Growth & Development Strategies

SECTION 5: DEVELOPMENT ECONOMICS
GROWTH & DEVELOPMENT

STRATEGIES
Economics – A Course Companion.
P344-359. (Blink & Dorton, 2007)
Differences between models, strategies,
growth & development
Growth Models
• As a general rule, growth models describe how
growth has occurred and so suggest that this may be
replicated.
Growth Strategies
• Economic and political measures designed to gain
growth.
Development Strategies
• Economic politics and measures designed to achieve
human development (i.e. to improve the well being of
the people.
Economic Growth vs
Economic Development
REMINDER!!
Economic growth is not economic

development, BUT it can generate
extra income for governments, firms,
and people and then it may lead to
development, depending upon how
that extra income is used.
GROWTH MODELS
Harrod-Domar Growth Model
• Sir Roy Harrod in the UK and Evsey Domar in
the US independently developed the Harrod-
Domar growth model in 1939.
• Although its original purpose was to analyse
the business cycle, the model has been used
by economists to identify factors affecting the
rate of growth of GDP.
GROWTH MODELS
• In its simplest form, the models states that the
rate of growth of GDP is determined by the
national savings ratio of capital to output in
the economy. It can be stated as:
Rate of Growth of GDP = Savings ratio

Capital/output ratio
GROWTH MODELS
Savings Ratio
• The marginal propensity to save
Capital/Output Ratio
• The expenditure on capital as ratio of the output
gained from capital.
• Thus it may be that it is necessary to spend $2.50
on capital goods (infrastructure/capital
equipment) in order to increase the national
output by $1.
GROWTH MODELS
Example
• If the savings ratio in the

country is 5% and the
capital/output ratio is 2.5,
then the country can grow at
a rate of 2% per annum.
GROWTH MODELS
Exercises
• A country has a marginal propensity to save of
12%.
• For every $3.5 spent on capital goods, national
output should increase by 50 cents.
• Calculate the real growth of GDP for the
country, based on Harrod-Domar Growth
model
GROWTH MODELS
GROWTH MODELS
If the model is correct, we can say that the rate
of growth of an economy may be increased by:
Key Assumption 1:
Increasing the level of savings in the economy.
 If savings are increased in the economy then our economic
theory tells us that this can lead to an increase in investment.
 The increase in investment represents a greater stock of
capital, which in turn should lead to greater output in the
economy and greater income.
 Since a proportion of that increased income should be saved,
there should be a circular situation, which should lead to
increasing growth.
Problems with
Harrod-Domar Growth Model: Savings
• Although the theory would appear to work,
there are problems when it is applied to
developing countries.
• In theory all a country has to do is to increase the
savings ratio.
• If the savings ratio is increased to 7.5%, then
economic growth will increase to 3%.
• However, raising the savings ratio in developing
countries is not easy.
Problems with
Harrod-Domar Growth Model: Savings
• Most developing countries have very low marginal
propensities to save, as people spend the vast majority
of their low incomes on consumption.
• Furthermore, if they do have spare income, then they
often spend it on assets, such as bike, TV, rather than put
their money into local banking systems that may not be
secure.
• In some cases, savings are sent out the country in the
form of capital flight.
• This combination of high consumption, poor financial
infrastructure and capital flight makes its difficult to
increase the level of savings in developing countries.
GROWTH MODELS
Key Assumption 2:
Reducing Capital/Output Ratio in the Economy
• If the capital output ratio can be reduced, i.e.
the use of capital can become more efficient,
this would increase the rate of economic
growth.
Problems with
Harrod-Domar Growth Model: Growth/Output Ratio
• Increasing efficiency is this way is never easy and

especially so in developing countries.
• A shortage of educated and skilled labor (possibly
made worse due to the “brain drain”) implies
that new capital will not be effectively used.
• In addition, a lack of managerial skills means that
the organising factor will be weak, which is
unlikely to result in improved efficiency.
Problems with
Harrod-Domar Growth Model: Growth/Output Ratio
• R&D which improves efficiency is also likely to

be underfunded , and access to foreign
technology (another means of gaining
efficiency) is expensive and so is often not
available to developing countries.
GROWTH MODELS
Structural Change/Dual Sector Model
• The Lewis dual sector model was first

