4.10.1 Strategies to Promote Economic Growth and Economic Development Notes

Trade strategies

Developing countries use different trade strategies to promote economic growth and development.Some of the main approaches include the following.

Import Substitution

1. Countries begin manufacturing consumer goods domestically instead of importing them.
2. Domestic industries get protected by trade barriers like tariffs and quotas to help them grow.
3. Some common consequences include:
   1. High costs and inefficiency due to lack of competition.
   2. Resource misallocation from excessive protection.
   3. Limited long-term growth potential.
   4. Negative impacts on employment and income distribution.

Export promotion

1. An export-led growth strategy focuses on expanding exports with strong government support while maintaining international competitiveness.
2. Financial assistance is provided to targeted industries in the form of production subsidies.
3. Investment is made in education and skills training.
4. Exchange rates are managed to keep exports competitive.

Economic integration

1. Countries remove trade barriers between them to increase trade.
2. This can be regional (like ASEAN) or global (through WTO).
3. Benefits of this strategy include: larger markets, increased competition, technology transfer, and foreign direct investment opportunities.

Diversification

Moving from primary production to more varied economic activities is key for development. Let's explore how diversification works.

1. Value-added production contributes to diversification by moving up the production chain through processing raw materials and creating more sophisticated products using higher skill levels and advanced technology.
2. Diversification is further supported by more varied production activities, which open up new employment opportunities, promote higher-skilled job creation, and enhance export potential.

Diversification leads to key outcomes outlined below:

1. Sustained export growth is achieved through access to a variety of markets.
2. The development of technological capabilities strengthens innovation and production efficiency.
3. Reduced vulnerability to price changes helps stabilize the economy.
4. Better use of domestic resources enhances productivity and economic resilience.

Social enterprise

1. Social enterprises are organisations that use business methods to achieve social goals.
2. They can be for-profit or non-profit, but the social mission comes first.
3. They must be commercially viable without relying on donations.

Key features of social enterprises are as follows:

1. Focus on social impact over profit maximization
2. Reinvests profits into the social mission
3. Operates in various sectors (education, health, agriculture)
4. Creates employment opportunities
5. Often targets developing countries' needs

1. Social enterprises have a broad impact across various sectors, including education, healthcare, agriculture, clean technology, environmental conservation, poverty reduction, and microfinance services.
2. These areas contribute to both social and economic development.

Market-based policies

In the 1980s, a shift toward market-oriented approaches emerged. Let's explore these key policies.

Trade liberalisation

1. Countries began removing trade barriers to promote international competition.
2. Governments focused on eliminating or significantly reducing tariff barriers.
3. Markets were opened to allow more foreign companies to compete locally.

Privatisation

1. Governments started converting state-owned enterprises into private companies.
2. Major economic sectors like transport, oil, gas, and utilities moved to private ownership.
3. The primary goal was to enhance efficiency through market competition.

Deregulation

1. Government control over markets was systematically reduced.
2. Labor markets became more flexible with fewer restrictions.
3. Price controls were removed to allow market forces to determine prices.

The reform package included several additional measures:

1. Exchange rates were allowed to float freely in currency markets.
2. Restrictions on foreign direct investment were significantly reduced.
3. Government borrowing was placed under stricter control.
4. Direct industrial policy intervention was limited.

This large-scale market liberalisation led to certain limited benefits, social impacts, and a new consensus in the 1990s.

1. Export growth declined in numerous developing countries.
2. Manufacturing diversification remained limited in most regions.
3. Economic growth showed minimal improvement in many cases.

1. Public sector employment decreased as state enterprises were privatized.
2. The informal economy grew as formal jobs became scarcer.
3. Social protection systems weakened in many countries.
4. Income gaps widened between different social groups.

In the post-1990s consensus era, a new status quo was established.

1. A balance between market forces and government intervention became necessary.
2. Education and infrastructure development gained renewed importance.
3. Social protection measures were recognized as essential.
4. Proper market regulation emerged as a crucial factor.

Interventionist policies

Government intervention through redistribution aims to reduce inequality and promote development.

Tax policies

1. Tax systems need to become more progressive in developing countries.
2. Personal income tax coverage should gradually expand.
3. Indirect taxes target luxury goods and negative externalities.
4. Capital gains and property taxes help ensure fair contribution.
5. Tax evasion reduction remains a key priority.

Transfer payments

1. Direct financial support helps vulnerable populations.
2. Universal social protection covers basic needs.
3. Benefits include child support and pensions.
4. Disability and unemployment protection provide safety nets.

Minimum wages

1. The government sets wage floors after consulting workers and employers.
2. Regular reviews ensure wages keep pace with living costs.
3. Strong enforcement prevents illegal underpayment.
4. Policy must balance worker protection with employment levels.

Provision of merit goods

Government plays a crucial role in providing goods with significant social benefits.

Education Programs

1. Universal literacy serves as a foundation for economic development.
2. Primary education delivers the highest returns in developing countries.
3. Investment in education creates positive spillover effects.
4. Skills development supports technological advancement.

Healthcare Services

1. Public health systems improve overall workforce productivity.
2. Disease prevention generates community-wide benefits.
3. Healthcare access reduces poverty from medical expenses.
4. Immunization programs protect entire populations.

Infrastructure Development

1. Transportation networks connect markets and communities.
2. Clean water and sanitation improve public health.
3. Energy access increases productivity.
4. Communications infrastructure enables business growth.

These vital infrastructure systems can generate far-reaching impacts, which include:

1. Higher productivity through better public services.
2. Reduced inequality in access to basic services.