teorias de crecimiento economico

7/30/2019 teorias de crecimiento economico

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GROWTH & DEVELOPMENT

STRATEGIES

Economics A Course Companion.

P344-359. (Blink & Dorton, 2007)

SECTION 5: DEVELOPMENT ECONOMICS


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Differences between models,

strategies, growth & development

Growth Models

As a general rule, growth models describe howgrowth has occurred and so suggest that this may

be replicated.Growth Strategies

Economic and political measures designed to gaingrowth.

Development Strategies

Economic politics and measures designed toachieve human development (i.e. to improve the

well being of the people.


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Economic Growth vs

Economic Development

REMINDER!!

Economic growth is not economic

development, BUT it can generate

extra income for governments, firms,

and people and then it may lead todevelopment, depending upon how

that extra income is used.


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GROWTH MODELS

Harrod-Domar Growth Model

Sir Roy Harrod in the UK and Evsey Domar in

the US independently developed the Harrod-

Domar growth model in 1939.

Although its original purpose was to analyse

the business cycle, the model has been used

by economists to identify factors affecting the

rate of growth of GDP.


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GROWTH MODELS


In its simplest form, the models states that the

rate of growth of GDP is determined by the

national savings ratio of capital to output in

the economy. It can be stated as:

Rate of Growth of GDP = Savings ratio

Capital/output ratio


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GROWTH MODELS


Savings Ratio

The marginal propensity to save

Capital/Output Ratio

The expenditure on capital as ratio of theoutput gained from capital.

Thus it may be that it is necessary to spend

$2.50 on capital goods (infrastructure/capitalequipment) in order to increase the nationaloutput by $1.


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GROWTH MODELS


Example

If the savings ratio in the

country is 5% and thecapital/output ratio is 2.5,

then the country can growat a rate of 2% per annum.


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GROWTH MODELS


Exercises

A country has a marginal propensity to save of

12%. For every $3.5 spent on capital goods, national

output should increase by 50 cents.

Calculate the real growth of GDP for thecountry, based on Harrod-Domar Growth

model


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GROWTH MODELS

http://welkerswikinomics.com/blog/wp-content/uploads/2008/02/growthmodels_1.jpeg


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GROWTH MODELS

Harrod-Domar Growth ModelIf the model is correct, we can say that the rate

of growth of an economy may be increased by:

Key Assumption 1:

Increasing the level of savings in the economy.

If savings are increased in the economy then oureconomic theory tells us that this can lead to anincrease in investment.

The increase in investment represents a greater stock

of capital, which in turn should lead to greater outputin the economy and greater income.

Since a proportion of that increased income should besaved, there should be a circular situation, whichshould lead to increasing growth.


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Problems with

Harrod-Domar Growth Model: Savings

Although the theory would appear to work,there are problems when it is applied todeveloping countries.

In theory all a country has to do is to increasethe savings ratio.

If the savings ratio is increased to 7.5%, then

economic growth will increase to 3%. However, raising the savings ratio in

developing countries is not easy.


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Problems with

Harrod-Domar Growth Model: Savings

Most developing countries have very low marginalpropensities to save, as people spend the vast majorityof their low incomes on consumption.

Furthermore, if they do have spare income, then theyoften spend it on assets, such as bike, TV, rather thanput their money into local banking systems that maynot be secure.

In some cases, savings are sent out the country in the

form of capital flight.

This combination of high consumption, poor financialinfrastructure and capital flight makes its difficult toincrease the level of savings in developing countries.


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GROWTH MODELS


Key Assumption 2:

Reducing Capital/Output Ratio in the Economy

If the capital output ratio can be reduced, i.e.the use of capital can become more efficient,

this would increase the rate of economic

growth.


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Problems with

Harrod-Domar Growth Model:

Growth/Output Ratio Increasing efficiency is this way is never easy and

especially so in developing countries.

A shortage of educated and skilled labor (possiblymade worse due to the brain drain) implies that

new capital will not be effectively used.

In addition, a lack of managerial skills means thatthe organising factor will be weak, which is

unlikely to result in improved efficiency.


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Problems with

Harrod-Domar Growth Model:

Growth/Output Ratio R&D which improves efficiency is also likely to

be underfunded , and access to foreign

technology (another means of gainingefficiency) is expensive and so is often not

available to developing countries.


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GROWTH MODELS

Structural Change/Dual Sector Model

The Lewis dual sector model was firstconceived by W. Arthur Lewis in the 1950s andwas later modified by other economists.

