Strategies to Achieve Growth
Harrod-Domar growth model
- Economy’s rate of growth depends on level of saving and the productivity of investment.
- Increasing the savings ratio or the amount of investment are vital for economic growth.
Structural change / Dual Sector Model
- When an economy develops, incomes will increase and the demand for agricultural goods will rise. However, because of low income elasticity of demand, this will occur at a slow rate. On the other hand, the demand for manufactured goods have a higher income elasticity of demand, so the demand for them will increase at a faster rate.
Type of Aid
- Humanitarian - Money that is sent (by an individual country or a major organisation) to help against a specific problem, e.g. drought
- Bilateral – A loan which is given by one country to another.
- Multilateral – When seperate countries pay money into one central organisation, and it then determines who receives money and for what.
Export-led growth / outward-oriented strategies
Increase in export demand can lead to…
- Increased investment
- Enable the country to gain conomies of scale
- Increased employment
- Greater equality of income distribution
- Increased competition
Commercial Loans
- loans from banks and other financial organisations
Micro-credit schemes
- schemes that lend small amounts to the poor in a developing country.
- Directly targeted at the needs of those people and reflect the circumstances they operate in.
Sustainable Development
- Development that will not cause long run costs on the future generations.
Fairtrade Organizations
- Fairtrade organizations will set a “fair price” that ensures farmers and producer’s minimum revenue. The price covers production costs and creates a surplus so that the producers have enough money to invest and maintain a living.
Foreign Direct Investment
- Self explanatory – incomes from foreign direct investment. As more foreign firms invest in the economy, the more money that is injected into the economy.
Haiti’s Strategies to Growth
Harrod-Domar growth model: Level of disposable income is very low. This means that most of the income for an average family in Haiti will be immediately spent on commodities such as food and shelter. Therefore, the level of savings are low so the Harrod-Domar growth model cannot apply to Haiti. Instead, Haiti should consider other strategies of growth that could increase savings and investment that can lead to economic growth.
Type of Aid: Haiti has been very dependent on foreign aid. Currently in Haiti, the existing infrastructure is struggling to handle the aid that is flowing in and resources are scarce. There had been a lot of humanitarian aid (money that is sent to help against a specific problem) because of the earthquake. Many countries that are sending humanitarian aid to Haiti is not expecting a return from it due to Haiti’s economic state. These aids may be a starting point for economic improvement, since Haiti does not have enough capital to achieve economic growth. These aids could be the basis of Haiti’s economic activity. Although many countries are not expecting a return from sending aids to Haiti, the Haitian economy will emotionally be in debt.
Export-led growth / outward-oriented strategies: This strategy of growth is not applicable to Haiti because it is a heavily import dependent country. The large sum of current account deficit indicates how dependent Haiti is on other countries. Haiti’s main exports are agriculture and it is difficult to increase demand for agriculture. Demand for innovative manufactured goods (ipod, computers) could increase largely and lead to an increase in exports, but it is unlikely that demand for primary goods will suddenly increase. Hence, this method is unreliable/unlikely to happen.
Structural change / Dual Sector Model: 66% of Haiti’s economic output is agriculture. Such primary goods have low income elasticity of demand, meaning that when the economy develops, incomes will increase but the demand for goods will increase at a slow rate. This lag between income and demand for goods slows down the economy instead and makes it difficult to achieve growth.
Commercial Loans: may be an effective way of stimulating the Haitian economy. However, note that they are “loans”, meaning that the economy will eventually have to pay back. At the moment, Haiti has low potential of paying back so this is not a reliable strategy of growth.
Micro-credit schemes: Since Haiti has a high level of income inequality, this may be a good strategy for helping the poor. It may lead to a reduction of income inequality and raise the standard of living for many.
Fairtrade Organizations: In Haiti there is little fairtrade organizations that exist. Hence, it is difficult to set fair trade prices and this may be one of the leading causes of poverty.
Sustainable Development: Since Haiti has a lot of factors to improve on, sustainable development will be an important factor to consider. Most of Haiti’s economical factors need improvement so the key is to spend aid from other countries wisely so that they will not “run out”.
Foreign Direct Investment: It is important for Haitian economy to globally expose itself. Although many might suggest that protectionism is required to protect many Haitian firms (because it is less developed/efficient than others), foreign competition and global exposion may be effective.
Evaluation
Haiti lacks basic capitals in every other way such as government budget, taxation system, employment opportunities, industrial factors etc. Hence, the most effective way to attain growth could be to improve basic sources of growth. Many sectors of the economy are under-invested but due to the corruption of the Haitian government, it may be difficult to invest in the short run. In the long run, if government investment is directed towards basic necessities such as improvement in infrastructure, this could stimulate the economic activity. However, in the short run, aids from other countries seem to be an effective starting point. Not only will Haiti use aid to recovery from the recent earthquake, but they could also improve their economy. For example, instead of simply fixing buildings, they could improve the quality of it.
Currently the Haitian economy is focusing on recovering from the earthquake. However, in the long run I think micro-credit schemes could be an effective way of achieving economic growth. Since income inequality is high in Haiti, if this strategy could focus on helping the poor, it could greatly contribute to economic growth. If the poor are helped, it could improve disposable income and consumer expenditure may increase. If consumer expenditure increases, firms will have more revenue and thus, employment may increase. This creates a positive cycle in the economy.
