Development strategies Notes

How Do Countries Attempt To Raise Living Standards?

1. Countries try to raise living standards through development strategies, coordinated plans to improve people's quality of life.
2. A useful starting point is to separate economic growth (producing more output) from development (improving people's opportunities and well-being).
3. Because many countries have experienced growth without enough progress in health, education, or fairness, the choice of strategy matters.

What's Are The Two Main Development Strategies?

1. Most real-world strategies are mixed, but it is helpful to compare two ideal types:
   1. Market-based policies rely mainly on incentives, competition, trade, and private enterprise.
   2. Interventionist policies rely more on government planning, spending, regulation, and redistribution.

What Are Market-Based Policies?

1. Market-based strategies aim to expand the "size of the economy" by improving incentives for firms and workers.
2. Common market-based approaches include:
   1. Encouraging entrepreneurship and small business formation (simplifying licensing, reducing unnecessary red tape).
   2. Promoting trade (export growth, participation in global supply chains).
   3. Attracting foreign direct investment (FDI) to bring capital, jobs, and technology.
   4. Supporting financial inclusion (bank accounts, microcredit, mobile payments) so that savings can become investment.
   5. Protecting property rights and enforcing contracts to reduce risk for investors.
3. In the circular flow of income, these policies aim to increase investment, exports, and productive capacity, which can raise incomes.

Strengths

1. Market-based approaches often:
   1. Create strong incentives to innovate and use resources efficiently.
   2. Expand employment when private firms grow.
   3. Increase consumer choice and sometimes reduce prices through competition.
   4. Work relatively well when government capacity is limited, as long as basic rule of law exists.

Weaknesses and Risks

1. However, markets do not automatically deliver development.
2. Benefits may be unequally distributed (urban areas, skilled workers, and owners of capital may gain most).
3. Private investors may underprovide public goods (roads, basic education, sanitation) because they cannot easily charge users.
4. Growth in one sector can leave others behind, increasing regional inequality.
5. If regulation is weak, growth can come with unsafe working conditions or environmental damage.

What Are Interventionist Policies?

1. Interventionist strategies focus on directly improving people's access to essential services and correcting market failures.
2. Governments may:
   1. Spend on education and health care to build human capital.
   2. Build infrastructure (roads, electricity grids, clean water systems) that supports private activity.
   3. Provide welfare and social protection to reduce extreme poverty and vulnerability.
   4. Use industrial policy (subsidies, training programmes, targeted support) to develop new sectors.
   5. Regulate labour and product markets (minimum standards, consumer protection).

Strengths

1. Intervention can:
   1. Break the poverty cycle by raising school attendance and health outcomes.
   2. Improve equity (fairness in distribution of resources and opportunities).
   3. Provide public goods that markets underprovide.
   4. Stabilize households during shocks (job loss, illness, disasters), preventing long-term setbacks.

Weaknesses and Risks

1. Intervention also faces constraints:
   1. Limited tax revenue and borrowing capacity can restrict what is affordable.
   2. If institutions are weak, funds may be used inefficiently or captured by elites.
   3. Poorly designed subsidies or price controls can create shortages or discourage production.

How Do Governments Choose Development Strategies?

1. While there isn't a universal "best" model, strategy depends on a country's starting conditions.
2. Some key context factors to consider though are:
   1. Government capacity: Can the state collect taxes, plan projects, and reduce corruption?
   2. Human capital levels: Are workers healthy and educated enough to adopt new technologies?
   3. Geography and market size: Do landlocked or small island states face higher transport costs and narrower export options?
   4. Financial system development: Can savings become investment through trustworthy institutions?
   5. Social priorities: How much inequality is acceptable, and what level of social protection is expected?

Case study

Maldives and tourism-led growth

• While luxury tourism successfully moved the country to "upper-middle income" status, it created a dangerous single-point-of-failure.
• Extreme Economic Fragility
  • Tourism directly accounts for over 25% of GDP.
  • This lack of diversification meant that when COVID-19 stopped global travel in 2020, the Maldivian economy contracted by 33.5% in a single year.
  • Implication: Because the country relied on one industry, a global event erased a third of their economy overnight, leaving them with limited foreign reserves to import food and fuel.
• Environmental Cannibalism
  • To sustain the industry, the country is damaging the very assets (clean water and reefs) that tourists come to see.
• Waste
  • The country created Thilafushi, an artificial island made almost entirely of garbage, to handle the waste generated largely by resorts.
  • It receives roughly 300 to 500 tons of trash daily.
• Water
  • Resorts consume massive amounts of fresh water for pools and showers, depleting natural aquifers and forcing reliance on energy-intensive desalination.