conceived by W. Arthur Lewis in the 1950s and
was later modified by other economists.
• Its main focus is on structural change and it
attempts to explain how an underdeveloped
economy moves from being a traditional
agrarian economy, with a small manufacturing
sector, to an economy where there is a more
modern balance with a larger manufacturing
and service sector.
GROWTH MODELS
Assumptions
• The model starts from the assumption that there is a
large agricultural sector with a surplus of labour, and a
small, but productive, modern manufacturing sector.
• The surplus of labour in the agricultural sector is not
productive and so moves to the manufacturing sector.
• They are attracted by wages, that are higher than in the
agricultural sector, but fixed because the supply of
labour is high.
GROWTH MODELS
• Entrepreneurs in the manufacturing sector will make a
profits because their prices are always above the fixed
wage rate.
• The theory assumes that these profits will be
reinvested , which will increase the capital stock.
• This in turn will increase the productive capacity of the
manufacturing sector and demand for labor will grow.
• More workers will be employed from the surplus
labour from agriculture and the profits of the
entrepreneurs will once again increase and be
reinvested.
GROWTH MODELS
• The process is assumed to continue until all
the surplus labour has been employed in the
larger manufacturing sector.
• A structural change has now taken place and
the economy is no longer a traditional
agrarian model, but is now an industrialized
country.
Problems with the
Lewis Dual Sector Model
• The Lewis model, in a rather simplified way,
illustrates the process that took place during
the industrial revolutions in many of the now
developed countries.
• Whether it can be used as a model for
economic growth in developing countries is
debatable:
Problems with the
There are number of weaknesses in the theory:
• The model assumes that entrepreneurs will
keep adding capital that is the same as the
original capital.
• It is likely that entrepreneurs would begin to
invest in technologically advanced more
labour-saving capital and this would reduce
the increases in employment, severely slowing
the process of growth.
Problems with the
• The model assumes that all profits are reinvested, but
capital flight is a common occurrence in developing
countries and is likely that a large proportion of
profits would leave the economy, thus reducing
investment and again slowing the whole growth
process.
• The model assumes that there is a pool of surplus
rural labour. The situation in many developing
countries indicates that there is likely to be high
unemployment in urban areas and little surplus of
labour in rural areas, caused by rural-urban migration.
Problems with the
• The model assumes that wage levels in the
manufacturing sector will remain constant.
• The growing existence of collective bargaining,
imposed wage scales, and wages offered by
foreign companies, tends, however, to lead to
rising wages, even where there is
unemployment.
• This would reduce profit levels and the ability to
reinvest.
Growth & Development Strategies
•Export Led Growth

