The balance between Markets and intervention

The balance between Markets and intervention

Market led interventionist growth strategies	Gone on for 250 years Now being debated at international level Market led- Policies designed to minimize the role of gov and max free opp of supply and demand Include: Export led growth, growth through FDI, privatization, deregulation, structural adjustment policies Problems- Infrastucture is not created becuase it requires planning and gov intervention - developed countries protect their industries making it hard for developing countries to compete - spending on health and education needs to be high for development - can hit the poor because of increased unemployment increased prices of essencial goods - tends to focus on the urband, increases devide between urban and rural areas. leads to slums - not in possition to attract FDi because of political instability
Interventionist	Policies which involve gov manipulating the market Inclueds- imprt substitution, protectionist trade policies, exchange rate intervention, reglation, nationalization of industries, and government involvement in export markets to promote ceratin industries and their products.   •       Large public sectors lead to huge bureaucracy, over-staffing and inefficiency. o   If also politically unstable- corruption becomes likely. •       National industries often inefficient due to lack of competition and tend to make losses. •       Government spending can become excessive, leading to large budget deficits, the need for borrowing, taxes and the need for increasing the money supply. •       Increasing the money supply leads to high levels of inflation. •       Much spending is on infrastructure, often high costs and relatively little benefit.
conclusion	•       Solutions leading to development probably lie in a combination of market-led and interventionist strategies and need to be tailored to each individual country. •       Öne size fits all” doesn’t appear to work when it comes to development. •       Trade justice- decreased protectionist policies by developed countries. •       Debt relief- to release funds that may be invested in physical and human capital. •       Free domestic markets- with the caveat that they have achieved a competitive size, have sufficient infrastructure support, a quality labor force, technical and managerial expertise. •       Political stability, good governance and no corruption. •       Effective, targeted aid that leads to economic growth and a reduction in poverty.

The balance between Markets and intervention

The balance between Markets and intervention

Market led interventionist growth strategies	Gone on for 250 years Now being debated at international level Market led- Policies designed to minimize the role of gov and max free opp of supply and demand Include: Export led growth, growth through FDI, privatization, deregulation, structural adjustment policies Problems- Infrastucture is not created becuase it requires planning and gov intervention - developed countries protect their industries making it hard for developing countries to compete - spending on health and education needs to be high for development - can hit the poor because of increased unemployment increased prices of essencial goods - tends to focus on the urband, increases devide between urban and rural areas. leads to slums - not in possition to attract FDi because of political instability
Interventionist	Policies which involve gov manipulating the market Inclueds- imprt substitution, protectionist trade policies, exchange rate intervention, reglation, nationalization of industries, and government involvement in export markets to promote ceratin industries and their products.   •       Large public sectors lead to huge bureaucracy, over-staffing and inefficiency. o   If also politically unstable- corruption becomes likely. •       National industries often inefficient due to lack of competition and tend to make losses. •       Government spending can become excessive, leading to large budget deficits, the need for borrowing, taxes and the need for increasing the money supply. •       Increasing the money supply leads to high levels of inflation. •       Much spending is on infrastructure, often high costs and relatively little benefit.
conclusion	•       Solutions leading to development probably lie in a combination of market-led and interventionist strategies and need to be tailored to each individual country. •       Öne size fits all” doesn’t appear to work when it comes to development. •       Trade justice- decreased protectionist policies by developed countries. •       Debt relief- to release funds that may be invested in physical and human capital. •       Free domestic markets- with the caveat that they have achieved a competitive size, have sufficient infrastructure support, a quality labor force, technical and managerial expertise. •       Political stability, good governance and no corruption. •       Effective, targeted aid that leads to economic growth and a reduction in poverty.

