<4.10 STRATEGIES FOR ECONOMIC GROWTH & DEVELOPMENT

"LET'S PRODUCE IT RATHER THAN IMPORT IT!"

• IMPORT SUBSTITUTION is also known as 'IMPORT-SUBSTITUTING INDUSTRIALIZATION' (ISI), and refers to an INWARD-ORIENTATED GROWTH STRATEGY based on strong government intervention AIMED AT PRODUCING GOODS DOMESTICALLY, RATHER THAN IMPORTING THEM.

• For this to be achieved it would involve LARGE SUBSIDY SPENDING TO ENCOURAGE LOCAL PRODUCTION as well as HEAVY PROTECTIONIST POLICIES (through tariffs, quotas, subsidies, etc) to PROTECT THESE 'INFANT INDUSTRIES' from IMPORTS with the aim of BECOMING SELF-SUFFICIENT and EVENTUALLY BEING ABLE TO COMPETE INTERNATIONALLY.

• Many newly independent countries in the 1950s considered this to be the way to MODERNIZE and CATCH UP with rich countries.

• It ran counter to the THEORY OF COMPARATIVE ADVANTAGE in that it DISCOURAGED SPECIALISATION in the goods that the economies had an advantage in as these goods were mostly agricultural and unprocessed which kept the populace in a low state of development as well as heavily dependent on foreign imports as well as volatile foreign demand.

• In order to RAISE THE LIVING STANDARDS of their citizens to be more on par with developed economies they desired to build their own industrial base to manufacture consumer goods such as cars and consumer electronics and REDUCE THEIR OVER-SPECIALISATION IN THE VOLATILE PRIMARY COMMODITY MARKETS.

• As such under the INFANT INDUSTRY justification, they would erect trade barriers in order to protect the growth of these new industries from more efficient importers.

• (-) INEFFICIENCES & LACK OF INCENTIVE (DWL): As we have seen protectionism CREATES DWL as the MORE EFFICIENT IMPORTERS are replaced by INEFFICIENT DOMESTIC PRODUCERS who WITHOUT COMPETITION, HAVE LESS INCENTIVE TO BECOME MORE PRODUCTIVE. Furthermore, as the firms are STATE-OWNED, the LACK OF PROFIT MOTIVE meant PRODUCTIVITY was not PRIORITISED.

• (-) LOSS OF MAIN EXPORT REVENUE: The need to OVERVALUE THEIR CURRENCIES to enable them to IMPORT THE ESSENTIAL CAPITAL GOODS NECESSARY TO INDUSTRIALISE CHEAPLY meant SACRIFICING their EXPORT REVENUES, which were essential for the primary sector.

• (-) INAPPROPRIATE INVESTMENT & LACK OF JOB CREATION: This focus on Capital-intensive production methods for manufacturing came at the expense of INVESTMENT IN APPROPRIATE TECHNOLOGY THAT COMPLEMENTED THE LOW-SKILLED LABOUR FORCE IN THE PRIMARY SECTOR to the extent that they became RELIANT ON FOOD IMPORTS.

• (-) INSUFFICIENT LOCAL DEMAND: These NEW DOMESTIC INDUSTRIES such as AUTOMOBILES REQUIRED A LARGE CONSUMER BASE IN ORDER TO ACHIEVE ECONOMIES OF SCALE and TURN A PROFIT however these developing regions generally LACKED THE SUFFICIENT SPENDING POWER.

"LET'S TRADE MORE!"

• EXPORT PROMOTION refers to an OUTWARD ORIENTATED GROWTH STRATEGY based on strong government intervention AIMED AT EXPANDING ITS EXPORTS. 

• In terms of the reasons and choice of the industry as well as the protectionist policies used, it was SIMILAR TO IMPORT SUBSTITUTION however the industries invested in were almost entirely EXPORT-ORIENTATED and UTILISED the economy's COMPARATIVE ADVANTAGE whilst the PROTECTIONIST MEASURES were only viewed s SHORT TERM and TRADE WOULD GRADUALLY BE LIBERALISED.

• Furthermore, the most successful economies at using this strategy LIBERALISED CAPITAL FLOWS to ENCOURAGE FDI as well as IMPROVED ITS INFRASTRUCTURE to APPEAL TO MNCs.

