correct sectoral imbalance problems occur when growth is uneven between agriculture (primary),...
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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)
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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
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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
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Policies to Develop AgricultureMust 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
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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
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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
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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)
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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
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Inward Looking Policies: Benefits To encourage independency
To preserve individual culture
To nurture domestic industry while growing to compete on international market
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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)
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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.)
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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
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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