Institutional Factors Affecting Economic Development and Growth
Institutional factors affecting development:
1.
Education:
Improvements in education = improve well-being of the population: those educated and society as a whole. Leads to more efficient workforce + External benefits to society: ppl can read and communicate, and can discuss, which may lead to social change. Some benefits: Improve the role of women in society: women are empowered by education. Women should politically, economically and socially participate to increase development. // Improve the levels of health:as ppl can communicate more fully, and also read, they may become aware of dangers they face and of some of the opportunities that exist. / =/= Provision of education requires vast funding: may not be available in sufficient quantities. Disparities between rural and urban pops (they receive more funds). Also, family economic conditions that prevent children from attending school: needed to work in their home or in external work (=child labourers) for an income.2.
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Factors affecting E.D:··1.
Over-specialization on a narrow range of products:
Lots of developing countries, dependent on primary commodities for a significant share of their export revenues. If P of commodities rise = beneficial. Itll increase E.G. And if revenues are used to finance educ, health and infra = it can set off a positive cycle in terms of E.D. And future E.G. =/= If P fall: deteriorating terms of trade. Current account deficits will increase & difficult for countries to finance current expenditure and necessary Ms. Unless they can change the patter of their export trade, countries dependent on a narrow range of primary exports will find it difficult to gain growth through intll trade. // Regardless of goods exported, if country dependent on a narrow range of exports: vulnerability and uncertainty. There are some factors outside their control: tropical country dependent on tourism = tsunami = affected. ·2.
Price volatility of primary products:
PED and PES for commodities tends to be relatively inelastic. Any change in demand or supply conditions: LARGE price fluctuations. Impact of export revenues in these countries. Price volatility = export revenue volatility = difficult to plan ahead. Reduces Inv = reduces E.G. And E.D. ·3.
Inability to access intll mkts:
Protectionism = any type of economic policy aimed at supporting domestic producers at the expense of foreign producers (tariffs, subsidies, quotas, etc). Protecc measures of developed countries against developing = very harmful. Even more if the measures prevent developing countries from utilizing their comparative advantages and exporting to developed countries (reduced ability of foreign exchange). In primary product markets, its even more damaging: developed countries subsidy their farmers: this forces prices down as CofP are reduced. When they are exported, they are dumped in foreign mkts. Small scale farmers in developing countries are deprived of the possibility to earn a living, provide for their families and schooling for their children = barrier to E.D. // Another important issue Tariff escalation: rate of tariffs on goods rises the more the goods are processed. An importing country does this to protect its processing and manufacturing industries. Problem for developing countries to access markets & little incentive to diversify away from producing raw materials to processing them, as the higher prices due to tariffs will make their goods uncompetitive. It can trap them as suppliers of raw materials. Por ejemplo, con cocoa: cocoa raw, en EU, tariff de 0.5%. Cocoa intermedia, tariff de 9.7%. Cocoa final, tariff de 30.6%. / If tariff escalation is successful reducing the Ms of more processed goofs, then the final processing, along w/ the packaging and marketing, are done in developed countries. These add the highest value to the product in terms of price: largest gains are made by them. // Final factor affecting developing countries from accessing intll mkts: non-convertible currencies (=not accepted for exchange on the F.E.M.) Most developing countries: fixed exchange rate system. Non-convertibility means trade is less likely to occur: traders and FDI would be taking more of a risk in these countries. Besides, non-convertibility: currencies often over-valued at their official pegged exchange rate: black mkt will arise, damaging the economy. ·4.
Long term changes in the terms of trade:
i.E. Changes in relative prices of Ms and Xs, have a marked effect upon their ability to trade internationally. If commodity prices fall over time, and developing countries are primarily exporters of commodities: less export rev. = less ability to buy imports.
Trade strategies for economic growth and economic development:
Growth strategies: policies & measures to gain growth =/= Development strategies: policies & measures to achieve human development. ··1.
Import substitution Industrialization (ISI):
Inward-orientated strategy: a developing country should produce goods domestically, rather than import them. Industries producing the goods: able to grow, and then will be competitive on world mkts in the future, when they gain from EofS.
Necessary conditions
G needs to organize the selection of goods to be produced domestically. Historically, tends to be labor-intensive, low-skill manufactured goods. / Subsidies are given by G to encourage domestic industries. / G needs to implement a protectionist system to keep out foreign Ms.
Advantages:
ISI protects jobs in the domestic mkt, as foreign firms are prevented from competing. / ISI isolates the economy from foreign influence, so protects local culture and social habits. / ISI protects the economy from the power and bad influence of MNCs.
Disadvantages:
ISI only protects jobs in the short-run. In the long run, E.G. Is lowered = lack of growth leads to lack of job creation. / The country wont benefit from comparative advantage and specialization, and will produce in a relatively inefficient way, as goods could be imported from efficient foreign producers. / ISI may lead to inefficiency because of lack of competition = no encouragement to R&D. / ISI may lead to higher rates of INF due to domestic aggregate supply constraints. / ISI may cause other countries to take protecc policies. ·2.
Export promotion:
Export-led growth, outward-orientated growth strategy, based on openness and increased intll trade. Growth achieved by concentrating on increasing exports, and export rev = main factor to increase Aggregate Demand in the economy, increasing GDP = higher incomes = growth in domestic & exporting mkts. The country concentrates on producing and exporting products in which it had a comparative advantage of production.
