Economic growth and development strategies

trade strategies

• increasing international trade helps increase economic growth and development

• most important strategies:

  • import substitution

  • export promotion

  • economic integration

import substitution

• aims to increase domestic production by moving consumers away from imports, by using tariffs or quotas to increase import prices

• pros:

  • less dependence on imports

  • supports local firms

  • may increase employment

• cons:

  • higher prices and less choice for consumers

  • possible retaliation from other countries

  • distorts efficient allocation of resources, more inefficient domestic firms increase production

  • raises costs for firms who use the imported good as raw material

export promotion

• aims to promote development by expanding exports through supply side policies, export subsidies, other measures

• pros:

  • greater output generates more employment

  • increases international competitiveness

• cons:

  • loss in efficiency of resource allocation, more resources allocated to inefficient domestic producers

  • opportunity cost to government for supporting firms

economic integration

• countries become interdependent by signing an agreement which decreases trade barriers

• pros:

  • decreases prices and increases choice

  • access to wider range of tech

  • more political cooperation between countries

  • high efficiency in global allocation of resources

  • expands markets for domestic firms

• cons:

  • some loss of national sovereignty may occur

  • some integration requires common barriers to be imposed on third-party nations, limiting other opportunities for increasing trade

increasing diversification

• occurs when country is able to increase the number of products that it offers for export

• pros:

  • reduces problems associated with overspecialisation e.g price volatility

  • creates new employment

  • reduces risk, if one product fails others may succeed

• cons:

  • firms may fail to compete as global competitors are well established

  • takes time and money for creation of new industries

social enterprise

• encouraging for-profit businesses that focus on meeting specific social or environmental objectives through subsidies, tax breaks

• pros:

  • raises motivation, productivity and output

  • can create new employment opportunities

  • raises income within communities

• cons:

  • these ventures tend to be small and very localised

  • can be difficult for them to compete internationally

market based policies

• create conditions for private individuals and firms to pursue an economic activity with the aim of maximising profit and output

• market based strategies to increase growth and development:

  • trade liberalisation

  • privatisation

  • deregulation

trade liberalisation

• removing barriers to to trade

• pros:

  • increased choice for consumers and decreased prices

  • competition encourages harder work leading to innovation and better quality of goods

  • improves efficiency in global allocation of resources

• cons:

  • some firms may not be able to compete at the global level, leading to unemployment

  • less support for domestic industries

  • less government revenue (from tariffs) that can be reinvested into the economy

privitisation

• encourages new firms to enter market and compete with gov firms, increasing total supply in economy

• pros:

  • increases competition leading to increase in output, employment and incomes

  • private firms may be more efficient than gov firms

  • competition results in cheaper prices for consumers

• cons:

  • government assets are often sold cheaply at prices below fair market value - hard to compete

  • quality of services may deteriorate as private firms focus on profit maximisation

  • unemployment may increase as private firms may cut wages to maximise profits

deregulation

• removing gov controls/laws from markets to increase competition

• pros:

  • deregulation decreases COP for firms, resulting in greater supply

  • less regulation results in more innovation and more enterprise in economy

• cons:

  • may create environment of corruption leading to inefficiency

  • increases quantity of negative externalities

interventionist strategies

• put in place by governments to correct failings of free market to promote welfare/development of its citizens

• main strats:

  • tax policies

  • transfer payments

  • minimum wage

tax policies

• progressive tax system redistributes from those with higher to those with lower income and reduces tax inequality

• pros :

  • reduces disposable income for high income earners, redistributing income from those with higher to those with lower, reducing income inequality (barrier to development)

    • addresses SDG 10 of reducing inequality within countries

  • redistribution often starts with provision of free education and healthcare

  • many govs use tax revenues to provide financial support to poorer households e.g disability payments, heating subsidies

  cons:

  • discourages rich people from working as hard as large proportion of their income goes towards taxes, reducing overall productivity and growth

  • higher income individuals may participate in tax evasion affecting overall revenue generated

transfer payments

• cash transfers usually given to the poorest and most vulnerable people in society, include unemployment, disability payments

• pros:

  • poorest households are supported

  • money received from payments generates consumption in economy, increasing economic growth

  • help improve access to healthcare and education, resulting in increased human capital

• cons:

  • poorer countries have less money available to support the poor, cannot be fully implemented in the short term

  • opportunity cost for gov associated with each payment

  • sometimes politically unpopular as may disincentivise hard work

minimum wage

• set above free market rate, firms aren’t allowed to pay less than the legal rate

• pros:

  • workers receive higher wages, more disposable income

  • consumption increases, increasing AD

  • SOL increases w/ higher income

• cons:

  • COP increases for firms, leading to less international competitiveness

  • higher COP may lead to less output, meaning increased unemployment

merit goods

• goods beneficial to society but under-provided in a market

• gov often has to subsidise them in order to lower the price/increase the provision

• they result in significant improvements to human development and SOL

• strategies:

