Factors influencing growth and development

• Education affects development as lack of training means low human capital which decreases productivity

  • Low productivity for the firms shifts LRAS to the left, limiting GDP and economic growth
  • Low productivity for workers means they cannot demand high wages and therefore the government revenue falls due to the low income tax from the low incomes. This means they cannot invest into infrastructure and development
• In Madagascar, their was an attempt to reform their education system in the 1950's by switching from French to Malagasy however this failed as teacher training was poor and the first generation to got through this new education system were called "The Lost Generation"
• Infrastructure affects development as poor infrastructure limits productivity and therefore economic growth.

  • Poor infrastructure means less productivity for firms and higher costs shifting LRAS to the left, limiting real GDP and economic growth - this deters investment
  • Poor infrastructure e.g lack of transport means workers are less productive with things like increasing geographical immobility and therefore have lower wages. This decreases government revenue from income tax. This means they have less to reinvest in development and infrastructure
• 11 factors affecting growth and development in countries:

  • Primary-product dependency
  • Volatility of commodity prices
  • Savings gap: Harrod-Domar model
  • Foreign currency gap
  • Capital flight
  • Demographic factors
  • Debt
  • Access to credit
  • Infrastructure
  • Education/skills
  • Absence of property rights
• 4 non-economic factors affecting growth and development:

  • Corruption
  • Political instability
  • Geography
  • Poor governance and therefore poor decision-making
• Volatility of commodity prices influences growth and development as it is closely related with the GDP of a country
• The savings gap influences growth and development as it refers to the difference in the amount of savings that households have and the amount they need to finance investment
• The Prebisch-singer hypothesis refers to how as world incomes rise, the demand for imported income elastic manufactured good significantly rises whilst demand for exported income inelastic primary goods only changes by a small amount meaning the developing countries terms of trade worsen
• A buffer stock is a scheme aims to correct price instability of primary products by allowing the government to buy up and release produce from firms in order to control the price
• One negative of buffer stock schemes is that they can be expensive to set up and maintain - there is an opportunity cost of this government spending
• One negative of buffer stock schemes is that it may encourage producers to be relaxed and overproduce knowing that the government will buy up any extra produce
• Three characteristics of primary products:

  • PED Inelastic
  • Supply inelastic
  • Income Inelastic
• Transfer pricing is a practice used by multinational corporations in which they sell their goods/services and therefore profits to their exact same company in a different country in order to shift profit out of countries with high corporation tax - they aim to avoid tax
• Primary products are PED inelastic as they are often deemed as necessities so therefore an increase in price will not have a significant impact on quantity demanded
• Primary products are income elastic as they are deemed as necessities so changes in income do not affect quantuty demanded
• Primary products are supply inelastic as they are often non-renewable, finite resources or goods that take longer to harvest/acquire so producers are not responsive to changes in price
• One way to reduce primary product dependency is through industrialisation
• The Lewis model outlines the development from a traditional economy to an industrialized one, particularly through shifting the labour sector from agricultural to industrial jobs.
• The Lewis Model =

  • Only one firm sets up a factory
  • Since they are a monopsony, they demand labour at a low wage
  • This means they can get SNP and reinvest in dynamic efficiency
  • This causes them to expand meaning they seek more workers
  • This increased demand for labour menas wages increases
  • This attracts more workers from agricultural jobs into industrial ones
  • This cycle continues until there are few agricultural jobs and thus primary products production stops
  • Higher incomes and profit are collected by the government through income and corporation tax for development