4.3.2 Factors influencing growth and development

economic factors influecnign growth and development

• primary product dependency

• volatility of commodity prices

• savings gap: Harrod-Domar model

• foreign currency gap

• capital flight

• demographic factors

• debt

• access to credit and banking

• infrastructure

• education/skills

• absence of property rights

how does primary product dependency affect growth and development

• Primary products tend to have a very low-income elasticity of demand (YED). As world income rises, there is a less than proportional increase in demand

  • This means that there is limited scope to continue increasing demand

• Primary products have very little added value

  • Exporting manufactured products raises the added value, incomes and profits

• natural disasters can also wipe out production and they are non renewable and so can run out

prebisch singer hypothesis

suggest the long run price of primary goods declines in proportion to manufactured goods which means those dependant on primary exports will see a fall in their terms of trade

Zambia primary product dependency

n 2022 copper exports from Zambia accounted for 70% of their total exports and primary products in excess of 90%. They are suffering from over-specialisation

ghana primary product depenedency

. Gold, cocoa and oil account for 75% of their total exports and they had to ask the IMF for a loan in 2014 due to their unsustainable balance of payments deficit.

how does Volatility of commodity prices affect growth and development

• Primary products tend to have inelastic demand and supply curves which means relatively small changes in demand or supply leads to huge fluctuations in price.

• These large changes in price mean that producers’ income and the country’s earnings are also rapidly fluctuating, making it difficult to plan and carry out long term investment as well as meaning that producers can see their income fall very rapidly, causing poverty.

• When prices of commodities rise for a number of years, there tends to be over-investment in the production of the commodity causing long term risk when the price eventually falls.

Bolivia example of Volatility of commodity prices

n 2020, 25% of Bolivia's GDP was generated by exports. Commodities accounted for 60% of its exports

• When commodity prices rise, GDP rises -

how does the savings gap impact growth and development

Developing countries have lower incomes and thus they save less. This means there is less money for banks to lend, reducing borrowing and thus reducing investment/consumption. A savings gap is the difference between actual savings and the level of savings needed to achieve a higher growth rate.

harrod domar model

africa savings gap example

The savings rate in Africa is around 17% of GDP compared to 31% on average for middle income countries

criticisms of harrod domar model

• It does not account for many other factors such as labour productivity, corruption, technological innovation

• It was created based on data from wealthier industrialising nations as opposed to very poor undeveloped countries

• It focused only on physical investment and ignored other types such as investment in human capital (labour)

how does foreign currency gaps impact growth and development

This is when exports from a developing country are too low compared to imports to finance the purchase of investment or other goods from overseas required for faster economic growth.

why do foreign currency gaps develop

• Oil importing countries have to pay more (reserves decrease) when world oil prices rise whereas oil exporting countries receive less (less flowing in) when world oil prices fall

• Large international debt payments may require continual outflows of currency

• Capital flight due to uncertainty or sanctions

ethiopia example foreign currency gap

In 2018, public debt was around 60% of GDP; most of it in foreign currency so it is possible that they will not have enough foreign currency to repay their debt. It is thought there are only enough currency reserves to pay for a month of imports

how does capital flight affect growth and development

• Occurs when money or assets rapidly leave a country

• This may happen due to political upheaval, economic sanctions, war, or changes to government policy (e.g. interest rates)

• Capital flight reduces the money available for investment, reducing growth and development

example of capital fligh russia

• Sanctions applied to Russia in 2022 resulted in $75 billions of capital outflows

how does demographic factors impact growth and development

Developing countries tend to have higher population growth, which limits development. If population grows by 5%, the economy needs to grow by 5% to even maintain living standards. This means developing countries need to have higher rates of growth to develop than more developed countries would do.

The high population growth is caused by high birth rates, which increases the number of dependents within a country but does not immediately increase those of working age. It places strains on the education system and leads to youth unemployment

africa high dependency

The population of Africa is expected to more than double by 2050, complicating efforts to reduce hunger.

how does access yo credit and banking impact growth and development

• Financial institutions enable individuals and firms to borrow money which can be used for investment or to generate growth

• A lack of financial institutions prevents this from happening

how does debt affect growth and development

• During the 1970s and 1980s, developing countries received vast loans from banks in the developed world. Now, they suffer from high levels of interest repayment ; sometimes even higher than the loans and aid they receive from developed countries, meaning money is flowing from developing to developed countries.

• This means they have less money to spend on services for their population and they may need to raise taxes, which limits growth and development.

• Borrowing for growth makes sense, just as firms borrow to expand, but the problem occurs when governments take on too much debt and do not spend it well

nigeria debt

Nigeria’s debt is 52% of GDP

how does infrastructure affect growth and development

• Good infrastructure reduces business costs and attracts foreign direct investment

• Some developing countries have such poor infrastructure that it makes it difficult to generate economic activity

india infrastructure

India is a good example of country suffering from poor infrastructure. For example, they saw power blackouts in 2012 and this damages their potential tourism industry. About half their roads are not paved and they need to invest around $400bn in the power sector.

how does education and skills affect growth and development

• Investing in this supply-side policy increases the potential output of the country (shifts the production possibility frontier outwards)

• Higher education/skill levels → higher human capital → increased productivity → higher output → higher income

Ethiopia illiteracy rates

high illiteracy rates at around only 49%

example of investment in human capital

China and South Korea invested heavily in their human capital when they were developing, and this has benefitted them in the long term.

how does absene of property rughts affect growth and development

• In many countries, property is the main household asset which can be used to secure loans or generate income

• A lack of property rights in some developing countries prevents this from happening

non economic factors impacting gorwth and development

• corruption

• poor governance

• wars

• political instability

• geography

• disease

how does corruption impact growth and development

corruption means individuals will make decisions which maximise the bribes they receive as oppose to those which maximise development and output. Leaders are likely to make decisions which benefit themselves rather than benefiting the economy. High levels of bureaucracy are often linked to corruption and this is costly and time-consuming, deterring new businesses and reducing output of those already established.

how does poor governance affect growth and development

eads to inefficient use of resources and poor decision-making. It may also result in laws/regulation which directly inhibit growth and development

how does war affect growth and development

conflict destroys infrastructure, disrupts supply chains and often reduces the post war supply of labour. Conflict shifts the production possibility curve inwards

how does political instbaility affect growth and development

if governments keep changing, it results in constantly changing policies and priorities. It also reduces confidence in the economy and international investors are slower to invest as they are fearful of losing their investment

how does georgaphy affect growth and development

it is harder for landlocked countries to generate economic growth. Often transportation and administration costs are higher than those with access to ports, which increases the costs of production and decreases international competitiveness. Natural terrain can also be a limiting factor e.g the arid, mountainous terrain of Pakistan