International strategies to promote

economic growth and economic

development
 20.1
International Trade Strategies
01 02 03
Import substitution Export promotion Economic integration
Import substitution
What is import substitution:

● Import substitution is a growth and trade strategy where a country begins to manufacture simple consumer goods for the
domestic market to support domestic industries
● It is based on the idea that blocking imports of a good can help an economy by increasing the demand for domestically
produced goods
● shoes, textile, electrical appliances
○ Motive: Protects infant firms against competition from imports
○ Measures: Tariffs, quotas preventing entry of imports that compete with domestic firms
In history:

● Adopted by latin american countries from 1930s onward

● Many developing countries around the world followed in the 1950s and 1960s
● Attractive because most developed countries used it in the initial phases of industrialization
● The infant industry argument: a country may have a comparative advantage in the production of a particular industrial
good, but cannot specialize in it unless it first receives some protection.
 Import substitution: Policies
& consequences
Policies Consequences

High level of protection of domestic firms ● Lack of competition

● Inefficiency in private and public sector
● In the form of tariffs, quotas, and import ● Resource misallocation and high prices for
licenses consumers

Excessive government intervention ● Serious resource misallocation and

inefficiencies in production
● Relied heavily on industrial policies:
protective trade barriers, overvalued
exchange rates, subsidised credit, tax
allowances, production & wage subsidies,
price controls etc.
● Extensive public ownership of firms and
industries (fertilizers, steel, banking &
financial services etc.)
 Import substitution: Policies
& consequences
Policies Consequences

Overvalued exchange rates ● Cheap imports led to capital-intensive production, unemployment,

● Countries overvalued exchange and growth of the informal economy
rates, reducing the price of imports ● It made agriculture exports more expensive, worsening rural
and increasing the price of exports poverty
● The objective was to allow firms to ● Neglect of agriculture increased need for food imports
import capital inputs more cheaply

Encouragement of capital intensive ● Impacted small entrepreneurs as there was no effort to provide
methods support for small firms who were likely to use labour intensive
● Believe to result in more rapid techniques
growth ● Negative effect on employment and income distribution since
small producers were neglected
 Import substitution: Policies
& consequences
Policies/Outcomes Consequences

● Increasing imports of capital equipment as Deterioration of balance of payments

input in production ● Balance of payments: The systematic record of
● Increased need for food imports all economic transactions between residents of
● Outward flow of financial capital due to profit one nation and the rest of the world
repatriation of foreign multinational ● Summary of these transactions carry great
economic significance
corporations
● Deterioration of BOP: A deterioration in the
balance of trade means a country is importing
more than exporting

● By the 1970s and 1980s, there was a general agreement among economists that import substitution
had not lived upto expectations
● Began to be abandoned in favour of export promotion
● Selective import substitution is still practiced, which may include industrial policies for infant
industries It’s finally over...phew
Export promotion
What is export promotion:

● Export promotion is a growth and trade strategy where a country attempts to achieve economic growth by expanding
exports
● Like import substitution, it is based on strong govt. intervention, but justified by the idea that this is necessary to develop a
strong manufacturing sector oriented towards exports

In history:
● Export promotion strategies slowly evolved as an extension of import substitution
● Many industries that initially received strong imports-substituting protection became the strongest exporters
● The developing economies that first turned to export promotion are known as the Asian Tigers
 Export promotion
While each economy used an unique blend of policies, some typical policies are as follows:

● Financial assistance to targeted key industries, which includes:

○ Targeting of export industries that use increasingly higher skill and technology levels
○ Industrial policies to support export industries like investment grants, production
subsidies, exemptions from tariffs of imported inputs, tax exemptions, export
subsidies etc.
○ Provision of incentives to the private sector for R&D in high technology products
● Strong govt. Intervention in the economy, which includes:
○ State ownership and control of financial institutions (banking & insurance) to provide
subsidised credit to the industries being promoted, such as lower interest rates
○ Large public investment in key areas including education & skills, R&D, and expansion
of transport and communication infrastructure
 Export promotion
While each economy used an unique blend of policies, some typical policies are as follows:

