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4.10  Economic growth and development strategies

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Quick note

  • All of the following policies are done for not only growth and development but also to break the poverty cycle. Each and every one of them as that is one of the main goals as a SDG. To assess the pros and cons of each policy try to link it with the poverty trap and where it helps.

Strategies to trade

  • Trading is arguably the most important step to globalisation, but also a very important step for economic growth. Aggregate demand as we know is made up of net exports-Imports, a proponent of economic growth.

  • Discussed in unit 4.6 were several of the strategies; those being expenditure switching, export subsidies, economic integration, specialisation, diversification and achieving social welfare/appeasing stakeholders

Definitions, pros and cons

  • Expenditure switching; aims to encourage consumption of domestically produced goods instead of imports. This is done by implementing protectionist policies. Useful to improve current account deficits, and reduce dependency on imports; However may lead to retaliation by trade partners implementing protectionist policies, increase production costs and times for producers using imported raw materials, less variety of products, reduces competition thus can reduce incentive for efficiency.

  • Export subsidies are straightforward, working the same way as normal subsidies, these can be firms or more oftenly tax breaks. Lower cost of productions can be beneficial to make more competitive products given they are ped elastic, competition is still present hence efficiency can increase, greater output would also be generated if demand increases and thus increase economic growth and employment as supply would have to increase.

  • Economic integration is when nations unify by abolishing existing protectionist policies. The EU is an area of economic integration, where trade partners musn’t pay any taxes or fees but consumers may pay VAT tax to compensate loss of tariff revenue. Of course costs could be decreased along with variety increasing. The member countries can share their technologies to make each other more efficient and also provides more consumers to firms in member countries. However member countries may need to enact barriers on non member countries to encourage intra bloc trading which would hamper possibilities of international relationships.

  • Specialisation can be global and local and this is when resources are used to make one section, product or one type of product. This is done to increase efficiency and productivity and improved competitiveness.  However this has many problems as they lack diversification and if a industry is declining this will significantly reduce GDP and/or profits. 

  • Diversification is the opposite of specialisation and its when a country/firm spreads out and offers a variety of products rather than just one. This is done to reduce risks of business if one industry declines as profits from others will remain stable most likely. However it is difficult to set a substantial foothold on many industries at once and thus the country or firm will face stubborn competition especially if there are bigger operators in the market.

  • Achieving social welfare/appeasing stakeholders is a mostly local initiative wherein firm(s) work to please the society instead of only shareholders, this is actually a objective of firms. Stakeholders also include workers, consumers and appeasing them can lead to increased productivity, loyalty and free word of mouth advertisement. However as it is a local venture it is near useless for international competition unless the firm itself is large and renowned.

Market based approaches

  • A government will intervene in working of a market to correct any failures present, with the aim of reducing government participation in the market as the end result.

  • Reducing barriers; Barriers such as paperwork and trading permits can be simplified to obtain or removed to streamline the process of international trading. Increasing efficiency, becoming more enticing for firms to settle, lowering costs of production and perhaps for consumers. The increase in imports will lead to foreign competition with which sunset or sunrise industries may not be able to compete.

  • Deregulation and privatisation are similar in the sense that they work to reduce state control of assets/market(privatisation), regulation(deregulation) and convert it into private ownership where they can work with more liberty. Deregulation makes production streamlined and attracts investments, more private competition often results in efficiency and thus cheaper prices with lower costs of production. Can also lead to employment. Money earned by privatisation can be used for supply side policies like investing in education and healthcare. Although it can still lead to loss in employment in capital focused industries, loss in public interest as profit is often prioritised. Monopolisation can occur to a extent which can lead to wealth concentration, along with consumer exploitation with weaker laws. Environmental concerns if environmental laws are loosened leading to greater negative externalities.

Interventions

  • A government will intervene in working of a market to correct any failures present, with the aim of reducing government participation in the market as the end result.

  • The government can opt to alter fiscal and monetary policies and also provide supply side policies.

  • Expansionary fiscal policies reduce taxes to boost consumer expenditure and economic activity as disposable incomes increase, resulting in higher aggregate demand and economic growth. An increase in government spending in the form of supply side policies would increase social welfare and living standards increasing qualitative aspects of the economy; like investing healthcare and education. Alternatively progressive taxes can be implemented and revenue generated can be redistributed to the low income households, however corruption can lessen the extent to which it would be beneficial, too high taxes and tax evasion could start happening reducing total revenue. Supply side policies will have opportunity costs.

