4.3. Factors influencing Growth and Development

Question 1

What are the 12 factors which influence growth and development?

Answer 1

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

Non-economic factors

Interestingly enough, poor polly dear ventured down silently going home cuz fancy crazes fundamentally couldn’t get proposed near death

Question 2

What is Primary Product Dependency?

Answer 2

Developing countries are relient on growing / extracting and exporting low value primary commodities
Natural disasters and conflicts can wipe out harvests or extraction/mining capability

Question 3

How does Primary Product Dependency affect economic growth?

Answer 3

Dependency on low value goods limits the total value of exports
This limits the value of AD (AD = C + I + G + (X - M))
This limits the level of actual growth

Question 4

How does Primary Product Dependency affect development?

Answer 4

Dependency on low value goods limits the incomes earned
This limits GNI per capita
This limits the living standards dimension of HDI

Question 5

Evaluation of Primary Product Dependency?

Answer 5

The extent of benefits or costs depends on the product
Agricultural products are more susceptible to supply constraints from poor weather and are often lower value
Mined & extracted commodities are less likely to have supply issues and are often high value, e.g. oil

Question 6

What is Volatility of commodity prices?

Answer 6

Primary goods often have volatile prices; they fluctuate up and down unpredictably
This leads to low levels of investment due to uncertainty making it difficult for businesses to make informed investment decisions

Question 7

How does Volatility of commodity prices affect economic growth?

Answer 7

Low levels of investment limits the level of AD and limits actual growth (AD = C + I + G + (X - M))
Low levels of investment limits the productive potential of the economy (potential growth)

Question 8

How does Volatility of commodity prices affect economic development?

Answer 8

Low investment means Q2CELL develops at a slower rate
This leads to slower grains in the level of living standards
GNI per capita grows more slowly
HDI grows more slowly

Question 9

Evaluation of Volatility of commodity prices?

Answer 9

Significance depends on the type of primary product: agricultural goods tend to fluctuate more as supply can be more volatile
Volatility affects low priced goods - the government could intervene to encourage the development of infant industries in higher value manufactured goods, limiting the impact of the issue

Question 10

What is the Savings Gap / Harrod-Domar model?

Answer 10

Low savings -> Low investment -> Low capital stock -> Low incomes

Low levels of savings makes it harder for firms to find funds for investment
Financial markets might not be well established in LEDCs: makes access to funds more difficult, 1.4bn people worldwide do not have a formal bank account

Question 11

How does the Savings Gap / Harrod-Domar model affect economic growth?

Answer 11

Lack of investment limits the level of AD and limits actual growth (AD = C + I + G + (X - M))
Low levels of investment limits the productive potential of the economy (potential growth)

Question 12

How does the Savings Gap / Harrod-Domar model affect economic development?

Answer 12

Low investment means Q2CELL develops at a slower rate
This causes GNI to increase more slowly
This causes GNI per capita to rise more slowly, or fall, leading to a fall in the level of living standards
HDI grows more slowly

Question 13

Evaluation of the Savings Gap / Harrod-Domar model?

Answer 13

Intervention can break the cycle
Finance is internationalised, so funds may be available abroad, even if domestic savings are low
Microfinance could be used to create funding for those that would otherwise not get it
FDI attracts investment from abroad without needing domestic funds for investment

Question 14

What is the Foreign currency gap?

Answer 14

Developing countries face shortages of foreign currency
Possible causes: dependency on exporting primary products
Capital flight
High interest payments on foreign loans
This can lead to a lack of foreign currency with which to buy imported capital goods

Question 15

How does the Foreign currency gap affect economic growth?

Answer 15

Lack of capital goods limits the productive capacity of the economy
This restricts the potential growth of the economy

Question 16

How does the Foreign currency gap affect economic development?

Answer 16

Lack of capital means that the country is not increasing the value of what they are producing
This leads to slower gains in the level of living standards
Slow growth of GNI per capita
HDI grows more slowly

Question 17

Evaluation of the Foreign currency gap?

Answer 17

Foreign finance may be available to provide funds for capital goods
Aid could provide the capital goods or the funds to buy them

Question 18

What is Capital flight?

Answer 18

The uncertain and rapid movement of large sums of money out of a country
If the money was left in domestic banks, credit could be created by banks for consumers and businesses to spend
Caused by political unrest / conflict
Corruption and/or fears of governments seizing assets
Exchange rate volatility / uncertainty

Question 19

How does the Capital flight affect economic growth?

Answer 19

Lack of funds for domestic investment along with a lack of FDI
Limits actual growth as investment is a component of AD
Limits potential growth as low levels of investment limits growth of LRAS

Question 20

How does the Capital flight affect economic development?

Answer 20

Lack of funds for investment means output of the economy remains low value
This limits the level of GNI per capita
This limits the living standards dimension of HDI

Question 21

Evaluation of Capital flight?

Answer 21

Governments can impose restrictions on the freedom to move money out of the economy (highly unpopular, but stops the outflow of currency)
Alternatively, any strategy that creates funding / credit for investment could solve the problem (microfinance, aid, FDI, although aid would be unlikely for countries experiencing capital flight)

Question 22

What are Demographic factors?

Answer 22

Population issues
e.g. rapidly growing populations needing rapid GDP growth just to maintain living standards, if total population rises faster than total real GDP, real GDP per capita will fall
Ageing populations (low birth rates, high dependency ratio, more retired individuals per member of the population)

Question 23

How do Demographic factors affect economic growth?

Answer 23

Rapidly rising population can lead to a rising level of LRAS (potential growth) as the quantity of labour rises (even though it may lead to falling GDP per capita)

Question 24

How do Demographic factors affect economic development?