Necessary conditions:
Liberalized trade (open up domestic mkts to foreign competition to gain access to foreign mkts) / Liberalized capital flows (reduce restrictions on FDI) / A floating E.R. / Investment in the provision of INFRA to enable trade to take place. / Deregulation and minimal G intervention. Differences between exports of primary or manufactured products as the engine for growth: A)
Primary products:
Many developing countries tried to use X of these to gain export rev. However, overall trend of primary product prices is to fall, due to increasing supply + relatively insignificant increases in demand + protecc from developed countries. Export-led growth based on export of primary products: unlikely to be achieved. B)
Manufactured products:
More successful (as Asian Tigers: Hong Kong, South Korea, Japan, Singapore, and Taiwan). Exported products where they had comp. Advantage, based upon low-cost labour. Over time, they started changing from labour-intensive production methods to more sophisticated products, using capital-intensive production methods + highly skilled workers (improvements in education systems were necessary). // Problems:
I) Success of Asian Tigers around 1965, increased protectionism in developed countries against developing: trade unions and workers argued they couldnt compete to low-cost labour countries, said it was unfair. Price increases because of tariffs removed the comp advantage of exporting countries. Tariff escalation also reduced ability of developing countries to export processed goods and assembled products: forcing them to export 1ry products + low-skill manufactures. II) Some assumptions were not met in the successful countries: economists argue that the role of state in export-led growth is vital. G should provide INFRA, subsidize output through low credit terms via central banks, promote savings + improve tech. + Protect domestic industries which were not yet able to compete w/ foreign firms. Infant industry argument of protectionism. Others say protecc slowed down growth rates. / III) If countries try to start export-led growth by attracting MNCs, they may become too powerful = problms. / IV) Some economists: free-mkt, export led growth increases income inequality. E.G. At the expense of E.D. ·3.
Trade liberalization:
Removal of trade barriers that block the free trade of G&S between countries. Involves elimination of tariff barriers, quotas, export subsidies and administrative legislation. Trade liberalization is believed to increase world trade + enable developing countries to concentrate on the production of G&S where they have comp advantage. The WTO is an institution that attempts to promote trade liberalization to encourage free trade. 1989, American economist Williamson, stated that for E.G. In developing countries, one of the key reforms was trade liberalization. World Bank + IMF + US treasury department agreed (Started to be known as the Washington Consensus) = Latin American economies seeking economic help were encouraged to adopt such marker-based reforms.
Policies:
Fiscal discipline (balanced budgets) / Redirect spending priorities from things like indiscriminate subsidies to basic health and education / Lower marginal tax rates and broaden the tax base / Interest rate liberalization / A competitive E.R. / Trade liberalization / Liberalization of FDI inflows / Privatization / Deregulation / Secure property rights.
Problems:
By the end of 20th century: Washington Consensus (W.C.) increasingly criticized by economists not supporters of such policies: anti-globalization movement. Argued that W.C. Was to ensure access of MNCs to cheap labour mkts in developing countries, to produce inexpensive products and sell them at high prices in developed countries. W.C. And liberalization of trade didnt lead to high E.G. Instead, it led to increased debt and economic crises, increased income inequality and exploitative working conditions. Movement to the left of Latin American countries, criticizing W.C. ·4.
Bilateral and regional preferential trade agreements:
Countries in a preferential trade agreement / area give preferential access to products from other member countries, by reducing (not necessarily abolishing) tariffs. They can be between two countries (bilateral) or two regional groups (EU and APC). More trade = more E.G. = more E.D. ·5.
Diversification:
Developing countries are pursuing export diversification, to gain E.G. And move from the dependence on production of a limited range of commodities. Replace them with production of manufactured & semi-manufactured goods. They hope to stabilize & increase X.Rev and stabilize & increase employment. Therell be an increase use of tech + increase demand for highly skilled workers.
Barriers:
Tariff escalation. + Need for a more highly qualified workforce to produce more sophisticated products.
Development strategies: Fairtrade Organizations:
Fair trade schemes try to ensure producers of food and some non-food products, in developing countries, receive a fair deal when selling their products. If consumers are aware of harsh and unfair conditions farmers face, then: theyll be willing to buy from producers who pay a fair price to the farmers. // International Fairtrade Labelling Organization (FLO):
coordinates labelling in 20 countries, trying to help small and landless workers. Products can be certified if they meet the standards of the FLO, which lets them display the FLO certification mark, so consumers identify the product and know the producer was paid a fair price. It has resulted in fair trading conditions for aprox 1 million farmers, workers and their families. FLO criteria: Product must reach trade with the less possible intermediaries / Product purchased at FLO minimum P (covers production costs, sustainable production and living income). / Premium for producer if its organic / Trader committed to long-term contract / Producer can access credit from trader / Small farmers should guarantee producers are treated democratically: trade unions, no child labour, employment standards meted. / Premium to the producer for aid to local development (health care, education). – Products as bananas, cocoa, coffee – cotton, sports balls. Fairtrade leads to E.D. And E.G.: proper working conditions, giving security, granting a living income, sustainable production, funding local community development.
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