Kabir's Econ Blog

February 3, 2010

Ecuador Growth and Development Strategies

Filed under: Uncategorized — kabir1892 @ 2:31 am

1) Harrod-Domar Growth Model

-Increased investment would, in turn, force the production possibility curve outwards and create more wealth.

The model concludes that:

  • Increasing the savings ratio, or the amount of investment or the rate of technological progress are vital for the growth process
  • Economic growth depends on the amount of labour and capital.
  • As developing countries often have an abundant supply of labour it is a lack of physical capital that holds back economic growth and development.
  • More physical capital generates economic growth.
  • Net investment leads to more capital accumulation, which generates higher output and income.
  • Higher income allows higher levels of saving.

Ecuador: At the situation Ecuador is at now, there is no need for savings since the real GDP per capita is already considered low. Due to distribution of income issues, Ecuador cannot apply the Harrod-Domar theory.

2) Structural change/dual sector:

– Two economists, Fisher and Clark, put forward the idea that an economy would have three stages of production:

  • Primary production: is concerned with the extraction of raw materials through agriculture, mining, fishing, and forestry. Low-income countries are assumed to be predominantly dominated by primary production.
  • Secondary production: concerned with industrial production through manufacturing and construction. Middle income countries are often dominated by their secondary sector.
  • Tertiary production: concerned with the provision of services such as education and tourism. In high-income countries, the tertiary sector dominates. Indeed having a large tertiary sector is seen as a sign of economic maturity in the development process.

Ecuador: It depends highly on its primary factors, such as oil. Tourism and infrastructure is also considered good, so there is not much need for the structural/dual sector.

3) Types of Aid:

  • Humanitarian – which can both be by individual country to country or via a major organisation such as one of the UN agencies. This is not a loan and is normally sent to help against a specific problem, e.g. drought.
  • Bilateral – which is given by one country to another. It is a loan, though may be subject to a long period prior to re-payment commencing, and granted as soft or below market terms.
  • Multilateral – which is when separate countries pay money into one central organisation, say the IMF, and it then determines who receives money and for what. So, multilateral aid is given via one of the large international agencies.
  • Ecuador:  For Ecuador, this solution is going to be very helpful. HIAS has helped by hiring and training local staff in ways of intervention. In 2007, the Government of the United Kingdom, with HIAS support, trained Ecuadorian policemen on human rights. In addition, HIAS works closely with a network of local institutions and grass roots. America also agreed to help Ecuador through the bilateral investment (BIT). This Treaty will assist Ecuador in its efforts to develop its economy by creating conditions more favorable for U.S. private investment, helping to attract such investment and, thus, strengthening the development of the private sector. The IMF has also extended loans for Ecuador.

    4) Export-led growth/outward oriented strategies:

    • It conforms more closely to comparative advantage – resources may be used more efficiently as the resources used in earning a unit of foreign exchange from exports will be less than those used in saving a unit of foreign exchange by replacing imports with domestic goods.
    • Increased investment – outward-oriented policies may help encourage inward investment and therefore domestic productivity.
    • Economies of scale – the increased sale of exports may help raise the domestic level of production and enable the country to gain from economies of scale.
    • Increased employment – increased production should help boost the domestic level of employment.
    • Greater equality of income distribution – increased demand for labour will help boost wages in a developing economy and this should help to make income distribution more even.
    • Increased competition – an outward-oriented strategy will expose the country to the full weight of international competition. They may struggle initially to compete, but productivity will rise much faster than if import substitution policies are followed.

    Ecuador: Export led growth is being used already as Ecuador has a large exporting sector. Ecuador is substantially dependent on its petroleum resources, which have accounted for more than half of the country’s export earnings and one-fourth of public sector revenues in recent years.

    5) Import substitution/inward oriented strategies/protectionism

    – The protection of jobs and the promotion of growth might be best served by concentrating on producing import substitutes. Countries need foreign exchange and if they can produce substitutes for imports, this will release foreign exchange.

