4.3.2 Factors influencing growth and development

IMPACT OF ECONOMIC FACTORS ON DEVELOPMENT AND GROWTH IN DIFFERENT COUNTRIES (11)

1. primary product dependency

2. volatility of commodity prices

3. savings gap: Harrod-Domar model

4. foreign currency gap

5. capital flight

6. demographic factors

7. debt

8. access to credit and banking

9. infrastructure

10. education/skills

11. absence of property rights

1. PRIMARY PRODUCT DEPENDENCY- DEFINITION

• when majority of a countrys GDP is from primary sector

1. NEGATIVE IMPACTS OF PRIMARY PRODUCT DEPENDENCY

• Prebisch Singer hypotheis

• dutch disease

• corruption

• natural disasters can wipe out production of primary product + often non-renewable, so country will suffer when they run out

1. PRIMARY PRODUCT DEPENDENCY- PREBISCH SINGER HYPOTHESIS

• predicts that there will be long-term decline in primary product prices, relative to industrial goods

• due to rising incomes → small increase in demand for primary product (as income inelastic demand) + increase in supply of primary products due to improvements in tech

• lead to long-term decline in terms of trade (as cheaper exports) → will reduce living standards

1. PRIMARY PRODUCT DEPENDENCY- DUTCH DISEASE

• when country becomes significant commodity producer → increase in demand for their currency (to buy goods) → appreciation in currency → higher export prices → reduces competitiveness of economy → fall in output + prevent diversification in LR

1. PRIMARY PRODUCT DEPENDENCY- CORRUPTION

• global companies have strong profit motive to exploit commodity resources in developing countries, so may be willing to offer gov officials bribes to set up → corruption can become endemic in gov → constrain growth and development as decisions made by gov may be for personal gain

1. EVAL OF NEG IMPACTS OF PRIMARY PRODUCT DEPENDENCY

• country might have comparative advantage in primary products → can specialise in this → good may have income elastic demand (e.g. diamonds) → so prices may be high → improve terms of trade → improve living standards

• some countries used primary products to develop (Saudi Arabia and oil) → used revenue to invest in manufacturing

2. NEGATIVE IMPACTS OF VOLATILE COMMODITY PRICES

• primary products usually have inelastic demand and supply → relatively small changes in demand or supply → huge fluctuations in prices

• means that producers income and tax revenue is rapidly fluctuating → lack of long term business investment (e.g. on infrastructure) and gov spending (e.g. on education/healthcare) due to uncertainty → limits economic growth and development

• when commodity prices rise → leads to over-investment in production of commodity → causes long term risk when prices fall

3. SAVINGS GAP- DEFINITION

• difference between actual savings and level of savings needed to achieve a higher economic growth rate

3. NEGATIVE IMPACTS OF SAVINGS GAP

• developing countries have lower incomes → save less → less money for banks to lend → reduce borrowing → reduce investment/consumption → reduce econ growth and development

• Harrod-Domar model suggests savings provide funds used for investment so growth rates depends on level of saving

• concludes that economic growth depends on amount of labour and capital and because developing countries have a high labour supply, the lack of invesment into capital is what restraints them which is caused by lack of savings

3. EVAL OF NEGATIVE IMPACTS OF SAVINGS GAP

• not all investments would be successful- so would be wasted

• difficult for individuals to save when they have low income and borrowing from overseas could cause problems with debt

4. FOREIGN CURRENCY GAP- DEFINITION + NEG IMPACT

• when exports in a developing country are too low compared to imports to finance investment or purchase of goods from overseas for faster economic growth

• foreign currency gap → decrease AD → lower rate of economic growth

• lower exports → more difficult for business investment → decrease AD → lower rate of economic growth

5. CAPITAL FLIGHT- DEFINITION AND NEG IMPACT

• capital flight is the movement of money from one investment to another in search of greater stability or increased returns (could be really high during economic crisis)

• if large amounts of money taken out of country → less available to borrow for investment or consumption → limits econ growth and development

6. NEGATIVE IMPACTS OF DEMOGRAPHIC FACTORS

• developing countries usually have higher population growth → country needs to have high rates of economic growth and development to maintain living standards

• increases no. of dependants- places strains on education systems and leads to youth unemployment

• leads to lack of food- more people → higher demand for food → production cant rise as fast → rising starvation, malnutrition → fall in living strandards

• lack of essential services- puts strain on healthcare, infrastructure, pensions and water systems → fall in living standards

7. NEGATIVE IMPACTS OF DEBT

• countries which have taken loans in the past suffer from high levels of interest repayments, meaning than there is an outflow of money from developing to developed countries

• this creates an opportunity cost- gov has to spend on debt meaning there is less to spend on services to boost econ growth

• may need to raise taxes to fund for debt repayments- limits econ growth

• crowding out

8. NEGATIVE IMPACTS OF ACCESS TO CREDIT AND BANKING

• developing countries have a lack of access to credit and banking (due to low savings) → cant borrow for investment → limit econ growth

• may use loan sharks- give high IR and leave people in debt

9. NEGATIVE IMPACTS OF LACK OF INFRASTRUCTURE

• lack of roads and communications- less efficient to do business (less incentive for FDI) which can limit econ growth, less trade which limits net exports so limits econ growth and harder to gain food and water which increases povrty and lowers living standards

• lack of hospitals and schools- lower human capital development and can lower life expectancy → limit econ development

• EVAL- but investments into this have a short term opportunity cost and a time lag due to it being a supply-side policy

10. NEGATIVE IMPACTS OF A LACK OF EDUCATION/SKILLS

• lower education → lower human capital → lower productivity → limits profits for firms and less income for labour → limits investment/consumption → constraints econ growth/development

• less incentive for FDI due to lower skilled workforce → less job opportunities

11. NEGATIVE IMPACTS OF ABSENCE OF PROPERTY RIGHTS

• property rights are where individuals are allowed to own and decide what happens to certain resources

• lack of rights mean that individuals and businesses cant use law to protect their assets → reduced investment

• will be unwilling to buy machinery, build factories or establish brands.

IMPACT OF NON-ECONOMIC FACTORS ON DEVELOPMENT AND GROWTH IN DIFFERENT COUNTRIES

• wars, conflicts and natural disasters

• disease rates

• corruption and poor governance

1. NEGATIVE IMPACTS OF WARS, CONFLICTS AND NATURAL DISASTERS

• reduction in working population from casualties and deaths

• infrastructure damage→ difficult to rebuild

• can direct government spending away from econ growth

• discourage business investment and can contribute to capital flight

2. NEGATIVE IMPACTS OF HIGH DISEASE RATES

• reduction in working population due to people being ill and deaths

• increase pressure on healthcare- so gov may have to move spending away from other areas (e.g. infrastructure)

3. NEGATIVE IMPACTS OF CORRUPTION AND POOR GOVERNANCE

• corruption means individuals will make decisions which maximise bribes they receive as oppose to those which maximise development and output

• can reduce business investment and FDI