Strategies Influencing Growth & Development (Edexcel A Level Economics A)

Trade Liberalisation

Foreign Direct Investment

Subsidy Removal

More trade increases output, employment and incomes

More FDI increases output, employment and income

Subsidy removal can increase competition, efficiency, employment, profits and income 

Floating Exchange Rate Systems

 Microfinance

Privatisation

Appreciation can generate higher incomes as the cost of imported raw materials reduces possibly leading to higher income

An extremely successful policy in many countries, especially Bangladesh. Microfinance helps to break the poverty cycle

May increase competition leading to an increase in output, employment and incomes

Human capital

Protectionism

Managed exchange rates

Policies aimed at developing human capital raise the potential output of the economy which leads to an increase in income

This can intervene in natural market forces which lower wage rates. Protecting employees can lead to higher levels of income

In a floating exchange rate mechanism, rising exports will lead to currency appreciation which, in time, will lead to a slowdown or fall in exports. Managing currency prevents appreciation and a slowdown in exports leading to long periods of growing income

Infrastructure

Joint ventures

Buffer Stocks

Developing infrastructure reduces the cost of business and makes economic activity easier. This increases FDI, output, employment and income

Some countries (e.g. India) block foreign ownership of firms (FDI). Joint ventures (JV's) are a way that firms can get around that. JV's can increase trade, output, employment and incomes e.g Tata Starbucks allows Starbucks to sell their product through an Indian global steel giant, Tata

This is explained in more detail below. Price stability ensures income stability. It also results in excess production which increases levels of employment. It was used extensively in Europe post second world war (Common Agricultural Policy) and is still used extensively in different markets in India, Thailand (rice), Vietnam, Indonesia (rice and coal)

• Developed in 1955, the Lewis Model described economies as having two sectors - the rural agricultural sector and the urban industrial sector

• Productivity and incomes are higher in the industrial sector so Lewis argued countries should transform their structure

• Critics argue that many developing countries have high unemployment in urban areas; the theory also assumes that manufacturing will be a labour intensive task when in reality it is often capital intensive

• For many developing countries this is an excellent source of employment, revenue and income

• Rising global incomes have increased demand for tourism

• 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)

• Some countries have successfully developed as a result of GDP growth that has been driven by relatively few primary industries e.g Zambia has benefitted from the copper industry; most Middle East countries developed entirely due to oil; Ethiopia depends on coffee and cut flowers

• Developing these primary product industries is lucrative due to their comparative advantage

• Many developed countries use protectionism to shift profits from developing nations to developed nations

  • E.g. the USA has no tariff on cocoa beans imported into the USA from Ghana, but does place a tariff of 12% on cocoa powder. It want manufacturers in the USA to benefit from processing cocoa beans

• The price of many commodities is set far away from where the farmers are - the Chicago Board of Exchange. Here, prices are set months in advance and determine the price buyers will pay sellers on a particular day in the future

• Fair trade schemes aim to bypass these restrictions by connecting ethical buyers directly with the farmers in developing countries

  • They pay them higher prices

  • They often help them to develop and market value added products

• Three of the most common forms are humanitarian aid, grants and soft loans

• Aid has proven beneficial in times of distress

• Critics argue that aid breeds dependency, corruption and disincentivises individual responsibility

• Many developing nations have borrowed significant sums of money in the past which have to be repaid (with interest) over a long period of time

• The opportunity cost of these repayments is significant and often includes

  • Loss of infrastructure development

  • Inability to create a welfare system

  • Investment in human capital/education

• Countries began to default on their loans in 1982 (Mexico was the first) and this has led to restructuring of these loans to make it more affordable

• More recently there has been significant progress in writing off the entire debt of the most heavily indebted poor countries (HIPC) so that they can focus on building their economies

• Founded in 1944 as the International Bank for Reconstruction and Development to fund postwar redevelopment

• They provide reconstruction loans to countries devastated by war

• They provide loans to developing countries to aid in their development

• They provide loans to countries to assist with the development of infrastructure

• They work with governments and institutions so as to encourage economic reform and trade liberalisation

• Founded in 1944 with the aim of establishing a stable global financial system that could help with postwar reconstruction efforts and better deal with challenges such as the Great Depression of the 1930's

• John Maynard Keynes was one of two founders

• They aim to facilitate a stable global financial system

• They oversee exchange rates and the system of international payments that occurs between nations and individuals

• They monitor country policies and national, regional and global economic and financial developments through a formal system known as surveillance

• They provide member countries with currency to help deal with balance of payments problems

• These are typically voluntary, community based organisations which do not aim to make a profit but seek to meet a need or provide a service

• They operate locally, nationally and/or internationally

• With a community based emphasis, they are able to

  • Engage in small scale projects giving control to community stakeholders

  • Draw on local skills

  • Encourage sustainability and remove the need for aid

  • Tackle environmental sustainability using local knowledge and resources