What are market-led

development strategies?

MARKET-LED STRATEGIES TUTOR2U.NET/ECONOMICS

 Market Led Development Strategies

Market-led development strategies, also known as

market-oriented or market-driven development
strategies, are approaches that prioritize the role of
markets, private sector activity, and market-based
mechanisms as key drivers of economic growth and
development. These strategies emphasize the
importance of allowing market forces to allocate
resources, promote competition, and drive innovation.

MARKET-LED STRATEGIES TUTOR2U.NET/ECONOMICS

 MARKET-LED APPROACHES TO DEVELOPMENT

Estonia has followed a free Chile has adopted a free-

market approach market development agenda

Free-market approaches favour giving a larger role to private sector enterprises with liberalisation of
markets, structural economic reforms to raise incentives for people and businesses and increased
transparency for government high on the policy agenda.

MARKET-LED STRATEGIES TUTOR2U.NET/ECONOMICS

 EXAMPLES OF MARKET-LED STRATEGIES
• Trade Liberalization: Governments reduce trade barriers, such as tariffs and import quotas, to
open their economies to international trade. This promotes the export of domestic goods and
services and encourages foreign investment.
• Privatization: Governments sell or transfer ownership and management control of state-
owned enterprises to private entities.
• Financial Sector Reform: Governments improve the regulation and competitiveness of the
financial sector. This can include the establishment of private banks, the introduction of credit
bureaus, and the liberalization of interest rates. India's financial sector reforms, beginning in
the early 1990s, helped modernize the country's banking and financial system.
• Farm Reforms: Market-oriented strategies in agriculture involve reducing subsidies and price
controls and facilitating access to credit for farmers. China's rural reforms in the late 1970s,
which allowed farmers to sell surplus produce on the open market, contributed to increased
agricultural productivity and rural income.

MARKET-LED STRATEGIES TUTOR2U.NET/ECONOMICS

 Trade Liberalisation

Trade liberalization refers to the process of reducing

or eliminating barriers and restrictions that impede
the free exchange of goods and services between
countries. The aim of trade liberalization is to
promote international trade and create a more open
and competitive global market. This typically involves
reducing or removing tariffs, import quotas,
subsidies, and other trade barriers.

MARKET-LED STRATEGIES TUTOR2U.NET/ECONOMICS

 EXAMPLES OF TRADE LIBERALISATION

• Reducing Import Tariffs: Tariffs are taxes or duties applied to imported goods
and lowering them makes foreign products more affordable for domestic
consumers and businesses.
• Eliminating Import Quotas: Quotas restrict the quantity of specific goods that
can be imported into a country. Trade liberalization may involve removing or
increasing these quotas, allowing for more goods to enter the market.
• Removing Non-Tariff Barriers: Non-tariff barriers, such as technical standards,
product regulations, and licensing requirements, can be barriers to trade.
Trade liberalization efforts aim to simplify or harmonize these barriers to
reduce trade friction.

MARKET-LED STRATEGIES TUTOR2U.NET/ECONOMICS

Price of beef
TRADE WITH AN IMPORT TARIFF

Domestic supply
of beef

P1
P2 World supply of beef
with an import tariff

Domestic
demand for beef

Q3 Q1 Q2
Output of beef

MARKET-LED STRATEGIES TUTOR2U.NET/ECONOMICS

Price of beef
IMPACT OF TRADE LIBERALISATION

Domestic supply
of beef

P1
P2 World supply of beef
with an import tariff
World supply of beef
P3 with lower tariff
Domestic
demand for beef

Q3 Q1 Q2
Output of beef

MARKET-LED STRATEGIES TUTOR2U.NET/ECONOMICS

Price of beef
IMPACT OF TRADE LIBERALISATION

Domestic demand expands from Q2-

Q4 because of lower import prices Domestic supply
of beef

P1
P2 World supply of beef
with an import tariff
World supply of beef
P3 with lower tariff
Domestic
demand for beef

Q3 Q1 Q2 Q4 Output of beef

MARKET-LED STRATEGIES TUTOR2U.NET/ECONOMICS

Price of beef
IMPACT OF TRADE LIBERALISATION

Domestic supply
of beef

P1
P2 World supply of beef
with an import tariff
World supply of beef
P3 with lower tariff
Domestic
demand for beef

