Models for development

Economic Models and Methods for Development

Harrod-Domar This model argues that an economy’s growth rate is a function of the level of saving (and hence investment) and its capital-output ratio. Capital-output ration – the output created from a certain level of capital – best to be lowest. Savings gap – gap between actual level of savings, and the amount needed to fund sufficient investment to create growth. It suggest that high savings are, therefore, important, to provide the funds for investment; so the rate of growth depends on the levels of saving.

Problems-Savings may be difficult to stimulate, where the first priority is consumption, or savings may be deposited abroad. Many developing countries may lack a financial system which makes saving and investment possible.

Rostow This model shows the 5 stages of development that countries traditionally followed. This shows that savings and investment are key for development. Rostow suggested foreign aid to LDCs to allow investment.

Problems-Also depends on other things – e.g. need good infrastructure, management and human capital. Many countries, e.g. in Africa, are still in first stages, despite much investment, possibly due to debt servicing.

Lewis This is a structural change model. The economy is split into a rural agricultural, and an urban industrial sector. Development is promoted by transferring labour from rural to urban output, as manufacturing is more productive.

Problems -Not applicable to many LDCs as urban slums often unemployed, more productive in agriculture. Manufacturing is actually often capital intensive.

Reducing protectionism This will allow LDCs to sell on the world market, and become internationally competitive. This may allow MEDCs to exploit LDCs.

Tourism Over 40% of tourism takes place in LDCs. It creates injections into the economy, by tourism spending, and by FDI, e.g. hotels. This multiplies throughout the economy, creating jobs and raising incomes. Most LDCs encourage tourism, as they are dependent on it. It may mean more infrastructure is developed by MNCs, benefitting locals, and allowing more business. It provides many, often low-skilled, jobs. It may offset over reliance on agriculture. Tourism may be deterred by climate, conflict, crime and security issues.

However, tourism is likely also to cause negative externalities – government may divert resources towards tourism rather than locals, e.g. clean water; expand infrastructure for tourism, damaging farmland and polluting; loss of culture and damage to environment, which eventually will impact most severely on LDCs. Imports for tourists may create a negative balance on the current account. If world recession, PED is high, so will create a drastic fall in tourism.

Microfinance This means lending small amounts to local firms to allow them to expand, creating a multiplier in poorest areas.

Debt relief Debt has meant governments are unable to borrow, invest in human capital or infrastructure. Cancelling debt would mean they could reduce poverty and invest. IMF created ‘structural adjustment programmes’ to be followed when reducing aid, to reduce corruption. Stiglitz argues these are wrong.

However, risk of ‘moral hazard’, in that countries may waste money. There is a cost to firms who lent the money.

Foreign Aid Often duplicated, as NGOs do not collaborate, or squandered on things that do not help development. People may become over dependent, preventing future development, e.g. in Ethiopia. Often does not go to those who need it most, due to a lack of development. Half of aid goes to middle-income countries, as aid is best used where there is already infrastructure in place.

Fairer trade It improves the living standards of producers, allows a higher income, can invest for future, and ensure sustainability. However, raised prices may lead to excess supply, leading to lower prices in non-fair trade areas. Only 10% of the Fair Trade premium actually goes to producers – it is just a ploy.