Harrod-Domar growth model
The Harrod-Domar Growth Model contends that the savings rate of a developing country is the key to developing. The basic model assumes a closed economy and an absence of a government sector (no exports, imports, government spending, or taxes) It specifically uses the equation g=s/k, which means the growth rate equals the savings rate divided by capital-output ratio. This means that as saving increases the growth of the economy will increase because there is more money to invest and an increase in economic flow and activity. There are several reasons why the model has been criticized:
-Eventually the law of diminishing returns will dictate that adding more capital will only hurt productive efficiency,
-While investment is an important pre-condition for growth, it is not sufficient in itself in creating growth.
-The focus on capital neglects the fact that human capital is also necessary in being able to actually use the machines and technology to their full potential (what's the use of medical technology or advanced computing systems if no one is educated enough to use them?)
-Issues such as infrastructure, institutional capacity, and political stability are not adressed.
-Filling the savings gap via loans can lead to large foreign debt, while both loans and domestic savings are subject to capital flight, which hampers investment.
Structural change/dual sector model
The dual sector model consists of the Todaro model and the Lewis model. The Todaro model is when the opportunity cost of moving to the city is lower than the benefits so people move to the city. The Lewis model is when we assume the marginal product of agriculture laboe equals zero, so hiring one more person or losing one worker will not change the amount of food you get so farmers do not need as many workers to get more production. This affects the workers/people because they won't get hired so they choose to move to the cities because as the Todaro model says, the opportunity cost is lower to move to the city where there is presumably a job that they can get. This models fails because it oversetimates the number of jobs available in the urban area.
Types of aid
- • Bilateral Aid: When one country gives money to one other country
- Ex: The U.S. giving money to the Afghan government.
- • Multilateral Aid: When many countries give money to one country.
- Ex: The United Nations giving money to Haiti after the earthquake.
- • Grant Aid: A grant aid is when a country gives another country money, and they do not expect to get it back.
- Ex: Like a college scholarship, only for countries!
- • Soft Loans: Soft loans are loans with a very low interest rate, or a really long payback period (and also generally have lower expectations of being repaid).
- • Official Aid: Official aid is when a government gives aid (in the form of money, factors of production, etc.) to another government.
- Ex: The U.S. government providing Haiti with aid directly.
- • Tied Aid: Tied aid is when a wealthy country provides aid to another country only if they are going to get something in return. Tied aid is often used to form an alliance with a country, such as in a global conflict.
- Ex: "I scratch your back, you scratch mine."
Export-led growth/outward-oriented strategies
This strategy is heavily favored by many economists because it has a history of success in both India and China, unlike many countries that have attempted import substitution strategies. The reasons for this all have to do with the fact that increasing trade is always good. When trade barriers are decreased by one country, other countries will do the same. This counld result in free trade. This would make trade the most efficient. Good relationships would be able to be developed between countries who have reached trade agreements. Also, there is no end to the amount of good this strategy could do. No matter how much exports have been increased, it is always possible to increase them. In general, if a country exports, instead of importing, then a country will be less dependent on other countries and can become more developed. In order for this to work at its best ability, you will have to decrease tariffs, subsidize production, and reduce some subsidies.
Import substitution/inward-oriented strategies/protectionism
There are two main reasons why this strategy often tends not to work. Reason number one: trade barriers must be put in place. Reason number two: imports can only decrease to a certain level. Trade barriers are always bad. They make trade inefficient and trading partners are often angered, creating problems with future trade. In order to pursue an import led strategy, a government must either place subsidies on domestic goods, quotas on imports, or tariffs on imports. The other countries may retaliate, enforcing trade barriers on this country, decreasing this country's exports. The exchange rate will also need to be reduced in order for this to work. This strategy is also bad because if a country somehow manages to make their imports zero, they can go no lower. There will be no more room for improvement, even though it is needed.
Large companies will often invest in a developing country. This is because the developing country has factors that make it advantageous to be in business there. These factors can be things like lack of laws against pollution and cheap labor. These companies end up helping both themselves and the developing countries they are working in. However the companies can impose negative externalities because of the lack of laws and cheap labor.
Fair trade organizations
Fair trade organizations is a market-cased approach that aims to help the producers in a developing country to obtain better trading and sustainability. The organizations helps to get the payment of a higher price to producers. Fair trade organizations focuses on exports from developing countries to developed countries. Fair trade orginizations are concerned with: improving wages, environmental concerns, and labor rights. How they work is they cut out the "middle man." By doing this they increase the % of the final price that goes back to the original growers.
ex: fair trade coffee may cost X% more, but coffee bean farmers get more money. (please note: fair trade does not require higher prices, just a larger % of the profit going back to where the product was originally grown/made)
== Micro-credit schemes==
Micro-credit is when one loans a small amount of money to start a small business. From the creation of that business, one can expand it and increase profit, but usually micro-credit is not as helpful. The LRAS has to beshift right, if not, the poverty cycle crashes = bad!
