an economy is uncompetitive the currency will depreciate. This will reduce export prices and increase import prices and increase competitiveness.
• If a government fixes the exchange rate at a high rate it may have to use high interest rates or it may need to keep large reserves of foreign currency or it may need to impose capital controls. Therefore, in floating exchange rates, market forces determine currency so govt doesn’t have to worry about gold/foreign currency revieves and govt does not intervene.

Question 9

Evaluate floating exhange rates influencing G&D

Answer 9

• If the exchange rate is very volatile this could
  cause uncertainty about the cost of imports, the revenue from exports and the return on FDI. This could deter international trade and FDI.
• Fixing the currency at a low rate increases exports and increases AD, economic growth and employment (eg in China).
• Fixing the currency at a high rate reduces the price of imports and cost-push inflation. This raises living standards.

Question 10

Explain microfinance schemes influencing G&D

Answer 10

These schemes aim to give poor households permanent access to a range of financial services e.g. small loans to help them engage in productive activities/grow their tiny businesses.

• Harrod-Domar model: If there is alack of saving to finance investment in poor countries then small loans can help farmers and entrepeneurs to invest and this
  can promote economic growth and development.
• Most loans go to poor farmers and vendors who could not obtain credit anywhere else.
  -The scheme tends to target groups who would be less likely to otherwise receive loans, for example women.

Question 11

Evaluate microfinance influencing G&D

Answer 11

• Many micro-finance schemes have been accused of exploiting the poor with very high interest rates
  and other charges. Large multi-national banks that fund the schemes have not prevented this.
• There is little evidence that micro finance schemes have a significant effect in promoting economic development.

-South Africa has shown the problems that can occur with this system. It has become a method of financing consumption spending and unemployment means that most people do not have the funds necessary to ensure repayment of their loan, meaning they have to sell off family assets, borrow from friends and family or simply take out new loans to repay the old ones.

Question 12

Explain Privatisation influencing G&D

Answer 12

• Governments can raise revenue by selling shares to private individuals. Also, they don’t need to subsidise loss making state sector companies
• Privatisation may enable governments to introduce more competition in markets and increase contestability. This could increase efficiency and choice.
• Private sector companies have an incentive to maximise profits. This encourages them to cut costs, invest and innovate. Private sector companies may be more dynamically efficient and provide better quality goods and services for consumers
• Private sector companies may provide goods and services that consumers want. Nationalised industries may not do this and could be allocatively inefficient

Question 13

Evaluate Privatisation influencing G&D

Answer 13

• Privatisation may create privately owned monopolies which may exploit consumers with high prices and poor quality services. It is sometimes difficult to regulate these firms due to assymetric information and regulatory capture.
• Privatisation may result in greater inequality as the profits from private sector firms go to wealthy owners or shareholders instead of to the government. Private sector firms have more unequal pay structures than nationalised industries. Top managers may earn a lot more than in the public sector, but low skilled workers may have poorer pay and working conditions.
• Privatisation may result in fragmentation of services. For example there may not be an integrated transport system where trains and buses link up with each other.

Question 14

Give 6 Interventionist strategies influencing G&D

Answer 14

 Development of human capital
 Protectionism
 Managed exchange rate
 Infrastructure development
 Promoting joint ventures with global companies
 Buffer stock schemes

Question 15

Explain development of human capital influencing G&D

Answer 15

• If workers have better skills this could increase productivity, AS and economic growth
• Countries that have invested in education have
  seen rapid economic growth and development.
  -FDI may be attracted and MNCs may wish to employ skilled workers.
  -A well-educated population may be more politically aware and could put pressure on politicians to ensure there is good governance and better economic decisions are made

Question 16

Evaluate development of human capital influencing G&D

Answer 16

-There may be long time lags. It would take many years before improvements to primary school education would benefit an economy
-Developing countries may experience a brain drain where skilled workers chose to emigrate
-Children may not attend school if they come from poor families who need them to go out and work
-The quality of the education system is poor in
many developing countries

Question 17

Explain protectionism influencing G&D

Answer 17

● Protectionism allows domestic industries to grow by keeping foreign goods out and protects them from strong competition, ^Producer surplus. They can use a policy of import substitution, where they deliberately attempt to replace imported goods with domestically produced goods by adopting protectionist measures.