  • To support low income households the government can make NMW legislation and safety nets for the poor. NMWs were already discussed earlier, they are legal minimum wages that employers must pay to employees, however if the NMW is not set above the equilibrium price it won’t be effective. This also contributes to higher costs of production and may cause higher unemployment in declining industries. Safety net policies are government policies made to support the low income households like assistance programs for shelter, food, etc along with cash transfers. Assistance programs are straightforward and are provided to lessen the burden of such needs on low income households. Cash transfers can be conditional or unconditional; conditional is where households are given money on certain terms like ensuring their children go to school whereas unconditional means there are no strings attached and they can spend their money freely. The government can also set up national assistance programs such as emergency relief and strengthen law institutions that will be helpful if unfortunate events such as disasters occur.

Interventions vs Market based approaches

  • Market based approaches as said free up the market from government control and this tends to be a more efficient method of running the market as competition increases increasing the need of efficiency as efficient producers are favored by the price mechanism. Market based approaches can directly lead to increasing GDP and output due to more productivity of the country and on top of that it attracts investment also as businesses prefer free markets where there aren’t many regulations to abide by. Reduced barriers also promote trading as there will be no ‘hostility’ between global partners and free trade can ensue. However due to the final result of lower government intervention its very easy for the market to fail as it will fail to take into account social benefits and costs especially with possibility of weakened regulations and economic instability . Free market can lead to wealth concentration and inequality as neglected portions of the population will have lesser and lesser bargaining power for their needs. The 2008 depression was caused by excessive deregulation which lead to a financial bubble, as the government had loosened oversight over most financial institutions leading to questionable decisions to say the least. Like lending to individual with poor credit scores.

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  • Interventions are done with social welfare in mind and to lessen market failures, the so called supply side policies with the aim of bringing mainly economic development rather than economic growth, which is done by improving living conditions. The policies of providing funding to improve infrastructure, education and healthcare improve the aggregate supply of the country or the potential of the economy not the output directly.The government utilising progressive taxation bridges the income gap as it redistributes the income in an economy and provide more equality.  As the government does have active participation in the market the economy tends to remain stable as they can intervene to control swings in the market. Qualitative Assistance programs are mighty helpful in cases of economic downturn or slowdown. Disaster programs can be very helpful to provide immediate relief. Governmental control and effectiveness is often subject to corruption which could lead to major inefficiencies if funds are mismanaged. Not only political corruption due to changing ideas but also relationships with big industry players to make favorable policies for them, and as it is politicians who have the role of assigning the policies where they do not necessarily have experience it can lead to inefficient policies and can lead to political unrest and violence.

Provision of merit goods and FDI

  • While discussing merit goods in earlier units we remarked how they are often underallocated to or under consumed thus governments often incentivise the production and consumption of these goods.

  • The prior discussed supply side policies of healthcare and education are merit goods. Both of these are one of the most important factors to increasing the size of the economy with more qualitative factor of production and quantitative; increased human capital from wider skill sets and ability to specialise increases opportunity to increase production and profits/incomes for all members both labour and enterprise. Higher incomes may add to aggregate demand. Healthcare is equally if not more important in certain cases like developing economies where the immediate effect of healthcare is very helpful rather than the long term gain of education for the society. Both of these increase standard of livings and productivity. However as always they will have opportunity costs which will have to be weighed case wise and as mentioned education is like a long term investment where gains aren’t immediately apparent, and the provision of funds to these supply side policies is also subject to corruption. 

  • Another merit good is of developing and improving on infrastructure, how much ever  strong the workforce of a country may be if the basic infrastructure like roads, communication and hygiene are not in place the country will lack efficiency. The benefits are apparent with communication and roads where transport and decision making are greatly benefitted, hygiene is closely related to healthcare of the country. Like the prior goods, these carry a opportunity cost along with possible corruption in the qualitative aspect of the infrastructure. Most also take a lot of time to be finished.

FDI

  • Foreign direct investments are important for all countries from a perspective of economic growth and also international relationships promoting trading. MNCs or multi national corporations are a very good example of FDI, they can bring with them possibilities of generating significant economic growth however ut is really dependent on the policy of the firms; if the firm is ready to offer jobs which are more than just entry level/ low level jobs where much skill isn’t required thus local households also don’t gain a lot of income from offered jobs. If a MNC is performing well in a country they may invest further into the economy which would increase aggregate demand and also increase productivity and incomes from higher output, and higher tax revenue from increased economic activity that can be used to fund merit good production. However often times if a MNC or any major investment is a large source of a country’s economy they get strong bargaining power and can strongarm the government to make new policies favoring them which could be detrimental to the society, like environmental laws being weakened. Much of the profits are often sent back to the country of origin of the MNCs so the host country doesn’t get full benefits. Depending on the strictness of the laws related to power concentration and dumping in a country a MNC may be able to run other businesses out of the market as they can incur losses from dumping for extended amount of times which smaller local firms amy not be able to.

