What factors limit growth and development?

What factors limit growth and development?

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Exam Boards: Edexcel, AQA, WJEC, CIE, OCR         Level: AS/A LEVELS/IB/IAL

What factors limits growth and development?

  1. Primary product dependency
  2. Savings gap
  3. Corruption
  4. Government failure
  5. Wars
  6. Population issues
  7. Human capital problems
  8. Poor infrastructure

Primary product dependency

A variety of challenging issues are faced by countries dependent on primary products.

Price fluctuations

Primary products are inelastic in nature and therefore any demand or supply shocks will result in significant price changes. 

The difficulty of planning investment and output

A fall in price will cause a fall in incomes making it difficult to plan for future investment. Also due to regular price fluctuations, producers are unable to predict their future income.  

Natural disasters

Hurricanes, floods, droughts and tornadoes etc can cause severe disruptions to the supply of primary products.

Protectionism by developed countries

Subsidies provided to domestic firms by governments could make it difficult for companies abroad to compete. 

Low-income elasticity of demand for primary products (Prebisch-Singer Hypothesis)

  • Over time there is a deterioration in the terms of trade for primary products. 
  • As the incomes rise in developed countries, consumers will switch their attention to buying more normal and luxury goods rather than primary products from developing countries. 
  • This is because the income elasticity for manufactured goods is greater than that of primary products, especially food. 
  • Therefore as incomes rise in developing countries, they will demand more manufactured goods over the primary products produced in developing countries. 
  • As developing countries produce more primary products they will suffer from lower incomes as the developing countries will purchase less primary products from them.
  • This will constrain the growth of developing countries as they rely on the income from the sales of primary products to fund the investment of machinery (Capital goods) from developed countries. 

Other constraints on economic growth

Savings Gap

A country with low savings will have low levels of investments which in turn will lead to low capital accumulation and therefore low incomes. This cycle will keep repeating itself until savings can increase.

Population Issues

Population growth is very fast in developing countries over developed countries such as in Haiti. The overall population is actually falling in some of the developed countries of the world such as Germany and Japan.

Thomas Malthus – Population Theory

Thomas Malthus predicted in the 18th century that famine was inevitable because population was growing faster than food production in the world. Although his predictions have been proved wrong, some economists believe his theory to be true in some of the poorest countries in the world. 

Human Capital Problems

Developed countries tend to have much higher standards of education compared to some of the poorest countries in the world. This leads to lower productivity and economic growth in developing countries.

In addition, HIV and Aids are proving to be very challenging in some of the poorest countries in the world hindering their growth and development.

Poor Infrastructure

Infrastructure provides the mechanism for a country to develop and grow. Unfortunately, the poorest countries in the world don’t have the infrastructure required to promote development and growth e.g. waste disposal, water supply, roads, telecommunication etc.

A lack of infrastructure can also make it difficult for these countries to attract foreign direct investment (FDI).

Corruption

Corruption can lead to the essential funds required for a country to develop going into the wrong hands of those in power through bribery, extortion etc.

Government failure

Poor macroeconomic decision making by those in charge can lead to government failure and a worse economic outcome for a country.

Wars

Wars in countries like Afghanistan, Syria and Iraq can destroy all of the progress that was previously made in a country in addition to discouraging any new FDI.

Question

Analyse the constraints to growth and development for a developing or developed country of your choice? (20 Marks)

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Tushar Depala

Author: Tushar Depala

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