4.3.3 Strategies influencing growth and development

• Market-orientated strategies


  • Trade liberalisation
  • Promotion of FDI
  • Removal of government subsidies
  • Floating exchange rate systems
  • Microfinance schemes
  • Privatisation
• Trade liberalisation


  Free trade between nations without protectionist barriers like tariffs, quotas or regulations
• World GDP can be increased using free trade, since output increases when countries specialise
• Free trade can increase living standards and economic growth
• FDI (Foreign Direct Investment)


  The flow of capital from one country to another, in order to gain a lasting interest in an enterprise in the foreign country
• Benefits of FDI


  • Creates employment
  • Encourages innovation of technology
  • Promotes long term sustainable growth
  • Provides LEDCs with funds to invest and develop
• Removal of government subsidies

  Could distort price signals by distorting the free market mechanism, leading to government failure and inefficient allocation of resources
• Floating exchange rate systems


  The value of the exchange rate is determined by the forces of supply and demand
• Microfinance


  Borrowing small amounts of money from lenders to finance enterprises
• Benefits of microfinance


  • Increases incomes of borrowers
  • Reduces dependency on primary products
  • Multiplier effect from investment of loan
  • Allows unbankable people to access finance
  • Detaches poor from high interest, exploitative loan sharks
  • Can stimulate employment by funding SMEs
• In Tamil Nadu, India, less than 2% of microenterprises were still operating after their establishment
• Microfinance loans have high repayment rates
• Privatisation


  Assets are transferred from the public sector to the private sector
• Benefits of privatisation


  • Gives firms incentives to operate efficiently, increasing economic welfare
  • Firms have to produce goods and services consumers want, increasing allocative efficiency and quality
  • Raises revenue for the government (one-off payment)
• Interventionist strategies


  • Development of human capital
  • Protectionism
  • Managed exchange rates
  • Infrastructure development
  • Promoting joint ventures with global companies
  • Buffer stock schemes
• Development of human capital

  Improving the skills base in the economy to improve productivity and allow more advanced technology to be used
• Primary school enrolment has increased from about 80% to around 90% of children, but secondary and tertiary education enrolment is still low
• Developing human capital can allow a country to move their production up the supply chain
• Protectionism


  Measures to reduce trade deficits and protect infant industries, but can distort the market and lead to a loss of allocative efficiency
• Tariffs are regressive and most damaging to those on low and fixed incomes
• There is a risk of retaliation from other countries with protectionism
• Managed exchange rate systems

  The currency fluctuates, but the central bank buys and sells currencies to influence the exchange rate
• Benefits of infrastructure development

  • Reduces supply costs and increases mobility of labour
  • Can boost employment with improved transport, energy, water and telecommunications
• India's poor irrigation system makes it difficult to sustain food grain production if there is low rainfall, hurting the poorest communities and leading to rising food prices
• The lack of a continuous supply of electricity in India affects transport, communication and healthcare, and it is estimated that $400 billion needs to be invested in power to meet development goals
• The Asian Infrastructure Investment Bank (AIIB) led by China funds Asian energy, transport and infrastructure, with the UK as a founding member
• China invested 9% of their GDP in infrastructure in the 1990s and 2000s, whilst most emerging economies only invested around 2%-5% of GDP
• China has the first and only high speed Maglev train system in the world between the city centre in Shanghai and its international airport
• Joint ventures with global companies

  Partnerships between firms based in multiple countries, allowing small firms to participate in international trade, transfer technological knowledge, access new markets, and spread risk
• Buffer stock schemes


  Governments buy up harvests during surpluses and sell goods when supplies are low, to reduce price volatility in agriculture markets
• Historically, buffer stock schemes have been unsuccessful due to lack of financial resources, storage difficulties, and high administrative costs
• Lewis model of industrialisation

  Developing countries with surplus unproductive labour in agriculture can move towards manufacturing by attracting workers to higher wages, allowing entrepreneurs to reinvest profits into more capital and grow the manufacturing sector
• In reality, profits might not be reinvested, capital investment might replace labour, and it is not always easy for labour to transition from agriculture to manufacturing
• Surplus of unproductive labour in developing economies

  • Wages are fixed in the manufacturing sector
  • Workers from agriculture are attracted to the higher wages in the manufacturing sector
• Manufacturing sector


  1. Entrepreneurs charge prices above the wage rate

  2. Profits are invested into more fixed capital for the business
• Demand for labour increases

  Productive capacity of firms has increased
• Surplus labour in the agricultural sector

  Employed in the manufacturing sector
• Economy moves from agriculture to manufacturing, from a traditional state to an industrialised state
• • Profits might not be reinvested into the firm
  • Capital investment might replace labour, so the demand for labour could fall
  • It is not always easy for labour in the agricultural sector to move to the manufacturing sector
• Development of tourism


  • Creates thousands of jobs
  • Helps shift a developing country away from dependency on primary products
  • Developing countries tend to have a marginal propensity to consume, which could create a multiplier effect
  • Helps diversify the economy
  • Makes the country more attractive to FDI
  • Develops their infrastructure