5.5 Evaluation of growth and development strategies

Natural Endowments are plentiful

5.5 Evaluation  of Growth and Development Strategies.

Pros and Cons of FDI

Potential to improve education, health and infrastructure

•Stimulate AD and investment

•Importation of capital and technology

Little evidence that aid result in development

•Increasing Indebtedness

•Inefficient use of aid money

•Dependency encouraged

•Corruption diverts aid to the powerful

In DRC, corruption is a major problem, and it is known that the government diverts the aid from the people of DRC to themselves. Therefore unless there is some way to make sure that the money goes to people in the most need, the allocation of the resources would be highly inefficient. Nonetheless, the country is highly reliant on FDI. For a limited period of time, FDI may be important for DRC’s productivity.

Classical vs Keynesian

Classical

•Minimize government intervention

•Let markets work

•Examples: export-led growth , FDI, privatization

Keynesian

•Active Government manipulation of the market

•Examples: Import Substitution, protectionism nationalization exchange rate manipulation

IMF

The purpose of the IMF is to monitor the balance of payments in the countires to detect signs of fundamental sisequilibrium, and to intervene on behalf of countries. However there have been many questions on the morality of their work. IMF is non-democratic, and tends to work towards the favor of richer countries. Additionally IMF lending has not shown to be very effetive at all.

Idealistically: Trade Justice  -> Debt Relief -> Free markets  -> Political stability -> Effective target aid

DRC’s problems:

• Around 2.5 million people in DRC have died since the war started, majority from preventable disease like malaria and aids.
• At least 37 per cent of the population, approximately 18.5 million people, have no access to any kind of formal health care.
• There are 2,056 doctors for a population of 50 million; of these, 930 are in the capital.
• Infant mortality rates in the east of the country have in places reached 41 per cent per year.
• Officially, between 800,000 and 900,000 children have been orphaned by AIDS.
• 40 per cent of health infrastructure has been destroyed in Masisi, North Kivu.
• Only 45 per cent of people have access to safe drinking water. In some rural areas, this is as low as three per cent.
• Of 145,000 km of roads, no more than 2,500km are asphalt.

All of these problems are so large, and so refusing FDI would be detrimental for the country.

The problem is that there is little international awareness of the situation in Congo. Not many people are aware of the war that happened internally and the corrupt rulers. Raising awareness of the country’s situation may increase the aid.

Get a better leader, that will show the country that it can be reliant and capable on their own production and not just on external aid, and reducing the violence that still remains. There are so many people affected by the war, and therefore the country is less productive. Additionally, improving people’s health would be one of the most beneficial uses of aid.

DFID’s main objectives in the Democratic Republic of Congo are:

-building a capable and accountable state

-delivering a peace dividend for poor people

-reducing the remaining violent conflict and its impact.

I believe that if these challenges are overcome, then since it is such a well endowed country, the development of the country would be easier. However it will most likely take a very long time. In mid-December 2009, the IMF agreed to a $550-million loan arrangement with DRC. I hope that the IMF would make sure that the money is allocated to the causes that need most attentions first: the people’s health.

Hilary Clinton in Congo.

Add a comment February 14, 2010

5.4 Growth and Development Strategies

Harod-Domar Growth Model:

Rate of GDP growth = Saving Ratio/Capital and output ratio

Saving ratio = marginal propensity to save

Capital and output ratio = capital expenditure: outgain gained

Increased savings -> Increased investment -> larger capital stock -> increased output -> increased income ->increased savings

Not applicable to DRC since in this model, we assume that it is a closed economy, no government sector, no depreciation.

Dual Sector Model:

The progressive move from an economy based primarily on agriculture to a capitalist-based industrialised economy. The transformation from traditional to modern sector will be closely linked to rural-urban migration

The agriculture sector is one of DRC’s most hopeful sectors. If the infrastructure of the sector is improved, this model may not be relevant to DRC.

Aid:

-bilateral- one country giving support to another country directly.

