4.3.3 - Strategies influencing growth and development

Market-Orientated Strategies

Market-orientated strategies try to let prices, competition and private incentives drive change. The logic is that protected or state-directed economies often keep resources in inefficient uses, while greater openness can push labour and capital towards sectors where the country is more productive.

Trade liberalisation can promote development in several ways. When domestic firms face overseas competition, inefficient producers cannot rely on protection forever, so they must cut costs or improve quality. Resources can then move towards industries where the country has comparative advantage, and firms that succeed in export markets can exploit economies of scale. Consumers also gain from lower prices and more choice. This is the logic behind export-led growth.

The gains are not automatic, though. If infant industries are exposed to global competition too early, they may collapse before they have had time to learn, invest and become efficient. A country may also end up specialising in low-value or volatile primary products, so trade openness can increase vulnerability as well as efficiency.

Foreign direct investment is another major market-orientated strategy.

FDI can fill a savings gap by bringing in capital that domestic firms or governments cannot raise on their own. It can create jobs, generate tax revenue, and transfer technology, management skills and production techniques. Unlike external borrowing, failed FDI projects do not leave the host government with a debt repayment obligation. Vietnam's rapid growth in electronics exports, for example, has been closely linked to inward investment from multinational firms such as Samsung, which also helped create local supply chains.

However, the benefits of FDI can leak away. Profits may be repatriated to the parent company, skilled jobs may go to expatriate workers, and weak regulation can allow poor labour conditions or environmental damage. Heavy reliance on multinationals can also leave a country dependent on foreign firms, while local businesses may struggle to compete.

Other market-orientated policies work through a similar idea: reduce distortions and improve incentives. Removing blanket food, fuel or producer subsidies can reduce fiscal costs and curb inefficiency, especially when subsidies mainly benefit better-off households or protected firms. Cash transfers are often preferred because they can be targeted more directly at poor households. But removing subsidies is politically risky because prices can rise immediately, while efficiency gains take longer to arrive.

A floating exchange rate can also help adjustment because the currency can move with market conditions, reducing the need for large foreign exchange reserves. Yet exchange rate volatility can make export planning harder and may discourage investment. Microfinance schemes try to widen access to loans, savings and insurance for people excluded from formal banking. Bangladesh's Grameen Bank, founded by Muhammad Yunus, is the best-known example. Many schemes use group lending and often target women, because peer monitoring and repayment incentives can lower default risk. These schemes can help households start small businesses when lending is tied to productive activity, but they can also deepen debt problems if loans are used mainly for consumption.

Privatisation may improve efficiency and reduce losses in state-owned firms, but only if competition or regulation is strong enough. Selling a state monopoly to a private owner does not automatically create competition, and essential services can become less affordable even if financial performance improves.

Interventionist Strategies

Interventionist strategies start from a different view: markets alone may not build the capabilities a developing economy needs. Governments may therefore invest directly, protect key industries, or shape the conditions in which firms operate.

Investment in human capital can raise productivity, improve workers' ability to use new technology, and help an economy move from low-value primary production into manufacturing or services. Better education and health also improve quality of life directly, so this is a development strategy as well as a growth strategy. The weakness is timing. Education and training take years to show results, the right mix of academic and vocational skills is debatable, and highly educated workers may emigrate, creating brain drain.

Infrastructure is another classic interventionist strategy. Roads, ports, electricity networks, water systems and telecommunications often have public good characteristics, large positive externalities, or capital costs so high that private firms will underprovide them. Good infrastructure lowers transport and transaction costs, makes trade more reliable, and can attract inward investment. But large projects are expensive, vulnerable to corruption, and only help development if they are maintained and matched to local needs. Some economists argue that intermediate technology, using local materials and methods that can be repaired locally, may be more useful than prestige mega-projects.

Protectionism is often linked to import substitution industrialisation, where a country tries to replace imports with domestically produced goods. The case for it is the infant industry argument. New domestic firms may need temporary shelter from established foreign competitors so they can learn by doing, exploit economies of scale, and build up the capability to compete later. This can preserve jobs and support industrialisation.

The danger is that temporary protection becomes permanent. If firms are shielded for too long, they may never become efficient, consumers face higher prices, and other countries may retaliate. In the long run, the country can lose the gains from comparative advantage and remain locked into high-cost production.

Governments may also manage the exchange rate rather than leave it entirely to the market. A fixed or heavily managed rate can reduce volatility and keep essential imports cheaper, while multiple exchange rates can try to favour exports or vital imports over luxury consumption. The problem is that these systems need reserves and clear administration. If the official rate is unrealistic, black markets, corruption and speculation often emerge.

Another interventionist policy is to require joint ventures between multinationals and local firms. That can keep some profits inside the country, increase technology transfer, and help local firms build the capacity to operate more independently over time. India's Tata Starbucks venture is a useful illustration of the idea: the foreign brand gains local knowledge, while the domestic partner gains access to global systems and expertise. However, some multinationals may invest elsewhere if they are forced to share control.

Industrialisation, Tourism and Commodities

Some strategies focus less on the policy instrument and more on the development path itself. The Lewis model is a good example. It argues that development can happen when workers move from a traditional agricultural sector with low productivity and disguised unemployment (so many workers that the extra output of the last worker is close to zero, meaning labour can leave without farm output falling much) into a modern industrial sector with higher productivity and wages. As labour shifts into industry, output per worker rises, profits and savings can increase, and that can finance further investment and urban growth. China's movement of hundreds of millions of rural workers into urban factories since the 1980s is the classic illustration.