growth & development strategies economics – a course companion. p344-359. (blink & dorton,...

GROWTH & DEVELOPMENT STRATEGIES

Economics – A Course Companion.P344-359. (Blink & Dorton, 2007)

SECTION 5: DEVELOPMENT ECONOMICS

Differences between models, strategies, growth & development

Growth Models• As a general rule, growth models describe how

growth has occurred and so suggest that this may be replicated.

Growth Strategies• Economic and political measures designed to gain

growth.Development Strategies• Economic politics and measures designed to

achieve human development (i.e. to improve the well being of the people.

Economic Growth vs Economic Development

REMINDER!!

Economic growth is not economicdevelopment, BUT it can generate extra income for governments, firms, and people and then it may lead to development, depending upon how that extra income is used.

GROWTH MODELSHarrod-Domar Growth Model

• Sir Roy Harrod in the UK and Evsey Domar in the US independently developed the Harrod-Domar growth model in 1939.

• Although its original purpose was to analyse the business cycle, the model has been used by economists to identify factors affecting the rate of growth of GDP.


• In its simplest form, the models states that the rate of growth of GDP is determined by the national savings ratio of capital to output in the economy. It can be stated as:

Rate of Growth of GDP = Savings ratio Capital/output ratio


Savings Ratio• The marginal propensity to saveCapital/Output Ratio• The expenditure on capital as ratio of the

output gained from capital.• Thus it may be that it is necessary to spend

$2.50 on capital goods (infrastructure/capital equipment) in order to increase the national output by $1.


Example

• If the savings ratio in the country is 5% and the capital/output ratio is 2.5, then the country can grow at a rate of 2% per annum.


Exercises• A country has a marginal propensity to save of 12%.• For every $3.5 spent on capital goods, national output should increase by 50 cents. • Calculate the real growth of GDP for the

country, based on Harrod-Domar Growth model


http://welkerswikinomics.com/blog/wp-content/uploads/2008/02/growthmodels_1.jpeg


If the model is correct, we can say that the rateof growth of an economy may be increased by:Key Assumption 1: Increasing the level of savings in the economy. If savings are increased in the economy then our

economic theory tells us that this can lead to an increase in investment.

The increase in investment represents a greater stock of capital, which in turn should lead to greater output in the economy and greater income.

Since a proportion of that increased income should be saved, there should be a circular situation, which should lead to increasing growth.

Problems with Harrod-Domar Growth Model: Savings

• Although the theory would appear to work, there are problems when it is applied to developing countries.

• In theory all a country has to do is to increase the savings ratio.

• If the savings ratio is increased to 7.5%, then economic growth will increase to 3%.

• However, raising the savings ratio in developing countries is not easy.

Problems with Harrod-Domar Growth Model: Savings

• Most developing countries have very low marginal propensities to save, as people spend the vast majority of their low incomes on consumption.

• Furthermore, if they do have spare income, then they often spend it on assets, such as bike, TV, rather than put their money into local banking systems that may not be secure.

• In some cases, savings are sent out the country in the form of capital flight.

• This combination of high consumption, poor financial infrastructure and capital flight makes its difficult to increase the level of savings in developing countries.


Key Assumption 2: Reducing Capital/Output Ratio in the Economy• If the capital output ratio can be reduced, i.e.

the use of capital can become more efficient, this would increase the rate of economic growth.

Problems with Harrod-Domar Growth Model: Growth/Output

Ratio • Increasing efficiency is this way is never easy and

especially so in developing countries.• A shortage of educated and skilled labor (possibly

made worse due to the “brain drain”) implies that new capital will not be effectively used.

• In addition, a lack of managerial skills means that the organising factor will be weak, which is unlikely to result in improved efficiency.

Problems with Harrod-Domar Growth Model: Growth/Output

Ratio

• R&D which improves efficiency is also likely to be underfunded , and access to foreign technology (another means of gaining efficiency) is expensive and so is often not available to developing countries.

GROWTH MODELSStructural Change/Dual Sector Model

• The Lewis dual sector model was first conceived by W. Arthur Lewis in the 1950s and was later modified by other economists.