Grant Aid, Soft Loans – gift of money for which there is no recirpcal agreegment. Soft loans are when money is lent on favorable terms.

Official Aid- sum of bilateral and multilateral aid.

Tied Aid- Agreement between donor and recipient ntions, where loans to the recipient must be used on goods and services from the donor country.

Export Led Growth/ Outward-Oriented strategies- to concentrate on producing goods specifically aimed at export markets. This involves focusing of industrialization and opening the country towards free trade and free capital flows from abroad.

Import-substitution /Inward oriented strategies ie protectionism  -industrialise by substituting imported goods with domestically produced goods. The strategy is to implement barriers to imports like tarrifs, which encouraging domestic producers with subsidies. The rationalisation: increase demand for domestic goods wll move domestic industries along a learning curve so that they can compete on equal grounds with foreign firms.

Because DRC is reliant on aid from other countries, implementing a policy that would hurt international relations would be detrimental. Also, DRC’s market is not strong enough to support all of the people.

Commercial loans– Commercial loans provide liquidity to the business sector by transfering savings. It is the most valuable element in economies based on a market system of production.  Foreign banks cater to international firms and lage domestic enterprises in developing countries.

This limits the amount of available credit on the officil market. Poor people who need a small loan will not be granted a loan from commericial bank.  Individuals in the DRC may not benefit. Also since there is little transparency in the government, it may be difficult to make sure that the loans will not be granted to family and friends of the ruling party.

Microcredit schemes- it finances small scale projects and thus supplies liquidity to the millions of people ith scant assets in developing countries.

It seems like an ideal project. Although it will not save the whole country and it is not a quick fix, if people are able to start their own business or start to earn more, it is one of the most efficient ways to use money. Many people have the ability and knowledge to own businesses.  DRC’s literacy rate is ~68%. Although it is not as high as it should be, it is high enough to indicate that some people are educated enough to be able to run their own small businesses efficiently.

Fair trade organizations- The idea that producers should get a fair amount for their profit, and not go to the middle-men that handle the profit.  Oxfam established price structures and profit margins, and adds on an element of ethical and ecological ambition in both production and purchasing.

Foreign Direct Investment- it undertaken by multinational companies. This leads to the problem of whether the company is pro or anti developmental.

All of this leads to: Is it sustainable?

Sustainability will depend on the mix between our use of resources and human capital, and on the speed with which we are able to increase our efficiency in use of the resources.

How???

There needs to be a strengthening of institutions such as governance, rule of law, and banks to enable a virtuous cycle of income -> saving -> investment. There must be a strong focus on social investment such as infrastructure and education and it must be broadly accesible to all as pssible. All institutional reforsm must be transparent and those in charge must be openly accountable.

What is the best method for DRC? The country has to be able to be dependent on its own, and not rely on imports, as the country needs to be able to keep as much of the money within the economy. Also, DRC has to make sure the the country has A TRANSPARENT GOVERNMENT. The country has a lot of potential, yet the aid that is given to the country may not be properly allocated, the loans given out in the country are probably not for the people that need it most.

Add a comment February 14, 2010

5.3 Barriers to growth

Biggest Barrier: Corruption? (Mobutu and his wife)

The cycle to development

The most obvious indicator of lack of development is POVERTY.

1.2 billion people live below the absolute poverty line, and they go through the POVERTY CYCLE

Poverty Cycle

Low income –> low savings –> low investment –> low incomes

INSTITUTIONAL AND POLITICAL BARRIERS

Ineffective taxation structure: Direct Taxation (profit and income tax)

• Informal markets: much of the economic activity is probably in an informal market, which are unaccounted for by the government. As most of this income is parallel to the official markets, the tax base will be difficult to calculate.
• Low profit tax: governments set low profit tax to incent domestic firms to facilitate inflow of FDI. Foreign fimrs are offered tax holidays to attract FDI.
• Ways to evade tax: Multinationals evatde taxes by overpricing intermediate goods which are purchased form subsidaries in ow tax countries outside the LDC.

