What other measures can be used to promote growth and development?

Aid
Aid: the voluntary transfer of resources from one country to another, or loans given on concessionary terms (i.e. at less than the market rate of interest, or for longer etc.). Official development assistance relates specifically to aid provided by governments and excludes aid given by voluntary agencies. Aid may be given for emergency relief. The UN goal for the amount of aid offered by developed countries is 0.7% of GDP.

Types of Aid
1. Tied Aid: this is aid with conditions attached, e.g. there might be a requirement to buy goods from the donor country or the aid might be given on the condition that there are some economic and political reforms. Aid from many countries, including the UK, is now completely untied. 2. Bilateral Aid: this is aid given directly by one country to another. 3. Multilateral Aid: this occurs when countries pay money to an international agency which then distributes it to countries on the basis of certain criteria.

Advantages
Absolute poverty is reduced. The savings gap is filled. Funds for infrastructure are provided essential if the country is going to industrialise will help to increase aggregate demand and investment will have a multiplier effect on GDP. This will help to promote sectoral development. Improving human capital through the promotion of healthcare, education, training and expertise (e.g. training of teachers and doctors). In some countries, aid might be used to help the prevention and treatment of AIDS. Aid might contribute to increased globalisation and trade, both of which are frequently associated with growth and development. The reduction of world inequality.

Disadvantages
It results in a dependency cultures. It might not benefit those for whom it is intended, due to, for example, corruption. There is no clear evidence that aid contributes to the reduction of absolute poverty or to growth and development. Right-wing economists argue that aid distorts market forces and results in an inefficient allocation of resources. Left-wing economists regard aid as a form of economic imperialism by which donor countries aim to secure political influence in the countries to which they give aid. Aid in the form of concessional loans involves the payment of interest, in which case there will be an opportunity cost for developing countries, e.g. improvements in the health and education services. Some aid is religious in nature e.g. Christian Aid dont focus on the use of condoms to prevent HIV/AIDS in sub-Saharan Africa, but also on fidelity and abstinence.

Aid Dependency: Occurs when a country becomes reliant on aid to the extent that it is such a large proportion of GDP that the nation would be unable to maintain central government functions without it. Aid dependency is a particular problem for countries in sub-Saharan Africa, but also for nations embroiled in wars. The worst aid dependency is in Afghanistan, where aid amounted to 36% of GDP in 2006. The financial crisis has brought numbers down, as developed countries become more inward-looking although, DC has promised 650m in aid to Pakistani education.

Where is aid most beneficial?

Aid should be targeted towards those in the greatest need. To push this, the Millennium Development Goals have tried to focus more on aid for low income countries. Most aid still goes to middle-income countries. One reason for this is that organisations are likely to channel aid to where they think it will be most effectively used. Middle income countries are most likely to have the economic structure and sound governmental institutions that are necessary if aid is to be well used. For developing countries to secure aid, it is becoming increasingly important to put into place the conditions that will allow aid to be effectively used.

Debt Relief Debt

Debt burden is high in some countries, e.g. the Gambia, Mali, Nicaragua, Bolivia and Malawi. The debt is usually owed to all or some of the following: the IMF, the World Bank, Governments and banks in developed countries. Servicing the debt may account for a disproportionate amount of public expenditure, to the extent that resources available for expenditure on health and education are limited. Pressure to cancel the debts of the poorest countries has increased. Under the Heavily Indebted Poor Countries (HIPC) initiative and Multilateral Debt Relief Initiative (MDRI), the World Bank provides debt relief to the poorest countries in the world. The HIPC initiative was started in 1996 by the IMF and World Bank with the aim of reducing the external debts of the poorest and most heavily indebted countries. The HIPC initiative was changed in 1999 to make the process quicker and deepen the links between debt relief, poverty reduction and social policies. In 2005, the HIPC initiative was enhanced by MDRI in order to speed up progress towards meeting the Millennium Development Goals (MDGs). Forty one countries were identified as being eligible for HIPC initiative assistance, and by March 2009, 35 countries had benefitted from HIPC debt relief. World Bank and IMF have spent $16bn on HIPC debt relief globally.

Advantages
Developing countries would have more foreign currency with which to buy imported capital and consumer goods from developed countries. To the extent that the money released from debt cancellation is used for the purchase of capital goods, then there is the prospect of higher economic growth in the future. This means that developing countries would be able to buy more goods from richer countries. It would help to reduce absolute poverty, as developing countries have more money to spend alleviating poverty. It would help to reduce both the savings gap and the foreign exchange gap. It might help to conserve the environment, e.g. debt for nature swaps.

