4.3.2 Factors influencing growth and development

• Primary products


  Raw materials in industries such as agriculture, mining and forestry
• Mining accounts for just over 60% of South Africa's exports
• South Africa's ability to pay foreign debts and for imports relies on primary products
• Several developing countries rely on primary products as a significant part of their economy
• Issues with primary product dependency

  • Volatility of commodity prices makes it hard for workers to plan for the future
  • Incomes of farmers are fickle and hard to predict
• A fall in the price of primary products

  Leads to a fall in export incomes, which can make it hard to fund infrastructure and education
• Relying on primary products is not necessarily sustainable, since they could be over extracted and run out
• Savings gap


  In many developing countries, there is only limited wealth, which means money cannot be put aside for the future, and they can only afford to spend in the short run
• Consumers in developing countries have to focus on their immediate needs, including food and safe water, to ensure they can survive
• Without sufficient savings, there is inadequate capital accumulation
• Africa's saving rate is around 17%, whilst the average for middle income countries is around 31%
• This makes it more expensive for the African public and private sectors to get funds since they have higher borrowing costs
• This impedes capital investment
• Harrod-Domar model


  • Investment, saving and technological change are required in an economy for economic growth
  • The rate of growth increases if the savings ratio increases
  • This leads to increased investment and technological progress, which leads to higher productivity
• Rate of growth in Harrod-Domar model

  • Calculated by the savings ratio / capital output ratio
  • Growth increases with more saving or a small capital output ratio
• Limitations of Harrod-Domar model

  • Low marginal propensity to save in some countries
  • Poor financial system where funds might not lead to borrowing and investment
  • Inefficiency in the workforce
• An increase in savings

  Could lead to an increase in investment, but also a reduction in spending and a fall in AD (paradox of thrift)
• Foreign currency gap


  When the country is not attracting sufficient capital flows to make up for a deficit in the capital account on the balance of payments
• Capital flight


  When capital and money leave the economy through investment in foreign economies, triggered by an economic threat
• Capital flight can worsen an economic crisis and cause a currency to depreciate
• Impact of population on growth and development

  • Link between keeping birth rates down and fighting hunger, poverty and environmental damage
  • Rapid population growth has complicated efforts to reduce poverty and eliminate hunger in Africa
  • The current population of 1.1 billion is expected to double by 2050, which is not sustainable
• The debt crisis emerging in the developing world threatens the fight against poverty and inequality
• Importance of access to credit and banking

  • Without a safe, secure and stable banking system, there is unlikely to be a lot of saving in a country
• Importance of infrastructure


  • Poor infrastructure discourages MNCs from setting up premises in the country, since production costs increase where basic infrastructure is not available
• Importance of education/skills


  • Adequate human capital ensures the economy can be productive and generate employment and raise standards of living
• Importance of property rights


  • Weak or absent property rights mean entrepreneurs cannot protect their ideas, so do not have an incentive to innovate
• In sub-Saharan Africa, the money lost from corruption could pay for the education of 10 million children per year in developing countries
• Impact of poor governance/civil war

  • Could hold back infrastructure development and is a constraint on future economic development
  • Could destroy current infrastructure and force people into poverty
• Impact of vulnerability to external shocks

  • An earthquake prone country is likely to find it hard to develop their infrastructure, and people might be pushed into poverty
  • The Nepal earthquake in 2015 pushed more people into poverty