• One of the major failings of IMPORT SUBSTITUTION was the INABILITY OF DOMESTIC FIRMS TO ACHIEVE ECONOMIES OF SCALE DUE TO THE SMALL DOMESTIC MARKET, however, EXPORT PROMOTION TARGETS the GLOBAL MARKET and thus has the SCOPE TO ACHIEVE THESE LOWER AVERAGE COSTS.

• Furthermore, the FOCUS ON GOODS THAT THE ECONOMY ALREADY HAS A COMPARATIVE ADVANTAGE by way of FACTOR ENDOWMENTS such as a LARGE POOL OF MANUAL LABOUR, GEOGRAPHICAL LOCATION, leads to MORE APPROPRIATE INVESTMENT further enhancing PRODUCTIVITY.

• (-) MORE PROTECTIONISM IN DEVELOPED COUNTRIES: As these economies became MORE ABLE TO EXPORT THEIR GOODS in MORE PROCESSED and COMPETITIVE FORMS, DEVELOPED NATIONS used TARIFF ESCALATION and other forms of PROTECTIONISM.

• (-) MNC ISSUES: The FREE CAPITAL FLOWS meant that LARGE MULTINATIONALS INVESTED HEAVILY in the economies and as a result ALL THE DISADVANTAGES TO THE HOST COUNTRY mentioned HERE apply.

• (-) OVER-RELIANCE ON EXPORT DEMAND: If a substantial amount of income is generated from exports and your MAIN TRADING PARTNERS SUFFER RECESSIONS then this will severely impact aggregate demand and growth.

• SDG 17.10 (goal 17, target 10)

• GROWTH OF PTAs

• DIVERSIFICATION refers to the REALLOCATION of RESOURCES INTO NEW ACTIVITIES that BROADEN the RANGE of GOODS & SERVICES PRODUCED, 

• Both IMPORT SUBSTITUTION & EXPORT PROMOTION involved DIVERSIFICATION, though the latter mainly focused on diversifying into fields that still utilised their comparative advantage, while the former diversified into brand-new fields that they had little experience in.

• WHY IS THIS IMPORTANT FOR DEVELOPMENT? An economy that produces and exports primary commodities in their 'raw' form is missing out on the BENEFITS of PROCESSING its product into a HIGHER VALUE-ADDED VERSION that would command a higher export price.

• Furthermore, THE CREATION OF A MANUFACTURING BASE would CREATE EMPLOYMENT OPPORTUNITIES, IMPROVED SKILLS, and TECHNOLOGY.

• IRONICALLY it has been RESOURCE-POOR COUNTRIES that have DEVELOPED at a faster rate than the RESOURCE-RICH COUNTRIES as they have DIVERSIFIED INTO MANUFACTURING at an EARLIER STAGE.

• An economy that produces and exports PRIMARY COMMODITIES in their 'RAW' form is missing out on the BENEFITS of PROCESSING its products into HIGHER VALUE-ADDED VERSIONS that would command a higher export price.

• Furthermore, diversification allows countries to MOVE AWAY FROM OVERSPECIALISING and ONLY GENERATING EXPORT REVENUES FROM HIGHLY VOLATILE (INELASTIC SUPPLY) AND RELATIVELY LOWER-PRICED COMMODITIES, and INTO relatively HIGHER PRICED manufactured goods which are MORE RESPONSIVE (ELASTIC SUPPLY) to GLOBAL DEMAND allowing for SUSTAINED INCREASES IN EXPORT REVENUE.

• Furthermore, as the economy diversifies into manufacturing, it will be compelled to engage in GREATER TRAINING and EDUCATION as well as INVESTMENTS IN TECHNOLOGIES.

• IRONICALLY it has been RESOURCE-POOR COUNTRIES that have DEVELOPED at a faster rate than the RESOURCE-RICH COUNTRIES as they have DIVERSIFIED INTO MANUFACTURING at an EARLIER STAGE.

• MARKET-BASED POLICIES refer to policies aimed at REDUCING THE ROLE OF THE GOVERNMENT and occurred in the following ways:

• In terms of TRADE, this involved the REMOVAL OF PROTECTIONIST BARRIERS such as TARIFFS, QUOTAS, ETC. This PROCESS is referred to as TRADE LIBERALISATION.

• In terms of OWNERSHIP, this involved the sale of PUBLIC ENTERPRISES to the PRIVATE SECTOR. This PROCESS is referred to as PRIVATISATION.

