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Promoting Development - Inward/Outward Strategies & Interventionist vs Free Market

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Hugo Flower

on 28 January 2015

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Transcript of Promoting Development - Inward/Outward Strategies & Interventionist vs Free Market

Promoting Development: Inward Looking/
Outward Looking Strategies

Inward and Outward Looking
There are two ways of looking at how a country can strengthen its industries to progress to industrialisation
1. Inward Looking:
Using protectionism and import substitution to protect domestic industries from foreign competition
2. Outward Looking:
Opening up domestic markets to world trade
Inward Looking:
Could increase employment
Could improve Balance of Payments deficit
Protects infant industries
Inefficient - due to lack of competition
Difficult to remove protections
Fall in world trade - comparative advantage lost
Only possible if domestic manufacturing is large enough
Outward Looking
Encouraging FDI
Promoting free trade
Improving competitiveness
devaluing exchange rates
Creates employment
Injection into the circular flow and the Harrod-Domar Model (FVC)
AD shifting right - economic growth
Sharing of technology and knowledge
Comparative advantage - increase in world trade
Economies of Scale
Could become dependent on exports - a problem in a global recession
The environment could suffer
Domestic producers could lose out
Richer countries could use protectionism against cheap manufacturing
Interventionist vs Free Market Approaches
A high amount of Government intervention into markets
Subsidies on lots of important goods
import substitution - subsidising domestically produced substitutes for imports
Over-valuing the exchange rate to keep import (raw materials) costs down
Nationalising industries into state-run firms
The government controls agriculture prices and production
Inefficient nationalised companies
Corruption in government
low economic growth
Large fiscal deficits due to high government spending
Balance of Payments issues - over valued currency harms exports
Free Market Development
Liberalisation of Trade
Promotion of free markets
Supply-side policies
Works on the basis that those in charge (politicians) cannot be trusted to make decisions that are in the country's interest - Public Choice Theory
Pollution and other negative externalities
There is an assumption that all markets are efficient - this is not always true
Assymetric information - would healthcare and education be provided by the free market?
There are benefits to each policy.
High amounts of government intervention can mean low unemployment and a more equal society
However, growth is sacrificed, markets are inefficient and corrupt governments often spoil the effects
A free market approach encourages higher amounts of growth - but at the expense of equity and the environment.
A sensible approach would be to employ a mixture:
allow markets to operate without intervention where appropriate and encourage enterprise
invest in infrastructure
provide education and healthcare
have some form of income redistribution
Revision of Trade Liberalisation:
Case for trade liberalisation:
• LEDCs have access to markets in developed countries: increased
exports and higher GDP, the proceeds of which may be used for
health, education, improved access to clean water

• Increased competition might promote increase efficiency in LEDCs

• Incentive for multinationals to establish production plants in the
country so contributing to industrialisation

• Consumers benefit from lower prices and more choice

• More efficient use of resources – based on law of comparative
advantage leading to increased growth

• Enables LEDCS to become less dependent on aid

• Use of tariff diagram to illustrate impact of cut in tariffs

• Domestic firms in LEDCs may be unable to compete with TNCs from developed economies

• Infant industries may be unable to survive

• Monopsony power of TNCs might result in exploitation of
resources of LEDcs

• Environmental arguments against free trade

• Problems of overspecialisation

• Dumping by developed countries
Allows economies of scale to be developed
replaces imports with domestic goods
Read the case study on Thailand.
What have been the effects of Thailand's move to a more outward looking strategy?
Full transcript