4.3.3 Strategies Influencing Growth and Development

• Types of Interventionist Strategies


  -Protectionism

  -Buffer stock schemes

  -Development of human capital

  -Managed exchange rates

  -Infrastructure development

  -Granting property rights
• Types of Market-Based Strategies

  -Trade liberalisation

  -Promotion of FDI

  -Floating exchange rate systems

  -Microfinance

  -Privatisation

  -Removal of government subsidies
• Other Strategies

  -Industrialisation

  -Fairtrade schemes

  -Aid

  -Debt relief

  -Development of tourism

  -Development of primary industries
• Buffer Stock Schemes


  The government buys excess stock when supply is above a certain limit and releases it when supply is below a certain limit to keep the price of commodities in a particular range

  
• Evaluation of Buffer Stocks

  This may incentivise overproduction which increases the opportunity cost of the scheme for the government, perishable goods cannot be stored and several bad harvest will deplete the stock
• Protectionism


  Infant industries can be protected by introducing tariff and non-tariff barriers which makes them more domestically competitive and reduces imports leading to an increase in real GDP
• Evaluation of Protectionism

  Decreased competition for domestic firms may lead to increased inefficiency as they become reliant on subsidies or have less of an incentive to lower production costs. There is also a risk of retaliation and a trade war which reduces demand for exports.
• Granting Property Rights


  This allows consumers to use their assets as collateral to receive loans so they can invest in their businesses increase their incomes and begin saving and spending more which shrinks the savings gap and increases real GDP
• Evaluation of Property Rights


  People may be afraid to use their assets as collateral and having property rights may not change the likelihood of them borrowing as de Soto originally thought
• Development of Human Capital


  Increased spending on training teachers, building schools and sex education helps to improve the quality and quantity of education and thus the quality of human capital improves as more people enrol in school and fewer women leave school to have children.
• Evaluation of Development of Human Capital


  The increase in productivity may be insignificant so the rise in incomes will not reflect the rise in spending, there is a significant time lag involved and religious or cultural beliefs impact the effectiveness of sex education
• Microfinance


  Microfinance increases access to small loans so investment, productivity, growth and profits increase thus the government earns more corporation tax revenue which can be spent on development
• Evaluation of Microfinance


  In 2016, $102bn of microfinance was given to small firms globally, however, it has high interest rates which makes it inaccessible to most people who may sell assets or borrow from family instead
• Infrastructure Development

  Countries can attract FDI to fund infrastructure development e.g. India received $31bn in 2015 by reducing corporation tax and wage costs. This allowed firms to invest in equipment and generate more profits which were taxed then spent on transport links which boosts productivity
• Evaluation of Infrastructure Development

  Reducing the minimum wage leads to a reduction in incomes and decreased consumption which limits growth, there is no profit incentive for the government so construction may be inefficient e.g. HS2 and can cause environmental damage
• Environmental Damage


  The environmental Kuznets curve suggests that as an economy develops the environment deteriorates, but as economies advance into the service sector this begins to decrease. However, the need for resources continually grows as an economy grows.

  
• The Lewis Model


  Structural model indicating change from agricultural to industrial and becoming a dualistic economy as the high level of investment and higher wages available attracts the excess labour from the agricultural sector
• Fairtrade Schemes

  The fairtrade premium creates a communal fund for farmers to invest in necessary infrastructure in their community and increases their stability and incomes
• Evaluation of Fairtrade Scheme


  Fairtrade schemes reduce the incentive to leave the agriculture sector, less than 1% of the extra price reaches farmers and it reduces demand for non-fairtrade farmers
• Debt Relief


  When the institution or country issuing a loan forgives the debt owed to them freeing developing countries from high interest repayments thus government finances can be redirected to development
• Evaluation of Debt Relief

  Debt relief leads to a moral hazard as it creates a precedent to help all poor countries and eases pressures on weak governments to adopt reforms and good economic policies increasing the likelihood they continue to poorly manage finances.
• Trade Liberalisation

  Countries can aim for export-led growth by developing their manufacturing sector as it forces domestic industries to shut down or become efficient to remain competitive and gain a comparative advantage e.g. China
• Evaluation of Trade Liberalisation


  Export-led growth can be risky as it increases interdependence as the economy is vulnerable to the state of its trading partners and it may have many infant industries which would not be able to compete internationally
• Promotion of FDI


  FDI allows for the transfer of knowledge which improves the quality of human capital this creates jobs and fills the savings gap by attracting investment
• Evaluation of the Promotion of FDI


  This can lead to repatriation of the profits, environmental damages, exploitation of natural resources and loss of sovereignty as the economy may become dependent on the firm e.g. Coca-Cola in Swaziland was a monopsony
• Transfer Pricing/ Repatriation


  The process of manufacturing cheaply in one country and then selling to the parent at an extremely low price to avoid making a profit thus evading taxes in that country limits the benefits of industrialisation and FDI
• Prebsich-Singer Hypothesis


  An increase in the index price of manufactured imports over the increase in the index price of primary products leads to a deterioration of the terms of trade
• Removal of Government Subsidies


  Subsidies incur a large opportunity cost to the government, are often inappropriately targeted, can lead to increased inefficiency as industries become reliant and cause corruption if its misused
• Evaluation of the Removal of Subsidies


  Removing a subsidy is very politically unpopular and may lead to civil unrest and subsidies help to reduce absolute poverty and ensure a minimum standard of living
• Privatisation


  This improves government finances, eliminates corruption and increases efficiency
• Evaluation of Privatisation

  Corruption can continue if a government official sells the firm for below market value to a family member and if it is a monopoly people may be exploited
• Tied Aid


  Aid with conditions such as economic or political reforms or a commitment to buy goods and services from the donor country
• Concessional Loans


  Loans given with no, or low, interest rates
• Aid


  Egypt, Afghanistan and Vietnam are the greatest recipients of aid while the EU and US are the greatest donors aid reduces absolute poverty and fills the savings gap and foreign currency gap which increases investment and trade.
• Evaluation of Aid


  Aid can lead to dependency, governments lack perfect knowledge so may misallocate funds and corruption can lead to funds being misused e.g. Venezuela and Kenya have had consistent issues with corruption
• Development of Primary Industries


  Developing primary industries can help combat Dutch disease by investing funds from that industry and diversify into more stable manufactured goods this helps to reduce primary product dependency
• Evaluation of the Development of Primary Industries

  However, primary industries are prone to corruption and many developing economies lack workers with the skills to diversify into manufacturing
• Development of Tourism

  Promoting tourism attracts foreign currency, FDI from transnational hotels e.g. Hilton or Raffles, jobs are created and high tax revenue
• Evaluation of the Development of Tourism


  However, tourism is highly income elastic and has seasonal demand which means the impact of the multiplier is limited and the economy is particularly vulnerable to recessions. Additionally, there are high costs to the environment and living standards of local and TNCs may repatriate profits.
• Evaluation of the Lewis Model


  There is no guarantee that those with higher wages will save or invest more and exploitation by TNCs may mean that workers are paid low wages leading to urban poverty and improvements in tech will reduce demand for labour.