5.4 Growth and Development Strategies

February 14, 2010 annay17

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.

Entry Filed under: Section 5

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