Market orientated approaches to development

Market orientated approaches to development

Trade liberalisation 

The removal or reduction of restrictions on free trade/protectionist barriers (e.g tariffs, quotes, etc.)

Promotes growth as: 

Lead to GDP/output increase through specialisation and so greater world growth. World GDP can be increased using free trade, since output increases when countries specialise in goods that they have a comparative advantage in. Therefore, living standards might increase and there could be more economic growth. 

Lower prices for consumers as the added cost of the tariff/quota isn't passed on to them. 

Increased competition between firms (as foreign firms become more competitive), which increases efficiency, leads firms to try and cut costs. 

e.g 

Zambia copper mining and trading machinery (capital equipment) imported from China. 

In lifting trade restrictions and joining the WTO, China has become a massive power in the global economy. It is the number one exporter in the world now, and the country has become a lot more developed as a result. 

Average growth rate of 9.8% per year since 1978 (effectively the start of market based reforms) 

Lifted 660 million out of abject poverty.  

Eval 

Can harm infant industries who can’t compete with foreign imports. Job losses and unemployment. 
Might discourage diversification which could be detrimental in the long run  

e.g 

Japanese automobile industry experience a lot of growth due to import restrictions that were placed - allowing the infant industry to grow. Were these not put in place, may not have allowed the industry to grow. 

Zambia will eventually run out of copper. 

Promotion of FDI 

The flow of capital from one country to another.

Promotes growth as:

Greater investment shifts out AD 
Creates new jobs leading to higher per capita incomes and household savings

Workers become more skilled - greater productivity and hence growth. (improvement in human capital) shift AS out 

Infrastructure improvements 

e.g 

China has been investing in many African countries recently – in Zambia and Nigeria has sent amounts of over $100 million per year and this has boosted growth. With recent growth rates in Sub-Saharan Africa of more than 8% - substantial progress has been made in reducing extreme poverty. 

E.g. the Addis Ababa – Djibouti road; provides coastal access for land-locked Ethiopia.
e.g Zambia received $750 million of inwards FDI in 2011. This included investment in the expanded international airport and road network that was funded by Chinese firms' investment. 

also - 'China aims to lure more FDI in advanced manufacturing, as well as services including logistics, research and development, higher education and vocational training. This part of her aim to boost the service-side of the economy and to lift per capita incomes, sustain growth and avoid the risk of a middle-income trap' 

Eval

Limited job creation effects / perhaps with a small spillover for local content suppliers. MNCs may bring in their own managers and specialists favouring them over employing local people. Capital flight 

Investors can easily pull out/leave projects unfinished, leaving locals worse off. 

e.g

Sosumar in Mali – sugar plantation 

investors will pull out if political conditions change, leaving those who the development was meant to help worse off - the Malians can no longer farm on the land which was fenced off for the development, even though it is no longer going to be carried out. 

Foreign investors tried to enforce a model that didn’t fit with the Malians. There is no ‘one-size-fits-all’ model for development, yet often projects are inflexible.
Glencore brought a lot of European employees into Zambia and also evades tax, leading to profits leaking out of the economy and meaning the gov doesn't get much revenue. 

Removal of government subsidies 

Promotes growth as:

Means firms must cut costs/become more efficient in order to survive. Therefore, promotes innovation, leading to outwards shift in AS. 

Increased output/growth. 

Consumer benefits from lower prices. 

Government no longer has to spend tax revenue on subsidies, so money can be spent elsewhere in the economy. 

e.g 

Malaysia has significantly cut fuel and sugar subsidies, while increasing cash transfers to the poor. Indonesia, which spent 15 per cent of its state budget on fuel subsidies in 2014, reduced them all on January 1st 2015. 

Removal of subsidies in Zambia saw growth as a result. 

Eval 

Initially, consumers may have to pay more for the good, especially if it is PED inelastic. 

Job losses as companies may fail. This leads to unemployment and a decrease in living standards which could lead to a negative multiplier and economic downturn. 

e.g

In Jamaica, IMF forced removal of subsidies to dairy farmers to encourage more competition between firms and to help improve the long run price competitiveness of their dairy products on international markets without it being dependent on gov funds. This was done as a really of IMF conditional loans that required the gov to move to a more market oriented approach to growth. 
The number of dairy farmers has dropped from more than 4,000 to just over 100, as farmers were unable to make a living. 
The economy became dependent on milk powder substitutes imported from the US which worsened their economy and trade balance (households switch to imports increasing M and reducing C, shifting in AD and reducing Y) 

Floating exchange rate systems

Promotes growth as:

Greater control over monetary policy (as isn't being used to peg XR), which means it can be used to target inflation. 