● This will create jobs in the short run and will allow the industry to develop, perhaps to the extent where the barriers can be removed , and the industry can compete globally.

● Increased tariff revenue for govts

● Less TNCs/MNCs therefore less profits/tax revenues leaving the country, domestic firms will pay full tax and keep profits/reinvest in this country. ^Multipler effect

Question 18

Evaluate Protectionism influencing G&D

Answer 18

• However, it means countries lose out from the benefits of specialisation and comparative advantage.
• Domestic producers will suffer from a lack of competition and this could cause inefficiency as there is no incentive to cut costs, innovate and reduce waste etc.
• Other countries are likely to retaliate, leading to higher import prices, ^COP for raw materials, Cost push inflation, reduce consumption/investment, AD falls etc, fall in rate of growth. Countries that are dependent on imports if not self-sufficient will be hit hardest.

Question 19

Explain managed exchange rates influencing G&D

Answer 19

• The currency could be fixed against a number of different exchange rates . They can introduce high exchange rates for the import of essential products and lower exchange rates for others. There could be an even lower one for exports.
  -A high exchange rate for essential products will mean that the price within the country is low, which helps to reduce poverty if the goods are consumer goods and encourages investment if they are capital goods.
• A lower exchange rate for other imports will mean that the price of these goods within the country is higher, discouraging their import and encouraging consumers to buy from domestic producers. ^AD and economic growth.
• Alternatively, governments can manage a single exchange rate which will reduce volatility. ^Certainty over export revenues and cost of imports, ^Domestic investment & FDI.

Question 20

Evaluate managed exchange rates influencing G&D

Answer 20

-The problem with these tiered exchange rates is that they often fail to work in practice; black markets in foreign exchange develop which can destabilise the system and corruption becomes an issue, when government officials buy currency at one exchange rate and sell it for profit at another.

• Floating exchange rates adjust to restore competitiveness. If an economy is uncompetitive the currency will depreciate. This will reduce export prices and increase import prices and increase competitiveness.
• If a government fixes the exchange rate at a high rate it may have to use high interest rates or it may need to keep large reserves of foreign currency or it may need to impose capital controls. Greater intervention/use of resources
• Speculation may mean that countries find it difficult to maintain an exchange rate over a number of years.

Question 21

Explain infrustructure development influencing G&D

Answer 21

-Investment in infrastructure such as roads, railways, power stations and water supplies, schools and hospitals can provide essential services and reduce extreme poverty.
-Infrastructure may help to increase productivity and increase AS and long term economic growth.
-It can increase international competitiveness and exports and improve the current account of the balance of payments.

Question 22

Evaluate infrustructure development influencing G&D

Answer 22

-Infrastructure is very expensive to build and there is a high opportunity cost for developing
countries.
-Sometimes infrastructure is built which does not increase growth and development. For
example, governments may build motorways, conference centres and stadiums that do not
help the poor and do not promote growth and development.
- Infrastructure projects are often associated with bribery and corruption , cause environmental damage and may be poorly built and maintained.

Question 23

What is a joint venture?

Answer 23

a company that is owned by two major firms or a firm and a government. E.G. Jaguar Land Rover £1bn joint venture

Question 24

Explain promoting joint ventures with global companies as a strat influencing G&D

Answer 24

• Developing/emerging countries can benefit from the knowledge and technology of MNCs e.g. a chinese car manufacturer can gain expertise off JAG-LR.
• Reduce exploitation of countries as a result of FDI with joint ventures. The government may insist that firms setting up production plants in their country find a local partner to create a jointly owned company with. This will help to keep some of the profits generated within the country , which can be used in investment.
  -Joint ventures can spread cost and risk of an investment ^FDI, ^AD, ^AS, ^GDP, ^Growth.

