LDC Essay Economics Barriers to Growth

ESSAY HIGHER ECONOMICS LEVEL:

Explain the Key Issues in Relation to the Developing Nations Concerning Economic Growth and Development Strategies

First of all it is extremely constructive and advantageous if thorough definitions and what processes of the topic at hand are given. Economic Development is the simplistic process where there is improvement in the lives of all people in the country. This involves not only living standards, for instance greater accessibility of goods and services and also the ability to purchase them, but also the encouragement of personal characteristics such as confidence, pride and admiration, in addition to the broadening of people's freedom to choose and to take control of their own lives. While a country may grow wealthier therefore, during the growth of its real productivity, it does not essentially mean that it will expand. Economic Growth on the other hand, occurs where there is an increase in the productive potential of the economy and is best calculated by the boost in a country's real level of output over a period of time. Less Economic Developed Country administrations have intricate decisions to make in their efforts to promote development. The tribulations of scarcity and choice are undeniably, incredibly evident. In this thesis, the investigation and evaluation of several prospective economic growth and development strategies for policy makers will be systematically addressed as follows: The Harrod-Domar growth model, Structural Transformation/dual sector model, the types of aid, export-led growth/ peripheral- oriented strategies, important substitution/integral-oriented strategies/protectionism, commercial loans, fair trade organizations, micro-credit schemes, foreign direct investment, in addition to as a final factor, Sustainable Development.

At the outset, The Harrod-Domar model is unavoidably named after two 19th century economists, Sir Roy F. Harrod and Evsey Domar, who were working in the l930s. The model identifies the rate of growth for an economy through time that allows savings-investment equilibrium to be maintained. This is known as the “warranted” rate of growth. The two innovative economists consequently solidified their model majorly on the foundation of investment, savings and technology as the main agents of economic growth. Purely summarized, the more an economy can save and invest, the higher will be its own fiscal growth. Augmented investment would, consecutively, power the production possibility curve outwards and create more monetary wealth. The impact of this increased investment on the production possibility frontier is shown on the right hand side in Figure 12, branded as “Increased Investment Shifting the Production Possibility Frontier”.

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The Harrod-Domar model focuses upon the amount of investment on the rate of technological progress vital for the growth process. Furthermore, the replica represents economic growth depending primarily on the amount of labour and capital. As lower economically developing countries regularly have an abundant supply of labour, it is a lack of physical capital that holds back economic growth and development. 3 Net investment leads to more capital accumulation, which generates higher output and income. Methodically, higher income allows higher levels of saving. Savings enable investment, which leads to capital accumulation, which increases productive capacity and allows higher output. That said however, while increased saving and investment may be necessary, it is not sufficient for growth. Many of the complementary factors required for growth may well be lacking in an LDC, the necessary structural, institutional and social conditions eg money markets, transport networks, skilled labour, and efficient administrations. 4 To conclude, most definitely a promising growth and development strategy for a lower economically developed country, is simply to increase the proportion of the national income that is saved.

Structural Transformation (change) integrates the idea than an economy would have three stages of production. Initially, Primary production is concerned with the removal of raw materials through agriculture, mining, fishing, and forestry. The LDC’s (Lower Developed Countries) are to be principally dominated by primary production as their economic growth and development has not exactly reached into the upper echelon phases. Secondary production is the self-proclaimed “renaissance” phase, where developing countries lure into industrial production through manufacturing and construction. Middle income countries such as the United Arab Emirates or the Czech Republic are often dominated by their secondary sector. Tertiary production is regarded as the provision of services such as education and tourism. In high-income countries such as the United Kingdom and Germany, the tertiary sector dominates. Indeed, for all lower developing countries, the eventual goal is having a large tertiary sector proving their credibility as a sign of economic maturity in the growth and development process.

Assistance to developing economies comes in a number of different ways. The largest single source is known as aid. This can be given in three main ways. Firstly, Humanitarian aid can be both by an individual country to country and via a major organization such as one of the UN agencies like UNICEF. Bilateral aid is given by one country to another. It is a loan, though may be subject to a long period prior to re-payment commencing as a “granted or soft” loan, below market terms. Multilateral aid is by far the most efficient and renowned, as it is when separate countries pay money into one central organization, for example the World Bank, and then establishes who receives the allocated money and for what purpose.

There also raises a stark argument on whether the Aid given is legitimate or unsanctioned. The types of aid can come across as certified in which case it is “administered by government or government agencies” 5, or it may be unendorsed, in which case it is “administered by a non-government body, such as a charity.” 6 Aid might also be trade related, in that the taxes will only be made available if the receiving country agrees to buy goods or services from the donor nation. “This is called tied aid - the aid is tied to particular contracts i.e. it has strings attached.” 7 In the end, successful aid should aim to reduce the dependency of private investment, which may not arrive or will only be found at a high price to the country seeking such funding.

