Strategies to promote growth and development

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Strategies to promote growth and development

There is a range of strategies that could be used by countries to promote growth and development.

Strategies for growth and development in countries will be different depending on their social, economic, political and cultural environment. The strategy mix will be different in developed countries compared to developing countries.

It’s likely that all countries will require a mix of a number of strategies to promote growth and development.

Growth vs Development

Growth

Growth is associated with an increase in real GDP, which is caused by an increase in the quantity / quality of the factors of production.

An outward shift in the PPF.

Development

Development is associated with an increase in the standard of living, freedom and life expectancy.

It focuses on the moral aspect of economic growth and is usually normative.

The main strategies for growth and development in a country

Aid
Debt
Microfinance
Fairtrade
Infrastructure
Education/ Training
Tourism

Aid

Foreign aid is money that one country voluntarily transfers to another, which can take the form of a gift, a grant or a loan.

What are the three most popular types of Aid provided?

1. Tied Aid

This is aid with conditions attached e.g. there might be a requirement to give something back e.g. provide specialist skills and expertise in healthcare.

2. Bilateral Aid

Aid is given directly from one country’s government to another country. This is normally with no conditions attached to this.

3. Multilateral Aid

This type of aid involves providing money to an external agency that then distributes it to countries that are in need of this aid when required.

What are the arguments for aid?

Promotes the reduction of absolute and relative poverty
Creates a positive multiplier and an increase in AD in the recipient’s country
Improves human capital through promotion of healthcare and education
Contributes to increasing globalisation and trade
Reduces international inequality
Tied aid would also provide benefits for the donor country e.g. Interest earned.

What are the arguments against providing aid?

Dependency culture creates a moral hazard as countries might get used to receiving aid and become less self-sufficient in the long run
Due to corruption aid might not get to the people that are in need of it the most
There is no concrete evidence that aid helps to significantly reduce absolute or relative poverty
Tied aid is not always given in the best interest of the recipient who might be exploited through desperation

Tourism

There are many examples of countries that have developed through investment tourism e.g. Dubai, Greece.

Advantages of Tourism

Attracts inward FDI from businesses e.g. hotels
Encourages further infrastructure improvements
Helps to create employment
Provide extra tax revenue to the government
Attracts further aid and development
Increases the country’s Aggregate demand curve and Real GDP

Disadvantages of Tourism

Tourism can only be seasonal income for some countries
Tourism is vulnerable to shock in the economy e.g. floods, hurricanes, virus pandemics
Increases environmental pollution
It could paint a fake conception of the country
Increase in foreign currency and imports
It could lead to further income inequality
Profits are sent back to the company’s headquarters abroad

Market-orientated Strategies

Microfinance

Trade Liberalisation

Countries can remove trade barriers to encourage export-led growth and become as efficient as world producers

Promotion of FDI

Promoting firms to engage in FDI enables access to new markets and safeguards the country as if the investment from one firm into another fails, the company itself will be liable for the debts

Labour productivity and wages tend to increase, leading to the multiplier and creating more jobs

However, developed countries may exploit developing countries by offering lower wages and poor working conditions

Absence of Government Subsidies

Although subsidies can be beneficial in ensuring a minimum standard of living and reducing poverty, it can be argued that they are poorly targeted, making them inefficient

Floating Exchange Rate System

Market forces determine the currency – however, this can mean that the currency may be volatile, making it difficult for exporters / importers to speculate and make future economical decisions

Privatisation

Privatisation can increase competition and reduce political corruption

Interventionist Strategies

Protectionism

This allows domestic industries to grow by protecting them from strong competition and keeping foreign goods out, which will create jobs in the short run

However, due to the potential removal of barriers, countries may lose out on benefits of specialisation and comparative advantage

Human Capital

Workers will be provided with skills and training, making them more employable and improving productivity. Where there are skill shortages, business struggle to grow

Better skillsets allow a country to develop from the primary sector to a manufacturing sector

Infrastructure Development

It can be argued that the government should provide infrastructure for the country to use as it is essential for development. Despite the Free Ride Problem which is associated with the government providing infrastructure, there are also many positive social benefits which people in the economy can benefit from

Managed Exchange Rates

The country can introduce a higher exchange rate for the import of essential goods – this also illustrates the price in a country is low and can be used to reduce poverty as well as encourage investment of capital goods

On the other hand, the country can implement a lower exchange rate to discourage imports and consumers from purchasing goods / services