• Its main focus is on structural change and it attempts to explain how an underdeveloped economy moves from being a traditional agrarian economy, with a small manufacturing sector, to an economy where there is a more modern balance with a larger manufacturing and service sector.


Assumptions• The model starts from the assumption that there is a

large agricultural sector with a surplus of labour, and a small, but productive, modern manufacturing sector.

• The surplus of labour in the agricultural sector is not productive and so moves to the manufacturing sector.

• They are attracted by wages, that are higher than in the agricultural sector, but fixed because the supply of labour is high.


• Entrepreneurs in the manufacturing sector will make a profits because their prices are always above the fixed wage rate.

• The theory assumes that these profits will be reinvested , which will increase the capital stock.

• This in turn will increase the productive capacity of the manufacturing sector and demand for labor will grow.

• More workers will be employed from the surplus labour from agriculture and the profits of the entrepreneurs will once again increase and be reinvested.


• The process is assumed to continue until all the surplus labour has been employed in the larger manufacturing sector.

• A structural change has now taken place and the economy is no longer a traditional agrarian model, but is now an industrialized country.

Problems with the Lewis Dual Sector Model

• The Lewis model, in a rather simplified way, illustrates the process that took place during the industrial revolutions in many of the now developed countries.

• Whether it can be used as a model for economic growth in developing countries is debatable:


There are number of weaknesses in the theory:• The model assumes that entrepreneurs will

keep adding capital that is the same as the original capital.

• It is likely that entrepreneurs would begin to invest in technologically advanced more labour-saving capital and this would reduce the increases in employment, severely slowing the process of growth.


• The model assumes that all profits are reinvested, but capital flight is a common occurrence in developing countries and is likely that a large proportion of profits would leave the economy, thus reducing investment and again slowing the whole growth process.

• The model assumes that there is a pool of surplus rural labour. The situation in many developing countries indicates that there is likely to be high unemployment in urban areas and little surplus of labour in rural areas, caused by rural-urban migration.


• The model assumes that wage levels in the manufacturing sector will remain constant.

• The growing existence of collective bargaining, imposed wage scales, and wages offered by foreign companies, tends, however, to lead to rising wages, even where there is unemployment.

• This would reduce profit levels and the ability to reinvest.

Growth & Development Strategies

•Export Led Growth vs..•Import Substitution Industrialization

GROWTH STRATEGIES Export-led Growth OR Export

Oriented Industrialization • Export led growth is an outward-oriented growth

strategy, based on openness and international trade.• Growth is achieved by concentrating on increasing

exports, and export revenue, as a leading factor in the aggregate demand of the country.

• Increasing exports should lead to increasing GDP, and this in turn should lead to higher income and, eventually, growth in domestic markets as well as exporting ones.

• The country concentrates on producing and exporting products in which it has a comparative advantage of production.

GROWTH STRATEGIES Export Led Growth

In order to achieve export led growth, it is assumed the country will need to adopt certain policies. These include:• Liberalized Trade: Open up domestic markets to

foreign competition order to gain access to foreign markets.

• Liberalized Capital Flows: Reduce restrictions on FDI.• A Floating Exchange Rate: • Infrastructure: Investment in the provision of

infrastructure to enable trade to take place. • Deregulation & Minimal Government Intervention.

GROWTH STRATEGIES Export Led Growth

• The previous list illustrates the theoretical “package” of policies associated with export-led growth.

• In reality, countries that adopt an outward-oriented strategy do not necessarily adopt all of these policies.

GROWTH STRATEGIES Export Led Growth: Primary Products

• The overall trend in primary products has been downward for many years, with the exception of oil and some metals.

• This is due to increasing supply and relatively insignificant increases in demand.

• This combined with increasing protectionism by developed countries, means that export led growth based solely on the export of primary products is unlikely to be achieved.

Export Led Growth: Manufacturing Exports

• The focus on export-led growth is usually on increasing manufacturing exports.

Asian Tigers• The success of countries such as South Korea, Hong

Kong, Singapore and Taiwan (known previously as the Asian Tigers) is usually used to illustrate the effectiveness of such a strategy.