Its main focus is on structural change and itattempts to explain how an underdevelopedeconomy moves from being a traditionalagrarian economy, with a small manufacturingsector, to an economy where there is a moremodern balance with a larger manufacturingand service sector.


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GROWTH MODELS


Assumptions

The model starts from the assumption that thereis a large agricultural sector with a surplus oflabour, and a small, but productive, modernmanufacturing sector.

The surplus of labour in the agricultural sector isnot productive and so moves to themanufacturing sector.

They are attracted by wages, that are higher thanin the agricultural sector, but fixed because thesupply of labour is high.


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GROWTH MODELS


Entrepreneurs in the manufacturing sector willmake a profits because their prices are alwaysabove the fixed wage rate.

The theory assumes that these profits will bereinvested , which will increase the capital stock.

This in turn will increase the productive capacityof the manufacturing sector and demand forlabor will grow.

More workers will be employed from the surpluslabour from agriculture and the profits of theentrepreneurs will once again increase and bereinvested.


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GROWTH MODELS


The process is assumed to continue until all

the surplus labour has been employed in the

larger manufacturing sector.

A structural change has now taken place and

the economy is no longer a traditional

agrarian model, but is now an industrialized

country.


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Problems with the

Lewis Dual Sector Model

The Lewis model, in a rather simplified way,

illustrates the process that took place during

the industrial revolutions in many of the now

developed countries.

Whether it can be used as a model for

economic growth in developing countries is

debatable:


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Problems with the


There are number of weaknesses in the theory:

The model assumes that entrepreneurs will

keep adding capital that is the same as the

original capital.

It is likely that entrepreneurs would begin to

invest in technologically advanced more

labour-saving capital and this would reduce

the increases in employment, severely slowing

the process of growth.


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Problems with the


The model assumes that all profits are reinvested,but capital flight is a common occurrence indeveloping countries and is likely that a largeproportion of profits would leave the economy,

thus reducing investment and again slowing thewhole growth process.

The model assumes that there is a pool of surplusrural labour. The situation in many developing

countries indicates that there is likely to be highunemployment in urban areas and little surplusof labour in rural areas, caused by rural-urbanmigration.


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Problems with the


The model assumes that wage levels in themanufacturing sector will remain constant.

The growing existence of collective bargaining,

imposed wage scales, and wages offered byforeign companies, tends, however, to lead torising wages, even where there isunemployment.

This would reduce profit levels and the abilityto reinvest.


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Growth & Development Strategies

Export Led Growth

vs..

Import SubstitutionIndustrialization


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GROWTH STRATEGIES

Export-led Growth OR

Export Oriented Industrialization Export led growth is an outward-oriented growth

strategy, based on openness and international trade.

Growth is achieved by concentrating on increasing

exports, and export revenue, as a leading factor in theaggregate demand of the country.

Increasing exports should lead to increasing GDP, andthis in turn should lead to higher income and,

eventually, growth in domestic markets as well asexporting ones.

The country concentrates on producing and exportingproducts in which it has a comparative advantage ofproduction.


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GROWTH STRATEGIES

Export Led Growth

In order to achieve export led growth, it is

assumed the country will need to adopt certain

policies. These include:

Liberalized Trade: Open up domestic markets toforeign competition order to gain access to foreignmarkets.

Liberalized Capital Flows: Reduce restrictions on FDI.

A Floating Exchange Rate:

Infrastructure: Investment in the provision ofinfrastructure to enable trade to take place.

Deregulation & Minimal Government Intervention.


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GROWTH STRATEGIES

Export Led Growth

The previous list illustrates the theoretical

package of policies associated with export-

led growth.

In reality, countries that adopt an outward-

oriented strategy do not necessarily adopt all

of these policies.


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GROWTH STRATEGIES

Export Led Growth: Primary Products

The overall trend in primary products hasbeen downward for many years, with theexception of oil and some metals.

This is due to increasing supply and relativelyinsignificant increases in demand.

This combined with increasing protectionism

by developed countries, means that export ledgrowth based solely on the export of primaryproducts is unlikely to be achieved.


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Export Led Growth:

Manufacturing Exports

The focus on export-led growth is usually onincreasing manufacturing exports.

Asian Tigers

The success of countries such as South Korea,Hong Kong, Singapore and Taiwan (knownpreviously as the Asian Tigers) is usually used toillustrate the effectiveness of such a strategy.

