Unit 4.10: Economic Growth and Development Strategies (Part 1)

4.10 ECONOMIC GROWTH
AND/OR ECONOMIC
DEVELOPMENT STRATEGIES

STRATEGIES TO PROMOTE ECONOMIC
GROWTH AND/OR ECONOMIC DEVT

CONCEPTUAL UNDERSTANDING

• Perceptions of the meanings of devt and equity change over time and vary

across cultures.

• Govts and other economic agents may intervene in an attempt to promote

economic wellbeing and equity in societies.

• The pursuit of sustainability is subject to various constraints.

• Effective strategies should take account of the relevant social, economic,

and political context.

TRADE STRATEGIES

Objectives

• ​To recap measures and policies that government can use to achieve EG and devt

• Appropriateness of policies - Developing vs Developed countries

A. IMPORT SUBSTITUTION

Import substitution refers to a growth and trade strategy where a country
begins to manufacture simple consumer goods for the domestic market
to promote its domestic industry. It depends on protective measures
(tariffs, quotas, etc.) preventing the entry of imports that compete with
domestic producers.

•Promote consumption of import substitutes (i.e. goods produced
by domestic industry)

•E.g. shoes, textile, electrical appliances

Import Substitution

​Also known as import -substitution industralization

• Growth and trade strategy where a country begins to manufacture simple consumer goods for domestic market to promote domestic industry.

• Dependents on protective measures

IMPORT SUBSTITUTION

POLICIES AND CHARACTERISTICS

High levels of protection of domestic firms, inefficiency & resource misallocation
(from tariffs, quotas and import licenses etc)
Breeds inefficiency in resource allocation & resource misallocation → encourages
high-cost producers to continue production + lack of competition in the mkt →
consumers have to pay a higher price for the gds

Overvalued exchange rate
•To lower price of imported capital goods in domestic currency to facilitate setting
up of domestic industry but at the expense of export competitiveness & Nt
•Made agricultural X more expensive → worsen rural poverty

•Led to capital-intensive production methods (inappropriate tech) → unNt and
growth of the informal sector

IMPORT SUBSTITUTION

POLICIES AND CHARACTERISTICS

Limited growth in the LT
•Higher growth in the ST but slow growth in the LT as domestic industry that
produces import substitutes remains an ‘infant’

Too much govt intervention
•Relied heavily on industrial policies (interventionist SS-side policy) -->misallocation of resources & inefficiencies in production

•Govt failure whereby govt fails to allocate resources efficiently due to
bureaucracy & red-tape

IMPORT SUBSTITUTION

POLICIES AND CHARACTERISTICS

Deterioration in the BOP and debt position
•Increased importation of K goods

•Need to import food due to neglect of agricultural sector

•Outward flow of financial capital due to profit repatriation of foreign MNCs, or by
domestic wealthy grp seeking higher returns

Encouragement of capital intensive production methods
•Inappropriate technologies

•Workers do not have the necessary skills

•Increase unNt, widening Y gap & rise in poverty

Negative impacts on Nt & Y distribution
•Capital-intensive tech + neglect of small producers in agricultural & urban sector →
rise in unNt & growth in informal sector → worsening Y distribution & rise in poverty

Open Ended

Explain a reason why import-substitution is not a good strategy for growth and development of a country.

B. EXPORT PROMOTION

Export promotion refers to a growth and trade strategy where a country
attempts to achieve economic growth by expanding its exports.

•Develops a manufacturing sector that produces goods to be exported

•Generates export revenue

•Promotes economic growth

EXPERIENCE OF EXPORT

PROMOTION

• Extension of import substitution → industries become the strongest exporters

(i.e. import substitution was successful as a temporary industrialisation
strategy)

• China, HK, Indonesia, Japan, Malaysia, Singapore, South Korea, Taiwan and

Thailand are the newly industrialising economics known as the Asian Tigers

B. EXPORT PROMOTION

COMMON POLICIES ADOPTED

Provide incentives for
pvt sector to engage
in R&D on high-tech

gds

- Encourages devt of

domestic skill lvls &
technological devts
appropriate to local

conditions

Impose requirements

on MNCs

- e.g. use local inputs,
training of domestic
workers, transfer of
technical know-how

