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GROWTH & DEVELOPMENT
STRATEGIES
Economics A Course Companion.
P344-359. (Blink & Dorton, 2007)
SECTION 5: DEVELOPMENT ECONOMICS
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Differences between models,
strategies, growth & development
Growth Models
As a general rule, growth models describe howgrowth has occurred and so suggest that this may
be replicated.Growth Strategies
Economic and political measures designed to gaingrowth.
Development Strategies
Economic politics and measures designed toachieve human development (i.e. to improve the
well being of the people.
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Economic Growth vs
Economic Development
REMINDER!!
Economic growth is not economic
development, BUT it can generate
extra income for governments, firms,
and people and then it may lead todevelopment, depending upon how
that extra income is used.
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GROWTH MODELS
Harrod-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.
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GROWTH MODELS
Harrod-Domar Growth Model
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
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GROWTH MODELS
Harrod-Domar Growth Model
Savings Ratio
The marginal propensity to save
Capital/Output Ratio
The expenditure on capital as ratio of theoutput gained from capital.
Thus it may be that it is necessary to spend
$2.50 on capital goods (infrastructure/capitalequipment) in order to increase the nationaloutput by $1.
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GROWTH MODELS
Harrod-Domar Growth Model
Example
If the savings ratio in the
country is 5% and thecapital/output ratio is 2.5,
then the country can growat a rate of 2% per annum.
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GROWTH MODELS
Harrod-Domar Growth Model
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 thecountry, based on Harrod-Domar Growth
model
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GROWTH MODELS
Harrod-Domar Growth Model
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GROWTH MODELS
Harrod-Domar Growth ModelIf the model is correct, we can say that the rate
of 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 oureconomic theory tells us that this can lead to anincrease in investment.
The increase in investment represents a greater stock
of capital, which in turn should lead to greater outputin the economy and greater income.
Since a proportion of that increased income should besaved, there should be a circular situation, whichshould lead to increasing growth.
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Problems with
Harrod-Domar Growth Model: Savings
Although the theory would appear to work,there are problems when it is applied todeveloping countries.
In theory all a country has to do is to increasethe 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.
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Problems with
Harrod-Domar Growth Model: Savings
Most developing countries have very low marginalpropensities to save, as people spend the vast majorityof their low incomes on consumption.
Furthermore, if they do have spare income, then theyoften spend it on assets, such as bike, TV, rather thanput their money into local banking systems that maynot be secure.
In some cases, savings are sent out the country in the
form of capital flight.
This combination of high consumption, poor financialinfrastructure and capital flight makes its difficult toincrease the level of savings in developing countries.
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GROWTH MODELS
Harrod-Domar Growth Model
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.
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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 (possiblymade worse due to the brain drain) implies that
new capital will not be effectively used.
In addition, a lack of managerial skills means thatthe organising factor will be weak, which is
unlikely to result in improved efficiency.
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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 gainingefficiency) is expensive and so is often not
available to developing countries.
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GROWTH MODELS
Structural Change/Dual Sector Model
The Lewis dual sector model was firstconceived by W. Arthur Lewis in the 1950s andwas later modified by other economists.
Its main focus is on structural change and itattempts to explain how an underdevelopedeconomy moves from being a traditionalagrarian economy, with a small manufacturingsector, to an economy where there is a moremodern balance with a larger manufacturingand service sector.
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GROWTH MODELS
Structural Change/Dual Sector Model
Assumptions
The model starts from the assumption that thereis a large agricultural sector with a surplus oflabour, and a small, but productive, modernmanufacturing sector.
The surplus of labour in the agricultural sector isnot productive and so moves to themanufacturing sector.
They are attracted by wages, that are higher thanin the agricultural sector, but fixed because thesupply of labour is high.
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GROWTH MODELS
Structural Change/Dual Sector Model
Entrepreneurs in the manufacturing sector willmake a profits because their prices are alwaysabove the fixed wage rate.
The theory assumes that these profits will bereinvested , which will increase the capital stock.
This in turn will increase the productive capacityof the manufacturing sector and demand forlabor will grow.
More workers will be employed from the surpluslabour from agriculture and the profits of theentrepreneurs will once again increase and bereinvested.
