Strategies to promote growth and development
Strategies to promote growth and development
Exam Boards: Edexcel, AQA, WJEC, CIE, OCR Level: AS/A LEVELS/IB/IAL
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 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 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
- Education/ Training
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
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
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 can increase competition and reduce political corruption
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
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
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 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
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 encourage fairer prices, fairer working conditions, community development and aims to protect the environment
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 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
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
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
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)
Next Revision Topics
- Poverty and Inequality
- Measuring Economic Growth
- What factors limit Growth and Development?
A Level Economics Past Papers