5.4 Growth And Development Strategies


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5.4 Growth And Development Strategies

  1. 1. + Development Topic 5.4 Growth and Development Strategies
  2. 2. + Key pointers for Topic 5.4 Growth models suggest how growth has 1. occurred in the past. Growth strategies are economic polices and 2. measures aimed at increasing GDP Development strategies are policies and 3. measures aimed at improving human development / standard of living / welfare. Be careful about differences between models, strategies and the difference between development aims and growth aims. Economic Growth ≠ Economic Development
  3. 3. + Growth Models Harrod - Domar Model – identifies factors that 1. affect the rate of economic growth (% change in GDP) Structural Change / Dual Sector Model – 2. attempts to explain how an agricultural undeveloped society with a small manufacturing sector can move to become a modern economy with large manufacturing and service sector
  4. 4. + HarrodDomar Model Shows how factors can influence the rate of economic  growth Suggests that the rate of growth of GDP is determined by  national savings ratio and the ratio of capital to output in the economy. Savings Ratio Rate of GDP Growth = Capital / Output Ratio Savings Ratio = marginal propensity to save, for an extra dollar of income, what is the percentage saved Capital / Output Ratio = spending on capital as a ratio of output from capital, efficiency of spending
  5. 5. + HarrodDomar Model So according to the formula…Growth can be increased by  Increasing the level of savings in an economy  This leads to an increase in investment  Lower interest rates for borrowing  Greater stock of capital available  Should lead to increased output and efficiency do you try to But how in the long term  apply these ideas to Reducing the capital / output ratio  developing  Increased efficiency of capital, through greater technology, countries? improved training, skill development. Improved managerial skills to that capital is used in intended  ways. Increased research and development. 
  6. 6. + Growth Models Structural Change / Dual Sector Model – 1. attempts to explain how an agricultural undeveloped society with a small manufacturing sector can move to become a modern economy with large manufacturing and service sector Manufacturing Profit reinvested Profit reinvested Agriculture
  7. 7. + Growth Strategies Export-led Growth – and outward orientated 1. growth strategy. Aim is to stimulate AD by pursuing export growth. Import Substitution – inward orientated 2. strategy, local people should by locally produced product rather than import them. Foreign Direct Investment 3.
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  9. 9. High exports + Current Account surplus Balanced Current Export Led but strong Account domestic market Scandinavia Germany, Japan Low imports High imports Balanced Current Account Current Account Deficit Very inwards looking, self sufficient United States Low exports
  10. 10. + Types of Aid  Bilateral, multilateral aid Bilateral is aid is between two nations  Multilateral aid is given to international aid agencies by  wealthy donor nations and is distributed on a needs basis. International aid agencies include International  Monetary Fund (IMF) or World Bank  Grant Aid, Soft Aid Gift of money, capital or technology with no reciprocal  obligations. ‘no stings attached’
  11. 11. + Types of Aid Official Aid  Official Development Assistance (ODA) is the sum of all the  multi and bi lateral aid. The globally agreed aim is that Donor nations contributed on  average 0.7% of global GNP per year. Tied Aid  These are reciprocal arrangements between the donor and  the recipient country. Usually such aid is given to a country for instance to build rail  network. The material for the rail network will come from the donor country. Example: France provides loans to Thailand and Bangkok for  building MRT lines which will use French technology.
  12. 12. + Foreign Direct Investment (FDI) Long term investment by Multinational 1. Companies in foreign countries.
  13. 13. + Very high level of Foreign Direct Investment into the country. “Net receivers” Net Foreign Direct Investment as % of GDP
  14. 14. + Types of Aid Aid is the help, mostly economic, which may be provided  to communities or countries in the event of a humanitarian crisis or to achieve a socioeconomic objective. Humanitarian aid is therefore primarily used for  emergency relief, Boxing Day Tsunami Development aid aims to create long-term sustainable  economic growth, Water pumps, building schools.
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  17. 17. + Reasons for Foreign Direct Investment Main motivations are revenue and profit and not  development. No incentive to create equality, only to make money for shareholders. Firms investing directly can gain on a number of counts  By setting up productions, multinational companies gain  access to lower costs of production. International awareness of tastes and preferences.  Can lead to multinationals avoiding tariffs.  Countries can offer a geographical advantage, such as  closeness to key markets, or global trade routes. Hong Kong, Shanghai, Singapore. Lower taxes of capital, labour and profits  Can exploit countries with lower environmental standards. 
  18. 18. + Export Led Growth Ethopian Coffee Industry – Pre Trade P$ SE Consumer surplus PE Producer surplus DE 0 QE produced
  19. 19. + Export Led Growth Ethopian Coffee Industry P$ SE Consumer surplus after trade Pw Producer surplus PE after trade DE 0 QD QE Qs exported
  20. 20. + Export Led Growth Ethopian Coffee Industry P$ SE Pw Gains from trade PE DE 0 QD QE Qs exported
  21. 21. + Reasons for Outward Orientated Strategies Increase in export revenue is an important boost to  domestic GDP. Proportion of exports to GDP in Korea increased from 2.4% in 1962 to 42% in 1999. Benefits of Economies of Scale, as market size grows  beyond the domestic population, average costs will tend to fall. Increased competition and incentive for domestic firms to  compete with the world, increasing efficiency.
  22. 22. + Import Substitution Russian Market for Cars P$ SR PR DR Qs QR QD imported
  23. 23. + Import Substitution Russian Market for Cars P$ SR SR + Subsidy PR Consumer Surplus with trade or import substitution Domestic PS with DR imports Producer surplus gains Qs QR QD from subsidy imported
  24. 24. + Import Substitution Russian Market for Cars P$ SR SR + Subsidy PR Consumer Surplus with trade or import Tariff substitution + Sworld Domestic PS with DR imports Producer surplus gains Qs QR QD from subsidy imported
  25. 25. + Failures and Successes of Import Substitution Lack of competition to drive quality  Lack of price competition in limits markets  Low incentives to invest for the future as likely to be hit by  changes in import tariffs and laws.
  26. 26. + Micro Credit Microcredit is the extension of very small loans  (microloans) to those in poverty designed to spur entrepreneurship. These individuals lack collateral, steady employment and  a verifiable credit history and therefore cannot meet even the most minimal qualifications to gain access to traditional credit. http://www.kiva.org/app.php
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  28. 28. + Fair Trade
  29. 29. + What does Africa need? More Aid Increased Foreign More trade and Direct Investment exports Less Debt Greater import substitution and why?
  30. 30. + Poverty Cycle Growth Development Low economic Low levels of growth education and healthcare Low levels of Low levels of Low incomes investment human capital Low level of Low savings productivity
  31. 31. + Cutos Customs Union
  32. 32. + Examination Questions Explain the main characteristics, of an export led 1. growth strategy. (10 marks) Evaluate the view that economic growth and 2. development are best achieved through the adoption of an outward orientated strategy. (15 marks) Discuss three reasons for multinational company 3. investment in developing countries (10 marks) Evaluate the role of Foreign Direct Investment in 4. promoting economic growth and development in developing countries. (15 marks)
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  34. 34. + Development Bingo Revision Bingo Inflationary pressure Recessionary Gap   Boom Recovery   Elastic Peak   Public Finance Act Unit Elastic   Public Provision  Allocative efficient  Positive Externalities of  Consumption Involuntary Unemployed  Increased equity Lorenz Curve   Inelastic Progressive Tax system   Real wage  Subsidy  Monopsony  Subnormal Profit  Free rider behaviour  Non Depletable 