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GROWTH MODELS
Structural Change/Dual Sector Model
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.
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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:
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Problems with the
Lewis Dual Sector Model
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.
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Problems with the
Lewis Dual Sector Model
The model assumes that all profits are reinvested,but capital flight is a common occurrence indeveloping countries and is likely that a largeproportion of profits would leave the economy,
thus reducing investment and again slowing thewhole growth process.
The model assumes that there is a pool of surplusrural labour. The situation in many developing
countries indicates that there is likely to be highunemployment in urban areas and little surplusof labour in rural areas, caused by rural-urbanmigration.
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Problems with the
Lewis Dual Sector Model
The model assumes that wage levels in themanufacturing sector will remain constant.
The growing existence of collective bargaining,
imposed wage scales, and wages offered byforeign companies, tends, however, to lead torising wages, even where there isunemployment.
This would reduce profit levels and the abilityto reinvest.
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Growth & Development Strategies
Export Led Growth
vs..
Import SubstitutionIndustrialization
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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 theaggregate demand of the country.
Increasing exports should lead to increasing GDP, andthis in turn should lead to higher income and,
eventually, growth in domestic markets as well asexporting ones.
The country concentrates on producing and exportingproducts in which it has a comparative advantage ofproduction.
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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 toforeign competition order to gain access to foreignmarkets.
Liberalized Capital Flows: Reduce restrictions on FDI.
A Floating Exchange Rate:
Infrastructure: Investment in the provision ofinfrastructure to enable trade to take place.
Deregulation & Minimal Government Intervention.
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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.
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GROWTH STRATEGIES
Export Led Growth: Primary Products
The overall trend in primary products hasbeen downward for many years, with theexception of oil and some metals.
This is due to increasing supply and relativelyinsignificant increases in demand.
This combined with increasing protectionism
by developed countries, means that export ledgrowth based solely on the export of primaryproducts is unlikely to be achieved.
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Export Led Growth:
Manufacturing Exports
The focus on export-led growth is usually onincreasing manufacturing exports.
Asian Tigers
The success of countries such as South Korea,Hong Kong, Singapore and Taiwan (knownpreviously as the Asian Tigers) is usually used toillustrate the effectiveness of such a strategy.
These countries exported products in which theyhad a comparative advantage, previously basedupon low cost labor and were extremelysuccessful in doing so.
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Export Led Growth:
Manufacturing Exports
Asian Tigers
Over time the type of product being exported bythe majority of these countries has also tended to
change from products that were produced usinglabour intensive production methods, to moresophisticated products, using capital intensiveproduction methods and more highly skilled
workers. Improvements in education systems were
essential for this.
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Problems with Export Led Growth
Rising Protectionism in Developed Countries
The success of the Asian tigers since around 1965has led to increased protectionism in developed
countries against manufactured products fromdeveloping countries.
Trade Union and workers in developed countriesargued that they could not compete against the
imports from low-wage developing countries thatthis was unfair.
The lobbied their governments to put tariffs andquotas on the lower-priced goods.
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Problems with Export Led Growth
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 manyto export primary products and low-skilled
manufactured goods instead.
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Problems with Export Led Growth
The Role of Government
Certain assumptions are made about thenecessary conditions for export led growth.
If we examine the successful countries theseconditions were not necessarily met.
Many economists would argue that the role of
the state in successful export-led growth isvital& minimizing government intervention isnot the way forward.
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Problems with Export Led Growth
The Role of Government
In the Asian tiger countries, governments playedan important role by providing infrastructure,subsidizing output through low credit terms via
central banks and promoting savings andimprovements in technology.
In addition, governments adopted policies wherethey protected domestic industries, that were not
yet able to compete with foreign firms (infantindustry argument for protection)
They also promoted the industries that wereready for competition in export markets.
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Problems with Export Led Growth
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.
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Problems with Export Led Growth
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.
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Problems with Export Led Growth
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.
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The Post 1980s Globalizing Economies
Research at the World Bank has identifiedcountries know as post-1980 globalizingeconomies.
These are developing economies that have
integrated more fully in the internationaleconomy through the process of globalizationsuch as trade liberalization and capital marketliberalization.