• These countries exported products in which they had a comparative advantage, previously based upon low cost labor and were extremely successful in doing so.

Export Led Growth: Manufacturing Exports

Asian Tigers• Over time the type of product being exported by

the majority of these countries has also tended to change from products that were produced using labour intensive production methods, to more sophisticated products, using capital intensive production methods and more highly skilled workers.

• Improvements in education systems were essential for this.

Problems with Export Led Growth

Rising Protectionism in Developed Countries• The success of the Asian tigers since around 1965

has led to increased protectionism in developed countries against manufactured products from developing countries.

• Trade Union and workers in developed countries argued that they could not compete against the imports from low-wage developing countries that this was unfair.

• The lobbied their governments to put tariffs and quotas on the lower-priced goods.


Rising Protectionism in Developed Countries• Price increases as a result of tariffs effectively

removed the comparative advantage of the exporting countries.

• Tariff escalation also reduced the ability of the developing countries to export processed goods and assembled products, forcing many to export primary products and low-skilled manufactured goods instead.


The Role of Government• Certain assumptions are made about the

necessary conditions for export led growth.• If we examine the successful countries these

conditions were not necessarily met.• Many economists would argue that the role of

the state in successful export-led growth is vital & minimizing government intervention is not the way forward.


The Role of Government• In the Asian tiger countries, governments played an

important role by providing infrastructure, subsidizing output through low credit terms via central banks and promoting savings and improvements in technology.

• In addition, governments adopted policies where they protected domestic industries, that were not yet able to compete with foreign firms (infant industry argument for protection)

• They also promoted the industries that were ready for competition in export markets.


The Role of Government• This topic is one of great debate among

development economists, and many argue that invention is vital.

• Others argue that the state intervention in these economies actually slow growth rates.


MNCs become too powerful!• If countries attempt to kick start their exort-

led growth by attracting MNCs, there is always the fear that the MNCs may become too powerful within the country and this may lead to problems.


Increased Income Inequality• It is argued by some economists that free-

market export-led growth may increase income inequality in the country.

• If this is the case, then the economic growth may be achieved at the expense of economic development.

The Post 1980s Globalizing Economies

• Research at the World Bank has identified countries know as post-1980 globalizing economies.

• These are developing economies that have integrated more fully in the international economy through the process of globalization such as trade liberalization and capital market liberalization.

• They became outward oriented economies• The list of post 1980 globalizers includes such

countries as Malaysia, Mexico and Thailand.

IMPORT SUBSTITUTION INDUSTRIALISATION (ISI)

• It may also be referred to an inward-oriented strategy.

• This states, that a developing country should, wherever possible, produce goods domestically rather than import them.

• This should mean that industries producing the goods domestically will be able to grow, as will the economy, and will then be able to be competitive on world markets in the future as they gain from economies of scale.

IMPORT SUBSTITUTION INDUSTRIALISATION

• It is the opposite of export-led growth.• It is not supported by economists who believe

in the advantages of free trade based on comparative advantage.

IMPORT SUBSTITUTION INDUSTRIALISATION

Necessary conditions for strategy to work:• Governments need to adopt a policy of organizing

the selection of goods to produce domestically. • Historically this has been labour-intensive, low

skilled manufactured goods such as clothing or shoes.

• Subsidies are made available to encourage domestic industries.

• The government needs to implement a protectionist system with tariff barriers to keep out foreign imports.

Advantages of ISI

• ISI protects jobs in the domestic market, since foreign firms are preventing from competing so domestic firms dominate.

• ISI protects local culture and social habits by practically isolating the economy from foreign influence.

• ISI protects the economy from power, and possibly the negative influence of MNCs.

Disadvantage of ISI• ISI may only protect jobs in the short run.• In the long run economic growth may be lower in

the economy and the lack of growth may lead to a lack of job creation.

• ISI means that the country does not enjoy the benefits to be gained from comparative advantage and specialization. Therefore products are produced relatively inefficiently when they could be imported from efficient foreign producers.

Disadvantages of ISI

• ISI may lead to inefficiency in domestic industries because competition is not there to act as a spur to be efficient or to conduct R&D.

