OxfordAQA International AS and A-level Economics: Policies to promote development (9640)

This guide is aligned to the OxfordAQA International AS and A-level Economics (9640) specification, version 1.2, section 3.4.3.3 Policies to promote development. Section 3.4 is extra International A2 content, examined in the A2 unit on economic development and the global economy. The other 3.4.3 statements (measuring growth and development, and factors affecting development) have their own pages. All figures below are invented and illustrative. Currency is shown as “cu” (currency units).

Related pages: course hub, printable checklist, revision notes, practice questions and the free 10-minute diagnostics.

What the specification asks for

Content	What you must be able to do
Demand-side and supply-side policies	Say which type a policy is and how it works
Market-based versus interventionist strategies	Define both, list examples, see where they overlap
FDI	Give advantages and disadvantages
Buffer stocks	Explain how they stabilise commodity prices
Microfinance and fair trade	Explain how each helps and where each falls short
Foreign aid, including debt relief	Describe the types and judge the role of aid
Remittances, tourism	Explain the role in development
World Bank, IMF, NGOs	Describe what each does

The specification stresses that economists disagree on the best route to development, and that the line between the two strategies is not clear cut. Use this in evaluation.

Demand-side and supply-side policies

Demand-side policies raise aggregate demand: government spending, lower taxes, cheaper credit. They help when there is spare capacity, but a developing economy often has a supply problem too: poor roads, weak skills, little capital. More demand in that case raises prices and imports rather than output.

Supply-side policies raise productive capacity (long-run aggregate supply): education, health care, infrastructure, deregulation, incentives to invest. They work slowly and cost money up front.

Market-based strategies

These rely on prices, competition and private firms. The specification lists trade liberalisation, privatisation, deregulation, encouraging FDI, low taxes and minimal state involvement, and floating exchange rates.

• Trade liberalisation: cutting tariffs and quotas. Imported inputs get cheaper and domestic firms face competition. Infant industries may be wiped out.
• Privatisation: selling state assets. The profit motive may raise efficiency, but a private monopoly may exploit consumers, and poorer households may lose access if prices rise.
• Deregulation: removing rules that block entry. Starting a business becomes easier. Rules on safety and the environment may weaken.
• Low taxes: encourage work and investment, but leave less revenue for schools and clinics.
• Floating exchange rate: the currency adjusts to the balance of payments, so the central bank does not need large reserves. It can be volatile, which makes export earnings and import costs uncertain.

Worked example: trade liberalisation

Country A imports a machine with a world price of 10,000 cu.

Tariff 20%: price = 10,000 x 1.20 = 12,000 cu
Tariff 5%:  price = 10,000 x 1.05 = 10,500 cu
Change = (10,500 - 12,000) / 12,000 x 100 = -12.5%

A 12.5% fall in the cost of capital goods encourages investment. Against this, the government gives up tariff income and local machine makers lose protection. Whether total tariff revenue falls depends on how many machines are imported afterwards.

Interventionist strategies

The state leads. The specification lists protectionism, public ownership, industrial strategies, government spending on infrastructure, education and health care, and managed exchange rates.

• Protectionism shields infant industries while they grow, at the cost of higher prices and weaker pressure to be efficient.
• Public ownership lets the state run strategic industries and serve remote areas, but government failure (waste, political interference) is a risk.
• Industrial strategy picks priority sectors and supports them with finance and training. The state may pick the wrong ones.
• Spending on infrastructure, education and health care builds human and physical capital. It needs tax revenue or borrowing, and results take years.
• A managed exchange rate gives stability for traders and can hold the currency competitive, but it needs reserves and can be attacked by speculators.

Overlap

The strategies complement each other. A government may liberalise trade (market-based) while funding schools (interventionist). Encouraging FDI is market-based, but a state agency that offers tax breaks and builds roads to a new zone is intervening. Judge the mix, not the label.

Foreign direct investment

FDI is a lasting investment by a foreign firm, such as building a factory.

Advantages: capital, technology and management skills arrive; jobs and exports rise; tax revenue grows; the multiplier spreads income.

Disadvantages: profits are repatriated; the firm may use imported inputs; jobs may be low-skilled or low-paid; it may crowd out local firms; the host has little control if the firm leaves.

Worked example: FDI

A foreign firm injects 200 cu of spending in Country B. Households spend 0.6 of extra income domestically (domestic MPC).

Multiplier = 1 / (1 - 0.6) = 2.5
Total rise in income = 200 x 2.5 = 500 cu

The firm earns 60 cu profit and sends 70% abroad: 60 x 0.70 = 42 cu leaves; 18 cu stays. The gain is large, but only if the firm buys locally. If most inputs are imported, the effective MPC falls and so does the multiplier.

Buffer stocks

Primary commodity prices swing because supply depends on weather and demand is price inelastic. A buffer stock authority sets a minimum (floor) and maximum (ceiling) price. If the market price is heading under the floor, the authority buys the surplus into storage; if it is heading over the ceiling, the authority releases stock onto the market.

Worked example

Crop X, quantities in thousand tonnes, price in cu per tonne. Demand: Qd = 1,800 - P.