There can be conditions for debt cancellation, such as evidence of low levels of corruption in government. It can break the cycles of debt many debts are serviced or repaid simply through further borrowing, and debt tends to increase over time. In the long-term, it can create bigger markets for exports from developed countries.

Disadvantages
In comparison with aid, it is likely to take much longer to agree to a debt cancellation programme. Unless conditions are attached to debt cancellation, there is no guarantee that the governments of these countries will pursue sound macroeconomic policies. Corruption might mean that the benefits of debt cancellation are channelled to government officials rather than the poor. Shareholders of banks in the developed world may bear some of the burden of debt cancellation. It may be much less effective than the introduction of policies to reduce protectionism in developed countries. The use of public money if debts to governments are cancelled to provide debt relief incurs an opportunity cost in the country from which the money came. An example of where debt relief may not be beneficial was in Rwanda in 2005: - $4.5m was going into the economy in aid from DFID and USAID. - $4.5m was coming out of the economy in interest and repayments. - In addition, $2.9 million was going into the economy from Rwandan tax, and $2.9m in interest payments were taken by the IMF. - Cancelling the $4.5m wouldnt necessarily be beneficial to Rwanda, as then USAID and DFID may not pay as much money into the country in aid may end up no better off. - Wont do anything to change corruption.

Nicaragua: One of the poorest countries in South America. Burdened with the largest per capita debts in the world. Government spends 2.5 times more on repayments than education and healthcare combined. Over half the population live in absolute poverty. In 2000 Nicaragua qualified for HIPC relief aim to cut their debt by 75%. The relief is conditional on the successful implementation of macroeconomic stabilisation, poverty reduction programmes and improved governance. Privatisation of state industries has led to an increase in the price of electricity, water etc. Nicaraguas debt is much less, however there have been no clear signs of economic development in Nicaragua. FDI has increased and the countrys economic indicators have shown growth, but human indicators are getting worse. Debt will again increase once the government decides to increase spending on health and education.

Inward/Outward Looking Strategies Inward looking strategies

Import substitution replacement of imports with domestically produced manufactured goods. Protectionism

Their aim is to enable a country to diversify in a controlled way until it has built a strong domestic base most effective where a countrys domestic market is large enough to enable industries to benefit from economies of scale. Once achieved, industry will be strong enough to cope with foreign competition. E.g. infant industries. Drawbacks: Comparative advantage is distorted resources will not be allocated efficiently. Lack of competition could lead to inefficiency.

Outward-looking strategies
Free Trade Deregulation of capital markets Promotion of FDI injection into the Harrod-Domar model may help with the problem of shanty towns Devaluation of exchange rates

Disadvantages of these policies have been considered in previous sections. In practice, many countries have used a combination of strategies. Some FDI may not be appropriate all over the world investment in technology may be beneficial in, say, Singapore, where hi-tech capital-intensive activity is needed to match its well trained and disciplined workforce. However, such technology is not appropriate in sub-Saharan Africa. In attracting FDI, some LDCs may need to provide tax breaks for firms, transfer pricing. It is, therefore, important for LDCs to negotiate countries such as Indonesia have negotiated conditions on the share of local workers that will be employed by the MNC after a period of, say, 5 years. It will help if the LDC has some key resource that the MNC cannot readily acquire elsewhere. High levels of human capital in East Asia and China, for example, have attracted more FDI than countries in sub-Saharan Africa. South Korea: Initial focus was on import substitution, followed by labour intensive manufactured goods, and finally hightechnology electronic goods. Designed as export-orientated industries outward-looking focus allowed South Korea to exploit its comparative advantage. High levels of FDI were encouraged as TNCs were attracted to locations with a cheaper, well-educated workforce. 2009 worlds 8th largest exporter. But, significant subsidies were given to South Korean infant industries to protect them The economist Ha-Joon chang believes that this was crucial to the rapid economic development. There are many monopolies and conglomerates with close links to the government (therefore subsidies). South Korea had significant tariffs to achieve a desired exchange rate these have been removed gradually, particularly after 1995 following their membership of the WTO. Mixture of inward- and outward-looking policies were successful, although there were other factors such as USA aid and a skilled workforce.