• ISI may lead to high rates of inflation due to domestic aggregate supply constraints.

• ISI may cause other countries to take retaliatory protectionist measures.

Countries adopting ISI

• The main countries which attempted ISI were in Latin America, including Argentina & Chile. Both has since changed their policies.

• As former colonies gained their independence many also adopted inward oriented strategies.

• These included India, Nigeria and Kenya.• These policies showed some success in the 1960s and

1970s but the policies started to fail in the early 1980s.• Government over-spending and the debt crisis lead to the

inability of governments to repay the loans they had take. In the 1980s many of the countries were forced to go to the IMF for help.

THE WASHINGTON CONSENSUSReforms needed for Economic Growth

• In 1989, the American economist John Williamson identified 10 common reforms that were necessary for economic growth.

• The World Bank, the IMF and the US Treasury department agreed with the list and as a result Latin American economies seeking help were encouraged (or forced) to adopt such reforms to illegible for assistance.


• Fiscal Discipline, that is, balanced budget• Redirection of spending from indiscriminate subsidies to

basic health and education.• Lowering of Marginal Tax Rates and broadening of the

tax base.• Interest Rate Liberalization• A competitive Exchange Rate• Trade Liberalization• Liberalization of FDI inflows• Privatization• Deregulation• Securing of Property Rights


CRITICISM OF THE WASHINGTON CONSENSUS• By the end of the 20th century, the Washington

Consensus was increasingly criticized by economists who were not supporters of such policies.

• This claims that reforms such as the Washington Consensus are just a way of to ensure that MNCs have access to cheap labor markets in developing countries.

• In this way the MNCs can produce inexpensive products, which are them sold for higher prices in developed countries.


CRITICISM OF THE WASHINGTON CONSENSUS• The MNCs make high profits and the workers in

developing countries gain little. • According to this view, the Washington consensus

has not led to high economic growth in Latin America.

• Instead there has been economic crises and increased debt.

• Such policies have led to increased income inequality and exploitative working conditions, thus working against the goal of economic development.


A MOVE TO THE LEFT IN LATIN AMERICA• There has been a movement to the left in a

number of Latin American countries such as Venezuela, Ecuador, Bolivia and to a lesser extent Brazil.

• These countries along with Cuba have been very vocal in their condemnation of the Washington consensus.

FOREIGN DIRECT INVESTMENT (FDI)

• FDI is a long-term investment by private MNCs in countries overseas.

Greenfield Investment• FDI usually occurs through MNCs building new

plants or expanding their existing facilities in foreign countries. This is known as greenfield investment.

Alternatively MNCs merge with or acquire (buy) existing firms in foreign countries.

FOREIGN DIRECT INVESTMENT (FDI)

• There are approximately 70,000 MNCs operating internationally with more than 690,000 affiliates around the world.

FOREIGN DIRECT INVESTMENT (FDI)Growth of FDI

• There was a rapid increase in flows of FDI in the 1990s, a sign of the significant role that FDI played in the integration of the world’s economies and globalization

• There was a sharp fall in the global FDI flows in 2001, followed by three years of continuous drops, but they rebounded again in 2004.

• In 2008, the GFC, also led to reduction in global FDI.

Why do MNCs invest in developing countries?

Natural Resources• These countries may be rich in natural

resources, such as oil and minerals.• MNCs have the technology and expertise to

extract such resources. • For example, the top recipients in Africa are

those countries with valuable natural resources. Eg: Nigeria.


Growing Markets• Some developing countries such as Brazil, China

and India represent huge and growing markets. • If MNCs are located directly in the markets then

they have much better access to a large number of potential consumers.

• With growing incomes, demand for all sorts of consumer goods is rising and MNCs may wish to be there to satisfy the demand.


Lower Labour Costs• The cost of labour are much lower in more

developed countries.• Lower costs of production allow firms to sell

their final products at lower prices and make higher products.


Favorable Government Regulations• In many developing countries government

regulations are much less severe than those in developed countries.

• This makes it easier for companies to set up but, more significantly, it can greatly reduce costs of production.

• Additionally, many developing countries offer tax concessions to attract FDI


Favorable Government Regulations• Over the last 15 years many countries, both

developed and developing have adopted policies that have been more and more favorable to FDI.

