The Benefits and Problems to lesseconomically developed countries of free market development strategies.

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Craig Agutter                Economics, Mrs Lumutenga

The Benefits and Problems to less economically developed countries of free market development strategies

Multi-national firms have access to the markets necessary for making use of technological processes and implementing them. These firms have headquarters located within developed nations yet the expertise that they possess would be invaluable to less developed nations with struggling industries and economies. In order for poor countries to develop and increase their wealth they must attract these firms or possibly create their own.

However, these firms require a specific set of institutions within which they operate. The nations must have solid property laws, a corruption free government (that is stable and which abides by a set of laws), and a large internal market. There should also be some sort of physical infrastructure such as transport links, communication capabilities and educational facilities. These basic needs vary depending on the industry. For example, India’s computer industry requires good educational institutions and communications, yet transport is not as important.

There are two main development strategies used in third world countries. These are Export Lead Growth and the Import Substitution Model. The one in favor at the moment is the export lead growth, although import substitution was preferred in the 60’s and 70’s. With the import substitution model, growth comes from ‘home-grown’ products manufactured by domestic firms that would substitute imports from foreign countries. Government tariffs, subsidies and quotas help to protect and support these local industries. As a form of national self-sufficiency it appeals to nationalistic governments, who must be corruption-free and well-functioning in order for it to work. This is a difficult requirement for third world countries to fulfill, since economic underdevelopment is directly related to inefficiency in the public sector.

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The emergence of a local business elite means that they must be separated from government decision-making yet must have some input in national planning. This is also a particularly difficult compromise to reach as the local business elite invariably become a key component of local policy-making. Another prerequisite for successful implementation of the import substitution model is that there must be a sufficiently large internal market. For instance, in Peru the population is little more than 24 million (of whom only a minority could afford a car) and yet the government protected the automobile industry with high tariffs on ...

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