CH31: Strategies for Growth

Trade Strategies

Trade Strategies

1. Import substitution

2. Export promotion

   1. Primary commodities

   2. manufactured goods

3. Economic Integration

Market Based Policies

1. Trade liberalization

2. Privatization

3. Deregulation

4. Minimum wage (inverse effect)

Institutional CHanges

1. Securing property rights

2. Improving access to Banking

3. Effective tax collection

4. Women’s empowerment

5. Reducing Corruption

Interventionist Policies

1. Diversification

2. Transfer payments

3. Provision of merit goods

3rd Party

1. FDI

2. Social enterprises/NGOs

3. Foreign aid

4. Multilateral assistance

5. Debt relief

Import substitution necessities

1. gov organizes selection of goods and services

2. gov protect domestic industry

Import substitution adv anf dis

Adv:

1. protects job

2. protects local culture

3. protects from the bad influence of MNC

Dis

1. may only protect and create jobs in short-term

2. inefficiency of domestic producers/ no comparative advantage

3. increased inefficiency due to protectionism

4. high rates of inflation

5. may cause other countries to take protectionist retaliatory measures

Export substitution Primary commodities

→ downwards trends in prices (decrease in inflow on the long term) except for oil products

Export substitution Manufactured goods

Adv:

1. advantages of low cost labour and low skill level → employment

2. with higher education level of goods will get better → higher skilled workers (appropriate tech)

Dis

1. developed countries might protect from these cheap exports (threat to their labour)

2. requires a lot of government investment/funding for:

   1. infastructure

   2. education

   3. improving tech

   4. subsidies

3. MNC’s can be too powerful

4. Increased income inequality

Economic integration adv and dis

Adv:

1. Larger export market

   1. gain economies of scale

   2. stimulus for FDI investment

   3. greater efficiency of domestic producers due to competition

   4. increased diversification

2. Encourages INternational Cooperation

   1. benefits landlocked countries

   2. incentivises gov to better infrastructure to decrease transport costs

   3. free movement of labour → remittances

   4. encourages investment

   5. greater political stability

3. Increased bargaining power

Dis:

1. undermines WTO

2. trade is more complicated

3. more unemployment as a result of firms not being able to compete

Diversification adv and dis

• needs higher skilled workers and improved tech

Adv:

1. increased export revenue

2. more stability in export revenue → firms and gov can plan

3. increased employment

4. better standards of living

Dis:

1. low tariffs and low gov revenues on imports

2. gov funding in education

Trade liberalization

Adv:

1. lower costs for raw material imports → more competitive → decrease in inflation

2. increased competition encourages firms to be more efficient

Dis:

1. requires string infrastructure → opp cost

2. protectionist policies from developed countries may harm effects

3. increased need for efficiency may lead to:

   1. greater deregulation

   2. unemployment

Privatization

needs to be:

• transparent

• gov regulated due to the social impacts of monopolization and or effect on employment and worker living standards

Derregulation

Adv:

• decreases costs → more competitive → increased output → increasing FDI

Dis:

• threat to worker safety and environment

Why do MNC invest

1. growing economy and consumers

2. natural resources (comparative advantage)

3. lower costs

4. deregulation

FDI

Adv:

1. fills saving gap (due to poverty)

2. provides employment and training

3. greater R&D

4. multiplier effect due to increased employment (recovery period)

5. gov increased tax revenue

6. injects foreign capital

7. incentivises gov to improve infrastructure

8. ,more choice and lower prices for consumers'

9. more efficient allocation of resources

Dis:

1. may employ low-skill workers and not invest in training

2. too much influence power over policies

3. may transfer profits abroad

4. can harm environment

5. can exploit workers

6. may strip natural resources (tragedy of the commons)

7. may not use appropriate tech and lead to lower employment

• MNC are getting more accountable due to the improved flow of information on social media and boy-coting

