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STRATEGIES TO PROMOTE ECONOMIC GROWTH AND ECONOMIC DEVELOPMENT - Coggle…
STRATEGIES TO PROMOTE ECONOMIC GROWTH AND ECONOMIC DEVELOPMENT
Trade strategies
Import substitution / import substitution industrialization (ISI) / inward-oriented strategy
Introduction
produce goods domestically > import products
Industries producing domestic goods grow -- economy grows -- industries become competitive on world markets (gaining from economies of scales)
the opposite of
export-led growth
and not supported by the economists who believe in the advantages of free trade based on comparative advantage
Advantages
Protects the local culture and social habits -- isolate economy from foreign influence
Protects economy from power and bad influence of multinational corporations.
Protects jobs in domestic market -- domestic firms can dominate the market
Conditions
A policy of organizing the selection of goods to produce domestically is imposed
Subsidies
Protectionist system with tariff barriers is implemented
Disadvantages
May only protect jobs in the short run
The country does not enjoy the benefits from comparative advantage and specialization -- the products produced are relatively inefficiently
Inefficiency in domestic industries because of no competition
High rates of inflation
Export promotion / export-led growth / outward-oriented growth strategy
Differences
Problems faced
Introduction
growth is achieved by concentrating on:
1) increasing exports
2) export revenues
(AD)
↑ exports -- ↑ GDP -- ↑ incomes
= growth in domestic and exporting markets
as it concentrates on producing and exporting products, hence there will be comparative advantage of production
by keeping exchange rate as low as possible against the others can make the exports more attractive
Conditions (policies)
Liberalized trade
Investment in the provision of infrastructure
A floating exchange rate
Deregulation and minimal gov. intervention
Liberalized capital flows
Economic Integration
Diversification
Aims
to move from the production and export of primary commodities
to replace these with the production and export of manufactured and semi-manufactured products
As a result:
protect themselves from the volatile changes in primary product prices
stabilitze or increase export revenue
stabilize or increase employment
increase in the use of technology
increase demand for more highligh skilled workers
Barriers
practice of tariff escalation
↑ rate of import tariffs, ↑ goods are processed
the importing country protects its industries by putting lower tariffs on imports of raw materials and components and higher tariffs on processed and finished products.
the need for a more highly qualified workforce to produce relatively more sophisticated products
the country is in a poverty trap
↓ education, ↓ production of profit commodities and components, ↓ incomes for gov. and individuals, ↓ ability to fund education
Market based supply-side policies
Privatization
Introduction
The sale of public government-owned firms (nationalized firms) to the private sector
Free market economists argued that profit-maximizing firms will be more efficient > nationalized firms -- increase the potential output of the economy
Challenges
The process requires careful design and sequencing
The creation of a regulatory infrastructure
Assessment of possible poverty and social impacts
Transparent public communication
Some G&S still need to be provided by nationalized firms for it to be accessible and affordable to everyone
Deregulation
Introduction
Regulations may have caused:
↑ COP, ↓ potential output in the economy
Regulations include:
Environmental laws, health and safety regulations or laws concerning working hours, leave and holidays
Deregulations effect:
↑ aggregate supply, generate economic growth
Disadvantages
If deregulation of
labour laws
is to attract investment: damages the safety and rights of workers, then economic growth will not be inclusive
If deregulation of
the banking system
leads to debt-driven (as opposed to growth through industrial dev. and infrastructural change) there will be increase in the cost of environmental laws
If deregulation relates to the
relaxing of environmental laws
, then there will be an increase in the cost of sustainable development
Trade liberalization
Introduction
The removal, or at least reduction, of trade barriers that block the free trade of goods and services between countries
Involves the elimination of tariff barriers, quotas, export subsidies and administrative legislation
Will increase world trade and will enable developing countries to concentrate on the prod. of goods and services which have a comparative advantage
Challenges
lack of infrastructure and institutions
protectionist policies to block developing countries from exporting higher-value manufactured goods can reduce the effectiveness of developing countries
subsidies can damage the ability of producers from developing countries to compete in international markets
Foreign direct investment (FDI)
Introduction
long-term investment by private multinational enterprises/corporations (MNEs or MNCs) in countries overseas.