Answer 24

If total population rises faster than GNI, then GNI per capita will fall, so living standards dimension falls
Rapidly rising population may make education less accessible as there is limited capacity (reduces years of schooling)

Question 25

Evaluate Demographic factors?

Answer 25

Falling birth rates over time means that globally, population is not rising as rapidly as it was - i.e. the issue is becoming less significant

Question 26

What is Debt?

Answer 26

Historic lending leaving developing economies burdened with significant levels of debt This means a significant amount of spending on debt interest payments Annual spending on interest removes spending on healthcare, infrastructure, etc. (because of the opportunity cost)

Question 27

How does the Debt affect economic growth?

Answer 27

Debt payments are a withdrawal from the economy Every year debt interests are paid, AD is lower than it could be, reducing actual growth Reduces ability of governments to develop supply side of the economy Limits potential growth

Question 28

How does the Debt affect economic development?

Answer 28

Greater spending on interest repayments limits health and education spending Reduced years of schooling and life expectancy and level of HDI

Question 29

Evaluate Debt?

Answer 29

Programs in place for countries dealing with the greatest extent of debt HIPC debt relief programme The heavily indebted poor countries (HIPC) are a group of 37 developing countries with high levels of poverty and debt overhang (e.g. Bolivia, Kenya) which are eligible for special assistance from the International Monetary Fund (IMF) and the World Bank

Question 30

What is Access to credit and banking?

Answer 30

Developing countries often have less developed financial systems in place A lack of an established banking sector may limit the access to credit for businesses and individuals Less availability of finance means less investment (refer back to the Harrod-Domar model)

Question 31

How does Access to credit and banking affect economic growth?

Answer 31

Lack of finance = lack of investment Limits actual growth since investment is a component of AD Limits potential growth, as low levels of investment limits growth of LRAS

Question 32

How does Access to credit and banking affect economic development?

Answer 32

Lack of funds for investment means that output of the economy remains low value This limits the level of GNI per capita This limits the living standards dimension of the HDI

Question 33

Evaluate Access to credit and banking

Answer 33

Some developing countries that do not have banking infrastructure in towns and villages are now able to use 'mobile banking' via phones for citizens Alternatively, there could be other sources of funds available, such as microfinance, FDI, etc.

Question 34

What is Infrastructure?

Answer 34

Transport, communications, energy, etc. Poor infrastructure reduces mobility in the economy and deters investment (both domestic and FDI) Can limit access to international markets, limiting amount of trade Developing economies may lack the funds for large scale infrastructure projects

Question 35

How does Infrastructure affect economic growth?

Answer 35

Poor infrastructure makes it harder to do business domestically and harder to trade Lack of exports could limit AD Infrastructure is the capital of an economy - i.e. it enables businesses to function effectively Poor infrastructure puts a limit on the potential growth of the economy

Question 36

How does Infrastructure affect economic development?

Answer 36

Poor infrastructure limits the value of what an economy can produce and export Lower value production leads to lower GNI per capita & living standards This limits growth of HDI

Question 37

Evaluate Infrastructure

Answer 37

External funding can help to plug any domestic funding gap E.g. Chinese state investment - significant investment in infrastructure in Sub-Saharan Africa

Question 38

What is Education/skills?

Answer 38

Sometimes referred to as 'human capital' Low levels of education and skills leads to low levels of productivity Low skills levels may deter FDI - i.e. foreign companies will only look to invest in a country if workers have the necessary skills

Question 39

How does Education/skills affect economic growth?

Answer 39

Low productivity negatively impacts LRAS so reducing potential growth Lack of investment would reduce AD (AD=C+I+G+X-M) This limits the level of actual growth

Question 40

How does Education/skills affect economic development?

Answer 40

Low skills and productivity levels limit the earnings potential of workers This limits the level of GNI per capita, so limiting the living standards dimension of HDI

Question 41

Evalutate Education/skills

Answer 41

Where domestic funding prevents the development of education, foreign sources of funding can be found Aid could provide sources of funding to help more children go to school

Question 42

What is Absence of property rights?

Answer 42

When assets lack defined ownership they cannot be used as effectively to create investment Cannot create value for the poor due to a lack of property rights (i.e. a lack of an identifiable owner) Having clear property ownership allows banks to lend against the value of that asset (‘collateral’) An absence of property rights therefore limits investment

Question 43

How does Absence of property rights affect economic growth?

Answer 43

Lack of investment reduces AD (AD=C+I+G+X-M) This limits the level of actual growth Lack of investment also limits the increase in potential growth due to slower capital accumulation, technology advances, etc.

Question 44

How does Absence of property rights affect economic development?

Answer 44

Low investment means capital quality and quantity develop at a slower rate The leads to slower gains in the level of living standards GNI per capita grows more slowly HDI grows more slowly

Question 45

Evalutate Absence of property rights

Answer 45

Property rights can be given to assets that previously had no ownership or common ownership Microfinance can provide lending to individuals that would otherwise not get credit due to a lack of assets

Question 46

What are Non-economic factors?

Answer 46

Range of factors, including Corruption, diseases (HIV / AIDS, Malaria), Geography, Conflict

Question 47

How do Non-economic factors affect growth?

Answer 47

Corruption leads to poor economic decision making, deters businesses that do not want uncertainty Less spending and investment lowers AD and actual growth, and potential growth by extension

Question 48

How do Non-economic factors affect development?

Answer 48

Health problems from diseases limits HDI by lowering life expectancy Conflict lowers income earning potential, disrupts schooling and reduces life expectancy

Question 49

Evaluate Non-economic factors

Answer 49

Problems can be overcome, e.g. large fall in new HIV cases and deaths from AIDS in sub-saharan africa since 2000 Corruption can be reduced through a change of government Conflict can be ended by peace deals