IB Economics 4.10.1 Strategies to Promote Economic Growth and Economic Development Notes

The Eight Families of Strategies

1. Strategies to promote growth and development fall into eight families, each working through a different channel.
   1. Trade strategies.
   2. Diversification and social enterprise.
   3. Market-based policies.
   4. Interventionist policies.
   5. Merit goods.
   6. Inward foreign direct investment.
   7. Foreign aid and multilateral assistance.
   8. Institutional change.
2. No single strategy is enough on its own; the best approach combines several, matched to a country's context.

Trade and Diversification Strategies

1. These change how a country engages with world markets.
   1. Import substitution: build local industry behind tariffs, though protected firms often stay high-cost.
   2. Export promotion: support industries to sell abroad, earning foreign exchange and scale, though it ties growth to global demand.
   3. Economic integration: join trade blocs to widen markets and competition, at some loss of policy independence.
   4. Diversification: broaden output beyond a few primary products to spread risk, though new industries are slow to build.
   5. Social enterprise: run a business to solve a social problem while covering costs, though impact usually stays small.

Market-Based and Interventionist Policies

1. Market-based policies leave more to the market to raise efficiency.
   1. Trade liberalisation: remove tariffs to raise competition and cut prices, though it can wipe out uncompetitive local firms.
   2. Privatisation: move state firms to private owners to sharpen efficiency, though it can create an unregulated monopoly.
   3. Deregulation: cut excessive rules to lower business costs, though too little regulation invites instability.
2. Interventionist policies act directly where markets fall short.
   1. Progressive taxes: raise revenue and redistribute to the poor, though high rates can blunt incentives.
   2. Transfer payments: raise poor households' incomes quickly, though they are costly.
   3. Minimum wages: lift the lowest-paid, though set too high they can raise unemployment.

Merit Goods

1. Merit goods build the capacity every other strategy relies on, but markets under-provide them, so government steps in.
   1. Education: builds the skills that raise productivity, though gains take years.
   2. Healthcare: raises productivity and lengthens working lives, though it is expensive to build.
   3. Infrastructure: roads, power, water, and connectivity are the foundation, though upfront costs are huge.
2. Because they raise the economy's productive capacity, merit goods deliver the most durable gains, but only with steady financing and if skilled workers stay rather than emigrate.

Inward Foreign Direct Investment

1. Inward FDI is a multinational building or buying productive capacity inside a developing country.
2. It brings capital, jobs, technology, and management know-how the host often lacks, raising productivity.
3. But development happens only under conditions: strong links to local suppliers, enough skills to absorb the technology, and regulation that captures tax and protects labour.
4. Without them, profits are repatriated, the project stays an enclave, and footloose capital can move on.

Foreign Aid and Multilateral Assistance

1. External finance fills the gap between what a country can save and what it needs to invest.
   1. Development and humanitarian aid: grants and cheap loans fund investment and services, though aid can breed dependency and follow donor interests.
   2. Debt relief: cancelling unpayable debt frees budgets, though it risks moral hazard if reckless borrowing resumes.
   3. The World Bank and IMF: provide finance and expertise, though attached conditions can be one-size-fits-all.

Institutional Change

1. Institutional change makes every other strategy work better, since cleaner governance means more of the same budget reaches services.
   1. Microfinance and mobile banking: reach the unbanked so poor households can save, borrow, and invest, though small loans alone rarely transform incomes.
   2. Female empowerment: expands women's access to education, work, and credit, though cultural and legal barriers shift slowly.
   3. Cutting corruption and securing property rights: let people invest in and borrow against what they own, though entrenched interests resist.