4.3.2 Factors influencing growth and development Flashcards
Economic factors influencing growth and development
- Primary product dependency
- Volatility of commodity prices
- The savings gap: Harrod-Domar model
- The foreign currency gaps
- Capital flight
- Demographic factors
- Access to credit & banking
- Infrastructure
- Education & skills
- Absence of property rights
Examples of infrastructure
- Roads
- Railways
- Schools
- Hospitals
- Water supplies
- Electricity supplies
- Sewerage
- Telephone / internet services
Give examples of how does poor infrastructure make it difficult for a country’s economy to grow or be internationally competitive.
- If energy supplies are unreliable, then firms and factories won’t be able to operate efficiently.
- If transport links are poor, it can be difficult to move goods around or out of the country.
- If telephone and internet services are scarce, then businesses will find it difficult to coordinate their operations and communicate with customers.
How does infrastructure influence growth and development?
The infrastructure of a country means the basic facilities and services needed for the country and its economy to function.
Poor infrastructure makes it difficult for a country’s economy to grow or be internationally competitive.
Poor infrastructure also makes it very difficult to attract foreign direct investment (FDI).
Foreign aid is often used to improve or maintain infrastructure, but developing nations can sometimes persuade foreign investors to help improve their infrastructure – perhaps because these nations have important raw materials or because they would become attractive new markets for foreign firms.
Give an example of how the natural resources available in a country affect how it develops.
Chile has large reserves of minerals and has attracted large amounts of FDI in various party of its economy, such as in its energy and communications industries.
Non-economic factors that influence growth and development
- Corruption
- Poor governance
- Wars
- Political instability
- Geography
How can wars influence growth and development?
Conflict destroys infrastructure, disrupts supply chains & often reduces the post-war supply of labour.
- Conflict shifts the PPF curve inwards.
How can political instability influence growth and development?
If governments keep changing, it results in constantly changing policies & priorities. There is no long-term strategy.
It also reduces confidence in the economy & international investors are slower to invest as they are fearful of losing their investment.
How can geography influence growth and development?
It is harder for landlocked countries to generate economic growth.
Often transportation & administration costs are higher than those with access to ports, which increases the costs of production & decreases international competitiveness.
Natural terrain can also be a limiting factor e.g the arid, mountainous terrain of Pakistan or desert environments in North Africa.
How can poor governance influence growth and development?
Poor governance leads to inefficient use of resources & poor decision-making. It may also result in laws/regulation which directly inhibit growth & development.
How can corruption influence growth and development?
Corruption is a major problem in many countries. Often money intended for investment is siphoned off by corrupt politicians resulting in a lower level of investment.
Corruption also diverts funds to certain groups who have bribed or lobbied officials (e.g. multinational firms) resulting in projects that deliver a low level of growth & development.
How can education and healthcare influence growth and development?
If a country’s population grows faster than its economy, it will put strain on key infrastructure.
- For example, a fast-growing population means there’ll be lots of children, while can put pressure on a country’s education system.
- Household poverty is a major factor in keeping children out of school, and if children don’t go to school, this can lead to further problems. Low educational standards are likely to mean a workforce that’s less productive, as they have fewer skills.
- A less productive workforce will make it difficult to attract FDI. It can also be difficult for people to access professional training (e.g. medical school) in developing countries, which causes similar problems.
- Disease can also affect a country’s economy – e.g. it can result in lower productivity if people are unable to work and put a strain on the country’s healthcare system.
- Over the last few decades, HIV/AIDS has also led to a huge number of children being orphaned – it’s common for them to then miss out on going to school, with long-term consequences both for them and the economy.
How can primary product dependency influence growth and development?
- Many countries depend on primary products (commodities) — i.e. products taken directly from the earth. These might include minerals like copper and iron ores, or plants like rice, wheat or fruits, where the ‘value added’ is low.
- Demand for primary products is usually price elastic this means that a change in demand will have a large effect on the price.
- Supply of some primary products (e.g. agricultural products) will be price inelastic in the short term, since supplies can’t quickly increase or decrease (e.g. because it takes time for plants to grow). Agricultural products are also easily damaged by natural disasters and extreme weather events.
- This volatility of commodity prices means that producers’ incomes and earnings from exports can change quickly. If supply and demand are both price inelastic then slight changes in either will cause big fluctuations in price. The uncertainty this creates makes it very difficult to plan and attract investment.
- Developed countries may use protectionist policies to protect their own primary industries — e.g. EU policies such as the Common Agricultural Policy (CAP) make it difficult for farmers in developing nations to compete on equal terms.
when is a country classed as being export commodity dependent
A country is export-commodity-dependent when more than 60 per cent of its total merchandise exports are composed of primary commodities.
what is the dutch disease
Dutch Disease refers to the adverse impact of a sudden discovery of natural resources on the national economy via the appreciation of the real exchange rate and the subsequent worsening of export price competitiveness
explain dutch disease
If natural resources are found and extracted and if the world price of them is rising, then export revenues will increase and there will be increased investment into that sector.
But the risk is that there is a corresponding loss of investment into other industries such as manufacturing businesses.
The surge in export incomes can cause an appreciation of a country’s exchange rate which then makes other sectors trying to export less price competitive in overseas markets.
A worst-case scenario is when manufacturing industries in developing countries start to shrink before it has reached middle-income status.
This is known as premature de-industrialisation.
what is the Harrod-domer model
It focuses on the relationship between growth rates, savings, and capital-output ratios, emphasising the importance of investment in driving economic growth.
Harrod-Domar model
what are some assumptions of harrod-domer model
- Fixed Capital-to-Output Ratio: The economy requires a certain amount of capital investment to produce output. This is represented by the capital-output ratio (v), which is assumed to be constant.
- Constant Savings Rate: A fixed proportion of national income (savings rate, s) is saved and then reinvested into the economy. suggests higher savings ratio leads to higher investment.
- No Government Intervention: The model assumes no fiscal or monetary policy interventions.
- No Technological Progress: Economic growth is dependent only on investment and capital accumulation.
Criticisms of Harrod-domer model
- Assumptions: The model assumes fixed capital-output ratios and savings rates, which are unrealistic in dynamic economies.
- Instability: The model suggests that economies are inherently unstable and require continuous investment to maintain growth, which is overly pessimistic.
- Lack of Technological Progress: The model does not account for technological progress, which is a major driver of long-term growth.
- Capital-output Ratio: It assumes a constant capital-output ratio, ignoring the possibility of changes due to technological improvements or shifts in production processes.
Formula for relationship of Harrod-domer model
Investment = savings
What is the ‘savings gap’?
The gap between the level of domestic savings in an economy and the investment needed to grow that economy.
- This lack of investment in capital means incomes are likely to remain low, as shown by the Harrod-Domar model.
Capital flight
When people start holding their savings abroad (often as a result of political instability or high tax rates). This lack of domestic investment makes economic growth more difficult to achieve. It also means that less tax is collected (since the government won’t receive taxes due on those savings).
Is servicing debts a more significant issue for developed or developing countries?
Servicing debts often makes up a significant amount of developing countries’ budgets, leavings less money available for health and education.
Foreign exchange gap
Where capital outflows from a country are greater than capital inflows.
This is more likely when a country:
a) is dependent on exports of primary products, or imports of manufactured goods.
b) has to spend a lot of money servicing debt.