Q5 Q3 Q1 Q2 Q4 Output of beef

Domestic supply contracts because Domestic demand expands from Q2-

firms unable to compete at low prices Q4 because of lower import prices
 Evaluate the impact of
trade liberalisation on
economic welfare

MARKET-LED STRATEGIES TUTOR2U.NET/ECONOMICS

 GAINS IN WELFARE FROM TRADE LIBERALISATION

 Lower prices for consumers:

 This increases their real incomes / real purchasing power
 Higher consumer surplus (can be shown in an analysis diagram)
 Might help to reduce inequalities in consumption
 Liberalisation makes domestic markets more competitive / contestable
 Lower prices increase allocative efficiency
 Increased competition can drive higher productivity, lower unit costs
 Allows businesses & countries to benefit from specialisation and economies of scale
– leading to improved productive efficiency

MARKET-LED STRATEGIES TUTOR2U.NET/ECONOMICS

 Identify some of the
possible economic risks
/ drawbacks from trade
liberalisation

MARKET-LED STRATEGIES TUTOR2U.NET/ECONOMICS

 POTENTIAL DRAWBACKS FROM TRADE LIBERALISATION

 Loss of import tariff revenue for the government

 Risk of higher structural unemployment if domestic demand shifts away from home
suppliers to imports – made worse if labour is geographically and occupationally
immobile
 Linked risk of a rise in relative poverty (inequality) especially if certain industries &
regions suffer a decline as trade is liberalized
 Short-term rise in the size of a country’s trade deficit due to an increase in the
volume of imports
 Trade liberalisation could lead to greater exploitation of the environment, such as
trading toxic waste to countries with weaker environmental laws.

MARKET-LED STRATEGIES TUTOR2U.NET/ECONOMICS

EXAM GOLD

Trade liberalisation can have micro and

macroeconomic effects. The impact depends on the
scale of tariff reductions and the flexibility of
domestic businesses to respond to changing
relative prices including lower prices for imports.

MARKET-LED STRATEGIES TUTOR2U.NET/ECONOMICS

EXAM GOLD

The impact of trade liberalisation can be different

for advanced (developed) high income countries
contrasted with low-income nations. Build this into
your evaluation.

MARKET-LED STRATEGIES TUTOR2U.NET/ECONOMICS

 How can the concepts
of trade creation and
trade diversion be
applied to this topic?

MARKET-LED STRATEGIES TUTOR2U.NET/ECONOMICS

 TRADE CREATION AND TRADE DIVERSION EFFECTS

 Trade creation: lower import tariffs stimulate trade

between members, of a trade agreement
 Trade diversion: lower tariffs redirect trade away
from non-members of the trade agreement to
participating members

MARKET-LED STRATEGIES TUTOR2U.NET/ECONOMICS

EXAM GOLD

Trade liberalisation is an important growth and

development strategy for many countries. For trade
agreements to occur they should result in mutual
gains for the countries involved – in other words,
there should be net economic welfare gains and a
stronger macroeconomic performance.

MARKET-LED STRATEGIES TUTOR2U.NET/ECONOMICS

 Foreign Direct Investment (FDI)

Foreign Direct Investment (FDI) refers to the

investment made by a company or individual in one
country into business interests in another country.
FDI involves acquiring ownership or a significant
degree of influence or control over foreign
enterprises. It is a key component of international
economic integration and plays a vital role in the
global economy.

MARKET-LED STRATEGIES TUTOR2U.NET/ECONOMICS

 FOREIGN DIRECT INVESTMENT – EXAMPLES

China investing overseas in Vietnam has attracted much

metals and minerals such as FDI in a range of
nickel & lithium manufacturing sectors

MARKET-LED STRATEGIES TUTOR2U.NET/ECONOMICS

 What are the main
demand & supply-side
advantages of foreign
direct investment (FDI)?