Social enterprise

organization that has a specific social objective as a primary goal

Securing Property Rights

Adv:

1. allows greater agricultural investment and efficiency → greater output → attract FDI

2. prevents formation of informal settlements and slums → more affordable urban living areas → secures property for homeowners → can use as collateral for investment

3. empowering women’s rights to property

4. incentivises owners to be sustainable and protect land and environment

5. allows private sector land capital→ collateral for investment → greater employment

6. secures indigenous rights

7. helps displaced people return to homes

Dis:

1. requires funding for gov (housing)

2. no short-term solution

3. can lead to complicated legal situations

Increasing effective tax collection methods

1. strategies to mobilize informal sector to formal

2. imposing higher taxes on high income goods

3. improving tax structure

4. making taxes simpler

5. lower tax rates on high income → incentivises them to pay → offsets tax evasion

Improving access to Banking Methods

1. Micro finance

   1. provision of financial services such as small loans, saving accounts etc for small businesses → protects from unexpected occurrences (weather/ market fluctuations)

2. Mobile phone banking

   1. more accesable banking

Increasing women empowerment methods

1. increasing women education/health

2. safer environments for women (home and workplace)

3. increasing women involvement in decision making

Women empowerment

the process by which women gain power and control over their own lives and acquire the ability to make strategic decisions

Reducing Corruption methods

1. invest in high levels of transparency

2. use of technology where appropriate

3. reform institutions (simpler laws)

4. more cooperation between countries

5. collect data on gender corruption and apply knowledge to develop better gender inclusive policies

6. include women in anti-corrupt decisions

FDI

long-term investment by private multinational enterprises/cooperations

Transfer Payments

Adv:

1. gives the poor immediate income

2. increases the consumption of merit goods

3. improves workforce → efficiency → output

4. short-term solution → long term effects

Dis:

1. opp cost for funding

Minimum wage limitations

1. only moderate effect on poverty

2. ineffective for informal market workers

3. might incentivise firms to lay off workers → unemployment → look for work in informal field

4. firms can get away with not paying workers minimum wage

   1. can be fixed through awareness campaigns to get collective action against firms

   2. targeted labour inspections

Provision of Merit Goods

Adv:

1. improvement of human capital

2. effect on workforce on the long term

Dis:

1. opp cost in funding

2. requires investment in infrastructure

   1. through FdI, foriegn aid and social enterprise

Types of Foreign Aid

1. Humanitarian aid

   1. short term aid due to natural disasters/wars

2. Development Aid

   1. long term aid aimed to improve economic development

Official Development Assistance

Eligibility of aid:

1. provided by official agencies

2. concessional (interest free/soft loans)

3. promote economic development

Concerns:

1. may not be spent on correct sector

2. political bias → country is threatened of being cut off due to change in political beliefs of donor

3. effect of “tied aid” on other developing countries exports

4. long-term aid effect on growth and policy making (overdependence)

   1. country indebtedness

NGO’s Concerns

1. bias due to source of funding

2. inefficiency due to uncoordinated NGOS

3. unaccountable

4. composition of funding on “awareness” bvs the issue

Multilateral Assistance Concerns

1. USA bias

2. sticking to free market strategies which may harm development (unfavourable conditions for loans)

IMF

1. Surveillance

   1. monitors country’s progress and recommends policies

2. Technical assistance

   1. gives free courses on implementing and choosing policies

3. financial assistance

   1. gives out soft loans with conditions

   2. gathers savings from country quotas

Concessional

interest rates below those available on the market or by grace periods, or a combination of these

World Bank

Goals

• End extreme poverty

• Promote shared prosperity

Extends loans and recomendations for policies

Foreign debt

outstanding loans that a country owes to other countries or other countries’ institutions.

International Monetary Fund(IMF)

An international organization created for the purpose of standardizing global financial relations and exchange rates.

Tied aid

A type of aid that the receiving country must spend according to guidelines of the donor country.