These countries exported products in which theyhad a comparative advantage, previously basedupon low cost labor and were extremelysuccessful in doing so.


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Export Led Growth:

Manufacturing Exports

Asian Tigers

Over time the type of product being exported bythe majority of these countries has also tended to

change from products that were produced usinglabour intensive production methods, to moresophisticated products, using capital intensiveproduction methods and more highly skilled

workers. Improvements in education systems were

essential for this.


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Problems with Export Led Growth

Rising Protectionism in Developed Countries

The success of the Asian tigers since around 1965has led to increased protectionism in developed

countries against manufactured products fromdeveloping countries.

Trade Union and workers in developed countriesargued that they could not compete against the

imports from low-wage developing countries thatthis was unfair.

The lobbied their governments to put tariffs andquotas on the lower-priced goods.


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Rising Protectionism in Developed Countries

Price increases as a result of tariffs effectively

removed the comparative advantage of the

exporting countries.

Tariff escalation also reduced the ability of the

developing countries to export processed

goods and assembled products, forcing manyto export primary products and low-skilled

manufactured goods instead.


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The Role of Government

Certain assumptions are made about thenecessary conditions for export led growth.

If we examine the successful countries theseconditions were not necessarily met.

Many economists would argue that the role of

the state in successful export-led growth isvital& minimizing government intervention isnot the way forward.


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In the Asian tiger countries, governments playedan important role by providing infrastructure,subsidizing output through low credit terms via

central banks and promoting savings andimprovements in technology.

In addition, governments adopted policies wherethey protected domestic industries, that were not

yet able to compete with foreign firms (infantindustry argument for protection)

They also promoted the industries that wereready for competition in export markets.


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This topic is one of great debate among

development economists, and many argue

that invention is vital.

Others argue that the state intervention in

these economies actually slow growth rates.


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MNCs become too powerful!

If countries attempt to kick start their exort-

led growth by attracting MNCs, there is always

the fear that the MNCs may become too

powerful within the country and this may lead

to problems.


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Increased Income Inequality

It is argued by some economists that free-

market export-led growth may increase

income inequality in the country.

If this is the case, then the economic growth

may be achieved at the expense of economic

development.


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The Post 1980s Globalizing Economies

Research at the World Bank has identifiedcountries know as post-1980 globalizingeconomies.

These are developing economies that have

integrated more fully in the internationaleconomy through the process of globalizationsuch as trade liberalization and capital marketliberalization.

They became outward oriented economies The list of post 1980 globalizers includes such

countries as Malaysia, Mexico and Thailand.


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IMPORT SUBSTITUTION

INDUSTRIALISATION (ISI)

It may also be referred to an inward-orientedstrategy.

This states, that a developing country should,

wherever possible, produce goods domesticallyrather than import them.

This should mean that industries producing thegoods domestically will be able to grow, as will

the economy, and will then be able to becompetitive on world markets in the future asthey gain from economies of scale.


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IMPORT SUBSTITUTION

INDUSTRIALISATION

It is the opposite of export-led growth.

It is not supported by economists who believe

in the advantages of free trade based on

comparative advantage.


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IMPORT SUBSTITUTION

INDUSTRIALISATION

Necessary conditions for strategy to work: Governments need to adopt a policy of

organizing the selection of goods to producedomestically.

Historically this has been labour-intensive, lowskilled manufactured goods such as clothing orshoes.

Subsidies are made available to encouragedomestic industries.

The government needs to implement aprotectionist system with tariff barriers to keepout foreign imports.


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Advantages of ISI

ISI protects jobs in the domestic market, since

foreign firms are preventing from competing

so domestic firms dominate.

ISI protects local culture and social habits by

practically isolating the economy from foreign

influence.

ISI protects the economy from power, andpossibly the negative influence of MNCs.


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Disadvantage of ISI

ISI may only protect jobs in the short run.

In the long run economic growth may be lower inthe economy and the lack of growth may lead to

a lack of job creation. ISI means that the country does not enjoy the

benefits to be gained from comparativeadvantage and specialization. Therefore products

are produced relatively inefficiently when theycould be imported from efficient foreignproducers.


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Disadvantages of ISI

ISI may lead to inefficiency in domestic

industries because competition is not there to

act as a spur to be efficient or to conduct R&D.

ISI may lead to high rates of inflation due to

domestic aggregate supply constraints.