MARKET-LED STRATEGIES TUTOR2U.NET/ECONOMICS

 FOREIGN DIRECT INVESTMENT – BENEFITS & COSTS
FDI can lead to
Direct and
improved
indirect jobs
effects from Employment Higher productivity training which
increases the
investment
projects such
created and real incomes quality of
human capital
as Shell oil which helps
extraction improve
and refineries
Gains from Foreign productivity.

Investment Overseas
FDI creates retailers can
extra AD help to open a
(including via Expands productive Increases market and
reduce
exports) but
also increases
capacity and competition in the domestic
LRAS exports domestic economy monopoly
power

MARKET-LED STRATEGIES TUTOR2U.NET/ECONOMICS

 FOREIGN DIRECT INVESTMENT – BENEFITS

• Economic Growth: FDI can stimulate economic growth by increasing capital

investment, expanding production capacities, and creating jobs.
• Job Creation: Foreign investors often establish new businesses or expand
existing ones, leading to the creation of employment opportunities.
• Transfer of Technology and Knowledge: Foreign investors bring with them
advanced technologies, management practices, and industry expertise. This
knowledge transfer can enhance the skills and capabilities of the local
workforce, contributing to increased productivity and innovation.
• Infrastructure Development: Foreign investors often invest in infrastructure,
including transportation and telecommunications, to support their operations

MARKET-LED STRATEGIES TUTOR2U.NET/ECONOMICS

 What are the main risks
and drawbacks of of
foreign direct investment
(FDI) for emerging /
developing countries?

MARKET-LED STRATEGIES TUTOR2U.NET/ECONOMICS

 FOREIGN DIRECT INVESTMENT – COSTS

Inequality – profits from Many global corporations Ethical standards from Volatile / footloose FDI flows
FDI are flow use tax avoidance TNCs may be poor – – e.g. FDI is more volatile
disproportionately to techniques to increase especially in mining, than remittance flows
powerful elites their profits farming and textiles

Limited job creation Monopsony power of

effects / small spillover TNCs who can negotiate
for local content suppliers highly favourable prices

MARKET-LED STRATEGIES TUTOR2U.NET/ECONOMICS

 FOREIGN DIRECT INVESTMENT – COSTS
• Multinationals wield power within host countries especially LEDCs using their
strength to gain favourable laws & regulations
• Foreign multinationals take advantage of weak laws on anti-competitive
practices and environmental protection
• Multinationals (such as clothing companies) have been criticised for poor
working conditions in foreign factories
• Profits made in an LEDC are often repatriated to the host country
• Imports of components/capital goods initially have a negative effect on a
country’s trade balance / current account
• Multinationals may only employ local labour in lower-skilled jobs

MARKET-LED STRATEGIES TUTOR2U.NET/ECONOMICS

 Removal of State Subsidies

The removal of state subsidies, often referred to as

subsidy reform, is the process of reducing or
eliminating financial assistance or support provided
by the government to certain industries, sectors,
products, or services. State subsidies are typically
offered to promote economic development, protect
domestic industries, or address specific social or
environmental concerns.

MARKET-LED STRATEGIES TUTOR2U.NET/ECONOMICS

 A government subsidy of £100 per tonne to steel producers
Price

Supply Pre-subsidy

The supplier
(producer) P3
receives price P1
P2 plus the Subsidy per unit
subsidy per Supply Post-subsidy
unit which P2
therefore
equals P3

Demand

Q1 Q2 Quantity
 A government subsidy of £100 per tonne to steel producers
Price

Cost of the subsidy to the

government Supply Pre-subsidy

The total cost

of the subsidy P3
to the P1
government is Subsidy per unit
shown by the Supply Post-subsidy
shaded area. P2
Equals (
P3P2 x Q2)

Demand

Q1 Q2 Quantity
 What are free-floating
exchange rates?

MARKET-LED STRATEGIES TUTOR2U.NET/ECONOMICS

 Floating Exchange Rate Systems

A free-floating exchange rate system, also known as a

floating exchange rate system, is a currency exchange
rate regime where the value of a nation's currency is
determined by the foreign exchange market through
the forces of supply and demand. In this system, the
exchange rate for a currency is allowed to fluctuate
freely and is not pegged to any other currency or a
fixed value like gold.

