Barriers to growth and development

poverty traps

• there are many causes of poverty, but poor countries exhibit several common characteristics

• a poverty trap is a combination of factors that causes poverty to be self-perpetuating with low income as the cause

• development:

  • low wages: intersection of economic growth and development and are the major cause of poverty

    • usually the result of unemployment

  • low levels of education and healthcare

    • cost money thus not accessible to those with lower wages

  • low levels of human capital

    • low education/healthcare leads to low level of human capital, reducing productivity

  • low productivity

    • results in low wages, cycle continues

• growth

  • low wages

  • low saving

    • low wages means its harder to save because any money is spent on necessities

  • low investment

    • savings drive investment as firms are able to borrow money from banks. low savings = less money available for investment

  • low economic growth

    • investment is a component of GDP

economic barriers

• rising income inequality

  • more equal distribution of income means more households able to consume wider range of goods

  • rich get richer poor get poorer

• dependence on primary sector

  • primary sector produces primary commodities (goods arising from land FOP)

  • PES and PED for primary products is inelastic, meaning prices are volatile, affecting income, investment, employment of agricultural workers

  • one bad yield one year means economy suffers greatly

• lack of access to international markets

  • trade is a significant source of higher incomes, leading to development

  • many countries can’t access more developed markets due to trade barriers

• informal economy

  • economic activity not officially recorder, regulated or taxed

  • less gov revenue so less provision of merit goods, hence development

• capital flight

  • when households/firms take money/resources out of a country due to low confidence

  • prevents consumption/investment, preventing growth & development

• indebtedness

  • countries have to focus on repaying loans over investing in its economy, preventing growth & development

• lack of access to infrastructure

  • good infrastructure reduces business costs and attracts FDI

  • makes it difficult to generate economic activity

• low levels of human capital

  • lack of access to healthcare/education, less knowledge and productivity, less output, less growth, less income

• geography

  • landlocked countries find it more expensive to import/export products bc no access to ports

• tropical climates and endemic diseases

  • many diseases e.g malaria, dengue most common in tropical climates, hinder productivity and output of workforce and development

political and social barriers: institutional

• institutional framework barriers - refers to functions of government

  • legal system

    • strong legal system builds confidence in an economy. this attracts overseas investment

    • less confidence means less investment hindering growth & development

  • tax structure

    • progressive tax system redistributes income from those with higher to those with lower, reducing inequality

  • banking system

    • lack of financial institutions means less borrowing for investment, hence less growth

  • property rights

    • includes both assets like land and copyrights/patents

    • lack of enforcement of this discourages investment (as its risky) and innovation (as others can copy)

other social/political barriers

• lack of good governance

  • leads to insufficient use of resources and poor decision making - meaning laws that directly inhibit growth and development

  • corruption leads to diverting funds to groups that have bribed or lobbied, resulting in low growth and development

• unequal political power & status

  • countries with low trade union membership leads to exploitation of workers through low wages and income inequality

• gender inequality

  • increases income inequality leading to lower growth

  • reduces incentive for women to work, meaning loss of productivity and hence growth

evaluating barriers to growth and development

• there are a common set of factors which prohibit economic growth and development however each country is unique and likely to have a different combination of factors which are more prominent

• understanding context of the country is vital to evaluating how significant the barrier is

• e.g Romania has a history of corruption, reducing its development

• e.g India has infrastructure problems limiting its ability to grow