● Requirement imposed on multilateral corporations such as,

○ Promotion of R&D
○ Transfer of desired and targeted technologies into the domestic economy
○ Training of domestic workers
○ Use of local inputs where possible
To maximise the benefits of foreign direct investment

● Exchange rate management

○ Undervaluing currency to encourage exports while making imports more expensive
 Export promotion: a success?
Factors behind the success of export promotion over import substitution:

Possible disadvantages:
● Expansion into foreign markets, taking advantage of economies
of scale
● Emphasis on diversification. Industrial policies supported
● If exporting countries depend overly on exports, a recession in
diversification based on increasing skill and technology levels
major trading partners will cause exports to fall and aggregate
● Major investment in human capital, including education,
demand to be affected
training, and skills
● Workers may not benefit from the growth of exports. This is
● Appropriate technologies. Government supported R&D for the
because firms are looking to minimize labour costs to make
development of appropriate technologies, as well as transfer
exports more competitive
from abroad technologies appropriate to local conditions
● A trade surplus in a country might mean a trade deficit in
● Increased employment, due to more labour-intensive
trading partner. This might impel the trading partner, who feels
technologies
threatened by the excessive imports, to impose trade
● No balance of payments problem, due to increase in exports
protections
and exports earning
Economic
integration
SDG 17.10 states, “Promote a universal,
rules-based, open, non-discriminatory, and
equitable multilateral trading system
under the WTO
 Economic integration
Economic integration:

● Refers to economic co-operation between countries and

Preferential trade agreements:
co-ordination of their economic policies, leading to
increased economic links between them ● A trading bloc that gives preferential access to markets on a
● Occurs because countries expect to derive benefit from reciprocal basis from the participating countries.
co-operation and policy co-ordination ● Preferential access- reducing tariffs but not abolishing them
● Begins with trade agreements and can extend to other completely
matters ● FTAs usually cover trade in services and investment provisions as
well
● It is the first stage of economic integration
● Examples include the North American Free Trade Agreement and
the ASEAN Free Trade Area
● Two types discussed are bilateral and regional trade
agreements
 Economic integration
Bilateral trade agreements: Risks for growth and development
● A bilateral agreement has the potential to provide a developing
Regional trade agreements: potential benefits for growth and country with access to the developed country market, but this
development comes with risks:
○ Matching tariff cuts- can be detrimental even to local
● Benefits:
efficient firms
○ Expansion of markets, achieve economies
● FTAs have the greatest potential to help
of scale
○ Developed countries with multiple bilateral agreements-
○ Diversification of production and exportsdeveloping countries when they involve:
developing countries will have to compete with each other,
○ Competition is fair and easy to deal with ○ Geographical closeness
exports may be limited
○ Policies can be jointly pursued ○ Similar level of development and tech
○ Trade deficits & balance of payments issues- may result in
■ Transport infrastructure for trade ○ Similar market sizes
unemployment, unequal income distribution and poverty
■ Energy & water supplies for growth○ Shared commitment to co-operation
○ Weaker bargaining power compared to multilateral
■ Collaboration on R&D project and tech
negotiation
development
○ Other requirements- freer rules on foreign direct
■ Combat common environmental issues
investment, stricter patent laws, etc.
● Regional FTAs therefore have greater potential to lead to increased
○ May weaken regional trade agreements
growth and development
 20.2
Diversification & social enterprise
Diversification of economic activity:

● Diversification involves a reallocation of resources into new activities that broaden the rage og G&S produced
● Has been taking place in higher income developing countries, towards manufacturing and services
● Exports are more varied and and primary sector’s contribution to GDP declines due to diversification

The importance of expanding into higher value-added production:

● ‘Value-added’ refers to the value of a good that is added at each step of a production process

● Each step in the process adds value to the cocoa

beans
● Diversification into chocolate manufacturing
● Adding value in diversification important because:
○ Engagement in more varied production
○ Establishment of new manufacturing firms
○ Creation of employment
○ Expansion into higher skill & technology
activities
The benefits of diversification

Sustained increase in exports ● Diversification into markets with a sustained

increase in global demand- non-commodity

Development of technological capabilities and skills ● Diversification provides incentive to acquire new
technologies and invest in human capital for growth
and dev.

