4.3 - Factors influencing growth and development

Question 1

Explain the Impact of Economic Factors in Different Countries:

• 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

Answer 1

• Primary Product Dependency:
  > Some countries heavily rely on the export of primary products (e.g., minerals, agricultural goods).
  > Vulnerable to price fluctuations, as demand and prices for primary products can be volatile.
• Volatility of Commodity Prices:
  > Commodity-dependent economies face instability due to price swings.
  > Price fluctuations can impact government revenues, economic stability, and development plans.
• Savings Gap (Harrod-Domar Model):
  > The Harrod-Domar model explains the relationship between savings, investment, and economic growth.
  > 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.
  > A savings gap occurs when domestic savings are insufficient to support desired investment levels, hindering growth.
• Foreign Currency Gap:
  > A foreign currency gap arises when a country’s imports exceed its foreign exchange reserves.
  (> 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
  > It can lead to trade deficits, currency depreciation, and economic instability.
• Capital Flight:
  > Capital flight occurs when investors move assets out of a country due to economic instability or unfavourable conditions.
  > It depletes a country’s resources and can lead to financial crises.
  > If these assets were left there, people could use it to borrow and invest.
  > If money was placed in banks within the country,
  then credit could be created by banks for consumers and businesses to spend.
  > This can occur because of lack of confidence in the country’s stability, to hide it from government authorities or simply for profit repatriation.
• Demographic Factors:
  > Population growth, age distribution, and workforce skills impact economic development.
  > A youthful population can be a demographic dividend if properly harnessed for economic growth.
  > 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.
• Debt:
  > High levels of public or external debt can lead to debt servicing burdens, reducing resources for development.
  > as there is less money for gov to spend on services for their population and
  they may need to raise taxes, which limits growth and development.
  > Borrowing for growth makes sense, but the problem occurs when governments take on too much debt and do not spend it well.
• Access to Credit and Banking:
  > Limited access to credit and banking services can hinder investment, entrepreneurship, and economic growth.
  > Developing countries have limited access to credit and banking compared to
  developed countries, who have complex systems. This means those in developing countries cannot access funds for investment and they struggle to save for the
  future.
• Infrastructure:
  > Infrastructure development (transport, energy, telecommunications) is vital for economic growth and competitiveness.
• Education/Skills:
  > A skilled and educated workforce is crucial for innovation, productivity, and economic diversification.
  > Poor education within countries means that workers are low skilled, sometimes
  unable to read and write, so have low levels of productivity.
• Absence of Property Rights:
  > Property rights are where individuals are allowed to own and decide what happens to
  certain resources. A lack of rights mean that individuals and businesses cannot use
  the law to protect their assets, leading to reduced investment. They will be
  unwilling to buy machinery, build factories or establish brands.
  > Weak property rights can deter investment, as individuals and businesses lack security over their assets.

Question 2

Harrod-Domar model

Answer 2

● The Harrod-Domar model suggests savings provide the funds which are borrowed
for investment purposes
- and that growth rates depend on the level of saving and the
productivity of investment.

• It concludes that economic growth depends on the amount
  of labour and capital
• and that developing countries have a vast labour supply, so their problems are caused by capital.
• In order to improve capital, investment is
  necessary and investment requires savings.

Question 3

Problems with the Harrod-Domar model

Answer 3

• Economic growth is not the same as
  economic development.
• It is difficult for individuals to save when they have little
  income and borrowing from overseas causes problems with debt.
• It is possible that
  investment could be wasted.

Question 4

Impact of Non-Economic Factors in Different Countries

Answer 4

• Political Stability:
  > Political stability and the rule of law are essential for attracting investment and fostering economic growth.
• Governance and Corruption:
  > Transparent and accountable governance promotes economic development, while corruption hampers it.
• Conflict and Security:
  > Conflict and security issues can devastate economies, disrupt trade, and displace populations.
• Health and Education:
  > Access to healthcare and quality education influences labour productivity and overall well-being.
• Cultural Factors:
  > Cultural norms and values can influence entrepreneurship, innovation, and economic activities.
• Geography and Climate:
  > Geographic location and climate conditions can impact agriculture, trade, and vulnerability to natural disasters.
• Social Cohesion:
  > Social harmony and inclusivity contribute to economic stability and social progress.
• Technological Readiness:
  > Technological advancement and digital infrastructure enable innovation and economic competitiveness.
• Environmental Sustainability:
  > Environmental policies and practices can affect long-term sustainability and economic resilience.
• Human Rights:
  > Respect for human rights and freedoms is closely tied to social progress and economic development.

Question 5

Economic factors influencing
growth and
development

Answer 5

• 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