Economic Growth and Development Strategies

Why are Specific Strategies Needed for Economic Growth and Development?

• Many lower-income countries struggle to reach economic development due to being stuck in poverty.
  • This makes it difficult for the government, which is lacking in revenue, to fund sectors such as healthcare and education or invest in infrastructure.
• To break out of poverty traps, specific strategies are needed to break one or more parts of the cycle.

Strategies

Trade Liberalization

• Trade liberalization is when countries remove all trade barriers such as tariffs, subsidies, quotas or administrative barriers.
• Trade is one of the most important factors in an economies ability to grow and develop.

Strengths

• Economic integration in developing countries leads to greater access to a variety of goods at theoretically lower prices and greater quality.
• Increases in exports
• Access to larger markets
• Improved international cooperation
• Efficient resource allocation

Limitations

• Infant industries may be phased out or unable to compete
• Potential increase in domestic unemployment
• More reliant on foreign imports
• Potential exposure to dumping
• Loss of tariff revenue for the government
  • Tariffs might be a large revenue source for developing nations, as imports are always monitored and administered, unlike the informal economy which doesn't generate government revenue.
• More difficult to protect population safety

Diversification

• Most developing countries lack the variety of production and exports.
• Diversification allows developing countries to be protected from economic shocks to specific sectors, reduce exchange rate fluctuations, and promote the growth of sectors outside of the primary sector.
  • This is due to reduced reliance on the primary sector.

Social Enterprise

• A social enterprise is a company whose main objective is to have a social impact rather than to make a profit for their owners or shareholders.
• It operates by providing goods and services for the market in an entrepreneurial and innovative fashion and uses its profits primarily to achieve social objectives.

• Social enterprises earn profit but typically put the profits back into their social objective. They are typically classified as for-profit or not-for-profit organizations.
• Social enterprises strive to provide essential goods, services, or resources in areas where local businesses or government intervention has failed.

Market-Based Policies

• There are several policies designed to encourage competition and efficiency.
  • Trade liberalization
  • Privatization
  • Deregulation

Privatization

• When government-owned industries are sold to the private owners.
  • Improves efficiency and promotes competition
  • Decrease in government spending and increase in revenue
  • Equity issues
    • Preferential selling of cheap government-owned industries lead to wealth inequity

Deregulation

• Removing rules and restrictions enforced by the government.
  • Removes barriers for start-up business
  • Lower costs of production
  • Public health and security concerns arise

Interventionist Policies

Redistribution

• Redistribution policies are designed to redistribute wealth and income equally in society.
• These policies are generally effective in countries where income equality is low and social mobility is difficult.

• Common redistribution policies include:
  • Progressive Tax Reform
    • Poor countries have a largely informal, untaxed economy with no formal income, so they typically use regressive indirect taxes on goods and services.
    • Progressive taxation allows most of the tax burden to fall on those with high income, allowing for more disposable income in the lower class.
  • Transfer payments
    • Countries with established tax revenue can implement transfer payments that give funds directly to lower-income families to provide greater income, opportunity, and well-being.
  • Minimum wage
    • Minimum wage requirements can help protect vulnerable workers from exploitation and increase income equality in society

Provision of Merit Goods

• Economic growth and development can be improved through government provision of merit goods such as education, healthcare, and infrastructure.
  • As with most other interventionist policies, the government needs to consider the opportunity cost of this provision, and how efficiently it can supply these goods compared to private firms.

Foreign Direct Investment (FDI)

• FDI occurs when large multinational corporations (MNC) invest in a country.

Inwards FDI Positive Effects

• Increases jobs
• Increases growth and development
• Improves infrastructure
• Improves human capital
  • As MNCs work with and invest in developing countries, they can transfer their knowledge to the workers and governors there.
• Increases government business tax revenue

Inward FDI Negative Effects

• Loss of control of capital
• Over-reliance on foreign firms
• Environmental damage
• High barriers for infant industry competitors

Foreign Aid

Humanitarian Aid

• Aid for countries where people are struggling to fulfill basic needs.
• Typically this type of aid focuses on food, medical, or natural disasters.

Official Developmental Aid

• Aid is provided to achieve long-term development.
• Types of developmental aid include:
  • Grants, loans, project/program aid
  • NGO (Non-Governmental Organization)
  • Aid Official Developmental Assistance (ODA)
  • Debt Relief
• In some cases, developmental aid, such as large amounts of resource donations like food, can actually hurt development, as these free supplies give local firms no chance to compete.

Multilateral Development Assistance

• This term refers to receiving assistance from organizations contributed to by countries.
  • The World Bank and the International Monetary Fund (IMF) are the two most popular examples.

World Bank

• Goal: Reduce Poverty
• Functions:
  • Provides low-interest loans
  • Policy advice
  • Technical assistance
  • Financial assistance with a strong focus on long-term factors of production growth.

International Monetary Fund

• Goal: Economic Stability
• Functions:
  • Provides conditional loans
  • Economic surveillance
  • Development policy creation

Institutional Change

Gender Inequality

• Gender inequality hinders women's access to education, political empowerment, and economic opportunity.
• Some general recommendations to combat these issues are:
  • Addressing and eradicating gender stereotypes
    • Can be done through education and campaigns
  • Establish laws prohibiting gender discrimination
  • Ensure equal rights under the law
  • Promote gender hiring initiatives or quotas

Corruption

• Corruption is a significant barrier to development.
• Some actions to reduce corruption in general are:
  • Establish an effective justice system and the rule of law
  • Reform public administrational roles and auditing process to ensure transparency
  • Promote freedom of the press
  • Close international loopholes that may fund corrupt leaders
  • Promote transparency and the power of communities