Aversion of short-term price volatility ● Diversification protects countries against fluctuating

export prices

Use of domestic primary commodities ● Countries gifted with natural resources are in a
special position to use these as a basis of
diversification into manufacturing
Overspecialization
● Overspecialization occurs when countries produce a narrow range of commodities
● Developing countries tend to specialise more in primary commodities
● ‘The curse of natural resources’
○ Suggests that resource rich countries may be better off without these natural resources
○ Examples of such countries which have experience low or no growth rates despite abundance in resources include
Russia (metals, timber, oil), Nigeria (oil), and South Africa (mineral deposits)

● What is the reason behind this? What can we learn from these examples?
○ Resource-poor countries:
■ Diversified into manufacturing early on
■ Were unable to rely on production and export on of primary commodities
■ Therefore turned toward labour-intensive manufacturing, together with investments in human capital and
appropriate technologies
○ Resource-rich countries:
■ Became heavily dependant on primary commodities
■ Resorted to external borrowing due to short-term volatility of export revenue
■ Therefore accumulate large debts and balance of payment difficulties
Social enterprise
● Social enterprise- a type of commercial organisation that aims to achieve social goals to improve people’s wellbeing and
promote social change
● Two types- for profit and non profit organisations
○ Unlike its name it implies that the organisation tries to be commercially viable rather than relying on grants or
donations
○ Profits from selling services or products are put back into the enterprise rather than being taken as profit income by
owners
○ The primary objective is to achieve social goals and not maximize output

● Social enterprises operate in a broad ● Example (from the T.B):

variety of areas including education, ○ Bambike, a socio-ecological enterprise based in the
health, social care, agriculture, fisheries, Philippines
forestry, clean technology, and energy ○ Works to bring an end to poverty- hand makes bamboo
bicycles with fair trade labour, scholarships, weekly feeding
programmes
○ Has a social and environmental impact
Thanks!
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 Market-Based &
Interventionist Policies
Strategies to promote economic growth and economic
development (20.3 & 20.4)
Market-Based and Interventionist Policies
● allow the free market to eliminate imbalances
Market-based policies
● forces of demand and supply are utilized
● to increase incentives
● to promote competition
● to reform the labour market

● rely on the government intervention

Interventionist policies
● to promote competition
● to reform the labour market
● to improve skills and quality of labour force
● to improve infrastructure
Benefits of Market-Based Policies
● more efficient resource allocation due to decreased government intervention: promoting
positive and sustainable economic growth
● incentives from competition and maximizing profits:
○ consumers benefit from lower prices
○ firms driven to lower costs and produce higher quality products
○ produce goods that consumers actually require
○ maximum profits can be reinvested into firms to innovate and promote technology
● encourages FDI (Foreign Direct Investments)
Market-Based Policies

Trade Liberalisation Privatisation Deregulation

● involving moving to ● transfer of ownership, ● adopting market-based

free trade by lowering property or business, supply-side policies for
and eliminating tariff from the government to labour (reducing labour
and other barriers to the private sector union power and
trade ● privatisation of state unemployment benefits,
● promotes lower prices enterprises, such as reducing or eliminating
and thereby economies transport, oil, and gas minimum wages); it
of scale also means removing
barriers to enter
product markets
Trade Liberalization: NAFTA
● The North American Free Trade Agreement (NAFTA) was signed on Dec. 17, 1992, by
Canada, Mexico, and the United States.
○ aimed to integrate Mexico’s lucrative new market for Canada and U.S., while
improving Mexico’s economy
○ regional trade increased from $290 billion in 1993 to over $1.1 trillion in 2016, and
U.S. FDI stock in Mexico increased from $15 billion to $100 billion
Other Free Market Policies
● encouraging floating exchange rates: no exchange rate management
● reduced restrictions to foreign direct investments by multinational corporations
● limiting borrowing by the government; keeping budget deficits under control
● restricting the use of industrial policies (IPs)
Disadvantages of Free Markets
● decreased infrastructure
● public and merit goods, namely roads, healthcare, education, and defense, will have
missing markets or underprovision
● environmental problems and welfare issues
● income inequality
○ no safety net for the low income earners (disability benefits or job security)
● protectionism (taxing imports) in advanced economies: limiting potential avenues of trade
with foreign countries
● lack of well-functioning financial institutions: government may be necessary to fill the
savings gap
Interventionist Policies
Redistribution Policies Provision of Merit Goods