Promoting joint ventures with global companies

Joint ventures reduce the exploitation of countries arising through FDI

Buffer Stock Schemes

Government imposes a maximum and minimum price for goods, buying stocks when there is excess supply and selling them when there is excess demand

It is generally used on commodities when prices are volatile, in order to help stabilise prices

However, they do require high start-up costs, there may be issues regarding storage space and it depends upon stocks increasing / decreasing

Another important factor to consider is that minimum prices may be set too high, discouraging producers to become inefficient

Microfinance

Microfinance was introduced by Muhammad Yunus from the Grameen Bank of Bangladesh to empower those in poverty to start small business enterprises. He noticed that the poor were unable to get access to finance in order to start a small business and grow. They had no assets they could provide banks as a guarantee to minimise the risks of lending them credit.

He, therefore, provided banks with the guarantees required and provided small tiny loans (Microcredit) to help the poor engage in productive business activities to grow their small businesses such as selling lemonade or selling essential items door to door.

The main clients of microfinance were women who were self-employed and household-based entrepreneurs in small rural areas. Examples of business include small shopkeepers, street vendors, door to door sales.

Criticisms of Microfinance

Collection and accounting methods have been questionable
Interest charged on microfinance can be high
Microfinance could lead to other methods of finance provided by the government to decrease e.g. aid or development assistance

Other Strategies

Industrialisation

The Modern Industrial sector can attract workers from rural areas and offer them higher wages. According to the Lewis Model which assumes that labour productivity in agricultural areas is low, he believes people will move to urban areas for better job opportunities and to earn higher incomes

It can also be argued that industrialisation is a result of development and economic growth could be achieved through rural-to-urban migration

Development of Tourism

Development of Primary Industries

The development of a primary industry encourages a country to diversify due to the funds its provides, in addition to providing infrastructure development and better education

However, there is likely to be corruption in primary industries

Fairtrade Schemes

Fairtrade Schemes encourage fairer prices, fairer working conditions, community development and aims to protect the environment

Aim

Debt Relief

This eases government finances, especially for those countries which suffer from high interest repayments and allows for the allocation of more money to be spent on the provision of services

However, debt relief can cause moral hazard

International Institutions

International Monetary Fund

Was set up by Bretton Woods Conference to ensure the exchange rate systems work efficiently.

Countries which are suffering from an international exchange rate crisis or are struggling to pay their international debt can be offered loans from the IMF.

However, it is imperative that the countries taking the loans make macroeconomic reforms to resolve their problems

NGOs

These are non-profit organisations which operate independently from the government.

They can provide direct assistance to countries in terms of education, healthcare, sanitation, etc. by engaging in various projects

However, it can be argued that NGOs cannot solely solve the problems, there needs to be some level of government intervention

World Bank

Founded by Bretton Woods Conference and aims to bring long-term development, as well as a reduction in poverty

It is made up of five organisations: The International Bank for Reconstruction and Development (IRBD), The International Development Association (IDA), The International Finance Corporation (IFC), The Multilateral Investment Guarantee Agency (MIGA), and the International Centre for Settle of Investment Disputes (ICSID), which provide financing, policy advice and technical assistance, as well as strengthens the private sector in developing countries

World Bank has funded 12,000 development projects since 1947

Ted Talks – Muhammad Yunus – Grameen Bank of Bangladesh

https://www.youtube.com/watch?v=6UCuWxWiMaQ

AQA Spec – Additional Content

Characteristics of LEDCs

High mortality rates
Low life expectancies
Low GDP
Fast population growth
Poor standard of living
Low levels of education
Lack of access to clean water and sanitation
Poor health care provision

Quick Fire Quiz – Knowledge Check

1. Identify and explain four strategies for growth and development (8 marks)

2. Identify and explain the three most common types of Aids provided for growth and development (6 marks)

3. Examine the arguments for providing aids (6 marks)

4. Examine the arguments against providing aids (6 marks)

5. Analyse the advantages of tourism (6 marks)

6. Analyse the disadvantages of tourism (6 marks)

7. Explain what is meant by ‘Microfinance’ (2 marks)

8. Discuss the advantages and disadvantages of Microfinance (6 marks)

9. Identify and explain five market-orientated strategies (10 marks)

10. Identify and explain five interventionist strategies (10 marks)

11. Identify and explain three International Institutions (6 marks)

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