• In terms of REGULATION, this involved DEREGULATING the LABOUR MARKETS via the ABOLITION/REDUCTION of the MINIMUM WAGE, REDUCTION IN UNION POWER, LOWERING OF UNEMPLOYMENT BENEFITS ETC...

• ENCOURAGING FLOATING EXCHANGE RATES

• UNRESTRICTED FDI

• REDUCED GOVERNMENT BORROWING

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• Evidence suggests that TRADE LIBERALISATION creates BOTH WINNERS and LOSERS.

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• TAX POLICIES

• TRANSFER PAYMENTS

• MINIMUM WAGES

• EDUCATION

• HEALTHCARE

• INFRASTRUCTURE

• FOREIGN DIRECT INVESTMENT (FDI) refers to INVESTMENT BY FIRMS BASED IN ONE COUNTRY (HOME), IN PRODUCTIVE ACTIVITIES IN ANOTHER COUNTRY (HOST).

• These firms are termed MULTINATIONAL COMPANIES (MNCs)

• MAJOR SOURCE OF FOREIGN FINANCE INFLOWS to some developing economies.

• TO INCREASE SALES & REVENUE: An MNC may wish to invest in an LDC in order to INCREASE SALES & REVENUES, especially those that are RAPIDLY DEVELOPING and which HAVE LARGE POPULATIONS, such as China and India.

• TO AVOID TRADE BARRIERS: If an MNC aims to sell its product in the LDC and this LDC has erected TRADE BARRIERS such as TARIFFS then the MNC would be able to AVOID PAYING them by producing within its borders.

• TO LOWER THE COSTS OF PRODUCTION: The COST OF LABOUR is much CHEAPER in the HOST COUNTRY therefore the MNC will be able to LOWER ITS COSTS OF PRODUCTION.

• TO SAVE ON SHIPPING RAW MATERIALS FROM THE HOST: Rather than ship the raw materials from the host country to be used for manufacture in the home country, to then be exported globally, it is CHEAPER TO BUILD THEIR PRODUCTS CLOSER TO THE RAW MATERIAL.

• TO GET ACCESS TO NATURAL RESOURCES: If the MNCs main activity is the EXTRACTION OF PRIMARY RESOURCES then it will wish to invest in all locations that possess abundant supplies of the resource.

• POLITICAL STABILITY: 

• STABLE MACRO ENVIRONMENT: 

• FAVOURABLE TAX RULES: Many developing countries attempt to attract the MNCs by offering extremely favourable tax incentives

• WEAK LABOUR LAWS: MNCs are not only attracted by the low wages but also the cost savings from not having to pay for worker protection, health and safety, compensation etc... 

• LIBERALISED TRADE: This means they will be able to import raw materials without having to pay any tariffs.

• LARGE DOMESTIC MARKETS: The larger the size of the potential local market the greater the potential to make a lot of local sales.

• RAPID GROWTH RATES: This implies local incomes are rising which means the potential to make sales locally will increase.

• GOOD INFRASTRUCTURE: A country that already has for example a reliable electric grid and water supply as well as airports and ports, will make the economy 

• WELL-EDUCATED LABOUR FORCE: 

• (+) FDI PROVIDES FOREX TO OFFSET CA DEFICIT, not only do the MNCs bring FOREX into the economy when they BUY THE HOST'S PHYSICAL CAPITAL, but as these MNCs are usually EXPORT-ORIENTATED there will be further inflows from EXPORT SALES. 

• (+) MNCs WILL IMPROVE THE SKILLS OR THE HOST'S WORKFORCE, as they will likely need to hire local workers (often a contingency) who will receive advanced training which brings with it POSITIVE PRODUCTION EXTERNALITES.

• (+) DOMESTIC SAVINGS & INVESTMENTS WILL INCREASE as the extra income generated will likely lead to GREATER SAVINGS which can then be USED FOR INVESTMENT PURPOSES.

• (+) INCREASED TAX REVENUE as the MNC's profits and workers' salaries will be taxed by the HOST country's government, which can lead to MORE SPENDING ON MERIT GOODS.

• (+) LOCAL FIRMS REVENUES INCREASE, as the MNCs will likely need to BUY A LOT OF LOCALLY PRODUCED INPUTS, furthermore, there will be OPPORTUNITIES to START SUPPORT BUSINESSES.

• (+) THE HOST COUNTRY'S UNEMPLOYMENT RATE WILL FALL as the MNCs will HIRE LOCALS.