  • education programs

  • health programs

  • infrastructure projects

education programs

• include primary/secondary/tertiary education which is free at the point of consumption but is paid for through tax revenue

• targets SDG 4

• pros:

  • education helps break the poverty trap by increasing human capital

  • increased human capital resulting in higher productivity and output

  • higher output improves wages which improves SOL

  • higher wages may lead to more consumption thus an increase in AD

  • social benefits like political stability, better quality of life, lower crime rate

• cons:

  • education programs take a long time before there’s an increase in productivity

  • opportunity cost associated with provision

  • education still may be under consumed in developing nations as children are required to work for the family

health programs

• range from emergency only healthcare to full healthcare which are free at the point of consumption but paid for through tax revenue

• targets SDG 3

• pros:

  • universal access to vaccinations can improve life expectancy and productivity significantly

  • improved health helps break poverty trap

• cons:

  • healthcare interventions require government expenditure so carry an opportunity cost

  • how much health care should be provided is a normative issue and subject to political pressure

infrastructure projects

• infrastructure (capital stock in an economy that helps facilitate economic activity) including energy, transport

• pros:

  • can play direct role in improving the health and living standards

  • lowers COP for firms and increases productivity

  • telecommunications increase efficiency

  • transport increases employment opportunities

• cons:

  • each project requires significant gov spending thus carries opportunity cost

  • may take long time to complete

  • subject to political pressure and lobbying

inward foreign direct investment (FDI)

• inward FDI occurs when investment by foreign firms results in more than a 10% share of ownership of domestic firms

  • a firm that undertakes FDI is and a multinational corporation (MNC)

• FDI has potential to generate significant economic growth as more economic activity, employment and output is generated

• also has potential to raise household income, helping break the poverty cycle

• impact of FDI on economic growth depends on how it occurs

evaluation of FDI

• pros:

  • MNCs can help offset a current account deficit as investment funds from abroad appear as credits in the financial account

  • MNCs can improve upon local technical, management skills and technology, by bringing in expertise as well as new technologies which can be learned and adopted by local labour force

  • helps generate extra national income, which can help increase level of savings, helping increase funds available for domestic investment

  • MNCs can help increase local employment and help lower unemployment by hiring local workers

  • government may receive higher tax revenue generated by increased profits from the MNCs

  • increased levels of investment, improved technology and increases in human capital, aswell as greater tax revenues all may lead to higher economic growth in host country, with increased possibility to pursue development objectives

• cons:

  • weak local regulations often exploited leading to poor working conditions (e.g low wages) and increased negative externalities of prod

  • MNCs often hire personnel from their own country for management roles, and only employ local unskilled labour for manual tasks

    •  meaning workers don’t develop many skills from the role

  • multinational firms often pay very little tax to host nations because they enjoy many tax privileges, lowering the amount of tax paid.

    • tax benefits are offered as incentive to attract MNCs into the host country

  • local firms may struggle to compete with multinational firms now based in their country and go out of business

  • MNCs have exceptional political and economic power which they use to influence host govs to act in their own interests, but against economic development

    • MNCs are interested in investing in nations with weak labour protection laws (to lower COP) and weak environmental regulations (to avoid associated costs)

foreign aid

• the transfer of funds/goods to developing countries to improve their economic, social or political conditions

• who offers foreign aid:

  • ODA (official development assistance)

  • NGOs (non gov orgs)

• types of foreign aid:

  • humanitarian aid

    • food aid, medical aid

  • development aid

    • project aid

    • debt relief

humanitarian aid

• aid extended in regions where there are emergencies caused by violent conflicts or natural disasters

• intended to save lives and ensure access to basic necessities (food, medical)

development aid

• intended to help developing countries achieve their economic growth and development objectives

• may involve financial support for specific projects, e.g infrastructure, education, healthcare

debt relief

• many developing nations have borrowed significant sums of money in the past which have to be repaid over a long period of time

• opportunity cost of these repayments is significant

• recently there has been significant progress in writing off the entire debt of the most heavily indebted poor countries (HIPC) so they can focus on building their economies

• pros:

  • actual repayment of debt is removed or reduced

  • opportunity cost of debt repayment is reduced or eliminated

  • gov is able to use the money saved to provide new services and additional public/merit goods

• cons:

  • country may have a lot more funds available than ever before, can breed corruption

  • once debt is forgiven, many developing nations borrow more money and cycle restarts

ODA

• ODA funding for the development of a country provided by another country’s government.

