document

1. CHAPTER 3
POLICIES TO PROMOTE
ECONOMIC GROWTH AND DEVELOPMENT
HOANG BAO TRAM (Ph.D)
baotram.hoang@ftu.edu.vn

2. CHAPTER CONTENT
• Trade policy
• Financial development policies
• Poverty, Redistribution policies
• Macroeconomic Stability policies
• Natural Resources, Foreign Aid policies

3. TRADE POLICIES
• CLASSIFICATION OF POLICIES
✓ price-type: import tariffs, export taxes and subsidies
✓ quantity-type: quotas, “voluntary” restraint and “orderly” marketing arrangements
✓ other: licensing, product regulation, administrative
• CLASSIFICATION OF EFFECTS
✓allocation and efficiency: counter market failures, reduce dead-weight losses
✓distribution: across persons or groups in a country, across countries
• CLASSIFICATION OF MARKETS
✓perfectly competitive,
✓various types of imperfect competition
• CLASSIFICATION OF ANALYSES
✓positive economics: calculation of incidence, allocative and distributive effects
✓normative economics: policy design and recommendation 1 positive
✓political economy: political processes of policymaking & their outcomes

4. TRADE POLICIES
Tariff Export subsidy Import quota Voluntary
export restraint
Producer surplus Increases Increases Increases Increases
Consumer surplus Falls Falls Falls Falls
Government
revenue
Increases Falls
(gov. spending
rises)
No change
(rents to license
holders)
No change
(rents to
foreigners)
Overall national
welfare
Ambiguous
(falls for small
country)
Falls Ambiguous
(falls for small
country)
Falls

5. TRADE POLICIES
• Since WTO, the tariff and quota become less popular as international trade tools… giving
stage to others policy instruments such as:
✓NTMs
✓Rules of origin, Local content requirement
✓ Export credit subsidies
✓ National procurement
✓ Red-tape barriers
✓……

6. TRADE POLICIES
Source: UNCTAD Global Trade Update (April 2025): Escalating tariffs – the impact on
small and vulnerable economies

7. FINANCIAL DEVELOPMENT POLICIES
• A large body of evidence suggests that financial sector development promotes economic growth
through capital accumulation and technological progress by increasing the savings rate, mobilizing
and pooling savings, producing information about investment, facilitating and encouraging the inflows
of foreign capital, as well as optimizing the allocation of capital.
• Financial sector development reduces poverty and inequality by broadening access to finance to
the poor and vulnerable groups, facilitating risk management by reducing their vulnerability to
shocks, and increasing investment and productivity that result in higher income generation.

8. FINANCIAL DEVELOPMENT POLICIES
• To promote financial stability and to develop diversified, efficient and inclusive financial systems, financial
policies should focus on:
▪Financial stability and integrity
✓ maintain efficient capital markets and bond markets
✓ efficient and secure financial transactions by reforming and developing payments systems
✓ development of international standards in banking, insurance, capital markets, market integrity, financial infrastructure
▪Financial access and inclusion of households and SMEs
✓ ensure that all (adult) individuals and firms can safely use of a range of appropriate financial services (savings, payments, credit and insurance).
✓ ease access to finance and credit of SMEs (SMEs have been underfunded as banks are not interested in extending credit to them due to perceived high risk and a lack of collateral)
▪Development of long-term finance and risk management
✓ identify important risks to financial condition
✓ ensure compliance with established public management best practices in risks management

9. POVERTY, REDISTRIBUTION POLICIES
• In countries where growth is satisfactory but benefits the poor much less than the non-poor,
there obviously is a strong case for shifting resources from those at the top of the income
scale to those at the bottom.
• Redistributive policies could also help narrow the gap between rich and poor in countries
with high inequality, where social and political tensions or the rise of populist regimes might
prove bad for growth in the long run.

10. POVERTY, REDISTRIBUTION POLICIES
• Straight income redistribution: Progressive taxation and income transfers
▪ A higher and more effective income tax in the upper part of the income scale could help raise the necessary
funds for income transfer
▪Developing economies tend to rely on the indirect taxes (relatively more than advanced economies) which tend
to be regressive because they tax consumption rather than income.
▪The success of conditional cash transfer programs has demonstrated that it is possible to transfer cash
efficiently to poor people in developing economies: give money to households on the condition that they
comply with certain pre-defined requirements (up-to-date vaccinations, regular school attendance by
children... )
▪Income transfers are preferable to subsidies because they cost less and are better targeted to the truly needy.

11. POVERTY, REDISTRIBUTION POLICIES
• Increasing opportunities
▪Education and training as well as access to health care, micro-credit, water, energy, and transportation …are
powerful instruments to boost people’s capacity to generate income, today and in the future.
▪Social assistance (safety net policies) is critical to prevent people from falling into poverty traps when adverse
shocks hit.
▪Enhancing the pro-poor nature or inclusiveness of growth strategies, in particular through fostering employment
for unskilled workers.
▪Others: anti-discrimination, anti-corruption laws…

12. MACROECONOMIC STABILITY POLICIES
• Fiscal policy
▪ Changes in the level and types of taxes, the scale of spending and its composition, the size of the budget deficit, and
the modalities of its financing ….
▪ Reduce macroeconomic volatility using discretionary countercyclical fiscal policy: government actively raises taxes
and/or reduces spending during booms and cuts taxes and/or increases spending during recessions.
▪ Strengthening institutions and building fiscal space during economic upturns would allow countries to pursue more
stabilizing fiscal policies
• Monetary policy
▪ Countercyclical monetary policy (i.e., raising interest rates during booms and episodes of rising inflation while cutting them
during recessions) can reduce business cycle fluctuations and volatility of output and inflation.
▪ Monetary policy expansion can increase growth and contribute to employment creation, at least in the short run, and thereby
favor the poor and the middle class (for whom labor income constitutes a higher share of their total income than for the rich).

