1. Measures to promote growth and development

2. Measures to promote growth and development

3. Free market and government
Economic systems
Market system
Central planning (command economies)
Mixed economies
Most goods provided by the market, but where there is market failure, principally merit and public goods, the state provides goods or services

4. Advantages of market based economies (and policies)
Central economics question – allocation of scarce resources
Incentives in markets act to encourage economically beneficial and efficient behaviour. Workers work, firms try to make profits
Investment
Linked to above, if enterprise is encouraged, and firms are able to make profits, they are more likely to invest
FDI more likely if foreign firms can make profits on investments
Government failure
Governments may choose wrong investment projects, in particular not choosing investments which reduce poverty. Could be lack of information, corruption, incompetence
X inefficiency common in public sector and state enterprises

5. Obstacles to encourage market activity in developing countries
Infrastructure
Financial sector
Legal structure and property rights
Stability
Market failure
Merit goods, public goods, inequality

6. Another theory - 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:
Colonialism!
Unequal distribution of income and wealth goes back to when the major powers forced their colonies to focus on producing primary products
Deliberate intent (Marxist)
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
Well-meaning but poor advice from economists of developed countries , such as recommending large loans to bridge the savings gap

7. Structural change
Many theories and evidence suggest structural change is necessary for a country to develop. This in essence means industrialisation
Links to Rostow stages of development
Links to free market models – attraction of FDI
Links to international dependence (that developed countries stop development by preventing industrialisation)
One more model: Lewis two sector model
Subsistence agriculture and manufacturing

8. Lewis two-sector model
Model views the economy as consisting of 2 sectors:
Rural subsistence (agriculture ie primary product)
Urban industrial
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
This means they are surplus
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
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 (or more specifically until the marginal productivity is equal)

9. Debt relief

10. Debt relief Many countries built up substantial external debts
Servicing the debt (interest payments) means insufficient government revenue available to promote development (reduce poverty, improve education/healthcare etc)
Link to savings gap and foreign exchange gap
Current state

11. Debt relief Benefits to cancelling or reducing debt:
Funds spent on servicing and repaying debt can then be used to:
Foster development, eg with investment (infrastructure, education, healthcare etc – each of these can be a full point in an essay)
Alleviate poverty (absolute poverty now defined as $1.90)
It may be in the long term interests of the developed world, since growth in the developing world means more and bigger markets for developed world firms (eg growth in Apple sales)
Debt cancellation generally tied to conditions, eg evidence of low levels of corruption, increased spending on development and on measures to alleviate poverty
Can also be tied to privatisation and other market opening/free market measures (so Dependency Theory advocates have an opportunity to criticise)

12. Debt relief
Costs or risks of cancelling or reducing debt (evaluation!):
Moral hazard - a situation in which one party gets involved in a risky event knowing that it is protected against the risk and the other party will incur the cost. This means debt cancellation could encourage irresponsible borrowing by developing countries
Comes at a cost to governments, and so to consumers and firms, in developed countries (which means an opportunity cost)
Linked to the above, and like the debate on aid in the UK some argue we should reduce (relative) poverty in the UK before spending money to alleviate poverty elsewhere

13. Debt cancellation programmes
See print-outs
Heavily Indebted Poor Countries Initiative (HIPC) launched in 1996
Aimed at ensuring no poor country has an unsustainable debt burden, and allowed for reducing debt from IMF and World Bank
Country eligible if the debt burden could not be managed with traditional means
Assistance provided subject to governments meeting a range of economic management and performance targets
Supplemented by the Multilateral Debt Relief Initiative (MDRI) in 2005 (drawn up to help achieve Millenium Development Goals)
Allows up to 100% relief on debt to IMF, World Bank and African Development Bank
Just under 40 countries included in the programmes
Total debt relief of about $130 billion by early 2013
Debt service costs have stayed at the same levels over the last 20- years whilst there has been an increase in spending on development and poverty reducing measures (see sheet)