• ODA is all public, all comes from government funds

• most common forms are of providing it are grants (don’t need repayment) and soft loans (need repayment but lower interest rate)

• can be bilateral (funds go directly from donor gov to recipient gov) or multilateral (going from donor gov to international org which transfer funds to developing country gov)

evaluation of ODA

• pros:

  • aid the poverty cycle. foreign aid provides the missing funds for necessary investments in healthcare, education and infrastructure aswell as savings

  • focuses on the most disadvantaged groups in society so helps contribute to improved income distribution

  • increases investment and consumption levels so leads to economic growth

  • helps LEDCs achieve the SDGs

• cons:

  • tied aid, donors make the recipients of aid spend all/ a portion of the funds to buy goods from the donor country

  • conditional aid, donors of ODA impose conditions that must be met by the recipient e.g the elimination of trade barriers

  • aid resources may substitute domestic resources instead of supplementing them, recipients may not make enough effort to increase domestic revenues through taxation

  • corruption may occur, where aid funds are diverted from their true purpose

NGOs

• voluntary organisation which do not aim to make a profit but to meet a need or provide a service

• their aid often comes with fewer conditions than ODA

• pros:

  • can elicit support for particular need from a very wide audience including the global public and wealthy governments

  • work very closely with communities of poor people and help them emerge from poverty

  • recruit experts in a variety of areas who provide in country support, improving the efficiency of their aid

  • are innovative in their solutions to specific problems as opposed to govs which usually take a uniform approach

• cons:

  • many NGOS are too small and weak to play an important role. limited resources and skilled personnel

  • country receiving the aid can become overly dependent on it

multilateral development assistance

• financial support delivered through international institutions

• MDA takes the form of non concessionary loans (incurs interest and repayment periods determined by the market

• main providers:

  • World Bank

  • International Monetary Fund (IMF)

World Bank

• founded in 1944 to fund postwar redevelopment

• provide reconstruction loans to countries devastated by war

• provide loans to developing countries to aid economic growth and development

• provide loans to countries to assist with infrastructure

• supports FDI

evaluation of World Bank

• social and environmental concerns

  • has been criticised for implementing socially unsound and environmentally unsustainable projects. now they are aware and do better

• conditional assistance

  • imposition of conditions that must be met by recipients to qualify for a loan

  • problematic as it deprives countries of control over their economic activities

• inadequate attention to poverty alleviation - not enough funds allocated for loans intended to meet needed investments in education, healthcare and infrastructure

IMF

• founded in 1944 with the aim of establishing a stable global financial system that could help with post-war reconstruction efforts

• oversee/monitor the stability of the international monetary system

• lend money to help members with balance of payments problems

• loans provided by IMF come with a package of policies the recipient must adopt (stabilisation policies). these include:

  • tight monetary policy - increase in interest rates, lower AD, reduce economic activity and reduce demand for imports while encouraging exports

  • cuts in real wages to reduce AD and level of economic activity

  • currency depreciation to discourage imports and promote exports helping balance of payments

  • trade liberalisation policies to promote free trade

evaluation of IMF

• highly negative impact due to stabilisation policies:

  • cuts in real wages where wages are low to begin with reduces SOL

  • cuts in gov spending on merit goods and food subsidies where many poor people depend on for survival

  • increase in poverty due to trade liberalisation

institutional change

• sound institutions, free from corruption help a country to progress in human development

• types:

  • improved access to banking

    • making it easier to borrow money which can be used for investment or to generate growth

    • achieved through microfinance (making it easier to take out small loans) and mobile banking

  • increasing women’s empowerment

    • reducing gender inequality represents increased economic efficiency for an economy

  • reducing corruption

    • corruption reduces investment, limits growth

    • also reduces confidence, decreasing FDI and assistance, hindering development

  • land & property rights

    • making owning land and assets easier increases investment and helps households generate income

market orientated for achieving growth and development

• market orientated aim to reduce gov intervention and up private-sector economic activity so that real GDP rises

• as rGDP increases, the potential to break the poverty cycle increases, leading to better economic development in a nation

evaluation of market orientated approaches

• pros:

  • competitiveness

    • the more competitive the environment, the more investment (due to lower costs) and the more innovation, leading to better quality of goods

  • efficiency

    • allows market forces to drive allocation of resources, leading to more efficiency

  • trade liberalisation

    • removing trade barriers increases competition, and efficiency, leading to economic growth, decreased prices and higher quality for consumers, aswell as more choice

  • increased FDI

    • MNCs prefer to invest in economies where the markets are more open and less regulated, which market based strats promote

• cons

  • increased market failure

    • less gov intervention means an increase in negative externalities of production and consumption

  • increased inequality

    • loss of worker protection from labour-market reforms.

    • increased unemployment resulting from some policies that aim to increase competition

evaluation of interventionist policies

• pros

  • infrastructure

    • energy, transport, health infrastructure improves SOL

  • investment in human capital

    • education increases skills leading to higher productivity

  • provision of social welfare

    • support for the most vulnerable groups in society helps raise SOL

  • stable economic growth

    • government intervention can even out business cycle swings

  • reduction in income inequality

    • government able to regulate disparity between rich and poor through policies e.g progressive taxation

  • institutional systems

    • strong institutions (police, defence) can be used to deal w/ national emergencies quickly

• cons

  • corruption

    • large amounts of money generated through taxation can lead to misuse of government funds

  • heavy associated opportunity costs

  • powerful business people or large corporations can build strong relationships with governments that they end up influencing their decisions