Discuss market-orientated strategies the Angolan government could use to improve development
Edexcel A-Level Economics Paper 2 June 2023 Extract
Discuss market-orientated strategies the Angolan government could use to improve development. (15 marks)
Paragraph 1
One market-based strategy that the Angolan government can use to increase economic development is to reduce corporation taxes. Lower corporation taxes mean that firms would be able to keep more of their profits. This would incentivise more multinational corporations, MNCs, to set up in Angola. Additionally, those that do set up would be able to keep more of their profits, which would allow them to reinvest more. As they reinvest more money into capital, productivity increases as firms can produce more output per unit of input. This would lead to an increase in the productive potential, and as long-run economic growth increases, the Angolan economy will develop more. Economic development occurs when there are improvements in HDI which tracks changes in life expectancy, mean years of schooling and real GNI per capita at PPP, all of which should improve as the economy grows.
Evaluation
However, this may strategy may be difficult or almost impossible for the Angolan government currently as reducing corporation taxes would lead to an increase in the budget deficit, which is where government spending exceeds tax revenue in a given year. Extract B Line 9 mentions that the government have a high cost of debt repayments and are looking at debt relief options. As national debt increases, governments must pay more in interest, which has an opportunity cost as it means the government have less room in the fiscal budget to spend in other areas. Although, the extract does mention that they will have a freeze on debt repayments for three years, which would open up the option for lower taxes. If lower corporation taxes leads to more economic growth, it could lead to higher tax revenue in the future.
Paragraph 2
Another market-based strategy that can be useful in promoting economic development is the use of microfinance schemes. These are small loans provided to entrepreneurs who lack access to traditional banking. They work differently to regular loans as they are much more flexible and usually have a human touch. The extract mentions 17 million people living in absolute poverty, and there would be many more people living on low incomes. One example of microfinance is The Grameen Bank Model which involves offering loans to self-selected groups of 5 where each member is responsible for covering any other member who fails to pay. Many of these microfinance schemes also often empower women especially. Overall, microfinance schemes enable small business owners to grow by giving them funds to increase investment, breaking the savings gap. As capital stock increases, the economy can grow, which can lead to higher incomes and higher savings, allowing for more reinvestment, reinforcing the cycle. Overall, microfinance schemes should enable for more real gni per capita and therefore more economic development.
Evaluation
However, as microfinance can be deemed as a much riskier form of lending than traditional banking, it will involve higher interest rates. This can put more customers at risk of not being able to afford their repayments, which will lead to defaults. This can make it even harder for them to borrow in the future, and puts them further into poverty. As customers or groups default, this increases the risk of a liquidity crisis for the lenders, making microfinance schemes potentially unsustainable.
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