4.3.2 Factors Influencing Growth and Development

• Constraints on Growth and Development


  -Poor education/ human capital

  -Property rights

  -Poor infrastructure

  -Savings gaps

  -Foreign currency gap

  -Primary product dependency

  -Capital flight

  -Infant industries

  -Demographic factors

  -Debt

  -Dutch disease

  -Corruption

  -Landlocked countries
• Poor Education


  Poor education means poor human capital and low productivity which limits growth thus workers can only do low-paying labour so GDP decreases and income tax revenue decreases which limits development
• Demographic Factors


  Poor health reduces productivity as sick people cannot work and children may have to drop out of school to work so have low human capital. High population growth means parents stay home to raise children and do unskilled labour and high demand for education and healthcare reduce the quality of both services.
• Poor Infrastructure


  Firms are less productive as it takes workers longer to do their jobs due to poor transport links etc. This causes LRAS to shift inwards, limiting growth and increasing costs and reducing profits and corporation tax revenue.
• Foreign Currency Gap


  A fall in foreign currency reserves due to a trade deficit causes the domestic currency to depreciate leading to cost-push inflation, decreased output, an economic slowdown and ultimately decreased FDI
• Savings Gap


  A gap between a bank's savings deposits and the amount that firms want to borrow from banks as low income workers spend all their money and there may be limited access to banks due to poor infrastructure
• Dutch Disease


  The negative consequences of a spiral in a nation's currency due to the discovery of natural resources e.g. in 1959 natural gas was being exported by the Netherlands causing the currency to appreciate and unemployment to rise and other industries will decline.
• Property Rights


  When people have no legal rights/ownership over their property it becomes dead capital of which there is an estimated $9.3tn globally this makes it difficult to receive loans as they do not have collateral so investment and productivity are low.
• Corruption


  Corrupt officials use tax revenue and foreign aid which limits investment in healthcare and education thus reducing development
• Primary Product Dependency


  Primary products are demand, supply and income inelastic. Primary products are price volatile leading to uncertainty about future profits which keeps investment low so AD does not grow
• Landlocked Countries


  Landlocked countries have higher shipping costs as transporting across land takes longer due to poor infrastructure, civil unrest or closed borders. This reduces competitiveness which forces the government to borrow money as they earn less from tax thus have a high debt to GDP ratio which reduces FDI
• Harrod-Domar Model


  Low incomes mean low savings which means banks cannot lend money thus there is low investment and economic growth which results in low incomes

  
• Capital Flight


  When large amounts of money are taken out of the country due to a country's instability or to hide it from the government thus reducing access to credit this caused the Argentine Economic Crisis in 2001
• Debt


  Developing economies have taken high interest loans from developed economies causing an outflow of money from them so may have to raise taxes to afford goods and services which limits growth and development e.g. Nigeria's debt is 52% of GDP
• Infant Industries


  Infant industries have high average costs as they are not large enough to benefit from economies of scale this makes them less competitive and thus the jobs in those markets are more vulnerable