5.4 Growth and Development StrategiesDevelopment Economics

Key Points • Growth models suggest how growth has occurred

in the past.• Growth strategies are economy policies and

measures aimed at increasing GDP.• Development strategies are policies and measures

designated at improving society.

Growth Models• Harrod-Domar growth model:

– Identifies factors that affect the rate of economic growth.– Shows how factors can influence rate of growth.– Suggests that GDP’s rate of growth is determined by

national savings ratio and the ratio of capital to output in the economy.

Structural Change/Dual Sector Model• Attempt to explain how a agricultural, undeveloped

society with small manufacturing can move to become a large economy.– Achieved by reinvesting profit.

TYPES OF AID

Bilateral and Multilateral Aid• Bilateral Aid is between two nations.• Multilateral Aid is given to international aid agencies.

• Ex. World Bank

Grant Aid and Soft Loans• Receiving money, capital or technology with no

obligations.

Official Aid and Tied Aid• Official Aid

• Sum of all the multi and bi lateral aid.

• Tied Aid• Reciprocal arrangements between receiving and donor

country.

EXPORT-LED GROWTH

Export Led Growth• Export revenue substantially boosts GDP.• As market size enlarges, average costs will tend to

diminish.• Promotes competition by competing in world

markets.

IMPORT SUBSTITUTION

Import Substitution/Protectionism• Success

– Promotes Domestic Industry

• Failures• Lack of competition to improve quality.• Lack of price competition in limited markets.

MICRO CREDIT

Micro Credit• Extension of small loans to those in poverty.• Aimed at people who lack qualifications to receive

traditional credit.

FOREGIN DIRECT INVESTMENT

Foreign Direct Investment• Motivated by revenue and profits, not development.• Gains of foreign investment:

– Access to lower production costs.– Avoiding tariffs.– More rapid access to key markets.– Lower capital, labor and profit taxes.

IB EXAM