They became outward oriented economies The list of post 1980 globalizers includes such
countries as Malaysia, Mexico and Thailand.
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IMPORT SUBSTITUTION
INDUSTRIALISATION (ISI)
It may also be referred to an inward-orientedstrategy.
This states, that a developing country should,
wherever possible, produce goods domesticallyrather than import them.
This should mean that industries producing thegoods domestically will be able to grow, as will
the economy, and will then be able to becompetitive on world markets in the future asthey gain from economies of scale.
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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.
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IMPORT SUBSTITUTION
INDUSTRIALISATION
Necessary conditions for strategy to work: Governments need to adopt a policy of
organizing the selection of goods to producedomestically.
Historically this has been labour-intensive, lowskilled manufactured goods such as clothing orshoes.
Subsidies are made available to encouragedomestic industries.
The government needs to implement aprotectionist system with tariff barriers to keepout foreign imports.
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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, andpossibly the negative influence of MNCs.
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Disadvantage of ISI
ISI may only protect jobs in the short run.
In the long run economic growth may be lower inthe 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 comparativeadvantage and specialization. Therefore products
are produced relatively inefficiently when theycould be imported from efficient foreignproducers.
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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.
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Countries adopting ISI
The main countries which attempted ISI were in LatinAmerica, including Argentina & Chile. Both has sincechanged 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 and1970s but the policies started to fail in the early 1980s.
Government over-spending and the debt crisis lead tothe inability of governments to repay the loans theyhad take. In the 1980s many of the countries wereforced to go to the IMF for help.
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THE WASHINGTON CONSENSUS
Reforms 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 suchreforms to illegible for assistance.
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THE WASHINGTON CONSENSUS
Reforms needed for Economic Growth 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
THE WASHINGTON CONSENSUS
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THE WASHINGTON CONSENSUS
Reforms needed for Economic Growth
CRITICISM OF THE WASHINGTON CONSENSUS By the end of the 20th century, the Washington
Consensus was increasingly criticized byeconomists who were not supporters of such
policies. This claims that reforms such as the Washington
Consensus are just a way of to ensure that MNCshave access to cheap labor markets in developing
countries. In this way the MNCs can produce inexpensive
products, which are them sold for higher prices indeveloped countries.
THE WASHINGTON CONSENSUS
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THE WASHINGTON CONSENSUS
Reforms needed for Economic Growth
CRITICISM OF THE WASHINGTON CONSENSUS The MNCs make high profits and the workers in
developing countries gain little.
According to this view, the Washington consensushas not led to high economic growth in LatinAmerica.
Instead there has been economic crises andincreased debt.
Such policies have led to increased incomeinequality and exploitative working conditions,thus working against the goal of economicdevelopment.
THE WASHINGTON CONSENSUS
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THE WASHINGTON CONSENSUS
Reforms needed for Economic Growth
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 lesserextent Brazil.
These countries along with Cuba have been
very vocal in their condemnation of theWashington consensus.
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FOREIGN DIRECT INVESTMENT (FDI)
FDI is a long-term investment by private MNCs incountries overseas.
Greenfield Investment
FDI usually occurs through MNCs building newplants or expanding their existing facilities inforeign countries. This is known as greenfieldinvestment.
Alternatively MNCs merge with or acquire (buy)
existing firms in foreign countries.
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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)
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FOREIGN DIRECT INVESTMENT (FDI)
Growth of FDI
There was a rapid increase in flows of FDI inthe 1990s, a sign of the significant role thatFDI played in the integration of the worlds
economies and globalization There was a sharp fall in the global FDI flows
in 2001, followed by three years of continuousdrops, but they rebounded again in 2004.
In 2008, the GFC, also led to reduction inglobal FDI.
Wh d MNC i t i
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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.
Wh d MNC i t i
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Why do MNCs invest in
developing countries?
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 largenumber of potential consumers.
With growing incomes, demand for all sorts ofconsumer goods is rising and MNCs may wishto be there to satisfy the demand.
Wh d MNC i t i
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Why do MNCs invest in
developing countries?
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.
Wh do MNCs in est in
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Why do MNCs invest in
developing countries?
