4.3.2 - Factors influencing growth and development

• Impact of economic factors in different countries:

  • primary product dependency
  • volatility of commodity prices
  • savings gap: Harrod-Domar model
  • foreign currency gap
  • capital flight
  • demographic factors
  • debt access to credit and banking
  • infrastructure
  • education/skills
  • absence of property rights
• Primary Product Dependency:

  • Some countries heavily rely on the export of primary products (e.g., minerals, agricultural goods).
  • Vulnerable to price fluctuations, as demand and prices for primary products can be volatile.
• Volatility of Commodity Prices:

  • Commodity-dependent economies face instability due to price swings.
  • Price fluctuations can impact government revenues, economic stability, and development plans.
• Savings Gap (Harrod-Domar Model):

  • The Harrod-Domar model explains the relationship between savings, investment, and economic growth.
  • A savings gap occurs when domestic savings are insufficient to support desired investment levels, hindering growth.
• Foreign Currency Gap:

  • A foreign currency gap arises when a country's imports exceed its foreign exchange reserves.
  • It can lead to trade deficits, currency depreciation, and economic instability.
• Capital Flight:

  • Capital flight occurs when investors move assets out of a country due to economic instability or unfavorable conditions.
  • It depletes a country's resources and can lead to financial crises.
• Demographic Factors:

  • Population growth, age distribution, and workforce skills impact economic development.
  • A youthful population can be a demographic dividend if properly harnessed for economic growth.
• Debt:

  • High levels of public or external debt can lead to debt servicing burdens, reducing resources for development.
• Access to Credit and Banking:

  • Limited access to credit and banking services can hinder investment, entrepreneurship, and economic growth.
• Infrastructure:

  • Infrastructure development (transport, energy, telecommunications) is vital for economic growth and competitiveness.
  • Low levels of infrastructure make it hard for businesses to trade and set up within the country, for example if there are a lack of roads. It makes their services and production less reliable. However, the development of infrastructure can be expensive and tends to conflict with environmental goals.