The majority of trade generated by developing economies goes to the developed world. The developing countries sporadically trade within themselves as exporting to the more refined markets of the developed world compels them to produce at superlative standards and that makes their goods more globally spirited and cutthroat. Being involved in export trade also promotes the ending of protectionist policies. 8 Domestic industry must be competitive and not hide behind barriers. Export-led demand can be an important source of growth for developing countries in the early on stages of their development, predominantly given their trust and dependence on primary exports as previously noted in the structural change of the three phases. “However, countries may also try to export manufactures as a growth strategy. This is often termed an outward-oriented strategy.” 9 One possible example of the peripheral or termed here “outward-oriented strategy” presenting with largely beneficial effects can be increase in competition. This outward-oriented strategy will expose the country to the full wind of international competition. They may struggle originally to contend, but efficiency-wise, will rise much faster than if import substitution/inward-oriented strategies are followed.

Import substitution/inward-oriented strategies/protectionism in contrast evaluates the protection of jobs and the support of growth being best utilized by engaging on producing import substitutes strategies to further propagate growth and development for the lower economically developed countries. The LDC’s necessitate “foreign exchange and if they can produce substitutes for imports, this will release foreign exchange.” 10 To encourage import substitution, many countries have already adopted thee inherent strategy of protectionist policies.

Loans can also come from banks or other financial organisations often in the developed world. These are known as commercial loans. Concerned by the rising commodity prices in the mid 1970’s, many developing countries borrowed from banks to subsidize development. However, with higher interest rates and falling commodity prices in the 1980’s and the 1990’s “many defaulted their loans and many other loans had to be rescheduled.” 11 The terms of trade also have a propensity to move against the “laggard”, especially those that are producers of primary products, thus developing countries. This makes the economy unstable and unpredictable, thus inhibiting growth. Fair trade organization exist “who guarantee farmers and producers a 'fair' price for the goods they produce.” 12 This creates a certain extent of price permanence whilst growth and development t can be based on a more regular level. Micro-credit schemes refer to making small loans available to the poor through schemes especially designed to meet the poor's particular needs and circumstances. These are very small amount of money, as little as 1$ a day handed directly to those in need by an NGO (Non-Governmental organization) and reflects the circumstance in which the recipient is in. In some areas micro-credit schemes are addressing the financial needs of the deprived. The Grameen Bank is the best known example of a micro-credit scheme. 13 The rapid expansion of private direct foreign investment into LDC’s since the 1960s and 1970s has been largely due to the activities of the transnational conglomerates. A multinational company (MNC), or transnational company (TNC), is a firm that owns production units in more than one country. “Furthermore, many of them are colossal in size and control more economic resources than the whole GNP of many less development countries.” 14 However, MNC’s bring about widening inequalities, capital-intensive production schemes, and exploitation of local labor and send back profits.

This could also lead to instability in the market, mounting dissatisfaction and broadening cracks of disparity. This issue is apparent in China for example where, “the government is concerned about growing rural unrest as the hundreds of millions of rural poor are left behind in Chinas surging economy.” 15

Many economies now aim for sustainable economic growth as stated before. This means that they are attempting to grow today without damaging the prospects for development for future generations tomorrow. Sustainability has become the new scheme for economists, in relation to developing nations however this very notion tends to be largely ignored, believing that more is better. Some doubt if this is really possible but to achieve it means investing more in such courses of action as:

Recycling
Using alternative methods and resources to generate power etc.
Admitting to both social costs and benefits and accepting that someone has to pay the truce cost of resource allocation

Source: Triplea

Purely said, economic growth and development is of the essence, a fundamental aspect for every developing nation, because after all when it comes down to the basics, “growth is good”, and is treated as the steeping stone as a set view of growth and development throughout multinational economies. There is no qualm that people want to enjoy a better standard of living. In addition, Economic growth is the very aspect that enables us to enjoy a comfortable standard of living. Despite the fact that one must keep in mind those favourable consequences of economic growth such as: employment, opportunities for investment, and the heights of new significant political and communal dimensions. But in relation to developing countries one must not disregard they’re current status and the structure of the economy. Adopting these new schemes might not be appropriate and often these countries are furthermore weighed down by the lack of legal framework. Sustainability has become the new format for economists, in regard to developing nations, however the problem lies on the fact of the blindness of economical affluent nations, who tend to ignore the concept of the LDC’s, that more is better!