Favorable Government Regulations
In many developing countries governmentregulations are much less severe than those in
developed countries. This makes it easier for companies to set up
but, more significantly, it can greatly reducecosts of production.
Additionally, many developing countries offertax concessions to attract FDI
Why do MNCs invest in
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Why do MNCs invest in
developing countries?
Favorable Government Regulations
Over the last 15 years many countries, both
developed and developing have adopted
policies that have been more and morefavorable to FDI.
In 2004, for example, more than 20 countries
lowered their corporate tax rates in order totry to attract more FDI.
POSSIBLE ADVANTAGES
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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 tosuffer from a savings gap.
FDI helps to fill that savings gap and thus may
lead to economic growth.
POSSIBLE ADVANTAGES
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POSSIBLE ADVANTAGES
ASSOCIATED WITH FDI
Employment MNCs will provide employment in the country
and, in many cases, may also provide educationand training.
The may improve the skill levels of the work forceand also the managerial capabilities.
Multiplier Effect
Increased Employment and earnings may have amultiplier effect on the host economy, stimulatinggrowth.
POSSIBLE ADVANTAGES
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POSSIBLE ADVANTAGES
ASSOCIATED WITH FDI
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 theirindustrialization.
POSSIBLE ADVANTAGES
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POSSIBLE ADVANTAGES
ASSOCIATED WITH FDI
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 ininfrastructure or to improve pubic services
such as health & education and to promote
economic development.
POSSIBLE ADVANTAGES
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POSSIBLE ADVANTAGES
ASSOCIATED WITH FDI
Increase in Aggregate Demand
If MNCs buy existing companies in developingcountries, 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 physicaland financial, or they may act as spur forgovernments to do so in order to attract them.
POSSIBLE ADVANTAGES
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POSSIBLE ADVANTAGES
ASSOCIATED WITH FDI
Greater Choice for Consumers
The existence of MNCs in a country may providemore choice or consumers and lower prices.
They may be able to provide essential goods thatare not available domestically.
More Efficient Resource Allocation
MNC activities along with liberalized world tradecan lead to more efficient allocation of worldresources.
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CHINA & FDI Although it is difficult to isolate FED in terms of its
effects on Chinas economic growth, it is reasonable toassume 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 Chinas exports are
produced by foreign firms.
Through joint ventures with foreign firms, Chinesefirms have grown rapidly and successfully.
As a result, China itself is now the source of a largeoutflow of FDI.
As China grows, so does its demand for raw materialsand much Chinese FDI abroad is its investment in
natural resources.
POSSIBLE DISADVANTAGES
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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 usinginexpensive low-skilled workers for basic
production and providing no education and
training. This also limits the ability of host countries to
acquire new technologies.
POSSIBLE DISADVANTAGES
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POSSIBLE DISADVANTAGES
WITH FDI
MNCs have too much power!
In some cases it is argued that MNCs have toomuch power, because of their size, and so gain
large tax advantages or even subsidies, reducingpotential government income in developingcountries.
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 ininstitutions such as the WTO.
POSSIBLE DISADVANTAGES
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POSSIBLE DISADVANTAGES
WITH FDI
MNCs practise Transfer Pricing
This is when MNCs sell goods and services fromone division of the company to another division
of the company in a separate country to takeadvantage of different tax rates on corporateprofits.
In this way, developing countries with low tax
rates to encourage MNCs to invest reap little taxreward, and developed countries also lose out onpotential tax revenue.
POSSIBLE DISADVANTAGES
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POSSIBLE DISADVANTAGES
WITH FDI
Given that approximately one third of allinternational trade is made up of sales from onebranch of firm to another firm, this represents apotentially large loss of revenues forgovernments.
Governments have rules to prevent firms fromabusing their ability to use transfer pricing to
minimize their tax payments, but these aredifficult to monitor and enforce, particularly fordeveloping country governments.
POSSIBLE DISADVANTAGES
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POSSIBLE DISADVANTAGES
WITH FDI
Taking Advantage of lax Environmental laws It is argued that MNCs situate themselves in
countries where legislation on pollution is noteffective 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 workersthrough low wage levels and poor workingconditions.