Aid, Debt and economic development

Aid, Debt and economic development

AId?	Any assistance given to a country that would not have been provided through normal market forces. Reasons for aid- •       To help people who have experienced some form of natural disaster. •       To help developing countries achieve economic development. •       To create or strengthen political or strategic alliances. •       To fill the savings gap that exists in developing economies and so encourage investment. •       To improve the quality of the human resources in a developing country. •       To improve levels of technology. •       To fund specific development projects.
Humanitarian Aid	Aid given to alleviate short-term suffering which may be caused by events such as droughts, wars or natural disasters. Grant Aid- short term aid provided as a gift and does not have to be repaid. Food Aid- Provision of aid from donor countries or money to pay for food, which also includes money given for the transport, storage and distribution of food. Medical Aid- provision of medical services and provisions from donor countries, as well as money to facilitate medical services. Emergency Aid- the provision of emergency supplies including temporary shelters, tents, clothing, fuel, heating and lights
Development aid	Aid given in order to alleviate poverty in the long run and improve the welfare of individuals. Often provided on concessional terms but sometimes by as simple donations. Can be provided by individual countries, through their official aid agencies or through multilateral organizations such as the UN.
Types of development aid	Long-term loans- repayable by the developing country over a period of 10-20 years. –      Known as concessional or soft loans –      Have low rates of interest –      Are repayable in foreign currency, local currency or mixture of both –      Developing countries would prefer to have loans repayable in their local currencies. Tied Aid- Grants or loans given to a developing country with the condition that funds can only be used to buy goods/services from the donor country. Project Aid- Money given for a specific project in a country, often in the form of grant aid. –      Projects are often to improve infrastructure. –      One of the main suppliers of project aid to developing countries is the World Bank. Technical Assistance Aid- Sometimes included in project aid, tends to have to aims: –      To raise the level of technology in developing countries by bringing in foreign technology and technicians who can instruct in its use. –      To raise the quality of human capital by providing training facilities and expert guidance. *Foreign scholarships are also sometimes provided so managers and technicians can study abroad. •       Commodity Aid- Grant aid given by countries to increase productivity in developing countries. –      Provides funds to purchase commodities including consumer items, intermediate inputs and industrial raw materials. –      25% of aid commitments to Bangladesh take this form and provide necessary commodities such as: edible oils, seeds, fertilizer, chemicals, cement, steel, pumps & other equipment.
Concerns about Aid	research suggests: No significant correlation between level of aid and GDP growth. Meaning long-term aid to encourage development and reduce poverty is a normative economic concept In some developing countries the government in power may not have the welfare of the people at heart. So, when aid is received it goes to a small sector of the population, in many cases relatively wealthy city dwellers. In cases of extreme corruption, the aid often leaves the country almost as soon as it has come in. Tied aid is generally considered less effective than untied aid. The developing country is unable to “shop” for the least expensive goods/services and instead has to buy from the donor country. It doesn’t create any employment in the developing country because expenditure takes place in the donor country. Import may replace domestic products further harming domestic industries. Tied aid is viewed by some economists as being simply a subsidy to industries in the donor country. *Tied aid is now illegal in some countries such as the UK & is dropping in popularity. Continued dependence on aid may mean: There is little incentive to be innovative People develop a “welfare” mentality where they feel aid will always be there to help them. Some argue aid often focuses on the modern, industrial sector and may cause a greater gap in income and living standards than with those in the primary (agriculture) sector. Aid is often only available if the country agrees to adopt certain economic policies & these often reflect the policies suggested by the Washington Consensus. Emphasizing free market principles of liberalizations, deregulation and privatization to promote growth. These policies are often best suited for developed countries and MNCs rather than developing countries and their industries. There has been discussion that people in developed countries are beginning to suffer “aid weariness” & are beginning to think problems in their own economies are more important than problems in other countries. A reduction in the flow of aid may result. In the poorest countries, wars, corruption, lack of infrastructure and an illiterate and uneducated work force may make attracting private investment impossible. Directly targeted development aid, often from NGOs, may be the only viable option to achieve growth and development.