Question 25

Evaluate promoting joint ventures with global companies as a strat influencing G&D

Answer 25

• Strategy may be effective for relatively large, successful developing economies such as china as Foregin car producers are willing to accept join ventures because they are desperate to gain access to largest car market itw. However, strategy may not work for smaller, poorer developing countries as foreign MNCs may not be willing to share their technology and expertise.
• There could be a clash of cultures and working practices which creates inefficiency

Question 26

What is a buffer stock scheme

Answer 26

This is where the government imposes both a maximum and minimum price for goods, buying up stocks when there is excess supply and selling them off when there is excess demand.

Question 27

Explain Buffer stock schemes as a strat influencing G&D

Answer 27

1. Often used on commodoties where prices are volatile. Stabilises prices, increasing certainty, encourages investment as producers can plan for LT, ^productivity and potential output.
2. Prevents crashes in market prices that reduce export revenue, AD and GDP, therefore a potential solution to PPD. Also, by preventing sharp falls in prices, meaning that producers are kept from falling into absolute poverty, and preventing sharp rises in prices, meaning that consumers are able to afford the good.
3. The govt could make a profit (or at least cover costs) off the scheme if they buy crops at a low price and sell them at a high price. Increased govt budget, can be spent elsewhere to promote G&D.

Question 28

Evaluate Buffer stock schemes as a strat influencing G&D

Answer 28

1. If crops are grown in many countries, international co-operation is necessary for the schemes to work. Also could cause free rider problem as other countries may benefit from a buffer stock system since it keeps global prices stable when undertaken by a group of countries, therefore some countries don’t need to introduce system.
2. Scheme only works with non-perishable goods that can be stored e.g. fresh foods would rot. Furthermore, requires stocks to go up and down, if they keep rising, scheme will run out of money and collapse.
3. If govt set minimum price too high and have to keep buying up stock, scheme could run out of money. Furthermore, a high min price encourages producers to be inefficient as they can produce as much as they like and be able to sell it anyway/

Question 29

Give 6 other strategies that can influence G&D

Answer 29

 Industrialisation
 Development of tourism
 Development of primary industries
 Fairtrade schemes
 Aid Page
 Debt relief

Question 30

Explain industrialisation as a strat influencing G&D

Answer 30

-The Lewis model assumed that developing countries had dual economies with a traditional agricultural sector, which had low wages, low productivity, underemployment and low savings, and a modern industrial sector, with high levels of investment and urbanisation.
- Development is promoted by the transfer of surplus labour away from the agricultural sector, attracted by higher wages available in manufacturing industry.
- Lewis argued that productivity is higher in manufacturing than in agriculture. If workers move into manufacturing jobs they will have higher incomes, higher living standards and more savings for investment. E.G. Structural change in china

Question 31

Evaluate industrialisation

Answer 31

• Manufacuring jobs largely capital intensive nowadays, therefore people move to city for manufacturing jobs that are limited or not available. Increasing level of unemployment.
• Also lack of urban housing, creating slums, increasing poverty, therefore lots of people may be better off in rural areas.
• Schumacher argued small scale, rural investment is better for development
• Infant industries may fail if govts have imperfect knowledge and back the wrong industry. Also, firms may lack incentives to become competitive if protected.
  E.G. instead of industrialising, India went from agriculture to services as this is where they had a comparative advantage. This shows that not all countries will develop in the same way.

Question 32

Explain development of tourism as a strat influencing G&D

Answer 32

• Creation of jobs e.g. in construction, hotel staff, tour guides. Tourism is labour intensive and provides jobs for low skilled workers who know the area well.
• Tourism is income elastic, therefore as global incomes rise, there will be an increase in demand for tourism. The govt will see higher tax revenues due to higher income and profits as tourism increases.
• Tourism boosts AD and results in a multiplier effect. Tourism is an export, this injects income into the economy which is passed on described as ‘one person’s spending is another person’s income’. Eventual rise of GDP is greater than the inital injection.