Target specific

industries for exports

- e.g. high-tech gds/
higher value-added
production activities

B. EXPORT PROMOTION

COMMON POLICIES ADOPTED

Industrial policies to support

export industries

- Investment grants, production
subsidies to X industries, special
benefits granted to MNCs that

were export oriented etc

Some protection of
domestic industries

- e.g. selective import
substitution for some
domestic industries

Large public spending in key

areas

- On education & training to

ensure workers have the

necessary skills / modernization of
the transport & communication

infrastructure

State ownership & control of

financial institutions to

ensure easy credit for export

industries

- Subsidised credit & other

favourable borrowing terms

B. EXPORT PROMOTION

FACTORS BEHIND THE SUCCESS OF EXPORT

PROMOTION OVER IMPORT SUBSTITUTION

Export promotion

allows firms to tap on
foreign mkt ➔ Reap

EOS

Economic

diversification:
labour-intensive
production to K-

intensive production

Investment in
human capital

Govt support for

R&D of appropriate
tech to raise level of

tech ➔ Moves up
value-added chain

Increased Nt

TRX➔(X-M) ➔
favourable current

account

Multiple Choice

Which of the following is not the disadvantage of export promotion?

• vulnerable to changes in the economic conditions of trading partners

• liable to protectionist measures

• need to maintain low wages to maintain export competitiveness

• Increase in human capital

C. ECONOMIC INTEGRATION

Recall :

Preferential trade agreement (PTA) is an agreement between two or more
countries to lower trade barriers on particular products.

Trade barriers may remain for the rest of the products, and on imports from
non-member countries.

Types of PTA:
• Bilateral
• Regional
• Multi-lateral

C. ECONOMIC INTEGRATION

THE GROWTH OF PTA

Rise in no.

of

preferential

trade

agreements

Slow progress

of WTO in

promoting free

trade

Benefits of free

trade

Bypass protection

by developed

c’tries

Retain some

trade

protection

REGIONAL FTA:

POTENTIAL BENEFITS FOR GROWTH & DEVT

Success factors in FTAs:
▪ regional agreements;
▪ geographical closeness;
▪ similar level of devt & technological capabilities;
▪ similar market sizes;
▪ shared commitment to co-operation

REGIONAL FTA:

POTENTIAL BENEFITS FOR GROWTH & DEVT

Regional FTA
▪ Expansion of mkt & achieve EOS
▪ Diversify production & exports
▪ Higher TRX & attract more investment → Economic growth

Countries with similar lvl of devt, technological capabilities mkt sizes
▪ Competition btwn c’tries is more ‘fair’

Shared commitment to co-operation
▪ Joint effort in pursue of policies
▪ E.g. infrastructural devt (transport infrastructure), collaboration on

R&D → raise economic devt for all

REGIONAL FTA:

POTENTIAL BENEFITS FOR GROWTH & DEVT

• Neighbouring c’tries forming regional blocs

• Examples:

MERCOSUR

ASEAN

COMESA

CEMAC

(Latin America) (Southeast Asia) (Eastern & Southern Africa) (Central Africa)

BILATERAL FTA:

RISKS FOR GROWTH & DEVT

Developed

c’try

Developing

c’try

Bilateral FTA

that gives
developing
c’try access
to developed

c’try’s mkt

BILATERAL FTA:

RISKS FOR GROWTH & DEVT

Risks faced by developing c’tries

Make equal and

matching cuts in tariffs ➔
at a competitive disadv
→ Forced to compete

with lower-cost

developed c’try’s firms ➔

--> Leading to Shut down of domestic firms

Many developing

countries form FTAs with
same developed c’try ➔
Compete with each other
& developed c’try’s firms

➔ Limited rise in TRX

Weaker bargaining

power of developing c’try

➔ Better for it to

negotiate multilateral

trade agreements under

WTO rather than enter

into bilateral trade

agreement with
developed c’try

BILATERAL FTA:

RISKS FOR GROWTH & DEVT

Risks faced by developing c’tries

Forced to agree to

other requirements not

usually in its best

interests, e.g. stricter IP
rights ➔ higher cost of
adopting high tech ➔
Slows down econ devt

Limited rise in TRX &

greater rise in TEM➔(X-
M) falls ➔ Current a/c
worsens & econ growth

falls, higher unNt,

worsening Y

distribution, increased

poverty

Divide developing c’tries

by creating different

interests + weaken regional

trade agreements when a

member c’try makes a

bilateral agreement with a

third c’try

Open Ended

Explain one potential disadvantage of bilateral trade agreement to promote growth and development in a developing country.