Foreign aid

  • Developing countries may have to resort to getting foreign aid instead of the prior mentioned policies. 

  • Humanitarian aid is one of the most popular types of foreign aid, often given when countries are suffering through periods of extreme distress like natural disasters, this helps to build relationships between the donor and the recipient country. However significant aid can lead to disincentivization of the country to pursue economic growth which can lead to stagnation and dependency. Some of the aid may also be misused due to corruption politically.

  • Developing nations often have to borrow money to fund their construction of infrastructure however the repayment of it carries great opportunity cost, like investing and providing supply side policies and some countries fail to repay them, thus debt relief initiatives were created to lift off the debt burden from countries who are indebted largely. There are evident benefits like opportunity costs being forgone and money saved can be used for public goods. However when forgone the countries could very easily fall into the same cycle as there is no pressure for them to be sensible about taking loans. Corruption as always is a problem and the large sums of money can be misused.

  • NGOs are the most basic form of aid they can operate internationally, nationally and locally. They are not funded by the government and are instead made up of volunteers. They have been most useful for raising awareness about global issues without any funding necessary. Like when Doctors without borders helped Nicaraguan survivors after a disastrous earthquake. NGOs can attract global attention and aid through publicity. NGOs have focused initiatives that make them more effective, they are also able to reach overlooked communities by the government due to their small scale operations. As they are non funded their scope of help is often limited.

Developmental assistance

  • Developmental assistance is provided to help development of countries, these are bilateral or multilateral like the World Bank. These are commonly grants[ transactions that mustn’t be repaid] or concessional loans[favourable loans that have to be rapid but with lower interest rates]. The UN has a long standing target that developed countries should devote 0.7% of their GNI to ODA to eliminate poverty. ODA can help facilitate relationship and future partnership between countries. Although minor there are opportunity costs when the loan must be repaid, countries can become dependent on the assistance and funds may be diverted due to corruption.

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  • As referenced earlier The World Bank is a major source of developmental assistance. Another major source is the (IMF) or International monetary Fund. They are major organizations to provide multilateral development assistance.

  • World bank and IMF were founded during July 1944 at the Bretton Woods conference. The world bank focuses on long term development and poverty reduction, whereas IMF focuses on economic and financial stability. IMF was created to build economic cooperation globally and mainly to avoid the repetition of the Great Depression due to competitive devaluation of currencies( sort of like price gouging ). The world bank was created to help postwar stabilization of the economy and development mainly of the Europe. The aim of the IMF; furthering international monetary cooperation, encouraging the expansion of trade and economic growth, and discouraging policies that would harm prosperity. To fulfill these missions, IMF member countries work collaboratively with each other and with other international bodies.(directly from IMF)

  • The world banks aims is; to reduce poverty by lending money to the governments of its poorer members to improve their economies and to improve the standard of living of their people.(directly from World bank)

Addressing systemic problems

  • To enable a country to have economic development there must be multiple basic systems put in place like reputable and reliable banking services, equality, effective law and order, strong property rights and addressing corruption and regulatory frameworks.

  • Financial institutions are necessary as they enable people to be able to borrow and loan money providing necessary funding for investing and economic growth/development. They can also provide more favourable saving policies to encourage the act which is necessary for investment as they are the source of the required funds without which investments are limited. Advancements like mobile banking[allows banking remotely] and microfinance[offering financial services to unemployed or low income individuals like microloans] have made financial services simpler and more accessible to almost all demographics of a country. However microfinance often have high interest rates and over-indebtedness due to the high interest rates and low financial literacy of most of the targeted demographic, coupled with the stringent repayment pressures have sadly led to high suicide rates amongst borrowers. Mobile banking has security risks as it is digital, it is prone to human error like accidental transactions and limited access as they do need a phone.

  • Equality, specially gender equality, has been a long lasting issue a=especially in countries such as India where discrimination is still common. Inequality works as a deterrent to women from entering the work force and keeps the country from reaching its maximum productive potential and household incomes are negatively affected as more stress is also put on the working members. Providing equal opportunity incentivizes this half of the population to also take part in the labor force. Increasing average living standards as they also may get access to better institutions such as education.

