4.9 Barriers to Economic Growth and/or Economic Development

The Poverty Cycle: graph

Poverty is caused by a lack of both economic growth and human development

Shows how being in poverty will result in entrapment in poverty, from one generation to the next

Economic development

Low wages: Intersection of economic growth and human development and are the major causes of poverty Low wages are usually the result of unemployment. Informal employment, a lack of skills, or a primary sector-based economy

Low levels of education and healthcare: cost money and with lower wages levels these are not accessible People find it harder to stay well or to recover from illness

Low levels of human capital: low education + healthcare lead to low levels of human capital → reduces productivity

Economic growth

Low wages: represent the intersection of economic growth and human development and are the major cause of poverty

Low saving: with low wage levels, it is much harder to save as any money is spent on necessities

Low investment: Savings drive investment as firms are able to borrow money from commercial banks. Low levels of savings mean that banks have less money available for investment

Low economic growth: Low levels of investment hold back productivity and economic growth

Barriers to economic growth/development have different factors:

Barriers to economic growth/development have different factors:

Economic barriers

Political barriers

Social barriers

Economic barriers

1. Rising economic inequality

2. Lack of access to infrastructure and appropriate technology

3. Low levels of human capital - lack of access to healthcare and education

4. Dependence on primary sector production (fishing, mining, farming, etc.)

5. Lack of access to international markets

6. Informal economy

7. Capital flight

8.Indebtedness

9. Geography

10. Tropical climates and endemic diseases:

1. Rising economic inequality

Higher inequality prevents development for all

A high degree of economic inequality in many less economically developed countries = barrier

A more equal distribution of income = lower income people will be more likely to have access to healthcare and education

The main way to redistribute is through progressive tax → increasing marginal tax bands when income increases

Lack of access to infrastructure and appropriate technology

Better infrastructure = greater productive capacity, which will lead to economic growth and development in the long run

In ELDCs, there is limited infrastructure = which reduces inefficiencies in production

Also, it is more challenging to engage in international trade and attraction of FDI

Low levels of human capital - lack of access to healthcare and education:

Less education or healthy people = less knowledge and productivity

Dependence on primary sector production (fishing, mining, farming, etc.):

One bad yield one year and the economy suffers greatly.

Primary sectors are exhausitble + cannot be sustained long run

Lack of access to international markets:

Less trade = less efficiency

Market access is the ability of a country to enter foreign markets to sell its goods and services

More economically developed countries (MEDCs) look overseas for cheaper and more efficient production methods (especially if their labour costs were substantially lower than in their home nations)

-> Eg, Bangladesh, Brazil, China, India

Loss of trade and potential income due to the lack of access to international markets leads to lower potential development as income from export earnings is needed to fund a country's purchase of imports of capital goods and consumer goods/services

Informal economy:

Informal economy/parallel markets = various economic activities that are not officially recorded as part of a country's GDP

Economic activity is not officially recorded, regulated, or taxed. More of this prevents government revenue and hence, development.

Capital flight:

Capital flight is the withdrawal of money, assets and resources from a country owing to economic and political uncertainties

When households/firms take their money/resources out of a country due to low confidence.

This hampers consumption and investment, preventing growth and development.

Indebtedness:

When countries owe money.

Debt servicing costs mean the country will have to focus on repaying loans over investing in its economy, hampering economic growth and development.

Geography:

Landlocked countries have no access to ports (trade), dry countries have little access to agriculture

Tropical climates and endemic diseases:

Many diseases, such as malaria, are most common in tropical climates, which may hinder economic development

Political and social barriers

Non-economic factors influence economic growth and development

some can prevent economic growth/development

- Weak institutional frameworks

- Gender inequality:

- Lack of good governance/corruption

- Unequal political power and status

- Weak institutional frameworks

Weak legal system: Strict/authoritative laws or an unpredictable court will prevent proper investment, hindering growth/development.

Ineffective taxation structures: Too high taxes discourage hard work, too low taxes prevent a proper redistribution of income.

Weak banking system: Less developed banks mean less borrowing and hence investment.

Weak property rights (both physical items like land as well as copyrights/patents): A lack of enforcement of such rights will discourage investment and innovation

Gender inequality:

Gender inequalities decrease general well-being and reduce productivity. This hinders growth/development.

Lack of good governance/corruption:

Bribery makes economies seem less trustworthy, decreasing investment and confidence, and is detrimental to economic development in the long run.

Unequal political power and status:

Those with high power/status will likely prioritize themselves, leaving those with less money and power behind. This will increase inequalities, hampering economic development.

Significance of Different Barriers

All barriers can cause difficulties for creating economic growth/and or economic development in countries

The significance of the different barriers vary depending on where you are

Such as poor infrastructure, human capital inadquecieis, over-dependency on the natural resources

Evaluating significance must be done in context of the country

eg. In the Democratic Republic of the Congo, the main barriers are political/social. They have immense deposits of valuable resources, but lack proper governance (contrary to its name, it is not a very democratic republic).

5 domestic factors that contribute to the economic development of ELDC

Education and health

use of tehcnology

Access to credit and micro-credit

Empowerment of women

income distribution

→ These factors all have positive externalities of production and consumption on ELDCs = improving growth and sustainable development