ECON 356 Final on developing countries



ECON 356 Final on developing countries

Question 1

Many developing countries lack sufficient domestic savings to be able to finance the recommended rate of capital investment to promote growth, otherwise known as savings gap. Moreover, many developing countries also experience a foreign exchange gap, that is, shortage of foreign exchange that can be utilized to finance imports of consumer goods and services and novel capital inputs. Nonetheless, the development and growth constraints such as savings gap and foreign exchange gap in developing countries can be eradicated through foreign aid. This is because foreign aid allows developing nations to invest more than what they are able to save. Moreover, developing countries can be import more than what they are capable of financing by their own exports through foreign aid. Foreign aid is also critical to filling up the labor gap and technological gap of developing nations. For example, the 1960s green revolution was driven by a technology revolution which brought about significant increase in output of food grains in many African and Asian nations. In addition to supplementing foreign exchange, inadequate domestic savings and transferring labor and technology to developing nations, foreign aid also helps in building a nation’s infrastructure of airports, health centers, roads, schools, airports and clean water supply among others. Finally, through foreign aid, multilateral agencies provide policy dialogue to aid developing countries in sorting out their structural and macroeconomic imbalances.

Question 2 ECON 356 Final on developing countries

“Neo” implies that it is new. This means that unlike other development philosophies, the neoliberal approach supports new concepts such as market deregulation, privatization, open national economy and public spending reduction. Thus, rather than having a smaller government, neoliberalism means having a larger government that incorporates all new concepts. Neoliberalism is also a good way of bringing about development since involves increased governmental influence. This means that, for instance, is a president or politician wants to get something done, he or she can rely on neoliberalism since it entails increased governmental influence that contrasts the ideologies that promote normalcy and consistency. However, the neoliberal approach to development has certain disadvantages. For instance, classical liberals favor smaller governments which goes against the large government ideology of neoliberalism. Rather than foster faster development through increased government involvement, neoliberalism can lead to governments becoming too large and strong.

When it comes to social democracy as an approach to development, it has various advantages such as greater welfare, greater efficiency, absence of business fluctuations and absence of monopolistic practices. Notwithstanding, social democracy has certain disadvantages such as red-tapism, elimination of individualism, non-existence of political and economic freedom and non-existence of competition.

Question 3 ECON 356 Final on developing countries

Microfinance is gaining general acceptance especially in the developing countries. A savings account, a meager loan and an affordable way to send pay home can make all the difference to a low-income individual or family or to a small-scale enterprise. Access to microfinance enables individuals to earn more and better shield themselves against unexpected financial setbacks and losses. Moreover, with the ability to collateralize their assets, small-income earners can move beyond day to day survival and plan their future. This means that they can invest in better housing, education, nutrition and health. They can also formulate productive businesses and recover fast in the event of natural disasters. Basically, small-income earners can take real strides toward breaking the cycle of vulnerability and poverty. However, there are limits to microfinance since much more is required to eliminate hunger and poverty. Good governance, good regulatory systems that formulate the proper incentives for businesses, sound macroeconomic policy and strategies to develop the industrial sector and rural areas are essential elements required to eradicate poverty on top of microfinance.

Question 4 ECON 356 Final on developing countries

ISI is an aspect of developing economies that is normally implemented by governments that lean toward populism. In Import-substitution industrialization (ISI), the state is the driver of industrialization though either nationalization of industry or subsidies in industries that are not fully nationalized. ISI relies on protectionist trade practices such as quotas, high import tariffs and embargoes on foreign imports. ISI was common in Latin economies in the 1950s and 1960s, for instance, Brazil. However, EPI relies on good international relations with benefits such as free trade barriers. ISI experienced enormous problems for a number of reasons, for instance, no country with the possible exception of the United States and China has a domestic market that is big enough to pursue an ISI policy for a long period of time. However, when increased globalized international economy hindered the growth of countries pursuing ISI, EPI-pursuing countries benefited from increased international market to export their commodities.

Question 5 ECON 356 Final on developing countries

In order to secure future economic development, the fiscal policies that I would propose for a country are increased government expenditure and increased taxation. Through increased government expenditure, the country can experience development through development of infrastructure and subsidies for companies to thrive and benefit from improved labor. Moreover, through increased taxation, the government will eliminate excess flow of money in the nation brought about by increased government expenditure so as to ensure that there is sustainable development. When it comes to monetary policies, I would propose setting a favorable interest rate and cash reserves for banks by the central bank. This is to limit the level of borrowing in the country so as to prevent excess flow of money in the economy  and setting favorable cash reserves for banks that are sufficient for business and development, but do not allow banks to have too much cash reserves at their disposal to foster borrowing.

Question 6

The debt crisis affecting numerous developing nations can be attributed to imprudent lending by banks, imprudent borrowing and management by debtor nations and rising interest rates. The 1982 increase in real interest rates by six percent altered the nature of the debt problem. In the past, when loans were made at fixed rates, the real interest rates increased with deflation. However, when the price levels stabilized, the interest burden would be registered as high only to the extent of the proportional decrease in price levels. During the 1980s, most commercial banks in the United States curtailed their lending activity in debtor nations due to fear of financial loss. By 1982, nine big banks had more than two hundred and fifty percent of their capital in loans to developing nations with the banks decreasing their activities by mid-1986 to the point whereby they had enough reserves and equity to withstand potential losses. This only worsened the debt crisis in developing nations. Currently, the bank strategy that is utilized to deal with the debt crisis is extending the effective maturity of loans. However, as long as real interest rates remain high, developing nations will remain in debt. Thus, only two options remain. The lenders and debtor countries can continue with the piecemeal approach or a debt relief occurs. With sensible debt relief, lending institutions and developing nations can begin to create novel growth-oriented development policies without increasing the burden on taxpayers in lender nations.