● Tax Policies ● Education & Health Services As

● Transfer Payments Merit Goods
● Minimum Wages ● Infrastructure

● Import Substitution (promoting purchase of domestic goods and services)

● Protectionism (taxing imports)
● Exchange Rate Intervention
● Regulation
● Nationalisation (transfer of private ownership to state control)
● Increased Government Spending
Costs & Benefits of Interventionist Policies
● bureaucracy, inefficiency, and corruption can lead to misallocation of resources and
government failure
● nationalised industries lack a profit motive, no intention to drive down costs, thereby
leading to inefficiency
● increased government spending -> indebtedness

● infrastructure development -> overcoming public goods issue

● the government is a major employer and investor in human capital within the public
sector
● stable macroeconomy
● welfare state, pension provision
Examples of Interventionist Policies
● In March 2020, Congress voted to provide direct cash payments of $1,200 to most
Americans, totaling some $250 billion, as well as additional direct assistance to U.S.
workers affected by the economic collapse. (transfer payment)

● The U.S. government periodically assesses the federal minimum wage level for changes
in inflation or cost of living. The Fair Minimum Wage Act of 2007 ordered the minimum
wage to be raised from $5.15 in three increments, rising to $5.85, $6.55, and then finally
to $7.25. The federal minimum wage has not increased since July 2009. (minimum
wage)
Thank You!
Foreign Direct Investment
&
Multinational Corporations
What is FDI?

FDI is investment by firms based in one Multinational Corporations are firms

country, in productive activities in another
that engage in foreign direct
country.
investment.
● Inorganic: Purchasing controlling
share in domestic company
(eg. Uber investment in Careem)
● Organic: Expanding own operations
in the foreign country
(eg. Amazon largest campus in
hyderabad)
Content ● Why do MNCs invest in
developing countries?
● Characteristics of countries that
attract FDI
● Advantages of FDI for host
country
● Disadvantages of FDI for host
country
Why Do MNCs invest in developing nations?

● Increase sales and revenue: Take ● Extract natural resources: Many developing
advantage of emerging markets (eg.China, countries are rich in natural resources
India , Africa) required for manufacturing goods. MNCs
● Bypass trade barriers: Producing locally in implement extraction infrastructure as it is
countries means they can get around tariffs, cheaper than importing them.
red tape etc. (eg. automotive manufacturing
in India)
● Lower costs of production: Cheaper labour
costs (eg. Cloth manufacturing)
Attractive characteristics for FDI

● Political Stability
● Macroeconomic stability (low inflation,
stable currency, low debt)
● Favourable Tax Rules (eg. Ireland)
● Weak labour laws
● Liberal Economy
● Large markets
● Educated Labour force
● Well funded infrastructure
Advantages of FDI for host country

● Injection into circular flow of money leads ● Promote local industry due to increased
to increase in long term potential growth demand for factors of production which are
● Supplements savings gap. Developing often bought locally
countries often have low savings rates and ● Decreases unemployment as MNCs create
increases in savings leads to new capital
more jobs
formation.
● Increased productive efficiency as local
● Supplements current accounts. Developing
countries incur debt as they import more than producers have to now compete with MNCs
they export (trade deficit). Export oriented on price and quality leading to better
MNCs can increase foregin exchange goods/services for consumers.
earnings. ● Technological transfer (China)
● Greater tax revenue in the forms of ● Increased infrastructure spending (eg.
increased income tax, corporate tax and Africa)
expenditure tax
Disadvantages of FDI for host country