ISI may cause other countries to take

retaliatory protectionist measures.


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Countries adopting ISI

The main countries which attempted ISI were in LatinAmerica, including Argentina & Chile. Both has sincechanged their policies.

As former colonies gained their independence many

also adopted inward oriented strategies. These included India, Nigeria and Kenya.

These policies showed some success in the 1960s and1970s but the policies started to fail in the early 1980s.

Government over-spending and the debt crisis lead tothe inability of governments to repay the loans theyhad take. In the 1980s many of the countries wereforced to go to the IMF for help.


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THE WASHINGTON CONSENSUS

Reforms needed for Economic Growth

In 1989, the American economist John

Williamson identified 10 common reforms

that were necessary for economic growth.

The World Bank, the IMF and the US Treasury

department agreed with the list and as a

result Latin American economies seeking help

were encouraged (or forced) to adopt suchreforms to illegible for assistance.


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Reforms needed for Economic Growth Fiscal Discipline, that is, balanced budget Redirection of spending from indiscriminate subsidies

to basic health and education.

Lowering of Marginal Tax Rates and broadening of the

tax base. Interest Rate Liberalization

A competitive Exchange Rate

Trade Liberalization

Liberalization of FDI inflows Privatization

Deregulation

Securing of Property Rights



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CRITICISM OF THE WASHINGTON CONSENSUS By the end of the 20th century, the Washington

Consensus was increasingly criticized byeconomists who were not supporters of such

policies. This claims that reforms such as the Washington

Consensus are just a way of to ensure that MNCshave access to cheap labor markets in developing

countries. In this way the MNCs can produce inexpensive

products, which are them sold for higher prices indeveloped countries.



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CRITICISM OF THE WASHINGTON CONSENSUS The MNCs make high profits and the workers in

developing countries gain little.

According to this view, the Washington consensushas not led to high economic growth in LatinAmerica.

Instead there has been economic crises andincreased debt.

Such policies have led to increased incomeinequality and exploitative working conditions,thus working against the goal of economicdevelopment.



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A MOVE TO THE LEFT IN LATIN AMERICA

There has been a movement to the left in a

number of Latin American countries such as

Venezuela, Ecuador, Bolivia and to a lesserextent Brazil.

These countries along with Cuba have been

very vocal in their condemnation of theWashington consensus.


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FOREIGN DIRECT INVESTMENT (FDI)

FDI is a long-term investment by private MNCs incountries overseas.

Greenfield Investment

FDI usually occurs through MNCs building newplants or expanding their existing facilities inforeign countries. This is known as greenfieldinvestment.

Alternatively MNCs merge with or acquire (buy)

existing firms in foreign countries.


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There are approximately 70,000 MNCs

operating internationally with more than

690,000 affiliates around the world.



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Growth of FDI

There was a rapid increase in flows of FDI inthe 1990s, a sign of the significant role thatFDI played in the integration of the worlds

economies and globalization There was a sharp fall in the global FDI flows

in 2001, followed by three years of continuousdrops, but they rebounded again in 2004.

In 2008, the GFC, also led to reduction inglobal FDI.

Wh d MNC i t i


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Why do MNCs invest in

developing countries?

Natural Resources

These countries may be rich in natural

resources, such as oil and minerals.

MNCs have the technology and expertise to

extract such resources.

For example, the top recipients in Africa are

those countries with valuable natural

resources. Eg: Nigeria.

Wh d MNC i t i


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Growing Markets

Some developing countries such as Brazil,China and India represent huge and growing

markets. If MNCs are located directly in the markets

then they have much better access to a largenumber of potential consumers.

With growing incomes, demand for all sorts ofconsumer goods is rising and MNCs may wishto be there to satisfy the demand.

Wh d MNC i t i


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Lower Labour Costs

The cost of labour are much lower in more

developed countries.

Lower costs of production allow firms to sell

their final products at lower prices and make

higher products.

Wh do MNCs in est in


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Favorable Government Regulations

In many developing countries governmentregulations are much less severe than those in

developed countries. This makes it easier for companies to set up

but, more significantly, it can greatly reducecosts of production.

Additionally, many developing countries offertax concessions to attract FDI



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Favorable Government Regulations

Over the last 15 years many countries, both

developed and developing have adopted

policies that have been more and morefavorable to FDI.

In 2004, for example, more than 20 countries

lowered their corporate tax rates in order totry to attract more FDI.

