global economy 4.9 - Barriers to economic growth and/or economic development

Question 1

define a poverty trap

Answer 1

any linked combination of barriers to growth and development that forms a circle, thus self-perpetuating unless the circle can be broken

Question 2

draw a poverty cycle

Answer 2

p455

Question 3

give 10 economic barriers to growth/development

Answer 3

rising economic inequality
lack of access to infrastructure and appropriate technology
low levels of human capital - lack of access to healthcare and education
dependence on primary sector production
lack of access to international markets
informal economy
capital flight
indebtedness
geography including landlocked countries
tropical climates and endemic diseases

Question 4

how does rising economic inequality hinder economic growth?

Answer 4

• there tend to be lower levels of saving because the poor save a v small proportion of their income (meaning low investment and growth)
• the rich tend to dominate both politics and the economy and this tends to mean that policies are followed that are more in their favour and there is no pro-poor growth
• high income inequality in developing countries tends to be marked by the rich moving large amounts of funds out of the economy in the form of capital flight.
• a large proportion of the goods purchased by the rich are foreign-produced and so their consumption doesn’t rlly help the domestic economy

Question 5

how does lack of access to infrastructure and appropriate technology hinder economic progress?

Answer 5

• infrastructure is the essential facilities and services such as roads, airports, sewage treatment, water systems, railways, telephone and other utilities that are necessary for economic activity
• good infrastructure and technology reduces business costs & attracts foreign direct investment

Question 6

how do low levels of human capital - lack of access to education and healthcare - hinder economic progress?

Answer 6

• Low levels of education and healthcare reduce productivity
• Investing in supply-side policy to improve health and education 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 economic growth → higher income

Question 7

how does dependence on primary sector production hinder economic progress?

Answer 7

1. 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
2. Primary products have very little added value. Exporting manufactured products raises the added value, income & profits
3. Due to the inelastic nature of both the demand & supply of commodities, small changes in demand or supply can lead to large changes in price, meaning that prices can be volatile. When commodity prices rise, GDP rises - & vice versa

Question 8

how does a lack of access to international markets hinder economic progress?

Answer 8

• International trade is a significant source of economic growth and higher incomes, leading to economic development
• Many countries cannot access more economically developed markets due to the trade barriers put in place by developed economies to protect their firms, or due to their non-convertible currencies

Question 9

how does the existence of an informal economy/sector hinder economic progress?

Answer 9

Workers in the informal economy are not taxed on their wages
The lack of tax revenue reduces the provision of infrastructure, merit and public goods
Many developing countries have a larger informal than the formal economy

Question 10

how does capital flight hinder economic progress?

Answer 10

• 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 & development
• may also cause a depreciation in the depreciation in the currency

Question 11

how does indebtedness hinder economic growth?

Answer 11

• The higher the level of borrowing from institutions like the International Monetary Fund (IMF), the higher the monthly repayments
• Repaying debt reduces the money available for investment and expenditure on merit and public goods
• The higher the debt the worse the potential economic growth

Question 12

how do geographical factors hinder economic growth?

Answer 12

• Landlocked countries find it harder/more expensive to import and export products (shipping freight is much cheaper than air freight)
• Natural features such as deserts reduce the quantity of productive land that can be used to generate output and economic growth

Question 13

how do tropical climates and endemic diseases hinder economic growth?

Answer 13

• Tropical climates are often associated with debilitating diseases such as malaria or dengue
• These reduce the productivity and output of the workforce and limit/reduce economic growth

Question 14

give 7 political and social barriers to economic growth

Answer 14

• weak institutional framework:
  -> legal system
  -> ineffective taxation structures
  -> banking system
  -> property rights
• gender inequality
• lack of good governance/corruption
• unequal political power and status

Question 15

legal system

Answer 15

• A strong legal system builds confidence in an economy
• Legal institutions help to create boundaries that households and firms can operate within
• This certainty attracts overseas investment and helps to make business easier to conduct leading to higher economic growth

Question 16

tax structure

Answer 16

• A progressive tax system redistributes from those with higher income to those with lower income & reduces income inequality and promotes economic growth
• it is difficult for governments to collect taxes in developing countries (tax exemptions, inefficient/corrupt administrations, low corporate activity, informal markets)
• the main source of tax revenue is therefore export, import and excise (customs) duties: however, some countries are not heavily involved in trade

Question 17

financial institutions/banking system

Answer 17

• Financial institutions enable individuals & firms to borrow money which can be used for investment or to generate growth
• A lack of financial institutions prevents this from happening

Question 18

property rights

Answer 18

• In many countries, the 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

Question 19

gender inequality

Answer 19

Gender inequality reduces the incentive for women to work and this can mean a loss of income, loss of productivity to an economy, leading to lower economic growth

Question 20

Lack of good governance

Answer 20

• Leads to inefficient use of resources & poor decision-making. It may also result in laws/regulation which directly inhibits growth & development
• 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

Question 21

unequal political power and status

Answer 21

• Countries with strong trade union membership provide workers with more power and higher levels of income
• With low trade union membership, the exploitation of workers through low wages is easier and income inequality is worse
• Countries with a class system are less incentivised to increase economic growth and development in such a way that it removes the class barriers. This limits growth and development