NGOs	Play a large role in international development. Difficult to generalize about because they are so diverse in terms of : –      Size, orientation, outlook, nationality, income & success. Priority: To promote economic development, humanitarian ideals and sustainable development. –      May seek long or short term improvement –      Examples: Oxfam, CARE, Mercy Corps, Cafod, Greenpeace, Amnesty International, Global 200, Doctors Without Borders Plan and implement specifically targeted projects in developing countries. Act as lobbyist to try to influence public policy in areas such as poverty reduction, workers’ rights, human rights & the environment.     *some NGOs do one or the other of these activities, others do both. NGOs that actively raise funds and awareness can result in public pressure on governments that might affect the amount of official aid given or the consumption patterns of the citizens that contribute to development. NGOs work directly in the field. They tend to develop a deep understanding of the issues and challenges faced by the poor. –      Particularly in comparison to official aid donors Much work by NGOs focuses on improving human capital: literacy programs, health education, AIDs prevention, agricultural micro credit schemes, immunizations, vocational training, etc. Many NGOs focus their attention on women
Indebtedness	A major barrier to growth & development is the need to repay debts on borrowed money. Before the 1970s the amount of borrowing by developing countries was low & tended to be in the form of bilateral official aid at concessionary interest rates.  (meaning?) In 1973, the world experienced an “oil shock” when OPEC steeply increased oil prices, causing the cost of production to increase dramatically worldwide, but also increasing oil revenues. Oil revenues earned by OPEC nations were then deposited into Western commercial banks Interest rates fell dramatically, making it “cheap and easy” to take a loan. Loaning the money was in fact, very important to the banks- so they could make profits. Because so much money was available (and traditional borrowers did not borrow all the available money) banks offered loans to developing countries. Developing countries borrowed money from Western banks, but at market rates (not soft rates) The loans were repayable in “hard currencies” (not the non-convertible currencies of most developing countries. Banks lent the money without monitoring what it was being used for & very little actually went into development projects. 20% of the money was spent on arms, some went into large infrastructure projects that failed & large amounts went into the bank accounts of dictators, generals and corrupt politicians. Developing nations were able to keep up debt repayments in hard currency through the 1970s –      high inflation –      low real world interest rates –      High world demand for commodities Then in 1979, OPEC raised prices again, increasing costs of production (transport), sending most of the world into a recession. World recession meant that the demand for commodities fell sharply & developing nations found it hard/impossible to repay loans. In 1972, Mexico defaulted, sending the international credit market into crisis. Several countries followed Mexico & the International Monetary Fund became instrumental in trying to solve what became to be known as the “Third World Debt Crisis” The IMF lent funds to countries that needed them but only under certain conditions. The conditions were known as “Structural Adjustment Policies” and included: •       Trade liberalization by lifting restrictions on imports/exports. •       Encouraging the exports of primary agricultural commodities called “cash crops”, and other commodities like minerals and metals. •       Devaluing currencies. •       Encouraging FDI •       Privatization of nationalized industry. •       Reducing government spending to ensure a balanced budget. •       “Austerity measures” reducing spending on social initiatives. •       Charging for basic services- education/health care •       Removing subsidies and price controls •       Improving governance & reducing corruption Criticism of the SAPs (Structural Adjustment Policies) §  Caused a reduction in government-provided services (education & health care) §  Increased unemployment §  Caused a fall in real wage levels §  Increased prices of essential products (as gov. subsides were taken away)  The result of the SAPs (Structural Adjustment Policies) was: A “de-development” of developing nations: o   Increased rates of malnutrition o   Declining school attendance rates o   Increasing infant mortality figures Although SAPs may lead to long-term growth; the short-term costs to the poor are very high. There is much international debate regarding the importance of debt relief. Many argue the debts of developing countries should be reduced or cancelled. Arguments in favor of debt relief: –      Reality: many developing countries have paid off the interest; but have barely touched the principal of their loans: o   Nigeria borrowed $17 billion, has paid back $18 billion so far and still owes $34 billion. It has been argued that this escalation of original debt is unfair. –      When governments are paying debts they are unable to spend money on other areas of the economy. This opportunity cost slows down growth & development. Malawi spends more on debt repayment than health