POSSIBLE ADVANTAGES


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POSSIBLE ADVANTAGES

ASSOCIATED WITH FDI

Savings Gap is Addressed

According to the Harrod-Domar model, a

necessary condition for growth is increased

savings and developing countries tend tosuffer from a savings gap.

FDI helps to fill that savings gap and thus may

lead to economic growth.

POSSIBLE ADVANTAGES


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POSSIBLE ADVANTAGES

ASSOCIATED WITH FDI

Employment MNCs will provide employment in the country

and, in many cases, may also provide educationand training.

The may improve the skill levels of the work forceand also the managerial capabilities.

Multiplier Effect

Increased Employment and earnings may have amultiplier effect on the host economy, stimulatinggrowth.

POSSIBLE ADVANTAGES


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POSSIBLE ADVANTAGES

ASSOCIATED WITH FDI

Access to a Greater Knowledge & Skill base

MNCs will allow developing countries greater

access to R&D, technology and marketing

expertise and these can enhance theirindustrialization.

POSSIBLE ADVANTAGES


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POSSIBLE ADVANTAGES

ASSOCIATED WITH FDI

Tax Revenue from Profits for Host Country

The host country may gain tax revenue from

the profits of the MNC, which can then be

used to gain more growth by investing ininfrastructure or to improve pubic services

such as health & education and to promote

economic development.

POSSIBLE ADVANTAGES


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POSSIBLE ADVANTAGES

ASSOCIATED WITH FDI

Increase in Aggregate Demand

If MNCs buy existing companies in developingcountries, then they are injecting foreign

capital and increasing the aggregate demand.Improvements in Infrastructure

In some cases, MNCs may improve the

infrastructure of the country, both physicaland financial, or they may act as spur forgovernments to do so in order to attract them.

POSSIBLE ADVANTAGES


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POSSIBLE ADVANTAGES

ASSOCIATED WITH FDI

Greater Choice for Consumers

The existence of MNCs in a country may providemore choice or consumers and lower prices.

They may be able to provide essential goods thatare not available domestically.

More Efficient Resource Allocation

MNC activities along with liberalized world tradecan lead to more efficient allocation of worldresources.


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CHINA & FDI Although it is difficult to isolate FED in terms of its

effects on Chinas economic growth, it is reasonable toassume it has played a significant role.

Since 1978, China has actively tried to attract FDI as a

way to stimulate economic growth. A significant proportion of Chinas exports are

produced by foreign firms.

Through joint ventures with foreign firms, Chinesefirms have grown rapidly and successfully.

As a result, China itself is now the source of a largeoutflow of FDI.

As China grows, so does its demand for raw materialsand much Chinese FDI abroad is its investment in

natural resources.

POSSIBLE DISADVANTAGES


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WITH FDI

MNC just take advantage of low skilled workers

Although MNCs do provide employment, it is

argued that they often bring in their own

management teams and are simply usinginexpensive low-skilled workers for basic

production and providing no education and

training. This also limits the ability of host countries to

acquire new technologies.



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WITH FDI

MNCs have too much power!

In some cases it is argued that MNCs have toomuch power, because of their size, and so gain

large tax advantages or even subsidies, reducingpotential government income in developingcountries.

Along the same lines, it is argued that MNCs have

too much power internationally. Their incomes and size allow them to exert too

much influence on policy decisions taken ininstitutions such as the WTO.



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WITH FDI

MNCs practise Transfer Pricing

This is when MNCs sell goods and services fromone division of the company to another division

of the company in a separate country to takeadvantage of different tax rates on corporateprofits.

In this way, developing countries with low tax

rates to encourage MNCs to invest reap little taxreward, and developed countries also lose out onpotential tax revenue.



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WITH FDI

Given that approximately one third of allinternational trade is made up of sales from onebranch of firm to another firm, this represents apotentially large loss of revenues forgovernments.

Governments have rules to prevent firms fromabusing their ability to use transfer pricing to

minimize their tax payments, but these aredifficult to monitor and enforce, particularly fordeveloping country governments.



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WITH FDI

Taking Advantage of lax Environmental laws It is argued that MNCs situate themselves in

countries where legislation on pollution is noteffective and thus they are able to reduce their

private costs while creating external costs. While this is good for the MNC, it is damaging for

the environment of the host country.

