Understanding how to foster economic growth and development is key to improving living standards in emerging and developing countries. This topic explores various market-based and interventionist strategies.
Market-oriented strategies
Market-oriented strategies focus on enhancing the role of market forces in allocating resources efficiently, with minimal state intervention. They are based on the belief that private enterprise, competition, and open trade can generate economic growth and promote development.
Trade liberalisation
Trade liberalisation refers to the removal or reduction of trade barriers such as tariffs, import quotas, and export restrictions. The goal is to allow goods and services to move more freely between countries, encouraging specialisation and comparative advantage.
Advantages:
Increased export opportunities: Developing economies can access larger global markets, which can lead to expansion in sectors where they have comparative advantage. This generates export revenues, employment, and foreign exchange.
Competitive pressure: Domestic firms are exposed to international competition, which can incentivise them to reduce costs, improve product quality, and adopt new technologies.
Lower consumer prices: Consumers benefit from lower prices and more choice due to access to cheaper imported goods.
Technology diffusion: Trade allows for the faster transmission of new technologies and production techniques from more advanced economies.
Disadvantages:
Risk of over-dependence: Countries may become reliant on a narrow range of exports, leaving them vulnerable to global price fluctuations and external shocks.
Structural unemployment: The decline of uncompetitive domestic industries may lead to widespread job losses, especially where there is limited social safety net or retraining programmes.
Widening inequalities: Benefits from trade may be unevenly distributed, potentially increasing the gap between rural and urban areas, or between skilled and unskilled workers.
Balance of payments pressure: Liberalisation often results in a surge in imports before exports can expand, leading to current account deficits.
Foreign direct investment (FDI) promotion
FDI involves overseas firms establishing or expanding operations in another country, such as building factories, acquiring local firms, or opening service centres.
Advantages:
Capital inflows: FDI provides much-needed capital for investment in infrastructure, manufacturing, and services, which may not be available domestically.
Technology and skill transfer: Multinational corporations (MNCs) bring advanced technology and management practices that can benefit local employees and suppliers.
Employment generation: MNCs can create jobs directly through their operations and indirectly via demand for local inputs and services.
Improved productivity: Exposure to global standards and practices can lift productivity across the economy.
Export enhancement: FDI into export-oriented sectors can help increase foreign exchange earnings.
Disadvantages:
Repatriation of profits: A significant portion of profits may be sent back to the parent company’s country, limiting the domestic benefits.
Limited linkages: MNCs may import raw materials and components from abroad, reducing the potential for local supply chains.
Labour exploitation: Poor working conditions and low wages may occur, especially if labour laws are weak or poorly enforced.
Policy influence: Large MNCs may exert undue influence on governments, leading to policies that favour foreign firms over domestic ones.
Subsidy removal
Subsidy removal refers to the elimination of government financial support for goods or services, particularly those that distort market outcomes such as fuel, food, and electricity subsidies.
Advantages:
Improved fiscal balance: Reducing subsidies helps free up public funds that can be redirected toward education, health, or infrastructure.
Increased efficiency: Removing subsidies forces firms and consumers to respond to true market prices, reducing waste and inefficiency.
Reduced corruption: Subsidy schemes are often associated with leakage, fraud, and political patronage; their removal can improve governance.
Disadvantages:
Impact on the poor: Removing subsidies on basic goods raises living costs for low-income households, potentially worsening poverty and inequality.
Inflation: The sudden withdrawal of subsidies, especially on energy, can trigger inflationary pressure throughout the economy.
Social unrest: Popular resistance can arise if reforms are perceived as unfair or if adequate safety nets are not in place.
Floating exchange rates
A floating exchange rate system allows the value of a currency to be determined by supply and demand in the foreign exchange market without direct government control.
Advantages:
Automatic correction: Trade imbalances can be addressed through currency adjustments. For example, a trade deficit leads to depreciation, which makes exports cheaper and imports more expensive, helping rebalance the economy.
Policy independence: Countries can pursue domestic monetary policy objectives, such as controlling inflation or stimulating growth, without needing to defend a fixed exchange rate.
No need for large reserves: Governments do not have to maintain high levels of foreign currency to manage their exchange rate.
Disadvantages:
Volatility: Exchange rate fluctuations can deter foreign investors and create uncertainty for exporters and importers.
Pass-through inflation: A weaker currency can lead to higher import prices, fuelling inflation, especially where import dependency is high.
Speculative attacks: Currency speculation can create instability, especially in economies with weak fundamentals.
Microfinance schemes
Microfinance refers to the provision of small loans and other financial services to individuals or groups who are typically excluded from the traditional banking sector.
Advantages:
Financial inclusion: Enables the poor, especially women and rural populations, to access capital for micro-enterprises, consumption smoothing, or emergencies.
Entrepreneurship development: Small loans support the creation and expansion of informal businesses, boosting household income and resilience.
Empowerment: Increases self-reliance and encourages savings and financial planning among low-income groups.
Disadvantages:
High interest rates: Due to administrative costs and risk, microfinance institutions may charge high interest, making repayment burdensome.
Limited reach: Microfinance may not be suitable for large-scale business or infrastructure investment and is unlikely to transform the economy on its own.
