4.3.2 Factors influencing growth and development Flashcards
Impact of primary product dependency
-Some countries heavily rely on the export of primary products e.g. minerals, agriculture
-Price of goods being imported into the country (manufactured goods) are higher than the price of the goods being exported (commodities)
-High percentage of jobs are reliant and often state-owned firms generate gov revenue
-Vulnerable to price fluctuations as demand for these products are volatile - hard to predict income
-Low income elasticity of demand
-Prebisch singer hypothesis - developing countries produce income inelastic goods (necessities), developed countries produce luxury goods which are income elastic - as world GDP rises developed countries get richer while developing countries get poorer
-Leads to lower terms of trade and and increased world inequality
-Ghana- gold, cocoa, oil account for 75% of exports - asked IMF for loan due to unstaible balanace of payments deficit
Commodity price volatility
-Inelastic demand and supply curves - small changes in d+s lead to huge price fluctuations
-Lack of predictable revenue increases (poverty)uncertainty and discourages investment
-Dutch disease - when a country becomes a significant commodity producer in a short amount of time
-Causes an increase in demand for the currency to enable people to buy the good - value of currency pushed up
-increases export prices, reduces competitiveness
-Further problems due to over-innvestment of commodity prices - supply increases - prices reduces - revenue reduces
-long term risk when price eventually falls
-natural resources exploited by foreign firms- low tax, regulations, pay
Savings gap - Harrod Domar model
-Key factors leading to g+d are savings, investment, technology
-Savings gap is difference between actual savings and level of savings needed to achieve a higher growth rate
-Savings - investment - accumulation of capital increases productivity - output and income
-If people save more, banks have more capital to lend out, investment increases, growth!
-Technology increases productivity - dynamic efficiency
-LEDCs lack savings as they rely on substinence farming
-However growth is not development
-It is difficult to save when they have little income and borrowing from overseas causes debt problems
-Poor financial system
-Low MPS so funds may not lead to increased borrowing and investment
-workforce inefficiency
-Paradox of thrift: increase in saving leads to increased investment but reduced consumption lowering AD and output thus lowering savings again
Foreign currency gap
-Value of exports are too low (compared to imports) to finance the purchace of investment or import capital goods for faster economic growth
-Cannot make up for deficit of capital account
-depreciates currency as supply of domestic currency decreases and demand for foreign currency increases
-Reduced investment
Capital flight
-Savings are sent abroad rather than being left for people to borrow and invest - credit could be created by banks
-Often done when there are few investment opportunities due to unskilled workforce, lack of infrastructure or economic threat like rising tax rates or hyperinflation
-Caused Argentine economic crisis in 2001
Demographic factors
-Dependency ratio: proportion of population of working age vs not (too young/ old - called dependents)
-When there are many dependents there is strain on education and healthcare services
-They are unable to contribute to the production of g+s however still consume them
-Large problem in subsidence economy
Debt
-High level of debt can slow down development as gov revenue is used to make repayments - less gov investment
-Future borrowing made inaccessible as lenders require higher interest rates
-Credit ratings fall - risk of default
-Private debt - harrod-domar model - more spent on repaying debt - less to save
Access to credit
-Exchange of g+s made easier by banking systems
-Banking system encourages saving as banks reward savers (interest rates) and provides safe place to make deposits
-Turns saving (withdrawal) into injection (lending)
-Developing countries cannot access funds for investment - use loan sharks
Infrastructure
-Infrastucture increases transport links to export/import
-More productive and cost-effective
-FDI increases - if inward employment opportunities increases as companies want to access skilled workforce
-Provides accessibility to essential services - education/healthcare
-However expensive and bad for environment
Education/skills
-Education raises skills and productivity level of workers
-These workers able to receive higher income as their MRP is higher and their labour supply is lower
-Reduces occupational immobbility of labour
-When children can read of write they can gain more employement opportunities with higher incomes - harrod-domar model
-Skills need to match with demand of labour market
-Concern of underemployment
-Many developing countries have low literacy rates - 50% illiteracy rate - UNESCO
Absence of property rights
-Right of private individuals and firms to ownership and control of their land and profit received
-In many developing countries a lot of the land is gov owned or not owned by anyone at all
-When property rights are not protected land owners are not incentivised to invest and generate profits
-Land could be ‘land-grabbed’ so people lose funds invested into the land
-Profits could be claimed by gov
-Land is often used as collateral to secure a loan - no land no loan no investment
Non-economic factors:
Dictatorship: corruption
-As populations become wealthier they are more likely to demand more democratic rights
War: gov finances used to purchase weapons - opportunity cost - damages infrastructure
Pandemics: affects populations with undeveloped healthcare systems
-workers unable to work, secure an income, slows productivity and growth
Geography: Countries with coastlines can construct ports
-Easier trade
Algeria
-Primary product dependency
-Export of oil and gas make up 96% of total export revenue
-Contributes 50% of gov rev
-30% of GDP
-Struggled to cope with declining oil prices
-High unemployment
-Need for diversification