MARKET-LED STRATEGIES TUTOR2U.NET/ECONOMICS

 WHAT ARE FREE-FLOATING EXCHANGE RATES?

• Currency value is set purely by market forces.

• Strength of currency supply and demand drives the external value of a
currency in the markets
• Currency can either appreciate (rise) or depreciate (fall)
• No intervention by central bank - Central bank allows the currency to
find its own market level. There is no target for the exchange rate
• The external value of currency is not an explicit target of monetary
policy (meaning that a country’s interest rates are not set to influence
the value of the currency)

MARKET-LED STRATEGIES TUTOR2U.NET/ECONOMICS

 CHOICE OF CURRENCY SYSTEM BY COUNTRY (2022)
Exchange Rate System Exchange rate anchor currency (where relevant)
Composite or Other
US Dollar ($) Euro
Currency Peg
Fixed currency with no separate Ecuador
Kosovo, San Marino
legal tender Zimbabwe

Currency Board System (Fixed) Hong Kong (SAR) Bulgaria

Conventional exchange rate peg Qatar Denmark Kuwait

(fixed currency system) Saudi Arabia Senegal Nepal
Crawling exchange rate peg China
Jamaica Croatia
(semi-fixed currency) Ethiopia
Kenya, Brazil, Ukraine, South Korea, India, Zambia, South Africa, Thailand,
Managed floating currency
Turkey, Sweden, Mexico, Israel, Japan, Chile

Free floating exchange rate Australia, Canada, Norway, UK, USA, Euro Zone (Euro)

MARKET-LED STRATEGIES TUTOR2U.NET/ECONOMICS

 ADVANTAGES OF FREE-FLOATING EXCHANGE RATES

• Monetary Policy Autonomy: Countries with free-floating exchange rates have greater flexibility in
conducting an independent monetary policy. This means that they can adjust interest rates and the
size of quantitative easing to address domestic economic conditions such as growth, inflation and
unemployment without being constrained by exchange rate considerations.
• Shock Absorption: Free-floating exchange rates allow countries to absorb external economic shocks
more effectively. If a country faces an economic crisis, such as a recession, the exchange rate can act
as a shock absorber by helping to rebalance the economy.
• Trade Balance Adjustment: A floating exchange rate can help correct trade imbalances over time. If
a country is running a large trade deficit, its currency's depreciation can eventually make its exports
more price competitive and imports more expensive, leading to a narrowing of the deficit.
• Currency reserves: When operating a free-floating exchange rate system, the central bank does not
need to hold large foreign currency reserves because there is no specific currency target, financial
capital can flow freely across countries seeking the best returns

MARKET-LED STRATEGIES TUTOR2U.NET/ECONOMICS

 DRAWBACKS OF FREE-FLOATING EXCHANGE RATES

• Exchange Rate Volatility: One of the most significant drawbacks of a free-floating system is the
potential for exchange rate volatility. Currencies can experience rapid and unpredictable
fluctuations, which can introduce uncertainty for businesses engaged in international trade
and investment.
• Currency Risk: The volatility of exchange rates introduces currency risk for businesses and
investors.
• Inflation Pass-Through: Exchange rate fluctuations can lead to changes in import prices, which
can impact domestic inflation. A significant depreciation of the currency can contribute to
imported inflation and erode real purchasing power.
• Loss of Exchange Rate as a Policy Tool: While countries gain monetary policy autonomy, they
lose the ability to manage the exchange rate as a deliberate policy tool. This can limit the
direct influence of exchange rates on trade and competitiveness.

MARKET-LED STRATEGIES TUTOR2U.NET/ECONOMICS

 What is micro-finance?

MARKET-LED STRATEGIES TUTOR2U.NET/ECONOMICS

 Microfinance

In development economics, microfinance refers to the

provision of financial services, such as small loans, savings
accounts, insurance, and payment systems, to individuals,
particularly those with low incomes or lacking access to
traditional banking services. Microfinance institutions (MFIs)
and programs aim to empower and support people at the
grassroots level, especially in developing countries, by giving
them access to financial resources and opportunities for
economic improvement.