Over-indebtedness: Borrowers may take multiple loans, risking default and worsening poverty.
Privatisation
Privatisation involves transferring ownership of state-owned enterprises (SOEs) to the private sector, often through sales, auctions, or public share offerings.
Advantages:
Improved efficiency: Private firms are generally more profit-driven and responsive to market signals, leading to better performance and productivity.
Revenue generation: Governments can raise substantial funds from the sale of public assets.
Service quality: Competition and profit incentives may lead to improved service delivery and innovation.
Disadvantages:
Job losses: Efficiency drives may involve redundancies, affecting employment.
Equity concerns: Wealthy individuals or foreign investors may gain control of national assets, excluding ordinary citizens.
Risk of corruption: If processes lack transparency, assets may be sold at undervalued prices or to politically connected groups.
Interventionist strategies
Interventionist strategies are based on the idea that market failures, inequality, and underdevelopment require active state involvement to correct inefficiencies and support long-term development.
Human capital development
Human capital development involves investment in people’s skills, knowledge, and health to improve productivity and promote inclusive growth.
Key methods:
Education: Expanding access to primary, secondary, and tertiary education; improving quality of teaching; increasing school enrolment and retention.
Healthcare: Strengthening healthcare systems, vaccination programmes, maternal health, nutrition, and clean water access.
Benefits:
Productivity gains: Better-educated and healthier workers contribute more to economic output and innovation.
Poverty alleviation: Access to education and health services enables upward mobility.
Social benefits: Education improves civic engagement, reduces crime, and empowers women.
Protectionism
Protectionism involves shielding domestic industries from foreign competition using tariffs, quotas, or regulatory measures.
Justifications:
Infant industry argument: New industries may need temporary protection until they become efficient and globally competitive.
Strategic sectors: Protecting key industries such as agriculture or defence for national security and food sovereignty.
Drawbacks:
Reduced efficiency: Lack of competition can breed complacency, inefficiency, and low-quality goods.
Retaliation: Trading partners may impose counter-tariffs, leading to trade wars and reduced exports.
Higher consumer prices: Tariffs raise the cost of imports, reducing consumer welfare.
Managed exchange rates
A managed exchange rate system, also known as a dirty float, allows currency values to fluctuate but with occasional government intervention to stabilise movements.
Benefits:
Stability: Reduces volatility in exchange rates, encouraging investment and trade.
Policy tool: Allows authorities to influence inflation or competitiveness through exchange rate management.
Market confidence: Predictable exchange rates can build investor confidence in emerging economies.
Risks:
Currency manipulation: Critics may accuse countries of keeping their currencies artificially low to boost exports.
Reserve requirements: Interventions require large foreign exchange reserves, which may be difficult to maintain.
Policy inconsistency: Frequent changes in strategy may reduce policy credibility.
Infrastructure development
Infrastructure development includes investment in physical systems such as transport networks, energy grids, water supply, and telecommunications.
Positive effects:
Reduces business costs: Efficient transport and communication improve supply chain management and market access.
Enhances productivity: Reliable electricity and internet access allow firms to operate more effectively.
Facilitates growth: Infrastructure attracts private investment and supports industrialisation and urbanisation.
Challenges:
High capital cost: Large upfront investments require long-term planning and financing.
Corruption risks: Public works are vulnerable to misallocation and embezzlement.
Maintenance: Poor maintenance can reduce the lifespan and effectiveness of infrastructure.
Joint ventures with multinational corporations
Joint ventures involve partnerships between domestic entities and foreign firms to undertake shared business activities.
Advantages:
Shared expertise: Combines local knowledge with foreign capital and technology.
Capacity building: Trains domestic workers and managers in global best practices.
Risk sharing: Helps mitigate financial and operational risks for both parties.
Disadvantages:
Unequal bargaining power: MNCs may dominate decision-making and control profits.
Cultural clashes: Differences in corporate culture or expectations can hinder cooperation.
Limited benefit spread: Gains may be concentrated in specific sectors or regions.
Buffer stock schemes
Buffer stock schemes are government-led programmes to stabilise prices of essential commodities by buying excess output in good years and releasing it in poor years.
Mechanism:
During surplus years: Government purchases excess supply to prevent price collapse.
During shortage years: Government releases stored goods to reduce inflation and scarcity.
Advantages:
Income stability: Farmers receive more predictable incomes, encouraging investment and planning.
Food security: Stockpiles can be used in emergencies to ensure access to essentials.
Price smoothing: Reduces extreme price volatility which can destabilise economies.
Disadvantages:
Storage costs: Warehousing and spoilage can be expensive and technically challenging.
Market distortion: Artificial price signals can cause overproduction or underproduction.
Budgetary strain: Sustaining such schemes may require large public spending.
