1. +
Development
Topic 5.4
Growth and Development Strategies

2. +
Key pointers for Topic 5.4
Growth models suggest how growth has
1.
occurred in the past.
Growth strategies are economic polices and
2.
measures aimed at increasing GDP
Development strategies are policies and
3.
measures aimed at improving human
development / standard of living / welfare.
Be careful about differences between models, strategies and the
difference between development aims and growth aims.
Economic Growth ≠ Economic Development

3. +
Growth Models
Harrod - Domar Model – identifies factors that
1.
affect the rate of economic growth (%
change in GDP)
Structural Change / Dual Sector Model –
2.
attempts to explain how an agricultural
undeveloped society with a small
manufacturing sector can move to become a
modern economy with large manufacturing
and service sector

4. +
HarrodDomar Model
Shows how factors can influence the rate of economic

growth
Suggests that the rate of growth of GDP is determined by

national savings ratio and the ratio of capital to output in
the economy.
Savings Ratio
Rate of GDP Growth =
Capital / Output Ratio
Savings Ratio = marginal propensity to save, for an extra dollar of income,
what is the percentage saved
Capital / Output Ratio = spending on capital as a ratio of output from capital,
efficiency of spending

5. +
HarrodDomar Model
So according to the formula…Growth can be increased by

Increasing the level of savings in an economy

This leads to an increase in investment

Lower interest rates for borrowing

Greater stock of capital available

Should lead to increased output and efficiency do you try to
But how in the long term

apply these ideas to
Reducing the capital / output ratio

developing
 Increased efficiency of capital, through greater technology,
countries?
improved training, skill development.
Improved managerial skills to that capital is used in intended

ways.
Increased research and development.


6. +
Growth Models
Structural Change / Dual Sector Model –
1.
attempts to explain how an agricultural
undeveloped society with a small
manufacturing sector can move to become a
modern economy with large manufacturing
and service sector
Manufacturing
Profit reinvested
Profit reinvested
Agriculture

7. +
Growth Strategies
Export-led Growth – and outward orientated
1.
growth strategy. Aim is to stimulate AD by
pursuing export growth.
Import Substitution – inward orientated
2.
strategy, local people should by locally
produced product rather than import them.
Foreign Direct Investment
3.

8. +

9. High exports
+
Current Account surplus
Balanced Current
Export Led but strong
Account
domestic market
Scandinavia
Germany, Japan
Low imports High imports
Balanced Current
Account Current Account
Deficit
Very inwards looking,
self sufficient United States
Low exports

10. +
Types of Aid
 Bilateral, multilateral aid
Bilateral is aid is between two nations

Multilateral aid is given to international aid agencies by

wealthy donor nations and is distributed on a needs
basis.
International aid agencies include International

Monetary Fund (IMF) or World Bank
 Grant Aid, Soft Aid
Gift of money, capital or technology with no reciprocal

obligations. ‘no stings attached’

11. +
Types of Aid
Official Aid

Official Development Assistance (ODA) is the sum of all the

multi and bi lateral aid.
The globally agreed aim is that Donor nations contributed on

average 0.7% of global GNP per year.
Tied Aid

These are reciprocal arrangements between the donor and

the recipient country.
Usually such aid is given to a country for instance to build rail

network. The material for the rail network will come from the
donor country.
Example: France provides loans to Thailand and Bangkok for

building MRT lines which will use French technology.

12. +
Foreign Direct Investment (FDI)
Long term investment by Multinational
1.
Companies in foreign countries.

13. +
Very high level of
Foreign Direct
Investment into the
country.
“Net receivers”
Net Foreign Direct Investment as % of GDP

14. +
Types of Aid
Aid is the help, mostly economic, which may be provided

to communities or countries in the event of a
humanitarian crisis or to achieve a socioeconomic
objective.
Humanitarian aid is therefore primarily used for

emergency relief, Boxing Day Tsunami
Development aid aims to create long-term sustainable

economic growth, Water pumps, building schools.