• (+) HIGHER LEVELS OF ECONOMIC GROWTH, as the combination of IMPROVED TECHNOLOGY, HIGHER EDUCATION, and GREATER TAX REVENUES to spend on MERIT GOODS, should LEAD TO AN INCREASE in PRODUCTIVITY and PRODUCTIVE POTENTIAL.

• (-) FDI REPATRIATES PROFITS/INCOME instead of the FOREX from IMPORT ACTIVITY remaining in the economy, it is often 

• (-) MAY NOT IMPROVE LOCAL WORKER'S SKILL LEVELS, as the MNC is likely to HIRE its SPECIALISTS from the HOME COUNTRY, who are already trained, and EMPLOY LOCALS AS MANUAL LABOUR.

• (-) ONLY LEADS TO A MODERATE INCREASE IN TAX REVENUE, as the government often offers TAX CONCESSIONS to ATTRACT MNCs in the first place. Furthermore, firms often use 'TRANSFER PRICING' in order to REDUCE THEIR REPORTED PROFITS. 

• (-) NEGATIVELY IMPACTS LOCAL BUSINESSES, as the MNC FORCES LOCAL COMPETITION OUT OF THE MARKET, and can USE ITS MARKET POWER AND INFLUENCE as a BARRIER TO ANY NEW ENTRANTS.

• (-) IMPACT ON UNEMPLOYMENT LEVELS UNCERTAIN as the LOSS OF LOCAL JOBS caused by the MNC's MARKET POWER may not be supplemented by NEWLY CREATED JOBS. Furthermore, the CAPITAL INTENSIVE NATURE of some of the MNC's activities, IS INAPPROPRIATE  FOR THE HOST COUNTRY'S ABUNDANCE OF CHEAP LABOUR SUPPLY.

• (-) CREATES ENVIRONMENTAL DEGRADATION.

• (-) DIVERTS GOV'T RESOURCES TOWARD INFRASTRUCTURE.

• (-) MNCs POSSESS TOO MUCH POLITICAL POWER.

• (-) RACE TO THE BOTTOM. LINK

• FOREIGN AID refers to THE TRANSFER OF FUNDS/GOODS/SERVICES TO DEVELOPING COUNTRIES aimed at IMPROVING SOCIAL & POLITICAL CONDITIONS. It has TWO DISTINGUISHING CHARACTERISTICS:

  • • 1) It is CONCESSIONAL IN NATURE, meaning the terms of the AID (IF IN A LOAN FORMAT) are MORE FAVOURABLE than market rates in terms of interest rate and the repayment period.

    • 2) It is NON-COMMERCIAL IN NATURE, and as such NO PROFIT is made. 

• HUMANITARIAN AID refers to THE TRANSFER OF FUNDS/GOODS/SERVICES TO DEVELOPING COUNTRIES aimed at IMPROVING SOCIAL & POLITICAL CONDITIONS. It has TWO DISTINGUISHING CHARACTERISTICS:

  • • 1) It is CONCESSIONAL IN NATURE, meaning the terms of the AID (IF IN A LOAN FORMAT) are MORE FAVOURABLE than market rates in terms of interest rate and the repayment period.

    • 2) It is NON-COMMERCIAL IN NATURE, and as such NO PROFIT is made. 

• The WORLD BANK was established in 1944 after the end of WWII, in order to give FINANCIAL ASSISTANCE for the REBUILDING of EUROPE. 

• In the 1950's it also began offering financial assistance to DEVELOPING NATIONS for the purpose of ALLEVIATING POVERTY.

• INAPPROPRIATE CHOICE OF PROJECTS FUNDED that CREATED NEGATIVE EXTERNALITIES OF PRODUCTION leading to ENVIRONMENTAL & SOCIAL PROBLEMS and which DO NOT DIRECTLY TARGET POVERTY ALLEVIATION.

• UNEQUAL POWER as RICHER COUNTRIES that MAKE THE LARGEST CONTRIBUTIONS have a GREATER INFLUENCE on where FUNDS are diverted.

• CONDITIONAL STATUS OF THE LOANS, means LDCs are FORCED TO ACCEPT these TERMS which may not be in their best interests.

• The INTERNATIONAL MONETARY FUND (IMF), was established in 1944 after the end of WWII, along with the WORLD BANK, with the initial aim to provide funds for economies FACING CREDIT ISSUES and to STABILISE EXCHANGE RATES that come under intense DOWNWARD pressure.

