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Evaluate four ways in which economic growth and development might be promoted in developing countries.

Updated on January 16, 2016


Different strategies have been used to promote growth and development in different countries. What is successful in one country may not necessarily be successful in another. In practice a combination of strategies is likely to be more effective than reliance on only one approach. In this HUB four different approaches are evaluated

Rising costs due to X-inefficiency
Rising costs due to X-inefficiency

1: Inward-looking, Interventionist Approach

One possible route is to follow an inward-looking, often interventionist approach. Promoting the growth of industrialisation and a manufacturing sector within the country using import substitution. This is when imports are replaced with goods produced in the domestic economy. Protectionism in the the form of tariffs, quotas and in particular subsidies to domestic producers would be used along with restrictions to FDI. This follows the idea of the infant industry argument whereby industries can now be given the chance to develop economies of scale and perhaps gain a comparative advantage in production. This is likely to increase employment and could lead to a positive multiplier effect and increased tax revenue could be used to fund social projects such as schools and benefit programmes.

However, inward looking strategies have problems, for example the restriction of competition could cause an inefficient mis-allocation of resources and a distortion of comparative advantage. In addition to this there may be trade wars and retaliatory action by other countries, furthermore in the long-run industries are known to grow yet due to X-inefficiency and lack of competition they are not able to reduce average costs low enough to compete internationally, even over a 15-20 year time scale in some cases. This is problematic as outward looking strategies are often needed to reach higher levels of growth and development as explained below.

2: Outward-looking Strategies

Another possible option is the use of outward looking strategies; characterised by trade liberalisation in line with globalisation and further integration into the global economy. The OECD states that a 4% rise in GDP will occur for every 10% rise in trade liberalisation. This removal of trade barriers will bring welfare effects such as increased consumer surplus. In terms of development, more material goods can be afforded, and/or a larger of necessities can be afforded due to increased disposable income. Liberalisation allows LEDCs access to developed economy markets, increasing exports and GDP. In addition to this TNCs (Trans-national companies) are more likely to establish themselves in the country due to ease of trade, further contributing to industrialisation. The proceeds of this can be used for improving access to clean water, education and health, which also means there is lower dependance on aid. the full exploitation of comparative advantage here means resources are used most efficiently which further increases growth.

However, countries may find that their newly established industries still lack the competitive edge and economies of scale to compete in global markets and especially with TNCs who have established themselves within the country.

TNCs may have high negative externalities; i.e. damage to natural capital, air pollution & greenhouse gases due to lack of stake in the land and perhaps poor governance systems in developing countries. Also, as TNCs focus FDI in industrial and urban areas, the income gap within the country is likely to get larger.

In addition to this, on a larger scale, the process of globalising a country can be risky as high levels of integration can mean that crises spread faster and have a larger effect on an economy. This may be why sub-Saharan Africa's growth rate was not as badly effected during the financial crisis as financial markets there were not greatly integrated.

Does a lack of stake causes rising negative externalises from TNCs such as water pollution?
Does a lack of stake causes rising negative externalises from TNCs such as water pollution?
Good or Bad for the locals?
Good or Bad for the locals?
A dilution of culture?
A dilution of culture?

3: Use of Endowed Capital - Tourism

Developing countries are also likely to focus on use of their endowed capital, this could take the form of sectoral development of tourism. This has many benefits as a strategy, for example it provides a very large source of foreign exchange as tourists send on goods and services produced within the local economy. This allows a country to stock up its official financing account on the balance of payments to mitigate against bankruptcy or high levels off debt. Tourism also acts as an inflow on the current account so this is likely to improve. Tourism acts as a magnet for subsequent development and investment by TNCs, and associated services will have multiplier on GDP. TNCs may also improve some of the infrastructure needed for tourism in cooperation with governments in the form of roads, airports, reservoirs, sewers and energy plants. This increases economic development by most indicators and builds a strong foundation for the economy to support more investment of other types, therefore diversifying its pattern of trade.

The tourism industry is labour intensive and can operate with shallow capital levels per worker so development should lead to significant job creation which may lead to significant job creation which may then lead to reduced absolute poverty, redistribute income and improve public services. Finally, demand for tourism is income elastic which has the advantage that when real incomes are rising, demand will rise more than proportaionally.

However, the development of tourism has drawback, including adverse effects on the balance of payments. Because capital goods are needed for building hotels and equipment, along with specialist food and gifts demanded by tourists, thereby increasing Imports. There may also be an outflow of net investment income from abroad as profits of TNCs are repatriated.

Fluctuations of demand are also highly likely because demand for tourism is income elastic (linked to the trade cycle) and three may be changes in fashion or taste e.g. Spain suffered the effects of European travels going to more exotic locations in the 1990s onwards.

There are also likely to be employment fluctuations as work is seasonal and TNCs may provide their own mangers and professional, keeping domestic workers' pay and skills low.

Finally, tourism has high external costs on natural capital i the form of waste, water shortages and degradation of ancient monuments, along with negative impacts on cultural values through cultural hegemony.

Litter form tourists after Thailand's full moon party
Litter form tourists after Thailand's full moon party
Right Shift in LRAS
Right Shift in LRAS

4: Harrod-Domar Model

The Harrod-Domar model could be used as a guide line for informing policy. This combats the problem many developing countries face of the savings gap and liquidity trap which limit the amour of capital available for entrepreneurs and domestic firms to borrow and increase the productive capacity of the economy, shifting LRAS right, due to capital deepening. The aim of this is to create a cycle, as GNI increases next and then factor incomes rise, leading to more savings and investment.

The government will likely raise interest rates to incentivise saving and promote industries which make saving more accessible. Such as mobile banking, with one example being M-Pesa mobile banking in Sub-Saharan Africa, which aids banking access overcoming poor infrastructure.

However, it could be considered that the savings gap could be filled by FDI or AID and that high domestic savings ratios are not necessary. This point is strengthened by the fact that many in developing countries live subsistence lifestyles and in absolute poverty (less than $1.25 per day) e.g. 95% of the Democratic Republic of Congo. The model also relays upon the public having high confidence in institutions but high levels of corruption may dissuade many.

The Harrod-Domar Model
The Harrod-Domar Model


If anyone finds this piece interesting or has an interest in the subject in general and would like to discuss this topic some more, feel free to comment below :)

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