Interventionist approaches to development

Interventionist approaches to development 

Development of human capital 

Human capital is the economic value of a worker's skill set - workers can become more skilled through education.  

Promotes growth as: 

More skilled workers are more productive, and an increase in productivity shifts out AS, generating growth. 
Greater innovation, so long term growth and higher living standards. 

Lower levels of structural unemployment as the labour force will be more adaptable to changes in the labour market (due to innovation, etc.) 

By developing human capital, the country can move their production up the supply chain from primary products, to manufactured goods and to services, which can earn them more.

e.g

Brazil - anti-poverty programmes include the investment in education and training by the government in order to build up human capital. The programmes have helped reduce extreme poverty from 23% in 1993 to 8.3% in 2009. 
Uganda have provided free school meals and vaccinations and the gov have invested in the provision of free primary schools, targeting 100% enrolment. 

Eval

If there aren’t many skilled positions in the economy then the skilled will either be unemployed and their education will go to waste, or they will emigrate and the economy will experience ‘brain drain’. 

e.g

Teacher absenteeism 

Taiwan – invested in education policies in the 50s, but students seeking further education were left with few options but to migrate. In 1979, only 8% of students who left to study abroad returned to Taiwan. 

Protectionism 

Promotes growth as: 

Protects infant industries, allowing them to grow by making foreign firms less competitive (through tariffs, subsidies, etc.), so more employment/growth. 

May increase tax revenue for the gov which can be spent on promoting development. 

e.g

China has blocked several large websites (i.e Facebook and Twitter), in order to allow for their own alternatives to develop while Europe struggles with US companies that don't listen to them and often don't pay taxes. 

Eval

However, protectionism could distort the market and lead to a loss of allocative efficiency. It prevents industries from competing in a competitive market and there is a loss of consumer welfare. Consumers face higher prices and less variety. By not competing in a competitive market, firms have little or no incentive to lower their costs of production.

Risk of retaliation from other countries. 

Tariffs are regressive - most damaging to those on a lower income, increasing inequality. 

e.g

China saw growth explode when it started removing protectionist barriers - living standards began to rise and industries became more competitive.  

Managed exchange rate 


Where the XR is fixed or semi-fixed rather than floating - so the government 'pegs' it to a certain rate/range of rates. 

Promotes growth as: 

Countries with lower incomes can increase investment and exports by fixing their XR at lower rates to make their exports more competitive. Increases AD and growth as a result. 

Devaluation > increased price competitiveness of exports + decreased price competitiveness of imports > increase X-M > increase AD > economic growth
Avoiding volatility 
Helps attract FDI as there is more certainty over wages and profits 

e.g

China has maintained a fixed exchange rate from 1994 - pegged to the dollar at a low XR. This is often attributed to what has allowed it to become such a major exporter/what has allowed its exports to be so competitive. Increased FDI as more stable. 
Brazil - the gov has been able to control their gov debt as the Real is fixed in USD. Also has enabled it to attract FDI. Also allows firms operating in Brazil to know with more certainty the cost of inputs that are imported and will be more certain about the price of their exports (e.g Brazilian farmers) 
In 2012, Brazil's gov were fixing the XR to avoid the substantial appreciation that had taken place in the Real, where the Real approached R$1.50 to the dollar. 

Eval

WTO may not allow this/may impose sanctions as this can be unfair on other countries if the economy is a large one.  

Have to sacrifice either monetary control or free capital flows. If you don’t allow others to trade the currency this restricts FDI and can cause asset bubbles. 

Devaluation > increased cost of imported goods > increased costs for firms > cost-push inflation > increased prices > exports become less price competitive and imports become more price competitive > decrease X-M > decrease AD

e.g

China experienced property bubbles as a result of having fixed capital flows in order to maintain the XR. (as wealth in China stays in China) 
Brazil had to lower interest rates to fix the rate, which made the economy vulnerable to higher rates of inflation. Erodes real incomes - increases menu costs which decreases productivity. 

Infrastructure development 

Promotes growth as: 

Improves transport and geographical mobility of labour – increased employment and productivity as a result, which shifts out AS and means greater economic growth. Also the employed enjoy better living standards. 

Lower costs for firms as transportation is cheaper, so increased GDP.  

Better access to clean water/greater sanitation in developing countries through infrastructure means better hygiene, less disease and infant mortality. Better living standards. 

e.g

Infrastructure development is a top priority for the Chinese government. From the late 1990s to 2005, 100 million Chinese people benefited from improved power and telecommunications. Employment can be boosted with improved roads, railways and airport constructions. However, some remote areas still have non-mechanised means of transport.

Some economists argue that the development gap between China and other emerging economies is due to its focus on infrastructure projects. China invested 9% of their GDP in infrastructure in the 1990s and 2000s, whilst most emerging economies only invested around 2%-5% of GDP.
Zambia - landlocked so investing in the roads and airports is crucial for firms, especially those in copper mining to trade efficiently. Moreover, the electricity infrastructure is patchy with regular power cuts that hinder productivity and FDI. 

Eval

Depends how effective the infrastructure is – if it is of poor quality/costs too much then won’t be as effective in promoting growth. 

Often investment in infrastructure is only to improve the aesthetics but not the functionality of the infrastructure - used as a means to political ends e.g to gain political support. Poorly built infrastructure can lead to accidents and may not improve living standards at all. 

e.g

The Nigerian landscape is littered with thousands of failed Public Infrastructure Projects, many of them costing the government billions of naira and denying the citizenry access to quality infrastructure which is critical for a decent standard of life.

Promoting joint ventures with global companies 

Promotes growth as: 

Knowledge (i.e technological knowledge) is transferred to local firms, which enables them to become more competitive/efficient. 

Can also help local firms penetrate foreign markets, which otherwise have posed high barriers to entry. 
Makes it harder for the investors to avoid paying tax as they are then more involved. 

e.g

Chinese FDI and the Zambian gov - the Zambian airport. 

Eval

Moral hazard problems where the private sector abdicates responsibility as they know that the gov will rescue any issues.  The investing firm has less control which may deter investment. 

Both firms may have conflicting objectives - also misaligned cultures can cause tension. 

e.g

May leave the Zambian economy vulnerable if there is a recession in China leading to them withdrawing the money and the airport shutting down. 

Buffer stock schemes 


A scheme designed to reduce price fluctuations by buying and selling stocks of goods. 

Promotes growth as: 

It helps incomes of farmers to remain stable, because fluctuations in the market are reduced and it increases consumer welfare by ensuring prices are not in excess.

e.g

Oil in Angola and Nigeria 
During the 2007-8 food price crisis, China maintain stable food prices in part due to the buffer stock scheme on grains held in place by SINOGRAIN (China Grain Reserve Corporation)

Eval

However, governments might not have the financial resources to buy up the stock. Moreover, storage is difficult and expensive, since agricultural goods do not last long, and there are administrative costs.

e.g

In Thailand, the government was forced to buy large amounts of rice off of rice farmers, and this rice is now sitting in storage units that the government has to pay for. Opportunity cost of the gov money.