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what is a market-oriented strategy?
the use of private sector organisations that use market forces to supply goods and services
what is a free market approach?
it allows firms to provide goods and services that can be exported
what leads to allocative efficiency in the market?
little government intervention, supply and demand determines prices
how do developing economies benefit from market-oriented strategies?
lower wage rates → lower production costs and increased exports
drawback of market-orientated strategies
reduced trade barriers create competition and might lead to job losses due to foreign competition
increasing trade liberalisation
as global demand and supply changes so will imports and exports
if an economy becomes more open to trade then it is likely to see greater export opportunities
this could be achieved through lowering tariffs and quotas
it might also occur if government remove rules and regulations that act as a barrier to trade
if foreign firms feel that it is easy to trade with that country, e.g. removal of bureaucracy economic growth is likely to occur
as these countries see increased trade more investment will be undertaken, increasing the productive capacity of the economy and leading to further growth
what does promoting foreign direct investment (FDI) lead to?
an increase in productive capacity as more firms look to locate in the developing country → can be achieved through relaxing the rules and regulations surrounding the movement of capital, which can move either freely or at very low cost quickly across the globe → increase in FDI
the greater freedom of movement of capital enables businesses to invest outside their country of origin
drawback of promotion of FDI
may lower their own costs of production and improve economic prospects and job opportunities in the invested country
removal of government subsidies
an industry will have to survive in the free market without financial assistance → it may be forced to become more productively and allocatively efficient if it is to survive → will increase international competitiveness and those firms that survive will be able to invest in productive capacity
only those firms that have a market and can make a profit will survive with profit maximisation becoming the main corporate objective → will free up government finances that can be used for elsewhere e.g. infrastructure
what is a floating exchange rate?
one that is set purely by the forces of demand and supply, and free from government intervention
what happens if there is low demand for exports?
the exchange rate is likely to fall → will increase demand as goods and services become cheaper to export
drawback of floating exchange rate?
the economy must be producing goods and services that are attractive to international markets in order for this process to be successful
if this is the case, demand will increase leading to growth
however, increased demand will lead to an appreciation of the
exchange rate so this strategy might only be successful in the short term
what is microfinance?
the supply of financial services to poor people, including credit, savings and insurance
it helps to provide investment for entrepreneurs and small businesses
this is seen as a lifeline to many poor communities in developing countries
what is privatisation?
the transference of assets from the government to privately owned businesses. It leads to monopoly power as most firms privatised operate in markets with barriers to entry such as economies of large scale.
benefits of privatisation
allows firms in developing countries to gain monopoly power and create barriers to entry
greater productive efficiency as profit maximisation → firms to cut average costs → more efficient
allocative efficiency occurs as market forces ensure that goods and services are produced to meet the needs of the consumer, with export-led strategies focusing on foreign markets
government revenue increases by selling off state assets and
expenditure falls as they no longer incur costs for the industry
monopoly power allows the firm to grow in size with the ability to
compete with MNCs, allowing for growth in the economy
drawbacks of privatisation
the government often uses its power to influence the activities of privatised firms
types of market orientated strategies
market orientated approaches
structural change theories
international dependence theories
market orientated approaches
use of private sector organisations that use market forces to supply goods and services
structural change theories
changing the structure of the economy, away from dependency on agriculture and towards the secondary and tertiary sectors of the economy
international dependence theories
the wealthier developed economies exploit the developing countries in terms of resources such as land and labour, requiring a response from the developing country e.g. inward looking theories
what is an interventionist strategy?
occurs when the government intervene in domestic markets.
firms might be subsidised and planning of exporting industries takes place → creates employment in domestic markets but increases government expenditure
drawbacks of interventionist strategies
might be productive inefficiency as firms are protected against decisions that might incur cost reductions due to less competition
corruption can occur as government agents use their position of power to influence which firms receive subsidies and contracts
benefits of development of human capital (skills and qualifications)
there is a close correlation between increased productive capacity and the development of human capital as the workforce improves
educational achievement and the development of cognitive
skills will allow individuals to operate the capital goods
within a country
a highly skilled labour force will lead to increased capacity
utilisation within the economy as the workforce are better
able to use the current capital equipment
leads to physical capital development as human
capital utilise their skills to increase productive capacity
what is an inward looking strategy?
