4.3.3a Market-orientated strategies

Market-Orientated Strategies

1. They aim to raise efficiency, attract capital and let a country exploit its comparative advantage.

Opening Up to Trade and Capital

1. Trade liberalisation lets a country specialise by comparative advantage and reach larger markets, raising efficiency and export earnings, as India's reforms after 1991 dismantled tariff and licensing barriers and lifted its growth rate.
2. Promoting FDI brings capital, technology and management that a poor economy cannot fund from low domestic savings, so it helps close the savings gap and, through Harrod-Domar, raise growth; large FDI inflows into Vietnam built up its export manufacturing base.
3. A floating exchange rate can correct trade imbalances automatically: a deficit weakens the currency, making exports cheaper and imports dearer, though it adds volatility that can deter investment.

Rolling Back the State

1. Removing subsidies exposes producers to true market prices, improving the allocation of resources and freeing public funds, though it can raise prices and hurt vulnerable groups in the short run.
2. Privatisation exposes firms to the profit motive and competition, sharpening incentives and efficiency, though natural monopolies may still need regulation to prevent exploitation of consumers.

Widening Access to Finance

1. Microfinance channels small sums to poor entrepreneurs who lack collateral, funding small enterprises and self-employment; the Grameen Bank in Bangladesh pioneered this model.
2. By turning tiny savings into productive investment it lifts the savings ratio and can raise incomes, often with a strong impact for women.

Do market-orientated strategies promote development?

1. It holds because freer markets raise efficiency, attract FDI and let economies exploit comparative advantage; several East and South-East Asian economies grew rapidly after opening to trade and investment.
2. But liberalising before institutions are ready can backfire: volatile capital flows, widening inequality and profit repatriation by multinationals can leave little lasting benefit.
3. On balance it depends on the stage of development and the strength of institutions: markets deliver only where property rights, regulation and infrastructure are in place, so reforms usually work best when sequenced.

4.3.3b Interventionist strategies

Interventionist Strategies

1. They target market failures and the gaps in capital that free markets tend to underprovide.

Building Human Capital and Infrastructure

1. A healthier, better-educated workforce produces more and adopts new technology faster; because education carries positive externalities the market underprovides it, which is the case for the state to step in.
2. Infrastructure lowers business costs and supports trade; its high cost and public-good features mean private firms would underinvest, so public provision, as with Ethiopia's state-led investment in roads, rail and hydroelectric power often financed through development banks, can unlock growth that markets alone would miss.

Shaping Trade and Prices

1. Protectionism can shelter infant industries until they reach efficient scale, but risks retaliation and props up inefficiency if the protection is never removed.
2. A managed exchange rate held at a competitive, undervalued level keeps exports cheap and supports export-led growth, as China did for much of its rise, though it can import inflation and provoke trade partners.
3. Buffer stocks steady producer incomes against volatile commodity prices, but setting the price too high builds costly surpluses and setting it too low exhausts the fund.

Partnering with Global Firms

1. Promoting joint ventures pairs foreign capital and expertise with domestic firms, transferring technology and skills while keeping some ownership and control at home.

Are interventionist strategies the best route to development?

1. It holds because state action can correct market failure and build the infrastructure and human capital that private firms will not fund, unlocking growth that markets alone would miss.
2. But intervention risks government failure, corruption and misallocation: poorly run schemes and buffer stocks that set the wrong price can waste scarce public funds.
3. On balance it depends on the quality of governance, and intervention and market forces are complementary rather than opposites, so the best approach uses the state where markets fail and markets where they work.

4.3.3c Other strategies and international institutions

Other Strategies and Institutions

1. Beyond broad market or state reform, targeted strategies, international institutions and NGOs can help an economy overcome specific barriers to development.

Industrialisation and the Lewis Model

1. Modern-sector wages sit just above subsistence, so firms hire cheaply, earn high profits and reinvest them, expanding industrial jobs in a self-sustaining cycle that raises average productivity.
2. It assumes genuine surplus rural labour and reinvested profits; if migration outruns job creation, the result is urban unemployment and slum growth rather than development, as seen across fast-urbanising economies such as India.

Tourism and Primary Industries

1. Both earn foreign currency, create jobs and attract investment, easing a foreign currency gap; Kenyan safari tourism and Botswanan diamonds turn assets into export revenue.
2. But tourism is income-elastic and exposed to shocks, while primary product dependency leaves export earnings at the mercy of volatile commodity prices and the long-run risk of the resource curse.

Fairtrade Schemes

1. A guaranteed price floor raises and stabilises the incomes of smallholders in economies such as Ghana and Ethiopia, funding community investment in schools and clinics.
2. But a price above the market level can encourage oversupply, much of the retail price stays with retailers rather than growers, and only certified producers benefit.

Aid and Debt Relief

1. Aid can fund investment a poor economy cannot finance itself, filling the savings gap and the foreign currency gap, though it may create dependency, fuel corruption or arrive tied to the donor's own exporters.
2. Debt relief frees income once spent servicing debt for spending on health and education; the Heavily Indebted Poor Countries (HIPC) initiative released such funds across sub-Saharan Africa.

The IMF, World Bank and NGOs

1. The IMF stabilises economies in short-term crisis while the World Bank targets long-run poverty reduction, so the two institutions play complementary rather than overlapping roles.
2. NGOs work at community level on specific needs such as clean water, healthcare and microfinance, reaching people that large state or institutional programmes often miss.

Do these strategies and institutions promote development?

1. It holds because they can supply the finance, expertise, technology and markets a poor economy lacks, filling savings and foreign currency gaps and tackling specific barriers to growth.
2. But conditionality can backfire: the Structural Adjustment Programmes of the 1980s and 1990s forced cuts and liberalisation that critics say deepened hardship, and aid or Fairtrade can distort local incentives.
3. On balance the effect depends on the country's context, the quality of governance and whether any conditions fit local needs rather than the donor's agenda.