Other strategies (Externally provided solutions)

A country appeals to other countries / international organisations to give assistance

Industrialisation (switch to another stage of production): The Lewis model

1) If a country has too much labour in primary production (ie. for agriculture) & not enough labour in manufacturing

2) given farmers higher pay

3) incentivise workers (ie. farmers) to become factory workers = switch resources to manufacturing

4) efficient allocation of resources (labour) for both sectors where both have equal number of resources (ie. labour)

5) production in primary production stay same but production in manufacturing industry increases

6) Since higher production in manufacturing industry caused by more quantity of labour → LRAS increases → total GDP increases

6) higher production in manufacturing industry → more profit in manufacturing industry → reinvestment in capital goods → quantity & quality of capital goods increased → LRAS increases → total GDP increases

Assumptions of Lewis Model (can use as EVAL)

Assumptions:

• too much labour in primary & not enough in manufacturing - but may not be the case

• higher pay in manufacturing industry at a level where entrepreneurs can eventually make profit - EVAL: wages increases → cost of production increases → profit decreases

• profit used for investment in capital goods

  • if firms owned by MNC’s, profit leave country → less profit for reinvestment in capital goods

  • if invest in capital goods → can replace some workers

Costs:

• If every developing country follow this model → increase in production → increase in demand for raw materials (ie. oil, labour) → demand of labour graph / normal demand curve shows a higher wage rate for labour / higher price → increase in cost of production → SRAS decreases → price level increases + profit decreases → to preserve profit levels, manufacturing firms increase price charge on consumers → price of manufactured good may increase due to cost-push inflation

Development of tourism

If tourism increases - can lead to development / economic growth

• Increase foreign currency to the country: since LDC country’s currency not really accepted by other countries → cannot buy imports → need to use foreign currency to buy imports → therefore, can now buy imported capital goods

• way of moving away from primary product dependency → focus on making money / growth from tourism instead → since prices of primary goods (commodity) are volatile, income not stable → now more stable as income comes from more than 1 source

• workers earn more wages - AD

• opportunity for partnerships with MNCs - FDI increases - FDI chain of reasoning

Disadvantages:

• more exposed to global shocks - external shock chain of reasoning

• needs lots of infrastructure investment (ie. hotels, airports)

Development of primary industries

Primary industries = produce natural resources / food

If development of primary industries increases - development & economic growth

1) Specialise in what natural resources they have

2) increase production of raw materials / food

3) more sold so export earnings increases

4) increase foreign currency to buy capital goods

5) investment increases

2) increase production of raw materials / food

3) support domestic industries

4) more production

5) more revenue…workers

EVAL:

Might not be as efficient in producing these raw materials as other countries (ie. Venezuela & Saudi Arabia) → less competitive → higher costs…

Commodity prices fluctuate a lot as the price depends on economic cycle / financial speculation / state of world economy

• if prices fall → export earnings decreases

Ability to add value = countries use raw materials to produce something with higher value exports - more profits

• however, need capital, skilled labour & government support which LDC lacks

Fairtrade schemes

Fairtrade schemes increases - profit for farmers increases

• MNCs dominate food distribution = fewer buyers to buy farmer’s products = monopsony power = farmers have less income/less profit…

• But with fairtrade schemes, guarantees higher prices the buyers have to buy from farmers = higher incomes/profit…

Disadvantages

• cost of joining fairtrade agreement high

  • farmers have to pau membership

  • have to pay higher wages to workers

  • use sustainable/organic methods (ie. no fertilisers - less efficient - increase costs)

• organic / fairtrade goods have elastic demand (YED more than 1)

  • seen as luxury goods

    • therefore, in global recession , income falls, consumers cannot afford to buy fairtrade / organic products - compared to factory-farmed where demand is inelastic

Aid

= when transfer resources voluntarily from one country to another

2 types:

Development Aid

• grants (country doesn’t need to pay back but may need to do a favour in return)

• Loans at reduced interest rate

• Technical assistance (skills, knowledge)

1) more funding for investment in key areas

2) ie. infrastructure, education, healthcare

3) improve productivity of labour / standard of living…

EVAL:

• multilateral aid = aid given to an agency (EU / World Bank / UN) - they distribute it (approx. £3.6 billion UK total)

  • takes longer - not be used when it’s most needed - delays development

• if Tied, = aid with conditions (ie. if donor country can mine oil/raw materials for them)

  • takes longer - not be used when it’s more needed - delays development

• Loans must be repaid

  • although interest low - still debt - government must repay in future - opportunity cost, less money available for development spending in LR

• dependency

  • rely on aid instead of developing on their own - reduces incentives to improve productivity

Humanitarian Aid (when there’s natural disasters, wars)

• food

• medical supplies

• emergency relief (ie. rescuers)

Debt relief