Free Market/Government Intervention Approaches

1940s-70s: Many developing countries experienced significant degrees of government intervention. This was characterised by import substitution policies, nationalisation, farmers being forced to sell their produce to state-controlled boards at low prices, price subsidies on many necessities and over-valued exchange rates (to keep down the cost of imports) 1970s:

There was increasing disillusion with such policies. They were associated with low rates of economic growth. There was resource and allocative inefficiency because of the absence of the profit motive. Corruption among civil servants associated with increased government intervention was rife. Fiscal deficits rose, due to subsidies and nationalised industries. There were increasing balance of payments deficits on the current account due to over-valued currencies.

Free market approaches: Free market analysis: assumes markets are efficient and therefore the best way to allocate resources.

Public choice theory: based on the assumption that politicians, civil servants and governments use their power for their own self-interest. Free market will lead to: - Trade liberalisation. - Market liberalisation. - Supply-side policies. - Structural adjustment programmes. - Increased efficiency in privatised industries. - Attracts FDI enterprise is encouraged. Intervention needed due to: - Asymmetric information. - Externalities. - Absence of property rights - Investment decisions

Problems: Inadequate infrastructure these are necessary if goods are to be transported to their final destination in a market system Such infrastructure is clearly lacking in many developing countries at present. Financial institutions many developing countries lack formal financial institutions, which are necessary for effective investment e.g. sub-Saharan Africa. Protection of property rights entrepreneurs are only likely to invest in what they legally own problems in China, however this has not held back economic growth. Entrepreneurial culture incentive of individual gain may clash with the cultures of developing countries, or traditional ways of life may make it difficult for market activity to take hold, e.g. subsistence farming in subSaharan Africa. Stability inflation needs to be low and relatively predictable price mechanism relies on producers reading price signals inflation discourages saving lower investment. Sudden privatisation can cause problems monopoly. Corruption in governments may impede market forces bribery etc. Market failure. Increased inequality.

Investment in Growth and Development Human Capital

Importance of human resources in the process of growth and development for many LDCs, labour is relatively abundant relative to physical capital, but this potential is not being realised. The absence of skilled labour is a huge obstacle to economic growth. For many LDCs, investment in human capital also means the provision of nutrition and healthcare, which also contributes directly to an improved quality of life, e.g. the provision of vaccinations and tablets to combat Malaria in sub-Saharan Africa by the WHO. In 2008, Malaria caused nearly one million deaths, mainly among African children.

Advantages: Investment in education and training can be beneficial to agricultural production, as well as beginning the growth of modern sector economic activity such as manufacturing. It also allows for the increased utilisation of technology. A group of educated workers cooperating together becomes more productive because the members of the group interact with each other MSB of investment in human capital exceeds MPB. Disadvantages: Vaccination programmes if one person thinks that the marginal benefit of having their child vaccinated is relatively low, and other people begin to think this way, then the chances of an epidemic are still high marginal social benefit exceeds marginal private benefit.

This has been seen in the west with the MMR vaccine, as many parents believe it causes autism, although there has been no proof of this. In LDCs there may be a lack of intervention to encourage people to invest in the vaccination. There may be information failures in education and healthcare a poor rural household may not perceive the benefits of education, especially where uneducated parents are taking the decision. In addition, there has been a tendency in many LDCs to keep female children away from school quality of life is not universally improved. An LDC may find it difficult to finance improvements in healthcare in education, especially given the problems with tax collection systems. Some progress has been made through the use of overseas assistance e.g. Uganda was able to launch a scheme to encourage primary education through funds provided by the HIPC Initiative by the World Bank.

Agriculture
Some developing countries have achieved growth and development on the basis of investing in agriculture. The case for focusing on agriculture is that the country may have a comparative advantage in the production of agricultural goods and so resources may be more efficiently allocated. Such comparative advantage should be viewed in a dynamic context as the country experiences growth, the government may use its tax revenues to spend on education the country may gain a comparative advantage in other products. Some countries have specialised in producing agricultural products with a high YED Peru produces asparagus, Chile produces wine consequently, they have benefitted from significant increases in demand.

Manufacture
It has traditionally been assumed that development is synonymous with industrialisation. The structural change/dual sector model the Lewis Model is based on the view that development requires a move away from traditional agriculture (characterised by subsistence, low productivity and barter).

Key Features: This model describes the transfer of surplus labour from a low productivity agricultural sector to a high productivity industrial sector. Lewis thought that, because of the excess supply of workers, the marginal productivity of agricultural workers may be zero or close to zero. With MP zero, the opportunity cost of transferring workers from the agricultural to industrial sector would be zero. Industrialisation would be associated with investment (possibly from TNCs), which will increase productivity and profitability if profits are reinvested, then further growth will occur. The share of profits as a percentage of GDP will increase, as will the savings ratio, providing more funds for investment and continued economic growth. Criticisms: Profits made in the industrial sector might not be invested locally, especially if firms are owned by TNCs. Reinvestment might be made in capital equipment, with the result that extra labour is not required increased unemployment. Empirical evidence suggests that the assumption of surplus labour in the agricultural sector and full employment in the industrial sector is invalid, e.g. favelas in South America.

