Development Problems

Primary Product Dependency problems

1. Dutch disease - damages competitiveness of other firms

2. Prebisch-Singer hypothesis - the long run price of agricultural goods decrease in proportion to high value manufactured goods = worsens terms of trade over time

3. Low value added - low wages, low export value, low tax revenue

4. Volatility of commodities

5. Extraction requires capital investment - which developing countries lack

Volatility of Commodity Prices problems

Demand and supply inelastic, fluctuations significantly increase firms uncertainty = decrease investment = decrease AD and LRAS

Savings Gap

1. Harrod-Domar model: rate of growth of GDP = savings ratio ÷ capital output ratio (productivity)

2. Lower levels of saving = decrease supply of loanable funds = increase costs of borrowing, decreasing AD and LRAS

Foreign Currency Gap

1. CA deficit funded by borrowing for FA surplus, leading to increase in debt (and repayments)

2. FA surplus leads to repatriation of profits for TNCs and foreign firms

3. Face depreciation of currency if insufficient FA surplus to fund CA deficit - causes increase in debt obligations and imported inflation

Capital Flight

1. Credit Crunch - reduces consumption, investment, government spending

2. Currency depreciation - imported inflation, debt increases

Demographic Factors

1. Rapid population growth - lower GNI per capita, cuts in gov. spending per person

2. Emigration - loss of human capital, reduces consumption, decreases investment

Debt

1. Debt repayments - tax revenue can’t be used elsewhere

2. Crowding-out private investment - reduces investment (AD and LRAS)