one where there is significant government intervention in the economy and protectionist policies are undertaken
when does import substitution occur?
where government promotes domestic industries, helped by the imposition of tariffs and quotas on imports
simultaneously, there is heavy subsidisation of industries, particularly those where imports had been significant → helps to protect infant industries and creates employment in the economy
drawbacks of protectionism
these strategies can lead to retaliation and reduced market access in terms of exports
what is a managed exchange rate?
aims to gain the advantages of both floating and fixed systems, whilst minimising the disadvantages
why might the government manage the exchange rate?
in order to achieve international competitiveness e.g. a weaker currency will make exports cheaper
what will the government and central bank look to control and why?
the exchange rate in order to make the currency more competitive, e.g. by increasing interest rates to attract hot money
who may invest in infrastructure development?
developing countries
types of infrastructure which may be invested in?
roads
railways
telecommunications
benefits of infrastructure development
helps support domestic firms who will become more productively efficient as their costs will fall
productive capacity of the economy will increase → further
investment opportunities
simultaneously, quality will improve, helping to attract global trade as it becomes easier for foreign economic agents e.g. firms and individuals to trade
might also lead to an increase in FDI as the country will be more likely to be an investment opportunity given that it is easier to do business there
good quality infrastructure is essential if a developing economy is looking to grow
what is a joint venture?
occurs when two or more business agree to act collectively to set up a new business venture with all parties contributing equity to fund the set up and purchase of assets
benefits of promoting joint ventures with global companies
government will be complicit in promoting joint ventures, using its
influence to attract global companies
developing country can use its local presence and local knowledge, helping to develop sales → allows products to be adapted for local needs: ‘glocalisation’ with global products having a local flavour
developing economy businesses that undertake joint ventures will be transferring technology and skills that will help the economy develop in the longer term
this strategy will hopefully lead to long run economic growth as these firms can increase the productive capacity of the economy
what is a buffer stock?
occurs when the government store agricultural products and commodities in order to maintain stable prices in a market
this is common in agricultural markets where supply can be
severely affected by weather conditions.
what is a buffer stock scheme?
removes uncertainty from the market.
farmers in developing economies can plan investment with the
certainty of demand for their product → farmers will stay in business even in poor market conditions.
this certainty allows the industry to grow and compete in the domestic and global market.
how does the government use buffer stock schemes?
the government keep stock in reserve in order to maintain market
equilibrium and guarantee farmers a minimum price for their produce
the government set a target price of P where output is Q.
if there is a decrease in supply e.g. due to a poor harvest the supply curve will shift to S1.
the government will release some of its buffer stock and increase supply back to its original equilibrium at PQ.
if there is a bumper harvest supply will increase to S2. The government will buy up stock in order to increase price.
again, the market returns to equilibrium at PQ.
buffer stock schemes
Price in commodity markets, especially for agricultural
products/ produce, can be very unstable.
Buffer stock schemes aim to stabilise prices and prevent shortages in supply. They can only work for storable commodities- e.g. wheat, rice, soya beans etc.
A maximum price (price ceiling) and minimum price (price floor) for a commodity are set by a government.
When the market price for a product goes below the price
floor, the government buys it and stores it in stockpiles.
Demand is increased and the price is brought up to an
acceptable level.
When the market price goes above the price ceiling, the
government sells the product from its stockpiles. Supply is
increased and the price is brought down to an acceptable levels.
buffer stock schemes
e.g, the quantity supplied (Q1) in a good year (when levels
of production have been high) is shown by the supply curve S1, so
its market price would be P1.
this price is below the minimum price, so to prevent price falling,
the government would purchase a quantity of Q3 to Q1 of the good at the set minimum price. Supply would be reduced and the market price would rise to the set minimum price.
the goods bought by the government would be added to its
stockpile.
the quantity supplied (Q2) in a poor year is shown by the supply
curve S2. The market price would be P2
the government would sell Q2 to Q4 from stockpile, at the set
maximum price. Supply is increased and market price would fall to
the set maximum price.