DIVERSIFICATION

Diversification is a strategy to reduce relianceon the export of a narrow
range of goods and services to reduce the risks of over-specialisation.

• Reallocate resources into new activities that broaden the range of

g&s produced

• Egs from S’pore: Petroleum refined products, semi-conductors,

financial services

DIVERSIFICATION

Objectives of diversification

Sustained increase in exports

•Diversify into products for which there’s sustained increase in global DD

•E.g. entry into higher value-added mkts for manufactured goods

•Sustained rise in TRX

Development of technological capabilities and skills

•Diversification encourages technological & skills developments to
facilitate pdtion of different types of g&s

•Rise in quality of labour → rise in c’try productive capacity

•Rise in LRAS → potential econ growth

DIVERSIFICATION

Objectives of diversification

Use of domestic primary commodities

•Vertical diversification → make use of domestic raw materials to fuel
growth of manufacturing industry

Reduced vulnerability to ST price volatility & LT price declines

•Diversification → manufactured goods produced alongside with
primary pdts

•Reduce reliance on primary pdts

•Less susceptible to price fluctuations of primary pdts

Open Ended

Explain two benefits of diversification to a developing country.

SOCIAL ENTERPRISE

Social enterprises are organisations that have specific social objectives as
their primary goal.

• May be for-profit or non-profit organization → profit is a secondary

goal

• Principal objective & purpose: to overcome or alleviate a global

or local issue (e.g. poverty)

SOCIAL ENTERPRISE

E.g. Sunny Money

• Provide solar-powered

products to rural and
off-grid communities in
Africa

• Create Nt in the areas

where they sell

SOCIAL ENTERPRISE

E.g. Bambike

• Produce hand-made bicycles made of bamboo

• Create Nt in the areas where they produce

MARKET-BASED POLICIES

Market-based policies are policies that support the allocation of resources by
SS and DD (or the price mechanism) rather than through govt intervention in
the mkt.

Market-based SS policies
-Deregulation of labour mkt : ↓
labour union power & unNt
benefits, ↓ or eliminate min. wage

-Deregulation of product mkt:
removing BTEs

-Privatisation of state enterprise:
e..g transport

Trade liberalisation
-Elimination of trade barriers to
achieve free trade

-Limited govt intervention

STRENGTHS OF MARKET-BASED

POLICIES

Under competitive conditions, mkt mechanism can affect efficiency in
resource allocation. This is because producers & consumers are rational (i.e. pursuit of self-interest)

•Prices act as incentives and signals for resources to be allocated to
address the resource allocation questions of what and how much to
produce, and how to produce

•Improves allocation of resources

•Incentives for hard work, risk-taking, innovation & investment → Higher level
of output and hence SOL

Policies encouraging competition (e.g. deregulation, privatization)

•Freeing mkt forces and make mkts more competitive

•Greater efficiency in production, lower prices, improved quality & a more
efficient allocation of resources

•Increased level of output (economic growth)

STRENGTHS OF MARKET-BASED

POLICIES

Trade liberalization (Free or freer trade)

•Elimination of trade barriers → increase competition, efficiency in
production, lower prices, improved qly & increase consumer choice

•Improve allocation of resources

•Greater economic growth

Open Ended

Explain the effects of liberalizing policies on export growth.

A. Cannot tackle mkt failures

-ve environmental externalities
& problems of common access

resources

Public gds (complete mkt

failure)

merit goods (partial mkt failure)

WEAKNESSES OF MARKET-BASED

POLICIES

B. Weak or missing market institutions

•Missing in developing c’tries:
- enforcement of property rights,
- enforcement of legal contracts,
-well-developed banking,
- effective road system, etc.

•Markets are highly imperfect in their functions & fail to function
effectively

WEAKNESSES OF MARKET-BASED

POLICIES

C. Insufficient credit for poor people

Free mkt

•No loans given to poor people with no collateral

•Low investment in human, phy & natural K

•Low productivity → low econ growth → low income

•Perpetuates poverty cycle

WEAKNESSES OF MARKET-BASED

POLICIES

D. Questionable effects on economic growth & development

•Firms in low-Y c’tries not able to withstand competition from bigger firms
from developed economies → cannot generate export revenue for
developing c’tries

Capital liberalization is undertaken before country develops necessary institutions --> capital flight -->reduced ability to use MP

•Market liberalization → withdrawal of govt from provision of merit goods
→ -ve impact on econ devt

WEAKNESSES OF MARKET-BASED

POLICIES

E. Limited benefits for export growth and diversification

•Developing c’tries could not diversify their production into increased
manufacturing for X due to trade protection used by developed c’tries
on developing c’try Xs

•Growing reliance on free mkt policies → With less govt support, many
developing c;tries were not able to perform well.