Foreign direct investment
The purchase of physical assets such as plants, buildings and land or a company in a foreign country. This helps development because the people in that country will have jobs in which they will get money and spend it on goods from their own country which fills the investment gap, increases tax revenue, increases technology transfer and foreign currency. Technology transfer is the gain of technology knowledge from other countries. Also allows the multiplier effect to take place. This where the net effect of FDI investment multiplies through the economy.
Develpoment is only sustainable if it is being achieved through the business of secondary/tertiary goods, and not primary/raw goods. When countries are poor, their status is very sustainable, because it is not hard to stay poor. When countries are in the middle of the pack, not at the bottom, but not very wealthy, they are in the stage that is least sustainable. This is because the development that they have achieved thus far has been through relying on natural resources and the selling of primary/raw goods. Sooner or later their business will dwindle and their level of development will drop. If when a country is in its stage of being in the middle of the pack, it switches from the production of primary/raw goods to the production of secondary/tertiary goods, it will succeed. The country will then make its way to the next sustainable position: wealthy. If a country is gaining wealth through the supply of secondary/tertiary goods, it is not difficult to maintain that wealth.
Evaluation of Development Strategies
- • aid and trade- Aid is when a country gives another country money to help them out. Usually aid is given to help countries overcome their deficit and then is later paid back to that country which lent them the money. Aid is identified based on the five main barriers to trade: international financial barriers, international trade barriers, political instability, cultural factors, and lack of infrastructure. By helping decrease these barriers, a country could be greatly helped.
- • market-led strategies- When the economy fixes itself through natural economic processes. It has worked in East Asia and Chile, failed in Sub-Saharan Africa, and both failed/worked in Latin America.
- • interventionist strategies- Interventionist strategies are when government is in charge of the peoples' money. Their decisions relate to import substitution, nationalization, price controls, decreasing financial freedom (the way one chooses to spend/save money), increase government sector (government provided stuff), and overvalued exchange rates. These strategies fail because a country needs strong government to begin with, and it can increase budget deficit and current account deficit. Sometimes cultural barriers can also get in the way because if someone comes in and tells a country that their religion is preventing their development, culture will rule over a foreign government.
The role of international financial institutions
- • The International Monetary Fund (IMF) offers loans to help poor countries to prevent debt defaults. The IMF is market-oriented and eliminates currency manipulation. They balance the budget by raising taxes and decreasing government spending and preventing inflation which leads to higher interest rates. However, the IMF may actually be anti-development because higher interest rates lead to lower investment. Therefore, poor countries are unable to break the poverty cycle which just leads to a failure of the IMF. The IMF is also mainly operated by rich countries and many critize that the rich countries are only after benefits because they want to get paid back. Giving out loans may also lead to moral hazards, because people will have the incentive to do wrong things to recieve the loans, which is a problem that many international finance institutions have.
- •The World Bank was created to help develop a country by giving loans to developing countries. They focus mainly on infrastructure projects, bond sales, and sorft loans. The down side of the World Bank is that it is considered to be anti-development because the projects do not work. World Bank can also be imcompetent at times also.
- •Private sector banks- It is a bank where individuals or gerenal partner owns a part of the bank and not the government, they outperform the public sector peers.
- •Non-governmental organizations (NGOs) like the Salvation Army provide advertisement that can help spread the word around the world. NGOs consist mostly of volunteers. although are trusted my most people. However they lack counterability. If something went wrong on their part, they are not held responsible for it.
- •Multinational corporations/transnational corporations (MNCs/TNCs) provides FDI, fills in the investment gap which breaks the poverty cycle. They also transfers technology so that a poor country will have more access to technology, increases tax revenue, and supports more foreign currency. However some disadvantages of MNCs are 1)the profits made is not reinvested so it is possible for the poverty cycle to remain unbroken 2)FDI can force out local businesses 3) MNC focuses on capital and not labor, which is bad for comparative advantages in trade 4) They only produce goods for wealthy people who can afford it 5)There is potential for capital flight and 6) too much political power may be given to the MNCs.
- •Commodity agreements is undertaken by a group of countries to stabilize prices of their goods for other participating countries, the agreeent usually involves trades and prices (mostly lower prices of the good exporting and the imports)