vs..
•Import Substitution
Industrialization
GROWTH STRATEGIES
Export-led Growth OR Export
Oriented Industrialization
• Export led growth is an outward-oriented growth strategy,
based on openness and international trade.
• Growth is achieved by concentrating on increasing
exports, and export revenue, as a leading factor in the
aggregate demand of the country.
• Increasing exports should lead to increasing GDP, and this
in turn should lead to higher income and, eventually,
growth in domestic markets as well as exporting ones.
• The country concentrates on producing and exporting
products in which it has a comparative advantage of
production.
GROWTH STRATEGIES
Export Led Growth
In order to achieve export led growth, it is
assumed the country will need to adopt certain
policies. These include:
• Liberalized Trade: Open up domestic markets to
foreign competition order to gain access to foreign
markets.
• Liberalized Capital Flows: Reduce restrictions on FDI.
• A Floating Exchange Rate:
• Infrastructure: Investment in the provision of
infrastructure to enable trade to take place.
• Deregulation & Minimal Government Intervention.
GROWTH STRATEGIES
Export Led Growth
• The previous list illustrates the theoretical
“package” of policies associated with export-
led growth.
• In reality, countries that adopt an outward-
oriented strategy do not necessarily adopt all
of these policies.
GROWTH STRATEGIES
Export Led Growth: Primary Products
• The overall trend in primary products has been
downward for many years, with the exception
of oil and some metals.
• This is due to increasing supply and relatively
insignificant increases in demand.
• This combined with increasing protectionism by
developed countries, means that export led
growth based solely on the export of primary
products is unlikely to be achieved.
Export Led Growth:
Manufacturing Exports
• The focus on export-led growth is usually on
increasing manufacturing exports.
Asian Tigers
• The success of countries such as South Korea, Hong
Kong, Singapore and Taiwan (known previously as
the Asian Tigers) is usually used to illustrate the
effectiveness of such a strategy.
• These countries exported products in which they had
a comparative advantage, previously based upon low
cost labor and were extremely successful in doing so.
Export Led Growth:
Manufacturing Exports
Asian Tigers
• Over time the type of product being exported by the
majority of these countries has also tended to
change from products that were produced using
labour intensive production methods, to more
sophisticated products, using capital intensive
production methods and more highly skilled workers.
• Improvements in education systems were essential
for this.
Problems with Export Led Growth
Rising Protectionism in Developed Countries
• The success of the Asian tigers since around 1965 has
led to increased protectionism in developed
countries against manufactured products from
• Trade Union and workers in developed countries
argued that they could not compete against the
imports from low-wage developing countries that
this was unfair.
• The lobbied their governments to put tariffs and
quotas on the lower-priced goods.
Rising Protectionism in Developed Countries
• Price increases as a result of tariffs effectively
removed the comparative advantage of the
exporting countries.
• Tariff escalation also reduced the ability of the
developing countries to export processed
goods and assembled products, forcing many
to export primary products and low-skilled
manufactured goods instead.
The Role of Government
• Certain assumptions are made about the
necessary conditions for export led growth.
• If we examine the successful countries these
conditions were not necessarily met.
• Many economists would argue that the role of
the state in successful export-led growth is vital
& minimizing government intervention is not the
way forward.
• In the Asian tiger countries, governments played an
important role by providing infrastructure, subsidizing
output through low credit terms via central banks and
promoting savings and improvements in technology.
• In addition, governments adopted policies where they
protected domestic industries, that were not yet able
to compete with foreign firms (infant industry
argument for protection)
• They also promoted the industries that were ready
for competition in export markets.
• This topic is one of great debate among
development economists, and many argue
that invention is vital.
• Others argue that the state intervention in
these economies actually slow growth rates.
MNCs become too powerful!
• If countries attempt to kick start their exort-
led growth by attracting MNCs, there is always
the fear that the MNCs may become too
powerful within the country and this may lead
to problems.
Increased Income Inequality
• It is argued by some economists that free-
market export-led growth may increase
income inequality in the country.
• If this is the case, then the economic growth
may be achieved at the expense of economic
development.
The Post 1980s Globalizing Economies
• Research at the World Bank has identified countries
know as post-1980 globalizing economies.
• These are developing economies that have
integrated more fully in the international economy
through the process of globalization such as trade
liberalization and capital market liberalization.
• They became outward oriented economies
• The list of post 1980 globalizers includes such
countries as Malaysia, Mexico and Thailand.
IMPORT SUBSTITUTION INDUSTRIALISATION
(ISI)
• It may also be referred to an inward-oriented
strategy.
• This states, that a developing country should,
wherever possible, produce goods domestically
rather than import them.
• This should mean that industries producing the
goods domestically will be able to grow, as will the
economy, and will then be able to be competitive on
world markets in the future as they gain from
economies of scale.
• It is the opposite of export-led growth.

• It is not supported by economists who believe
in the advantages of free trade based on
comparative advantage.
Necessary conditions for strategy to work:

• Governments need to adopt a policy of organizing
the selection of goods to produce domestically.
• Historically this has been labour-intensive, low skilled
manufactured goods such as clothing or shoes.
• Subsidies are made available to encourage domestic
industries.
• The government needs to implement a protectionist
system with tariff barriers to keep out foreign
imports.
Advantages of ISI
• ISI protects jobs in the domestic market, since
foreign firms are preventing from competing
so domestic firms dominate.
• ISI protects local culture and social habits by
practically isolating the economy from foreign
influence.
• ISI protects the economy from power, and
possibly the negative influence of MNCs.
Disadvantage of ISI
• ISI may only protect jobs in the short run.
• In the long run economic growth may be lower in
the economy and the lack of growth may lead to a
lack of job creation.
• ISI means that the country does not enjoy the
benefits to be gained from comparative advantage
and specialization. Therefore products are
produced relatively inefficiently when they could
be imported from efficient foreign producers.
Disadvantages of ISI
• ISI may lead to inefficiency in domestic
industries because competition is not there to
act as a spur to be efficient or to conduct R&D.
• ISI may lead to high rates of inflation due to
domestic aggregate supply constraints.
• ISI may cause other countries to take
retaliatory protectionist measures.
Countries adopting ISI
• The main countries which attempted ISI were in Latin
America, including Argentina & Chile. Both has since
changed their policies.
• As former colonies gained their independence many also
adopted inward oriented strategies.
• These included India, Nigeria and Kenya.
• These policies showed some success in the 1960s and
1970s but the policies started to fail in the early 1980s.
• Government over-spending and the debt crisis lead to the
inability of governments to repay the loans they had take.
In the 1980s many of the countries were forced to go to
the IMF for help.
THE WASHINGTON CONSENSUS
Reforms needed for Economic Growth
• In 1989, the American economist John
Williamson identified 10 common reforms
that were necessary for economic growth.
• The World Bank, the IMF and the US Treasury
department agreed with the list and as a
result Latin American economies seeking help
were encouraged (or forced) to adopt such
reforms to illegible for assistance.
• Fiscal Discipline, that is, balanced budget
• Redirection of spending from indiscriminate subsidies to
basic health and education.
• Lowering of Marginal Tax Rates and broadening of the tax
base.
• Interest Rate Liberalization
• A competitive Exchange Rate
• Trade Liberalization
• Liberalization of FDI inflows
• Privatization
• Deregulation
• Securing of Property Rights
CRITICISM OF THE WASHINGTON CONSENSUS
• By the end of the 20th century, the Washington
Consensus was increasingly criticized by economists
who were not supporters of such policies.
• This claims that reforms such as the Washington
Consensus are just a way of to ensure that MNCs have
access to cheap labor markets in developing countries.
• In this way the MNCs can produce inexpensive

products, which are them sold for higher prices in
CRITICISM OF THE WASHINGTON CONSENSUS
• The MNCs make high profits and the workers in
developing countries gain little.
• According to this view, the Washington consensus has
not led to high economic growth in Latin America.
• Instead there has been economic crises and increased
debt.
• Such policies have led to increased income inequality
and exploitative working conditions, thus working
against the goal of economic development.
A MOVE TO THE LEFT IN LATIN AMERICA
• There has been a movement to the left in a
number of Latin American countries such as
Venezuela, Ecuador, Bolivia and to a lesser
extent Brazil.
• These countries along with Cuba have been
very vocal in their condemnation of the
Washington consensus.
FOREIGN DIRECT INVESTMENT (FDI)
• FDI is a long-term investment by private MNCs in
countries overseas.
Greenfield Investment
• FDI usually occurs through MNCs building new
plants or expanding their existing facilities in foreign
countries. This is known as greenfield investment.
Alternatively MNCs merge with or acquire (buy)