● May lead to greater insufficient foreign ● Increased environmental impact MNCs are
exchange earnings. MNCs could repatriate profit maximizers and have no obligation to
profits which is a leakage or import more raw the preservation of the environment of the
materials minimizing their positive effect on host country
capital accounts. ● Have undue influence on politics as MNCs
● MNCs may hire workers from home become increasingly powerful
country leaving no jobs for local workers ● Could lead to diversion of public funds to
● MNCs often get favourable tax incentives infrastructure benefiting MNCs instead of
this it to attract FDI or they may undertake citizens
transfer pricing ● Promotes inappropriate consumption
● Could lead to cannibalizing of local patterns
industry by engaging in aggressive business ● Leads to “race to the bottom”
tactics
(20) Strategies to
Promote
Economic Growth
& Economic
Development
 01 02 03 04
Multilateral Institutional Interventionist vs The SDGs
Development Assistance Change Market Approaches
The World Bank and the Financing, women’s rights, Evaluating the strengths Where are we today with
IMF property rights & good and weaknesses of each the SDGs?
governance approach
01 Multilateral
Development
Assistance
❖ Lending to developing countries
on non-concessional terms
❖ Involves rates of interest and What is
market-determined loan
repayment plans
❖ Banks like the World Bank and the multilateral
African Development Bank, as -
well as the IMF
❖ Difference from commercial
development
banks: Their primary aim is to
promote development and
financial stability, rather than to
assistance?
seek profit
 • Constructed post-WW2, composed of 189 member

The •
states
Consists of the IBRD, for non-concessional loans to
middle-income nations, and the IRA, for highly

World •
concessional loans to low-income nations
Hence, isn’t considered an aid agency

Bank Pre-1990s World Bank Post-1990s World Bank

• ‘50s and ‘60s: Lending • Criticism of SALs for over-

for infra, agro, energy promoting exploitative
etc. market-based policies
• ‘70s: Grew in size and caused a pivot towards
committed more to poverty alleviation
basic poverty
alleviation • More focus on improving
• ‘80s: SALs to promote basic govt and institutional
market approaches capabilities
 Main criticisms:
Evaluating • Social and environmental impact: Implementing
unsustainable infra projects, adverse effects on
the World indigenous land and natural ecosystems;
changing in recent years
•
Bank Voting power in the WB determined by size of
donations, giving rich countries with large
economies dominant power and stifling
developing countries themselves
• Conditions: As with all foreign aid, imposition of
policy changes deprive developing countries’
govts from controlling their own economic
activities
• Not enough done for extreme poverty and HIPC
debt relief
• Too focused on supply-side policies: Labor
market flexibility, privatization, land takeovers that
crowd out small farmers
 • Established jointly with the WB in 1944
•
The Intl. Objectives have shifted from alleviating balance of
payments deficits to stabilizing exchange rates
and overseeing the global financial system
Monetary • Initially skewed heavily towards developed
nations, then changed due to ‘70s and ‘80s oil
Fund import debt crises and again after ‘08 financial
crisis

Conditionalities:

• Contractionary monetary policy

• Contractionary fiscal policy
• Currency devaluation
• Market based supply side policies like cuts in real
wages and privatization
 Main criticisms:
Evaluating
• Dominated by the richest nations
the IMF • Excessive breaches of sovereignty
• Flawed basis for stabilization
policies, though lately there has been a
shift away from unfettered neoliberalism
• Exacerbating income inequality among
the poorest nations
• Policies resulting in dramatically
lowering economic growth—
liberalization, cuts in subsidies,
imposition of fees for schools and
hospitals, cuts in real wages etc.
Institutional
Change
(SDG 16)
02
 • Refers to credit (loans) in small amounts to
Microfinance •
under-banked communities
Short repayment times
• MFIs include credit unions, financial NGOs
and some commercial banks
• Began with the poorest women in the ‘70s,
who were found to be excellent at repaying
loans with high interest rates through
community-based guarantees (no collateral)
• Micro-credit schemes target women and those
in the informal economy
• Have positive effects on poverty reduction,
stability of incomes, basic needs and the
status of women
• Still fledgling institutions, not enough to cover
everyone
 Evaluating Main criticisms:
microfinance • Much like charity, may mask the need for
strong govt anti-poverty measures,
institutions •
particularly for the most vulnerable
Contribute to the growth of the informal
economy rather than promoting
formalization
• For those who do not have literacy and
numeracy skills and are in extreme poverty,
may be a burden to repay; some institutions
try to tie credit to education schemes
• Higher-than-market interest rates to cover
the MFI’s higher costs; need subsidized
interest rates for very poor borrowers
 Mobile
Banking • Involves the use of mobile
phones to receive or send
money and to pay bills
• Leverages widespread
access to mobile phones
as opposed to lack of
access to formal financial
services in developing
nations
 +ves - ves
• Ease of payments and lack of delays
• No commute, so people’s cash is • Network problems could cause
safer delays
• Reduced transfer costs • Susceptibility of older people and
• Stronger rural-urban links illiterate people to financial fraud
• Easier to obtain credit to open • Cost of services; lower than
businesses; particularly beneficial for banking, still high in relation to
women most rural incomes
• Easier to pay aid workers delivering
in geographically remote areas
• Ease of buying raw materials and
inputs for businesses
 Positive externalities of improving
The Urgent women’s health and education:

Need to • Improved child health, lower infant

mortality
Empower • Improvements in children’ educational
Women outcomes
• Quality of human resources
• Lower TFR (total fertility rate, or birth
rate)

The UN developed the GII (Gender

Inequality Index) to measure gender
differences, reflecting the idea that
women are central to development.
 • Improving political participation and
Policies to representation
• Prioritizing elimination of poverty,
Empower illiteracy and poor health
• Ensuring labor market equality and
Women improving women’s access to non-
traditional (male-dominated)
occupations
• Eliminating employer discrimination
• Eliminating violence against women;
partner violence, workplace violence
• Policies to combine child bearing and
rearing with continued labor force
participation; Eg. Paid parental leave
and affordable childcare
 • Accountability measures like external
Policies to audits and public supervision
mechanisms; E.g. Online platform in
Reduce Paraguay for citizens to monitor public
infrastructure projects
Corruption • Tax reform (removing bureaucracy)
• Building a professional civil service where
and Promote hiring is based on merit
• Global and cross-border anti-corruption
Transparent agreements and laws

Governance The World Bank’s current policies:

• Carrots and sticks for corruption
• Soft-policies (changing perceptions of the
type of governance necessary)
 • Measure of equal rights to economic
resources, particularly for the most
Property & marginalized
• Property ownership is the main method for
Land Rights building inter-generational wealth
• Titling isn’t enough for community based
spaces outside of urban areas

Land rights are important because:

- Food security—Greater productivity and

access to credit
- Lower deforestation and more sustainable
land use
- Preservation of food cultures and biodiversity
- Support for indigenous people
- Contribute to gender equality
- Contribute to overall poverty reduction
 • System of recording, maintaining and
Steps Taken publicizing land tenure rights—land,
and Steps fisheries and forests
• Solid mechanisms for resolving
Necessary to tenure and land disputes between
public sector, private sector,
Secure Land individuals and indigenous parties
• Anti-eviction legislation
Rights for the • Right to legal counsel (particularly
Poorest benefits poor farmers by protecting
against land grabs)
• Agrarian reforms to redistribute land
(if extreme poverty is tied to
landlessness)
 Govt

03 Intervention
vs Market
Approaches
 Government Intervention
Strengths Weaknesses
• Correcting market failures • Limited budget
• Investment in human capital
• Provision of infrastructure • Bureaucratic inefficiency
• Development of stronger
• Inefficient producers being
institutions shielded
• Redistribution of income
• Promotion of gender equality and • Allocative inefficiencies
anti-discrimination
• Elite groups exerting undue
• Industrial policies
influence
• Provision of a stable
macroeconomic environment • Corruption and poor
governance
 Free Market - Oriented Policy

Strengths Weaknesses
• Free trade • Market failure (particularly positive
• Competition oriented policies production)
• Incentive (tax adjustment) policies
• Weak legal and institutional
use price mechanism to influence
framework
work, innovation and investment
• Market-determined exchange rates • Income inequalities and poverty
auto-adjusts to excess demand or
• Inability to promote gender equality
supply of a currency, acting as a and other social goals
‘price’ signal and incentive for the
currency • Informal economy

• Often not suited to primary sector

based low income nations’
economies
 Progress
Towards the
SDGs 04
 5. & 8. The pandemic has exacerbated child marriage
and women have left the labor force in droves.

13. Climate finance provided by developed to

developing countries continues to increase.

17. Nations are not on track to meet their Paris

Climate Agreement targets.

3. Infant mortality has been cut in

half from 2000 to 2019.

2. World hunger rose

dramatically from 2015 through
to 2021.
Thank You
-