strategies to promote growth and development revision pack komilla chadha

Measures to promote growth and development in LDCsA2 Economics Unit 4

Komilla ChadhaRevision pack• AS/A2 with Komilla • 29 May 2011

www.A2withKomilla.blogspot.com 1

http://www.A2withKomilla.blogspot.com


Contents Page

1.Foreign Aid...........................................................Page 3

2.Debt Relief...........................................................Page 4

3.Development of human capital................................Page 5

4.Inward looking strategies......................................Page 6

5.Outward looking strategies.....................................Page 7

6.Free market approach [IMF]...................................Page 8

7.Industrialisation ................................................Page 9

8.Tourism.............................................................Page 10

9.Micro-finance................................................Page 11

10.Fair trade .......................................................Page 12

11.Role of NGOs ....................................................Page 13


Note

The strategies explored in this pack will be explored in relation to the limiting

factors in my first pack - if you are still confused feel free to find the development

pack video on my blog.



1. Foreign AidWhat is Foreign Aid?

Aid is any financial or any other form of support such as military is given to one nation by another.

How can it be used to promote growth and development?

Aid is used to promote growth and development in many ways. Essentially aid increases the amount a government can spend and therefore manipulate policies. Just looking at my revision pack on limits to growth and development, aid helps to reduce the following factors which limit growth and development:

(i) Poor infrastructure - poor infrastructure hinders FDI and prevent AS from growing. Aid allows governments to invest in infrastructure as they can afford it.

(ii) Human Capital inadequacies - An unskilled workforce also reduces the levels of FDI and AS from growing. Aid can be used to fund interventionist supply side policies such as training and education which can help increase FDI and AS.

(iii)Primary product dependency - Aid can be used to give subsidies to local farmers and grants to those wanting to diversify what they grow and sell. This reduces dependency on primary products such as agriculture.

(iv)Debt - Many LDCs find themselves unable to grow and develop as they have to spend money on paying off debt so aid can help to pay off this debt and increase the amount the government spends on other policies such as education and training.

What are the advantages and disadvantages?

Advantages Disadvantages

It is an economic injection. Feed corruption

Better political relations can be established Opportunity cost (leakage for donor

countries)

Reduces the impact of the limiting factors

discussed above.

Dependency theory - uncertainty of when

aid is coming

Perhaps improve healthcare too. Time lags related to government spending

Fill the savings gap by giving subsidies and

grants.

Depends on the magnitude and frequency

of aid given




2. Debt ReliefWhat is Debt Relief?

Debt relief is the partial or total forgiveness of debt, or the slowing or stopping debt growth. [This definition was taken from thefreedictionary.com]


Similarly to aid essentially what debt relief does is allows countries to have more money to spend on themselves. A lot of countries hit a debt crisis in 1980s and 1990s where basically they were not able to fund any sort of growth and development policy thanks to debt. So by canceling or reducing debt or increasing repayment time or decreasing interest, countries are given more money to fund other things. Again lets look at which limiting factors does it cancel out;

(i) Debt - obviously debt limits growth by limiting government spending so debt relief reduces or abolishes this and allows government spending to work in full form.

(ii)Poor infrastructure - Like aid the increase in government revenue means that countries can invest more infrastructure developments.

(iii)Savings gap and inadequate capital accumulation - debt relief means that governments can give banks more money to lend or give grants and subsidies giving workers the chance to save and eventually invest.



Improvement to government finances Dependency theory - reliant on debt being

reduced

Better political relations established Encourages corruption - less incentive to

encourage growth and development

LDCs can import more from developed

countries

Moral hazard - of countries can’t pay off

debt they may find themselves borrowing

more money again

Reduction in absolute poverty Burden on credit institutions

Offers a chance to start again




3. Development of human capital

What is Development of human capital?

Human capital development is the process in which labour becomes skilled and specialised.


Human capital development essentially makes one of the most important factors of production, labour, more productive therefore enhancing economic growth but also attracting FDI. FDI would like to invest in a country where labour is trained because then they do not have to take up the cost of doing so. In reference to limiting factors, human capital development promotes growth and development by;

(i) Reducing population issues - LDCs have large population so developing and training the labour allows then to make the most of the resource which they are enriched in. It will also prevent people from having to work in the informal sector. Education is also important to control population growth in general.

(ii)Eliminating human capital inadequacies - obviously policies such as education can help to eradicate issues involving unskilled labour.

(iii)Reducing the foreign currency gap - education can help people to make economical decisions and take risks to diversify what they produce. This allows them to export other kinds of products and reduce the foreign currency gap. It can also reduce issues related to primary product dependency.