MARKET-LED STRATEGIES TUTOR2U.NET/ECONOMICS

 Dr. Muhammad Yunus

MICRO-FINANCE TUTOR2U.NET/ECONOMICS
 WHAT IS MICRO-FINANCE?

Microfinance refers to the provision

of financial services, such as loans,
savings, and insurance, to individuals
and small businesses who are
typically excluded from traditional
banking services – sometimes known
as the “unbankable”

MICRO-FINANCE TUTOR2U.NET/ECONOMICS
 THE SCALE OF MICRO-FINANCE

• Global Microscope on Financial Inclusion 2021: global microfinance

sector had a total loan portfolio of $139 billion in 2020.
• Microfinance Barometer 2021 report estimated that there were
over 10,000 microfinance institutions in the world in 2020.
• It is estimated that the microfinance sector provided financial
services to over 200 million people globally in 2020.
• The MIX Market, which is a leading source of data on the
microfinance industry, reported that the global microfinance sector
had total assets of $195 billion as of December 2020.

MICRO-FINANCE TUTOR2U.NET/ECONOMICS
 EXAMPLES OF MICRO-FINANCE
1. Bangladesh: The Grameen Bank, founded by Muhammad Yunus,
pioneered the concept of microfinance in Bangladesh in the 1970s
and 1980s. Today, the Grameen Bank, serves millions of low-income
individuals and small businesses.
2. India: Today, there are several microfinance institutions in India that
provide financial services to low-income individuals and small
businesses, including the Self-Employed Women's Association
(SEWA) and the Sa-Dhan network of microfinance institutions.
3. Peru: FINCA Peru provides financial services to low-income
individuals and small businesses.

MICRO-FINANCE TUTOR2U.NET/ECONOMICS
 POINTS IN FAVOUR OF MICRO-FINANCE
1. Increased access to credit: Microfinance provides access to credit for
people who would not normally have access to it, allowing them to start or
expand their businesses and increase their income or improve housing.
2. Empowerment of women: Microfinance programmes often target women,
who have historically been excluded because of social and cultural norms
from financial services. By providing them with access to credit and
training, microfinance can empower women and increase their economic
and social status including starting up micro-businesses.
3. Poverty reduction: Microfinance has been shown to help reduce extreme
poverty by increasing per capita incomes, raising household savings and
creating jobs, particularly in the poorest rural and urban areas.

MICRO-FINANCE TUTOR2U.NET/ECONOMICS
 LIMITATIONS OF MICRO-FINANCE
1. High interest rates: Microfinance institutions often charge high interest rates
to compensate for the risk of lending to low-income individuals. This can make
it difficult for borrowers to repay loans and may push them further into
poverty.
2. Over-indebtedness: There is a risk that borrowers may become over-indebted
if they take out multiple loans from different microfinance institutions. This
can lead to financial stress and even bankruptcy.
3. Limited impact: Some studies have suggested that the long-term impact of
microfinance on poverty reduction and development is limited. Critics argue
that microfinance is not a panacea and that other interventions, such as direct
cash transfers may be more effective at reducing extreme poverty.

MICRO-FINANCE TUTOR2U.NET/ECONOMICS
 Number of borrowers from microfinance institutions
in Kenya from 2010 to 2020 (in 1,000s)
600

513
500
416
400 386 391
356 342
311
300 293
265 264
219
200

100

0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

MICRO-FINANCE TUTOR2U.NET/ECONOMICS
 EXAM GOLD

Micro-finance on its own will always have a relatively limited impact

overall on economic growth and extreme poverty reduction.
Microcredit-plus programmes have emerged in a number of
countries. For example, BRAC provides microfinance, healthcare &
education to low-income communities in Bangladesh and other
countries. In addition to microcredit, BRAC offers maternal and child
health programmes, and education and training, including a
programme teaching basic literacy and numeracy to women.

