Promoting Growth and Development in a Country – By Dr. Gnana Sankaralingam
There are several policies to improve economic growth and development in a country. Different strategies adopted in promotion of growth and development are: aid and debt relief, structural changes in agricultural, industrial and tourism sectors and policies that favour either interventionist approach or market orientated approach. Since all developing countries are different, each would need a particular mix of policies and strategies probably involving both state and markets. But there is no gurantee that what worked in one country will be successful in another. Development often means changing the structure of econmy (balance between primary, secondary and tertiary sectors). Less developed countries have a large primary sector. As economies grow and develop, secondary sector will grow and if the process continues it will be dominated by tertiary sector as in developed states.
Aid means transferring of resources from one country to another. There are various types: Bilateral aid where donor country sends aid directly to the recipient country, Multilateral aid where donor countries pass the aid to an intermediate agency (IMF, World bank) which then distributes the aid to recipient country and Tied aid which is donated on condition that the money is spent in a particular way (eg: on imports from donor country). Aid could be used for emergency relief (eg: drought, floods) or for promoting development. Aid reduces poverty and improves health and education which will enhance human capital. It helps to fill the savings gap (gap between the level of domestic savings in an economy and the investments needed to grow that economy) and foreign exchange gap (capital outflows greater than capital inflows) likely in countries dependent on exports of primary produce or imports of manufactured goods where lots of money have to be spent on servicing debts. It can cause multiple effects, eg: if aid is used to improve infrastructure, it will generate more jobs, making available more money to spend. Development aid has disadvantages such as it may lead to dependency culture where countries start to count on receiving aid indefinitely instead of developing their economies; It can be misused by corrupt governments where aid money does not help the people it was meant to help; aid may be aimed more at securing of favours for the donor country than be of much benefit to the recipient country.
Debt relief means cancelling some of the debts owed by developing countries which helps to free money for public services such as health and education and that money saved can be invested in capital goods to help grow the economy. A country with large debt has to spend parts of its income on servicing the debts (paying the interest). For low income countries, debt servicing can use up large proportion of their income leaving less money for essential services. However cancelling of debts creates a risk of dependency culture where a country may feel that future debts will also be cancelled, and tend to borrow more. It could also create moral hazard where people take risks because they will not suffer consequences if things go wrong. Cancelling of debts of countries run by corrupt governments could mean more money is misused for personal gain or to buy weapons for repression of people. Debt relief may be used by donor country to exert influence on the recipient country.
Development means implementing structural change strategies on sectors of economy such as agriculture, industry and tourism. Agricultural sector is often seen as a low productivity sector (low output compared to input needed) where it is difficult to add value. Although there are potential problems if the country depends on primary products, it can be worth developing its agricultural sector if that is where it has competetive advantage, and it can be a stepping stone to develop other sectors. If improvements in agriculural sector lead to increases in national income, that could be invested in other sectors. Development of the industrial sector is the key where growth in manufacturing can be attained without reducing agricultural output or increase in inflation due to higher wages. Profits from industry can be re-invested on capital goods leading to greater productivity gains. Investments in education and training is needed to develop human capital in order to expand industrial output. Profits are not always re-invested locally, but used for consumption or sent abroad by foreign firms. If industrial production is capital intensive and involves little labour input, economic growth may not provide many additional jobs. Developing tourism can improve the economy by the country earning foreign exchange and attracting investments by multinational hotel groups. Employment would increase but local jobs created could be low skilled as foreign companies may want to bring their own management. Increase in tourists may require capital to put up facilities for them or import goods demanded by them, which can cause balance of payment problems. During global economic downturns, tourism demand is likely to fall.
Protectionism is an inward looking strategy to protect domestic industries by imposing tariffs and quotas on imported goods and providing subsidies to local producers to allow them to sell their goods at competitive prices. This is import substitution by replacing foreign goods with locally produced goods. It is resorted to create jobs, reduce poverty and improve balance of payments, but it can result in inefficiency with resources not exploited in full as it could be. Free market is an outward looking strategy which emphasises free trade, deregulation and promoting foreign investments, where firms are encouraged to invest and seek new export markets, benefits of which are increased efficiency and competitiveness by removing subsidies. Floating exchange rate is a market orientated strategy which allows the market to set exchange rates. Though export firms are not protected against fluctuations of currency, it could improve efficiency and productivity. Free trade schemes offer guaranteed price on condition, to farmers in developing countries for their goods which make long term planning easier, as their goods are not subjected to large fluctuations in price.
International institutions and non-government organisations (NGO) offer help in growth and development. In international monetary fund (IMF) each member country has a quota based on the size of its economy which determines the amount of financial resource it has to make available to the IMF. NGOs like private organisations and charities which work on a small scale also play a role in growth and development such as providing micro-finance, training in business skills and giving technical or medical assistance. Loans given by IMF and world bank are often conditional on certain policies such as privatisation and spending cuts in order to reform so that problems in seeking financial help are not repeated.