  • Here both effective law and property rights go hand in hand. Investments are likely to flourish if investors are assured that their property wont be wrongfully seized from them. Law also improves social development and political stability as it brings rest to political unrest and ease tensions amongst the population. Continuing on property rights, properties are the main asset for many low-middle income households which can be leveraged to get loans and so on, also promoting entrepreneurship for the same reason of being more confident in unlawful seizure. However this can lead to wealth concentration, like a monopoly where the wealthier can buy multiple properties leaving lesser available in the market for the ones who actually need it.

  • Corruption is a big deterrent to many businesses from settling in the country, tackling corruption fosters confidence and eases tension amongst citizens and can result in growing productivity and output due to lesser stress on the workforce and producers. Regulatory frameworks also help increase output of a country as they outline how firms should operate, a clear and effective framework makes production streamlined and reduces bureaucratic hurdles, they can also promote economic development with the help of environmental laws

Global progress to the SDGs

  • Positive progress

  • SDG 3 & 6; Global under-5 mortality rate has fallen from 75 to 48, Maternal mortality rates have improved in some regions but remains constant in others like sub-saharan africa. In asia maternal mortality cases have fallen from 200k in 2000 to 67k in 2020 by the WHO. Significant progress has been made to provide sanitary facilities like clean drinking water, as of 2022 57% of the population had access to clean water however 3.5 billion still had a lack of managed sanitary facilities, 2.2 billion of which completely lacked access.

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  • SDG 7; as of 2021 only the african continent and few asian countries lacked above 70% access to electricity, a similar case is seen for access to clean fuels for cooking. Due to the free and open land in africa most of its energy comes from renewable sources which is not the case for many of the major players in the world like russia, china, india and the USA. However asian and south american countries are making major investments into renewable energy( information not available for europe and the north America.) 

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  • SDG 9; as of 2021 very sparse rural areas across asia and africa had road access. Passenger and train volumes were about 1.5 trillion ( made up by multiplying the amount of passengers and the distance they were carried ) mostly concentrated in asia and eurasia. Most countries emitted 0.2 kg of CO2/$ of GDP of the country containing all of the 3 biggest countries by GDP. Although there have been significant investments into R&D most countries spent over 0.5% of their GDP on it. Most countries had over 10% of employed working in the manufacturing sector which is important as it helps to make a self sustaining economy that can be independent.

  • Although progress has been made in other SDGs they still remain about ‘neutral’ in progress in the countries suffering through the worst of the issues; although the world values may have fallen by a significant margin the most vulnerable regions haven't seen much change. 

  • SDG 2; Food insecurity has remained about the same in the african continent being over 60% for most countries. 

  • SDG 1; Poverty has remained about the same in african countries however not much data is available to make a wide assumption.

  • SDG 4; Child education has been well for most countries but yet again remains a problem in africa however certain few like Burundi have above 60% completion of primary education

  • SDG 5; Many countries dont have information available however developed countries have above 80% gender equality whereas developing countries have between 40-60%

  • SDG 8; Doing relatively good for ‘neutral’ progress however of course not astounding progress, many developing countries 2nd and 3rd world countries are seeing above 3% economic growth rate.

  • SDG 10; I most countries 1/5th of the population earns below 50% of median income and most countries see a growing consumption rate and proportion of income generated by the poorest 40% of the country.

  • SDG 11; most african countries and south asian countries have 40% of population living in slums. Most countries have around or above 40% have convenient access to public transport. Not enough info available for underprivileged countries.

  • SDG 12; Most of the largest by economic activity countries have a 10 year action plan for sustainable consumption and production

  • SDG 13; Most disaster prone countries have a national risk management policy however most countries near the equator do not have them. More countries do have a local risk management policy but too less information.

  • SDG 14; Most coastal countries have above 2% Chlorophyll-a by the result of eutrophication in their waters. All countries with data provided use a ecosystem focused developmental plan 

  • SDG 15;  Most developed and developing countries are sparsely populated by vegetation between 20-30%. 3rd world countries still have major portion of land covered by vegetation.

  • SDG 16; Homicide rates are around 5% for major countries however for south american countries and certain african countries they are around 20%, For most of the world deaths by armed conflicts are at the low end excluding the russia-ukraine war and certain south american, african countries.

  • SDG 17; Most governments revenues account for more than 20% of their countries GDP, Major european countries, countries in the OCED and the US provide more than 0.2 to 1% of their gdp as foreign aid

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