Transcript Strategies-for

Strategies for Growth and
Development
November 2016
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consider the benefits & costs associated with each of the following market-based strategies:
- trade liberalisation
- promotion of FDI
- removal of gov’t subsidies
- floating exchange rate systems
- microfinance schemes
- privatisation
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consider the benefits & costs associated with each of the following interventionist strategies:
- development of human capital
- protectionism
- managed exchange rates
- infrastructure development
- promoting joint ventures with global companies
- buffer stock schemes
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consider the benefits & costs associated with each of the following other strategies:
- industrialisation – the Lewis Model
- development of tourism
- development of primary industries
- Fairtrade schemes
- aid
- debt relief
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understand the role of international institutions: (World Bank, IMF, NGOs)
First section: Market Based
Strategies
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Trade liberalisation
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Promotion of inward FDI
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Removal of gov’t subsidies
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Adopt a floating exchange rate system
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Privatisation
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Microfinance schemes
Market Based Strategies: Benefits
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Harness and encourage the efficiency of the free market
& private enterprise
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Trade more; gain from comparative advantage
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Tap into rising worldwide incomes
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Allow the exchange rate adjust to a level that closer
reflects the terms of trade
Market Based Strategies: Costs
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Previously gov’t supported industries may fail –
unemployment & localised poverty
Domestic countries may not be strong enough to
compete with international companies & may close
Environment may be at risk
Fall in the value of the currency increases cost of
standard of living – imports more expensive
Foreign ownership may not have best interests of the
country at heart
Foreign owned companies may have tax avoidance
schemes
May lose local skills / products / culture
Next section:
Interventionist Strategies
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Development of human capital
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Protectionism
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Managed or fixed exchange rate
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Infrastructure development
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Promotion of joint ventures with global companies
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Buffer stock schemes
Interventionist Strategies: Benefits
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Quality / quantity of resources for production may be
increased
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Benefits from international competition &
cooperation – both incentive & knowledge
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Citizens may have more stable incomes & more
choice – may protect jobs
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Smaller, inefficient firms can grow protected, hopefully
enabling them to compete internationally later
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Exchange rate uncertainty may be reduced
Interventionist Strategies: Costs
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Inefficiency from protection or support for industries
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May be expensive for gov’t
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May miss out on FDI looking for open borders / free
market conditions
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Exch. rate may be unhelpful for exporting
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Buffer stock schemes are difficult / expensive /
unwieldy to manage
Correct Sectoral Imbalance
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Problems occur when growth is uneven between
agriculture (primary), industry (secondary), & services
(tertiary)
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If any are neglected, others can be pulled down
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High dependency on one export can leave a country
vulnerable (eg. tourism)
The Problems of Agriculture
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Low price elasticity of demand & supply – (products
supplied tend to be a small percentage of total
production cost)
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Low income elasticity of demand – as world income
rises, agriculture is barely effected (primary products
traded in perfect comp. but manufactured goods in
monopolistic comp.)
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Low productivity – low levels of mechanisation &
degradation of land quality may even ↓ productivity
The Problems of Agriculture Cont’
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Primary products are vulnerable to technological
replacements (eg. nylon replacing cotton, etc.)
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Uneven tariffs/subsidies – tariffs tend to be 5x higher
than on manufactured goods (subsidies cost
developed countries £350B; aid to developing
countries:£60B)
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Declining terms of trade – export prices falling but
import prices (highly skilled manufactured products)
rising – keeps farmers in poverty trap & indebtedness
Policies to Develop Agriculture
Must address market failure & capital problems
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Property rights extension
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Disease control
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Technological change
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Help in provision of financial infrastructure
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Abolition of marketing boards that fix prices below
world prices
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Raising human capital –education of women
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Land improvement schemes
Unstable Commodity Prices
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Prices may fluctuate too greatly to achieve efficient
allocation of resources
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Commodities are: raw materials used in production
of goods (eg. minerals, metals, or agricultural goods)
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Large swings in price distort messages sent to
producers & consumers, often resulting in underproduction
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Makes it difficult for producers to earn a steady
income, plan & invest for the future
Agricultural Markets
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Although there is a long-term supply curve determined by
all the different suppliers theoretical willingness to supply,
actual supply in any given season is fixed & perfectly
inelastic
Because demand for food tends to be relatively inelastic, a
‘good harvest’ where prices fall, actually can mean falling
revenue & profits
Good Weather; Good Harvest
S actual
S planned
Price
- Revenues
tend to fall
P planned
P actual
D
Q
planned
Q
actual
Quantity of
Wheat
Bad Weather; Bad Harvest
S actual
S planned
Price
P actual
- Revenues
tend to rise
P planned
D
Q
actual
Q
Planned
Quantity of
Wheat
Buffer Stock Schemes
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Gov’t or relevant agencies establish a ‘band’ outside which
prices are not allowed to go – authorities will step in to bring
prices back into the band
Price
S1
S2
S
If prices rise above
max, gov’t sells
stock into the market
to bring the price
down
Max Price
Min Price
D
If prices fall below
min, gov’t buys up
stock to bring price
back up
Quantity of
Wheat
Price & Income Elasticity
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Over the long run, supply of agricultural commodities
has increased – technology, GM foods, etc. –
decreased relative price of food
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But demand for food is price inelastic so revenues
have fallen
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World incomes have risen, raising the cost of living
and relative standard of living of production in the
non-agricultural sector.
