Correct Sectoral Imbalance Problems occur when growth is uneven between agriculture (primary), industry (secondary), & services (tertiary) If any are neglected, others can be pulled down High dependency on one export can leave a country vulnerable (eg. tourism)
The Problems of Agriculture Low price elasticity of demand & supply – (products supplied tend to be a small percentage of total production cost) Low income elasticity of demand – as world income rises, agriculture is barely effected (primary products traded in perfect comp. but manufactured goods in monopolistic comp.) Low productivity – low levels of mechanisation & degradation of land quality may even ↓ productivity
The Problems of Agriculture Cont’ Primary products are vulnerable to technological replacements (eg. nylon replacing cotton, etc.) Uneven tariffs/subsidies – tariffs tend to be 5x higher than on manufactured goods (subsidies cost developed countries £350B; aid to developing countries:£60B) Declining terms of trade – export prices falling but import prices (highly skilled manufactured products) rising – keeps farmers in poverty trap & indebtedness
Policies to Develop Agriculture Must address market failure & capital problems Property rights extension Disease control Technological change Help in provision of financial infrastructure Abolition of marketing boards that fix prices below world prices Raising human capital –education of women Land improvement schemes
Industrialisation: Moving Away from Agriculture Developing countries have adv. of lower wage costs Move into more flexible markets of manufacturing (esp. clothing) BUT: Migration to cities may leave agriculture under- resourced Value added is mostly at packaging & distribution stages – small margins at production stage
Tourism: A Service Based Strategy Attractive due to high YED; benefit from rising world incomes Tourist spending has multiplier effects – income passed on & creates tax revenue Can attract foreign investment (hotels, etc) Local infrastructure catering to tourists assists local businesses (roads, trains, etc) Encourages the tertiary sector – may correct sectoral imbalance
Tourism: Problems Tourists demand imports goods (food, luxury gds, etc) creating leakage – net gain can be much less than the total cost of the holiday International tour operators may get all the windfalls May threaten local culture & values Negative externalities – litter, environmental erosion, etc) Diversion of labour may lead to shortages elsewhere Market may be very volatile (subject to fashions, political conditions, natural disasters, etc)
Inward Looking Policies High levels of protectionism (tariffs, quota’s etc.) Subsidies for domestic producers (encourage import substitution) Prohibition of multinational activities Encouragement of locally acquired skills
Inward Looking Policies: Benefits To encourage independency To preserve individual culture To nurture domestic industry while growing to compete on international market
Inward Looking Policies: Problems Domestic inefficiency can occur without int’l competition Protectionism may lead to retaliation of trading partners New industries cannot grow due to requirement of imported inputs Tend to favour industry at expense of agriculture (migration to cities)
Outward Looking Policies Abolition of tariffs, quotas, etc Elimination of subsidies Encouragement of int’l capital flows & MNC’s Allowing int’l labour mobility Export promotion policies (eg. advertising, trade fairs, etc.)
Outward Looking Policies: Benefits Evidence suggests that countries that are open and outward looking have higher growth: Welfare gains from trade & comp. adv. Benefits from int’l comp – both incentive & knowledge Economies of scale from increased mkt size Benefit from other countries’ growth
Outward Looking Policies: Problems Short-term - loss of local jobs & businesses May lose local culture & tradition May lose special local skills / products May lose biodiversity / environment May adopt policies which suit larger wealthier nations rather than what is best for the individual nation Could lead to civil unrest