4.3.3 Strategies influencing growth and development

What are market-oriented strategies? How they influence growth/development?

• Market-oriented strategies focus on the role of markets, private sector activity, and market-based mechanisms to drive economic growth and development

• Allows market forces to allocate resources, promote competition, and drive innovation

Advantages of market-oriented strategies to growth/development

1. Trade liberalisation

• Less trade barriers, such as tariffs and quotas - promotes the export of domestic goods and promotes competition, forcing domestic markets to be as efficient as international competition - more export-led growth

• Resources are allocated to their best use, where the country has a comparative advantage - allocative efficiency

• Also lower prices for consumers due to EoS and specialisation of countries

• (E.g. Singapore, South Korea, Hong Kong have benefitted)

2. Promotion of FDI

• A private sector firm invests into another private sector firm in another country - firms tend to invest in developing countries due to lower production costs and they can access a new market (e.g. Samsung’s investment in Vietnam, created a large supply chain)

• It creates more jobs and labour productivity increases and wages are often higher - leading to multiplier effect and helps fill savings gap

• Transfer of knowledge and technology from one country to another, increases productivity and innovation

3. Removal of government subsidies

• Subsidies can lead to inefficiencies, as producers of essential goods, like food and fuel, become over-reliant in the long run and growth/development stagnates - therefore, removing them encourages efficiencies (allocative/productive) in order to remain competitive

• Subsidies on basic goods, like rice, benefit everyone not just the poor, making them ineffective - removing them lowers government spending opportunity cost

4. Floating exchange rates

• Market forces determine value of currency, so country does not have to worry about holding foreign currency reserves

• Forces export-based firms to be efficient, as exchange rates cannot be used to make exports artificially cheaper

5. Microfinance schemes

• Aim to provide the poor and near-poor households permanent access to a range of financial services (e.g. loans, savings, insurance) - small loans are offered with little to no collateral, as long as present loans are repaid fully and promptly

• Allows borrowers to invest in their businesses and start up new ones - also targets minority groups (e.g. women)

6. Privatisation

• Firms no longer backed by the state, forced to be more efficient by increasing competition

• Selling of firm, especially if it’s loss making, improves government finances and reduces debt levels

Disadvantages of market-oriented strategies to growth/development

1. Trade liberalisation

• Less tax revenue for government from reduced tariffs

• Increased structural unemployment in industries lost to specialisation - may increase relative poverty/inequality in those industries

• Exploitation of environment and increased pollution

2. Promotion of FDI

• TNCs set up in developing countries repatriate most of their profits and often exploit their resources - offering lower wages and poor working conditions to workers, while natural resources are depleted leading to environmental damage

• The developing country also loses some sovereignty and local workers are left with low-skilled jobs, as best jobs go to imported labour

3. Removal of government subsidies

• Absolute poverty increases and minimum standard of living falls - as poor households are affected most by higher prices

• Removing subsidies is politically unpopular for governments - best time to do it is when free market prices are falling

4. Floating exchange rates

• Currency becomes volatile, making it difficult for exporters/importers to make decisions as pricing keep fluctuating

5. Microfinance schemes

• May become a method of financing consumption spending and unemployment (rather than investment) as people become over-reliant on service - therefore, they do not have the funds to repay their loans on time, leading to a spiral of taking out loans (e.g. shown by South Africa)

• Investments may not also be successful or sustainable anyway

6. Privatisation

• If the firm privatised is a monopoly, there will be no competition, so still inefficient (e.g. Thames water)

• Also can be associated with corruption, where politicians/officials sell the company below market price to family/friends

What are interventionist strategies? How they influence growth/development?

• Government policies and actions aimed at actively influencing and shaping the economic activities and outcomes in developing countries

• Government directly intervening to drive economic growth and development

Advantages of interventionist strategies to growth/development

1. Development of human capital

• Provides workers with skills and training, making them more efficient, which increases productivity - this can also be done through schools or vocational training during education (e.g. China and South Korea)

• Higher skilled workforce allows the country to move into the manufacturing sector from primary sector - overcoming primary product dependency

• Workers also have more job opportunities and may see wage increases - as occupational mobility is overcome, improving quality of life

2. Protectionism (e.g. tariffs, quotas, non-tariff barriers)

• Protects domestic infant industries from foreign competition, allowing them to grow and develop before becoming competitive

• Creates more domestic jobs in the short run, while industry develops and then barriers are removed

• Encourages import substitution, where imported goods are deliberately attempted to be replaced by domestic goods

• Also prevents dumping, protecting domestic industries (e.g. China’s tariffs on steel tube imports from EU and Japan)

3. Managed exchange rates

• When a country’s exchanged rate is fixed, it reduces volatility and creates certainty, encouraging FDI

• Currency can also be fixed against different exchange rates - higher rates for imports of essential/commodity goods and lower rates for other imports, which means essentials, like food and oil, are cheaper and other goods more expensive - creating import substitution effect (lower rates also makes exports more competitive)

4. Infrastructure development

• Government provides systems like roads, airports, railways, schools, etc. in an interventionist system

• Allows for more trade, resource mobility, geographical mobility, etc.

