How Reforms of The Supply Side of an LDCs Economy Will Promote Economic Development

3) Within the context of globalisation, discuss the extent to which reforms of the supply side of an LEDCS economy will promote economic development? (20 marks) Average here was 14/20. Divided between some disasters and some excellent essays The key issue that created a disaster was going on auto-pilot and NOT answering the question. • Many wrote on supply-side reforms in Zambia, not just LEDCs. Some wrote on FDI, not supply side policies. 0 Some wrote on the advantages of globalisation in boosting LRAS. Many ignored the globalisation aspect of the question. If this occurred, depending on how badly the question was ignored, you could not enter top marks. Some questions were capped within 1.3 which is a REAL shame. Other issues on this question were not developing 13 and L4b2 enough. Remember the need for diagrams and to refer to these to hit 'Good Analysis and L4b2. Remember: Depth not breath, better to have fewer high quality points then lots of vague points which can't hit 'Good' analysis or L4b2. Common Mistakes FDI is NOT a supply-side policy. Supply-side policies are policies designed to boost LRAS. FDI may boost LRAS, but one must attract it. SSPs are a way to attract both it and domestic investment. Just saying FDI misses and important causal step. Key bit of advice for Analysis: Focus on ONE Supply-Side policy at a time and explain this, in a proper causal chain. Make sure you don't miss some of the more obvious points. These are the bread and butter of your 13. You can spice them up with A2 analysis, but DO mention them. N.b. Try to bring in context of an LEDC into this. a) Investment in Education and Training. One SSP that may boost development for LEDCs is government spending on education and training. (BASIC ANALYSIS) This may lead to an increase in real GDP and thus a rising in incomes and living standards. More crucially for development, spending may lead to higher literacy rates, a key component of the HDI. (GOOD ANALYSIS). This will improve the human capital of labour and so boost LRAS (insert diagram), leading to Long run growth. This will raise the MRPL and thus raise the wages of workers from w1 to w2 (insert MRPL diagram-see below in example). This may lead to higher purchasing power and a rise in consumption and hence AD. The ability to buy better quality products and/or afford healthcare may lead to a rise in living standards and hence development. b) Infrastructure Investment. (BASIC ANALYSIS) Government spending on infrastructure is another supply-side policy that could boost economic development. It will LOWER TRANSPORT costs for firm and so lower COSTS of PRODUCTION (very few said this crucial step). This may therefore increase domestic firm's profits and ability to invest, thus raising LRAS and AD. The improved infrastructure could help to attract FDI. (GOOD ANALYSIS). a) Refer to diagrammatic equilibria of increased investment. b) Could refer to multiplier effect. To make it GOOD analysis, mention the size in a developing country. Likely to have low MPS and MPT, therefore very high. Leads to higher wages and development. c) Positives of FDI: Bypasses the savings gap and provides a form of investment in lieu of weak domestic investment. May provide the basis for higher wages and standard of living etc. d) Would lower the capital-output ratio. Think about it. investment in capital e.g. new Lorries, would previously not massively increase output if they kept getting stuck in the mud. A new highway would help these Lorries increase output much more. This lowering would enhance growth according to the H-D model, which is especially important in many LEDCS given their savings gap. (N.b. I've been vague here but you ought to develop the H-D point etc). c) De-regulation. (BASIC ANALYSIS) Lower regulations would lower the costs of production for firms (again few said this) and enhance their profits. This could again lead to higher domestic investment and attract FDI. Thus increasing both AD and LRAS. May increase price competitiveness and so enhance exports. (GOOD ANALYSIS) a) De-regulation may attract FDI etc.... Same points as before. b) May allow 'infant industries' to make more profits. This could help the economy to diversify into manufacturing and reduce the problems of primary product dependency. c) Investment is important in light of the savings gap (which means firms find it hard to borrow), Increased profits provide an alternative way to fund investment. Key Bit of Advice for Evaluation: Aim for points that lend themselves to diagrams or advanced theory. This being said, the evaluation in this question is the key to bringing in the globalisation context. Can focus on evaluating ONE policy at a time. a) De-regulation or FDI- Negative Externalities: a. L481 MNC's are footloose, can easily re-locate. Therefore perhaps race to bottom on de- regulating. May lead to pollution. b. 1482: Draw the Neg externality diagram. Refer to overproduction where FMO exceeds the SOO. b) Education and Training 'Brain Drain' a. L481-higher education and MRPL may make firms more likely to leave the country. This could lead to a reduction in LRAS (see earlier question). Issue is would be left with perhaps less skilled workers and issues with development (I.e. doctors etc) b. L4B2- Would the gov lose tax revenue to spend on development? Draw LRAS and refer to equilibriums. Potential for rising inequality from remittances (Can draw a Lorenz curve)? c) De-regulation/Infrastructure/Attracting FDI may exacerbate issues with PPD: a. L4B1-MNCs may only focus on these areas of the economy. b. 1482- Could exacerbate the problem e.g. worsen Dutch Disease with appreciation currency and prevent diversification. d) De-regulation/Infrastructure/Education-Attracting FDI may be unstable: a. L481-FDI can withdraw due to external shocks. Leave the country with pre-existing problems. b. L-482-FDI may lead to higher employment, growth and wage increases. Education may lead to MRPL and wage increases. Higher wages may raise unit costs and COP for MNCs. They are footloose, may withdraw and leave savings gap etc. e) Funding issues of Infrastructure/Education a) 1481- Many LEDCs have a low taxation base and fluctuating revenue from exports (remember primary products have volatile prices due to in elasticities diagram). This means they may need to borrow in order to fund the investments. b) L482- Could increase debt by borrowing. Issues with this, e.g. rising interest payments and opportunity cost of paying back. Could use ODA, but will this come with 'strings attached' e.g. need to buy expensive exports from MEDCs, could worsen their terms of trade. May require them implementing structural reforms (think IMF Washington Consensus). These could worsen inequality etc. Judgement This cost people marks. I would NOT award judgement that referred ONLY to Zambia and not to the question on LEDCs. I liked the 'weighing up'. But need to do more than this. Try to categorise answer into general theme. Not 'But it won't be problematic if gov does x, and the other problem won't be an issue if gov does y'. Rather the success of SSPs in LEDCS will hinge on their respective governments. The government will need to be pro-active in managing the policies and doing X, Y, Z'. This is just one example, another theme would be ensuring that SSPs promote growth NOT only in Primary Products but all goods.