MICRO-FINANCE TUTOR2U.NET/ECONOMICS
 RESEARCH GOLD

From the research findings, results revealed that microfinance has significant role to
play in the economy, as it helps reduce poverty by providing financial services to the
active poor, help in generating employment and also provide small loans to grow
small businesses.
Yahaya et al. Global Journal of Management and Business Research (2011)

In comparison with other anti-poverty measures, microfinance appears to be

successful and relative cheap at reducing the poverty of those close to the poverty
line, but ineffective, by comparison with labour-market and infrastructural measures,
in reducing extreme poverty.
Mosley, Microfinance and Poverty Reduction in Bolivia, (2001)

MICRO-FINANCE TUTOR2U.NET/ECONOMICS
 What is privatisation?

MARKET-LED STRATEGIES TUTOR2U.NET/ECONOMICS

 Privatisation

Privatization is the process of transferring ownership

and control of government-owned or public-sector
assets, enterprises, or services to the private sector,
typically through the sale of these assets to private
individuals, businesses, or investors. Privatization is a
significant supply-side policy reform that can affect a
wide range of sectors, including industries, public
services, and infrastructure.

MARKET-LED STRATEGIES TUTOR2U.NET/ECONOMICS

 PRIVATISATION AS A STRATEGY

• Ownership Transfer: In the privatization process, the government typically sells shares
or ownership stakes in formerly public assets to private individuals, corporations, or
investors.
• Market Mechanisms: Privatization often relies on market mechanisms to determine
the value of assets and the terms of the sale. This can involve competitive bidding,
auctions, or negotiations with potential buyers.
• Diverse Sectors: Privatization can be applied to sectors, including telecoms,
transportation, energy, healthcare, education, water supply, and more
• Economic Objectives: Privatization is often pursued with objectives in mind, such as
improving efficiency, reducing government debt, increasing investment, and
promoting economic growth.

MARKET-LED STRATEGIES TUTOR2U.NET/ECONOMICS

 Research has found that monopoly power in the construction sector raises prices
Monopoly power can and undermines long-term growth in poor countries. Cement is largely non-
traded: only 5% of global cement consumption is traded. Finally, the cement
industry is characterized by significant market power, both in developed as well as
hamper development in developing countries. Higher cement prices increase the real cost of
government infrastructure projects and lower profits for construction firms.
Privatisation can lead In 2013, Senegal’s government privatised the management of one piece of Dakar’s
sanitation sector: sludge treatment centres. In 2013, Dakar’s sludge treatment
to increased economic centres were poorly managed and in disrepair. The government decided to
privatise them. In November 2013, management responsibility was delegated to
Delvic Sanitation Limited, a new joint venture run by the combined Delta and Vicas
efficiency trucking companies.
 BENEFITS OF PRIVATISATION FOR DEVELOPMENT

• Improved Efficiency and Productivity: Private companies tend to operate with greater
flexibility, cost-consciousness, and responsiveness to market forces, resulting in enhanced
performance.
• Reduced Government Burden: The sale of state-owned assets can reduce the financial
burden on the government so they can allocate resources to other essential public
services, such as education, healthcare, and infrastructure development.
• Increased Investment: Private companies may invest in upgrading and expanding the
capacity of privatized enterprises, thereby boosting economic growth and job creation.
• Enhanced Competition: Privatization sometimes introduces competition into industries
that were previously dominated by state-owned enterprises. This competition can drive
product quality improvements, price reductions, and better service provision, benefiting
consumers.

MARKET-LED STRATEGIES TUTOR2U.NET/ECONOMICS

 RISKS OF PRIVATISATION FOR DEVELOPMENT
• Income Inequality: Privatization can exacerbate income inequality, as private investors and
companies may prioritize profit maximization over equitable resource allocation and social welfare.
• Reduced Access to Essential Services: In sectors like healthcare, education, and utilities,
privatization may lead to reduced access and affordability for low-income and marginalized
populations.
• Higher Costs: Critics argue that privatization can lead to higher costs for consumers due to profit
motives. Privately operated services or industries may charge higher prices or cut services to
maximize profits.
• Loss of Control: Privatization can result in a loss of government control over critical services and
infrastructure. This can limit a government's ability to address public interest, respond to crises, or
ensure access to essential services.
• Job Losses: Critics argue that privatization often results in job losses, as private entities seek cost-
cutting measures, including layoffs, outsourcing, and automation.

MARKET-LED STRATEGIES TUTOR2U.NET/ECONOMICS