4.3.2 Factors influencing growth & development

• • How does primary product dependency influence growth and development?
  • Primary products tend to have very low income elasticity of demand (YED). As world income rises, there is a less than proportional increase in demand. So, there is little scope to continue increasing demand.
  • Primary products have very little added value.
  • Exporting manufactured products raises the added value, incomes and profits.
• How does volatility of commodity prices influence growth and development?

  • Due to the inelastic nature of both the demand and supply of commodities, small changes in demand or supply can lead to large changes in price.
  • When commodity prices rise, GDP rises & vice versa.
  • A more diversified range of exports prevents this.
• What is the savings gap (Harrod-Domar model)?

  In low-income countries, high levels of extreme poverty make it difficult to generate sufficient savings to provide the funds needed to fund investment projects leading to more dependence on aid or borrowing.
• How does the savings gap (Harrod-Domar model) influence growth and development?

  • They identified the savings gap as a major constraint on growth.
  • The Harrod-Domar model identified the following benefits of increased savings. Increased savings --> Higher capital stock --> higher economic growth --> Increased savings
  • Based on this, any intervention to increase the capital stock in an economy will lead to growth.
• What are the criticisms of the Harrod-Domar model?

  • It doesn't account for many other factors such as labour productivity, corruption, technological innovation.
  • It was created based on data from wealthier industrialising nations as opposed to very poor undeveloped countries.
  • It focuses only on physical investment & ignores other types of investment such as investment in human capital (labour).
• What are foreign currency gaps?

  The occur when currency outflows are constantly higher than foreign currency inflows. They develop because:

  • Oil importing countries have to pay more (reserves decrease) when world oil prices rise, whereas oil exporting countries receive less (less flowing in) when wordle oil prices fall.
  • Large international debt payments may require continual outflows of currency.
  • Capital flight due to uncertainty or sanctions.
• How do foreign currency gaps influence growth and development?

  • Central banks are forced to use their reserves to buy vital imports.
  • Developing a diversified, healthy export market prevents foreign currency gaps from developing.
• How does capital flight influence growth and development?

  It occurs when money or assets rapidly leave a country.

  • This may happen due to political upheaval, economic sanctions, war, or changes to government policy.
  • Capital flight reduces the money available for investment, reducing growth & development.
• How do demographic factors influence growth and development?

  If the dependency ratio is high it means there is less money available for savings & investment.

  • Many developing countries have high dependency ratios.
• How does access to credit & banking influence growth and development?

  • Financial institutions enable individuals and firms to borrow money which can be used for investment or to generate growth.
  • A lack of financial institutions prevents this from happening.
• How does infrastructure influence growth and development?

  • Good infrastructure reduces business costs & attracts foreign direct investment.
  • Some developing countries have such poor infrastructure that it makes it difficult to generate economic activity.
• How do education and skills influence growth and development?

  • Investing in this supply-side policy increases the potential output of the country (shifts the PPF outwards).
  • Higher education/skill levels --> higher human capital --> increased productivity --> higher output --> higher income
• How do absence of property rights influence growth and development?

  • In many countries, 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.
• What are some non-economic factors that also influence growth and development?

  1. Corruption (e.g money for investment siphoned off by corrupt politicians, or funds diverted to the wrong groups)
  2. Poor governance (e.g inefficient use of resources and laws that limit growth)
  3. Wars (conflict destroys infrastructure, disrupts supply chains & often reduce the supply of labour. Shift the PPF inwards)
  4. Political instability (policies and priorities will be changing, and confidence reduced)
  5. Geography (e.g being landlocked, transport costs)