Measures to promote growth

and development in LDCs

A2 Economics Unit 4

Komilla Chadha
Revision pack• AS/A2 with Komilla • 29 May 2011

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Contents Page
Note

The strategies explored in this pack will be explored in relation to the limiting
factors in my first pack - if you are still confused feel free to find the development
pack video on my blog.

1.Foreign Aid...........................................................Page 3

2.Debt Relief...........................................................Page 4

3.Development of human capital................................Page 5

4.Inward looking strategies......................................Page 6

5.Outward looking strategies.....................................Page 7

6.Free market approach [IMF]...................................Page 8

7.Industrialisation ................................................Page 9

8.Tourism.............................................................Page 10

9.Micro-finance................................................Page 11

10.Fair trade .......................................................Page 12

11.Role of NGOs ....................................................Page 13

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1. Foreign Aid
What is Foreign Aid?

Aid is any financial or any other form of support such as military is given to one
nation by another.

How can it be used to promote growth and development?

Aid is used to promote growth and development in many ways. Essentially aid
increases the amount a government can spend and therefore manipulate policies.
Just looking at my revision pack on limits to growth and development, aid helps to
reduce the following factors which limit growth and development:

(i) Poor infrastructure - poor infrastructure hinders FDI and prevent AS from
growing. Aid allows governments to invest in infrastructure as they can afford it.
(ii) Human Capital inadequacies - An unskilled workforce also reduces the levels of
FDI and AS from growing. Aid can be used to fund interventionist supply side
policies such as training and education which can help increase FDI and AS.
(iii)Primary product dependency - Aid can be used to give subsidies to local farmers
and grants to those wanting to diversify what they grow and sell. This reduces
dependency on primary products such as agriculture.
(iv)Debt - Many LDCs find themselves unable to grow and develop as they have to
spend money on paying off debt so aid can help to pay off this debt and
increase the amount the government spends on other policies such as education
and training.

What are the advantages and disadvantages?

Advantages Disadvantages

It is an economic injection. Feed corruption

Better political relations can be established Opportunity cost (leakage for donor
countries)

Reduces the impact of the limiting factors Dependency theory - uncertainty of when
discussed above. aid is coming

Perhaps improve healthcare too. Time lags related to government spending

Fill the savings gap by giving subsidies and Depends on the magnitude and frequency
grants. of aid given

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2. Debt Relief
What is Debt Relief?

Debt relief is the partial or total forgiveness of debt, or the slowing or stopping
debt growth. [This definition was taken from thefreedictionary.com]

How can it be used to promote growth and development?

Similarly to aid essentially what debt relief does is allows countries to have more
money to spend on themselves. A lot of countries hit a debt crisis in 1980s and
1990s where basically they were not able to fund any sort of growth and
development policy thanks to debt. So by canceling or reducing debt or increasing
repayment time or decreasing interest, countries are given more money to fund
other things. Again lets look at which limiting factors does it cancel out;

(i) Debt - obviously debt limits growth by limiting government spending so debt
relief reduces or abolishes this and allows government spending to work in full
form.
(ii)Poor infrastructure - Like aid the increase in government revenue means that
countries can invest more infrastructure developments.
(iii)Savings gap and inadequate capital accumulation - debt relief means that
governments can give banks more money to lend or give grants and subsidies
giving workers the chance to save and eventually invest.

What are the advantages and disadvantages?

Advantages Disadvantages

Improvement to government finances Dependency theory - reliant on debt being

reduced

Better political relations established Encourages corruption - less incentive to

encourage growth and development

LDCs can import more from developed Moral hazard - of countries can’t pay off
countries debt they may find themselves borrowing
more money again

Reduction in absolute poverty Burden on credit institutions

Offers a chance to start again

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3. Development of human capital

What is Development of human capital?

Human capital development is the process in which labour becomes skilled and
specialised.

How can it be used to promote growth and development?

Human capital development

essentially makes one of the
most important factors of
production, labour, more
productive therefore
enhancing economic growth
but also attracting FDI. FDI
would like to invest in a
country where labour is
trained because then they do
not have to take up the cost of
doing so. In reference to
limiting factors, human capital
development promotes growth and development by;

(i) Reducing population issues - LDCs have large population so developing and
training the labour allows then to make the most of the resource which they are
enriched in. It will also prevent people from having to work in the informal
sector. Education is also important to control population growth in general.
(ii)Eliminating human capital inadequacies - obviously policies such as education
can help to eradicate issues involving unskilled labour.
(iii)Reducing the foreign currency gap - education can help people to make
economical decisions and take risks to diversify what they produce. This allows
them to export other kinds of products and reduce the foreign currency gap. It
can also reduce issues related to primary product dependency.

What are the advantages and disadvantages?

Advantages Disadvantages

Impact on long run LRAS Expensive - Opportunity Cost

Attracts FDI Time Lags

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4. Inward looking policies
What are inward looking strategies?