Impact on long run LRAS Expensive - Opportunity Cost

Attracts FDI Time Lags




4. Inward looking policiesWhat are inward looking strategies?

Inward looking strategies are policies which help countries to industrialise and tend to be characterised by protectionist ideas such as subsidies, quotas and tariffs.


Essentially all the arguments for inward looking strategies are the same as ones for protectionism (Please see my video on this). The help a country to industrialise without foreign influence and tend to condemned by the WTO. Again in reference to my first pack they reduce the effect of the following limiting factors;

(i) Capital flight - inward looking strategies don’t necessarily reduce capital flight but legislation can be formulated through them which prevents capital flight from happening.

(ii)Human capital inadequacies - inward looking strategies mean that more jobs exists (to see how this happens see protectionism video) and this essentially helps labour become skilled because if more people are employed then they are constantly becoming skilled and learning on the job.

(iii)Foreign currency gap - inward looking strategies like tariffs allow domestic firms to compete with imports therefore attracting more people to diversify into markets which are usually imported. Similarly it gives the chance for enterprise to be formed around other sectors without being completely defeated by competition and therefore reducing primary product dependency.



Protects domestic employment Can affect political relations and the chance

of receiving debt relief

Allows domestic firms to become efficient

enough before competing with overseas

firms.

Loss of economic welfare for consumers as

prices are pushed up

Improve the terms of trade No incentive to become efficient for

domestic firms

National security is maintained - not too

reliant on overseas countries

If other countries follow suit then world

output is likely to fall.




5. Outward looking policiesWhat are outward looking strategies?

Outward looking strategies are policies which help build up a domestic industrial base in a country through attracting FDI, currency devaluation and encourage trade.


Outward looking policies essentially help a country to grow and develop by benefitting from all the advantages of free trade such as better AD through selling more exports. In reference to the first pack, it reduces the impact of some of the following limiting factors;

(i)Population issues - by increasing trade jobs are created and this good for countries which have large populations. Also by attracting FDI the labour force is likely to become more skilled and specialised therefore reducing the impact of human capital inadequacies too.

(ii)Poor infrastructure - FDI is likely to enhance the infrastructure in a country and thus promote growth and development.

(iii)Poor governance - free trade and can help reduce the role of the government which is particularly effective when poor governance exists in countries.

(iv)Civil wars - trade and FDI can help to allocate resources in the right place and bring about economic stability reducing the chances of civil wars breaking out.

(v)Debt - Trade and FDI can help increase government revenue through tariffs, injections, other forms of taxation. This can be used to pay off debt,

(vi)Corruption - as with civil wars outward looking policies reduce the role of government making less impact of corruption on the country.



Increased growth - on a basic GDP level Can increase poverty and pollution

Better consumer welfare May encourage corruption on an

international level




6. The free-market approach

What is the free market approach?

By the free market approach I mean the strategies endorsed by the IMF to promote growth and development e.g. trade liberalisation, privatisation, supply-side reforms and a reduction in fiscal expenditure.


Essentially the free market approach promotes growth and development by allowing an economy to grow as it would do without any government intervention. When countries accept loans from the IMF they have to sign a letter of Intent which basically states the IMF will give money in stages when certain targets are met. These targets come under a structural adjustment programme. As ever the limiting factors it targets are;

(i) Poor governance - it forces the government to care about economic issues such as inflation and invest in the economy.

(ii)Civil wars - the IMF can ensure that even if a civil war is going on money is still spent on traditional supply side policies.



Actual increases in GDP can be seen Can destroy domestic markets

It tackles poor governance pretty well Increase poverty




7. Industrialisation What is industrialisation?

By industrialisation I mean the process of an economy changing from being a large primary sector player to secondary sector. This process can be seen in the Clarke-Fisher model.


Industrialisation makes an economy less reliant on primary productivity and move in the secondary sector and develop. It helps a country produce more and become more richer therefore promoting growth and development. In relation to my first pack the limiting factors to aims to eradicate are;

(i) Poor infrastructure- industrialisation requires countries to change the sector in which most of their labour and other resources are implemented in. In order to do this they must invest in infrastructure as the secondary sector is heavily reliant on the existence of infrastructure.

(ii)Foreign currency gap and PPD - Essentially we are moving away from low yielding primary products to secondary ones which eliminates some of the issues caused by the foreign currency gap and primary product dependency.