existing firms in foreign countries.
• There are approximately 70,000 MNCs

operating internationally with more than
690,000 affiliates around the world.
Growth of FDI
• There was a rapid increase in flows of FDI in the
1990s, a sign of the significant role that FDI
played in the integration of the world’s
economies and globalization
• There was a sharp fall in the global FDI flows in
2001, followed by three years of continuous
drops, but they rebounded again in 2004.
• In 2008, the GFC, also led to reduction in global
FDI.
Why do MNCs invest in
developing countries?
Natural Resources
• These countries may be rich in natural
resources, such as oil and minerals.
• MNCs have the technology and expertise to
extract such resources.
• For example, the top recipients in Africa are
those countries with valuable natural
resources. Eg: Nigeria.
Growing Markets
• Some developing countries such as Brazil, China
and India represent huge and growing markets.
• If MNCs are located directly in the markets then
they have much better access to a large number
of potential consumers.
• With growing incomes, demand for all sorts of
consumer goods is rising and MNCs may wish to
be there to satisfy the demand.
Lower Labour Costs
• The cost of labour are much lower in more
• Lower costs of production allow firms to sell
their final products at lower prices and make
higher products.
Favorable Government Regulations
• In many developing countries government
regulations are much less severe than those in
• This makes it easier for companies to set up but,
more significantly, it can greatly reduce costs of
production.
• Additionally, many developing countries offer tax
concessions to attract FDI
Favorable Government Regulations
• Over the last 15 years many countries, both
developed and developing have adopted
policies that have been more and more
favorable to FDI.
• In 2004, for example, more than 20 countries
lowered their corporate tax rates in order to
try to attract more FDI.
POSSIBLE ADVANTAGES
ASSOCIATED WITH FDI
Savings Gap is Addressed
• According to the Harrod-Domar model, a
necessary condition for growth is increased
savings and developing countries tend to
suffer from a savings gap.
• FDI helps to fill that savings gap and thus may
lead to economic growth.
POSSIBLE ADVANTAGES
ASSOCIATED WITH FDI
Employment
• MNCs will provide employment in the country and, in
many cases, may also provide education and training.
• The may improve the skill levels of the work force and
also the managerial capabilities.
Multiplier Effect
• Increased Employment and earnings may have a
multiplier effect on the host economy, stimulating
growth.
POSSIBLE ADVANTAGES
ASSOCIATED WITH FDI
Access to a Greater Knowledge & Skill base
• MNCs will allow developing countries greater
access to R&D, technology and marketing
expertise and these can enhance their
industrialization.
POSSIBLE ADVANTAGES
ASSOCIATED WITH FDI
Tax Revenue from Profits for Host Country
• The host country may gain tax revenue from
the profits of the MNC, which can then be
used to gain more growth by investing in
infrastructure or to improve pubic services
such as health & education and to promote
economic development.
POSSIBLE ADVANTAGES
ASSOCIATED WITH FDI
Increase in Aggregate Demand
• If MNCs buy existing companies in developing
countries, then they are injecting foreign capital
and increasing the aggregate demand.
Improvements in Infrastructure
• In some cases, MNCs may improve the
infrastructure of the country, both physical and
financial, or they may act as spur for
governments to do so in order to attract them.
POSSIBLE ADVANTAGES
ASSOCIATED WITH FDI
Greater Choice for Consumers
• The existence of MNCs in a country may provide
more choice or consumers and lower prices.
• They may be able to provide essential goods that
are not available domestically.
More Efficient Resource Allocation
• MNC activities along with liberalized world trade
can lead to more efficient allocation of world
resources.
CHINA & FDI
• Although it is difficult to isolate FED in terms of its effects on
China’s economic growth, it is reasonable to assume it has
played a significant role.
• Since 1978, China has actively tried to attract FDI as a way to
stimulate economic growth.
• A significant proportion of China’s exports are produced by
foreign firms.
• Through joint ventures with foreign firms, Chinese firms have
grown rapidly and successfully.
• As a result, China itself is now the source of a large outflow of
FDI.
• As China grows, so does its demand for raw materials and much
Chinese FDI abroad is its investment in natural resources.
POSSIBLE DISADVANTAGES
WITH FDI
MNC just take advantage of low skilled workers
• Although MNCs do provide employment, it is
argued that they often bring in their own
management teams and are simply using
inexpensive low-skilled workers for basic
production and providing no education and
training.
• This also limits the ability of host countries to
acquire new technologies.
WITH FDI
MNCs have too much power!
• In some cases it is argued that MNCs have too much
power, because of their size, and so gain large tax
advantages or even subsidies, reducing potential
government income in developing countries.
• Along the same lines, it is argued that MNCs have
too much power internationally.
• Their incomes and size allow them to exert too
much influence on policy decisions taken in
institutions such as the WTO.
WITH FDI
MNCs practise Transfer Pricing
• This is when MNCs sell goods and services from one
division of the company to another division of the
company in a separate country to take advantage of
different tax rates on corporate profits.
• In this way, developing countries with low tax rates
to encourage MNCs to invest reap little tax reward,
and developed countries also lose out on potential
tax revenue.
WITH FDI
• Given that approximately one third of all
international trade is made up of sales from one
branch of firm to another firm, this represents a
potentially large loss of revenues for governments.
• Governments have rules to prevent firms from
abusing their ability to use transfer pricing to
minimize their tax payments, but these are difficult
to monitor and enforce, particularly for developing
country governments.
WITH FDI
Taking Advantage of lax Environmental laws
• It is argued that MNCs situate themselves in countries
where legislation on pollution is not effective and
thus they are able to reduce their private costs while
creating external costs.
• While this is good for the MNC, it is damaging for the
environment of the host country.
• In the same way, MNCs may set up in countries where
labor laws are weak or almost non-existent, allowing
exploitation of local workers through low wage levels
and poor working conditions.
WITH FDI
Resource Exploitation