Question 33

Evaluate development of tourism

Answer 33

• Exploitation of labour by overseas TNCs e.g. rapid growth of sex industry.
• Outflow of profits from foreign-owned tourist resorts. Nowadays, holidays involve all inclusive deals which take away from the local economy, foreign owned businesses take money out of country.
• Increased externalities from ^construction projects, congestion, waste, pressure on natural environment.

Question 34

Explain development of primary industries influencing G&D

Answer 34

• Countries such as Saudi arabia, were able to develop because of an abundance in natural resources.
• It is better to specialise in industries where the country has a comparative advantage such as agriculture or mining. This is less risky than trying to develop a manufacturing sector. Schumacher argued small scale investment in rural areas was most effective strategy for development.
• The development of a primary industry provides funds to allow a country to diversify as well as allowing infrastructure development and better education. High output of primary product, high export revenues, ^Investment & FDI, ^AD, ^GDP and ^Growth.

Question 35

Evaluate development of primary industries influencing G&D

Answer 35

• Lewis model suggests movement away from low productivity agricultural secotr to high productivity manufacturing/servces industries is desirable for growth.
• Prebisch singer hypothesis: Demand for agricultural goods are income inelastic (demand rises slowly as global incomes rise) whereas manufactured goods are income elastic (demand rises significamtly as global incomes rise). Therefore, if a country exports agricultural goods and imports manufactured goods, TOT will worsen.
• Volatile commodity prices - If prices fall, x revenues fall, AD and Gdp falls. If price fluctuate, creates uncertainty of import costs and export revenues. Therefore, less investment, AD falls. Also productivity and LR growth falls.
• Dutch disease - sharp inflow of foreign currency due to e.g. discovery of natural resources, means currency appreciates, exports become more expensive and less competitive. Fall in AD, growth.

Question 36

Explain fairtrade schemes as a strategy influencing G&D

Answer 36

A fair price typically means that agreements are made to buy a guaranteed amount of produce over a period of time at a price which is above the market price when the agreement was made. This gives producers stability and raises their income.
-Communities can become more self sufficeint e.g. getting their own clean water rather than waiting for govts
-Farmers can pay for their children to go to school, preventing child labour, increased education improving future workforce.
- Stabilise supply chain, gives big corps an incentive to use fair trade schemes, also giving them a better image.

Question 37

Evaluate fairtrade schemes as a strategy influencing G&D

Answer 37

• Only benefits small % of farmers
• Difficult to meet criteria to be part of scheme
• Generally benefits large scale producers in middle income countries than those poor farmers.
• Supermarkets make larger profit margins on fair trade products.

Question 38

Define aid

Answer 38

When a country voluntarily transfers resources to another (grant) or gives loans (soft loans- low interest rates) on concessionary terms (Tied aid).

Question 39

What is the difference between bilateral and multi lateral aid

Answer 39

Bilateral - given directly from one country to another
Multilateral - aid given by more than one country to international organisation who distributes it to other countries.

Question 40

Explain how aid promotes G&D

Answer 40

• Harrod Domar & Rostow models: foreign aid
  desirable to fill savings gap. If developing
  countries lack the savings to finance
  investment. Aid can be used to finance
  investment in schools, hospitals, roads & water
  supplies etc. This can help poor countries to
  develop and lift people out of poverty
• Humanitarian aid can save lives by providing
  people with basic necessities such as food,
  clothing, shelter and basic medicines. This is
  particularly important for countries suffering
  from war or natural disasters.

Question 41

Evaluate aid influencing G&D

Answer 41

-Dependency theories: soft loans (even at low
interest rates) make country dependent on
Western Developed country. Many developing
countries struggle to pay the interest on loans

-Some aid is ‘tied’ aid (eg if the British
government said the aid had to be spent on Land
Rovers made in the UK). This may not provide
developing countries with what they need.