• In 2004, for example, more than 20 countries lowered their corporate tax rates in order to try to attract more FDI.

POSSIBLE ADVANTAGES ASSOCIATED WITH FDI

Savings Gap is Addressed• According to the Harrod-Domar model, a

necessary condition for growth is increased savings and developing countries tend to suffer from a savings gap.

• FDI helps to fill that savings gap and thus may lead to economic growth.


Employment • MNCs will provide employment in the country and,

in many cases, may also provide education and training.

• The may improve the skill levels of the work force and also the managerial capabilities.

Multiplier Effect• Increased Employment and earnings may have a

multiplier effect on the host economy, stimulating growth.


Access to a Greater Knowledge & Skill base• MNCs will allow developing countries greater

access to R&D, technology and marketing expertise and these can enhance their industrialization.


Tax Revenue from Profits for Host Country• The host country may gain tax revenue from

the profits of the MNC, which can then be used to gain more growth by investing in infrastructure or to improve pubic services such as health & education and to promote economic development.


Increase in Aggregate Demand• If MNCs buy existing companies in developing

countries, then they are injecting foreign capital and increasing the aggregate demand.

Improvements in Infrastructure• In some cases, MNCs may improve the

infrastructure of the country, both physical and financial, or they may act as spur for governments to do so in order to attract them.


Greater Choice for Consumers• The existence of MNCs in a country may provide

more choice or consumers and lower prices.• They may be able to provide essential goods that

are not available domestically. More Efficient Resource Allocation• MNC activities along with liberalized world trade

can lead to more efficient allocation of world resources.

CHINA & FDI • Although it is difficult to isolate FED in terms of its effects on

China’s economic growth, it is reasonable to assume it has played a significant role.

• Since 1978, China has actively tried to attract FDI as a way to stimulate economic growth.

• A significant proportion of China’s exports are produced by foreign firms.

• Through joint ventures with foreign firms, Chinese firms have grown rapidly and successfully.

• As a result, China itself is now the source of a large outflow of FDI.

• As China grows, so does its demand for raw materials and much Chinese FDI abroad is its investment in natural resources.

POSSIBLE DISADVANTAGES WITH FDI

MNC just take advantage of low skilled workers• Although MNCs do provide employment, it is

argued that they often bring in their own management teams and are simply using inexpensive low-skilled workers for basic production and providing no education and training.

• This also limits the ability of host countries to acquire new technologies.


MNCs have too much power!• In some cases it is argued that MNCs have too

much power, because of their size, and so gain large tax advantages or even subsidies, reducing potential government income in developing countries.

• Along the same lines, it is argued that MNCs have too much power internationally.

• Their incomes and size allow them to exert too much influence on policy decisions taken in institutions such as the WTO.


MNCs practise Transfer Pricing• This is when MNCs sell goods and services from

one division of the company to another division of the company in a separate country to take advantage of different tax rates on corporate profits.

• In this way, developing countries with low tax rates to encourage MNCs to invest reap little tax reward, and developed countries also lose out on potential tax revenue.


• Given that approximately one third of all international trade is made up of sales from one branch of firm to another firm, this represents a potentially large loss of revenues for governments.

• Governments have rules to prevent firms from abusing their ability to use transfer pricing to minimize their tax payments, but these are difficult to monitor and enforce, particularly for developing country governments.


Taking Advantage of lax Environmental laws• It is argued that MNCs situate themselves in

countries where legislation on pollution is not effective and thus they are able to reduce their private costs while creating external costs.

• While this is good for the MNC, it is damaging for the environment of the host country.

• In the same way, MNCs may set up in countries where labor laws are weak or almost non-existent, allowing exploitation of local workers through low wage levels and poor working conditions.


Resource Exploitation• Economists have argued that MNCs may enter

a country in order to extract particular resources such as metals or minerals, then strip those resources and leave.

• There may be significant unrest as host country nationals see that the profits from their resources are being sent out of the country to foreigners.


Capital Intensive Production instead of Labour Intensive Production• Economist have argued that MNCs may employ capital-

intensive production methods make use of abundant natural resources.