• Economists have argued that MNCs may enter a
country in order to extract particular resources
such as metals or minerals, then strip those
resources and leave.
• There may be significant unrest as host country
nationals see that the profits from their
resources are being sent out of the country to
foreigners.
WITH FDI
Capital Intensive Production instead of Labour
Intensive Production
• Economist have argued that MNCs may employ capital-
intensive production methods make use of abundant natural
resources.
• This will not greatly improve employment in the country.
• It is argued that MNCs should use appropriate technology,
where production methods are aligned to the resources
available.
• Since developing countries usually have a large supply of
cheap labour, the argument is that labour-intensive
production methods would be more appropriate.
WITH FDI
Acquisitions often for paid in stock not cash
• In most cases where MNCs buy domestic
firms, the owners of the firms being bought
are paid in shares (stocks) from the MNC.
• This means that it is likely that the money will
never be used in developing country’s
economy.
WITH FDI
Repatriation of Profits
• MNCs may repatriate their profits.
• This means they transfer their profits out of
the country back to the MNCs country of
origin.
Sustainable Development & FDI
• While most would agree that FDI is a positive
factor for current economic growth the main
concerns relate to the possible negative effects
of MNCs on sustainable development.
• The extent to which FDI is able to contribute to
this development depends very much on the
type of investment and the ability of the host
country government to appropriately regulate
the behavior of MNCs and use the benefits of the
investment to achieve development objectives.
FDI – Problems & Accountability
• There has always been concerns relating to MNC activity
such as the possible exploitation of workers, the use of
child labour, the inability of workers to form unions in
some companies, and business practices that cause
immediate or future environmental damage.
• With the increasingly fast flow of information through
the media & the Internet and strong public interest
groups acting globally, it is becoming difficult for MNCs
to conceal activities that may contribute to these
problems.
FDI – Problems & Accountability
• No MNC wants to be perceived as being a cause
of problems and are keen to promote their
image in a positive ways.
• As a results, firms are more likely to develop a
publicize a set of priorities to show that they are
acting responsibly and ethically and `doing their
bit` to promote sustainable development.
• This is known as corporate social responsibility
(CSR)
FDI & Corporate Social Responsibility (CSR)
• Companies publish and promote their CSR policies
through their annual reports, websites and advertising.
• The policies outline the firms commitment to support
human rights, employee rights, environmental
protection, sustainable development, and community
involvement.
• The extent to which such policies are consistently
followed and the extent of their actual effect on
workers, the workers communities, and the
environment is uncertain, but it is usually regarding as
a step in the right direction
DEVELOPMENT STRATEGIES
Fairtrade Organizations
• In many developing countries many small-
scale farmers and workers are unable to make
a living income.
• Low world prices for primary products, high
profits for middleman, tariff escalation, and
poor working conditions make life extremely
difficult.
• Fair Trade schemes are an attempt to ensure
that producers of food, and some non-food,
products in developing countries receive a fair
deal when they are selling their products.
• If consumers are aware of the harsh and unfair
conditions facing the farmers, then perhaps
they my be willing to buy from producers who
pay a fair price to farmers.
• Today, the Fairtrade Labelling Organization International
(FLO) coordinates Fairtrade labelling in 20 countries.
• The schemes aim to help small farmers and landless
workers.
• Fair trade schemes have operated for more than 50
years, but the real growth of the movement has come
with the advent of Fairtrade labelling.
• This began in the Netherlands in 1988, when the Max
Havelaar Foundation began to sell coffee from Mexico
with the first Fairtrade consumer guarantee lable.
Fairtrade Consumer Guarantee
• This is a system where products can be
certified if they meet the standards of the FLO,
which gives them the right to display the
International Fairtrade Certification Mark.
• The recognisable Mark means that consumers
will be able to identify Fairtrade products,
know they are approved, and buy the knowing
that the producer of the good was paid a fair
price.
Role of the FLO
• The FLO regularly inspects and certifies
around 500 producer organizations in more
than 50 countries in Africa, Asia and Latin
America, which results in fair trading
conditions for approximately 1 million
farmers, workers and their families.
Criteria for the FLO Certification Mark
A trading company wishing to qualify for the
International Fair Trade Certification Mark must
meet certain FLO criteria:
• The product must reach the trader as directly as
possible with few, if any, intermediaries.
• The product must be purchased at least at the
Fairtrade minimum price.
• This is a guaranteed price that covers production
costs and provides a living income.
• It covers the costs of `sustainable production`
• The producer receives a premium if the
product is certified as organic.
• The trader must be committed to a long-term
contract, which in turn gives security to the
producer.
• Upon request, the producer has access to
credit from the trader, of up to 60% of the
purchase price.
• Where small farmers are involved the product
must come from producers that are managed
democratically.
• If the product comes from plantations then
the workers must benefit from the
internationally recognized employment
standards, including trade unions, if they wish,
and there must be no use of child labour.
• The producer must use sustainable farming methods
to produce the good.
• The also pays a fairtrade premium to the producer.
• The producer uses these funds to aid local community
development. The producers decide how the money
will be spent, but is usually used to promote health
care, education or other social schemes.
• The producers are accountable to the FLO for the
appropriate use of the funds.
Fairtrade Product Range
• Fairtrade certified food products include
bananas, cocoa, coffee, dried fruit, fresh fruit
and vegetables, honey, juices, nuts/oil seeds,
sugar, tea and wine.
• Non food products include cotton, cuts
flowers, ornamental plants and sports balls.
How expense are fairtrade products?
• Although the price might sometimes slightly