14. Industrialisation, agriculture and tourism
Most models, and evidence from history, stress the need for structural change for a country to develop
Current developed high income countries developed through industrialisation (eg industrial revolution for the UK). This is the basis of the Rostow model
Lewis two-sector model suggests labour must migrate from agriculture to industry
Dependence theory suggests developing countries need to escape enforced low wage primary product dependence
Prebisch-Singer highlights the low growth for economies dependent on primary products
Free market theory (which we will look at a little more) suggests countries participating in the global economic system will receive FDI (and aid)
Harrod-Domar suggests economies need to generate savings in order to invest. A presumption of industrialisation

15. Industrialisation Issues with industrialisation
Can lead to neglect of agriculture (as the focus in manufacturing)
Agriculture still vital for developing countries – need food
Productivity must improve in agriculture so that there is surplus labour and savings necessary for industrialisation
If investment in industry leads to higher wages whilst there is no investment in agriculture, inequality can widen within a country (and even with investment in agriculture it can widen)
Opportunity cost. Need (at least some) market economy structure which may have an effect on eg culture/existing structures

16. Industrialisation and technology
Labour vs capital intensive industry
Because of limited capital and because of abundant labour supply, developing countries should focus on labour intensive technology/industries (think Lewis surplus labour)
They can then develop a comparative advantage
Developing countries at early stage of industrialisation will have low quantity and quality of capital stock
Schumacher’s concept of intermediate technology
Cannot leap to make sophisticated electronics products with sophisticated machinery
Use machinery which unskilled labour can operate
Suggests production of more basic manufactures

17. First steps – import substitution
Identify areas of production which are labour intensive
Often non-durable consumer goods eg clothing, footwear, drinks
In strong demand in developing countries and so currently imported
Production of these goods leads to import substitution – so improving the balance of payments (increasing ability to import other products)
May require infant industry protection in the first (infant) stages
May target range of industries to develop – balanced growth - or just a few – unbalanced growth
Has a limit to growth – the size of the domestic market

18. Export promotion Export promotion
After gains from import substitution begin to be exhausted (or as an alternative strategy) policy could focus on producing goods for export
Must target products with export potential, ie where there is demand in foreign markets
Again, may require subsidies for the industries making such products (infant industry protection)
South East Asia followed the pattern of protecting certain domestic industries (ie unbalanced growth) to substitute imports, and subsidising certain industries which produced for export
Other policies as well such as artificially low interest rates, targeted public investment

19. Inward looking or outward looking
Import substitution is an example of an inward looking policy
Focus is on the domestic economy
Preserve domestic traditions
Citizens may not want to develop or become part of the international economy
Tends to be linked to protection, since there may be fears domestic firms cannot compete with large international companies (TNCs)
Allows time for domestic firms to be able to compete, although they may not want to

20. Outward looking Outward looking policy, eg export promotion Advantages
Seek to grow by fostering links with international community
Start with subsidies, but then favour an open economy with trade liberalisation ie a dismantling of barriers such as tariffs and withdrawal of subsidies
May also mean open capital and labour markets
Advantages
Access to new sources of investment (eg FDI)
Access to the large global economy with large and growing demand, and allowing economies of scale for domestic firms
Act as discipline/competition for domestic firms

21. Outward looking Disadvantages
Domestic firms may be unable to compete without protection (draw tariff diagram and use infant industry argument)
Some concern about FDI in the form of multinationals
Mobility of labour is one way – brain drain lead by MNCs
Stifle domestic firms
May be part of a package forced on a country by international institutions eg IMF/World Bank (Dependence)

22. Agriculture and Tourism
See separate sheets
Industrialisation can mean agriculture is ignored
Still a need for food
Need to improve productivity to provide labour (and savings/export revenues) for industrialisation
Note poor soil in many parts of SS Africa prevents this
Tourism an alternative for some countries
Often warm/hot climate with attractions (nature, beaches)
International tourism is income elastic