In the same way, MNCs may set up in countries

where labor laws are weak or almost non-existent, allowing exploitation of local workersthrough low wage levels and poor workingconditions.



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WITH FDI

Resource Exploitation

Economists have argued that MNCs may entera country in order to extract particular

resources such as metals or minerals, thenstrip those resources and leave.

There may be significant unrest as hostcountry nationals see that the profits fromtheir resources are being sent out of thecountry to foreigners.



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WITH FDI

Capital Intensive Production instead of LabourIntensive Production

Economist have argued that MNCs may employ capital-intensive production methods make use of abundant

natural resources. This will not greatly improve employment in the

country.

It is argued that MNCs should use appropriatetechnology, where production methods are aligned tothe resources available.

Since developing countries usually have a large supplyof cheap labour, the argument is that labour-intensiveproduction methods would be more appropriate.



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WITH FDI

Acquisitions often for paid in stock not cash

In most cases where MNCs buy domestic

firms, the owners of the firms being bought

are paid in shares (stocks) from the MNC.

This means that it is likely that the money will

never be used in developing countrys

economy.



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WITH FDI

Repatriation of Profits

MNCs may repatriate their profits.

This means they transfer their profits out of

the country back to the MNCs country of

origin.


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Sustainable Development & FDI

While most would agree that FDI is a positivefactor for current economic growth the main

concerns relate to the possible negative effects of

MNCs on sustainable development. The extent to which FDI is able to contribute to

this development depends very much on the type

of investment and the ability of the host country

government to appropriately regulate the

behavior of MNCs and use the benefits of the

investment to achieve development objectives.


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FDI Problems & Accountability

There has always been concerns relating to MNCactivity such as the possible exploitation ofworkers, the use of child labour, the inability ofworkers to form unions in some companies, and

business practices that cause immediate or futureenvironmental damage.

With the increasingly fast flow of informationthrough the media & the Internet and strong

public interest groups acting globally, it isbecoming difficult for MNCs to conceal activitiesthat may contribute to these problems.


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FDI Problems & Accountability

No MNC wants to be perceived as being a causeof problems and are keen to promote their image

in a positive ways.

As a results, firms are more likely to develop apublicize a set of priorities to show that they are

acting responsibly and ethically and `doing their

bit` to promote sustainable development.

This is known as corporate social responsibility

(CSR)

FDI & Corporate Social Responsibility


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FDI & Corporate Social Responsibility

(CSR)

Companies publish and promote their CSRpolicies through their annual reports, websitesand advertising.

The policies outline the firms commitment to

support human rights, employee rights,environmental protection, sustainabledevelopment, and community involvement.

The extent to which such policies are consistentlyfollowed and the extent of their actual effect onworkers, the workers communities, and theenvironment is uncertain, but it is usually

regarding as a step in the right direction

DEVELOPMENT STRATEGIES


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Fairtrade Organizations

In many developing countries many small-scale farmers and workers are unable to make

a living income.

Low world prices for primary products, highprofits for middleman, tariff escalation, and

poor working conditions make life extremely

difficult.



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Fair Trade schemes are an attempt to ensurethat producers of food, and some non-food,

products in developing countries receive a fair

deal when they are selling their products. If consumers are aware of the harsh and unfair

conditions facing the farmers, then perhaps

they my be willing to buy from producers whopay a fair price to farmers.



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Today, the Fairtrade Labelling OrganizationInternational (FLO) coordinates Fairtrade labelling in 20countries.

The schemes aim to help small farmers and landless

workers. Fair trade schemes have operated for more than 50

years, but the real growth of the movement has comewith the advent of Fairtrade labelling.

This began in the Netherlands in 1988, when the MaxHavelaar Foundation began to sell coffee from Mexicowith the first Fairtrade consumer guarantee lable.



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Fairtrade Consumer Guarantee

This is a system where products can becertified if they meet the standards of the FLO,which gives them the right to display theInternational Fairtrade Certification Mark.

The recognisable Mark means that consumerswill be able to identify Fairtrade products,know they are approved, and buy the knowing

that the producer of the good was paid a fairprice.



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Role of the FLO

The FLO regularly inspects and certifiesaround 500 producer organizations in more

than 50 countries in Africa, Asia and Latin

America, which results in fair tradingconditions for approximately 1 million

farmers, workers and their families.



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Criteria for the FLO Certification Mark

A trading company wishing to qualify for theInternational Fair Trade Certification Mark must

meet certain FLO criteria:

The product must reach the trader as directly aspossible with few, if any, intermediaries.