Less risk of speculation on the currency that could be detrimental to the economy (e.g Black Wednesday). Speculators tend to attack weaker currencies where a gov is trying to maintain a fixed XR out of line with macroeconomic fundamentals. 

No need to maintain large currency reserves - money can be spent elsewhere. 

Currency adjusts according to the state of the economy. e.g. in recession demand for currency decreases as AD shifts in and output falls. So as XR falls, X become more competitive. So X increases far more than it would have if XR were pegged too high. 
Automatic stabiliser in a downturn in the business cycle. 

e.g

In Zambia the Kwacha is allowed to float, and this has brought economic growth as the currency depreciated during the downturn in copper prices in 2013 and more copper was sold. 

Eval

X in countries with floating XR may usually be less competitive compared with other countries, who have their currencies pegged at a low XR. 

If the currency depreciates, debt in dollars increases 
the volatility of the XR may lead to market failure .. as import prices and export prices are therefore volatile and this uncertainty .. 

e.g

China had a lower XR for a long time and experienced huge growth, as X were more competitive.  It is slowly letting its XR float back up now. 

 Means declining terms of trade for Zambia as the price of imports rises for them. 
Volatility puts off FDI - in Zambia less investment as people are less sure of profits. 
Debt in Zambia partly priced in USD so the tax revenue in Kwacha won't necessarily be able to pay for the same amount of interest in USD debt as the XR moves. 

Microfinance schemes

Provides small amounts of credit to low income households in developing countries. 

Promotes growth as:

Individuals are lifted out of poverty as are able to generate their own income by creating businesses. 

More local businesses means more competition, and greater efficiency and lower prices for consumers. 

Improves productivity, AS, Y and increases I and also C, particularly as households with a high MPC will receive higher incomes. It will also benefit health and education disproportionately as many of the schemes focus on lending to women who will use the income generate to improve their families' health and education. 

e.g

Grameen Bank, set up in 1976 by Mohammed Yunus in Bangladesh. It gave very small sums of money to women (who would never otherwise received money as were deemed too 'high risk' by conventional banks). Also didn't demand collateral. Repayment rates have been consistently above 98% and many have been lifted out of poverty. 

Eval

High interest rates on loans (which are unethical) 

May be high rates of failure as some societies have no basic numeracy, making it hard to maintain a business. 

Many schemes don't make profits and must be subsidised by charities. 

Some schemes have started to act like loan sharks and lend out money without any education or training and then demand interest on the loans which households cannot provide. This leads to increased debt and poverty, lowering consumption and constraining growth and development. 
Reduces living standards for those who fail to pay back the loans (many of whom were slightly forced into taking them out in the first place) 

e.g

Farmer in India killed himself after he was unable to pay back a $200 loan from a Microfinance scheme. 

Studies done in Bangladesh, India and the Philippines found that schemes had little to no impact on income or living standards. 
In Bosnia a Microfinance initiative led to the funding of child labour... 

Privatisation 

This means that assets are transferred from the public sector to the private sector. In other words, the government sells a firm so that it is no longer in their control. The firm is left to the free market and private individuals.

Promotes growth as:

Firms in the private sector have a profit motive - means that they have to become more efficient to compete with rivalling firms, and so lower costs for consumers. 

For this reason greater incentive to innovate, and consumers benefit from improvements in healthcare, etc. AS shifts out and greater growth. 
Gov gets a large lump sum for selling the industry and can use this to invest in supply side policies to improve development and productivity and LR growth. 

e.g

Glencore - Privatisation of Zambian copper mines in 1991. Soon the copper mining industry boomed - it doubled in the space of 6 years and the contribution of mining to gross domestic product (GDP) increased from 6.2% in 2000 to 11.8% in 2005.

Eval

Often the industry is a natural monopoly, and the public monopoly is replaced by a private one that has less incentive to be fair on the consumer. Hard to compete with this firm as there are high barriers to entry/exit. 

Decrease in employment as firms sack workers to become more efficient - may replace with capital. 

Losses in government revenue if the nationalised firm was profitable. 

e.g

Zambia saw increased production performance through privatisation, but total employment in the mining industry declined significantly. From a high of 66,000 in 1976, employment dropped to 51,000 in 1986 and then to an all-time low of 22, 280 in 2000. 

The process has been poorly managed and it has not contributed to poverty reduction: employment has declined and government revenues from copper mining have been very low due to important tax
concessions.
Increased negative externalities in the form of water pollution in surrounding areas.