BW 041

A)     Define the following terms indicated in bold in the text

I)                    World Bank

Internal organization whose aims are too

-          Provide aid to developing countries

-          Reducing poverty levels

-          Encouraging and safeguarding international investments

II)                  Free Market

A free market is where prices and output are determined by supply and demand and the invisible hand

B)      Using an appropriate diagram, explain how a guaranteed price above the equilibrium price will benefit groundnut farmers

A supply and demand graph with a guaranteed price above equilibrium and an explanation that a guaranteed price above equilibrium may mean that farmers can earn higher income/ revenues

C)      Using an appropriate diagram, explain how the provision of hospital services has positive externalities

A marginal social cost/marginal social benefit diagram where there is a positive externality and healthcare benefits the economy because people are of better health

D)     Using information from the text/data and your knowledge of economic, evaluate fair trade as a means of improving the welfare of people in Malawi

Will improve-

1.       Better infrastructure and educational oppurtunities

2.       Economic security

3.       Higher income for farmers

4.       Can benefit from training

5.       There is greater demand for such products

6.       Increases living standards

Against-

1.       More needs to be done since Malawi is to poor

2.       Still be dependent on IMF and others

3.       Missalocatioon of resources

4.       There may not be a demand

5.       May become dependent of primary producs

6.       Could go to the super markets not Malawi

IBHL-2 BW 040

Bullet point your answers to the paper 2 practice question. For the Graph questions, make sure you draw the graph

A) define the following terms indicated in bold in the text

sustainable development-
Sustainable development (SD) refers to a mode of human development in which resource use aims to meet human needs while preserving the environment so that these needs can be met not only in the present, but also for generations to come.
Free trade-
International trade left to its natural course without tariffs, quotas, or other restrictions.

B) Using the concept of income elasticity of demand, explain th change in relative importance of the agricultural sector in comparison to the industrial and the sectors in Vietnam.

- YED for mancafactured goods and services is higher than for agricultural producrs

-as income increases there will be a relativley greater increase in demand for manafacutees and services as they become more important than agricultural products

C) Using an appropriate diagram ecplain the likely Long-erm impactof a rise in sea levels on the productive capacity of the vietnames economy

-Draw a PPC curve

- as sea lvels rease will reduce the amount of productive land and thus reduce the productive capicity of the vietnamese economy

D) Using information from the text/data and you knowledge of economics, evaluate diversification as a policy option for improving export performance in vietnam

In favour
- Avoids long erm declines in the terms of trade
-avoids extreme agricultural price fluctuations (4)
-avoides develeoped country barriers to trade
- reduces vulnderbality to shocks such as extreme weather(5)
- takes advantage of tourism (4)
- provides opp for increased employment, use of skills and development of skills
- can create a comparitive advantage

against-
-specialiaztion increases effecinecy and quanitity of output produced
- specialization and trade according to compartive advantage allow countries to consume at a point outside their PPC
- improves allocation of resources
- takes advantage of economies of scale
- farmers can take advatage of food price (4)
- diversification may lead to structural unemployment

HL 2 BW 039

HL 2 BW 039

Assessment advice: The questions asked o you paper 2 will inevitably cross over several syllabus sections; this emphasizes the interconnectedness of economics topics

1.       (A) Define the term infrastructure.

Large scale capital which is necessary for economic activity to take place, usually provided by government

(B) Outline the differences between customs union and a common market

Custom unions-

When countries agree to trade freely within the CU, and also agree to adopt common external barriers against any country attempting to import into the Customs Union.

All common markets and economic and monetary unions are also customs unions, thus the EU is customs union [plus a common market].

Common market-

Common markets are customs unions with common policies on product regulation & free movement of goods, services, capital and labor.

The best known example of a common market is the EU.

·         Economic and monetary union

An economic and monetary union is a common market with a common currency.

The best example of an economic and monetary union is the Eurozone, which includes EU member countries that have adopted the Euro as their currency.

2.       Explain using appropriate diagram(s) the possible short term and long term impact of increased and improved infrastructure in any of the EAC economies.

Short term- rightward shift in agg. Demand

Longterm- long run aggregate supply shift to the right because of increased government spending

3.       Using an appropriate diagram, explain the expected effect on an economy of a decrease in the level of corruption

More recorded government activity

More efficiency

More development

Foreign direct investment and economic development

Foreign direct investment and economic development

Forign direct investment (FDI)	A long term investmant by private multinational companies i oversea countries Greenfield investment- Build new or expand their existing companies Buy existing companies or merge Attracted to developing countries for a number of reasons: 1.countries may be rich in resources such as oil and minerals 2. some dcs are huge and growing markets 3. cost of labour may be low 4. government regulations are much less severe
Advantages associaiated with FDI	FDI helps to fill a savings gap Provide employment and some cases provide education and training Allow greater access to research and development Multiplier effect Tax revenue gained Increasing aggregate demand Improve thye infrastructure More choice and lower cost for consumers More effecient allocation of resources
Disadvantages	Only low skilled workers are used as managers come from abroad MNCs have to much power Transfer pricing Damaginf for the environment since they take advantage of regulations Resource stripping Use of capital intensive production but not use of many workers Owners of a firm are paid in stocks so money is usually not used within the country Transfer the profit back out the country They will ofton CSR in order promote a better image because of the negatives of Corporations- child labour, inability to make unions etc.