• This will not greatly improve employment in the country.• It is argued that MNCs should use appropriate technology,

where production methods are aligned to the resources available.

• Since developing countries usually have a large supply of cheap labour, the argument is that labour-intensive production methods would be more appropriate.


Acquisitions often for paid in stock not cash• In most cases where MNCs buy domestic

firms, the owners of the firms being bought are paid in shares (stocks) from the MNC.

• This means that it is likely that the money will never be used in developing country’s economy.


Repatriation of Profits• MNCs may repatriate their profits.• This means they transfer their profits out of

the country back to the MNCs country of origin.

Sustainable Development & FDI

• While most would agree that FDI is a positive factor for current economic growth the main concerns relate to the possible negative effects of MNCs on sustainable development.

• The extent to which FDI is able to contribute to this development depends very much on the type of investment and the ability of the host country government to appropriately regulate the behavior of MNCs and use the benefits of the investment to achieve development objectives.

FDI – Problems & Accountability

• There has always been concerns relating to MNC activity such as the possible exploitation of workers, the use of child labour, the inability of workers to form unions in some companies, and business practices that cause immediate or future environmental damage.

• With the increasingly fast flow of information through the media & the Internet and strong public interest groups acting globally, it is becoming difficult for MNCs to conceal activities that may contribute to these problems.

FDI – Problems & Accountability

• No MNC wants to be perceived as being a cause of problems and are keen to promote their image in a positive ways.

• As a results, firms are more likely to develop a publicize a set of priorities to show that they are acting responsibly and ethically and `doing their bit` to promote sustainable development.

• This is known as corporate social responsibility (CSR)

FDI & Corporate Social Responsibility (CSR)

• Companies publish and promote their CSR policies through their annual reports, websites and advertising.

• The policies outline the firms commitment to support human rights, employee rights, environmental protection, sustainable development, and community involvement.

• The extent to which such policies are consistently followed and the extent of their actual effect on workers, the workers communities, and the environment is uncertain, but it is usually regarding as a step in the right direction

DEVELOPMENT STRATEGIESFairtrade Organizations

• In many developing countries many small-scale farmers and workers are unable to make a living income.

• Low world prices for primary products, high profits for middleman, tariff escalation, and poor working conditions make life extremely difficult.


• Fair Trade schemes are an attempt to ensure that producers of food, and some non-food, products in developing countries receive a fair deal when they are selling their products.

• If consumers are aware of the harsh and unfair conditions facing the farmers, then perhaps they my be willing to buy from producers who pay a fair price to farmers.


• Today, the Fairtrade Labelling Organization International (FLO) coordinates Fairtrade labelling in 20 countries.

• The schemes aim to help small farmers and landless workers.

• Fair trade schemes have operated for more than 50 years, but the real growth of the movement has come with the advent of Fairtrade labelling.

• This began in the Netherlands in 1988, when the Max Havelaar Foundation began to sell coffee from Mexico with the first Fairtrade consumer guarantee lable.

DEVELOPMENT STRATEGIESFairtrade Consumer Guarantee

• This is a system where products can be certified if they meet the standards of the FLO, which gives them the right to display the International Fairtrade Certification Mark.

• The recognisable Mark means that consumers will be able to identify Fairtrade products, know they are approved, and buy the knowing that the producer of the good was paid a fair price.

DEVELOPMENT STRATEGIESRole of the FLO

• The FLO regularly inspects and certifies around 500 producer organizations in more than 50 countries in Africa, Asia and Latin America, which results in fair trading conditions for approximately 1 million farmers, workers and their families.

DEVELOPMENT STRATEGIESCriteria for the FLO Certification Mark

A trading company wishing to qualify for the International Fair Trade Certification Mark must meet certain FLO criteria:• The product must reach the trader as directly as

possible with few, if any, intermediaries.• The product must be purchased at least at the

Fairtrade minimum price.• This is a guaranteed price that covers

production costs and provides a living income.• It covers the costs of `sustainable production`


• The producer receives a premium if the product is certified as organic.

• The trader must be committed to a long-term contract, which in turn gives security to the producer.