if the market price is between the set minimum and maximum
price, no action is taken
what is industrialisation?
occurs when an economy moves from the primary to the secondary sector
the move away from agriculture is seen as key for economic growth in developing countries
investment in capital goods is essential → will increase the productive capacity of the
economy and create the conditions for growth
Walt Rostow’s five stages of industrialisation
Traditional society – subsistence economy
Transition – creating surpluses for exports and developing an
infrastructure
Take off – urbanisation and the growth of the secondary sector
Drive to maturity – diversification and investment
High mass consumption – increased consumerism and size of the service sector
the lewis model (industrialisation)
believed that economies were made up of two sectors:
rural or agricultural
urban or industrial
most less developed countries began as rural economies
Lewis suggested that the marginal productivity of labour was close to zero and there was therefore no point in adding additional labour to the agricultural workforce
in contrast, the industrial workforce had a higher marginal productivity of labour.
transferring labour from the agricultural to industrial sector
therefore improved productivity in the economy as a whole → industrialisation of an economy and higher profits, which provide the finance for further investment in capital → increased productive capacity and future economic growth
development of tourism and primary industries
an outward looking strategy promotes trade with other
countries and relies less on government intervention
often, this is based on tourism, making use of the natural
beauty and elements of the country
countries might also develop primary industries e.g. agriculture, benefitting from the natural resources that they are supplied with
countries that have adopted this approach have seen greater growth and development than those that follow inward looking strategies
they have benefitted from free trade and increased access
to markets
drawbacks of development of tourism and primary industries
the global recession impacted heavily on some of these economies
what are fairtrade schemes?
look to pay decent prices and ensure good working conditions for support farmers and workers in developing countries (an unjust movement that just serves the rich)
benefits of fairtrade schemes
they produce a range of ethical products that allow consumers greater choice
drawbacks of fairtrade schemes
producers have to pay for fair trade certification and this prohibits the majority of poor farmers from joining the scheme
how can overseas aid help growth and development?
provides capital for investment as the savings gap means that there is a lack of capital available for borrowing
investment e.g. infrastructure and factories will help to improve productive capacity
investment in human capital can provide the skills required for the workforce to contribute to productive capacity in the future
drawbacks of aid
poor distribution of aid can see corrupt individuals and
organisations benefitting instead of those who need it
domestic producers can be ‘crowded out’ as aid e.g. food increases supply and lowers price in the market → dependency on aid as domestic producers cannot survive
aid is linked to free market reforms which can cause unemployment and social tension
how can debt relief help growth and development?
it allows a country to spend on education and other merit goods rather than servicing debt
it can stop countries getting further into debt rather than making progress in repaying it
drawbacks of debt relief
it can lead to poor financial discipline as countries are rewarded for getting into financial trouble whilst those who have controlled their spending do not receive help
debt relief is normally tied to certain conditions that a country will have to fulfil if they are to receive help e.g. committing money to healthcare and free market reforms
what does the world bank do?
provides finance and other assistance, e.g. expertise to developing countries
what forms of finance and assistance does the world bank provide?
low interest loans, credit and grants
investment in education, health infrastructure and an array of other areas that benefit social welfare
what two specific goals has the world bank set to achieve by 2030?
to end extreme poverty, limiting the number of people who survive on $1.90 a day to 3% of the population
promoting shared prosperity by supporting income growth for the bottom 40% of people in all countries
what is the international monetary fund (IMF)?
comprised of 189 member countries that looks to promote monetary cooperation, e.g. exchange rates and international payments and to facilitate trade globally
what is a key area of the IMF?
helping macroeconomic stability in developing countries → helps promote economic growth and reduction of poverty
what are the types of non-governmental development organisations which exist to help development?
OXFAM
ACORD
are these non-governmental development organisations funded by the government?
no, these are self-funding, relying on donations in order to carry out their work
what do these non-governmental development organisations do?
they provide a range of services including humanitarian relief, support for communities and financial assistance
they are part of the Third Sector – neither public or private and generally operate to improve the social welfare of all, particularly those in poverty or with greater needs.
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