5. Promoting join ventures with global companies

• The government insists that firms setting up in their country have to find a local firm to create a jointly owned company with

• This prevents the exploitation of the country from FDI, and ensures some profits generated are retained for things like investment

6. Buffer stock schemes (e.g. Ghana and Ivory Coast buffer stock scheme for coca in 2017 due to low prices)

• Government imposes maximum and minimum prices for commodities where the prices are volatile - buying up stocks when there is excess supply and selling them when there is excess demand

• This is self-financing, as money raised from selling can be used to buy next stocks, it also stabilises prices encouraging long-term investment and prevents sharp falls in prices causing producers to fall into absolute poverty

Disadvantages of interventionist strategies to growth/development

1. Development of human capital

• More government spending leads to an opportunity cost and more fiscal burden

2. Protectionism

• Countries lose out from benefits of specialisation and comparative advantage - could lead to domestic producers being inefficient

• Could lead to countries retaliating (e.g. trade war between US and China or US 10% increase on tariffs)

3. Managed exchange rates

• Tiered exchange rates often fail to work and black markets and corruption occurs

• Speculation may mean countries find it difficult to maintain an exchange rate long term

4. Infrastructure development

• Government may not have the funds and would lead to an opportunity cost - also tend to be inefficient

• Often associated with bribery and corruption and can lead to environmental damage

• Increased state spending and borrowing can lead to crowding out effect, stifling competition and innovation

5. Promoting joint ventures with global companies

• Discourages FDI from investing at all

6. Buffer stock scheme

• If minimum prices are set too high, it encourages producers to become inefficient, as they can produce as much as they like and still be able to sell it, so government has to continually buy up the stocks

• Storing stocks after purchase costs a lot and may be hard to finance long term

Other strategies influencing growth/development

1. Industrialisation - Lewis Model

• The model suggests that in developing countries with both agricultural and an industrial sectors, the workers in agriculture are in surplus - therefore, have low wages, low/zero marginal productivity, underemployment, etc.

• By offering higher wages in the industrial sector, it attracts more workers from rural areas, and since labour productivity in agricultural areas are so low, there would be little to no effect on output - whereas, workers marginal revenue productivity increases

• Industrial workers now earn higher incomes and thus more savings for investment (reducing savings gap)

• (E.g. China in 1980-2010s, migration of millions to urban manufacturing jobs)

2. Development of tourism

• Some countries can take advantage of their geography to attract tourism (e.g. Caribbean) - as it is a luxury good, when global economy grows, demand increases even further - also more diversification and less primary product dependency

• Tourists are a source of foreign currency, which helps fill foreign currency gap - more profits and TNC and foreign investments leads to multiplier and accelerator effect and improvements in infrastructure

• Jobs are created which could also lead to higher tax revenues for government

3. Development of primary industries

• Countries like Saudi Arabia, Norway and Australia developed from natural resources - using these funds they diversified and increased investments - government also has more funds to develop infrastructure and education

4. Fair trade schemes

• Ensures supplier is protected from monopsony power, ensuring fair prices through minimum prices - gives stability and higher incomes - also allows smaller producers to access higher-income consumer markets, increasing profits

• Also work to stop child labour and ensure production is sustainable and not at the expense of the environment

5. Aid

• When a country transfers money to another country without expected financial return (e.g. Egypt, Afghanistan, Vietnam are big recipients, whilst EU and US are large donors)

• Helps fill savings gap (Harrod-Domar), providing funds for investment in things like infrastructure and human capital, boosting productivity - can also fill foreign currency gaps

• Helps reduce absolute poverty, especially for emergency relief (e.g. during wars or natural disasters)

6. Debt relief

• Countries owed write off debt on loans from poorer developing countries as it limits their growth and is relatively insignificant

• Allows developing countries to spend more money on services and infrastructure

Disadvantages of other strategies

1. Industrialisation (Lewis Model)

• Higher wages and profits do not mean higher savings and investment

• Over-migration can lead to urban poverty, as not enough jobs for everyone migrated

• For some parts of the year, during harvest large amount of labour is required which may be lost

• Improvements in technology can actually displace industrial jobs in the long run, increasing unemployment

2. Development of tourism

• Since it is a luxury good, when economy slumps, tourism industry suffers as demand falls - it is also seasonal dependent

• TNCs take their profits and move it out of country, leading to issue like capital flight

• Large number of externalities - including pollution, waste, environmental degradation (e.g. coral reef Australia)

3. Development of primary industries

• Can lead to primary product dependency and primary products are price volatile - also suffer from corruption

4. Fair trade schemes

• Only benefits fair trade producers but non-fair trade producers see a fall in demand for their goods

• Higher incomes from minimum prices also reduces incentive to diversify and farmers remain engaged in low profit activities

5. Aid

• Could create a dependency culture and a lack of awareness for a country’s own finances

• Corruption could mean that money from aid does not go to where it is intended to (e.g. to political elites)

• Hard to determine best place to spend the aid to maximise development

6. Debt relief

• Creates a moral hazard - if one country gets debt relief, other countries also expect it now

Role of World Bank

• Aims to bring about long-term development and a reduction in global poverty

• Has funded over 12,000 development projects since 1947 through things like interest free loans and grants

Role of International Monetary Fund (IMF)

• Ensures that exchange rate systems work well

Role of NGOs

• Non-profit organisations that are independent from the government

• Provide direct assistance to countries in the form of project work (E.g. Oxfam, looks to alleviate poverty, promote social and economic justice, and advocate for better living standards across Africa)

• Tend to focus on areas of environmental development, community development and human rights