Constraints and strategies for growth and development

• What are the three constraints of development?

  1) Low Productivity

  2) High Costs

  3) Low Investment
• How can low productivity constrain growth and development?

  Low productivity will decrease LRAS and limits economic growth . A fall in productivity will decrease incomes and income tax revenue, corporation will also decrease as profits fall. This decreases government revenue limiting funds and limiting growth and development
• How can High costs constrain growth and development?

  Left shift in SRAS, limiting growth. Also leads to higher uncompetitive prices which will reduce demand. Decreased profits will decrease corporation tax and as firms reduce their labour to reduce costs, incomes and income tax revenue will decrease - therefore, government funds for development will be limited.
• How can low investment constrain growth and development?

  Decreases AD, as investments in new capital falls, LRAS decreases - reduced real GDP and limiting growth. Low investment means a fall in income and income tax revenue as well as fall in profits and corporation tax revenue - limits funds and reduces developments.
• What are market-orientated strategies for development?

  1) Trade Liberalisation

  2) Promotion of FDI

  3) Removal of Government subsidies

  4) Floating exchange rate systems

  5) Microfinance

  6) Privatisation
• How can trade liberalisation influence growth and development?

  Free trade is an act of trading between nations without protectionist barriers such as tariffs, quotas or regulations. This can increase World GDP since output increases when countries specialise. Therefore, living standards might increase and there could be more economic growth.
• How can FDI promotion be used to influence growth and development?

  FDI is the capital flow from one country to another to gain a lasting interest in an enterprise in the foreign country. FDI can create employment, encourage the innovation of technology, and help promote the long-term sustainable growth. It provides LEDCs with funds to invest and develop
• How can removal of government subsidies influence growth and development?

  Government subsidies could distrort price signals by distorting the free market mechanism. A free-market economist would argue that this could lead to government failure. There could be an inefficient allocation of resources because the market mechanism is not able to act freely. Subsidy removal can increase competition, efficency, employment, profits and income - increase in income and profits will increase income and corporation tax revenue measing the government has more funds to increase development such as infrastructure
• How can floating exchange rates be used to influence growth and development?

  The value of the exchange rate in a floating system is determines by the forces of supply and demand. Appreciation can generate higher incomes as the cost of imported raw materials reduces.
• How can microfinance be used to influence growth and development?

  Microfinance involves borrowing small amounts of money from lenders to finance enterprises. It increases the incomes of those who borrow and can reduce their dependency on primary products - there could be a multiplier effect from the investment of the loan. They are small loans for usually unbankable people. It allows them to break away from aid and gives borrowers financial independence. Microfinance can help break the poverty cycle
• Evaluate the use of Microfinance as a way of increasing growth and development

  ridiculously high interest rates, high risk of bankruptcy.
• How can privatisation be used to influence growth and development?

  This means that assets are transferred from the public sector to the private sector i.e. the government sells a firm so that it is no longer in their control. The firm is left to the free market and private individuals. Free market economists will argue that the private sector gives firms incentives to operate efficiently which increases economic welfare. This is because firms operating on the free market have a profit incentive which public sector firms don't have. Since firms are operating in the free market, they will have to produce goods and services that consumers want. This increases allocative efficiency and could mean goods and services are of higher quality. This may increase competition leading to an increase in output, employment & incomes. By selling the asset, revenue is raised for the government. However this is only a one-off payment
• Give examples of interventionist strategies to influence growth and development

  1) Development of human capital

  2) Protectionism

  3) Managed exchange rates

  4) Infrastructure development

  5) Buffer stock schemes
• How can development of human capital influence growth and development?

  By developing human capital by improving education such as subsidising higher education, the skills base in the economy would improve. This would improve productivity and allow more advanced technology to be used since workers will have the necessary skills, increases LRAS and economic growth. The country can move their production up the supply chain from primary products to manufactured goods and to services which they can earn more. Furthermore, increased human capital means workers can get more highly-skilled jobs since they have more qualifications, this increases incomes and income tax revenue - increasing funds available for the government to invest in development.
• evaluate the use of developing human capital to influence growth and development?

  e.g. subsiding HEEV: If there are more students, there will be fewer workers (SR) In the SR, more students mean less people in the workforce. This will decrease labour supply and push wages up, an increase in wages will increase costs of production for firms and will in turn reduce SRAS – reducing economic growth in the short run.Furthermore in the LR, effect on economic growth of increased subsidies may be minimal depending on the courses as some courses such as Theoretical Physics may not contribute to productivity as they are not used in a regular office – limiting long-run growth
• How can protectionism influence growth and devlopment?

