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Strategies for Economic Development

Just as no single theory appears to elucidate the lack of economic advancement, nobody development strategy will likely achieve all nations. How active a task should government play in directing economic development? What sectors should be emphasized? Should one specialize in new business as a growth engine? These questions are being debated by economists and governments across the world.

Governments or Markets?

Soviet-style development was accomplished with detailed central planning, state ownership, and control of costs and output. Today in developing economies, the market plays away stronger role. In most parts of the planet, including non-democratic countries like China, state ownership has declined and costs are mostly set in markets. International agencies just like the International fund (IMF), whose primary goals are to stabilize international exchange rates and to lend money to countries with problems financing international transactions, and therefore the International Bank for Reconstruction and Development, which lends money to countries for development projects, have pushed hard for market-oriented reforms. Market-oriented reforms, however, haven't eliminated the role of the state. As indicated earlier, governments play an important role in creating institutions that allow markets to figure effectively—physical institutions like roads and schools, and business and legal institutions like accounting systems and enforcement of property rights. Many governments also use their taxing and expenditure policies to favor specific sectors over others as they struggle to grow. Industrial policy, during which governments actively pick industries to support as a base for economic development, remains carried on at some level in most developing nations. The greater central control of the economy in China was very evident during the recent recession within the speed with which China could direct its government expenditures because it sought to stimulate its economy.

Agriculture or Industry?

The richest countries listed—the US, Japan, and Korea—generate much of their GDP in services, with little value contributed by agricultural production. The poorest countries, on the opposite hand, have substantial agricultural sectors, although as you'll see, the service sector is additionally large during a number of those economies. an off-the-cuff check out the info might well lead one to conclude that moving out of agriculture was the trail to development. And, indeed, industrialization was the trail that Eastern Europe and other economies pursued within the post-World War II period. In many countries, however, industrialization has been unsuccessful. Some have argued that a move out of agriculture could also be a result of development, instead of a cause. Others have suggested that industrialization worked for the Western economies but might not work also for economies with other distributions of human and physical capital. Indeed, within the last several decades the agricultural sector has received more attention as a source of economic development. Many agricultural projects with big output enhancement potential have relatively low capital requirements and thus may better match the capital-poor developing world. Agricultural development also improves the lot of the agricultural population, where more of the poor typically live. Finally, improving agriculture may slow the movement of the poor to cities, where infrastructure is insufficient for the growing population. Experience over the last three decades suggests that some balance between industrialization and agricultural reform results in the simplest outcome—that is, it's important and effective to concentrate on both industry and agriculture. The Chinese have mentioned this dual approach to development as “walking on two legs.”

Exports or Import Substitution?

As developing nations expand their industrial activities, they need to decide what sort of trade strategy to pursue. Development economists talk over two options: import replacement or export upgrade.

 Import substitution may be a strategy wont to develop local industries that will manufacture goods to exchange imports. If fertilizer is imported, import substitution involves a domestic fertilizer industry to supply replacements for fertilizer imports. This strategy gained prominence throughout South America within the 1950s. At that point, most developing nations exported agricultural and mineral products, goods that faced uncertain and sometimes unstable international markets. Under these conditions, the decision to import substitution policies was understandable. Special government actions, including tariff and quota protection and subsidized imports of machinery, were found out to encourage new domestic industries. Multinational corporations were also invited into many countries to start domestic operations. Most economists believe that import substitution strategies have failed almost everywhere they have been tried. With national industries protected from international competition by high tariffs (often as high as 200 percent), major economic inadequacies were shaped. For instance, Peru features a population of roughly 29 million, only a small fraction of whom can afford to buy an automobile. Yet on just one occasion, the country had five or six different automobile manufacturers, each of which produced only a couple of thousand cars per annum. Because there are substantial economies of scale in automobile production, the value per car was much above it needed to be, and valuable resources that would are dedicated to another, more productive, activity were squandered producing cars. Furthermore, policies designed to market import substitution often encouraged capital-intensive production methods, which limited the creation of jobs and hurt export activities. A country like Peru couldn't export automobiles because it could produce them only at a cost far greater than its price on the planet market. Worse still, import substitution policies encouraged the utilization of pricy domestic products, like tractors and fertilizer, rather than lower-cost imports. These policies taxed the sectors which may have successfully competed in world markets.

As an alternative to importing substitution, some nations have pursued strategies of export promotion. Export promotion is that the policy of encouraging exports. As a manufacturing marketplace economy, Japan was an outstanding example to the developing world of the economic success that exports can provide. Japan had a mean annual per-capita real GDP rate of growth of roughly 6 percent per annum from 1960–1990. This achievement was, in part, supported industrial production oriented toward foreign consumers.