-Some aid is wasted on expensive projects which
don’t help the poor (eg new airports/stadiums)

-Some aid is stolen by corrupt governments. It
may sometimes be more effective to give aid to
NGOs (Non Government Organisations)

Question 42

Explain how debt relief promotes G&D

Answer 42

Many countries suffer greatly from the high interest repayments to loans they have
taken out. It limits the growth of some of the poorest countries, whilst being relatively
small for the countries and agencies that are owed the money. Therefore, it seems
reasonable for the debt of developing countries to be written off.
● It will ease government finances and allow more money to be spent on provision
of services and infrastructure to aid development.

Question 43

Evaluate debt relief

Answer 43

However, it causes moral hazard because it creates a precedent: every poor country may now expect to receive debt relief. It also eases pressure on weak governments to adopt reforms and good economic policies.
- Incentivises govts of developing countries to take risks if they know they can be bailed out.

Question 44

What is the world bank?

Answer 44

-founded after the Second World War to promote economic development. It provides low-interest loans, interest-free credit and grants to developing countries for education, health, infrastructure, communications and other developmental purposes.

Question 45

What are the main functions of the world bank?

Answer 45

• Granting reconstruction loans to war devasteted countries
• Granting developmental loans to underdeveloped countries
• Providing loans to govts for public services
• Encouraging industrial development and poverty reduction

Question 46

What is the IMF?

Answer 46

International monetary fund set up after world war two to
promote world development and stability.

Question 47

-What are the main functions of the IMF?

Answer 47

• to ensure the stability of the international monetary system – the system of exchange rates and international payments that enables countries (and their citizens) to transact with each other;
  -When providing loans, the IMF insists that countries make macroeconomic reforms to resolve the problems. Usually, it involves reducing imports and increasing exports which reduces the amount of resources available for domestic consumption.
  It can also be in the form of lower government spending.
• The IMF also provides advice which aims to bring about economic stability and raise living standards and help countries to develop their economic institutions

Question 48

How does IMF promote G&D

Answer 48

• They provide loans to help countries when there are international exchange rate crises or when they cannot afford to pay off their international debt or essential imports (financing a current account defecit).
  -Stabilise exchange rate e.g. iceland: IMF lend to govts in dollars so they can sell their dollars on forex market and buy domestic currency. Icelandic govt did this to prevent currency crashing
• Preventing sovereugn defaults e.g. greece govt given loans by IMF to pay for welfare benefits and public services.
• Financing bank bailouts e.g. Ireland

Question 49

Evaluate IMF as an influence G&D

Answer 49

• Most imports are bought by by firms and households rather than govts, therefore not significant way of financing current account defecits.
• IMF loans to greece had very tough conditions, govt forced to cut spending and raise taxes. Greek economy alrdy in a recession, so this policy made the recession even worse. GDP of greece fell by 25% and greek national debt rose as a % of GDP.
• There was a lot of resenment at the bank bailouts in ireland. The bankers made big profits in the run up to the financial crisis. But taxpayers had to pay back the loans to IMF.

Question 50

What are NGOs?

Answer 50

Non-governmental organisations.
-non-profit, voluntary organisations that are run independently from the government. E.G. Wateraid

Question 51

How do NGOs promote G&D

Answer 51

-They can provide direct assistance to countries in the form of project work,
for example Oxfam or CAFOD. This can range from education to wells to healthcare
and can either be emergency or long term.
-Funding for NGO’s can avoid the problem of funding corrupt govts who may steal or misuse funding.
- they can act as pressure groups to lobby governments to adopt more pro-development strategies

Question 52

Evaluate NGOs

Answer 52

-NGOs account for a small % of aid/support for developing countries (small compared to IMF)
- Assistance may not be co-ordinated and may not help the whole country.
- NGO’s may not be accountable to people in developing countries.