Season	Supply	Free-market price	Quantity
Normal	Qs = P - 200	1,000	800
Bumper	Qs = P + 100	850	950
Poor	Qs = P - 400	1,100	700

Without a scheme, the price swings from 850 to 1,100: a range of 250 cu. Set a floor of 900 and a ceiling of 1,050.

Bumper season, floor 900: Qd = 1,800 - 900 = 900; Qs = 900 + 100 = 1,000. The authority buys 100 thousand tonnes at 900, costing 90 million cu. Farmers receive 900 x 1,000 = 900 million cu, against 850 x 950 = 807.5 million without the scheme.

Poor season, ceiling 1,050: Qd = 750; Qs = 1,050 - 400 = 650. The authority sells 100 thousand tonnes from stock, raising 105 million cu.

Evaluation: farmers’ incomes become more predictable and planning improves. But storage costs money, the authority needs funds to buy, a floor set too high leads to endless surpluses, and perishable crops cannot be stored.

Microfinance

Microfinance gives small loans, savings and insurance to poor people who cannot borrow from banks because they lack collateral.

Worked example: a seamstress borrows 200 cu at 20% interest for a year. Repayment: 200 x 1.20 = 240 cu. An informal lender charges 10% a month, simple interest: 200 x (1 + 0.10 x 12) = 440 cu. A sewing machine raises her income by 60 cu a month, 720 cu a year. Interest costs 40 cu, so the net gain is 680 cu.

Strengths: raises small business income, empowers women who often run the enterprises, and avoids moneylenders. Weaknesses: interest can still be high, over-borrowing causes debt traps, and loans rarely build large firms.

Fair trade

Fair trade schemes guarantee a minimum price and often a premium for community projects.

Worked example: a cooperative sells 80 tonnes. It sells 50 tonnes on fair trade terms at 1,200 cu and 30 tonnes at the market price of 1,000 cu.

Revenue = 50 x 1,200 + 30 x 1,000 = 90,000 cu
At market price only = 80 x 1,000 = 80,000 cu
Gain = 10,000 / 80,000 = 12.5%
Separate community premium (150 cu per tonne on the 50 tonnes) = 7,500 cu

Limits: only the farmers in the scheme gain, consumers must be willing to pay more, and a surplus may build if the guaranteed price attracts extra producers.

Foreign aid and debt relief

Types: bilateral (government to government), multilateral (through an international body), NGO aid, grants, concessional loans, tied aid (must buy from the donor), project aid, emergency (humanitarian) aid, and debt relief (reducing or cancelling debt).

Role: aid fills the savings gap, funds infrastructure and health, and relieves emergencies. Problems: dependency, corruption, tied aid, conditions attached, and short-term thinking.

Worked example, debt relief: Country C earns 2,000 cu million from exports and spends 25% on debt service: 500 cu million. Relief cuts debt service by 40% (500 x 0.40), freeing 200 cu million. If each clinic costs 0.5 cu million, 200 / 0.5 = 400 clinics. Whether the money is spent on clinics depends on government priorities.

Tied aid: if 50 cu of aid is given and 60% is tied to purchases from the donor, only 50 x 0.40 = 20 cu can be spent freely.

Remittances

Remittances are money sent home by migrant workers. They raise household income, pay for schooling and health care, support the balance of payments, and are more stable than some other flows.

Worked example: 100,000 migrants each send 1,800 cu a year: 180 million cu. GDP is 6,000 million cu, so remittances are 3% of GDP. A transfer fee of 8% costs 144 cu per migrant, 14.4 million cu in total. Halving the fee saves 7.2 million cu.

Drawbacks: loss of skilled workers (brain drain), dependence on foreign labour markets, and spending on consumption instead of investment.

Tourism

Tourism creates jobs, brings foreign exchange and has a multiplier effect. Leakages (foreign-owned hotels, imported food) reduce the gain, and it can cause environmental damage and seasonal, low-paid work.

Worked example: 500,000 visitors spend 900 cu each: 450 million cu. Leakage is 40%, so 270 million cu stays. With a local MPC of 0.375, the multiplier is 1 / (1 - 0.375) = 1.6, so the final gain is 270 x 1.6 = 432 million cu.

The World Bank, IMF and NGOs

• World Bank: lends for development projects and gives technical advice. Concessional loans go to the poorest countries.
• IMF: oversees the international monetary system, lends to countries with balance of payments problems, and often attaches conditions such as spending cuts. Critics say the conditions can hurt the poor.
• NGOs: non-profit organisations that run local projects, deliver health and education, and campaign. They can reach communities directly but have limited funds and little accountability to the government.

Evaluating: a short chain

Claim: a country should liberalise trade. Chain: lower tariffs, cheaper inputs, more competition, higher productivity, faster growth. Counter: infant industries collapse, jobs are lost, and tariff revenue falls. Judgement: depends on how developed local firms are, the speed of change, and whether the state helps displaced workers. A phased approach combines both strategies.

Common errors

• Writing “FDI” without saying who owns the asset or where profit goes.
• Treating aid as always good. Tied aid and corruption reduce its value.
• Drawing a buffer stock without stating the floor and ceiling or what the authority does.
• Calling a policy market-based or interventionist with no reason.

Official syllabus

OxfordAQA International AS and A-level Economics (9640), specification version 1.2, section 3.4.3.3 Policies to promote development. For International AS exams from May/June 2021 and International A-level exams from May/June 2022.