Approaches to Economic Development

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Approaches to Economic Development
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We can Summarize the Approaches to Development as
Follows

• Industrialization through import substitution in
  which countries such as Nigeria tried to replace
  imports with home-made goods.
• Labor-intensive techniques.
• Income distribution approaches.

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• Provision of basic human needs to the poor
• Market-oriented approaches
• Development following revolution that eliminates
  existing elite and establishes a command economy.

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• Massive resource shifts in form of foreign aid
  and investment from rich to poor countries.

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5 Basic Approaches to Development

• Trickle-down Approach
• Foreign aid, private investment, and expanded
  trade opportunities
• Basic Human Needs Approach
• Based on development assistance and credit
• led to the debt crisis

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• Structural Adjustment
• Based on imposed solutions of economic reforms
• Self-Reliance and Producing for Local Needs
• Integration and cooperation
• Sustainable Development
• based on long-term development

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Trickle-down Approach

• This approach believes that take-off would come
  from large amounts of foreign aid, private
  investment, and expanded trade opportunities and
  the benefits would trickle down to even the
  poorest members of each society

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Failure of Trickle-down

• Failed because of
• the concentration of economic resources in the
  hands of the rich and unrepresentative governments

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• the exclusion of the large majority of affected
  populations from economic decision-making

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• the integration of developing countries
  economies in an international marketplace in
  which they could not compete equitably

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The Painful Road to Macroeconomic Stability

• Macro stabilization has three main objectives
• controlling inflation
• restoring fiscal balance by reducing governmental
  spending and by raising government tax revenues
• eliminating the current account deficit by means
  of devaluation and export promotion

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Financial Systems and Monetary Policy

• Differences between MDC and LDC financial systems
• The role of central banks
• The emergence of development banking
• The role of informal finance for small-scale
  enterprise

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Characteristics

• Smallness
• Duality
• Insufficiency

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Financial System
Informal Financial Markets Outside of the state
financial laws
Formal Financial Markets Under the control of
state credit financial laws

• Work Occupational associations
• Savings and credit Associations
• Insurance and burial associations
• Community development associations
• Individual financial brokers

• Commercial Banks
• Development Banks
• Savings Credit Banks
• Cooperative Banks

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Banking

• Virtually every country has a central bank
• Commercial banking is characterized by
• Low banking density
• Concentration in urban centers
• Rigid loan conditions
• Rationing

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Currency Issues

• Multiplicity of currencies
• With the exception of a few currencies such as
  the Franc CFA in some francophone African
  countries, virtually each country has its own
  currency
• Almost none of them is convertible

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Role of Central Banks

• Issuer of currency
• Banker to government
• Banker to commercial banks
• Regulator of financial institutions
• Operator of monetary policy
• Promoter of financial development

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Emergence of Development Banking

• Development banks are specialized public and
  private financial institutions that supply
  medium- and long-term funds for the creation or
  expansion of industrial enterprises.

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Case African Financial Markets

• More than 18 Stock Exchanges in Africa
• With a combined market capitalization of just
  over 280 billion at the end of 1997
• The Johannesburg Stock Exchange (JSE) in South
  Africa is by far the largest, accounting for
  around 234 billion in 1997

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Reforming LDC Financial System

• Financial liberalization, real interest rates,
  savings, and investment
• Interest rates often kept artificially low to
  encourage investment
• Interest rate ceilings lead to credit rationing
  and excess demand which, in turn leads to
  financial repression (limiting of investment
  because of shortage of savings)

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Financial Policy

• Deals with money, interest, and credit allocation
• Also involves monetary policy
• the deliberate altering of a countries money
  supply to for the purpose of bringing about
  economic growth, increasing employment or,
  stabilizing prices.

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• Removal of artificially low nominal interest rate
  ceilings generates more domestic savings.
• Higher interest rates allocates loanable funds to
  the most productive projects
• Direct initiatives to channel credit to small
  entrepreneurs is also essential
• may require new types of financial intermediaries
  oriented toward the traditional or informal
  sector.

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Fiscal Policy

• Focuses on government taxation and expenditure
• Deliberate manipulation of taxes and government
  spending to alter real domestic output and
  employment, control inflation and stimulate
  economic growth

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• Most stabilization attempts have concentrated on
  cutting government expenditures to achieve
  budgetary balance
• The mobilization of resources to finance public
  expenditures is the most important purpose of
  taxation

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Tax Sources

• Taxes can be
• Direct taxes--those levied on private
  individuals, corporations, and property
• Indirect taxes--such as import and export duties
  and excise taxes
• Personal income and property taxes
• Corporate income taxes
• Indirect taxes on commodities

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Public Administration the Scarcest Resource

• Managerial/administrative capability is scarce
  because of
• a lack of training or experience
• political instability
• Class, ethnic, or religious conflict make public
  administration difficult
• Bureaucracies are often overstaffed at the bottom
  and understaffed at the top