Strategies to Achieve Growth

Harrod-Domar growth model

- The model suggests that the economy’s rate of growth depends on: the level of saving and the productivity of investment.

- Economic growth depends on the amount of labour and capital. More physical capital generates economic growth.

- Higher income allows higher levels of saving. Increasing the savings ratio, or the amount of investment or the rate of technological progress are significant for the growth process.

- The key to economic growth is toe expand the level of investment both in terms of fied capital and human capital. Policies that encourage saving and/or generate technological advances are needed.

- Problems: 1. it is difficult to stimulate the level of domestic savings on a practical level, particularly in the case of developing countries where incomes are low. 2. Borrowing from foreign countries to fill the gap caused by insufficient savings causes debt repayment problems later.

Structural change / dual sector model

- Three stages of production: primary production (concerned with the extraction of raw materials), secondary production (concerned with industrial production), and tertiary production (concerned with the provision of services).

- Problems of the Lewis model: 1. An increasing rural-urban migration causes a more unequal distribution of income. 2. A constant demand for labour from the industrial sector is questionable. 3. Higher incomes do not necessarily mean higher savings. 4. The model ignores the cost of training and educating the surplus labour from the rural sector.

Types of aid

- Three main aids are humanitarian, bilateral, and multilateral. It may be official (by government agencies) or unofficial (by a non-government body, or charity.)

- Tied aid is tied to particular contracts, so the receiving country needs to agree to buy goods or services from the donor nation.

- Successful aid should be an attempt to overcome the low savings ratios, help reduce foreign exchange outflows, and reduce the dependency on private investment. It also should improve the living standards of the poorest people, move with the times, not simply provide cheap food, but allow choice to be exercised by the receiving country.

Export-led growth / outward-oriented strategies

- Benefits: More closely to comparative advantage (resources used more efficiently), Increased investment (it will increase domestic productivity), Increased employment (due to increased production), Greater equality of income distribution (Increased demand for labour will raise wages)

Import substitution / inward-oriented growth strategies / protectionism

- Advantages: protects jobs, culture and curbs power of MNC

- Disadvantages: LR lose of job creation, no benefits of comparative advantage, inefficient domestic industries, inflation due to supply constraints, retaliatory protectionism

Commercial loans

- loans frombanks and other financial organizations, usually in the developed world

Fair trade organizations

- FairTrade organizations allow farmers and small manufacturers use a FairTrade Logo which international consumers recognize as meeting certain standards

- Guarantee farmers and producers a fair price for the goods they produce. A price that covers their production costs and allows a surplus that they can reinvest in their business and that can sustain a reasonable standard of living.

- Creates a degree of stability of prices and allows development to take place at a consistent pace.

Micro-credit schemes

- Schemes that lend small amounts to the poor in a developing country. They are usually offered by Non-Governmental Organizations (NGO’s).

Foreign direct investment

- Mainly through multinational corporations (MNCs)

- Benefits of MNCs: proponents of outward (help raise enough finance to fund the necessary investment), Leading to a more efficient allocation of the world’s resources, Boosting the rate of economic growth (shifting the LRAS to the right, or productive potential), Injecting money into the local economy (provide jobs directly, multiplier effects),

Sustainable development

- Not having a detrimental effect on future generations and involving measures to limit the use of non-renewable resources

- Targeting aid (improve the environment), Research, Programmes to help reduce population growth

Barriers to Growth

Poverty can be shown by Human Poverty Index (HPI: a long and healthy life, knowledge and a decent standard of living)

Poverty Cycle

• Low income ® Low savings ® Low investment ® Low incomes

Nepal is having this poverty cycle in the economy  due to low income. 69% of population is living on less than $2 a day. This will cause people save less, invest less, and earn less eventually.

Institutional and Political Factors

1. Ineffective taxation structures: physical problems or simply data information problems (ex: poor records of the population)
2. Lack of property rights: property allocated on traditional or tribal grounds or ownership. This prevents trade of FOP between ownerships.
3. Political instability: There will be an unwillingness to engage in capital investment.
4. Corruption: a barrier for overseas firms investing in an economy
5. Unequal distribution of income
6. Formal and informal markets: In informal markets, no money is exchanged and economic activity goes unrecorded.
7. Lack of infrastructure: Can be known from the data of electricity use, roads, access to sanitation, fixed lines and mobile telephones, illiteracy total, mortality rates, and child malnutrition.

International Trade Barriers

Over-dependence on primary products

After the prices of primary goods fall, the developing countries have to export ever greater quantities of primary products to be able to import the same quantity of imported goods.

Low income elasticity of demand for primary products.

Violently fluctuating prices of primary goods. (Elastic)

Increased trade between developed countries

Consequences of adverse terms of trade

People need to sell more just to earn the same amount as they did in previous years, ignoring any decline in the value of their domestic currency.

Consequences of a narrow range of exports

Overproduction, failure to get all producers to join, storage of some commodities is difficult, and floor prices are too high and encourage overproduction.

Protectionism in international trade

• Strict protection policies in the developed economies in order to stop cheaper imports coming in from developing economies.

International Financial barriers

1. Indebtedness: After the first oil-crisis in 1973-74, developing countries’ debts suddenly rose. In the 1980s, those countries borrowed from US government and immediately interest rates moved upwards. The developing countries found their debt risen in real value. (Increased interest rates, increased value of the dollar, and the recession in the developed world)

To solve debt crisis. 1. Attempt to expand GDP faster than debt ratio. 2. Structural adjustment programmes can be accepted. 3. The richer nations could write-off debts and import more so that they can boost developed world trade.

1. Non-convertible currencies: mainly apply to developing countries whose exchange rates are fixed, rather than floating. As the fixed rate is usually greater than the free market equilibrium rate, the exchange rates tend to be overvalued. Therefore it makes exports more expensive.
2. Capital flight: Borrowed money used not to repay debts, but to put into stocks and shares and property. This occur due to fear of devaluation, highrates of inflation, a low real rate of interest, and a poor domestic investment prospect.

Social and Cultural Factors

1. Religion
2. Culture
3. Tradition
4. Gender issues

There exist a lot of barriers to economic growth in Nepal. Unequal distribution of income is one of them. Country’s 10% of the population takes 50% of the wealth, and the bottom 40% takes 10%. Also, due to lack of property rights, land ownership in Nepal has been extremely limited. Limited access to new farming technologies, inputs and extension services causes productivity levels remain low. It eventually prevents trade of land and agricultural goods. According to the data from 2003, 86%  of 24.7 million population in Nepal resided in the rural areas. It suggests their dependence on agriculture. 80.2% of the labour force is employed in this sector, but the industrial sector is still on its progress. Besides, lack of infrastructure can be seen from the following data: access to improves sanitation (35%) and literacy rate (49% all adults). Most households have little or no access to basic social services such as primary health care, education, clean drinking water and sanitation services. 85 % of Nepalese don’t have health access. The barriers include political instability; poverty and lack of economic growth contributed to political unrest and violence. A Moist rebellion that began in 1996 killed more than 14,000 Nepalese and about 600,000 have been internally displaces or made homeless. Fighting occurred largely in rural areas, affecting agriculture. Though a peace accord was signed between the Government and the Maoists, it still remains a fragile issue. This instability may cause an unwillingness to engage in capital investment.

Listed above, several barriers have been slowing down the economic growth in Nepal. Since the country is already in poverty cycle, it would be difficult to raise the productivity level. Considering influence from each barrier, the biggest barrier would be over-dependence on agriculture. It is unlikely for peasants to attempt getting education or to invest on FOP. Also, due to lack of property rights, people barely have no incentive to be productive.