Economic Development: Factors, Strategies, and the Role of FDI

Posted on Aug 2, 2024 in Economy

Economic Development: Factors, Strategies, and the Role of FDI

Institutional Factors Affecting Economic Development

  1. Education: Improves well-being, workforce efficiency, and health levels.
  2. Health Care: Increases life expectancy and well-being through healthcare services.
  3. Infrastructure: Enhances transportation, access to services, and economic activity.
  4. Political Stability and Lack of Corruption: Attracts investment, promotes economic growth, and improves living standards.
  5. Legal System: Enforces contracts, protects property rights, and fosters economic activity.
  6. Taxation: Provides funding for public services and infrastructure.
  7. Empowerment of Women: Improves family well-being, education, and health.
  8. Income Distribution: Reduces inequality and promotes economic development.
  9. Financial System and Microfinance: Facilitates lending, borrowing, and investment.

International Factors that Act as Barriers to Economic Development

  1. Over-Specialization on a Narrow Range of Products: Vulnerability to price fluctuations and economic downturns.
  2. Price Volatility of Primary Products: Difficulty in planning and investment due to fluctuating prices.
  3. Inability to Access International Markets: Protectionist measures and non-convertible currencies hinder market access.
  4. Long-Term Changes in Trade: Declining commodity prices reduce export revenues and economic growth.

Trade Strategies for Economic Growth and Economic Development

  1. Import Substitution Industrialization (ISI): Domestic production of goods to reduce imports.
  2. Export Promotion: Concentration on increasing exports to drive economic growth.
  3. Trade Liberalization: Removal of trade barriers to promote free trade.
  4. Bilateral and Regional Preferential Trade Agreements: Preferential access to products from member countries.
  5. Diversification: Production of a wider range of goods to reduce dependence on a limited range of commodities.
  6. Fairtrade Organization: Ensures fair treatment of producers in developing countries.

FDI and MNCs

Foreign Direct Investment (FDI): Long-term investments by private multinational corporations (MNCs) in overseas countries.

Benefits of FDI:

  • Economic growth
  • Employment
  • Education and training
  • Access to technology and expertise
  • Increased tax revenue
  • Improved infrastructure
  • Consumer choice and lower prices

Disadvantages of FDI:

  • Pollution and environmental degradation
  • Exploitation of low-skilled workers
  • Excessive power of MNCs
  • Tax incentives reducing government revenue
  • Transfer pricing

Current Account

The current account measures the flow of funds from trade in goods, services, and other income flows.

Components of the Current Account:

  1. Balance of Trade in Goods: Revenue from exports minus expenditure on imports of goods.
  2. Balance of Trade in Services: Revenue from exports minus expenditure on imports of services.
  3. Income: Net monetary movement of profits, interests, and dividends.
  4. Current Transfers: Net transfer of money between countries without exchange of goods or services.

Formula: Current Account = Balance of Trade in Goods + Balance of Trade in Services + Net Income Flows + Net Transfers