Development Promotion Policies

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Policies to Promote Development

There is no one 'solution' to achieving economic development. A range of policies can be adopted to pursue this aim.

Harrod-Domar model

The Harrod-Domar model stresses the importance of the need for saving and investment to fund economic growth.
The higher the level of saving there is, the more money there is available for firms to borrow for investment.
The model also states that, if the productivity of capital improves, then so will the LRAS and economic growth.
Policies to improve either of the two above would help to improve the financial system to allow for savings to be channelled into funds for investment.

Education

Policies like improving primary education (both quality and quantity) would allow for higher literacy rates. This would make it more likely that the young generation would go onto higher skilled jobs.
The younger generation is likely to earn higher incomes, which can be channelled into both consumption and savings. These are both determinants of short-run and long-run economic growth.
For developing countries, the focus is more on primary education because many primary students lack basic literacy skills.

Healthcare

Policies to improve the quality and quantity of health care is important because this will lead to higher productivity.
Spending more on doctors’ training or building more hospitals would help because many people are many miles away from their nearest doctor.

Attracting foreign direct investment (FDI)

Lower taxes, especially lower corporation tax, may encourage FDI to locate in the country, or indeed domestic firms to set up, which can lead to the LRAS shifting out.
FDI often creates positive multiplier effects through employment.
Multinational corporations (MNCs) can simply employ workers without providing any training, meaning that attracting FDI is less useful in the long-term.

Special economic zones (SEZs)

A special economic zone (SEZ) is an area in which business and trade laws are different from the rest of the country.
SEZs are located within a country's national borders.
Their aims include increased trade, increased investment and, job creation.
To encourage businesses to set up in the zone, financial policies are introduced.
These policies typically regard investing, taxation, customs and labour regulations.
Additionally, companies may be offered tax 'holidays' or breaks.

Infrastructure

The government could build better highways, trains, airports and ports.
This will improve productivity because goods and labour can be transported around the country much better.
Infrastructure can help connect rural areas to urban areas and so improve the geographical mobility of labour.
The problem with this and many other policies to promote development is that they are expensive and many less economically developed governments do not have the tax revenue to finance them.

Export-driven development

Joe Studwell argues that the Asian nations that tried to build exporting businesses facing domestic competition performed better than protected national champions.
In Korea, the Kia and Hyundai car companies competed against other domestic champions. Loans, credit, and informal government support were given to nations that exported. Korea produced national champions in cars, technology (LG and Samsung).
In Malaysia, there was 1 domestic car company, Proton, that sold mainly in Malaysia. It failed to export and Malaysia failed to develop at the same speed.

Aid vs Trade

'Aid or trade' is a long-standing debate in economics, regarding the best way for a less-developed economy (LDE) to develop. But a combination of the two is not an uncommon model for such countries.

Types of aid

Bilateral aid - aid between one government and another.
Multilateral aid - aid provided by many governments instead of just one government.
Tied / conditional aid - when one country donates money or resources to another (bilateral aid) but with conditions attached.
Charitable aid - funded by donations from the public through organisations such as Water Aid.
Non-financial aid - donation of items, such as malaria nets.

Trade

Export-led growth and trade with other countries enable an LDE to be self-sufficient and reinvest the proceeds of such an approach.
But many LDEs are restricted by issues such as worsening terms of trade - meaning that their exports are continually falling in value relative to more high-end imports.
A lack of skilled labour and capital may also mean that LDEs don't have the resources to focus on a profitable export industry, making this strategy unrealistic.