15. +

16. +

17. +
Reasons for Foreign Direct
Investment
Main motivations are revenue and profit and not

development. No incentive to create equality, only to
make money for shareholders.
Firms investing directly can gain on a number of counts

By setting up productions, multinational companies gain

access to lower costs of production.
International awareness of tastes and preferences.

Can lead to multinationals avoiding tariffs.

Countries can offer a geographical advantage, such as

closeness to key markets, or global trade routes. Hong Kong,
Shanghai, Singapore.
Lower taxes of capital, labour and profits

Can exploit countries with lower environmental standards.


18. + Export Led Growth
Ethopian Coffee Industry – Pre Trade
P$
SE
Consumer surplus
PE Producer surplus
DE
0 QE
produced

19. + Export Led Growth
Ethopian Coffee Industry
P$
SE
Consumer surplus
after trade
Pw
Producer surplus
PE after trade
DE
0 QD QE Qs
exported

20. + Export Led Growth
Ethopian Coffee Industry
P$
SE
Pw
Gains from trade
PE
DE
0 QD QE Qs
exported

21. +
Reasons for Outward Orientated
Strategies
Increase in export revenue is an important boost to

domestic GDP. Proportion of exports to GDP in Korea
increased from 2.4% in 1962 to 42% in 1999.
Benefits of Economies of Scale, as market size grows

beyond the domestic population, average costs will tend
to fall.
Increased competition and incentive for domestic firms to

compete with the world, increasing efficiency.

22. +
Import Substitution
Russian Market for Cars
P$
SR
PR
DR
Qs QR QD
imported

23. +
Import Substitution
Russian Market for Cars
P$
SR SR + Subsidy
PR Consumer Surplus with
trade or import
substitution
Domestic PS with
DR
imports
Producer surplus gains
Qs QR QD from subsidy
imported

24. +
Import Substitution
Russian Market for Cars
P$
SR SR + Subsidy
PR Consumer Surplus with
trade or import
Tariff
substitution
+
Sworld
Domestic PS with
DR
imports
Producer surplus gains
Qs QR QD from subsidy
imported

25. + Failures and Successes of Import
Substitution
Lack of competition to drive quality

Lack of price competition in limits markets

Low incentives to invest for the future as likely to be hit by

changes in import tariffs and laws.

26. +
Micro Credit
Microcredit is the extension of very small loans

(microloans) to those in poverty designed to spur
entrepreneurship.
These individuals lack collateral, steady employment and

a verifiable credit history and therefore cannot meet
even the most minimal qualifications to gain access to
traditional credit.
http://www.kiva.org/app.php

27. +

28. +
Fair Trade

29. +
What does Africa need?
More Aid
Increased Foreign
More trade and
Direct Investment
exports
Less Debt
Greater import
substitution
and why?

30. +
Poverty Cycle
Growth Development
Low economic Low levels of
growth education and
healthcare
Low levels of Low levels of
Low incomes
investment human capital
Low level of Low
savings productivity

31. +
Cutos
Customs Union

32. +
Examination Questions
Explain the main characteristics, of an export led
1.
growth strategy. (10 marks)
Evaluate the view that economic growth and
2.
development are best achieved through the adoption
of an outward orientated strategy. (15 marks)
Discuss three reasons for multinational company
3.
investment in developing countries (10 marks)
Evaluate the role of Foreign Direct Investment in
4.
promoting economic growth and development in
developing countries. (15 marks)

33. +

34. + Development Bingo
Revision Bingo
Inflationary pressure Recessionary Gap


Boom
Recovery 

Elastic
Peak 

Public Finance Act
Unit Elastic 

Public Provision

Allocative efficient

Positive Externalities of

Consumption
Involuntary Unemployed

Increased equity
Lorenz Curve 

Inelastic
Progressive Tax system 

Real wage

Subsidy

Monopsony

Subnormal Profit

Free rider behaviour

Non Depletable