13. MACROECONOMIC STABILITY POLICIES
• Macroprudential policies
▪Macroprudential policy limits systemic risks and ensure financial stability by addressing two
externalities:
✓The interconnectedness of financial entities: different financial entities do not internalize their risk to the
financial system as a whole through their transactions with other entities.
✓The financial accelerator: amplifying feedbacks within the financial sector and between the financial sector
and the macroeconomy, which can generate unsustainable credit booms.
▪Macroprudential policy instruments: a cap on loan-to-value ratio (LTVs) ratio, loan-to-income ratio
(LTI), and debt service-to-income ratios (DSTI)

14. MACROECONOMIC STABILITY POLICIES
• Exchange rate management
▪Empirical evidence finds that flexible exchange rate regimes tend to be more effective in stabilizing output.
▪Flexible rate regimes can also help countries recover more quickly from commodity price shocks and global
recessions and mitigate the transmission of global financial shocks to domestic financial markets
▪ Fixed regimes (pegs) are associated with lower inflation, which may benefit the poor.
▪ In the long run, pegs help monetary policy not only by anchoring inflation expectations but also by disciplining monetary
policy.
▪ Large exchange rate depreciations tend to favor the expansion of the traded goods sector relative to nontraded goods +
the export and import-competing sectors are dominated by large firms owned by the rich, while the poor are concentrated
in the nontraded goods sector → such movements may promote wealth inequality by increasing the value of firms
producing traded goods and increase income inequality by reducing real wages in the nontraded goods sector.

15. NATURAL RESOURCES
• Natural resource management refers to the coordinated strategies
adopted for the sustainable utilization of major natural resources,
such as land, water, soil, forests, fisheries, plants and animals.

16. NATURAL RESOURCES

17. FOREIGN AID POLICIES
• Developing countries often face low domestic savings, which limits capital formation
→ Foreign aid can provide the necessary capital to finance investment in infrastructure, education,
and health
• Motivation of foreign aid:
✓Foreign policy, political alliances and national security
✓Historical motives (former colonies)
✓ Economic motives
✓ Humanitarian motives (income and poverty)
✓…….

18. FOREIGN AID POLICIES
• Long-term reliance on aid can discourage domestic resource mobilization, weaken government
accountability to citizens, and create dependency.
▪ In an economy with no food imports, assume that local farmers could produce sufficient amount food → the entire
demand would be met by local production and local farmers.
▪ If foreign aid in the form of food donation occurred, then the supply would increase, thus leading to lower prices →
the local farmers would decrease production (the incentive to produce, would be lower, as the price of the product
would fall).
→ effectiveness depends on how they are designed, implemented, and aligned with recipient
countries’ needs and governance structures.

19. FOREIGN AID POLICIES
• Targeting
• Institutions (corruption is a real issue !!!!!)
• Large inflows of aid can lead to currency appreciation (Dutch
disease)

20. POLICY SIMULATION
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21. POLICY SIMULATION
WELCOME TO CHANGRIA !!!
• You will participate in Changria’s national policy-making process by taking on the
roles of different societal actors.
• You will cooperate to reach social consensus in:
➢ identifying development goals
➢ negotiating policy priorities
➢ selecting tools to implement them
…….. while balancing economic, social, and political interests.
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22. You are all part of the economy !!!
• Ministry of Planning and Development
• Executive Government (Prime Minister + Cabinet)
• Rural Farmers’ Union
• Urban Business Association
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23. Development goals
1. Increase GDP Growth
2. Reduce Income Inequality
3. Improve Access to Quality Education
4. Enhance Environmental Sustainability
5. Strengthen National Innovation Capacity
6. Reduce Youth Unemployment
7. Expand Healthcare Access
8. Develop Rural Infrastructure
9. Attract Foreign Investment
10. Improve Public Sector Transparency
11……..
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24. Policy tools
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Policy Tool Potential Impact Areas
Tax incentives for businesses Investment, employment, innovation
Free vocational training programs Employment, inequality, education
Subsidies for green energy Sustainability, innovation, investment
Minimum wage increase Inequality, consumption, labor rights
Infrastructure development (roads, ICT) Rural development, growth, jobs
Public health insurance expansion Health, inequality, rural services
Education reform (curriculum + funding) Education, innovation, inequality
SME credit programs Jobs, growth, innovation
Anti-corruption law enforcement funding Transparency, trust, foreign investment
National digital transformation plan Innovation, growth, efficiency

25. REFERENCES
• Hamid R. Davoodi, Peter Montiel, and Anna Ter-Martirosyan (2021). “Macroeconomic Stability and Inclusive Growth”, WP/21/81 IMF Working Paper
WP/21/81
• Immervoll, H. and L. Richardson (2011), “Redistribution Policy and Inequality Reduction in OECD Countries: What Has Changed in Two Decades?”, OECD
Social, Employment and Migration Working Papers, No. 122, OECD Publishing, Paris, https://doi.org/10.1787/5kg5dlkhjq0x-en.
• Demirgüç-Kunt A., Levine R. (2008). “Finance, Financial Sector Policies, and Long-Run Growth”. World Bank Policy Research Working Paper 4469
• Coria, J. and Sterner, T. (2011). “Natural Resource Management: Challenges and Policy Options”. Annual Review of Resource Economics, (3): 203-230.
• Sterner, T. and Coria, J. (2012). Policy instruments for Environmental and Natural Resource Management. RFF Press: New York.
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