FAQ
While trade liberalisation and FDI promotion are essential parts of development strategy, many developing countries still struggle to attract substantial foreign investment due to structural and institutional weaknesses. Key deterrents include political instability, weak legal systems, and inconsistent enforcement of contracts, which increase the perceived risk for investors. Corruption, excessive bureaucracy, and unclear property rights further erode investor confidence. Infrastructure deficiencies—such as unreliable electricity, poor transport networks, and limited digital connectivity—raise the cost of doing business. Human capital constraints, including low education and skill levels, reduce labour productivity and make it difficult for investors to operate efficiently. Market size is also a factor; small or fragmented domestic markets may not offer the scale needed to justify investment. Additionally, macroeconomic volatility, such as high inflation or fluctuating exchange rates, undermines predictability. Without strengthening governance, improving infrastructure, and ensuring policy continuity, liberalisation alone is insufficient to attract and sustain large FDI inflows.
The Harrod-Domar model highlights the importance of saving and investment in generating economic growth, especially for developing countries. According to the model, growth rate = (savings ratio) / (capital-output ratio). This implies that low savings rates lead to limited investment, which constrains capital accumulation and hampers growth. As a result, governments in developing countries may adopt interventionist strategies to overcome this "savings gap." For example, public investment in infrastructure, education, and health is used to raise productivity and encourage private investment. Aid or concessional loans may be sought from international institutions to supplement domestic savings. The model also supports the argument for financial sector development and microfinance schemes, which mobilise savings and channel funds into productive uses. Furthermore, state-led investment can be targeted at key sectors such as energy or transport to remove bottlenecks that prevent private sector expansion. Thus, interventionist approaches are often designed to compensate for market failures identified by the Harrod-Domar framework.
Although privatisation is promoted for its potential to improve efficiency and fiscal health, relying heavily on it in developing countries carries several risks. Firstly, without a competitive market structure, privatised firms may become monopolies, leading to high prices and poor service. Secondly, privatisation can result in job losses as private firms seek to cut costs, increasing unemployment and social unrest in the short term. Thirdly, the process is often marred by corruption or lack of transparency, allowing politically connected individuals or foreign entities to acquire valuable national assets at below-market prices, deepening inequality. Moreover, there’s a risk that foreign ownership leads to profit repatriation, where revenues are sent abroad instead of being reinvested domestically. In weak regulatory environments, privatised firms may also underinvest in infrastructure or environmental protection. Finally, poorly designed privatisation can erode public trust in government, particularly if it leads to a decline in service quality or access for vulnerable groups.
Infrastructure development underpins virtually every aspect of economic growth and development. Reliable transport systems reduce the time and cost of moving goods and people, thereby facilitating trade, market integration, and investment. Without paved roads, farmers struggle to bring products to market; without ports, exports cannot reach global buyers. Similarly, stable electricity is essential for manufacturing, education, and health services, while modern telecommunications support financial inclusion and innovation. Infrastructure also plays a crucial role in attracting foreign direct investment, as MNCs prefer operating in countries where basic utilities and logistics are dependable. Moreover, infrastructure boosts productivity by enabling economies of scale and specialisation. It supports education and healthcare access, especially in rural areas, enhancing human capital development. Crucially, infrastructure projects can generate significant employment and stimulate demand in related sectors such as construction and materials. As such, infrastructure is not just a development strategy in itself—it is the platform that enables most other strategies to succeed.
The success of buffer stock schemes depends on a range of economic, logistical, and institutional factors. First, the government must be able to correctly set a target price that is both fair to producers and reflective of long-term market conditions. If the price is set too high, overproduction may occur, leading to unsustainable stockpiles; if too low, producers may lose the incentive to grow the crop. Second, adequate storage infrastructure is essential. This includes warehousing, transportation, and systems to minimise spoilage, especially for perishable goods. Third, financing is crucial. Governments must have the fiscal space to purchase surplus produce during bumper years and manage operations without diverting funds from essential services. Fourth, transparency and governance are vital. Poor management, corruption, and inefficiencies can undermine public confidence and lead to misuse of resources. Lastly, international factors such as global price fluctuations and trade agreements can complicate efforts to stabilise domestic prices, making effective coordination and policy flexibility critical.
Practice Questions
Evaluate the effectiveness of trade liberalisation as a strategy to promote economic development in emerging economies.
Trade liberalisation can enhance development by allowing access to larger markets, encouraging specialisation, and increasing efficiency through competition. It may lower prices and attract foreign investment. However, in emerging economies, it can lead to structural unemployment as inefficient domestic industries collapse. Moreover, over-reliance on exports can create vulnerability to global shocks. Short-term inequality may worsen if benefits are unevenly distributed. Effectiveness depends on institutional strength, infrastructure, and the ability to retrain displaced workers. If complementary policies are in place, liberalisation can support sustainable development. Without these, it risks exacerbating existing economic and social problems.
Evaluate the role of microfinance schemes in promoting economic development in low-income countries.
Microfinance schemes can support development by increasing financial inclusion, enabling the poor—particularly women—to access credit and invest in small enterprises. This fosters entrepreneurship, raises incomes, and promotes self-reliance. Additionally, microfinance encourages savings and household stability. However, high interest rates may burden borrowers, and some become trapped in debt. Schemes are often limited in scale and may not significantly affect macroeconomic growth. Their impact depends on proper regulation, education on financial management, and integration into broader development strategies. While microfinance has potential, it is most effective when used alongside infrastructure, education, and institutional improvements.