Inward looking strategies are policies which help countries to industrialise and tend
to be characterised by protectionist ideas such as subsidies, quotas and tariffs.

How can it be used to promote growth and development?

Essentially all the arguments for inward looking strategies are the same as ones for
protectionism (Please see my video on this). The help a country to industrialise
without foreign influence and tend to condemned by the WTO. Again in reference
to my first pack they reduce the effect of the following limiting factors;

(i) Capital flight - inward looking strategies don’t necessarily reduce capital flight
but legislation can be formulated through them which prevents capital flight from
happening.
(ii)Human capital inadequacies - inward looking strategies mean that more jobs
exists (to see how this happens see protectionism video) and this essentially
helps labour become skilled because if more people are employed then they are
constantly becoming skilled and learning on the job.
(iii)Foreign currency gap - inward looking strategies like tariffs allow domestic firms
to compete with imports therefore attracting more people to diversify into
markets which are usually imported. Similarly it gives the chance for enterprise
to be formed around other sectors without being completely defeated by
competition and therefore reducing primary product dependency.

What are the advantages and disadvantages?

Advantages Disadvantages

Protects domestic employment Can affect political relations and the chance
of receiving debt relief

Allows domestic firms to become efficient Loss of economic welfare for consumers as
enough before competing with overseas prices are pushed up
firms.

Improve the terms of trade No incentive to become efficient for

domestic firms

National security is maintained - not too If other countries follow suit then world
reliant on overseas countries output is likely to fall.

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5. Outward looking policies
What are outward looking strategies?

Outward looking strategies are policies which help build up a domestic industrial
base in a country through attracting FDI, currency devaluation and encourage
trade.

How can it be used to promote growth and development?

Outward looking policies

essentially help a country to grow
and develop by benefitting from
all the advantages of free trade
such as better AD through selling
more exports. In reference to the
first pack, it reduces the impact of
some of the following limiting
factors;

(i)Population issues - by increasing

trade jobs are created and this good for countries which have large populations.
Also by attracting FDI the labour force is likely to become more skilled and
specialised therefore reducing the impact of human capital inadequacies too.
(ii)Poor infrastructure - FDI is likely to enhance the infrastructure in a country and
thus promote growth and development.
(iii)Poor governance - free trade and can help reduce the role of the government
which is particularly effective when poor governance exists in countries.
(iv)Civil wars - trade and FDI can help to allocate resources in the right place and
bring about economic stability reducing the chances of civil wars breaking out.
(v)Debt - Trade and FDI can help increase government revenue through tariffs,
injections, other forms of taxation. This can be used to pay off debt,
(vi)Corruption - as with civil wars outward looking policies reduce the role of
government making less impact of corruption on the country.

What are the advantages and disadvantages?

Advantages Disadvantages

Increased growth - on a basic GDP level Can increase poverty and pollution

Better consumer welfare May encourage corruption on an

international level

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6. The free-market approach

What is the free market approach?

By the free market approach I mean the strategies endorsed by the IMF to promote
growth and development e.g. trade liberalisation, privatisation, supply-side reforms
and a reduction in fiscal expenditure.

How can it be used to promote growth and development?

Essentially the free market approach promotes growth and development by

allowing an economy to grow as it would do without any government intervention.
When countries accept loans from the IMF they have to sign a letter of Intent which
basically states the IMF will give money in stages when certain targets are met.
These targets come under a structural adjustment programme. As ever the limiting
factors it targets are;

(i) Poor governance - it forces the government to care about economic issues such
as inflation and invest in the economy.
(ii)Civil wars - the IMF can ensure that even if a civil war is going on money is still
spent on traditional supply side policies.

What are the advantages and disadvantages?

Advantages Disadvantages

Actual increases in GDP can be seen Can destroy domestic markets

It tackles poor governance pretty well Increase poverty

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7. Industrialisation
What is industrialisation?

By industrialisation I mean the process of an economy changing from being a large

primary sector player to secondary sector. This process can be seen in the Clarke-
Fisher model.

How can it be used to promote growth and development?

Industrialisation makes an
economy less reliant on
primary productivity and
move in the secondary sector
and develop. It helps a
country produce more and
become more richer therefore
promoting growth and
development. In relation to
my first pack the limiting
factors to aims to eradicate
are;

(i) Poor infrastructure- industrialisation requires countries to change the sector in

which most of their labour and other resources are implemented in. In order to
do this they must invest in infrastructure as the secondary sector is heavily reliant
on the existence of infrastructure.
(ii)Foreign currency gap and PPD - Essentially we are moving away from low
yielding primary products to secondary ones which eliminates some of the issues
caused by the foreign currency gap and primary product dependency.

What are the advantages and disadvantages?

Advantages Disadvantages

Better quality of life as consumers are able Environmental damage

to buy from a large variety of goods and
services

Can help reduce the savings gap Pushes up prices of commodities as less
people supply them

GDP increases Time lags

Less reliant on weather etc - more stability Loss of culture in the long term

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8. Tourism
What is tourism?