• As a CONDITION, the recipients MUST implement STABILISATION POLICIES that AIM TO REDUCE EXPENDITURE ON IMPORTS and SUBSEQUENTLY REDUCE THE DOWNWARD PRESSURE and IMPROVE THE TRADE BALANCE.

• These policies include EXPENDITURE REDUCING POLICIES  such as CONTRACTIONARY FISCAL & MONETARY POLICY, to REDUCE DISPOSABLE INCOMES and limit import spending as well as EXPENDITURE SWITCHING POLICIES such as CURRENCY DEVALUATIONS, in order to make IMPORTS MORE EXPENSIVE.

• DETRIMENTAL IMPACT OF STABILISATION POLICIES: The NATURE of these CONTRACTIONARY POLICIES, will result in LOWER AGGREGATE DEMAND and incomes and DISCOURAGE INVESTMENT.

• The CUTS IN GOVERNMENT SPENDING will IMPACT THE PROVISION OF MERIT GOODS further IMPACTING LONG TERM GROWTH AND DEVELOPMENT.

• 'MICROFINANCE', also known as 'MICROCREDIT', refers to SMALL LOANS that are made available to low-income individuals who would otherwise have no access to credit due to their LACK OF INCOME and COLLATERAL.

• These funds are then INVESTED IN SMALL BUSINESSES known as MICRO-ENTERPRISES.

• OVER RELIANCE ON LOANS by the government may DISCOURAGE The NATURE of these CONTRACTIONARY POLICIES will result in 

• GROWTH OF UNREGULATED INFORMAL SECTOR as these micro enterprises mostly operate in this unregulated sector, in which workers have no protection, it is UNCERTAIN how it will IMPACT DEVELOPMENT.

• INTEREST RATES are TOO HIGH, as in order to MITIGATE the HIGHER RISK of making these loans the rates are USUALLY SET HIGHER THAN MARKET RATES.

• HIGH POTENTIAL FOR MISMANAGEMENT if the BORROWERS are from very low-income groups then some may LACK THE BASIC LITERACY & NUMERACY SKILLS to MANAGE THEIR FUNDS CORRECTLY, then the potential for default and worsening debt situation.

• MOBILE BANKING refers to the USE OF MOBILE TELEPHONES to RECIEVE & SEND MONEY  TO PAY FOR TRANSACTIONS.

• (+) INSTANT ACCESS, NO TIME DELAYS.

• (+) NO NEED TO TRAVEL to NEAREST BANK/ATM.

• (+) ABLE TO PAY WORKERS REGARDLESS OF LOCATION.

• (+) ABLE TO PAY FOR RAW MATERIALS MORE EASILY.

• (+) ABLE TO GET INSTANT SUMMARY OF FINANCIAL SITUATION.

• (-) RELIANT ON NETWORKS THAT CAN BE UNRELIABLE IN LDCs.

• (-) COST OF PHONE + PHONE PLANS.

• (-) INABILITY OF OLDER PEOPLE TO OPERATE.

• (-) INCREASED POTENTIAL FOR FRAUD.

• These EXTERNAL BENEFITS arise due in most part to the INCREASED CONSUMPTION OF EDUCATION by WOMEN, they include:

  • • INCREASED HEALTH OF CHILDREN as IMPROVED KNOWLEDGE regarding HYGIENE & NUTRITION, leads to IMPROVEMENTS in children's general health.

    • INCREASED EDUCATIONAL ATTAINMENT of CHILDREN as the educational level of the mother most often correlates with that of their child.

    • INCREASE IN THE QUALITY OF LABOUR as a direct result of the above two benefits leads to a MORE PRODUCTIVE WORKFORCE and thus a HIGHER POTENTIAL LEVEL OF GDP.

    • LOWER FERTILITY RATES as women will LIKELY HAVE FEWER CHILDREN due to WORK COMMITMENTS as well as BETTER KNOWLEDGE OF CONTRACEPTION and REPRODUCTIVE CHOICE.

• DEVELOP

• INVESTMENT IN HUMAN CAPITAL

• INVESTMENT IN NEW TECHNOLOGY

• INVESTMENT IN INFRASTRUCTURE

• OTHER INDUSTRIAL POLICIES

• ENCOURAGING COMPETITION

• LABOUR MARKET REFORMS

• INCENTIVE-RELATED POLICIES