    Ecuador: They recently imposed trade restrictions by putting tariffs on particular imports.  According to some in Ecuador, the tariffs, while slowing imports and hurting those companies that rely upon foreign goods; the tariffs have been an advantage for domestic producers.

    6) Commercial Loans:

    -Commercial loans are loans from banks and other financial organisations, usually in the developed world.

    Ecuador: The IDB (Inter-American Development Bank) provided $90 million loan to Ecuador for health care. China also gave a “massive loan” of $2 billion for a hydroelectric dam in Ecuador. This loan is yet to be agreed since there are still issues with this.

    7) Fairtrade Organizations

    – This means a price that covers their production costs and allows a surplus that they can reinvest in their business and that can sustain a ‘reasonable’ standard of living. This creates a degree of stability of prices and allows development to take place at a more measured and consistent pace.

    Ecuador: In Ecuador, the Fair Trade certification guarantees that employers pay decent wages, respect the right of their workers to join trade unions and provide good housing when relevant. The Fair Trade certification also demands the practice environmentally-friendly farming methods which reduce the use of pesticides, conserve energy and protect watersheds and wildlife. In the floral industry, 10% of the FOB price paid for the FTC roses goes to a fund for flower workers to invest in community development projects like: small businesses, scholarships for workers and their kids, health centers and loans.These funds are known as the Fair Trade Premium.

    8) Micro Credit Scheme

    -Microcredit schemes are schemes that lend small amounts to the poor in a developing country. The loans may be as low as $1, but they are directly targeted at the needs of those people and reflect the circumstances they operate in.

    Ecuador: Microfinance organizations in Ecuador offer savings and loan services to individuals and groups whom may not have access to traditional banking, the opportunity to access to capitals which can be used to invest in income generating activities. They used the microedit scheme is to provide small loans to the Ecuadorian community members, who would otherwise be unable to qualify for a loan, in order for them to start businesses and work their way out of poverty. The recipients of the loan use the money for such things as tools and materials with which they can make a living. Once income starts to be generated, the loan is paid back at a very low rate of interest.

    9) Foreign Direct Investment

    -Foreign direct investment is mainly undertaken through multinational corporations (MNCs). An MNC is a firm that has productive capacity in a number of countries. The profit and income flows that they generate are part of the foreign capital flows moving between countries.

    Ecuador: Ecuador aims to increase the role of foreign direct investment in its development not only by receiving more FDI, but also by gaining benefits of technology, employment, exports, skill and in overall competitiveness. In early 1990’s, Ecuador liberalized FDI policies. It also opened up its economy to international trade, reforming the tax and fiscal systems.

    10) Sustainable Developments

    -Sustainable development is development which will not have a detrimental effect on future generations and which involves measures to limit the use of non-renewable resources.

    • Targeting aid to projects that helped improve the environment (the provision of clean water etc.)
    • Research into environmentally friendly farming methods
    • Programmes to help reduce population growth (e.g. family planning and education)

    Ecuador: In the Ambato region, FSD partnered with organizations in order to address the environmental sustainability through education programs, awareness campaigns, and local initiatives. Volunteers work for the agriculture section by providing building workshops and technical assistance to increase productivity and ecological sustainability. Water systems is also another issue, so they plan on building and managing the effectiveness. Help is needed in these areas to ensure proper use of land and the resources that can be produced from it.

    Conclusion: After carefully researching and thinking about what the best growth and development strategies, I have concluded that foreign direct investment is the best idea. This is because the success of the growth of the economy depends on certain actions and policies of the government. Achieving social consensus by building around reforms is critical. The economic crisis brought deprivation to a large portion of the population, especially the poorest. Further improving framework for investment is another strategy since FDI changes made Ecuador favorable in comparison to Latin American countries. Improving physical infrastructure and designing policies used to increase long term benefits from FDI are also good. Finally, through foreign direct investment, implementing an investment promotion programme. The formulation and launch of an investment promotion programme should be one of Government’s priorities.

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