The product must be purchased at least at theFairtrade minimum price.

This is a guaranteed price that covers productioncosts and provides a living income.

It covers the costs of `sustainable production`



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V OPM NT STRAT GI S


The producer receives a premium if theproduct is certified as organic.

The trader must be committed to a long-term

contract, which in turn gives security to theproducer.

Upon request, the producer has access to

credit from the trader, of up to 60% of thepurchase price.



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Where small farmers are involved the productmust come from producers that are managed

democratically.

If the product comes from plantations thenthe workers must benefit from the

internationally recognized employment

standards, including trade unions, if they wish,and there must be no use of child labour.



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The producer must use sustainable farmingmethods to produce the good.

The also pays a fairtrade premium to theproducer.

The producer uses these funds to aid localcommunity development. The producers decidehow the money will be spent, but is usually usedto promote health care, education or other social

schemes. The producers are accountable to the FLO for the

appropriate use of the funds.



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Fairtrade Product Range

Fairtrade certified food products includebananas, cocoa, coffee, dried fruit, fresh fruit

and vegetables, honey, juices, nuts/oil seeds,

sugar, tea and wine. Non food products include cotton, cuts

flowers, ornamental plants and sports balls.

H f i t d d t ?


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How expense are fairtrade products?

Although the price might sometimes slightlyhigher for the Fairtrade certified products

than non-Fairtrade products, it is clear they

many consumers are willing to pay tocontribute to better conditions for producers.

Global sales of Fairtrade products were valued

as just over 1.1 billion for 2005.

Availability & Future of


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y

Fairtrade Products

Fairtrade products are making their way intomore and more shops and restaurants as firms

become aware of the increasing popularity.

Fairtrade with its emphasis on granting a livingincome, giving security, demanding property

working conditions, encouraging sustainable

production and funding local communitydevelopment, is clearly a strategy that leads to

development as well as growth.



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The Need for Micro-finance

In developing countries low-income people find italmost impossible to gain access to traditionalbanking and financial systems, since they lack toassets to use as collateral, are often unemployed

and lack savings. If they can find a way to borrow money, it is often

at exorbitant interest rates.

However, there is type of financial service that is

geared specifically for them. This is known as Micro-finance and it provides

financial services such as small loans, savingsaccounts insurance and every cheque books.



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Micro-Finance

Micro-credit Definition

The provision of small

loans to individuals who noaccess to traditional

sources is known as micro-credit.



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History/Origins of Micro-Finance A key element of the original micro-credit

schemes is that they did not originate in thedeveloped world, but rather had their beginningsin developing countries.

The first scheme began in the mid-1970s withprojects such as Opportunity International(1972), ACCION International (1973) MuhammadYunus/Grameen Bank (1974-76), FINCAInternational (1985) and the SEEP Network(1985)



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How is micro-credit used?

Usually, the micro-credit loans are given toenable poor people to start up very small-scalebusinesses, known as micro-enterprises.

These may include such things as roadside kiosks,bicycle repair services, market stalls, rice winemaking, knitting and woodworking.

The loans give protection against unexpected

occurrences and seasonal problems and may helpfamilies to gain a regular income, start to buildwealth and so escape poverty.



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Who has been the recipients of micro-credit?

Women have tended to be the main recipients ofmicro-credit, for many reasons.

It is thought that women are a better credit riskthe are more likely to pay back loans.

Women are usually responsible for caring forchildren and so any reductions in a womanspoverty will translate into improvements forchildren.

In many documented cases, this has allowed formore poor children to go the school.

With woman take loans and can begin to earn anincome their social and economic status is raised.

EXAM QUESTIONS


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Short Response Questions (10 marks each)

1. Using the Harrod-Domar growth model,explain why there may be slow growth in

developing countries.

2. Explain how Fairtrade is likely to contributeto economic development.

3. Explain how micro-credit can contribute to

economic development.

EXAMINATION QUESTIONS


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Essay Questions

1a. Explain the main characteristics of export-ledgrowth? (10 marks)

1b. Evaluate the view that economic growth anddevelopment can be best achieved through theadoption of outward-oriented strategy.(15 marks)

2a. Discuss three reasons for multinational

company investment in developing countries.

(10 marks)2b. Evaluate the role of FDI in promoting economic

growth and development in developing countries( )

teorias de crecimiento economico

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