WEAKNESSES OF MARKET-BASED

POLICIES

F. Increasing income inequalities and poverty within developing c’tries

•Greater Y inequalities & poverty

•Economic & trade liberalisation creates both ‘winners’ & ‘losers’

•E.g. of ‘winners’: the employed in X sectors / the employed in
growing formal sector / people with relevant skills & education

•E.g. of ‘losers’: less educated or illiterate people / poor who lack
collateral and has no access to credit / those working in income
sector

WEAKNESSES OF MARKET-BASED

POLICIES

Open Ended

Explain one negative effects of market liberalization policies.

THE NEW DEVELOPMENT

CONSENSUS

• Trade liberalisation continues to be important, but in developing countries

there should also be some government intervention to help create the
conditions needed for markets to work without resulting in the negative
effects described above. E.g. of conditions

• Human capital (health & education)
• Infrastructure
• Effective institutions
• Industrial policies
• Trading system that encourages developing country X

INTERVENTIONIST POLICIES

Interventionist policies are based on govt intervention in mkts intended to
correct market deficiencies and create an environment in which mkts can
work more effectively.

Redistribution policies such as:
-Tax policies

-Transfer payments

-Minimum wages

Objective of redistribution policies
SDG 10 – Reduce inequality within & among countries

INTERVENTIONIST POLICIES:

TAX POLICIES

SDG 17.1 (goal 17, target 1) states ‘strengthen domestic resource mobilisation . . .
to improve domestic capacity for tax and other revenue collection’.

-↑ progressivity of the tax system

-Expand coverage of personal Y taxes

-Expand the use of indirect taxes on luxury gds & gds that
create (-)ve ext

-↑ taxation from capital income

-Impose / ↑ taxes on real estate & land

-Reduce tax evasion

INTERVENTIONIST POLICIES:

TRANSFER PAYMENTS

SDG 1.3 (goal 1, target 3) states ‘Implement nationally appropriate social
protection systems and measures for all, including floors, and by 2030 achieve
substantial coverage of the poor and the vulnerable.

-Improve Y distribution & ↓ poverty

-World Bank & International Labour Org (ILO) →universal social
protection:include child benefits, pensions for older persons,
benefits for maternity, disability, work injury or unNt → mainly in
the form of transfer payments

INTERVENTIONIST POLICIES:

TRANSFER PAYMENTS

SDG 1.3 (goal 1, target 3) states ‘Implement nationally appropriate social
protection systems and measures for all, including floors, and by 2030 achieve
substantial coverage of the poor and the vulnerable.

• In 2019, four billion people or more than half of the world’s

population had no access to even one social protection benefit.

• 45% of the global population had access to one benefit, one-

third of children had a family and child benefit.

• Only 28% of people with disabilities had a benefit.
• Old age pensions were the most prevalent, with 68% of older

persons receiving pensions.

Open Ended

Explain the significance of transfer payments to achieve the economic growth and development.

INTERVENTIONIST POLICIES:

TRANSFER PAYMENTS

Special policy: conditional cash transfers (CCTs)
-Money paid on condition that the households receiving the
money undertake activities related to education and health
care, often for children
Example: Bolsa Familia in Brazil
- Social welfare programme that provides cash to the low income
- conditioned upon (a) children attend school regularly
(b) children must receive regular checkups and
vaccinations

Non-conditional cash transfers (CCTs)
-Do not impose restrictions
-Provides flexibility to households to manage their expenditure freely in accordance with their needs.

INTERVENTIONIST POLICIES:

TRANSFER PAYMENTS [EVALUATION]

Universal social protection systems are costly

•Beyond the means of many developing c’tries

•Cannot be fully implemented over the ST

Effectiveness depends on govt policies

•w/o appropriate infrastructure (e.g. schools, hospitals, roads) and human
capital (e.g. trained doctors & nurses), these policies are limited in
effectiveness

Difficulties in the design & implementation to reach those that are most in need

Open Ended

Explain how government policies may affect the effectiveness of transfer payments.