• Upon request, the producer has access to credit from the trader, of up to 60% of the purchase price.


• Where small farmers are involved the product must come from producers that are managed democratically.

• If the product comes from plantations then the workers must benefit from the internationally recognized employment standards, including trade unions, if they wish, and there must be no use of child labour.


• The producer must use sustainable farming methods to produce the good.

• The also pays a fairtrade premium to the producer.• The producer uses these funds to aid local

community development. The producers decide how the money will be spent, but is usually used to promote health care, education or other social schemes.

• The producers are accountable to the FLO for the appropriate use of the funds.

DEVELOPMENT STRATEGIESFairtrade Product Range

• Fairtrade certified food products include bananas, cocoa, coffee, dried fruit, fresh fruit and vegetables, honey, juices, nuts/oil seeds, sugar, tea and wine.

• Non food products include cotton, cuts flowers, ornamental plants and sports balls.

How expense are fairtrade products?

• Although the price might sometimes slightly higher for the Fairtrade certified products than non-Fairtrade products, it is clear they many consumers are willing to pay to contribute to better conditions for producers.

• Global sales of Fairtrade products were valued as just over €1.1 billion for 2005.

Availability & Future of Fairtrade Products

• Fairtrade products are making their way into more and more shops and restaurants as firms become aware of the increasing popularity.

• Fairtrade with its emphasis on granting a living income, giving security, demanding property working conditions, encouraging sustainable production and funding local community development, is clearly a strategy that leads to development as well as growth.

DEVELOPMENT STRATEGIESThe Need for Micro-finance

• In developing countries low-income people find it almost impossible to gain access to traditional banking and financial systems, since they lack to assets to use as collateral, are often unemployed and lack savings.

• If they can find a way to borrow money, it is often at exorbitant interest rates.

• However, there is type of financial service that is geared specifically for them.

• This is known as Micro-finance and it provides financial services such as small loans, savings accounts insurance and every cheque books.

DEVELOPMENT STRATEGIESMicro-Finance

Micro-credit Definition

• The provision of small loans to individuals who no access to traditional sources is known as micro-credit.

DEVELOPMENT STRATEGIESHistory/Origins of Micro-Finance

• A key element of the original micro-credit schemes is that they did not originate in the developed world, but rather had their beginnings in developing countries.

• The first scheme began in the mid-1970s with projects such as Opportunity International (1972), ACCION International (1973) Muhammad Yunus/Grameen Bank (1974-76), FINCA International (1985) and the SEEP Network (1985)

DEVELOPMENT STRATEGIESHow is micro-credit used?

• Usually, the micro-credit loans are given to enable poor people to start up very small-scale businesses, known as micro-enterprises.

• These may include such things as roadside kiosks, bicycle repair services, market stalls, rice wine making, knitting and woodworking.

• The loans give protection against unexpected occurrences and seasonal problems and may help families to gain a regular income, start to build wealth and so escape poverty.

DEVELOPMENT STRATEGIESWho has been the recipients of micro-credit?

• Women have tended to be the main recipients of micro-credit, for many reasons.

• It is thought that women are a better credit risk – the are more likely to pay back loans.

• Women are usually responsible for caring for children and so any reductions in a woman’s poverty will translate into improvements for children.

• In many documented cases, this has allowed for more poor children to go the school.

• With woman take loans and can begin to earn an income their social and economic status is raised.

EXAM QUESTIONSShort Response Questions (10 marks each)

1. Using the Harrod-Domar growth model, explain why there may be slow growth in developing countries.

2. Explain how Fairtrade is likely to contribute to economic development.

3. Explain how micro-credit can contribute to economic development.

EXAMINATION QUESTIONSEssay Questions

1a. Explain the main characteristics of export-led growth? (10 marks)

1b. Evaluate the view that economic growth and development can be best achieved through the adoption of outward-oriented strategy. (15 marks)

2a. Discuss three reasons for multinationalcompany investment in developing countries. (10 marks)

2b. Evaluate the role of FDI in promoting economic growth and development in developing countries (15 mark)

growth & development strategies economics – a course companion. p344-359. (blink & dorton,...

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