Tourism
Some countries have developed on the basis of investment in tourism advantages to this strategy over primary product dependency, not least that demand is likely to be income elastic. The expansion of tourism has strong attractions for developing countries. Advantages:

Valuable source of foreign currency as tourists spend money on goods and services provided within the local economy may help to close the savings gap. Tourism is likely to attract investment by TNC hotel chains. This will increase GDP via the multiplier. Jobs will be created, both as a direct result of the investment in the tourist and leisure industries, and as a result of multiplier effects within the economy. It can help to preserve the national heritage of the country. Improvements in infrastructure may be made (e.g. a TNC provides new roads as part of its contract to build hotels). It is now relatively cheap to promote tourism due to the Internet. Air travel has become cheaper boosted demand.

Disadvantages: It may be associated with a significant increase in imports capital equipment required to build hotels and facilities, but also to meet the demands of tourists for specialist foods and goods. Balance of payments might be adversely affected by the repatriation of profits to shareholders of TNCs. In times of recession, the fall in demand may be more than proportionate assuming demand is income elastic. Employment may only be seasonal in nature jobs created may only be low skilled and low paid if the TNC supplies its own managers and professional staff. Tourism is subject to changes in fashion in the developed world, Spain has suffered fro a significant downturn, for example. There may be significant external costs e.g. increases in waste pollution of beaches, water shortages for local people needs of tourists are prioritised. Damage to the environment might result in the need for restrictions e.g. tourists not allowed at Machu Picchu without a guide, limited number of tourists to the Galapagos Islands. E.g. the Maldives small size damage to coral reef and marine life. Import dependency in the Maldives. Susceptibility to global business cycle, and high YED (luxury destination). Devastation of 2005 Tsunami impact demand for tourism. Pro-poor tourism in St. Lucia: St. Lucia Heritage Tourism Programme developing a new branch of tourist attractions, the project could change tourism to the whole island. In the past, tourism has been concentrated in certain areas. The government is creating new attractions that take advantage of the skills of poorer communities in farming, fishing, cooking and arts and crafts. By diversifying the islands attractions, the project hopes to tempt tourists out of resorts. Local communities can make a profit. With more money, local people are likely to spend more on other goods and services. The EU is funding the project to pay for training in business skills and marketing local communities can develop high quality attractions that meet international health and safety standards. Communities involved in the programme are better off than before.

Microfinance
Provision of small loans (micro-credit) to extremely poor families to help them engage in productive activities or grow their tiny businesses. In particular, it can help the poor to increase income, build businesses and reduce vulnerability to external shocks.

Features: Microcredit insists on repayment, in contrast to development lending. Interest is charged to cover the costs involved.

The focus is on groups whose alternative sources of finance are limited to informal sectors, where the interest charged would be high. Focus on: - Women (more than 97% of clients) - The self-employed - Small farmers - Small shopkeepers, street vendors and service providers

Criticisms: Concerns have been raised about the repayment rate, collection methods and questionable accounting practices. On a larger scale, some argue that an overemphasis on microfinance to combat poverty will lead to a reduction of other assistance to the poor, such as official development assistance or aid from nongovernment organisations. Grameen Bank: In 1974 a sever famine affected Bangladesh many starving people converged on the capital city. Muhammad Yunus established the Grameen bank help people paying large levels of interest for informal loans and thus making tiny profits. Grameen bank was established in 1976 loans would be provided without the need for collateral borrowers had to join into groups of five with joint responsibility for payments minimise transaction costs of making and monitoring the loans. Enormous success repayment has been impressive, although the Grameen bank charges interest rates close to those in the formal commercial sector. Much lower rates than informal sectors. Provides housing loans nearly half a million houses had been built by 1998. By May 1998 more than $2.4 billion had been loaned by the Grameen bank. Now operating in 59 countries in Africa, Asia, the Americas, Europe and Papua New Guinea. The loans have generated new employment reduced number of days that workers are inactive and have raise income, food consumption and living conditions of Grameen Bank members. Considerable impact on the lives of millions of women.