INTERVENTIONIST POLICIES:

MINIMUM WAGES

To best design a minimum wage system to reduce inequality, the
International Policy Centre for Inclusive Growth notes guidelines:

-Set by govts after taking all relevant pts of view into account

-Consider needs of workers & families + monitor & evaluate effects
to make necessary adjustments

-Establish measures to ensure compliance and enforcement

INTERVENTIONIST POLICIES:

MINIMUM WAGES

Standard theory: designed to support Ys of unskilled workers but
give rise to unNt

However, studies have shown that in practice such job losses do not
occur unless minimum wages are set at very high levels.

Draw

Draw the minimum wage graph. Identify the unemployment.

Open Ended

What are the positive externalities of education?

POSITIVE EXTERNALITIES (EXTERNAL

BENEFITS) OF EDUCATION

Promotes economic growth

Education ➔ labour

productivity

Education ➔
unNt ➔ Investor

optimism

Education ➔

Political stability ➔
Investor optimism

Education ➔
 qly of phy

capital

Education ➔

crime rate ➔

Investor optimism

Education of women

labour force participation rate by women ➔

SS of labour

maternal mortality ➔non-material SOL

Healthier children ➔child mortality ➔non-

material SOL

Children taught basic principles of hygiene &

sanitation →non-material SOL

Spillover
benefits
into health

POSITIVE EXTERNALITIES (EXTERNAL

BENEFITS) OF EDUCATION

Draw

Draw the market failure diagram for merit goods.

INTERVENTIONIST POLICIES:

PROVISION OF MERIT GOODS

• Recall that both education & healthcare svcs are merit goods with (+)ve

consumption externalities

• If left to free market → underconsumed/underprovided

• 5-step analysis

(Explain how market failure arises.)

According to World Bank,
• Countries at a relatively low level of development should invest in

primary (elementary) school education

• However, they are often found investing too heavily in higher

(secondary and university) education

One of the most impt investment in education:

Achieving universal literacy rates

IMPORTANCE OF ELEMENTARY

EDUCATION & UNIVERSAL LITERACY

Brain Drain

Developing c’tries
that focus > on sec
& tertiary education

Misallocation of resources

Internal

UnderNt as

highly educated

individuals

cannot find Nt in

their field of
specialisation

Medical
personnel
work in pvt
hospitals,
instead of
govt ones

Work in

R&D

projects

that benefit
developed

c’tries

International

From

developing

to

developed

c’tries

IMPORTANCE OF ELEMENTARY

EDUCATION & UNIVERSAL LITERACY

2 main external benefits of consuming

healthcare svcs:

Healthy people do

not spread illnesses ➔
Community becomes

healthier

Healthy workforce ➔
labour productivity

➔productive

capacity of economy

➔ potential

economic growth

POSITIVE EXTERNALITIES (EXTERNAL

BENEFITS) OF HEALTHCARE

Spill over external

benefits

Healthy students ➔ Improve school
attendance & performance ➔

level of education

Healthy individuals ➔ make better

use of knowledge and skills they

possess

POSITIVE EXTERNALITIES (EXTERNAL

BENEFITS) OF HEALTHCARE

GOVT POLICIES IN EDUCATION &

HEALTHCARE

How to increase consumption to

socially optimal level

Mkt-based

policy:

Subsidies

Non-mkt-based

policy: Govt

provision

Non-mkt-based

policy:

Advertising &

persuasion

Open Ended

Explain one policy that will increase consumption of healthcare to the socially optimal level of output.

Subsidies on education/ healthcare
MKT-BASED SOLUTION:

output

Benefit, cost

MSB =MPB +MEB

MPB

0

Qs

Es

MPC = MSC

Qm

E

MPC - subsidy

subsidy

Mkt eqm E:
MPC=MPB

Social eqm: Es

which is =
marginal external
benefit generated

X

GOVT POLICIES IN EDUCATION &

HEALTHCARE

Direct Provision/Govt Provision

output

Benefit, cost

MSB =MPB +MEB

MPB

0

Qs

Es

MPC = MSC

Qm

E

S+ govt provision

Mkt eqm E:
MPC=MPB

Social eqm: Es

X

GOVT POLICIES IN EDUCATION &

HEALTHCARE

Legislation, advertising & persuasion

Es

Qs

MPB

Quantity
0

Cost/Benefit ($)

MPC = MSC

MSB

E

Qm

F

Assume no ext cost

MEB

MPB=MPC

• Legislation,

advertising &
persuasion would
be entirely
useless in a
situation where
there’re no
schools or health
clinics.