Furthermore, implementing a proper tax system increases cost.

Why is this a problem?

Taxes are needed to provide merit and public goods such as education and roads, as well as welfare systems such as social security and pension funds. The lack of tax causes governments of developing countries to overspend and run up deficits. Also, it means that existing taxes are often regressive, since flat rate taxation will mean less as a proportion of income for the rich than for the poor.

LACK OF PROPERTY RIGHTS

Property rights means that ownership or legal rights of use have been established by law. It enables people to use property right is a means of securing an income and also as collateral to take loans.

The problem with the lack of property rights is that business activity will suffer from the lack of investment, since povety cannot be used for collateral. It also lowers entrepreneurial incentives and reduces the propensity of farmers living on costmanry land. Just working on land that is not yours is a disincentive for improving land and enhancing capital.  The poor therefore do not a have acess to secure resources.

POLITICAL INSTABILITY

Weak governments are amongst the most oppresive since force is needed to hodl down the general population and favoritism is used to court favour of the powerful. Political instability often arises due to the absence of one or all of the following:

Rule of Law: A good system is one where the rules apply equally and to all. It provides tability and reliability since citizens will be able to reply on fair treatment in the system. This is particularly important in matters concerning the protection of property rights and competition: both are needed for economic growth.

Legal institutions: Police (where they act on authority limited by law), judicial (case are tried and rulings are based upon law) and penal system are needed.

Democratic institutions: People who have the right to elect a leader commonly become better citizens, as they feel it is easier to abide. Ideally, bad rulers do not survive elections in a democracy.

The results of political instability.

Political instability -> low level of investment and low FDI from abroad -> low output and growth and low level of tax receipts -> poverty and social conflict -> Political instability        ie. a cycle.

DRC has suffered a domestic war that has devastated the country. It is in the midst of recovery, but it is harder to recover, due to the corruption.

CORRUPTION

When people acting in an official capacity of trust and responsibility misuse their position for private gain.

Corruption is both the cause and the effect of poor governance and corruption levels are higher in developing countries than in developed.

Effect of corrption

• Corruption discourages investment and growth. Foreign companies tend to avoid countries where the costs of doing business are high and risky due to corruption.
• When firms are committed to doing business by bribery there is going to be a larger degree of bookkeeping and tax evasion.
• When countries are run by dictatorship, government contracts and loans go to family members and trusted friends of the dictators only. i.e. highly inneffcient use of government funds.
• Skews public funds away from areas rendering general social benefits. Highly corrupt countries tend to under spend in human capital goods such as education and health care.
• Environmental issues arrise.
• Distrust and sceptism towards government agencies.
• Country can suffer from an increase in the burden of debt.

DRC is infamous for the incredibly corrupt government officials.

INFORMAL MARKETS

The informal sector, or the unofficial economy is composed of two parts in developing economies:

a.)   substinence agriculture and manufacturing of tools ans clothing

b.)  parallel markets for goods.

In many developing countries, informal markets are the most important element for creating jobs and output.

Results of informal markets:

• los of income/output in the economy. The formal economy will have dificulty in growing due to competition from the informal market.
• Provides poor tax base
• People working in the informal sector have little social security or social welfare.

LACK OF INFRASTRUCTURE

• Difficulty in getting the goods to central markets
• Pay a higher price for goods in the village which has incurred transport costs
• Goods which villagers cannot bring to market themselves will be sold at lower prices to wholesalers who will be advantaged by the villagers’ lack of knowledgte of market prices
• The effort of bringing the good to the village to sell could be wasted if to good is not needed or wanted at the moment. Calling the market could have saved the trouble.

Problems

• Lack of airports, seaports, transportation network.
• Urbanization creates inner-city problems in many countries as people flock to the city. Burdens water supply sewage system and roads.
• Lack of access to basic education.

DRC has a good potential, as it has a lot of natural endowments. If the infrastructure is improved, then the country could be more efficient in production.

Add a comment February 11, 2010