POSSIBLE DISADVANTAGES
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POSSIBLE DISADVANTAGES
WITH FDI
Resource Exploitation
Economists have argued that MNCs may entera country in order to extract particular
resources such as metals or minerals, thenstrip those resources and leave.
There may be significant unrest as hostcountry nationals see that the profits fromtheir resources are being sent out of thecountry to foreigners.
POSSIBLE DISADVANTAGES
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POSSIBLE DISADVANTAGES
WITH FDI
Capital Intensive Production instead of LabourIntensive 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 appropriatetechnology, where production methods are aligned tothe resources available.
Since developing countries usually have a large supplyof cheap labour, the argument is that labour-intensiveproduction methods would be more appropriate.
POSSIBLE DISADVANTAGES
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POSSIBLE DISADVANTAGES
WITH FDI
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 countrys
economy.
POSSIBLE DISADVANTAGES
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POSSIBLE DISADVANTAGES
WITH FDI
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.
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Sustainable Development & FDI
While most would agree that FDI is a positivefactor 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.
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FDI Problems & Accountability
There has always been concerns relating to MNCactivity such as the possible exploitation ofworkers, the use of child labour, the inability ofworkers to form unions in some companies, and
business practices that cause immediate or futureenvironmental damage.
With the increasingly fast flow of informationthrough the media & the Internet and strong
public interest groups acting globally, it isbecoming difficult for MNCs to conceal activitiesthat may contribute to these problems.
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FDI Problems & Accountability
No MNC wants to be perceived as being a causeof problems and are keen to promote their image
in a positive ways.
As a results, firms are more likely to develop apublicize 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
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FDI & Corporate Social Responsibility
(CSR)
Companies publish and promote their CSRpolicies through their annual reports, websitesand advertising.
The policies outline the firms commitment to
support human rights, employee rights,environmental protection, sustainabledevelopment, and community involvement.
The extent to which such policies are consistentlyfollowed and the extent of their actual effect onworkers, the workers communities, and theenvironment is uncertain, but it is usually
regarding as a step in the right direction
DEVELOPMENT STRATEGIES
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DEVELOPMENT STRATEGIES
Fairtrade Organizations
In many developing countries many small-scale farmers and workers are unable to make
a living income.
Low world prices for primary products, highprofits for middleman, tariff escalation, and
poor working conditions make life extremely
difficult.
DEVELOPMENT STRATEGIES
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DEVELOPMENT STRATEGIES
Fairtrade Organizations
Fair Trade schemes are an attempt to ensurethat 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 whopay a fair price to farmers.
DEVELOPMENT STRATEGIES
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DEVELOPMENT STRATEGIES
Fairtrade Organizations
Today, the Fairtrade Labelling OrganizationInternational (FLO) coordinates Fairtrade labelling in 20countries.
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 comewith the advent of Fairtrade labelling.
This began in the Netherlands in 1988, when the MaxHavelaar Foundation began to sell coffee from Mexicowith the first Fairtrade consumer guarantee lable.
DEVELOPMENT STRATEGIES
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DEVELOPMENT STRATEGIES
Fairtrade Consumer Guarantee
This is a system where products can becertified if they meet the standards of the FLO,which gives them the right to display theInternational Fairtrade Certification Mark.
The recognisable Mark means that consumerswill be able to identify Fairtrade products,know they are approved, and buy the knowing
that the producer of the good was paid a fairprice.
DEVELOPMENT STRATEGIES
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DEVELOPMENT STRATEGIES
Role of the FLO
The FLO regularly inspects and certifiesaround 500 producer organizations in more
than 50 countries in Africa, Asia and Latin
America, which results in fair tradingconditions for approximately 1 million
farmers, workers and their families.
DEVELOPMENT STRATEGIES
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DEVELOPMENT STRATEGIES
Criteria for the FLO Certification Mark
A trading company wishing to qualify for theInternational Fair Trade Certification Mark must
meet certain FLO criteria:
The product must reach the trader as directly aspossible with few, if any, intermediaries.
The product must be purchased at least at theFairtrade minimum price.
This is a guaranteed price that covers productioncosts and provides a living income.