  Protectionism can help reduce a trade deficit. This is because they will be importing less due to tariffs and quotas on imports. It can protect in fact industries, which are relatively new and need support. Protectionism is usually short-term until the industry develops, at which point the industry can trade freely. Protecting employees can lead to higher levels of income - increased income tax - more funds for development - more development
• evaluate the use of protectionism as a way of influencing growth and development

  Protectionism can distort the market and lead to a loss of allocative efficiency. It prevents industries from competing in a competitive market, internationally or domestically resulting is a loss in consumer welfare. Consumers will face higher prices and less variety. By not competing in a competitive market, firms have little or no incentive to lower their costs of production. Moreover tariffs are regressive and are most damaging to those on low and fixed incomes furthermore, there is also a risk of retaliation so other countries could become hostile
• How can managed exchange rates be used as a way of influencing growth and development?

  Managed exchange rate systems combine the characterises of fixed characteristics of fixed and floating exchange rate systems. The currency fluctuates, but it does not float on a fully free market. This is when the exchange rate floats on the market, but the central bank of the country buys and sells currencies to try and influence their exchange rate.

  In a floating exchange rate mechanism, rising exports will lead to currency appreciation which will lead to a slow down or fall in exports. Managing currency prevents appreciation & a slowdown leading to long periods of growing incomes
• How can infrastructure development be used to influence growth and development?

  Development of infrastructure is an example of a supply-side policy. Developing infrastructure reduces the costs of business & makes economic activity easier. This increases FDI, output, employment & income. Increased spending on infrastructure such as transport will influence growth as there is increased mobility of labour, this increases quantity of labour (employment increases as more people can get to work) as well as quality of labour (productivity rises), this increases LRAS and real GDP - rise in economic growth. There will also be increased AD as employment rises, incomes rise as well as consumption - increase real GDP and economic growth. This increases profits for firms, who demand and hire more labour, incomes rise and increases AD even further - positive multiplier effect.
• Evaluate the use of infrastructure development as a way of influencing growth and development

  Crowding out - when the government spending pushes up demand for resources which will increase prices for the factors of production such as costs of raw materials and wages for labour. This provides a disincentive to invest and makes it more expensive for private firms so they have been crowded out. This increase in costs will reduce SRAS, reduce real GDP, and reduce economic growth
• How can buffer stock schemes be used a way to influence growth and development?

  Governments might intervene with a buffer stock system to reduce price volatility. Governments buy up harvests during surpluses and then sell the goods onto the market when supplies are low. However, historically, these have been unsuccessful.

  It helps incomes of farmers to remain stable because fluctuations in the market are reduces and it increases consumer welfare by ensuring prices are not in excess. It was extensively used in Europe post war (Common agricultural policy) & is still used extensively in different markets in India, Thailand (rice), Vietnam, Indonesia (rice & coal)
• Evaluate the use of buffer stock schemes as a way of influencing growth and development

  However, governments might not have the financial resources to buy up the stock. Moreover, storage is difficult and expensive, since agricultural goods do not last long, and there are administrative costs
• What other strategies can be used to influence growth and development?

  1) Industrialisation - the Lewis Model

  2) Development of Tourism

  3) Development of primary industries
• How can industrialisation influence growth and development?

  The Lewis Model is an explanation of how a developing country which focuses on agriculture could move towards manufacturing. It assumes that in agriculture, there is a surplus of unproductive labour in developing economies. The model assumes that in the manufacturing sector, wages are fixed. Workers from agriculture are attracted to the higher wages in the manufacturing sector.

  In the manufacturing sector, entrepreneurs change prices above the wage rate, which allows them to make profits. It is assumed these profits are invested into more fixed capital for the business.

  The demand for labour increases since the productive capacity of firms has increased. Since there is a surplus labour in the in the agricultural sector, this labour is employed in the manufacturing sector.