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But food is very income inelastic so farmers have not
seen the benefits & have fallen even further behind on
relative terms
Time Lags
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The length of the growing season means there are time
lags between farmers making decisions about production
and actual changes in production
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This reduces the ability of producers to respond to
changes in the market and find the best allocation of
resources – it’s a guessing game!
CAP (in a nutshell!)
• 1/3 of European Commission budget spent on
CAP
• Subsidies & min. prices cause food surpluses
which have to be dealt with
• Selling them into foreign markets cheaply
disrupts agricultural systems in other countries
• Destroying them represents a complete waste of
resources
• Many countries object to CAP and it is criticised
by the WTO
Last section - Industrialisation:
Moving Away from Agriculture
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Developing countries have adv. of lower wage costs
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Move into more flexible markets of manufacturing (esp.
clothing)
BUT:
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Migration to cities may leave agriculture underresourced
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Value added is mostly at packaging & distribution stages
– small margins at production stage
Prebisch-Singer Hypothesis
• Over the long run the price of primary goods such as coal,
coffee cocoa declines in proportion to manufactured goods such
as cars, washing machines and computers
• Countries with a high export dependence on primary products
may lose out from a worsening of the terms of trade.
• These countries should use revenues from primary commodity
exports to fund education, the development of skills and expand
technological capacity.
Arthur Lewis put forward a development model of a dualistic
economy, consisting of rural agricultural and urban manufacturing
sectors
http://www.tutor2u.net/economics/reference/lewis-model-of-structural-economic-growth-and-development
Rural workers become surplus
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Initially most of the
population works in the
rural subsistence sector
Diminishing marginal
productivity (Unit 3) in the
rural sector means with
such a large population
working in agriculture, many
workers would have zero
marginal productivity
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This means they are surplus
The move to urban work
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Higher productivity in
the industrial sector
means firms can offer
higher wages than in the
rural subsistence sector
This means workers will
migrate to urban
industrialising areas
Development
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This process becomes self sustaining since firms can
reinvest the profits they make to permit further
expansion in output
It carries on until all the surplus labour has been
transferred
Evaluation
• China provides a good example: official Chinese statistics place
the number of internal migrants over the past 20 years at over
10% of the 1.3bn population. 45% were aged 16-25 and twothirds were male. Urban incomes are around 3.5 times those of
rural workers.
• Evidence suggests that surplus labour is as likely in the urban
sector as in the agricultural sector. Migrating workers may
possess insufficient information about job vacancies, pay and
working conditions. This results in high unemployment levels in
towns and cities.
• Towns and cities may also be fixed in size and unable to
accommodate large numbers of immigrants. This gives rise to
slums and shanty towns, which are often illegal, built on flood
planes or areas vulnerable to landslides and without sanitation or
clean water. Cape Town provides a good example. Globally 1bn
people live in slums.
Tourism: A Service Based Strategy
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Attractive due to high YED; benefit from rising world
incomes
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Tourist spending has multiplier effects – income
passed on & creates tax revenue
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Can attract foreign investment (hotels, etc)
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Local infrastructure catering to
tourists assists local businesses
(roads, trains, etc)
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Encourages the tertiary sector –
may correct sectoral imbalance
Tourism: Problems
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Tourists demand imports goods (food, luxury gds, etc)
creating leakage – net gain can be much less than the
total cost of the holiday
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International tour operators may get all the windfalls
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May threaten local culture & values
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Negative externalities – litter,
environmental erosion, etc)
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Diversion of labour may lead to shortages elsewhere
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Market may be very volatile (subject to fashions, political
conditions, natural disasters, etc)
Other
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Fairtrade: How effective?
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Aid: Does Aid destroy domestic business and lead tp
dependency (next slide)
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Debt Relief
Dependency
International dependency models stress external rather than internal causes of
underdevelopment. Developed countries limit growth rather than help (eg by wealth
trickling down). Reasons include:
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Colonialism!
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Deliberate intent (Marxist)
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Unequal distribution of income and wealth goes back to when the major powers forced their colonies
to focus on producing primary products
Ruling class in poorer nations benefits from current situation. Get paid well as a result of the capitalist
system and by keeping wages low
Poor advice
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Well-meaning but poor advice from economists of developed countries , such as recommending loans
to bridge the savings gap