It covers the costs of `sustainable production`
DEVELOPMENT STRATEGIES
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V OPM NT STRAT GI S
Criteria for the FLO Certification Mark
The producer receives a premium if theproduct is certified as organic.
The trader must be committed to a long-term
contract, which in turn gives security to theproducer.
Upon request, the producer has access to
credit from the trader, of up to 60% of thepurchase price.
DEVELOPMENT STRATEGIES
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Criteria for the FLO Certification Mark
Where small farmers are involved the productmust come from producers that are managed
democratically.
If the product comes from plantations thenthe workers must benefit from the
internationally recognized employment
standards, including trade unions, if they wish,and there must be no use of child labour.
DEVELOPMENT STRATEGIES
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Criteria for the FLO Certification Mark
The producer must use sustainable farmingmethods to produce the good.
The also pays a fairtrade premium to theproducer.
The producer uses these funds to aid localcommunity development. The producers decidehow the money will be spent, but is usually usedto promote health care, education or other social
schemes. The producers are accountable to the FLO for the
appropriate use of the funds.
DEVELOPMENT STRATEGIES
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Fairtrade Product Range
Fairtrade certified food products includebananas, 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.
H f i t d d t ?
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How expense are fairtrade products?
Although the price might sometimes slightlyhigher for the Fairtrade certified products
than non-Fairtrade products, it is clear they
many consumers are willing to pay tocontribute to better conditions for producers.
Global sales of Fairtrade products were valued
as just over 1.1 billion for 2005.
Availability & Future of
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y
Fairtrade Products
Fairtrade products are making their way intomore and more shops and restaurants as firms
become aware of the increasing popularity.
Fairtrade with its emphasis on granting a livingincome, giving security, demanding property
working conditions, encouraging sustainable
production and funding local communitydevelopment, is clearly a strategy that leads to
development as well as growth.
DEVELOPMENT STRATEGIES
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The Need for Micro-finance
In developing countries low-income people find italmost impossible to gain access to traditionalbanking and financial systems, since they lack toassets 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, savingsaccounts insurance and every cheque books.
DEVELOPMENT STRATEGIES
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Micro-Finance
Micro-credit Definition
The provision of small
loans to individuals who noaccess to traditional
sources is known as micro-credit.
DEVELOPMENT STRATEGIES
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DEVELOPMENT STRATEGIES
History/Origins of Micro-Finance A key element of the original micro-credit
schemes is that they did not originate in thedeveloped world, but rather had their beginningsin developing countries.
The first scheme began in the mid-1970s withprojects such as Opportunity International(1972), ACCION International (1973) MuhammadYunus/Grameen Bank (1974-76), FINCAInternational (1985) and the SEEP Network(1985)
DEVELOPMENT STRATEGIES
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How is micro-credit used?
Usually, the micro-credit loans are given toenable poor people to start up very small-scalebusinesses, known as micro-enterprises.
These may include such things as roadside kiosks,bicycle repair services, market stalls, rice winemaking, knitting and woodworking.
The loans give protection against unexpected
occurrences and seasonal problems and may helpfamilies to gain a regular income, start to buildwealth and so escape poverty.
DEVELOPMENT STRATEGIES
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Who has been the recipients of micro-credit?
Women have tended to be the main recipients ofmicro-credit, for many reasons.
It is thought that women are a better credit riskthe are more likely to pay back loans.
Women are usually responsible for caring forchildren and so any reductions in a womanspoverty will translate into improvements forchildren.
In many documented cases, this has allowed formore poor children to go the school.
With woman take loans and can begin to earn anincome their social and economic status is raised.
EXAM QUESTIONS
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Short 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 contributeto economic development.
3. Explain how micro-credit can contribute to
economic development.
EXAMINATION QUESTIONS
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Essay Questions
1a. Explain the main characteristics of export-ledgrowth? (10 marks)
1b. Evaluate the view that economic growth anddevelopment can be best achieved through theadoption of outward-oriented strategy.(15 marks)
2a. Discuss three reasons for multinational
company investment in developing countries.
(10 marks)2b. Evaluate the role of FDI in promoting economic
growth and development in developing countries( )
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