• Govt need to

provide these
svcs

GOVT POLICIES IN EDUCATION &

HEALTHCARE

INFRASTRUCTURE

Infrastructure boosts economic growth/

economic devt

↑ productivity & ↓ COP
→ economic activities
are carried out more

efficiently

Irrigation → ↑ yields →

↑ Y and ↓ poverty

Facilitates

modernisation &
diversification → ↑
worker productivity
with availability of

electricity

INFRASTRUCTURE

Infrastructure boosts economic growth/

economic devt

↑ country’s
international

competitiveness → ↑

FDI

Provision of svs

essential for

maintaining basic SOL
→ ↓ avoidable illnesses
& premature deaths →

↑ qty of labour

Easier access to

healthcare svcs and
education for rural
areas + ↑ Nt opp + ↑

access to mkts →
alleviate poverty

INFRASTRUCTURE

Infrastructure boosts economic growth/ economic devt

Availability of water &

energy supplies improves

gender equity → ↑ sch

enrolment among girls as

less time needed to do

chores → ↑ Nt & ↓ poverty

↓ indoor air pollution with

safe energy sources →

(+)ve effects on health of

women & children

↑ Nt opp on construction

→ ↑ Ys

Open Ended

Explain one benefit of infrastructure on economic growth/economic development.

STRENGTHS OF INTERVENTIONIST

POLICIES

A. Correcting mkt failures

1.

Correct –ve environmental ext of
production & consumption & overuse of
common access resources

2.

Provide public goods (e.g. national
defence) & merit goods (e.g. health &
education)

3.

Assist in correction of co-ordination
failures

4.

Contribute to devt of mkt institutions that
enable mkts to operate more effectively

STRENGTHS OF INTERVENTIONIST

POLICIES

B. Investment in human capital

•

Govt correct underconsumption of education & training → increase
labour productivity & productive capacity of the economy

C. Provision of infrastructure

•

Infrastructure has significant positive externalities

•

Govt corrects underprovision of roads & sanitation

•

Encourage economic growth and results in economic & human devt
→ ↑ productivity → ↑ SOL

STRENGTHS OF INTERVENTIONIST

POLICIES

D. Provision of stable macro environment

•Stable macroeconomic environment:
•Price stability

•Full Nt

•Reasonable budget deficit

•Reasonable BOT

•Govt implements policies to achieve macro-objectives. --> Econ stability -->Investor confidence-->Rise in investment-->formation of physical &
human capital

STRENGTHS OF INTERVENTIONIST

POLICIES

E. Provision of a social safety net

•

Social safety net is a system of govt transfers of cash or goods to
vulnerable groups, undertaken to ensure that these groups do not fall
below a socially acceptable minimum SOL

F. Redistribute Y

•E.g. progressive income tax & transfer payments

G. Industrial policies

•Govt supports SMEs & infant industry through tech transfer from developed
countries, establishment of R&D capability, as well as investments in human
capital (through preferential tax cuts, subsidies, subsidized loans)

WEAKNESSES OF INTERVENTIONIST

POLICIES

A. Excessive bureaucracy

•Too many rules governing procedures-->red tape-->inefficiency &
high cost-->Hence, should reduce size of govt sector by privatisation of
SOEs, sub-contracting of govt projects to private sector, etc

B. Poor planning

•Govt may run into difficulties in planning as they lack the technical
knowledge & expertise as well as imperfect info

WEAKNESSES OF INTERVENTIONIST

POLICIES

C. Corruption

•Corruption-->lower growth & poorer development

•Corruption in the form of a payment for something: Works like a tax
that makes private investments more costly-->Reduce overall level of
investment

•Corruption as bribes to receive basic services like education or health
care: Works like a regressive tax as bribe is a higher fraction of the Y of
lower income earners

WEAKNESSES OF INTERVENTIONIST

POLICIES

C. Corruption

•Bribes for tax evasion-->reduce govt revenues

•Govt officials accept bribes to pursue uneconomic projects (e.g. dams
& power plants) instead of socially necessary services (e.g. education,
sanitation) -->results in misallocation of resources

•Weaken sustainable development if bribes are used to bypass
environmental regulation

•Reduction of people’s trust towards the state

Open Ended

State one strength and one weakness of interventionist policies.