Interventionist Strategies

Economics: IB Diploma, topic 3.7.1

Interventionist Strategies to Promote Growth and Development

Interventionist strategies can also be used to support an emerging economy's development.

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.

The 'infant industry' argument can be used to justify using protectionism in emerging economies.
Protectionist measures, such as tariffs or quotas can protect the developing industries in a country and allow them to get on their feet.
Once the industries are fully-fledged, the protectionist measures can be removed.
This policy is potentially dangerous as the industries can use the protectionist measures as a crutch.

Governments have the option of intervening in foreign exchange markets if they wish to alter the value of their currency.
For example, if the government wishes to devalue the currency, exports can become more competitive. This helps improve AD and could lead to export-led economic growth.

The government could build better highways, trains, airports and ports.
This will improve productivity because goods and labour can be transported around the country more efficiently.
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.

A joint venture is when two or more companies work together in a project.
A joint venture between a MEDC business and a LEDC business could lead to economic growth and development.
This is because the LEDC can learn from the MEDC and benefit from their skills and resources.
In return, the MEDC company has a foothold in an emerging economy.
It is in the interest of all parties for the LEDC's economy to develop.

A buffer stock scheme can be used to stabilise the price of primary products.
This is particularly useful for agricultural goods.
By buying up more stocks, the price of goods can be maintained despite the harvests.
This helps LEDCs overcome the issue of volatile primary product prices.

Fairtrade and debt relief are two more interventionist methods of helping developing nations to grow their economies at a faster rate.

Fairtrade schemes effectively implement a minimum price in the markets where they are operated.
Groups of farmers receive a minimum price that is deemed to be 'fair'. In exchange, the farmers must meet certain standards of health and safety and production.
The farmers receive a higher price but also a certain price, enabling them to plan more effectively for the future. This certainty can encourage investment. Particularly when the prices for primary products can be volatile.

If the markets view the country’s national debt as unsustainable, then demand for government debt will fall. So the cost of borrowing will rise.
High repayments on the national debt (principal and interest) have a significant 'opportunity cost'. This is money which could be spent on health, education, etc.
Instead of spending money on infrastructure and education, more money goes on debt payments.
There is also a question of intergenerational fairness: will future generations have to face increased taxes to pay off the debt being built up now?
Some people question if there is a moral hazard if countries know they are likely to receive debt relief.