Better quality of life as consumers are able

to buy from a large variety of goods and

services

Environmental damage

Can help reduce the savings gap Pushes up prices of commodities as less

people supply them

GDP increases Time lags

Less reliant on weather etc - more stability Loss of culture in the long term




8. Tourism What is tourism?

Tourism is travel for recreational, leisure or business purposes. [Taken from the thefreedictionary.com]. In economics tourism is classed as an invisible export as it bring revenue from overseas into the economy. It is also an injection.


Tourism brings money and jobs into a country allowing it to grow and develop. As ever the limiting factors it eradicates are;

(i) Poor infrastructure - tourism attracts FDI from TNCs like Hilton hotels which can help bring about changes in infrastructure. It will also attract credit institutions to lend to these countries.

(ii)Foreign currency gap - Tourism is also income elastic and in boom times can bring about a lot of money as it is of high value which can help restore terms of trade which had been previously deteriorating due to primary product dependency.

(iii)Savings gap and inadequate capital accumulation- Tourism creates jobs, albeit seasonal ones, which helps individuals financially and gives them more scope to save which can help close the savings gap.



The improvement in the foreign currency

gap means that LDCs can now buy capital

from developed countries.

Negative externalities e.g. pollution

FDI can have multiplier effects Income elastic - in times of recession terms

of trade can deteriorate again

Helps to make labour specialised Seasonal employment




9. Micro-finance

What is micro-finance?

Micro-finance are small scale institutions which allow people to borrow small amounts of money from local lenders to finance small scale enterprise.


Micro-finance promote enterprise which increases GDP and means that there is less pressure on the government to help people start up enterprise and they can spend money elsewhere. As ever the limiting factors it eradicates are;

(i) Capital flight - micro-finance in theory is likely to increase the amount of income people make by allowing them to take risks and start their own businesses. When these local people earn money they are likely to save money in local institutions in stead of looking overseas for better returns which could help solve the problem of capital flight

(ii)Foreign currency gap and primary product dependency - micro-finance support individuals wishing to create businesses of other products which are not agricultural or even in the primary sector therefore reducing the problems of the foreign currency hap and primary product dependency.

(iii)Savings gap and inadequate capital accumulation - as with capital flight there is more chance of savings as people enter jobs where they are likely to earn quite a bit money and save it. By saving it they can reduce the savings gap as banks are more likely to lend.



Impact on long run LRAS Lack of education means that locals can be

charged high interest rates

Multiplier effect -- creates further jobs If it gets too big could get corrupt

Gets rid of poverty trap Small scale




10. Fair Trade

What is fair trade?

Fair trade seeks to guarantee farmers a certain income so that they are not subject to monopsony purchasing power of TNCs and Western countries.


Fair trade can reduce absolute poverty and improve terms of trade as there is a minimum price. As farmers are being paid more they can spend more stimulating consumption. As ever the limiting factors it eradicates are;

(i) Foreign currency gap - Fair trade means that people are paying more for exports from developing countries this can help maintain the value of such exports and reduce the rate at which the terms of trade are deteriorating.

(ii)Geographical issues - Developing countries usually have issues with their geography e.g. being prone to floods. Fair trade means that farmers have more money to deal with situations where the geography makes earning money difficult.

(iii)Savings gap and inadequate capital accumulation - As farmers in theory become richer because their incomes go up their potential to save increases and this can have positive effects on the savings gap.



Higher incomes Low prices are a sign of oversupply so fair

trade may not be the answer - some farmers

leaving the industry may be the answer

Multiplier effect Inadequate for reducing absolute poverty

because in reality farmers do not get much




11. Role of NGOsWhat are NGOs?

NGOs are non government organisations such as the IMF, UN, Amnesty International and even small organisation which go to developing countries to help them.


NGOs support and aid countries in several ways and this helps them to grow and develop. As ever the limiting factors it eradicates are;

(i) Population Issues - NGOs sometimes educate people on family planning issues which can help eradicate some of the problems with large population growth.

(ii)Poor infrastructure - NGOs sometimes invest in countries by developing infrastructure there such as building an airport.

(iii)Human Capital Inadequacies - NGOs as we saw with population isssues they can come into countries in order to educate citizens but they may also help teach them how to read and write and a variety of other skills

(iv)Civil wars - NGOs which are powerful like the UN and Amnesty may try to intervene to stop civil wars. Other small scale ones may provide healthcare for those impacted by the war.

(v)Geography - When a natural disaster happens NGOs usually go to help the country whether it is by saving lives which are stuck between buildings or helping to fertilize soil which may have become too dry.

(vi)Corruption - Powerful organisations such as the UN and IMF can try and place sanctions on corrupt leads such as Gaddafi.

Thank you for reading!




strategies to promote growth and development revision pack komilla chadha

Documents