  This grows the manufacturing sector to the extent that the economy moves from agriculture to manufacturing. This is from a traditional state to an industrialised state
• Evaluate the use of industrialisation as a way to influence growth and development

  Profits might not be reinvested into the firm. Moreover, the capital investment might replace labour, so the demand for labour could fall instead. Also, it is not always easy for labour in the agricultural sector to move to the manufacturing sector - occupational immobility
• How can development of tourism be used to influence growth and development?

  Tourism can create thousands of jobs and help shift a developing country away from dependency on primary products. Developing countries tend to have a MPC which could create a multiplier effect. It will help to diversify the economy and make it more attractive to FDI as well as developing infrastructure. Tourism can also be a way of earning foreign currency for developing currencies.

  Ecotourism is developing as a response to negative externalities of consumption that tourism creates e.g. increased waste, noise, use of scarce resources (drinking water)
• Evaluate the use of tourism development as a way of influencing growth and development

  Little revenue is retained in the country since travel agents and hotel owners are likely to repatriate their profits. Moreover, there is the issue of overcrowding and the loss of habitats. Income from tourism is likely to be unstable since it relies heavily on the business cycle in developed countries. Investing in tourism can be risky and expensive. Furthermore, locals could feel stigmatised by tourism, especially if they cannot afford the luxuries that tourists have. There could also be environmental damage such as pollution.
• How can development of primary industries be used as a way of influencing growth and development?

  Some developing countries have an abundance of raw materials so some governments might choose to exploit this advantage and develop the industry so the country can have a comparative advantage in its production e.g. most middle east countries developed entirely due to oil. Moreover, primary industries, especially those allied to farming, form the livelihoods of the bulk of the population. It is sometimes the only source of income for most families. Therefore, it is important that the industry is supported
• How can Fairtrade Schemes be used a way of influencing growth and development?

  Fairtrade schemes ensure that farmers receive a fair price for their goods. Supermarkets buy a guaranteed quantity at a price above the market equilibrium. This helps farmers since they have a guaranteed income and certainty about their sales so they can plan for the future. Fairtrade can help support community development and social projects as well as ensuring working conditions meet a minimum standard, it also encourages the use of sustainable production, promotes environmental protection, and stops the use of child labour, increases efficiency, output, SRAS, real GDP and leads to economic growth
• Evaluate the use of fairtrade schemes to influence growth and development

  Critics say the impact of fairtrade schemes in insignificant. They argue that fairtrade is simply a psychological influence on consumers in developed countries who believe they are helping by buying fairtrade goods. Fairtrade schemes could also distract from other polices and development and it could make producers who are not part of fairtrade worse off. This is because the markets have now been divided into Fairtrade and Non-Fairtrade. Price signals may also be distorted, Fairtrade could also mean the production of goods is less efficient. Fairtrade will also increase prices of goods such as cocoa and bananas, this encourages farmers to produce more as their profits will increase, increasing their supply. Fairtrade farmers will still get their minimum price but those not on fairtrade will have t deal with a lower market equilibrium price due to an increase in supply. Fairtrade could also make farmers reliant on the sale of their produce
• How can Aid be used to influence growth and development?

  Aid provides temporary assistance to a country such as humanitarian aid offered to countries after/during conflicts or natural disasters. Aid could also be a grant for a project that a country might not have the funds for. Aid could also be used to reduce human capital inadequacies or to pay off debt. It can improve infrastructure, which can help make the country more productive. Aid could also be in the form of soft loans ( a loan that has be repaid but at a lower interest rate), Increases output and growth
• evaluate the use of aid as a way to influence growth and development

  The benefits of aid are limited by corrupt leaders, the size of the aid payment and the potential for the recipient country to become dependent on aid.
• How can debt relief be used to influence growth and development?

  Debt relief is the partial or total forgiveness of debt. In developing countries, debt is considered to be a principal cause of poverty, since it causes human suffering, misery, and hampers development.

  With high levels of debt, financial resources are diverted from infrastructure, education, and healthcare. The country's ability to pay the debt, not the size, is most important. If a country defaults on its debt, it can make it hard to borrow more money in the future.

  Debt forgiveness can allow a country to import more and increase the population's standard of living. It improves government finances, so public services could be funded instead
• Evaluate the use of debt relief as a way of influencing growth and development


  If debt is forgiven, it could encourage more borrowing in the future. Moreover, there could be corruption. The opportunity cost of these repayments is significant & often including:

  - Loss of infrastructure development

  - Inability to create a welfare system

  - Investment in human capital/education