Tourism is travel for recreational, leisure or business purposes. [Taken from the
thefreedictionary.com]. In economics tourism is classed as an invisible export as it
bring revenue from overseas into the economy. It is also an injection.

How can it be used to promote growth and development?

Tourism brings money and jobs into a country allowing it to grow and develop. As
ever the limiting factors it eradicates are;

(i) Poor infrastructure - tourism attracts FDI from TNCs like Hilton hotels which can
help bring about changes in infrastructure. It will also attract credit institutions to
lend to these countries.
(ii)Foreign currency gap - Tourism is also income elastic and in boom times can
bring about a lot of money as it is of high value which can help restore terms of
trade which had been previously deteriorating due to primary product
dependency.
(iii)Savings gap and inadequate capital accumulation- Tourism creates jobs, albeit
seasonal ones, which helps individuals financially and gives them more scope to
save which can help close the savings gap.

What are the advantages and disadvantages?

Advantages Disadvantages

The improvement in the foreign currency Negative externalities e.g. pollution

gap means that LDCs can now buy capital
from developed countries.

FDI can have multiplier effects Income elastic - in times of recession terms
of trade can deteriorate again

Helps to make labour specialised Seasonal employment

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9. Micro-finance

What is micro-finance?

Micro-finance are small scale institutions which allow people to borrow small
amounts of money from local lenders to finance small scale enterprise.

How can it be used to promote growth and development?

Micro-finance promote enterprise which increases GDP and means that there is less
pressure on the government to help people start up enterprise and they can spend
money elsewhere. As ever the limiting factors it eradicates are;

(i) Capital flight - micro-finance in theory is likely to increase the amount of income
people make by allowing them to take risks and start their own businesses.
When these local people earn money they are likely to save money in local
institutions in stead of looking overseas for better returns which could help solve
the problem of capital flight
(ii)Foreign currency gap and primary product dependency - micro-finance support
individuals wishing to create businesses of other products which are not
agricultural or even in the primary sector therefore reducing the problems of the
foreign currency hap and primary product dependency.
(iii)Savings gap and inadequate capital accumulation - as with capital flight there is
more chance of savings as people enter jobs where they are likely to earn quite
a bit money and save it. By saving it they can reduce the savings gap as banks
are more likely to lend.

What are the advantages and disadvantages?

Advantages Disadvantages

Impact on long run LRAS Lack of education means that locals can be
charged high interest rates

Multiplier effect -- creates further jobs If it gets too big could get corrupt

Gets rid of poverty trap Small scale

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10. Fair Trade

What is fair trade?

Fair trade seeks to guarantee farmers a certain income so that they are not subject
to monopsony purchasing power of TNCs and Western countries.

How can it be used to promote growth and development?

Fair trade can reduce absolute poverty and improve terms of trade as there is a
minimum price. As farmers are being paid more they can spend more stimulating
consumption. As ever the limiting factors it eradicates are;

(i) Foreign currency gap - Fair trade means that people are paying more for
exports from developing countries this can help maintain the value of such
exports and reduce the rate at which the terms of trade are deteriorating.
(ii)Geographical issues - Developing countries usually have issues with their
geography e.g. being prone to floods. Fair trade means that farmers have more
money to deal with situations where the geography makes earning money
difficult.
(iii)Savings gap and inadequate capital accumulation - As farmers in theory
become richer because their incomes go up their potential to save increases and
this can have positive effects on the savings gap.

What are the advantages and disadvantages?

Advantages Disadvantages

Higher incomes Low prices are a sign of oversupply so fair

trade may not be the answer - some farmers
leaving the industry may be the answer

Multiplier effect Inadequate for reducing absolute poverty

because in reality farmers do not get much

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11. Role of NGOs
What are NGOs?

NGOs are non government organisations such as the IMF, UN, Amnesty
International and even small organisation which go to developing countries to help
them.

How can it be used to promote growth and development?

NGOs support and aid countries in several ways and this helps them to grow and
develop. As ever the limiting factors it eradicates are;

(i) Population Issues - NGOs sometimes educate people on family planning

issues which can help eradicate some of the problems with large
population growth.
(ii)Poor infrastructure - NGOs sometimes invest in countries by developing
infrastructure there such as building an airport.
(iii)Human Capital Inadequacies - NGOs as we saw with population isssues
they can come into countries in order to educate citizens but they may
also help teach them how to read and write and a variety of other skills
(iv)Civil wars - NGOs which are powerful like the UN and Amnesty may try
to intervene to stop civil wars. Other small scale ones may provide
healthcare for those impacted by the war.
(v)Geography - When a natural disaster happens NGOs usually go to help
the country whether it is by saving lives which are stuck between buildings
or helping to fertilize soil which may have become too dry.
(vi)Corruption - Powerful organisations such as the UN and IMF can try and
place sanctions on corrupt leads such as Gaddafi.

Thank you for reading!

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