Fair Trade Schemes Aims

Address the injustice of low prices by guaranteeing that producers receive a fair price. Means paying producers an above-market price for their produce provided they meet particular labour and production standards. Premium is passed back to the producers to spend on development programmes. The market for fair trade products has been growing rapidly and there are now over 2,500 product lines, including chocolate, tea, coffee, bananas, wine and clothes.

Benefits
Producers receive a higher price. Extra money is available to spend on education, health, infrastructure, clean water supplies, conversion to organic farming and other development programmes in the producers countries. There are smaller price fluctuations, allowing producers to be shielded form market forces. The extra money an be used to improve the quality of products Producers are enabled to diversify into other products.

Disadvantages

Distortion of market forces low prices are due to overproduction or a downward-spiral in the market, and producers ought to recognise this as a signal to switch to growing other crops. Artificially high prices encourage more producers to enter the market. Certification is based on normative views on the best way to organise labour e.g. in the case of coffee, certification is only available to cooperatives of small producers. Guaranteeing a minimum price provides no incentive to improve quality. It is an inefficient way to get money to poor producers consumers pay a large premium for fair trade goods, but much of this goes to supermarkets in profits only 10% trickles down to the producer. It may create a dependency trap for producers.

Role of International Financial Institutions and NGOs International Financial Institutions

International Monetary Fund: Original role to increase international liquidity and provide stability in capital markets. 1970s significant oil price shocks and many countries, particularly developing countries, suffered from rapid inflation, huge balance of payments deficits and debt crises most currencies were allowed to float. IMF extended its role to include involvement in economic development and poverty reduction IMF imposed stabilisation programmes to ensure repayment of loans restrictions and conditions on the economic policies to be followed by developing countries. 2006 given the task of conducting multilateral surveillance of the global economy and suggesting steps that leading nations should take to promote it. Required to ensure more balanced growth and reduce global imbalances. 2009 G20 summit authorised the IMF to issue $250bn in new special drawing rights (SDR) value of and SDR is defined as the value of a fixed amount of yen, dollars, pounds and euros, expressed in dollars at the current exchange rate. These represent a claim on other countries foreign currency reserves, for which they can be exchanged voluntarily. Countries with high foreign currency reserves scan buy SDRs from countries that require hard currency. This may help to bridge the foreign exchange gap experienced by many developing economies. World Bank, aka IBRD (International Bank for Reconstruction and Development): Original role was to provide long-term loans for reconstruction and development to member nations that had suffered in WWII. 1970s role changed to setting up agricultural reforms in developing countries, giving loans and providing expertise. 1982 Mexico defaulted on its loan repayments as a result the World Bank now imposes SAPs (Structural Adjustment Programmes) which set out the conditions on which the loans are given. The aim is to ensure that debtor countries do not default on the repayment of debts. SAPs were based on free market reforms, e.g. trade liberalisation, removal of state subsidies on food, privatisation and reduction in public expenditure to reduce budget deficits. SAPs were based on free market reforms, however they were criticised because they: - Did little to help the worlds poor. - Failed to promote development. - Increased inequality. - Caused environmental degradation. - Resulted in social and political chaos in many countries. - There were devastating effects on some developing countries World Bank changed its strategy to concentrating on poverty reduction strategies. - Have benefited some countries, such as Tanzania growth and increased incomes. However, life expectancy and nourishment among children is still low. Now aid is directed towards: - Countries following sound macroeconomic policies. - Healthcare, broadening education. - Local communities rather than central governments.

Future of the IMF and World Bank: The roles of the IMF and the World Bank are currently blurred both have a role in the developing world and in poverty reduction and it is suggested that they should be reformed to reflect the changing needs of the economy. Critics of the institutions as they currently operate suggest the following: The IMF should be slimmed down and should undertake short-term lending to crisis-hit countries. The World Bank should act as a development agency and undertake a detailed credit appraisal of the creditworthiness of recipient countries. WTO: Doha Development Round. Launch a new range of talks focused on the needs of developing countries. Amongst the topics of talk are: - Reduction in tariffs in agriculture increase the access of developing markets to the developed world. - Reduction in agricultural price support, such as CAP. - Reduction in tariffs on industrial goods already been in the Uruguay round to phase out quotas in textiles and clothing. - Improvement of the dispute settlement mechanism view to improving the implementation of rulings and participation of developing countries. - Significant progress has already been made in opening up markets to the exports of developing countries. - However, the Doha talk rounds have proved difficult to bring to a successful conclusion.

NGOs
The work of NGOs has brought community based development to the forefront of strategies to promote growth and development. Key characteristics are: Local control of small-scale projects. Self reliance. Emphasis on using the skills available. Environmental sustainability.