higher for the Fairtrade certified products
than non-Fairtrade products, it is clear they
many consumers are willing to pay to
contribute to better conditions for producers.
• Global sales of Fairtrade products were valued
as just over €1.1 billion for 2005.
Availability & Future of
Fairtrade Products
• Fairtrade products are making their way into
more and more shops and restaurants as firms
become aware of the increasing popularity.
• Fairtrade with its emphasis on granting a living
income, giving security, demanding property
working conditions, encouraging sustainable
production and funding local community
development, is clearly a strategy that leads to
development as well as growth.
The Need for Micro-finance
• In developing countries low-income people find it
almost impossible to gain access to traditional banking
and financial systems, since they lack to assets to use
as collateral, are often unemployed and lack savings.
• If they can find a way to borrow money, it is often at
exorbitant interest rates.
• However, there is type of financial service that is
geared specifically for them.
• This is known as Micro-finance and it provides
financial services such as small loans, savings accounts
insurance and every cheque books.
Micro-Finance
Micro-credit Definition
• The provision of small loans

to individuals who no access
to traditional sources is
known as micro-credit.
History/Origins of Micro-Finance
• A key element of the original micro-credit schemes
is that they did not originate in the developed
world, but rather had their beginnings in
• The first scheme began in the mid-1970s with
projects such as Opportunity International (1972),
ACCION International (1973) Muhammad
Yunus/Grameen Bank (1974-76), FINCA
International (1985) and the SEEP Network (1985)
How is micro-credit used?
• Usually, the micro-credit loans are given to enable
poor people to start up very small-scale businesses,
known as micro-enterprises.
• These may include such things as roadside kiosks,
bicycle repair services, market stalls, rice wine
making, knitting and woodworking.
• The loans give protection against unexpected
occurrences and seasonal problems and may help
families to gain a regular income, start to build
wealth and so escape poverty.
Who has been the recipients of micro-credit?
• Women have tended to be the main recipients of
micro-credit, for many reasons.
• It is thought that women are a better credit risk – the
are more likely to pay back loans.
• Women are usually responsible for caring for children
and so any reductions in a woman’s poverty will
translate into improvements for children.
• In many documented cases, this has allowed for more
poor children to go the school.
• With woman take loans and can begin to earn an
income their social and economic status is raised.
EXAM QUESTIONS
Short Response Questions (10 marks each)
1. Using the Harrod-Domar growth model,

explain why there may be slow growth in
2. Explain how Fairtrade is likely to contribute
to economic development.
3. Explain how micro-credit can contribute to
economic development.
EXAMINATION QUESTIONS
Essay Questions
1a. Explain the main characteristics of export-led growth?
(10 marks)
1b. Evaluate the view that economic growth and
development can be best achieved through the
adoption of outward-oriented strategy. (15 marks)
2a. Discuss three reasons for multinational

company investment in developing countries. (10
marks)
2b. Evaluate the role of FDI in promoting economic
growth and development in developing countries (15
mark)

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Growth & Development Strategies

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SECTION 5: DEVELOPMENT ECONOMICS