Several countries within the developing world have attempted to emulate Japan’s early success. Starting around 1970, Hong Kong, Singapore, Korea, and Taiwan (the “four little dragons” between the 2 “big dragons,” China and Japan) began to pursue the export promotion of manufactured goods. Today their growth rates have surpassed Japan’s. Other nations, including Brazil, Colombia, and Turkey, have also had some success at pursuing an outward-looking national trading policy. China’s growth has been mostly export-driven also. Government support of export promotion has often taken the shape of maintaining an exchange rate favorable enough to allow exports to compete with products manufactured in developed economies. For instance, many of us believe China has kept the worth of the Yuan artificially low. Because a “cheap” Yuan means inexpensive Chinese goods within thus, sales of those goods increased dramatically. An enormous issue for countries growing or trying to grow by selling exports on world markets is trade. African nations especially have pushed for reductions in tariffs imposed on their agricultural goods by Europe and therefore thus, arguing that these tariffs substantially reduce Africa’s ability to compete within the world marketplace.


In the mid-1970s, Muhammad Yunus, a young Bangladeshi economist formed the Grameen Bank in Bangladesh. Yunus, who skilled at Vanderbilt University and was a former professor at Middle Tennessee State University, used this bank as a vehicle to introduce microfinance to the developing world. In 2006, Yunus time-honored a Nobel Peace Prize for his work. Microfinance is that the practice of lending very small amounts of cash, with no collateral, and accepting very small savings deposits. 2 It's aimed toward introducing entrepreneurs within the poorest parts of the developing world to the capital market. By 2002, quite 2,500 institutions were making these small loans, serving over 60 million people. Two-thirds of borrowers were living below the poverty level in their own countries, the poorest of the poor. Yunus, while teaching economics in Bangladesh, started lending his own money to poor households with entrepreneurial motivations. He establishes that with even very small quantities of cash, villagers could start simple businesses: bamboo weaving or hairdressing. Traditional banks found these borrowers unprofitable: The amounts were too small, and it had been too expensive to work out which of the potential borrowers was an honest risk. With a borrower having no collateral, information about his or her character was key but was hard for an enormous bank to get. Local villagers, however, typically knew an excellent deal about one another’s characters. This insight formed the idea for Yunus’s microfinance enterprise. Within a village, people that have an interest in borrowing money to start out businesses are asked to hitch lending groups of 5 people. Loans are then made to 2 of the potential borrowers, later to a second two, and eventually to the last. As long as most are repaying their loans, the subsequent group receives theirs. But if the primary borrowers fail to pay, all members of the group are denied subsequent loans. What does this do? It makes community pressure a substitute for collateral. Moreover, once the peer lending mechanism is known, villagers have incentives to hitch only with other reliable borrowers. The mechanism of peer lending may be thanks to avoiding the issues of imperfect information described in an earlier chapter. The Grameen model grew rapidly. By 2002, Grameen was lending to 2 million members. Thirty countries and thirty U.S. states have microfinance lending imitative from the Grameen model. Relative to traditional bank loans, microfinance loans are much smaller, repayment begins very quickly, and therefore the overwhelming majority of the loans are made to women (who, in many cases, are underserved by mainstream banks). A growing set of evidence shows that providing opportunities for poor women has stronger spillovers in terms of improving the welfare of youngsters than does provide comparable opportunities for men. While the sector of microfinance has changed considerably since Yunus’s introduction and a few people question how big a task it'll ultimately play in spurring major development and economic process, it's changed many people’s views about the chances of entrepreneurship for the poor of the planet.

Two samples of Development: China and India

China and India provide two interesting samples of rapidly developing economies. While low per-capita incomes still mean that both countries are typically labeled developing as against developed countries, many expect that to vary within the near future. Within the 25-year period from 1978 to 2003, China grew, on average, 9 percent per annum, a rate faster than the other country within the world. Even during the 2008–2009 U.S. recession, China continued to grow, and it's continued to try to so. While India’s surge has been newer, within the last 8 years, it too has seen annual growth rates within the 6 to eight percent range. Many commentators expect India and China to dominate the planet's economy within the twenty-first century. How did these two slightly different countries plot their development? Consider institutions: India may be a democratic country, features a history of the rule of law, and has an English-speaking heritage—all factors typically thought to supply a development advantage. China remains an authoritarian country politically, and property rights are still not well established—both characteristics that were once thought to hinder growth. Both China and India have embraced free-market economics, with China taking the lead as India has worked to get rid of a number of its historical regulatory apparatus. What about social capital? Both India and China remain densely populated. While China is that the most populous country within the world, India, with a smaller landmass, is that the more densely populated. Nevertheless, as is true in most developing nations, birth rates in both countries have fallen. Literacy rates and anticipation in China are quite high, partially a legacy from the past. India, on the opposite hand, features a literacy rate that's but that of China’s and lower anticipation. In terms of human capital, China appears to possess the sting, a minimum of for now. What about the expansion strategies employed by the 2 countries? China has adopted a practical, gradual approach to plug development, sharply in contrast thereto adopted some years ago in Poland. China’s method has been called Moshi Guohe, or “Crossing the river by feeling for stepping stones.” In terms of sector, most of China’s growth has been fueled by manufacturing. The main target of manufacturing is one reason that China’s energy consumption and environmental issues have increased so rapidly within the last decade. In India, services have led to growth, particularly within the software industry. In sum, it's clear from comparing India and China that there's no single recipe for development.

Also Read:
Firms: Investment and Employment Decisions
Transition to a Market Economy

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