Can occur in one of two ways
MNCs either build new plants or expand their existing facilities in foreign countries (greenfield investment)
MNCs merge with or acquire (buy) existing firms in foreign countries
Reasons
the countries may be rich in natural resources, such as oil and minerals since MNCs have the technology and expertise to extract such resources
some developing countries represent huge and growing markets, with growing incomes and increase in the demand for all sorts of consumer goods is rising, MNCs wish to be there to satisfy the demand
government regulations are much less severe compared to developed countries -- easy to set up -- can greatly reduce the COP
Pros & Cons
Pros
helps filling the savings gap
improve the work force skill levels and the managerial capabilities
greater access to R&D, technology and marketing expertise hence enhancing their industrialization
multiplier effect hence stimulating growth
tax revenue can be used to improve infrastructure physically and financially
provide more choice and lower prices for consumers
more efficient allocation of world resources
Cons
using inexpensive low skilled workers for basic production and providing no education or training
too much power —> gain large tax advantages / subsidies —> reducing potential government income
too much power internationally —> incomes and size allow to exert too much influence on policy
difficult to monitor and enforce
damaging the environment of the host country
MNCs enter a country to extract particular resources then strip them and leave
use capital-intensive production methods instead of labour-intensive production methods which is more appropiate
the actual money will never be used in the developing country’s economy
may repratiate their profits
Other alternative:
MNEs should:
contribute to the economic, environmental and social progress with a view to achieving sustainable development
respect internationally recognized human rights
encourage local capacity building
encourage human capital formation through providing employment and training opportunities
provide full financial and operating info
Social enterprise
Definition
organizations that have specific social objectives as their primary goal, may be for-profit or non-profit organizations but profit is a secondary goal
Aim
the creation of social wealth, a viable business model and environmentally responsible operation
Objective and purpose
to overcome, or alleviate a global or local issue, like poverty, lack of education, health care, technology access or an environmental problem
Example
Sunny Money
an enterprise that aims to provide solar powered products to rural and off-grid communities in Africa
sell at very low prices
Redistribution policies
Challenge
the large size of the informal economy is not taxed
heavy reliance on indirect taxes (easy to set and collect but tend to generate lower revenues
high income people may not pay their fair share
high tax rates on high levels of income tend to make people to evade paying taxes
high level of non-compliance, because:
corruption
a lack of transparency in government so people are not aware of how their tax revenues are used
a weak sense of national identity
Strategy
mobilize informal workers and enterprises into the formal sector
impose higher taxes on goods that are consumed more by high income people
improve the tax structure
lower rates of tax at high incomes
to overcome non-compliance:
commitments to reduce corruption
provide access to details concerning government budgets
public awareness campaigns to increase compliance
empower people to engage in open discussions of the uses of taxes
Merit goods
Underprovided in market (Health services and education)
Access to merit goods can raise the human capital of a country's population.
Extensive investments must be made in infrastructure, clean energy, transport, telecommunication and etc.
May be provided through domestic government investment, FDI, microfinance, social enterprise or foreign aid.
Institutional change
Improved access to banking system
Microfinance (Financial service geared specifically to the poor such as small loans, saving accounts, insurance and cheque books)
Poor people can start up very small-scale businesses (micro-enterprises)
Women tended to be main recipients because they're better credit risk
Mobile phone banking
A person can send money via text to the receiver's phone number.
Increasing women's empowerment
Process which women gain power and control over their own lives and acquire the ability to make strategic choices
Strategy for women's empowerment
Increase support for education of females
Increase access to healthcare for women
Create safe environment in home, workplace and society
Establish right for women to own property and asset
Increase female involvement in decision making, within home and outside.
Reducing corruption
Corruption limits the government's ability to grow the economy
Measures to reduce corruption (By IMF)
Invest in high levels of transparency and independent external scrutiny
Reform institutions
Build a professional civil service
Keep pace with new challenges as technology and opportunities for wrongdoing evolve
More cooperation to fight corruption
Problem of gender and corruption (Transparency International)
Collect, analyze and disseminate gender desegregated data
Recognize and address specific gendered forms of corruption
Include women in anti-corruption decision making
Empower women
Gender sensitive reporting mechanisms
Promoting securee property right and tenure rights
Why?
Secure land rights are an important pillar for agriculture
Secure land rights are essential for urban development
Secure property rights help protect the environment
Secure property rights and access to land are crucial for private sector development and job creation
Secure property rights are important for empowering women
Secure property rights help secure indigenous peoples' rights
Secure property rights are vital for keeping peace.
Reforming legal structures to ensure property titles would allow the poor to use their small homes or land in order to borrow money and start businesses
Foreign aid
Official development assistance
Government aid that promotes and specifically targets the economic development and welfare of developing countries
Bilateral aid: Government gives aid money directly to another country
Multilateral aid: Government gives aid money to one of the recognized international agencies
Eligibility requirements to meet the criteria to be considered ODA
provided by official agencies
Concessional (grant/soft loan)
DOESN'T INCLUDE:
Military aid
Aid donated to pursue security interest
Natural disaster or war
Developing countries achieve economic development
Fill the savings gap
Improve quality of human resources
Strengthen institutions
Improve technology
Humanitarian aid
Given to save lives and alleviate suffering due to natural disaster/human-made crises
Development aid
Alleviate systemic poverty and promote economic, social, environmental or political development.
Concerns about aid
Misallocate the aid to small sector
Given for political reason not where the need is greatest
Linked to political views of the donor
Long-term provision of food force down domestic prices and put the domestic farmers at disadvantage
Create culture of dependency
Focused on modern industrial sector causing greater gap in incomes
Only available if the country agrees to adopt certain economic policies
Debt relief
Importance of debt relief
Frees up resources for social spending
Boosting social spending
Reducing debt service
Improving public debt management
Non-governmental organizations (NGO)
Promote econmic development, humanitarian ideals and sustainable development
Operational activities (plan and implement projects)
Advocacy activities (influence public policy)
Concerns and criticisms
Rely on funding, what NGO can or can't do depends on where their funding came from
Operate in developing countries causing uncoordinated and wasteful activities
Political or religious bias
Accused of spending more money on advertising
Minimum wages
"Protect workers against unduly low pay and ensure an equitable share in the fruits of progress to all and a minimum living wage to all who are employed and in need of such protection"
However, it's argued that the impact is moderate because:
Majority of population works in the informal sector. Doesn't receive minimum wages.
Issue with compliance and enforcement. Easy for firms to pay less
May disadvantages other due to employers laying off workers